UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
----------------
FORM 10-Q/A
AMENDMENT NO. 1
TO
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000 Commission File Number 0-13124
COVER-ALL TECHNOLOGIES INC.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2698053
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18-01 Pollitt Drive
Fair Lawn, New Jersey 07410
--------------------- -----
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (201) 794-4800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Number of shares outstanding at August 7, 2000:
17,681,172 shares of Common Stock, par value $.01 per share.
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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INDEX TO FORM 10-Q/A FOR THE QUARTER ENDED JUNE 30, 2000.
--------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2000 (Unaudited)
and December 31, 1999 (Audited).................................. 3
Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and 1999 (Unaudited).................. 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (Unaudited).................. 6
Notes to Consolidated Financial Statements (Unaudited)........... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................13
PART II: OTHER INFORMATION..........................................16
SIGNATURES..........................................................18
. . . . . . . . . .
- 2 -
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
----------- -----------
(Unaudited) (Audited)
Assets:
Current Assets:
Cash and Cash Equivalents ..................... $ 379,804 $ 1,065,793
Accounts Receivable (Less Allowance for
Doubtful Accounts Of $1,537,823 and
$1,730,249) ................................ 2,262,915 2,368,272
Note Receivable -- Related Party .............. 982,814 959,344
Prepaid Expenses .............................. 316,607 365,194
Accrued Interest -- Related Party Note
Receivable ................................. 17,186 40,656
----------- -----------
Total Current Assets .......................... 3,959,326 4,799,259
----------- -----------
Property and Equipment -- At Cost:
Furniture, Fixtures and Equipment ............. 3,209,201 3,191,154
Less: Accumulated Depreciation ............... (2,825,391) (2,749,589)
----------- -----------
Property and Equipment -- Net................... 383,810 441,565
----------- -----------
Note Receivable -- Related Party
(Net of Unearned Interest of $192,635 and
$250,477) ..................................... 1,307,365 1,749,523
----------- -----------
Capitalized Software (Less Accumulated
Amortization of $3,534,191 and $3,084,571) .... 1,647,440 2,097,060
----------- -----------
Other Assets ..................................... 59,335 59,335
----------- -----------
Total Assets .................................. $ 7,357,276 $ 9,146,742
=========== ===========
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable ............................ $ 1,200,680 $ 1,085,395
Accrued Liabilities ......................... 533,391 886,850
Obligation Under Capital Lease .............. 61,917 59,497
Unearned Revenue ............................ 1,398,604 1,595,217
------------ ------------
Total Current Liabilities ................... 3,194,592 3,626,959
Long-Term Liabilities:
Obligation Under Capital Lease .............. 50,840 82,416
Convertible Debentures ...................... 3,000,000 3,000,000
------------ ------------
Total Long-Term Liabilities ................. 3,050,840 3,082,416
------------ ------------
Total Liabilities ........................... 6,245,432 6,709,375
------------ ------------
Commitments and Contingencies .................. -- --
------------ ------------
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized
75,000,000 Shares, Issued 17,681,172
and 17,003,672 Shares, Respectively ...... 176,812 170,037
Capital In Excess of Par Value ................. 27,207,203 26,763,197
Accumulated Deficit ............................ (26,272,171) (24,495,867)
------------ ------------
Total Stockholders' Equity ..................... 1,111,844 2,437,367
------------ ------------
Total Liabilities and Stockholders' Equity ..... $ 7,357,276 $ 9,146,742
============ ============
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Licenses ...................... $ 195,706 $ 1,003,635 $ 1,015,706 $ 2,203,190
Maintenance ................... 952,617 1,082,084 2,008,807 2,102,486
Professional Services ......... 407,000 1,411,048 809,530 2,320,599
------------ ------------ ------------ ------------
Total Revenues ................ 1,555,323 3,496,767 3,834,043 6,626,275
------------ ------------ ------------ ------------
Cost of Revenues:
Licenses ...................... 562,965 1,630,229 1,999,795 3,100,301
Maintenance ................... 853,295 368,192 1,552,287 829,778
Professional Services ......... 230,271 308,057 379,862 658,803
------------ ------------ ------------ ------------
Total Cost of Revenues ........ 1,646,531 2,306,478 3,931,944 4,588,882
------------ ------------ ------------ ------------
Direct Margin ................. (91,208) 1,190,289 (97,901) 2,037,393
------------ ------------ ------------ ------------
Operating Expenses:
Sales and Marketing ........... 212,398 514,988 400,048 984,706
General and Administrative .... 403,493 323,731 909,788 681,109
Research and Development ...... 224,407 246,337 389,372 486,379
Allowance for Doubtful Accounts (24,515) (234,000) (164,765) (274,405)
------------ ------------ ------------ ------------
Total Operating Expenses ...... 815,783 851,056 1,534,443 1,877,789
------------ ------------ ------------ ------------
Operating Income (Loss) ....... (906,991) 339,233 (1,632,344) 159,604
------------ ------------ ------------ ------------
Interest Expense (Income):
Interest Expense .............. 96,502 98,300 193,294 194,243
Interest Income - Related Party
(Imputed) ........... (17,186) (46,757) (57,842) (98,963)
Interest Income ............... (1,620) (6,393) (5,457) (13,448)
------------ ------------ ------------ ------------
Total Interest Expense (Income) 77,696 45,150 129,995 81,832
------------ ------------ ------------ ------------
Foreign Currency Transaction
Gain (Loss) .......... (13,965) (42,653) (13,965) (42,653)
------------ ------------ ------------ ------------
Income (Loss) Before Income Tax
Benefit .............. (998,652) 251,430 (1,776,304) 35,119
Income Tax Benefit ............... -- -- -- 200,000
------------ ------------ ------------ ------------
Net Income (Loss) ................ $ (998,652) $ 251,430 $ (1,776,304) $ 235,119
============ ============ ============ ============
Basic and Diluted Earnings (Loss)
Per Common Share .............. $ (.06) $ .01 $ (.10) $ .01
============ ============ ============ ============
Weighted Average Number of Common
Shares Outstanding for Basic
Earnings (Loss) Per Common
Share ......................... 17,171,000 17,000,000 17,100,000 16,993,000
============ ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
Six months ended June 30,
---------------------------
2000 1999
----------- -----------
Cash Flows from Operating Activities:
Income (Loss) from Operations ................ $(1,776,304) $ 235,119
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided From (Used for) Operating
Activities:
Depreciation ............................ 76,294 99,763
Amortization of Capitalized Software .... 449,620 228,976
Imputed Interest Income ................. (81,312) (104,793)
Deferred Tax Asset ...................... -- (200,000)
Provision for Uncollectible Accounts .... (164,765) (274,405)
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable ..................... 270,122 (1,613,955)
Prepaid Expenses ........................ 48,587 (175,510)
Accrued Interest-- Related Party Note
Receivable ............................ 23,470 5,830
Other Assets ............................ -- (6,825)
Increase (Decrease) in:
Accounts Payable ........................ 115,285 226,327
Accrued Liabilities ..................... (353,459) (14,736)
Unearned Revenue ........................ (196,613) 846,369
----------- -----------
Net Cash (Used For) Operating Activities ..... (1,589,075) (747,840)
----------- -----------
Cash Flows from Investing Activities:
Repayment of Notes Receivable - Related Party 500,000 500,000
Capital Expenditures ......................... (18,539) (356,551)
Capitalized Software Expenditures ............ -- (805,444)
----------- -----------
Net Cash (Used For) Investing Activities ..... 481,461 (661,995)
----------- -----------
Cash Flows from Financing Activities:
Net Proceeds from Issuance of Common Stock ... 431,250 --
Principal Payments on Capital Lease .......... (29,156) (9,093)
Proceeds from Exercise of Stock Options ...... 19,531 40,000
----------- -----------
Net Cash Provided from Financing Activities .. 421,625 30,907
----------- -----------
Change in Cash and Cash Equivalents .............. (685,989) (1,378,928)
Cash and Cash Equivalents - Beginning of Period .. 1,065,793 2,286,610
----------- -----------
Cash and Cash Equivalents - End of Period ........ $ 379,804 $ 907,682
=========== ===========
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
[1] General
For a summary of significant accounting policies, refer to Note 1 of Notes to
Consolidated Financial Statements included in Cover-All Technologies Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 1999.
While the Company believes that the disclosures herein presented are adequate to
make the information not misleading, these consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report. Certain amounts
for the prior period have been reclassified to conform with the current period's
financial statement presentation. The financial statements include on a
consolidated basis the results of all subsidiaries. All material intercompany
transactions have been eliminated.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments which are necessary to present fairly the Company's
consolidated financial position as of June 30, 2000, and the results of their
operations for the three and six month periods ended June 30, 2000 and 1999, and
their cash flows for the six month periods ended June 30, 2000 and 1999. Such
adjustments are of a normal and recurring nature. The results of operations for
the three and six month periods ended June 30, 2000 and 1999 are not necessarily
indicative of the results to be expected for a full year.
[2] Sale of Stock and Purchase and Sale of Care Software License
On March 31, 1996, the Company was granted by Care Corporation Limited ("Care")
the exclusive license for the Care software systems for use in the workers'
compensation claims administration markets in Canada, Mexico and Central and
South America (the "Care Software License"). In exchange for this license, the
Company issued to Care 2,500,000 shares of the Company's Common Stock at $2.00
per share to value the license at $5,000,000 at March 31, 1996. The agreement
was revised on March 14, 1997, and the Company engaged Care as its exclusive
sales agent for a monthly fee of $10,000 against commissions of 20%. Depending
upon the level of revenue reached, or not reached, the Company had the right to
repurchase all or 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 (the "Care Note"),
payable in semi-annual installments of $500,000 which, when discounted at 6%,
results in a principal amount of the note of $3,893,054. Based on the above, and
due to the related party nature of the Care Software License buy back agreement,
the Company has recorded the $1,143,054 difference between the carrying value of
the Care Software License at December 31, 1997 of $3,250,000 and the discounted
$4,393,054 buy back agreement amount to capital in excess of par value in the
first quarter of 1998.
The discounted note is collateralized by unencumbered Cover-All stock owned by
Care and a Care affiliate, Software Investments Limited ("SIL"). 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 of the
note. The number of shares required as collateral will be adjusted at each
payment date based on the market price of the Company's shares and the balance
outstanding on such date. Based on the market price of the Company's stock on
March 30, 1998, approximately 1,700,000 shares were pledged as collateral. Upon
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 has received the subsequent payments due under
the Care Note, including the payment due by March 31, 2000. In November 1999,
the Board of Directors decided that due to the hardship placed upon Care by the
pledged share requirement of the pledge agreement given the then current price
of the Company's common stock and to Care's history of making each of the
$500,000 payments on the promissory note in a timely
- 7 -
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
manner, it would be in the best interest of the Company to agree to allow Care
to cap the number of shares of the Company's common stock required to be pledged
to the Company pursuant to the pledge agreement to 2,500,000.
The balance of the undiscounted Care Note at June 30, 2000 is $2,500,000, of
which $1,000,000 is classified as currently due including implicit interest
accrued of $17,186. The undiscounted long-term portion of the Care Note at June
30, 2000 of $1,500,000 is shown at $1,307,365, net of unearned interest of
$192,635.
[3] Investment by Vault Management Limited
On June 21, 2000, the Company entered into an agreement with Vault Management
Limited ("Vault") to purchase between 640,000 and 1,600,000 shares of the
Company's Common Stock at $.625 per share, which was the closing price per share
of the Company's Common Stock on May 30, 2000, the date the agreement was
reached.
The agreement will generate a minimum of $400,000 and a maximum of $1 million in
proceeds to the Company. The proceeds will be used for general working capital
purposes.
The agreement also calls for the equivalent number of the Company's detachable
five-year warrants to be issued to Vault at an exercise price of $.625 per
share. The agreement provides that Vault shall have the option to make payments
beyond the required $400,000 in $200,000 installments each on August 31, 2000,
October 31, 2000 and November 30, 2000.
As part of the Vault transaction, the Company also agreed to modify the terms of
the Care Note such that the semi-annual principal payment of $500,000 due and
payable on September 30, 2000 shall be due and payable as to $250,000 on
September 30, 2000 and as to $250,000 on December 31, 2000. Mr. Mark Johnston,
the Company's Chairman and Interim Chief Financial Officer, is a director of
both Vault and Care.
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
[4] Income Taxes
An analysis of the components of the income tax provision is as follows:
The income tax provision (benefit) for continuing operations differs from the
amount computed by applying the statutory federal income tax rate as follows:
Six Months
Ended
June 30, 2000
-------------
Computed Federal Statutory Tax (Benefit) ...................... $(604,000)
Valuation Allowance to Reduce Deferred Tax Asset .............. 604,000
---------
Actual Provision (Benefit) ................................ $ 0
=========
The components of the net deferred tax asset and liability were as follows:
Six Months
Ended
June 30, 2000
-------------
Deferred Tax Assets-- Current:
Accounts Receivable Allowance .......................... $ 615,000
Reserve for Loss on Disposal ........................... 2,000
Vacation Accrual ....................................... 10,000
Valuation Allowance .................................... (627,000)
-----------
Current Deferred Tax Asset ........................... $ 0
===========
Deferred Tax Asset (Liability)-- Long-Term:
Net Operating Loss Carryforward ........................ $ 8,950,000
Stock Options .......................................... 128,000
Capitalized Software ................................... (659,000)
Depreciation and Amortization .......................... 140,000
Valuation Allowance .................................... (8,559,000)
-----------
Long-Term Deferred Tax Asset ......................... $ 0
===========
The net change (decrease) during 2000 in the total valuation allowance is
$916,000.
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
[5] Segment Information
The following information is presented as a result of the Company adopting SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
At March 31, 2000, the Company merged the management teams and infrastructures
of its two business units to improve customer service. The Company will continue
to separately assess the performance of each of these products.
At June 30, 1999, the Company's two business units had distinct management teams
and infrastructures that offer different products and services which are
evaluated separately in assessing performance and allocating resources. These
business units have been reported as two reportable segments, Classic and TAS.
The following financial information is reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three Months ended June 30, 2000
-----------------------------------------
Classic TAS Care Consolidated
------- --- ---- ------------
<S> <C> <C> <C> <C>
Revenues .............................. $ 1,446 $ 109 $ -- $ 1,555
Operating Profit (Loss) ............... 293 (1,200) -- (907)
Interest Income ....................... 18 1 -- 19
Interest Expense ...................... 89 7 -- 96
Income (Loss) before Income Tax
Benefit ............................. 208 (1,207) -- (999)
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Six Months ended June 30, 2000
-----------------------------------------
Classic TAS Care Consolidated
------- --- ---- ------------
<S> <C> <C> <C> <C>
Revenues .............................. $ 3,334 $ 500 $ -- $ 3,834
Operating Profit (Loss) ............... 1,176 (2,808) -- (1,632)
Interest Income ....................... 55 8 -- 63
Interest Expense ...................... 168 25 -- 193
Income (Loss) before Income Tax
Benefit ............................. 1,050 (2,826) -- (1,776)
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three Months ended June 30, 1999
-----------------------------------------
Classic TAS Care Consolidated
------- --- ---- ------------
<S> <C> <C> <C> <C>
Revenues .............................. $ 2,354 $ 1,143 $ -- $ 3,497
Operating Profit (Loss) ............... 1,474 (1,135) -- 339
Interest Income ....................... 36 17 -- 53
Interest Expense ...................... 66 32 -- 98
Income (Loss) before Income Tax
Benefit ............................. 1,409 (1,158) -- 251
</TABLE>
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands)
Six Months ended June 30, 1999
-----------------------------------------
Classic TAS Care Consolidated
------- --- ---- ------------
<S> <C> <C> <C> <C>
Revenues ............................... $ 4,055 $ 2,571 $ -- $ 6,626
Operating Profit (Loss) ................ 2,079 (1,919) -- 160
Interest Income ........................ 68 44 -- 112
Interest Expense ....................... 118 76 -- 194
Income (Loss) before Income Tax
Benefit .............................. 1,987 (1,952) -- 35
</TABLE>
[6] Earnings Per Share Disclosures
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>
For the three months ended
June 30, 2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Income Available to Common
Stockholders .................... $ (998,652) 17,171,000 $(0.06)
Effect of Dilutive Securities:
Options .......................... -- -- --
Warrants ......................... -- -- --
----------- ---------- ------
Diluted EPS:
Income Available to Common
Stockholders Plus Assumed
Conversions ................. $ (998,652) 17,171,000 $(0.06)
=========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
For the six months ended
June 30, 2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Income Available to Common
Stockholders .................... $(1,776,304) 17,100,000 $(0.10)
Effect of Dilutive Securities:
Options .......................... -- -- --
Warrants ......................... -- -- --
----------- ---------- ------
Diluted EPS:
Income Available to Common
Stockholders Plus Assumed
Conversions ................. $(1,776,304) 17,100,000 $(0.10)
=========== ========== ======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
For the three months ended
June 30, 1999
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Income Available to Common
Stockholders .............................. $ 251,430 16,999,716 $0.01
Effect of Dilutive Securities:
Options .................................... -- 310,745 --
Warrants ................................... -- 81,220 --
---------- ---------- -----
Diluted EPS:
Income Available to Common
Stockholders Plus Assumed Conversions .... $ 251,430 17,391,681 $0.01
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the six months ended
June 30, 1999
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Income Available to Common
Stockholders .............................. $ 235,119 16,993,230 $0.01
Effect of Dilutive Securities:
Options .................................... -- 454,349 --
Warrants ................................... -- 236,093 --
---------- ---------- -----
Diluted EPS:
Income Available to Common
Stockholders Plus Assumed Conversions .... $ 235,119 17,683,672 $0.01
========== ========== =====
</TABLE>
Options to purchase 262,500 shares of common stock at prices ranging from $2.25
to $5.00 per share were outstanding at June 30, 1999, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the period ($2.23). The
convertible debt did not have a dilutive effect because the amount of interest
(net of tax) on a per share basis exceeds basic earnings per share.
The Company's options and warrants were not included in the computation of EPS
for the periods ended June 30, 2000 because to do so would be antidilutive. The
Company's covertible debt does not affect the EPS calculation for the periods
ended June 30, 2000 because it would be antidilutive.
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<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Item 2:
Total revenues for the three months ended June 30, 2000 were $1,555,000 as
compared to $3,497,000 for the same period in 1999. Licenses fees were $196,000
for the three months ended June 30, 2000 compared to $1,004,000 in the same
period in 1999, as the result of fewer new Classic sales and no new TAS 2000
sales in the second quarter of 2000. For the three months ended June 30, 2000,
maintenance revenues were $952,000 compared to $1,082,000 in the same period of
the prior year. Professional services revenue contributed $407,000 in the three
months ended June 30, 2000 compared to $1,411,000 in the second quarter of 1999
as a result of no new TAS 2000 sales. Total Classic revenues were 1,446,000 for
the three months ended June 30, 2000 as compared to $2,354,000 for the three
months ended June 30, 1999. Total TAS 2000 revenues were $109,000 for the three
months ended June 30, 2000 as compared to $1,143,000 for the three months ended
June 30, 1999. For the six months ended June 30, 2000, total revenues were
$3,834,000 compared to $6,626,000 in the same period of the prior year. Total
Classic revenues were $3,334,000 for the six months ended June 30, 2000 as
compared to $4,055,000 in the same period in 1999. Total TAS 2000 revenues were
$500,000 for the first six months of 2000 as compared to $2,571,000 in the same
period in 1999.
Cost of revenues decreased to $1,647,000 and $3,932,000 for the three and six
months ended June 30, 2000 as compared to $2,306,000 and $4,589,000 for the same
periods in 1999 due to staff reductions in the TAS 2000 division. The TAS 2000
division has been reorganized and resources have been allocated to providing
maintenance to the existing TAS 2000 customer. Non-cash capitalized software
amortization was $225,000 and $450,000 for the three and six months ended June
30, 2000 as compared to $124,000 and $229,000 in the same periods in 1999.
Research and development expenses were $224,000 and $389,000 for the three and
six months ended June 30, 2000 compared to $246,000 and $486,000 for the same
periods in 1999.
Sales and marketing expenses were $212,000 and $400,000 for the three and six
months ended June 30, 2000 as compared to $515,000 and $985,000 in the same
periods of 1999 due primarily to a reduction in the sales force in 2000.
General and administrative expenses increased to $403,000 and $910,000 in the
three and six months ended June 30, 2000 as compared to $324,000 and $681,000 in
the same periods in 1999 primarily due to an increase in staffing and legal
costs in the second quarter of 2000.
Liquidity and Capital Resources
At June 30, 2000, the Company had working capital of $765,000 compared to a
working capital of $4,039,000 in 1999.
On March 28, 2000, the Company received the $500,000 scheduled payment due under
the Care Note.
During June 2000, the Company received $400,000 from Vault Management Limited.
The Company believes that its current cash balances and anticipated cash flows
from operations will be sufficient to meet normal operating needs for the
Company in 2000.
New Authoritative Accounting Pronouncements
The Financial Accounting Standard Board ("FASB") has issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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other contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and how it is designated, for example, gain or losses related to
changes in the fair value of a derivative not designated as a hedging instrument
is recognized in earnings in the period of the change, while certain types of
hedges may be initially reported as a component of other comprehensive income
(outside earnings) until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods.
The Company does not currently have any derivative instruments and is not
currently engaged in any hedging activities. In June 1999, the FASB issued SFAS
No. 137 which deferred the effective date of SFAS No. 133 to fiscal quarters
beginning after June 30, 2000.
Year 2000 Readiness
The Year 2000 issue ("Y2K") is the result of computer programs that were written
using two digits rather than four to define the applicable year. As a result,
software may recognize a date using the two digits "00" as 1900 rather than the
year 2000. Computer programs that do not recognize the proper date could
generate erroneous data or cause systems to fail. In addition, the Year 2000
problem also affects non-information technologies such as machines, equipment
and other systems that contain embedded microprocessors. The Year 2000 problem
could affect the Company's computers, software programs, equipment and other
systems used by the Company as well as such technologies of other companies with
which the Company does business.
To date, the Company's systems and software have not experienced any material
disruption due to the onset of the Year 2000, and the Company is unaware of any
material problems or issues with the operation of its systems and software as a
result of Year 2000 issues. In addition, the Company is unaware of any material
problems or issues with critical third party systems and services utilized by
the Company. The Company did not incur any significant additional expense
relating to the Y2K problem. In anticipation of Y2K, the Company installed a
managerial and financial reporting system and a telephone voicemail system which
are warranted to be Y2K ready by their respective vendors. The total cost of
those systems was approximately $58,000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of its investments.
Interest Rate Risk. The Company's exposure to market rate risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in a major bank money market
account. The Company protects and preserves its invested funds by limiting
default, market and reinvestment risk.
Investments in this account carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates or the Company may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Foreign Currency Risk. The Company earned revenues in the U.K. The Company's
international business is subject to risks typical of an international business,
including, but not limited to differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Accordingly, the Company's future results
could be materially adversely impacted by changes in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arises from sales
made to a U.K. customer. As exchange rates vary, these results, when translated,
may vary from expectations and adversely impact overall expected profitability.
The effect of foreign exchange rate fluctuations on the Company as of June 30,
2000 was a loss of $14,000.
* * * * * * * * *
Statements in this Form 10-Q, other than statements of historical information
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks which may cause the
Company's actual results in future periods to differ materially from expected
results. Those risks include, among others, risk associated with increased
competition, customer decisions, delays in productivity programs and new product
introductions, and other business factors beyond the Company's control. Those
and other risks are described in the Company's filings with the Securities and
Exchange Commission ("SEC") over the last 12 months, copies of which are
available from the SEC or may be obtained upon request from the Company.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On February 23, 2000, COVER-ALL commenced an action against Inspire
Insurance Solutions, Inc., a Texas corporation ("Inspire"), in United
States District Court, District of New Jersey, claiming $1.5 million in
damages for breach of contract stemming from Inspire's failure to make
certain maintenance and support payments to COVER-ALL and its anticipatory
repudiation of such future payments under the contract. In April 2000,
Inspire filed counterclaims against COVER-ALL for $2.5 million for
allegedly failing, among other things, to provide a graphical user
interface version of software to Inspire.
Item 2 - Changes in Securities and Use of Proceeds
In June 2000, the Company issued 640,000 shares of its Common Stock for
$.625 per share to Vault Management Limited for an aggregate of $400,000.
Pursuant to the agreement between the Company and Vault, Vault has the
option to purchase additional shares of the Company's Common Stock in
$200,000 installments at $.625 per share on each of August 31, 2000,
October 31, 2000 and November 30, 2000 for an aggregate of up to 1,600,000
shares for $1,000,000. The agreement also calls for the equivalent number
of the Company's detachable five-year warrants to be issued to Vault on
shares issued at an exercise price of $.625 per share. The proceeds to the
Company will be used for general working capital purposes. The sale of the
shares of Common Stock to Vault was exempt from registration under Section
4(2) of the Securities Act of 1933 because the offer and sales were made
to a limited number of investors in a private transaction.
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Cover-All Technologies Inc. was held
on June 22, 2000 (the "Meeting"). At the Meeting, the stockholders of the
Company elected one director, John Roblin, to serve for a three-year term
and until his successor has been duly elected and qualified.
Indicated below are the total votes cast in favor of the director nominee
and the total votes withheld:
Director Votes For Votes Withheld
-------- --------- --------------
John Roblin 14,897,848 262,031
The stockholders also approved an amendment to the Company's Certificate
of Incorporation to increase the authorized number of shares of Common
Stock from 30,000,000 to 75,000,000 by the requisite vote of a majority of
the outstanding shares of Common Stock entitled to vote on such proposal.
There were 14,766,907 shares cast in favor of the proposal and 366,282
shares cast in opposition thereto.
The stockholders of the Company also approved an amendment to the
Company's 1995 Employee Stock Option Plan (the "1995 Plan") to increase
the aggregate number of shares of Common Stock of the Company available
for grant under the 1995 Plan from 2,000,000 to 5,000,000 shares. There
were 7,685,869 shares cast in favor of the proposal and 428,132 shares
cast against such proposal.
The stockholders of the Company also approved an amendment to the 1994
Stock Option Plan for Independent Directors (the "1994 Plan") to increase
the aggregate number of shares of Common Stock of the Company available
for grant under the 1994 Plan from 300,000 to 750,000 There were 7,690,868
shares cast in favor of the proposal and 428,942 shares cast against such
proposal.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
*3(g) Certificate of Amendment of Certificate of Incorporation filed on
July 12, 2000.
10(1)(8) Letter Agreement, dated as of June 9, 2000, from the Registrant
amending Secured Promissory Note of Care Corporation Limited
("Care"), dated as of March 31, 1998.
10(p)(1) Form of Warrant issued by the Registrant to Vault Management
Limited.
10(p)(2) Stock Purchase Agreement, dated as of June 9, 2000, between the
Registrant and Vault Management Limited.
*27. Financial Data Schedule.
----------
* Previously filed
(b) Reports on Form 8-K.
None.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: August 22, 2000 By: /s/ Mark Johnston
-------------------------------------
Mark Johnston, Chairman and
Interim Chief Financial Officer
Date: August 22, 2000 By: /s/ John Roblin
--------------------------------------
John Roblin, President and
Chief Executive Officer
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