ITEM 1. BUSINESS
GENERAL
We provide state-of-the-art software products, services and solutions to the property and casualty insurance industry. Our customers include insurance companies, agents, brokers and managing general agents (MGAs).
Our software products and services focus on the functions required to market, underwrite, rate, issue, print, bill and support the entire life cycle of insurance policies. Our products and services combine an in-depth knowledge of property and casualty insurance with innovative solution designs using state-of-the-art technology. Our products are either available "off-the-shelf" or customized to specific customer needs. Our software can be licensed for customer use on their own platforms or can be provided through our application services provider, referred to as "ASP," using third party technology platforms and support.
We also provide a wide range of professional services that support product customization, conversion from existing systems and data integration with other software or reporting agencies. We also offer on-going support services including incorporating recent insurance rate and rule changes in our solutions. These support services also include analyzing the changes, developments, quality assurance, documentation and distribution of insurance rate and rule changes.
We earn revenue from software contract licenses, service fees from ASPs, continuing maintenance fees for servicing the product and professional services.
We were incorporated in Delaware in April 1985 as Warner Computer Systems, Inc. and changed our name to Warner Insurance Services, Inc. in March 1992. In June 1996, we changed our name to Cover-All Technologies Inc. Our products and services are offered through our wholly-owned subsidiary, Cover-All Systems, Inc., also a Delaware corporation.
PRODUCTS
MY INSURANCE CENTER
In 2001, we announced the availability of My Insurance Center, referred to as "MIC," a customizable and configurable Internet-enabled software platform and suite of product components that was developed to provide insurance agents, brokers and carriers with integrated workflows and access to real-time information.
MIC is designed to be the platform for the entire insurance process from the insured through agents, brokers, insurance companies and reinsurers. MIC is designed to serve both large and small organizations and to serve the "extended enterprise" by using advanced security to extend capabilities beyond the client's walls to partners, suppliers and customers. It is designed to be a low cost and variable cost platform that meets or exceeds security/audit standards required by sophisticated data centers.
MIC was designed to segregate functionality and access to data to the individual user. These capabilities are configured and managed by the client and can be "changed" in real time by authorized users. Additionally, all changes are tracked by user, date and time to provide audit trails and controls. These
capabilities enable our clients to manage and monitor their business as it happens, in real time as well as help them address the increasing demands of regulatory compliance.
New capabilities have been created in the last twelve months that extend the functionality of MIC to the submission of business and include underwriting rules, electronic underwriting files, milestone-driven workflows, which are customizable based upon definable conditions like completed applications and underwriting information, policy dashboards that include premium and loss information and various other functionality. The architecture of MIC enables Cover-All to introduce and customize capabilities in short cycle times that allow our customers to be responsive and nimble.
MIC enables our customers to utilize our rating, policy issuance, billing and other software components into a fully-integrated platform that, among other things, eliminates redundant data entry. Information is stored in a client-centric database and becomes immediately available to other users or functions. MIC may be customized to generate user alerts when a user-specified condition occurs. Additionally, MIC has been designed to allow the customer to configure features according to their own look and feel preferences and workflow processes. For instance, the browser-based user interface allows employees, agents and other end-users to personalize their desktops so they see only the information they need or desire. MIC allows our customers to reduce costs, leverage the latest technologies, better manage risk and provide better service to their customers.
MIC is built upon the Customer Insurance Database, referred to as "CI," that brings together policy, billing and information from other business functions into an integrated "customer view" that enables better customer service and coordination. A key component of CI is the Insurance Policy Database, referred to as "IPD." IPD is a relational database that holds detailed policy and policy history data for more than forty lines of commercial property and casualty insurance and has been designed to bring powerful data access and reporting capabilities to the desktop.
MIC is being made available to users either for in-house implementation or through our ASP. Combined with our client-centric database, MIC has an integrated and flexible architecture designed to enable our customers to make rapid business and technological changes.
MIC offers the following features and benefits:
o DATA INTEGRATION - IPD is an integrated data repository that provides information to MIC quickly and inexpensively. Multiple software components share data to help integrate business functions, manage workflow and avoid duplicate data problems. o APPLICATION INTEGRATION; SINGLE SIGN-ON - MIC allows the end user to switch back and forth among applications without having to log in to individual applications, increasing a user's productivity. MIC provides a consolidated view of data from different software components and provides "hotlinks" enabling a customer to connect quickly to the specific module of the specific system. MIC offers the user fast access, pro-active alerts and real-time responsiveness. o BROAD ACCESSIBILITY - MIC is an Internet application, which utilizes a sophisticated portal capability. o INTEGRATED DATA REPRESENTATION - MIC provides a consolidated view of information from disparate systems. o PERSONALIZATION AND CUSTOMIZATION - MIC allows each user to personalize his or her view similar to other Internet portals, to meet the needs and the stylistic preferences of each individual user. MIC personalization allows the user to hide or show content, filter the content and also change color and page styles. Customization in MIC allows the host to
control the accessibility to content for each user and also facilitates changes to content in MIC as business needs change, without additional programming. o SCALABILITY - MIC can grow with our customer's needs, measured in terms of the numbers of concurrent users, response times and other variables. o SECURITY - MIC can be configured to achieve appropriate levels of security on data transfer over the Internet. MIC is also designed to adapt to almost any organizational hierarchy and data level security needs with minimal set-up effort by the customer. o COMPLIANCE - MIC is compliant with federal, state and insurance regulations.
MIC utilizes technology based on Oracle(R) 10G Application Server, Oracle 10G Database, J2EE and XML. MIC seamlessly integrates MIC Rating and Issuance and other business components and our Customer Insurance Database.
MIC enables us to market the business components in "custom groupings," or as a service in an ASP environment, depending on customer needs.
MIC RATING & ISSUANCE - THE POLICY RATING AND ISSUANCE COMPONENT OF MIC
In 1989, we purchased the assets related to the exclusive proprietary rights to a PC-based software application for policy rating and issuance for property and casualty insurance companies. This software uses a unique design that separates the "insurance product definition" from the actual technology "engines." The sophistication of this design has enabled us to stay current with technology innovations while preserving our "insurance knowledge" investment. This concept evolved into what is formerly known as the Classic product. During 2003, 2004 and 2005, this concept further evolved and the Classic product was significantly expanded and is now sold and marketed as MIC Rating & Issuance. All of our Classic customers have upgraded to MIC Rating & Issuance, and we no longer refer to the product as "Classic."
The MIC Rating & Issuance component supports the following policy functions:
o Data capture and editing o Rating o Policy issuance including multiple recipient print o All policy transactions including quotes, new lines, endorsements, renewals, audits and cancellations o Policy database.
MIC Rating & Issuance is designed to accommodate all lines of property and casualty insurance. It is especially effective in coping with the complexity and variability of commercial lines of insurance.
This flexibility of MIC Rating & Issuance is a competitive advantage, and today we offer off-the-shelf support for more than 40 lines of commercial business in virtually all states and Puerto Rico. Our extensive experience in creating custom products combined with our proprietary tool set enables us to deliver support for new insurance products in short time frames.
During the latter part of 2002, we developed a new "presentation layer" incorporating the latest technologies, such as Java and XML, to provide a very flexible and robust user interface over the Internet. This capability also included significant enhancements to our security and administration functions as well as a number of "usability" enhancements. These capabilities significantly expand and enhance the "core" rating and issuance capabilities of the legacy Classic product. The new product has now been fully integrated with MIC and is being sold and marketed as MIC Rating & Issuance.The MIC Rating & Issuance has been and continues to be enhanced and updated with new technology. The sophisticated design of the product isolates
insurance product knowledge from the application itself in data files, referred to as "Metadata." We have built an extensive knowledge base, estimated at more than 100 person-years of effort, in this Metadata that defines the details of virtually hundreds of insurance policy types and coverages for the MIC Rating & Issuance product.
The design of MIC Rating & Issuance also allows us to stay current with changes in technology while re-using the intellectual capital invested in the insurance rules. Our upgrading the Classic product line to run on an intranet/Internet has enabled multiple users to contribute to the common data store. We have also integrated this product to IPD and MIC. We have streamlined the support process with the goal to improve quality to our customers.
The MIC Rating & Issuance product is in use in over 30 companies.
MY INSURANCE CENTER - FUNCTIONAL CAPABILITIES
We have, through MIC, a deep inventory of insurance software components combined with a sophisticated implementation platform. MIC includes the following critical components:
o My Insurance Center Portal o Enterprise, Customer-centric Oracle database o Underwriting Tools o End User access to information in real time o Rating and Issuance o Full policy lifecycle support o Clear and comprehensive data collection with extensive real time edits o Policy history - easy policy changes and useful for activities such as coverage inquiries o On-line system, screen and field level look-ups o On-line Commercial Lines Manual Tables and Footnotes o Easy and direct system navigation o Standard ISO (Insurance Service Office)/NCCI coverages and rates support o Company customized coverages and rates support o Fully automated recipient-driven issuance of insurance policies, worksheets, ID cards, etc., including print preview o Policy database o Multiple company/program/state/coverage support. o Templates to reduce data entry time o Billing Capabilities o Claims Repository o Customer Relationship Management o Agency and Program Management o Advanced Administration o Access to Web Services and Information Providers o Policy Dashboard - premium & loss information o Advanced Workflows, Diarie o Electronic Underwriting files o Compliance Assist, Help Desk o Interfaces to "back end" accounting and reporting systems
We expect to utilize these capabilities to expand and leverage our ability to respond to broadening marketplace and new customer opportunities with solutions that address the special needs of carriers, managing general agents, agents, brokers and third party providers with both off-the-shelf and custom solutions. Our user interface capabilities of the MIC product are being enhanced with more functionality through various strategic alliances and partnerships that offer business process partnering (outsourcing), accounting, claims administration capabilities and actuarial and statistical reporting services. We also intend to continue to enhance our functional components based upon market demand, existing customer needs, new capabilities offered by Web Services as well as changes in technology (for example, support for personal digital assistants, or PDAs), especially Internet technologies. We are also developing integration and inter-connection capabilities for MIC to exchange data with third party systems which should bring significant benefit to our customers by reducing data entry and reducing the exposure to errors & omissions liability.
We are also increasing and enhancing our services portfolio. We have expanded our professional services with conversion and interface offerings. We developed new rule-based capabilities to enable us to implement data exchange services that will save our customers time and effort converting to our products or linking our products to existing systems. We also have developed a "custom" service offering for customers who desire specially-tailored services, service level agreements and other services that enable them to achieve their business objectives.
In February 2007, we announced that we were extending MIC capabilities by acquiring and integrating the application processing functionality of the brokerage application processing platform of InsureHiTech, a specialty wholesale insurance brokerage for hedge funds, private equity, technology and life science companies.
COMPETITION
The computer software and services industry is highly competitive and rapidly changing, as current competitors expand their product offerings and new companies enter the marketplace. Because of our extensive knowledge-base in the insurance industry, however, we believe that our products offer customers certain advantages not available from our competitors. Our customers have access to our extensive experience and software inventory in the area of rating and policy issuance of commercial lines policies, among the most complex of insurance transactions.
There are a number of larger companies, including computer software, services and outsourcing companies, consulting firms, computer manufacturers and insurance companies that have greater financial resources than we have and possess the technological ability to develop software products similar to those we offer. These companies represent a significant competitive challenge to our business. Very large insurers that internally develop systems similar to ours may or may not become our major customers for software or services. We compete on the basis of our insurance knowledge, products, service, price, system functionality and performance and technological advances.
MARKETING
We maintain an in-house sales and marketing staff. We also utilize distributors, outside consultants and other complimentary service providers to market our products. We are continuing to redesign our Internet site and establish linkages to portals and other web sites. This is an on-going effort that will continue to expand in 2007 as we focus on the Internet as the primary source of information for current and potential customers interested in our products and services. We also participate in and display and demonstrate our software products at industry trade shows. Our consulting staff, business partners and other third parties also generate sales leads.
RESEARCH AND DEVELOPMENT
Our business is characterized by rapid business and technological change. We believe our success will depend, in part, on our ability to meet the new needs of our customers and the marketplace as well as continuing to enhance our products based on new technologies. Accordingly, we must maintain ongoing research and development programs to continually add value to our suite of products, as well as any possible expansion of our product lines.
Our goal with all of our products and services is to enhance the ease of implementation, functionality, long-term flexibility and the ability to provide improved customer service.
Research and development expenses were $464,000, $809,000 and $760,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
BACKLOG
We had no license, maintenance, professional services or ASP backlog of unbilled work as of December 31, 2006.
MAJOR CUSTOMERS
Our product line is in use in over 30 companies. For the year ended December 31, 2006, we had three customers contribute revenues in excess of 10% of our total revenues. For the years ended December 31, 2005 and 2004, we had only one customer in either of those years contribute revenues in excess of 10% of our total revenues. AIGT generated 27%, 23% and 31% of our revenues for the years ended December 31, 2006, 2005 and 2004, respectively. Two other customers generated 13% and 11%, respectively, of our revenue for the year ended December 31, 2006.
We had no export sales in 2006, 2005 or 2004.
EMPLOYEES
We had on average 45 employees during 2006. None of our employees are represented by a labor union, and we have not experienced any work stoppages. We believe that relations with our employees are good.
AVAILABLE INFORMATION
Our website address is www.cover-all.com. We make available, free of charge, through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on our website is not incorporated by reference into this report.
ITEM 1A.
ITEM 1A.RISK FACTORS
RISK FACTORS
THE FOLLOWING ARE CERTAIN RISK FACTORS THAT CAN AFFECT OUR BUSINESS AND OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. THERE MAY BE OTHER RISK FACTORS, AND THIS LIST IS NOT EXHAUSTIVE. WE OPERATE IN A CONTINUALLY CHANGING BUSINESS ENVIRONMENT, AND NEW RISK FACTORS EMERGE FROM TIME TO TIME. WE CANNOT PREDICT SUCH NEW RISK FACTORS, NOR CAN WE ASSESS THE IMPACT, IF ANY, OF SUCH NEW RISK FACTORS ON OUR BUSINESS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS OTHER INFORMATION DESCRIBED ELSEWHERE IN THIS ANNUAL REPORT.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
WE INCURRED LARGE LOSSES IN 2006 AND 2005. OUR EARNINGS ARE VOLATILE, AND WE MAY NOT BE PROFITABLE IN THE FUTURE.
We incurred a loss of $1,000,000 in 2006 and $1,434,000 in 2005. Although we generated net income in years prior to 2005, there is no assurance that we will be able to achieve profitability in the future. Our ability to make payments on and to refinance our indebtedness, to invest in sales and marketing programs, to expand and upgrade our technology infrastructure and to fund our research and development efforts will depend on existing cash balances and our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. If we are unable to achieve or maintain profitability in the future, we may be unable to service our indebtedness or to fund our other liquidity needs.
WE MAY NEED ADDITIONAL FINANCING IN ORDER TO CONTINUE TO DEVELOP OUR BUSINESS.
We may need additional financing to continue to fund the research and development of our software products and to expand and grow our business generally. To the extent that we will be required to fund operating losses, our financial position would deteriorate. We may not be able to find significant additional financing on terms favorable to us or at all. If equity securities are issued in connection with a financing, dilution to our stockholders may result, and if additional funds are raised through the incurrence of debt, we may be subject to further restrictions on our operations and finances. Furthermore, if we do incur additional debt, we may be limiting our ability to repurchase capital stock, engage in mergers, consolidations, acquisitions and asset sales, or alter our lines of business, even though these actions might otherwise benefit our business. As of December 31, 2006, we had a net stockholders' equity (deficit) of approximately $(1,024,000) and a net working capital (deficiency) of approximately $(898,000).
WE MAY NOT HAVE SUFFICIENT CASH TO SERVICE OUR INDEBTEDNESS.
As of March 23, 2007, our outstanding indebtedness consisted in aggregate principal amount of $295,880 on our 8% convertible debentures due 2008, which we refer to as our 2008 Debentures. The 2008 Debentures mature on July 1, 2008, unless they are earlier redeemed by us or the holder or converted into shares of our common stock at the holder's option at a conversion price of $0.30 per share, subject to adjustment. We may redeem the debentures for cash at 101% of the principal amount, together with accrued and unpaid interest through the redemption date, upon the occurrence of certain events specified in the debentures. We cannot assure you that any or all of the holders of our outstanding debentures will continue to elect to convert all or a portion of their monthly cash installments of principal into shares of our common stock in any future periods.
Our ability to make payments on and to refinance our indebtedness, to the extent the holders of our debentures do not continue to elect to convert required principal payments into shares of our common stock, and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. In addition, our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we are unable to repay our indebtedness through cash flow from operations, we may need to obtain additional financing. We cannot be certain that we will be able to obtain additional financing on terms favorable to us, or at all.
WE DEPEND ON PRODUCT DEVELOPMENT IN ORDER TO REMAIN COMPETITIVE IN OUR INDUSTRY.
We are currently investing resources in product development and expect to continue to do so in the future. Our future success will depend on our ability to continue to enhance our current product line and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments, satisfy diverse and evolving insurance industry requirements and otherwise achieve market acceptance. We may not be successful in continuing to develop and market on a timely and cost-effective basis product enhancements or new products that respond to technological advances by others, or that these products will achieve market acceptance. In addition, we have in the past experienced delays in the development, introduction and marketing of new and enhanced products, and we may experience similar delays in the future. Any failure by us to anticipate or respond adequately to changes in technology and insurance industry preferences, or any significant delays in product development or introduction, would significantly and adversely affect our business, operating results and financial condition.
OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH MAY MAKE IT DIFFICULT FOR US TO COMPETE.
Our future success will depend upon our ability to increase the number of insurance companies that license our software products. As a result of the intense competition in our industry and the rapid technological changes which characterize it, our products may not achieve significant market acceptance. Further, insurance companies are typically characterized by slow decision-making and numerous bureaucratic and institutional obstacles which will make our efforts to significantly expand our customer base difficult.
OUR PRODUCTS ARE AFFECTED BY RAPID TECHNOLOGICAL CHANGE AND WE MAY NOT BE ABLE TO KEEP UP WITH THESE CHANGES.
The demand for our products is impacted by rapid technological advances, evolving industry standards in computer hardware and software technology, changing insurance industry requirements and frequent new product introductions and enhancements that address the evolving needs of the insurance industry. The process of developing software products such as those we offer is extremely complex and is expected to become increasingly complex and expensive in the future with the introduction of new platforms and technologies. The introduction of products embodying new technologies and the emergence of new industry standards and practices can render existing products obsolete and unmarketable. Our future success depends upon our ability to anticipate or respond to technological advances, emerging industry standards and practices in a timely and cost-effective manner. We may not be successful in developing and marketing new products or enhancements to existing products that respond to technological changes or evolving industry standards. The failure to respond successfully to these changes and evolving standards on a timely basis, or at all, could have a detrimental effect on our business, operating results and financial condition.
OUR MARKET IS HIGHLY COMPETITIVE.
Both the computer software and the insurance software systems industries are highly competitive. There are a number of larger companies, including computer manufacturers, computer service and software companies and insurance companies, that have greater financial resources than we have. These companies currently offer and have the technological ability to develop software products similar to those offered by us. These companies present a significant competitive challenge to our business. Because we do not have the same financial resources as these competitors, we may have a difficult time in the future in competing with these companies. In addition, very large insurers internally develop systems similar to our systems and as a result, they may not become customers of our software. We compete on the basis of our insurance knowledge, products, service, price, system functionality and performance and technological advances. Although we believe we can continue to compete on the basis of these factors, some of our current competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our current competitors may be able to:
o undertake more extensive marketing campaigns for their brands and services; o devote more resources to product development; o adopt more aggressive pricing policies; and o make more attractive offers to potential employees and third-party service providers.
WE DEPEND ON KEY PERSONNEL.
Our success depends to a significant extent upon a limited number of members of senior management and other key employees, including John W. Roblin, our President and Chief Executive Officer, Maryanne Gallagher, our Chief Operating Officer, and Manish D. Shah, our Chief Technology Officer. Mr. Roblin's employment contract expires in December of 2007. We maintain key man life insurance on Mr. Roblin and Ms. Gallagher in the amount of $1,000,000 per individual. The loss of the service of one or more key managers or other key employees could have a significant and adverse effect upon our business, operating results or financial condition. In addition, we believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled technical, management, sales and marketing personnel. Competition for such personnel in the computer software industry is intense. We may not be successful in attracting and retaining such personnel, and the failure to do so could have a material adverse effect on our business, operating results or financial condition.
WE DEPEND UPON PROPRIETARY TECHNOLOGY AND WE ARE SUBJECT TO THE RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT.
Our success and ability to compete depends in part upon our proprietary software technology. We also rely on certain software that we license from others. We rely on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights. We currently have no patents or patent applications pending. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. The steps we take to protect our proprietary technology may not prevent misappropriation of our technology, and this protection may not stop competitors from developing products which function or have features similar to our products.
While we believe that our products and trademarks do not infringe upon the proprietary rights of third parties, third parties may claim that our products infringe, or may infringe, upon their proprietary rights. Any infringement claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause product shipment delays or require us to develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. If a claim of product infringement against us is successful and we fail or are unable to develop non-infringing technology or license the infringed or similar technology, our business, operating results and financial condition could be significantly and adversely affected.
WE DEPEND ON EXISTING CUSTOMERS.
In 2006 and 2005, our software products operations depended primarily on certain existing customers. One of these customers accounted for approximately 27% and 23% of our total revenues in 2006 and 2005, respectively. Two other customers accounted for approximately 13% and 11% of our total revenue in 2006, respectively. We anticipate that our operations will continue to depend upon the continuing business of our existing customers and the ability to attract new customers. As a result, the loss of one or more of our existing customers or our inability to continue to attract new customers could significantly and adversely affect our business, operating results and financial condition.
A DECLINE IN COMPUTER SOFTWARE SPENDING MAY RESULT IN A DECREASE IN OUR REVENUES OR LOWER OUR GROWTH RATE.
A decline in the demand for computer software among our current and prospective customers may result in decreased revenues or a lower growth rate for us because our sales depend, in part, on our customers' level of funding for new or additional computer software systems and services. Moreover, demand for our solutions may be reduced by a decline in overall demand for computer software and services. The current decline in overall technology spending may cause our customers to reduce or eliminate software and services spending and cause price erosion for our solutions, which would substantially affect our sales of new software licenses and the average sales price for these licenses. Because of these market and economic conditions, we believe there will continue to be uncertainty in the level of demand for our products and services. Accordingly, we cannot assure you that we will be able to increase or maintain our revenues.
WE MAY NOT GET THE FULL BENEFIT OF OUR TAX CREDITS.
Under the United States Internal Revenue Code, companies that have not been operating profitably are allowed to apply certain of their past losses to offset future taxable income liabilities they may incur once they reach profitability. These amounts are known as net operating loss carryforwards. At December 31, 2006, we had approximately $26,700,000 of federal net operating tax loss carryforwards expiring at various dates through 2026. Because of certain provisions of the Tax Reform Act of 1986 related to change of control, however, we may not get the full benefit of these loss carryforwards. If we are limited from using net operating loss carryforwards to offset any of our income, this would increase our taxes owed and reduce our cash for operations.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new Securities and Exchange Commission regulations, are creating uncertainty for companies such as ours. To maintain high standards of corporate governance and public disclosure, we intend to invest substantial resources to comply with evolving standards. This investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities.
RISKS RELATED TO OUR COMMON STOCK
HOLDERS OF SHARES OF OUR COMMON STOCK MAY HAVE DIFFICULTY IN SELLING THOSE SHARES.
Our common stock is not quoted on any market or listed on any securities exchange. Prices for our common stock are quoted on the Over-the-Counter (OTC) Bulletin Board. Securities whose prices are quoted on the OTC Bulletin Board do not enjoy the same liquidity as securities that trade on a recognized market or securities exchange. As a result, you may have difficulty in selling shares of our common stock. In addition, our common stock is a "penny stock" as that term is defined in the Securities Exchange Act of 1934. Brokers effecting transactions in a "penny stock" are subject to additional customer disclosure and record keeping obligations, including disclosure of the risks associated with low price stocks, stock quote information, and broker compensation. In addition, brokers effecting transactions in a "penny stock" are also subject to additional sales practice requirements under Rule 15g-9 of the Exchange Act including making inquiries into the suitability of "penny stock" investments for each customer or obtaining a prior written agreement for the specific "penny stock" purchase. Because of these additional obligations, some brokers will not effect transactions in "penny stocks."
OUR SHARES ARE SUBJECT TO DILUTION AS A RESULT OF THE CONVERSION OF OUR CONVERTIBLE DEBENTURES AND THE EXERCISE OF OUR WARRANTS.
DEBENTURES. In 2001, we issued $1,800,000 aggregate principal amount of 8% convertible debentures due 2008, which we refer to as the 2008 Debentures, and in 2002, we issued $700,000 aggregate principal amount of 8% convertible debentures due 2009, which we refer to as the 2009 Debentures. The 2008 Debentures were issued to two funds managed by RENN Capital Group, Inc., for an aggregate of $1,400,000, and the remainder of the 2008 Debentures were issued to John Roblin, our Chairman and Chief Executive Officer, and certain other investors. Our 2009 Debentures were issued only to the two RENN funds. Our debentures are convertible at the election of the holders into shares of our common stock, at a conversion price of $0.30 per share, subject to adjustment. Since we have been required to begin making monthly installments of principal payments on our 2008 Debentures and 2009 Debentures, in July 2004 and July 2005, respectively, and through January 2007, the holders of our debentures have elected to convert an aggregate of $468,399 in principal amount of such debentures at a conversion price of $0.30 per share, in lieu of receiving such installment payments in cash, for an aggregate of 1,561,330 shares of our common stock. On March 23, 2007, the RENN funds elected to convert all of their remaining unpaid principal amount due on their 2008 Debentures and 2009 Debentures, totaling $1,631,601, into 5,438,670 shares of our common stock. After giving effect to this conversion, as of March 23, 2007, our only outstanding debentures are an aggregate principal amount of $295,880 that remains outstanding on the 2008 Debentures, which, at the conversion price of $0.30 per share, are convertible into an aggregate of 986,267 shares of our common stock. The 2008 Debentures mature on July 1, 2008, unless they are earlier redeemed by us or the holder or converted into shares of our common stock at the holder's option at a conversion price of $0.30 per share, subject to adjustment.
The conversion price with the respect to each of our outstanding debentures is subject to adjustment if and whenever we issue additional shares of our common stock for less than the then current conversion price per share, in which case the conversion price will be reduced to a new conversion price equal to the price per share of the additional stock issued. Pursuant to the terms of the debentures, the issuance or sale of additional shares of our common stock resulting from (1) the conversion of any of the debentures, (2) the exercise of warrants or employee or director stock options outstanding on the day that the debentures were issued or (3) the exercise of stock options to be granted in the future to employees or directors pursuant to our existing stock option plans, will not trigger any adjustment to the conversion price of the debentures. The issuance of any shares of our common stock as a consequence of the conversion of any of the debentures may result in
significant dilution to our stockholders and may depress the market price of your investment. Further, if the conversion price of the debentures is adjusted, the additional shares of our common stock that would be issued upon conversion of the debentures as a result of such adjustment may also result in significant dilution to our stockholders.
WARRANTS. An aggregate of 128,572 warrants, expiring in 2007, to purchase such number of shares of our common stock issued to various investors, including the RENN funds, John Roblin and certain other investors, are outstanding as of December 31, 2006 and exercisable at a current exercise price of $0.22 per share. An aggregate of 128,572 warrants, expiring in 2011, to purchase such number of shares of our common stock issued to the same investors, are outstanding as of December 31, 2006 and exercisable at a current exercise price of $0.35 per share. The current exercise prices of these warrants are subject to adjustment if and whenever we issue or sell additional shares of our common stock for less than 95% of the market price on the date of issuance or sale, in which case the exercise price will be reduced to a new exercise price in accordance with the terms of the warrant. Pursuant to the terms of these warrants, the issuance or sale of additional shares of common stock resulting from (1) the exercise of stock options to be granted in the future to employees or directors pursuant to our existing stock option plans or (2) the exercise of any convertible security, in either case outstanding on the date of the warrant, will not trigger any adjustment to the exercise price of the warrants.
The issuance of any additional shares of our common stock as a consequence of the exercise of any of the warrants may result in significant dilution to our stockholders and may depress the market price of your investment. Further, if the exercise price of the warrants is adjusted, the additional shares of our common stock that would be issued upon exercise of the warrants as a result of such adjustment may also result in significant dilution to our stockholders.
OUR STOCK PRICE HAS BEEN VOLATILE.
Quarterly operating results have fluctuated and are likely to continue to fluctuate significantly. The market price of our common stock has been and may continue to be highly volatile. Factors that are difficult to predict, such as quarterly revenues and operating results, limited trading volumes and overall market performance, will have a significant effect on the price for shares of our common stock. Revenues and operating results have varied considerably in the past from period to period and are likely to vary considerably in the future. We plan product development and other expenses based on anticipated future revenue. If revenue falls below expectations, financial performance is likely to be adversely affected because only small portions of expenses vary with revenue. As a result, period-to-period comparisons of operating results are not necessarily meaningful and should not be relied upon to predict future performance.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
Our headquarters is located in Fairfield, New Jersey, where we occupy approximately 20,000 square feet under a lease which expires at October 31, 2012. Currently, we fully utilize this facility. We believe that our headquarters is well maintained and adequate to meet our needs in the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders through the solicitation of proxies or otherwise during the three months ended December 31, 2006.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
Our common stock trades in the over-the-counter market on the OTC Bulletin Board. The quotations below reflect the high and low bid prices for our common stock since January 1, 2005 as traded in the over-the-counter market on the OTC Bulletin Board. The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
2006: HIGH LOW ----- ----- 4th Quarter $ 0.79 $ 0.42 3rd Quarter 0.51 0.31 2nd Quarter 0.43 0.31 1st Quarter 0.58 0.35
2005: HIGH LOW ----- ----- 4th Quarter $ 0.57 $ 0.38 3rd Quarter 0.69 0.43 2nd Quarter 0.75 0.45 1st Quarter 0.80 0.41
As of March 13, 2007, there were 510 holders of record of our common stock. This number does not include beneficial owners who may hold their shares in street name.
We have not paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future. In addition, the convertible loan agreements governing the 2008 Debentures currently prohibit the payment of dividends by us without the prior written consent of the holders of such debentures.
The closing sales price for our common stock on March 13, 2007 was $1.10, as reported by the OTC Bulletin Board.
RECENT SALES OF UNREGISTERED SECURITIES
On March 23, 2007, we issued an aggregate of 5,438,670 shares of our common stock to the RENN funds in connection with their election to convert an aggregate of $1,631,601 principal amount of debentures, representing all of their remaining unpaid principal amount due on their 2008 Debentures and 2009 Debentures, at a conversion price of $0.30 per share. In August 2006 and January 2007, the holders of our debentures elected to convert an aggregate of $127,254 and $119,807, respectively, principal amount of such debentures, representing all of their monthly installments of principal due in 2006 under such debentures (in lieu of receiving such installment payments in cash), for shares of our common stock at the conversion price of $0.30 per share. In connection with this conversion, we issued to the holders of the debentures an aggregate of 424,181 and 399,358 shares of our common stock in August 2006 and January 2007, respectively. No cash proceeds were received by us in connection with each conversion of the debentures. The shares of our common stock issued upon each conversion of the debentures were issued exempt from registration in reliance on Section 3(a)(9) of the Securities Act of 1933 as an exchange of securities by an issuer with its existing security holders where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder returns (including reinvestment of dividends) from the period from December 31, 2001 through December 31, 2006 on an investment of $100 in (i) our common stock, (ii) the Russell 2000 Index (an index of small capitalization companies) and (iii) an index of peer companies that we have selected. You should be aware that historical results are not necessarily indicative of future performance.
- ------- (1) The peer group consists of Computer Sciences Corporation, Ebix.com Inc., Pegasystems Inc. and TenFold Corp.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information as of December 31, 2006 and 2005, and for each of the years ended December 31, 2006, 2005 and 2004, have been derived from and should be read in conjunction with our audited consolidated financial statements and related notes thereto included elsewhere in this report. The selected historical consolidated financial information as of December 31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002 have been derived from our audited consolidated financial statements which are not included in this report. All dollar amounts below are expressed in thousands, except per share data.
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
The following is a summary of selected five-year consolidated financial data for the years ended December 31, 2006, 2005, 2004, 2003 and 2002:
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the years ended December 31, 2006, 2005 and 2004:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT) ARE SUBJECT TO THE OCCURRENCE OF CERTAIN CONTINGENCIES WHICH MAY NOT OCCUR IN THE TIME FRAMES ANTICIPATED OR OTHERWISE, AND, AS A RESULT, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. THESE CONTINGENCIES INCLUDE, AMONG OTHER THINGS, RISKS ASSOCIATED WITH INCREASED COMPETITION, CUSTOMER DECISIONS, THE SUCCESSFUL COMPLETION OF CONTINUING DEVELOPMENT OF NEW PRODUCTS, THE SUCCESSFUL NEGOTIATION, EXECUTION AND IMPLEMENTATION OF ANTICIPATED NEW SOFTWARE CONTRACTS, THE SUCCESSFUL ADDITION OF PERSONNEL IN THE MARKETING AND TECHNICAL AREAS AND OUR ABILITY TO COMPLETE DEVELOPMENT AND SELL AND LICENSE OUR PRODUCTS AT PRICES WHICH RESULT IN SUFFICIENT REVENUES TO REALIZE PROFITS.
2006 OVERVIEW
We are a supplier of software products for the property and casualty insurance industry, supplying a wide range of professional services that support product customization, conversion from existing systems and data integration with other software or reporting agencies. We also offer on-going support services including incorporating recent insurance rate and rule changes in our solutions. These support services also include analyzing the changes, developments, quality assurance, documentation and distribution of insurance rate and rule changes.
We earn revenue from software contract licenses, service fees from our software provided through our application services provider ("ASP"), continuing maintenance fees for servicing our products and professional services. Total revenue in 2006 increased to $7,288,000 from $7,255,000 in 2005 due to an increase in license and professional services and ASP revenue, which was partially offset by a decrease in maintenance revenue.
The following is an overview of the key components of our revenue and other important financial data in 2006:
SOFTWARE LICENSES. We signed no new customer licenses in 2006. The increase in license revenue, to $1,376,000 in 2006 from $1,323,000 in 2005, was mainly a result of sales to existing customers in 2006 and one new customer license sale in 2005.
MAINTENANCE. The decrease in maintenance revenue, to $3,471,000 in 2006 from $3,637,000 in 2005, was mainly due to the non-renewal of several existing customers.
PROFESSIONAL SERVICES. The increase in professional services revenue, to $1,176,000 in 2006 from $1,064,000 in 2005, was a result of increased demand for new software capabilities and customizations from our current customer base.
ASP. ASP revenue increased to $1,265,000 in 2006 from $1,231,000 in 2005, due primarily to an expanded and extended contractual relationship with a large customer.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES. Loss before provision for income taxes was $(1,000,000) in 2006 compared to a loss of $(1,434,000) in 2005, primarily due to an increase in license, professional services and ASP revenue and a decrease in operating expenses.
NET INCOME (LOSS). Net income (loss) for 2006 decreased to $(1,000,000) from $(1,434,000) in 2005 as a result of an increase in license, professional services and ASP revenue and a decrease in operating expenses.
We continue to face several challenges to growth in 2007 mainly in the marketing and selling of our products and services to new customers, caused by long sales cycles and competition. In addition, there are risks related to customers' acceptance and implementation delays which could affect the timing and amount of license revenue we are able to recognize. However, given the positive response to our new software from existing customers, the significant expansion of our relationship with a very large customer and the introduction of additional software capabilities, we are expanding our sales and marketing efforts to both new and existing customers. Consequently, we are incurring additional sales and marketing expense in advance of generating the corresponding revenue.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared under accounting principles generally accepted in the United States. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could materially differ from those estimates. We have disclosed all significant accounting policies in Note 1 to the consolidated financial statements included in this annual report on Form 10-K. The consolidated financial statements and the related notes thereto should be read in conjunction with the following discussion of our critical accounting policies. Critical accounting policies and estimates are:
o Revenue Recognition o Valuation of Capitalized Software o Valuation of Allowance for Doubtful Accounts Receivable
REVENUE RECOGNITION
Revenue recognition rules are very complex, and certain judgments affect the application of our revenue policy. The amount and timing of our revenue is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions, royalties and other variable expenses.
Our revenues are recognized in accordance with SOP 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral of the Effective Date of SOP 97-2, Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions." Revenue from the sale of software licenses is predominately from standardized software and is recognized when standard software modules are delivered and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectibility is probable. Revenue from software maintenance contracts is recognized ratably over the life of the contract. Revenue from professional consulting services is recognized when the service is provided.
Amounts invoiced to our customers in excess of recognized revenues are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period.
Our revenue is derived from the licensing of our software products, professional services, maintenance and support and ASP services. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.
LICENSE REVENUE
We recognize our license revenue upon delivery, provided collection is determined to be probable and no significant obligations remain.
SERVICES AND SUPPORT REVENUE
Our services and support revenue is composed of professional services (such as consulting services and training) and maintenance and support and ASP services. Our professional services revenue is recognized when the services are performed. Our maintenance and support and ASP offerings are recognized ratably over the term of the arrangement.
MULTIPLE ELEMENT ARRANGEMENT
We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For maintenance and support, VSOE of fair value is established by renewal rates when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.
VALUATION OF CAPITALIZED SOFTWARE
Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, we capitalize costs to produce the finished software products. Capitalization ceases when the product is available for general release to customers. Costs associated with product enhancements that extend the original product's life or significantly improve the original product's marketability are also capitalized once technological feasibility has been established. Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product. If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that asset, such amount will be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and deploying that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.
VALUATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Our estimate of the allowance for doubtful accounts is based on historical information, historical loss levels and an analysis of the collectibility of individual accounts. We routinely assess the financial strength of our customers and, based upon factors concerning credit risk, establish an allowance for uncollectible accounts. We believe that accounts receivable credit risk exposure beyond such allowance is limited.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues:
YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005
REVENUES
Total revenues were $7,288,000 for the year ended December 31, 2006 compared to $7,255,000 for the year ended December 31, 2005. License fees were $1,376,000 for the year ended December 31, 2006 compared to $1,323,000 in the same period in 2005 as a result of no new customer sales and sales to existing customers in 2006 and one new customer license in 2005. For the year ended December 31, 2006,
maintenance revenues were $3,471,000 compared to $3,637,000 in the same period of the prior year, due in part to the non-renewal of several existing customers. Professional services revenue contributed $1,177,000 for the year ended December 31, 2006 compared to $1,064,000 for the year ended December 31, 2005 as a result of increased demand for new software capabilities and customizations from our current customer base. ASP revenues were $1,265,000 for the year ended December 31, 2006 compared to $1,231,000 for the year ended December 31, 2005 due primarily to an expanded and extended contractual relationship with a large customer.
Cost of sales increased to $5,244,000 for the year ended December 31, 2006 as compared to $5,087,000 for 2005, due to staff-related expenses. Non-cash capitalized software amortization was $1,114,000 for the year ended December 31, 2006 as compared to $981,000 in 2005. We capitalized software development costs of $888,000 in 2006 compared to $701,000 in 2005.
EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses decreased to $464,000 for the year ended December 31, 2006 from $809,000 in 2005, primarily due to an increase concentration on capitalizable projects and the need for our research and development staff to work on implementations of MIC. We continue to maintain our ongoing effort to enhance the functionality of our products and solutions.
SALES AND MARKETING. Sales and marketing expenses decreased to $943,000 for the year ended December 31, 2006 from $1,222,000 in 2005, primarily due to a reduction in our marketing and sales staff in 2006.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1,461,000 in 2006 as compared to $1,431,000 in 2005. The increase in the general and administrative expenses was mainly due to directors fees paid and an increase in legal fees related to a potential acquisition in 2006.
OTHER EXPENSE. We had $1,000 of other expense for the year ended December 31, 2006 compared to $0 of other expense for the year ended December 31, 2005. In 2006, other expense was related to a settlement of late fees related to one customer.
OTHER INCOME. We had $3,000 of other income for the year ended December 31, 2006 compared to $39,000 of other income for the year ended December 31, 2005. In 2006 and 2005, other income was related to late fees collected from customers.
PROVISION FOR DOUBTFUL ACCOUNTS. We had no provision for doubtful accounts in 2006 and 2005.
YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004
REVENUES
Total revenues were $7,255,000 for the year ended December 31, 2005 compared to $9,274,000 for the year ended December 31, 2004. License fees were $1,323,000 for the year ended December 31, 2005 compared to $3,435,000 in the same period in 2004 as a result of only one new customer sale and fewer sales to existing customers in 2005 and a license renewal by a major customer in 2004. For the year ended December 31, 2005, maintenance revenues were $3,637,000 compared to $4,356,000 in the same period of the prior year, due in part to the loss of a few customers and implementation delays for some customers upgrading to the new software, which delayed maintenance billing for their new software capabilities. Professional services revenue contributed $1,064,000 for the year ended December 31, 2005 compared to $866,000 for the year ended December 31, 2004 as a result of increased demand for new software capabilities
and customizations from our current customer base. ASP revenues were $1,231,000 for the year ended December 31, 2005 compared to $617,000 for the year ended December 31, 2004 due to an expanded and extended contractual relationship with a very large customer.
Cost of sales increased to $5,087,000 for the year ended December 31, 2005 as compared to $4,836,000 for 2004, due to staff-related expenses. Non-cash capitalized software amortization was $981,000 for the year ended December 31, 2005 as compared to $1,008,000 in 2004. We capitalized software development costs of $701,000 in 2005 compared to $988,000 in 2004.
EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $809,000 for the year ended December 31, 2005 from $760,000 in 2004, primarily due to the ongoing effort to enhance the functionality of our products and solutions.
SALES AND MARKETING. Sales and marketing expenses decreased to $1,222,000 for the year ended December 31, 2005 from $1,257,000 in 2004, primarily due to a reduction in our marketing and sales staff in 2005.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1,431,000 in 2005 as compared to $1,404,000 in 2004. The increase in the general and administrative expenses was mainly due to directors fees paid and an increase in legal fees in 2005.
OTHER INCOME. We had $39,000 of other income for the year ended December 31, 2005 compared to $17,000 of other income for the year ended December 31, 2004. In 2005 and 2004, other income was related to late fees collected from customers.
PROVISION FOR DOUBTFUL ACCOUNTS. We had no provision for doubtful accounts in 2005. We had a $22,000 provision for doubtful accounts in 2004.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF LIQUIDITY
We have funded our operations primarily from cash flow from operations and the proceeds from our 2008 Debentures and our 2009 Debentures. Cash from operations results primarily from net income from the income statement less non-cash expenses (depreciation and amortization) and changes in working capital from the balance sheet.
Our largest source of operating cash flows is cash collections from our customers following the purchase or renewal of software licenses, product support agreements and other related services. Payments from customers for software licenses are generally received at the beginning of the contract term. Payments from customers for product support and ASP services are generally received in advance on a quarterly basis. Payments for professional services are generally received 30 days after the services are performed.
At December 31, 2006, we had cash and cash equivalents of $132,000 compared to cash and cash equivalents of $296,000 at December 31, 2005. The decrease in cash and cash equivalents is primarily attributable to the decrease in maintenance revenue.
CASH FLOWS
In 2001 and 2002, we raised an aggregate of $2,500,000 in two rounds of debt financing through the sale of our 2008 Debentures, with an aggregate principal amount of $1,800,000, and our 2009 Debentures, with an aggregate principal amount of $700,000, respectively. Interest on the unpaid principal amount of the outstanding debentures is payable monthly at the rate of 8% per annum. We had been required repay principal on the 2008 Debentures and 2009 Debentures since July 2004 and July 2005, respectively, in monthly installments of ten dollars ($10) per thousand dollars ($1,000) of the then-remaining principal amount of such debentures. Since 2004 and 2005, the holders of our 2008 Debentures and 2009 Debentures, respectively, have elected to convert all of our required monthly installment payments of principal into shares of our common stock at the conversion rate of $.30 per share in lieu of receiving such payments in cash. On March 23, 2007, the RENN funds elected to convert all of their remaining unpaid principal amount due on their 2008 Debentures and 2009 Debentures, totaling $1,631,601. After giving effect to this conversion, as of March 23, 2007, our only outstanding debentures are an aggregate principal amount of $295,880 that remains outstanding on the 2008 Debentures. The 2008 Debentures mature on July 1, 2008, unless they are earlier redeemed by us or the holder or converted into shares of our common stock at the holder's option at a conversion price of $0.30 per share, subject to adjustment. We may redeem the debentures for cash at 101% of the principal amount, together with accrued and unpaid interest through the redemption date, upon the occurrence of certain events specified in the debentures.
Our ability to generate cash has depended on a number of different factors, primarily our ability to continue to secure and retain customers and generate new license sales and related product support agreements. In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of capital to invest in sales and marketing, technology infrastructure and research and development.
Our ability to continue to control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows. We intend to maintain our expenses in line with existing revenue streams from maintenance support, ASP services and professional services. We may require a significant amount of cash to service our indebtedness, which consists primarily of our obligations to make monthly principal and interest payments on our outstanding debentures.
Balance sheet items that should be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. Income statement items that should be considered in assessing our liquidity include revenue, cost of revenue (net of depreciation and amortization), operating expenses (net of depreciation and amortization) and other expenses. Statement of cash flows items that should be considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities.
In December 31, 2006, we had working capital deficit of $898,000 compared to working capital deficit of $237,000 at December 31, 2005. This decrease in our working capital resulted primarily from a decrease in our maintenance revenues. Net cash provided from operating activities totaled approximately $738,000 in 2006 compared to approximately $1,041,000 in 2005. In 2006, cash flow from operating activities represented the Company's principal source of cash and results primarily from net income (loss), less non-cash expense and changes in working capital.
In 2006, net cash used for investing activities was approximately $907,000 compared to approximately $910,000 in 2005. We expect capital expenditures and capital software expenditures to continue to be funded by cash generated from operations.
In 2006, net cash provided from financing activities was approximately $4,000 compared to approximately $21,000 in 2005. The cash provided from financing activities in 2006 and 2005 consisted of proceeds from the exercise of stock options.
FUNDING REQUIREMENTS
We do not anticipate any large capital expenditures that will require us to seek new sources of capital. We lease computer equipment for terms of three years in order to have the latest available technology to serve our customers and develop new products. In May 2005, we moved our headquarters and purchased new furniture to meet our current needs and anticipated growth.
We have been required to repay principal on the 2008 Debentures and 2009 Debentures since July 1, 2004 and July 1, 2005, respectively, in monthly installments of ten dollars ($10) per thousand dollars ($1,000) of the then-remaining principal amount of such debentures, and at maturity we will be required to pay the remaining unpaid principal amount.
As of December 31, 2006, we were not in compliance with the financial covenants set forth in the convertible loan agreements governing these debentures, and as of such date, we received limited waivers to the convertible loan agreements under which the holders of the debentures waived such non-compliance.
In 2006, the holders of the 2008 Debentures and the 2009 Debentures elected to convert an aggregate of $127,254 in principal of such debentures, representing a portion of their monthly installments of principal under such debentures (in lieu of receiving such installment payments in cash), for shares of our common stock at the conversion price of $0.30 per share. In January 2007, the holders of the debentures elected to convert the remaining portion of their monthly principal installments due in 2006, totaling $119,807, into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. As of December 31, 2006, we repaid $385,777 aggregate principal amount of the 2008 Debentures and $66,933 aggregate principal amount of the 2009 Debentures, and after giving effect to the conversion, as of December 31, 2006, the 2008 Debentures and 2009 Debentures had an aggregate outstanding principal amount of $2,470,290. We made an aggregate of $173,308 of interest payments on the debentures during 2006.
On March 23, 2007, the RENN funds elected to convert the remaining unpaid principal amount due on their 2008 Debentures and 2009 Debentures. As of March 23, 2007, an aggregate principal amount of $295,880 remains outstanding on the 2008 Debentures. In 2007, we will be required to make payments of $33,616 in principal amount of the 2008 Debentures and we expect to make interest payments of approximately $2,700 in the aggregate during 2007. In addition, upon maturity of our 2008 Debentures in July 2008, we will be required to repay the outstanding principal balance on our 2008 Debentures, which is expected to be approximately $262,264.
We prepare monthly cash flow projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, maintenance, ASP and professional services. We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and other specific payments, on a rolling twelve-month basis. Comparing estimated cash receipts to estimated payments, we evaluate our ending cash balance monthly and determine whether our anticipated cash flows from operations will be sufficient to meet our normal operating needs for at least the next twelve months.
We believe that our current cash balances and anticipated cash flows from operations will be sufficient to meet our normal operating needs for at least the next twelve months. We do not anticipate any material changes in our sources of and needs for capital. Our ability to fund our working capital needs, address planned capital expenditures and make payments on or refinance our indebtedness will depend on our ability to generate cash in the future. We anticipate generating future working capital through sales to new customers and continued sales and services to our existing customers. If the holders of our outstanding 2008
Debentures do not elect to convert their debentures, we will require cash to service our indebtedness, which consists primarily of our obligations to make monthly principal and interest payments on the debentures.
Our future liquidity and capital resource requirements will depend on many factors, including but not limited to the following trends and uncertainties we face:
o Our ability to generate cash is subject to general economic, financial, competitive and other factors beyond its control. o Our need to invest resources in product development in order to continue to enhance our current product, develop new products, attract and retain customers and keep pace with competitive product introductions and technological developments. o We experience intense competition in our industry and continuing technological changes. o Insurance companies typically are slow in making decisions and have numerous bureaucratic and institutional obstacles, which can make our efforts to attain new customers difficult. o We compete with a number of larger companies who have greater resources than those of ours. We compete on the basis of insurance knowledge, products, services, price, technological advances and system functionality and performance. o Our operations continue to depend upon the continuing business of our existing customers and our ability to attract new customers. o A decline in software spending in the insurance industry could result in a decrease in our revenue.
Material risks to cash flow from operations include delayed or reduced cash payments accompanying sales of new licenses or a decline in our services business. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures. We cannot be assured that our cash flow from operations will be sufficient, or that future borrowing will be available, to enable us to pay our indebtedness. Furthermore, we cannot be assured that any or all of the holders of our outstanding debentures will continue to elect to convert all or a portion of their monthly cash installments of principal into shares of our common stock in any future periods. If we are unable to pay our indebtedness through cash flows from operations, we may need additional financing, and we cannot be certain that we will be able to obtain additional financing with favorable terms.
We do not expect for there to be a change in the mix or relative cost of our sources of capital. If we were to seek to obtain additional capital, we would be required to obtain approval from the holders of our debentures. We do not foresee difficulty in obtaining such approval, but we have not recently sought approval to raise additional capital.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 2006, we had approximately $26,700,000 of federal net operating tax loss carryforwards expiring at various dates through 2026. The Tax Reform Act of 1986 enacted a complex set of rules which limits a company's ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change. These rules define ownership change as a greater than 50 percent point change in stock ownership within a defined testing period, which is generally a three-year period. As a result of stock which may be issued by us from time to time, including the stock which may be issued relating to our outstanding convertible debentures and the conversion of outstanding warrants, or the result of other changes in ownership of our outstanding stock, we may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations at December 31, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods(1):
- -------------------------------------------
(1) On March 23, 2007, the RENN funds elected to convert the remaining unpaid principal amount due on their 2008 Debentures and 2009 Debentures. As of March 23, 2007, an aggregate principal amount of $295,880 remains outstanding on the 2008 Debentures and the 2009 Debentures are no longer outstanding.
(2) In 2001, we issued 8% Convertible Debentures due 2008 with an aggregate principal amount of $1,800,000, and in 2002, we issued 8% Convertible Debentures due 2009 with an aggregate principal amount of $700,000. We have been required to repay principal on the 2008 Debentures and 2009 Debentures since July 1, 2004 and July 1, 2005, respectively, in monthly installments of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount of such debentures, and at maturity we will be required to pay the remaining unpaid principal amount.
(3) Since July 1, 2004, the holders of the 2008 Debentures elected to convert a portion of their monthly principal installments, totaling $385,777, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installments in cash.
(4) Since July 1, 2005, the holders of the 2009 Debentures elected to convert a portion of their monthly principal installments, totaling $66,933, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installments in cash.
OFF-BALANCE-SHEET ARRANGEMENTS
As of December 31, 2006, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the SEC issued Staff Accounting Bulletin 108 ("SAB 108"), which expresses the Staff's views regarding the process of quantifying financial statement misstatements. The bulletin was effective at fiscal year end 2006. The implementation of this bulletin had no impact on our results of operations, cash flows or financial position.
In September 2006, the FASB issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and will be effective for periods beginning after November 15, 2007. We are currently evaluating the effect, if any, of SFAS 157 on our consolidated financial statements.
In June 2006, the FASB issued FASB interpretation ("FIN") No. 48. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES-AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return FIN 48 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 31, 2006. We will adopt the provisions of FIN 48 in the first quarter of 2007 as required. The adoption of FIN 48 is not expected to have a material effect on our consolidated financial statements.
In June 2006, the EITF ratified EITF Issue 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). A consensus was reached by the EITF that entities may adopt a policy of presenting taxes in the income statement on either a gross or net basis. An entity should disclose its policy of presenting taxes and the amount of any taxes presented on a gross basis should be disclosed, if significant. The guidance is effective for periods beginning after December 15, 2006. We present revenues net of taxes. We do not believe that EITF 06-3 will impact the method for recording these sales taxes in our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and changes in the market value of our investments.
INTEREST RATE RISK. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in a major bank money market account. We protect and preserve our 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, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in Item 15(a)(1) and (2) of this report are included beginning on page herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act). Based upon that evaluation, we concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be disclosed in the our reports filed or submitted under the Exchange Act. There has been no change in the our internal control over financial reporting during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the our internal control over financial reporting.
ITEM 9B.
ITEM 9B.OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors of the registrant will be included in the Proxy Statement under the caption "Election of Directors" and is incorporated herein by reference.
The information required by this Item concerning our Audit Committee financial expert will be included in the Proxy Statement and is incorporated herein by reference.
The information required by this Item concerning our Code of Ethics and Business Conduct will be included in the Proxy Statement and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information, as of March 30, 2007, regarding our executive officers:
NAME AGE POSITION ---- --- -------- John W. Roblin 62 President and Chief Executive Officer Maryanne Z. Gallagher 45 Chief Operating Officer Manish D. Shah 35 Chief Technology Officer Ann F. Massey 48 Chief Financial Officer
The biographies of our executive officers are set forth below:
JOHN W. ROBLIN has served as our President and Chief Executive Officer since December 1999 and as a director since March 2000. He was named Chairman of the Board of Directors in February 2001. Prior to joining us, Mr. Roblin was Chief Information Officer and Senior Vice President for CIGNA Property and Casualty, positions he held since 1998. From 1994 until 1998, he was Chief Information Officer and Senior Vice President for Advanta Corporation. Prior to 1994, he was the Chief Information Officer at Chubb & Son, USF&G and Traveler's Personal Lines Division.
MARYANNE Z. GALLAGHER has served as our Chief Operating Officer since February 2001. Prior to holding that position, Ms. Gallagher served as our Senior Vice President since January 2000. From November 1998 until December 1999, Ms. Gallagher served as our Vice President - Customer Service. Ms. Gallagher joined us in 1990 and has held various development and support positions in our Classic division through 1998.
MANISH D. SHAH has served as our Chief Technology Officer since May 2004. Mr. Shah served as our Director of Technology from December 2002 through May 2004 and served as our technology consultant from September 2000 through December 2001. Prior to joining us, Mr. Shah held several technology management positions at various companies such as Andersen Consulting, P&O Nedlloyd and Tata Consultancy Services in different industries for over 10 years.
ANN F. MASSEY has served as our Chief Financial Officer since February 2001, as our Secretary since April 1997 and as our Controller since March 1997. From March 1996 to March 1997, Ms. Massey served as
our Assistant Treasurer. From 1994 until February 1996, Ms. Massey served as Assistant Controller for our insurance services division. Prior to 1994, Ms. Massey had served as our Accounting Manager.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) THE FOLLOWING ARE FILED AS A PART OF THIS REPORT.
(1) FINANCIAL STATEMENTS
Reference is made to the Index to Financial Statements on Page 42.
(2) FINANCIAL STATEMENT SCHEDULE
II - Valuation and qualifying accounts....................................................F-25
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the financial statements and notes thereto.
(3) EXHIBITS.
The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Form 10-K. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2 Certificate of Merger of the Company Computer Systems, Inc. (a New York corporation) into the Registrant, filed on June 11, 1985 [incorporated by reference to Exhibit 2 to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].
3(a) Certificate of Incorporation of the Registrant filed on April 22, 1985 [incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].
3(b) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on May 6, 1987 [incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-17533) filed on September 29, 1987].
3(c) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on March 26, 1990 [incorporated by reference to Exhibit 3(d) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on June 14, 1990].
3(d) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on March 18, 1992 [incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-13124) filed on March 30, 1992].
3(e) Certificate of Amendment of Certificate of Incorporation of the Registrant [incorporated by reference to Exhibit 3(e) to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 (Commission File No. 0-13124) filed on July 10, 1996].
3(f) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on July 12, 2000 [incorporated by reference to Exhibit 3(g) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 11, 2000].
3(g) 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) Warner Insurance Services, Inc. Tax Saver 401(k) Salary Reduction Plan adopted May 31, 1985 and restated as of August 11, 1992 [incorporated by reference to Exhibit 10(k) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 28, 1993].
10(b)(1)+ 1994 Stock Option Plan for Independent Directors adopted by the Board of Directors of the Registrant on November 10, 1994 [incorporated by reference to Exhibit 10(n)(1) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(c)(2)+ 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. 0-13124) filed on April 17, 1995].
10(c)(3)+ 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(c)(4)+ 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(c)(5)+ The 1995 Employee Stock Option Plan, as amended on April 29, 1997 by the stockholders of the Registrant [incorporated by reference to Exhibit 10(o)(4) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 31, 1998].
10(c)(6)+ The 1995 Employee Stock Option Plan, as amended on June 22, 2000 by the stockholders of the Company [incorporated by reference to Exhibit 10(c)(5) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 13, 2002].
10(c)(7)+ Summary of 2005 Non-Employee Director Compensation dated March 23, 2005 [incorporated by reference to Exhibit 99.1 the Registrant's Form 8-K (Commission File No. 0-13124) filed on March 24, 2005].
10(c)(8)+ Amendment to Non-Qualified Stock Option Agreement, dated as of December 20, 2004, between the Registrant and Mark D. Johnston [incorporated by reference to Exhibit 10(c)(8) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].
10(c)(9)+ Amendment to Non-Qualified Stock Option Agreement, dated as of December 20, 2004, between the Registrant and Earl Gallegos [incorporated by reference to Exhibit 10(c)(9) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].
10(c)(10)+ Amendment to Incentive Stock Option Agreement, dated as of December 20, 2004, between the Registrant and John Roblin [incorporated by reference to Exhibit 10(c)(10) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].
10(c)(11)+ Amendment to Incentive Stock Option Agreement, dated as of December 20, 2004, between the Registrant and John Roblin [incorporated by reference to Exhibit 10(c)(11) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].
10(c)(12)+ Cover-All Technologies Inc. 2005 Stock Incentive Plan [incorporated by reference to Exhibit 10(a) the Registrant's Form 8-K (Commission File No. 0-13124) filed on June 8, 2005].
10(c)(13)+ Cover-All Technologies, Inc. Amended and Restated 2005 Stock Incentive Plan [incorporated by reference to Exhibit 10(c)(13) the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].
10(c)(14)+ Form of Non-Qualified Stock Option Agreement [incorporated by reference to Exhibit 10(c)(14) the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].
10(c)(15)+ Form of Incentive Stock Option Agreement [incorporated by reference to Exhibit 10(c)(15) the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].
10(c)(16)+ Form of Restricted Stock Grant Agreement [incorporated by reference to Exhibit 10(c)(16) the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].
10(c)(17)+ Form of Non-Qualified Stock Option Agreement (for Consultants) [incorporated by reference to Exhibit 10(c)(13) the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].
10(d)(1) Lease Agreement, dated March 3, 2005, by and between the Registrant and Fairfield 80 Venture, LLC [incorporated by reference to Exhibit 10(d)(4) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 25, 2005].
10(e)(1)+ Employment Agreement, dated December 31, 2003, by and between the Registrant and John Roblin [incorporated by reference to Exhibit 10(e)(3) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 29, 2004].
10(e)(2)+ Letter Agreement, dated May 11, 2005, between the Registrant and John Roblin [incorporated by reference to Exhibit 10(e)(4) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 13, 2005].
10(e)(3)+ Tuition Reimbursement Agreement, dated September 1, 2006, between the Registrant and Manish D. Shah [incorporated by reference to Exhibit 10(p) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on September 1, 2006].
10(e)(4)+ Employment Agreement, dated December 26, 2006, by and between the Registrant and John Roblin [incorporated by reference to Exhibit 10(e)(5) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on December 27, 2006].
10(f)(1) Stock Purchase Agreement, dated as of June 9, 2000, between the Registrant and Vault Management Limited [incorporated by reference to Exhibit 10(p)(2) to the Registrant's Quarterly Report on Form 10-Q/A (Commission File No. 0-13124) filed on August 24, 2000].
10(g)(1) Convertible Loan Agreement, dated June 28, 2001, by and among the Company, Renaissance US Growth & Income Trust PLC, a public limited company registered in England and Wales, BFSUS Special Opportunities Trust PLC, a public limited company registered in England and Wales, as lenders, and Renaissance Capital Group, Inc., a Texas corporation, as agent [incorporated by reference to Exhibit 10(q)(1) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(g)(2) Convertible Debenture No. 1, dated June 28, 2001, issued to Renaissance US Growth & Income [incorporated by reference to Exhibit 10(q)(2) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(g)(3) Convertible Debenture No. 2, dated June 28, 2001, issued to BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(q)(3) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(g)(4) Pledge Agreement, dated as of June 28, 2001, between the Company, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. [incorporated by reference to Exhibit 10(q)(4) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001]. 10(g)(5) Security Agreement (with IP Schedule), dated as of June 28, 2001, among the Company, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. [incorporated by reference to Exhibit 10(q)(5) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(g)(6) Subsidiary Guaranty, dated as of June 28, 2001, by Cover-All Systems, Inc. in favor of Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC
[incorporated by reference to Exhibit 10(q)(6) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(g)(7) Subsidiary Security Agreement (with IP Schedule), dated as of June 28, 2001, among Cover-All Systems, Inc. and Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. [incorporated by reference to Exhibit 10(q)(7) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(g)(8) Security Agreement, dated as of June 28, 2001, among the Registrant, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. [incorporated by reference to Exhibit 10(g)(8) to the Registrant's Form 10-K/A (Commission File No. 0-13124) filed on August 17, 2004].
10(g)(9) Subsidiary Security Agreement, dated as of June 28, 2001, among Cover-All Systems, Inc. and Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. [incorporated by reference to [Exhibit 10(g)( )] to the Registrant's Form 10-K/A (Commission File No. 0-13124) filed on August 17, 2004].
10(h)(1) Convertible Loan Agreement, dated June 28, 2001, by and among the Company, John Roblin, Arnold Schumsky and Stuart Sternberg, and Stuart Sternberg, as agent [incorporated by reference to Exhibit 10(r)(1) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(h)(2) Convertible Debenture No. 3, dated June 28, 2001, issued to John Roblin [incorporated by reference to Exhibit 10(r)(2) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(h)(3) Convertible Debenture No. 4, dated June 28, 2001, issued to Arnold Schumsky [incorporated by reference to Exhibit 10(r)(3) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(h)(4) Convertible Debenture No. 5, dated June 28, 2001, issued to Stuart Sternberg [incorporated by reference to Exhibit 10(r)(4) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(h)(5) Security Agreement (with Schedule I), dated as of June 28, 2001, among the Company, John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated by reference to Exhibit 10(r)(5) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(h)(6) Subsidiary Guaranty, dated as of June 28, 2001, by Cover-All Systems, Inc. in favor of John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated by reference to Exhibit 10(r)(6) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(h)(7) Subsidiary Security Agreement (with Schedule I), dated as of June 28, 2001, among Cover-All Systems, Inc. and John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated by reference to Exhibit 10(r)(7) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(h)(8) Security Agreement, dated as of June 28, 2001, among the Company, John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated by reference to Exhibit 10(h)(8) to the Registrant's Form 10-K/A (Commission File No. 0-13124) filed on August 17, 2004].
10(h)(9) Subsidiary Security Agreement, dated as of June 28, 2001, among Cover-All Systems, Inc. and John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated by reference to Exhibit 10(h)(9) to the Registrant's Annual Report on Form 10-K/A (Commission File No. 0-13124) filed on August 17, 2004].
10(h)(10) Intercreditor Agreement, dated as of June 28, 2001, among Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC, and the other debenture holders who are signatories to this Agreement [incorporated by reference to Exhibit 10(h)(13) to the Registrant's Annual Report on Form 10-K/A (Commission File No. 0-13124) filed on August 17, 2004].
10(i)(1) First Amendment to Convertible Loan Agreements, dated as of March 30, 2002, by and among the Company, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. [incorporated by reference to Exhibit 10(l)(10) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 13, 2002].
10(i)(2) Form of Warrant issued by the Company to each of the holders under the Convertible Loan Agreements [incorporated by reference to Exhibit 10(l)(11) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 13, 2002].
10(i)(3) Second Amendment to the Convertible Loan Agreements and First Amendment to Intercreditor Agreement, dated as of August 21, 2002, by and among the Company, Renaissance US Growth & Income Trust PLC, a public limited company registered in England and Wales, BFSUS Special Opportunities Trust PLC, a public limited company registered in England and Wales, as lenders, and Renaissance Capital Group, Inc., a Texas corporation, as agent [incorporated by reference to Exhibit 10(o)(1) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on August 23, 2002].
10(i)(4) First Amendment to 8.00% Convertible Debentures, dated as of August 21, 2002, by and among the Company, Renaissance US Growth & Income Trust PLC, a public limited company registered in England and Wales, BFSUS Special Opportunities Trust PLC, a public limited company registered in England and Wales, as lenders, and Renaissance Capital Group, Inc., a Texas corporation, as agent, and John Roblin, Arnold Schumsky and Stuart Sternberg, as additional lenders, and Stuart Sternberg, as agent for the additional lenders [incorporated by reference to Exhibit 10(o)(2) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on August 23, 2002].
10(i)(5) Form of 8.00% Convertible Debentures, dated August 21, 2002, issued by the Registrant to Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(o)(3) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on August 23, 2002].
10(i)(6) Acknowledgment, Agreement and Reaffirmation of Guarantors, dated as of August 21, 2002, by Cover-All Systems, Inc. in favor of Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(o)(4) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on August 23, 2002].
10(i)(7) First Amendment to 8.00% Convertible Debentures Due 2009 and Second Amendment to 8.00% Convertible Debentures Due 2008, dated as of June 29, 2004 [incorporated by reference to Exhibit 10(i)(11) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 13, 2004.]
10(i)(8) Third Amendment to the Convertible Loan Agreements, dated as of June 29, 2004, by and among the Company, Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and Renaissance Capital Group, Inc. [incorporated by reference to Exhibit 10(i)(12) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 13, 2004.]
10(i)(9) Form of Revised 8.00% Convertible Debenture Due 2008 [incorporated by reference to Exhibit 10(i)(13) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 13, 2004.]
10(i)(10) Form of Revised 8.00% Convertible Debenture Due 2009 [incorporated by reference to Exhibit 10(i)(14) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 13, 2004.]
10(i)(11) Limited Waiver to Convertible Loan Agreements, dated as of September 30, 2004, by and between Renaissance US Growth Investment Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(i)(15) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on November 15, 2004.]
10(i)(12) Limited Waiver to Convertible Loan Agreements, dated as of December 31, 2005, by Renaissance US Growth Investment Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(i)(12) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 31, 2006.]
10(i)(13) Limited Waiver to Convertible Loan Agreements, dated as of March 31, 2006, by and between Renaissance US Growth Investment Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(i)(19) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006.]
10(i)(14) Limited Waiver to Convertible Loan Agreements, dated as of June 30, 2006, by Renaissance US Growth Investment Trust PLC (formerly known as Renaissance US Growth & Income Trust PLC) and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(i)(20) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 14, 2006.]
10(i)(15) Limited Waiver to Convertible Loan Agreements, dated as of September 30, 2006, by and between Renaissance US Growth Investment Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(i)(21) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on November 14, 2006.]
10(i)(16)* Limited Waiver to Convertible Loan Agreements, dated as of December 31, 2006, by Renaissance US Growth Investment Trust PLC and BFSUS Special Opportunities Trust PLC.
14 Code of Ethics and Business Conduct [incorporated by reference to Exhibit 14 to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 31, 2006.]
21 Subsidiaries of the Registrant [incorporated by reference to Exhibit 21 to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 11, 1996].
23.1* Consent of Moore Stephens, P.C.
23.2* Consent of Moore Stephens, P.C.
31.1* Certification of John W. Roblin, President and Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Ann F. Massey, Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------------- * Filed herewith.
+ Denotes a management contract or compensatory plan or arrangement.
COVER-ALL TECHNOLOGIES INC. - --------------------------------------------------------------------------------
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PAGE ----
Report of Independent Registered Public Accounting Firm.................
Consolidated Balance Sheets - December 31, 2006 and 2005................
Consolidated Statements of Operations - Years Ended December 31, 2006, 2005 and 2004...........................................................
Consolidated Statements of Changes in Stockholders' [Deficit] - Years Ended December 31, 2006, 2005 and 2004............................
Consolidated Statements of Cash Flows - Years Ended December 31, 2006, 2005 and 2004.....................................................
Notes to Consolidated Financial Statements..............................
Financial Statement Schedule II - Valuation and Qualifying Accounts.......................................
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheets of Cover-All Technologies Inc. and its subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders' [deficit], and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements and the consolidated financial statement schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cover-All Technologies Inc. and its subsidiary as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is the responsibility of Cover-All Technologies Inc.'s management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R).
MOORE STEPHENS, P. C. Certified Public Accountants
New York, New York March 27, 2007
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' [DEFICIT] - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
In 2006, the holders of the 2008 Debentures and the 2009 Debentures elected to convert a portion of their monthly principal installments due in 2006, totaling $127,254, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 424,181 shares of our common stock. In January 2007, the holders of the 2008 Debentures and the 2009 Debentures elected to convert the remaining portion of their monthly principal installments due in 2006, totaling $119,807, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 399,358 shares of our common stock. We made an aggregate of $173,000 of interest payments on the debentures during 2006.
In 2005, the holders of the 2008 Debentures and the 2009 Debentures elected to convert all of their monthly principal installments due in 2005, totaling $220,121, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 733,739 shares of our common stock. We made an aggregate of $189,000 of interest payments on the debentures during 2005.
In 2004, the holders of the 2008 Debentures elected to convert all of their monthly principal installments due in 2004, totaling $105,335, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures an aggregate of 351,116 shares of our common stock. We made an aggregate of $200,000 of interest payments on the debentures during 2004.
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Cover-All Technologies Inc., through its wholly-owned subsidiary, Cover-All Systems, Inc., licenses and maintains its software products for the property/casualty insurance industry throughout the United States and Puerto Rico. The subsidiary also provides professional consulting services to its customers interested in customizing their software.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Cover-All Technologies Inc. and its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION - Our revenues are recognized in accordance with SOP 97-2, "Software Revenue Recognition" ["SOP 97-2"], as amended by SOP 98-4, "Deferral of the Effective Date of SOP 97-2, Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions." Revenue from the sale of software licenses is recognized when standardized software modules are delivered to and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectibility is probable. Revenue from software maintenance contracts and ASP services are recognized ratably over the lives of the contracts. Revenue from professional services is recognized when the service is provided.
We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For maintenance and support, VSOE of fair value is established by renewal rates, when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.
CASH AND CASH EQUIVALENTS - We consider all highly liquid investments, with a maturity of three months or less when purchased, to be cash equivalents.
RISK CONCENTRATIONS - Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We place our cash and cash equivalents with high credit quality institutions to limit credit exposure. We believe no significant concentration of credit risk exists with respect to these investments. The amount of cash beyond insured amounts at December 31, 2006 and 2005 was approximately $269,974 and $282,370, respectively.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers principally major insurance companies, who are dispersed across many geographic regions. As of December 31, 2006, four customers accounted for approximately 68% of our trade accounts receivable portfolio. We routinely assess the financial strength of customers and, based upon factors concerning credit risk, we establish an allowance for doubtful accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2 - --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
IMPAIRMENT OF LONG-LIVED ASSETS - We review our long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the future use and disposal of the related asset or group of assets to their respective carrying amounts. Impairment, if any, is measured as the excess of the carrying amount over the fair value based on market value (when available) or discounted expected cash flows of those assets, and is recorded in the period in which the determination is made.
STOCK-BASED COMPENSATION - On January 1, 2006, we adopted SFAS No. 123R, "SHARE-BASED PAYMENT," or SFAS 123R, which is a revision of SFAS No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION," or SFAS 123, and supersedes APB No. 25, "ACCOUNTING FOR STOCK ISSUES TO EMPLOYEES," or APB 25. Among other items, SFAS 123R requires companies to record compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. Our share-based awards include stock options and restricted stock awards. Prior to our adoption of SFAS 123R, we applied the intrinsic value method set forth in APB 25 to calculate the compensation expense for share-based awards. Historically, we have generally set the exercise price for our stock options equal to the market value on the grant date. As a result, the options generally had no intrinsic value on their grant dates, and we did not record any compensation expense unless the terms of the options were subsequently modified. For restricted stock awards, the calculation of compensation expense under APB 25 and SFAS 123R is the same.
We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard to all share-based awards issued on or after January 1, 2006 and any outstanding share-based awards that were issued but not vested as of January 1, 2006. Accordingly, our consolidated financial statements for the years ended December 31, 2005 and 2004 have not been restated to reflect the impact of SFAS 123R. For the year ended December 31, 2006, we recognized $109,055 of stock-based compensation expense in our consolidated financial statements. We recognized expense because we had (a) stock options granted prior to January 1, 2006 that had not yet vested as of January 1, 2006 and (b) stock options granted subsequent to January 1, 2006.
The estimated fair value underlying our calculation of compensation expense for stock options is based on the Black-Scholes pricing model. SFAS 123R requires forfeitures of share-based awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if our estimates change based on the actual amount of forfeitures we have experienced. In the pro-forma information required under SFAS 123 for periods prior to January 1, 2006, we accounted for forfeitures as they occurred.
SFAS 123R requires us to calculate the pool of excess tax benefits, or the APIC pool, available as of January 1, 2006, to absorb tax deficiencies recognized in subsequent periods, assuming we had applied the provisions of the standard in prior periods. Pursuant to the provisions of FASB Staff Position 123R-3, "TRANSITION ELECTION RELATED TO ACCOUNTING FOR THE TAX EFFECTS OF SHARE-BASED PAYMENT AWARDS," we adopted the alternative method for determining the tax effects of share-based compensation, which, among other things, provides a simplified method for estimating the beginning APIC pool balance.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3 - --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
PROPERTY AND EQUIPMENT - Furniture, fixtures and equipment are carried at cost. Depreciation is recorded on the straight-line method over three to ten years, which approximates the estimated useful lives of the assets. Depreciation expense in 2006, 2005 and 2004 was $63,150, $96,146 and $74,819, respectively.
Routine maintenance and repair costs are charged to expense as incurred and renewals and improvements that extend the useful life of the assets are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reported in the statement of operations.
CAPITALIZED SOFTWARE - Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, we capitalize costs to produce the finished software products. Capitalization ceases when the product is available for general release to customers. Costs associated with product enhancements that extend the original product's life or significantly improve the original product's marketability are also capitalized once technological feasibility has been established. Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product. If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that asset, such amount will be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and deploying that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.
ADVERTISING EXPENSE - We expense advertising costs as incurred. Advertising expense in 2006, 2005 and 2004 was $63,198, $127,682 and $166,731, respectively.
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 bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4 - --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
EARNINGS PER SHARE - We have adopted the provisions of SFAS No. 128. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. 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. Equity instruments that may dilute earnings per share in the future are listed in Note 5.
The dilutive effect of convertible debt is reflected in diluted earnings per share by the application of the if-converted method. The convertible debt could potentially dilute basic earnings per share in future periods.
[2] RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the SEC issued Staff Accounting Bulletin 108 ("SAB 108"), which expresses the Staff's views regarding the process of quantifying financial statement misstatements. The bulletin was effective at fiscal year end 2006. The implementation of this bulletin had no impact on the Company's results of operations, cash flows or financial position.
In September 2006, the FASB issued Statement No. 157, FAIR VALUE MEASUREMENTS ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and will be effective for periods beginning after November 15, 2007. The Company is currently evaluating the effect, if any, of SFAS 157 on the Company's consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES-AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 31, 2006. The Company will adopt the provisions of FIN 48 in the first quarter of 2007 as required. The adoption of FIN 48 is not expected to have a material effect on the Company's consolidated financial statements.
In June 2006, the EITF ratified EITF Issue 06-3, HOW TAXES COLLECTED FROM CUSTOMERS AND REMITTED TO GOVERNMENTAL AUTHORITIES SHOULD BE PRESENTED IN THE INCOME STATEMENT (THAT IS, GROSS VERSUS NET PRESENTATION). A consensus was reached that entities may adopt a policy of presenting taxes in the income statement on either a gross or net basis. An entity should disclose its policy of presenting taxes and the amount of any taxes presented on a gross basis should be disclosed, if significant. The guidance is effective for periods beginning after December 15, 2006. We present revenues net of taxes. EITF 06-3 will not impact the method for recording these sales taxes in our consolidated financial statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5 - --------------------------------------------------------------------------------
[3] COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
OPERATING LEASES - We lease approximately 20,000 square feet of office space under a lease which expires in October 2012.
Rent expense was $412,135, $383,101 and $341,756 for the years ended December 31, 2006, 2005 and 2004, respectively.
Our future minimum rental commitments under the noncancellable operating lease in effect at December 31, 2006 were as follows:
Year Ending December 31, - ------------ 2007 $ 453,886 2008 448,304 2009 419,683 2010 405,567 2011 430,602 Thereafter 358,835 ---------------
TOTAL $ 2,516,877 ----- ===============
EMPLOYMENT CONTRACTS - We have an employment contract with one of our executives with an expiration date of December 31, 2007. The aggregate commitment for future salary at December 31, 2006 was approximately $300,000.
[4] INCOME TAXES
An analysis of the components of the income tax provision is as follows:
YEARS ENDED ------------------------------------------------- DECEMBER 31, ------------------------------------------------- 2006 2005 2004 ------------- ------------- ------- Current: Federal $ -- $ -- $ -- State -- -- 48,905 ------------- ------------- -------
Totals -- -- 48,905 ------------- ------------- -------
Deferred: Federal -- -- -- State -- -- -- ------------- ------------- -------
Totals -- -- -- ------------- ------------- -------
NET INCOME TAXES PROVISION $ -- $ -- $48,905 -------------------------- ============= ============= =======
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6 - --------------------------------------------------------------------------------
[4] INCOME TAXES [CONTINUED]
The income tax for continuing operations differs from the amount computed by applying the statutory federal income tax rate as follows:
The components of the net deferred tax asset and liability were as follows:
YEARS ENDED DECEMBER 31, ------------ 2006 2005 ----------- ----------- Deferred Tax Assets - Current: Accounts Receivable Allowance $ 10,000 $ 10,000 Vacation Accrual 15,000 15,000 Valuation Allowance (25,000) (25,000) ----------- -----------
CURRENT DEFERRED TAX ASSET $ -- $ -- -------------------------- =========== ===========
Deferred Tax Asset [Liability] - Long-Term: Net Operating Loss Carryforward $ 9,190,000 $ 8,760,000 Stock Options 80,000 80,000 Capitalized Software (550,000) (640,000) Depreciation and Amortization 15,000 15,000 Valuation Allowance (8,735,000) (8,215,000) ----------- -----------
LONG-TERM DEFERRED TAX ASSET $ -- $ -- ---------------------------- =========== ===========
A 100% valuation allowance has been established due to the uncertainty about the realization of the deferred tax asset. The net change during 2006 and 2005 in the total valuation allowance is $520,000 and $235,000, respectively
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7 - --------------------------------------------------------------------------------
[4] INCOME TAXES [CONTINUED]
At December 31, 2006, we had approximately $26,700,000 of federal net operating tax loss carryforwards expiring at various dates through 2026. The Tax Reform Act of 1986 enacted a complex set of rules which limits a company's ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period. As a result of stock which may be issued by us from time to time, including the stock which may be issued related to our outstanding convertible debentures [See Note 8] and the conversion of outstanding warrants, or the result of other changes in ownership of our outstanding stock, we may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited.
[5] STOCK OPTION AND STOCK PURCHASE PLANS
In June 2005, we adopted the 2005 Stock Incentive Plan (which we amended and restated in 2006 and refer to as the 2005 Plan). Options and stock awards for the purchase of up to 5,000,000 shares may be granted by the Board of Directors to our employees as consultants at an exercise or grant price determined by the Board of Directors on the date of grant. Options may be granted as incentive or nonqualified stock options with a term of not more than ten years. The 2005 Plan allows the Board of Directors to grant restricted or unrestricted stock awards or awards denominated in stock equivalent units, securities or debentures convertible into common stock, or any combination of the foregoing and may be paid in common stock or other securities, in cash, or in a combination of common stock or other securities and cash. At December 31, 2006 and 2005, 4,780,000 and 5,000,000 shares, respectively, were available for grant under the 2005 Stock Incentive Plan.
In March 1995, we adopted the 1995 Employee Stock Option Plan, which was amended in April 1997 and June 2000. Options for the purchase of up to 5,000,000 shares may be granted by the Board of Directors to our employees 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, 2006, 2005 and 2004, -0-, -0- and 1,784,525 shares, respectively, were available for grant under the 1995 Employee Stock Option Plan. The 1995 Employee Stock Option Plan expired in March 2005.
On November 15, 1994, we adopted the 1994 Stock Option Plan for Independent Directors. Options for the purchase of up to 300,000 shares may be granted to our directors who are not employees ["non-employee directors"]. The Plan was amended in June 2000 to increase the aggregate number of shares of common stock available for grant from 300,000 to 750,000. Each non-employee director who is serving on a "Date of Grant" shall automatically be granted an option to purchase 10,000 shares of common stock at the fair market value of common stock on the date the option is granted. Dates of Grant are November 15, 1994, 1999, 2004, and 2009 for non-employee directors serving on November 15, 1994. For individuals who become non-employee directors after November 15, 1994, such directors' Dates of Grant will be the date such individual becomes a director and the fifth, tenth and fifteenth anniversaries of such date. Options are exercisable in full 6 months after the applicable date of grant and expire 5 years after the date of grant. At December 31, 2006, 2005 and 2004, 750,000, 750,000 and 750,000 shares, respectively, were available for grant under the 1994 Stock Option Plan for Independent Directors.
In October 1994, we 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 us. The non-qualified stock options will have up to 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, 2006, 2005 and 2004, -0-, -0- and -0- shares, respectively, were available for grant under the 1994 Non-Qualified Stock Option Plan for Consultants. This Plan expired in October 2004.
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[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
A summary of the changes in outstanding common stock options for all outstanding plans is as follows:
The options granted during 2006 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:
The options granted during 2005 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:
The options granted during 2004 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9 - --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
Exercisable options at December 31, 2006, 2005 and 2004 were as follows:
NUMBER OF WEIGHTED-AVERAGE DECEMBER 31, EXERCISABLE OPTIONS EXERCISE PRICE - ------------ ------------------- --------------
2006 1,773,250 $ 1.00 2005 2,734,167 $ .78 2004 2,442,589 $ .80
The following table summarizes information about stock options at December 31, 2006:
On January 1, 2006, we adopted SFAS No. 123R, "SHARE-BASED PAYMENT," or SFAS 123R, which is a revision of SFAS No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION," or SFAS 123, and supersedes APB No. 25, "ACCOUNTING FOR STOCK ISSUES TO EMPLOYEES," or APB 25. Among other items, SFAS 123R requires companies to record compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. Our share-based awards include stock options and restricted stock awards. Prior to our adoption of SFAS 123R, we applied the intrinsic value method set forth in APB 25 to calculate the compensation expense for share-based awards. Historically, we have generally set the exercise price for our stock options equal to the market value on the grant date. As a result, the options generally had no intrinsic value on their grant dates, and we did not record any compensation expense unless the terms of the options were subsequently modified. For restricted stock awards, the calculation of compensation expense under APB 25 and SFAS 123R is the same.
We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard to all share-based awards issued on or after January 1, 2006 and any outstanding share-based awards that were issued but not vested as of January 1, 2006. Accordingly, our consolidated financial statements for the years ended December 31, 2005 and 2004 have not been restated to reflect the impact of SFAS 123R. For the year ended December 31, 2006, we recognized $109,055 of stock-based compensation expense in our consolidated financial statements. We recognized expense because we had (a) stock options granted prior to January 1, 2006 that had not yet vested as of January 1, 2006 and (b) stock options granted subsequent to January 1, 2006. The exercise price for all stock options issued during 2005 and 2004 were equal to or greater than the market price of our stock at the date of the grant. Accordingly, no compensation expense has been recognized for our stock-based compensation plans for fiscal years 2005 and 2004.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10 - --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
There were 257,144 warrants outstanding at December 31, 2006. The exercise prices for all the warrants issued and outstanding as of December 31, 2006 were equal to or greater than the market price of our stock at the date of grant.
A summary of the changes in outstanding warrants is as follows:
Exercisable options at December 31, 2006, 2005 and 2004 were as follows:
NUMBER OF WEIGHTED-AVERAGE DECEMBER 31, EXERCISABLE OPTIONS EXERCISE PRICE - ------------ ------------------- --------------
2006 1,773,250 $ 1.00 2005 2,734,167 $ .78 2004 2,442,589 $ .80
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. The weighted average fair value of stock options granted to employees used in determining pro forma amounts was estimated at $.40 and $.31 during 2005 and 2004, respectively.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11 - --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
Pro forma information regarding net income or loss and net income or loss per share has been determined as if we had accounted for our 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:
DECEMBER 31, ------------ 2005 2004 ------- -------
Risk-Free Interest Rate 3.90% 3.90% Expected Life 3.0 Years 3.0 Years Expected Volatility 79% 78% Expected Dividends None None
We applied the provisions of APB 25 to determine our stock-based compensation expense for all periods prior to January 1, 2006. The following table illustrates the effect on net income and net income per share if we had applied the fair value recognition provision of SFAS 123 to our stock-based compensation plans for the years ended December 31, 2005 and 2004.
YEARS ENDED DECEMBER 31, ------------ 2005 2004 ------- -------
Net [Loss] Income as Reported $ (1,434) $ 767 Deduct: Amount by which Stock-Based Employee Compensation as Determined under Fair Value Based Method for all Awards Exceeds the Compensation as Determined under the Intrinsic Value Method $ 102 $ 101 Pro Forma Net [Loss] Income $ (1,536) $ 666 Basic [Loss] Earnings Per Share as Reported $ (.09) $ .04 Pro Forma Basic [Loss] Earnings Per Share $ (.10) $ .03
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12 - --------------------------------------------------------------------------------
[6] BASIC EARNINGS PER SHARE DISCLOSURES
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ["EPS"] computations.
Equity instruments that may dilute earnings per share in the future are listed in Note 5.
The Company's options and warrants were not included in the computation of EPS at December 31, 2006 and 2005 because to do so would be antidilutive. The Company's convertible debt does not affect the EPS calculation at December 31, 2006 and 2005 because it would be antidilutive.
Options to purchase 1,682,000 shares of common stock at prices ranging from $.53 to $4.00 per share were outstanding at December 31, 2004, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares.
[7] SUPPLEMENTAL DATA
Accrued liabilities consist of the following:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13 - --------------------------------------------------------------------------------
[8] CONVERTIBLE DEBENTURES
In 2001 and 2002, we completed two rounds of debt financing through the sale of 8% convertible debentures due in 2008 ("2008 Debentures") and 2009 ("2009 Debentures"), respectively, to Renaissance US Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC and certain other investors (including John Roblin, our Chairman of the Board, President and Chief Executive Officer) with an aggregate principal amount of $2,500,000. Interest on the unpaid principal amount of the debentures is payable monthly at the rate of 8% per annum. The 2008 Debentures mature on July 1, 2008 and the 2009 Debentures mature on September 1, 2009, unless the debentures are earlier redeemed by us or the holder or converted into shares of our common stock at the holder's option at a conversion price of $0.30 per share, subject to adjustment. We may redeem the debentures for cash at 101% of the principal amount, together with accrued and unpaid interest through the redemption date, upon the occurrence of certain events specified in the debentures. The related financing costs incurred of $187,090 in connection with establishing these debentures have been deferred and are being amortized over the life of the debt. We have been required to repay principal on the 2008 Debentures and 2009 Debentures, since July 1, 2004 and July 1, 2005, respectively, in monthly installments of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount of such debentures, and at maturity we will be required to pay the remaining unpaid principal amount. In 2004, the holders of the 2008 Debentures elected to convert all of their monthly principal installments due in 2004, totaling $105,335, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures an aggregate of 351,116 shares of our common stock. We made an aggregate of $198,000 of interest payments on the debentures during 2004.
In 2005, the holders of the 2008 Debentures and 2009 Debentures elected to convert all of their monthly principal installments due in 2005, totaling $220,121, under such debentures into shares of our common stock at the conversion price of $.30 per share in lieu of receiving such installments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and 2009 Debentures an aggregate of 733,739 shares of our common stock. We made an aggregate of $184,000 of interest payments on the debentures during 2005.
In 2006, the holders of the 2008 Debentures and the 2009 Debentures elected to convert a portion of their monthly principal installments due in 2006 totaling $127,254, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 424,181 shares of our common stock. In January 2007, the holders of the 2008 Debentures and the 2009 Debentures elected to convert the remaining portion of their monthly principal installments due in 2006, totaling $119,807, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 399,358 shares of our common stock. We made an aggregate of $173,000 of interest payments on the debentures during 2006.
In March 2002, the holders of our debentures under the Convertible Loan Agreements agreed to amend one of the financial covenants for the quarters ending March 31, June 30 and September 30, 2002. As consideration for such amendments, we issued to such holders an aggregate of 128,572 warrants to purchase such number of shares of our common stock at an exercise price of $0.22 per share. The warrants expire in 2007 and became exercisable in equal monthly installments on each of March 31, 2002, June 30, 2002 and September 30, 2002, respectively. The $16,913 estimated fair market value of the warrants was charged to financing costs.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #14 - --------------------------------------------------------------------------------
[8] CONVERTIBLE DEBENTURES [CONTINUED]
As of March 31, 2006, we were not in compliance with certain of the financial covenants of the convertible loan agreements and, as of such date, we received limited waivers under which the holders of our debentures waived such non-compliance. As consideration for the receipt of such waivers, we issued to the holders an aggregate of 128,572 warrants to purchase such number of shares of our common stock at an exercise price of $0.35 per share. These warrants expire in 2011.
As of December 31, 2006, we were not in compliance with the financial covenants of the Convertible Loan Agreements and, as of such date, we received limited waivers to the Convertible Loan Agreements under which the holders of our debentures waived such non-compliance.
At December 31, 2006, principal payments due on the convertible debentures were as follows:
2006 $ 119,808 2007 218,991 2008 1,240,210 2009 468,281 Thereafter -- ----------------
TOTAL $ 2,047,290 ----- ================
[9] 401(K) PLAN
After completing a year of service and working 1,000 hours, employees age 21 and over are eligible to participate in our Tax Saver 401(k) Salary Reduction Plan. Employees can save a percentage of pay on a pre-tax basis to an annual maximum of $15,000 for the year ended December 31, 2006. We match $.50 for each $1.00 of the first 5% of pay employees elect to defer. Expenses associated with this plan in 2006, 2005 and 2004 were approximately $73,495, $81,500 and $76,000, respectively.
[10] STOCKHOLDERS' EQUITY
In January 2007, the holders of the 2008 Debentures and 2009 Debentures elected to convert an aggregate of $119,807 in principal of such debentures, representing their monthly installments of principal under such debentures (in lieu of necessary such installment payments in cash), for 399,358 shares of our common stock at the conversion price of $0.30 per share [See Note 8].
During 2006, the holders of the 2008 Debentures and 2009 Debentures elected to convert an aggregate of $127,254 in principal of such debentures, representing a portion their monthly installments of principal under such debentures (in lieu of necessary such installment payments in cash), for 424,181 shares of our common stock at the conversion price of $0.30 per share [See Note 8].
During 2005, the holders of the 2008 Debentures and 2009 Debentures elected to convert an aggregate of $220,121 in principal of such debentures, representing their monthly installments of principal under such debentures (in lieu of necessary such installment payments in cash), for 733,739 shares of our common stock at the conversion price of $0.30 per share [See Note 8].
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #15 - --------------------------------------------------------------------------------
[10] STOCKHOLDERS' EQUITY [CONTINUED]
During 2004, the holders of the 2008 Debentures elected to convert an aggregate of $105,335 in principal of such debentures, representing their monthly installments of principal under such debentures (in lieu of receiving such installment payments in cash), for 351,116 shares of our common stock at the conversion price of $0.30 per share [See Note 8].
During 2002, we issued an aggregate of 128,572 warrants to purchase such number of shares of our common stock in exchange for an amendment to the convertible loan agreements governing our 2008 Debentures pursuant to which one of the financial covenants was amended for the quarters ending March 31, June 30 and September 30, 2002 [See Note 8]. The $16,913 estimated fair market value of the warrants was charged to financing costs and capital in excess of par value.
During 2001, we issued 154,546 shares of our common stock in exchange for services rendered in connection with the financing described in Note 8. The cost of $68,000 for the services have been included in deferred financing costs, and capital in excess of par value has been increased by $66,455, representing the excess of the cost of the services over the par value of the common stock issued.
[11] FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. In assessing the fair value of our cash and cash equivalents, trade receivables and accounts payables and accrued expenses, management concluded that the carrying amount of these financial instruments approximates fair value because of their short maturities. Management estimates that the carrying amount of our convertible debentures, based on current rates and terms at which we could borrow funds, is approximately $2,000,000 and $2,200,000 at December 31, 2006 and 2005, respectively.
[12] SEGMENT INFORMATION
As of January 1, 2003, we merged the management teams and infrastructures of our two business units, Classic and TAS 2000, into one comprehensive unit. As a result, we no longer separately assess the performance of these products.
[13] MAJOR CUSTOMERS
For the year ended December 31, 2006, sales to three customers amounted to approximately 27%, 13% and 11% of revenues, respectively.
For the years ended December 31, 2005 and 2004, sales to one customer amounted to approximately 23% and 31% of revenues, respectively.
Amounts due from Turkon Line consist of accounts receivable against uncollected commissions earned by the company in a normal course of business.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #16 - --------------------------------------------------------------------------------
[14] RELATED PARTY TRANSACTIONS
In 2006, the Company paid Mark Johnston total consulting fees plus expenses related to a potential acquisition of approximately $37,000.
[15] SUBSEQUENT EVENT
On March 23, 2007, we issued an aggregate of 5,438,670 shares of our common stock to Renaissance US Growth & Income Trust PLC and US Special Opportunities Trust PLC, two funds managed by RENN Capital Group, Inc., in connection with their election to convert an aggregate of $1,631,601 principal amount of their 8% convertible debentures due 2008 and 8% convertible debentures due 2009, representing all of their remaining unpaid principal amount due on the debentures, at a conversion price of $0.30 per share. After giving effect to this conversion, as of March 23, 2007, our only outstanding debentures are an aggregate principal amount of $295,880 that remains outstanding on the 2008 Debentures to John Roblin, our Chairman and Chief Executive Officer, and certain other investors. The 2008 Debentures were originally issued in July 2001 with an aggregate principal amount of $1,800,000 and the 2009 Debentures were originally issued in September 2002 with an aggregate principal amount of $700,000.
No cash proceeds were received by us in connection with each conversion of the debentures.
. . . . . . . . . .
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: April 2, 2007 By: /s/ John W. Roblin ------------------------------------ John W. Roblin Chairman of the Board of Directors, President 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: