UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
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Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
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|
For the fiscal year ended
December 31, 2007.
|
|
|
o
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Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
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|
For the transition period from
________
to _________.
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Commission file number
0-13124
COVER-ALL
TECHNOLOGIES INC.
(Exact
name of Registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of incorporation or organization)
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13-2698053
(I.R.S.
Employer Identification No.)
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55
Lane Road, Fairfield, New Jersey
(Address
of principal executive office)
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07004
(Zip
Code)
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(973)
461-5200
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.01 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act from their obligations under
those Securities. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “larger accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o Accelerated
filer o
Non-accelerated
filer (Do not check if a smaller reporting company) o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 29, 2007, the last business day of
the registrant’s most recently completed second fiscal quarter, was
$15,966,000.
As of
March 17, 2008, there were 23,262,302 shares outstanding of our common
stock.
Documents
Incorporated by Reference:
Portions
of the Registrant’s Proxy Statement for the 2008 Annual Meeting of Stockholders
(“Proxy Statement”), to be filed with the Securities and Exchange Commission
(the “SEC”) not later than 120 days after the close of the Registrant’s fiscal
year, are incorporated by reference as described in Part III.
FORWARD-LOOKING
STATEMENTS
Certain
of the matters discussed in this report, including, without limitation, matters
discussed under Item 1 - “Business”, Item 1A - “Risk Factors” and Item 7 -
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” may constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended. Certain of these forward-looking statements can be
identified by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,”
“plans,” “estimates,” or “anticipates” or the negative of these terms or other
comparable terminology, or by discussions of strategy, plans or
intentions. Statements contained in this report that are not
historical facts are forward-looking statements. Without limiting the
generality of the preceding statement, all statements in this report concerning
or relating to estimated and projected earnings, margins, costs, expenditures,
cash flows, growth rates and financial results are forward-looking
statements. In addition, through our senior management, from time to
time we make forward-looking statements concerning our expected future
operations and performance and other developments. Such
forward-looking statements are necessarily estimates reflecting our best
judgment based upon current information and involve a number of risks and
uncertainties. Other factors may affect the accuracy of these
forward-looking statements and our actual results may differ materially from the
results anticipated in these forward-looking statements. While it is
impossible to identify all such factors, factors that could cause actual results
to differ materially from those estimated by us include, but are not limited to,
those factors or conditions described under Item 1A - “Risk Factors” and Item 7
- “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and Estimates” and general conditions
in the economy and capital markets.
Table
of Contents
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PART
I
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| ITEM 1. | BUSINESS |
4
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| ITEM 1A. |
RISK
FACTORS
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10
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| ITEM 1B. |
UNRESOLVED
STAFF COMMENTS
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14
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| ITEM 2. | PROPERTIES |
15
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ITEM
3.
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LEGAL PROCEEDINGS |
15
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| ITEM 4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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15
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PART
II
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||
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ITEM
5.
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MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
16
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ITEM
6.
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SELECTED
FINANCIAL DATA
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18
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ITEM
7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
20
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ITEM
7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
30
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
30
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ITEM
9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
31
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| ITEM 9A(T). | CONTROLS AND PROCEDURES |
31
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ITEM
9B.
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OTHER INFORMATION |
32
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PART
III
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| ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
32
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| ITEM 11. | EXECUTIVE COMPENSATION |
33
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
33
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| ITEM 13. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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33
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| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
33
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PART
IV
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| ITEM 15. |
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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33
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| SIGNATURES | ||
PART
I
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 creation 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. We
continue to expand MIC with new capabilities in response to customer
needs.
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.
4
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, support for insurance binders, new billing functionality including
commission management and installment support, 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, an
innovative structure that supports policy level profitability 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 is
designed to fully support STP (Straight Through Processing). 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 our 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:
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·
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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.
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·
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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.
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·
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Broad
Accessibility – MIC is an Internet application, which utilizes a
sophisticated portal capability.
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·
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Integrated Data
Representation – MIC provides a consolidated view of information
from disparate systems.
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●
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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.
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●
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Scalability –
MIC can grow with our customer’s needs, measured in terms of the numbers
of concurrent users, response times and other
variables.
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·
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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.
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·
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Compliance –
MIC is designed to enable our customers to respond quickly and efficiently
to the growing number of federal, state and insurance
regulations to help them meet their compliance
obligations.
|
5
MIC
utilizes technology based on Oracle® 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 &
Insurance – 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.
The MIC
Rating & Issuance component supports the following policy
functions:
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·
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Data
capture and editing
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·
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Rating
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·
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Policy
issuance including multiple recipient
print
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·
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All
policy transactions including quotes, new lines, endorsements, renewals,
audits and cancellations
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·
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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. 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.
6
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 35 companies.
During
2007, Cover-All developed a number of new MIC Rating & Issuance capabilities
that are designed to fundamentally improve the ability to customize and
introduce insurance products in very short time frames based upon the latest
technological advances and innovative architecture. These
capabilities include a new print engine, document packaging, a sophisticated set
of data capture/screen creation tools, and a number of other
components. These capabilities were deployed in two customers in 2007
and early 2008.
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:
|
·
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My
Insurance Center Portal
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·
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Enterprise,
Customer-centric Oracle database
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·
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Underwriting
Tools
|
|
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·
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End
User access to information in real time – Straight Through
Processing
|
|
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·
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Rating
and Issuance
|
|
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·
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Full
policy lifecycle support
|
|
|
·
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Clear
and comprehensive data collection with extensive real time
edits
|
|
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·
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Policy
history – easy policy changes and useful for activities such as coverage
inquiries
|
|
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·
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On-line
system, screen and field level look-ups
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·
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On-line
Commercial Lines Manual Tables and Footnotes
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·
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Easy
and direct system navigation
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·
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Standard
ISO (Insurance Service Office)/NCCI coverages and rates
support
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·
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Company
customized coverages and rates support
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·
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Fully
automated recipient-driven issuance of insurance policies, worksheets, ID
cards, etc., including print preview
|
|
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·
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Policy
database
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·
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Multiple
company/program/state/coverage support.
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·
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Templates
to reduce data entry time
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·
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Advanced
Billing Capabilities – integrating with NetSuite
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·
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Claims
Repository
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·
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Customer
Relationship Management
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·
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Agency
and Program Management
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·
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Advanced
Administration Tools
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·
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Access
to Web Services and Information Providers
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·
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Policy
Dashboard – premium & loss information
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·
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Advanced
Workflows, Diaries
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·
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Electronic
Underwriting files
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·
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Compliance
Assist, Help Desk
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·
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Interfaces
to “back end” accounting and reporting systems
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·
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Policy-level
Premium and Loss Information for profitability tracking /
accounting
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·
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Quote,
Binder, Policy Lifecycle
support
|
7
We expect
to utilize and expand 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 have
been 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
have also developed 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.
8
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 2008 as we focus on the Internet
as a valuable 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. We also communicate with our
existing customers in a variety of ways including an annual Customer
Conference.
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 $510,000, $464,000 and $809,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
BACKLOG
We had no
license, maintenance, professional services or ASP backlog of unbilled work as
of December 31, 2007.
MAJOR
CUSTOMERS
Our
product line is in use in over 35 companies. For the years ended
December 31, 2007, 2006 and 2005, we had two, three and one customer(s) who
contributed revenues in excess of 10% of our total revenues for the respective
years. AIGT generated 19%, 27% and 23% of our revenues for the years
ended December 31, 2007, 2006 and 2005, respectively. One other
customer generated 25% of our revenue for the year ended December 31,
2007.
We had no
export sales in 2007, 2006 and 2005.
EMPLOYEES
We had 44
employees as of December 31, 2007. 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 reports 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.
9
ITEM
1A. RISK FACTORS
RISK
FACTORS
In
addition to the other information described elsewhere in this Annual Report, you
should carefully consider the following risk factors, which could materially
affect our business, financial condition and results of
operations. The risks described below are not the only risks facing
our Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial may materially adversely affect
our business, financial condition and results of operations.
RISKS
RELATED TO OUR BUSINESS AND OUR INDUSTRY
While we were profitable in 2007, we
incurred 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 of $1,231,000 in 2007,
$767,000 in 2004 and $392,000 in 2003, there is no assurance that we will be
able to maintain profitability in the future. Our ability 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 fund our 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, 2007, we had a net stockholders’ equity of approximately $2,285,000
and a net working capital of approximately $545,000.
We
may not have sufficient cash to service our indebtedness.
As of
December 31, 2007, our outstanding indebtedness consisted in aggregate principal
amount of $262,265 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 converted into shares of our common
stock at the holder’s option at a conversion price of $0.30 per share, subject
to adjustment. Our ability to make payments on and to refinance our
indebtedness, to the extent the holders of our debentures do not 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. Although
as of December 31, 2007, we had working capital of $545,000, 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.
10
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.
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. We
maintain key man life insurance on Mr. Roblin and Ms. Gallagher in the amount of
$1,000,000 per individual. We are in the process of obtaining key man
life insurance on Mr. Shah in the amount of $1,000,000. 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.
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.
11
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:
|
·
|
undertake
more extensive marketing campaigns for their brands and
services;
|
|
·
|
devote
more resources to product
development;
|
|
·
|
adopt
more aggressive pricing policies;
and
|
|
·
|
make
more attractive offers to potential employees and third-party service
providers.
|
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 major customers.
In 2007
and 2006, our software products operations depended primarily on certain
existing major customers. One of these major customers accounted for
approximately 19% and 27% of our total revenues in 2007 and 2006,
respectively. One new other major customer accounted for
approximately 25% of our total revenue in 2007. We anticipate that
our operations will continue to depend upon the continuing business of our
existing customers, particularly the major customers, and the ability to attract
new customers. As a result, the loss of one or more of our existing
major customers or our inability to continue to attract new customers could
significantly and adversely affect our business, operating results and financial
condition.
12
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, 2007, we had approximately $25,700,000
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.
RISKS
RELATED TO OUR COMMON STOCK
Holders
of our common stock may have difficulty in selling those shares.
Our
common stock is not traded on any securities exchange or an inter-dealer
quotation system. 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 securities exchange or an inter-dealer quotation
system. 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.”
13
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.
Our
shares are subject to dilution as a result of the conversion of our convertible
debentures and the exercise of our warrants.
Debentures. As of
December 31, 2007, a total of $262,265 was outstanding on our 2008 Debentures,
which, at the conversion price of $0.30 per share, were convertible into an
aggregate of 874,217 shares of our common stock. The 2008 Debentures
mature on July 1, 2008, unless they are earlier redeemed by us or converted into
shares of our common stock at the holder’s option. 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 our common
stock. 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
121,429 warrants, expiring in 2011, to purchase such number of shares of our
common stock issued to the same investors, were
outstanding as of December 31, 2007 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 our
common stock. 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.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not applicable.
14
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. LEGAL PROCEEDINGS
None.
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,
2007.
15
PART
II
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, 2006 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.
|
2007:
|
High
|
Low
|
||||||
|
4th
Quarter
|
$ | 1.53 | $ | 1.12 | ||||
|
3rd
Quarter
|
1.50 | 1.24 | ||||||
|
2nd
Quarter
|
1.25 | 0.92 | ||||||
|
1st
Quarter
|
1.30 | 0.66 | ||||||
|
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 | ||||||
As of
March 12, 2008, there were 508 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 12, 2008 was $1.10, as
reported by the OTC Bulletin Board.
16
PERFORMANCE
GRAPH
The graph below compares the cumulative
total stockholder returns (including reinvestment of dividends) from the period
from December 31, 2002 through December 31, 2007 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.
|
|
Comparison
of 5 Year Cumulative Total Return among Cover-All
Technologies
Inc., the Russell 2000 Index and a Peer Group
|
|||||||||||||||||||||||
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12//31/06
|
12//31/07
|
|||||||||||||||||||
|
Cover-All
Technologies Inc.
|
$ | 100.00 | $ | 115.22 | $ | 139.13 | $ | 119.57 | $ | 171.74 | $ | 300.00 | ||||||||||||
|
Russell
2000 Index
|
$ | 100.00 | $ | 147.25 | $ | 174.24 | $ | 182.18 | $ | 215.64 | $ | 212.26 | ||||||||||||
|
Peer
Group (1)
|
$ | 100.00 | $ | 131.77 | $ | 164.62 | $ | 147.56 | $ | 157.10 | $ | 149.35 | ||||||||||||
__________________
|
(1)
|
The
peer group consists of Computer Sciences Corporation, Ebix.com Inc.,
Pegasystems Inc. and TenFold Corp.
|
17
ITEM
6. SELECTED FINANCIAL DATA
The
following selected historical financial information as of December 31, 2007 and
2006, and for each of the years ended December 31, 2007, 2006 and 2005, 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, 2005, 2004 and 2003 and for the years ended
December 31, 2004 and 2003 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, 2007, 2006, 2005, 2004 and 2003:
|
Year
ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Statement
of Operations Data:
|
(in thousands, except per share amounts) | |||||||||||||||||||
|
Revenues
|
$ | 9,777 | $ | 7,288 | $ | 7,255 | $ | 9,274 | $ | 7,524 | ||||||||||
|
Income
(loss) before income tax
|
1,231 | (1,000 | ) | (1,434 | ) | 816 | 392 | |||||||||||||
|
Net
income (loss)
|
1,231 | (1,000 | ) | (1,434 | ) | 767 | 392 | |||||||||||||
|
Net
income (loss) per share – basic
|
0.06 | (0.06 | ) | (0.09 | ) | 0.05 | 0.03 | |||||||||||||
|
Net
income (loss) per share – diluted
|
0.05 | (0.06 | ) | (0.09 | ) | 0.04 | 0.02 | |||||||||||||
|
Cash
dividends per share
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 11 | $ | 132 | $ | 296 | $ | 144 | $ | 1,193 | ||||||||||
|
Working
capital (deficiency)
|
545 | (898 | ) | (237 | ) | 900 | 177 | |||||||||||||
|
Total
assets
|
5,864 | 3,556 | 4,677 | 6,388 | 5,485 | |||||||||||||||
|
Short-term
debt
|
262 | 339 | 247 | 220 | 105 | |||||||||||||||
|
Long-term
debt
|
— | 1,708 | 1,927 | 2,175 | 2,395 | |||||||||||||||
|
Stockholders’
equity (deficit)
|
2,285 | (1,024 | ) | (265 | ) | 928 | 41 | |||||||||||||
Selected Quarterly Financial
Data (Unaudited)
The
following is a summary of selected quarterly financial data for the years ended
December 31, 2007, 2006 and 2005:
|
2007
|
||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Total
revenues
|
$ | 1,931 | $ | 1,939 | $ | 1,889 | $ | 4,018 | ||||||||
|
Operating
income
|
177 | 8 | 9 | 1,093 | ||||||||||||
|
Net
income
|
140 | 3 | 2 | 1,086 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.01 | $ | 0.00 | $ | 0.00 | $ | 0.05 | ||||||||
|
Diluted
earnings per common share
|
$ | 0.01 | $ | 0.00 | $ | 0.00 | $ | 0.04 | ||||||||
18
|
2006
|
||||||||||||||||
|
Q1
|
Q2 | Q3 |
Q4
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Total
revenues
|
$ | 1,739 | $ | 1,638 | $ | 1,618 | $ | 2,293 | ||||||||
|
Operating
income (loss)
|
(246 | ) | (270 | ) | (310 | ) | 2 | |||||||||
|
Net
income (loss)
|
(290 | ) | (314 | ) | (353 | ) | (43 | ) | ||||||||
|
Basic
earnings (loss) per common share
|
$ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.00 | ) | ||||
|
Diluted
earnings (loss) per common share
|
$ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.00 | ) | ||||
|
2005
|
||||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
Total
revenues
|
$ | 2,087 | $ | 1,713 | $ | 1,638 | $ | 1,817 | ||||||||
|
Operating
income (loss)
|
(23 | ) | (444 | ) | (472 | ) | (355 | ) | ||||||||
|
Net
income (loss)
|
(35 | ) | (487 | ) | (517 | ) | (395 | ) | ||||||||
|
Basic
earnings (loss) per common share
|
$ | (0.00 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.03 | ) | ||||
|
Diluted
earnings (loss) per common share
|
$ | (0.00 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.03 | ) | ||||
19
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
2007
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 2007 increased to $9,777,000 from $7,288,000 in 2006 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 two new customer licenses in
2007. The increase in license revenue, to $2,683,000 in 2007 from
$1,376,000 in 2006, was mainly a result of sales to existing customers in 2007
and two new customer license sales in 2007. In 2007 our growth in
license revenue was 95%.
Maintenance. The
decrease in maintenance revenue, to $3,210,000 in 2007 from $3,471,000 in 2006,
was mainly due to the non-renewal of several existing customers. We
expect that our new customer license sales will generate significant additional
maintenance revenue beginning in 2008.
Professional
Services. The increase in professional services revenue, to
$2,316,000 in 2007 from $1,176,000 in 2006, was a result of increased demand for
new software capabilities and customizations from our current customer base and
significant customizations related to the two new customer sales in
2007.
ASP. ASP revenue
increased to $1,568,000 in 2007 from $1,265,000 in 2006, due primarily to an
expanded and extended contractual relationship with two large
customers.
Income (Loss) Before Provision For
Income Taxes. Income before provision for income taxes was
$1,231,000 in 2007 compared to a loss of $(1,000,000) in 2006, primarily due to
an increase in license, professional services and ASP revenue. Our
growth in revenue of 34% significantly exceeded our growth in expenses of
3%.
Net Income
(Loss). Net income for 2007 increased to $1,231,000 from a net
loss of $(1,000,000) in 2006 as a result of an increase in license, professional
services and ASP revenue. Our growth in revenue of 34% significantly
exceeded our growth in expenses of 3%.
We
continue to face several challenges to growth in 2008 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.
20
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:
• Revenue
Recognition
• Valuation
of Capitalized Software
• 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.
21
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.
22
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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues:
|
||||||||||||
|
License
|
27.4 | % | 18.9 | % | 18.2 | % | ||||||
|
Maintenance
|
32.8 | 47.6 | 50.1 | |||||||||
|
Professional
Services
|
23.7 | 16.1 | 14.7 | |||||||||
|
Applications Service Provider
(“ASP”) Services
|
16.1 | 17.4 | 17.0 | |||||||||
|
Total Revenues
|
100.0 | 100.0 | 100.0 | |||||||||
|
Cost
of Revenues:
|
||||||||||||
|
License
|
11.7 | 17.6 | 21.6 | |||||||||
|
Maintenance
|
28.6 | 41.3 | 39.0 | |||||||||
|
Professional
Services
|
13.1 | 7.8 | 6.9 | |||||||||
|
ASP Services
|
4.8 | 5.2 | 2.6 | |||||||||
|
Total Cost of
Revenues
|
58.2 | 71.9 | 70.1 | |||||||||
|
Direct Margin
|
41.8 | 28.1 | 29.9 | |||||||||
|
Operating
Expenses:
|
||||||||||||
|
Sales and
Marketing
|
8.2 | 12.9 | 16.9 | |||||||||
|
General and
Administrative
|
14.7 | 20.1 | 19.7 | |||||||||
|
Research and
Development
|
5.2 | 6.4 | 11.1 | |||||||||
|
Provision for Doubtful
Accounts
|
0.5 | — | — | |||||||||
|
Total Operating
Expenses
|
28.6 | 39.4 | 47.7 | |||||||||
|
Operating Income
(Loss)
|
13.2 | (11.3 | ) | (17.8 | ) | |||||||
|
Other
Expense (Income):
|
||||||||||||
|
Interest Expense
|
0.5 | 2.3 | 2.5 | |||||||||
|
Interest
Expense - Related Party
|
0.1 | 0.1 | 0.1 | |||||||||
|
Interest Income
|
— | — | (0.1 | ) | ||||||||
|
Other Expense
|
— | — | — | |||||||||
|
Other Income
|
— | — | (0.5 | ) | ||||||||
|
Total Other
Expense
|
0.6 | 2.4 | 2.0 | |||||||||
|
(Loss) Income Before Income Taxes
Expense
|
12.6 | (13.7 | ) | (19.8 | ) | |||||||
|
Income
Taxes (Expense):
|
— | — | — | |||||||||
|
Net (Loss) Income
|
12.6 | % | (13.7 | )% | (19.8 | )% | ||||||
YEAR
ENDED DECEMBER 31, 2007 COMPARED WITH YEAR ENDED DECEMBER 31, 2006
Revenues
Total
revenues were $9,777,000 for the year ended December 31, 2007 compared to
$7,288,000 for the year ended December 31, 2006, an increase of
34%. License fees were $2,683,000 for the year ended December 31,
2007 compared to $1,376,000 in 2006, an increase of 95%, as a result of two new
customer license sales and sales to existing customers in 2007. For
the year ended December 31, 2007, maintenance revenues were $3,210,000 compared
to $3,471,000 of the prior year, due to the non-renewal of several existing
customers. We expect that the new license sales in 2007 will generate
significant additional maintenance revenue in 2008. Professional
services revenue contributed $2,316,000 for the year ended December 31, 2007
compared to $1,176,000 for the year ended December 31, 2006 as a result of
increased demand for new software capabilities and customizations from our two
new customers signed in 2007 and our current customer base. ASP
revenues were $1,568,000 for the year ended December 31, 2007 compared to
$1,265,000 for the year ended December 31, 2006 due primarily to an expanded and
extended contractual relationship with two large customers.
23
Cost of
sales increased to $5,688,000 for the year ended December 31, 2007 as compared
to $5,244,000 for 2006, due to higher salaries and personnel-related expenses
associated with staffing changes. Non-cash capitalized software
amortization was $880,000 for the year ended December 31, 2007 as compared to
$1,114,000 in 2006. We capitalized software development costs of
$1,084,000 in 2007 compared to $888,000 in 2006.
Expenses
Research and
Development. Research and development expenses increased to
$510,000 for the year ended December 31, 2007 from $464,000 in 2006, primarily
due to the need for our research and development staff to work on various new
software capabilities for our new and prospective customers. We
intend to continue to maintain our ongoing effort to enhance the functionality
of our products and solutions to remain competitive.
Sales and
Marketing. Sales and marketing expenses decreased to $800,000
for the year ended December 31, 2007 from $943,000 in 2006, primarily due to a
reduction in our personnel-related expenses associated with a reduction in
staffing in 2007.
General and
Administrative. General and administrative expenses were
$1,442,000 in 2007 as compared to $1,461,000 in 2006. The decrease in
the general and administrative expenses was mainly due to a reduction in our
legal fees in 2007 partially offset by an increase in stock-based
compensation. In 2006, the increase in legal fees was related to a
potential acquisition.
Other Expense. We
had $0 other expense for the year ended December 31, 2006 compared to $(1,000)
for the year ended December 31, 2006. In 2006, other expense was
related to a settlement of late fees related to one customer.
Other Income. We
had $0 of other income for the year ended December 31, 2006 compared to $3,000
of other income for the year ended December 31, 2006. In 2006, other
income was related to late fees collected from customers.
Provision for Doubtful
Accounts. We had $51,000 provision for doubtful accounts in
2007 compared to $0 for 2006, due to the write-off of the account receivable
balances of two customers who decided not to purchase our software.
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.
24
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.
LIQUIDITY
AND CAPITAL RESOURCES
Sources of
Liquidity
We have
funded our operations primarily from cash flow from operations and the proceeds
from our issuance in 2001 of $1,800,000 aggregate principal amount of 8%
convertible debentures due in 2008, which we refer to as the 2008 Debentures,
and our issuance in 2002 of $700,000 aggregate principal amount of 8%
convertible debentures due 2009, which we refer to as the 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.
25
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, 2007, we had cash and cash equivalents of $11,000 compared to
cash and cash equivalents of $132,000 at December 31, 2006. The
decrease in cash and cash equivalents is primarily attributable to the decrease
in maintenance revenue and the timing of one of our large license sales in
2007. We had a significant increase in accounts receivable due to a
license sale in the fourth quarter of 2007 to a major insurance
company.
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 and 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. 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. In June 2007,
the remaining holders of the 2008 Debentures elected to convert their monthly
principal installments due in 2007 totaling $33,617. After giving
effect to these conversions, as of December 31, 2007, our only outstanding
debentures were an aggregate principal amount of $262,265 that remained
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.
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.
26
In
December 31, 2007, we had working capital of $545,000 compared to working
capital deficit of $898,000 at December 31, 2006. This increase in
our working capital resulted primarily from a increase in our license,
professional services and ASP revenues. Net cash provided from
operating activities totaled approximately $907,000 in 2007 compared to
approximately $738,000 in 2006. In 2007, 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 2007,
net cash used for investing activities was approximately $1,101,000 compared to
approximately $907,000 in 2006. We expect capital expenditures and
capital software expenditures to continue to be funded by cash generated from
operations. We use cash to invest in capital and other assets to
support our growth.
In 2007,
net cash provided from financing activities was approximately $73,000 compared
to approximately $4,000 in 2006. The cash provided from financing
activities in 2007 and 2006 consisted of proceeds from the exercise of stock
options and warrants.
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.
In
January 2007, the holders of the 2008 Debentures and 2009 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.
On March
23, 2007, the RENN funds elected to convert the remaining unpaid principal
amount due on their 2008 Debentures and 2009 Debentures (representing all of our
outstanding 2009 Debentures). In June 2007, the remaining holders of
the 2008 Debentures elected to convert their monthly principal installments due
in 2007 totaling $33,617. As of December 31, 2007, an aggregate
principal amount of $262,265 remained outstanding on the 2008
Debentures.
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 $262,265.
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.
27
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:
|
·
|
Our
ability to generate cash is subject to general economic, financial,
competitive and other factors beyond its
control.
|
|
·
|
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.
|
|
·
|
We
experience intense competition in our industry and continuing
technological changes.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
Our
operations continue to depend upon the continuing business of our existing
customers and our ability to attract new
customers.
|
|
·
|
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, 2007, we had approximately $25,700,000 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.
28
CONTRACTUAL
OBLIGATIONS
The
following table summarizes our significant contractual obligations at December
31, 2007, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods:
Payments due by
period
(dollars in
thousands)
|
Contractual
Obligations
|
Total
|
Less
than
1 Year
|
1-3 Years
|
3-5 Years
|
More
than
5 Years
|
|||||||||||||||
|
Operating
Leases
|
$ | 2,175 | $ | 518 | $ | 868 | $ | 789 | $ | — | ||||||||||
|
8%
Convertible Debentures due 2008
– principal(1)
|
262 | 262 | — | — | — | |||||||||||||||
|
8%
Convertible Debentures due 2008
– interest
|
10 | 10 | — | — | — | |||||||||||||||
|
Total
|
$ | 2,447 | $ | 790 | $ | 868 | $ | 789 | $ | — | ||||||||||
___________________________
(1) Since
July 1, 2004, the holders of the 2008 Debentures elected to convert a portion of
their monthly principal installments 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
During
the fiscal year ended December 31, 2007, 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
Business
Combinations: In December 2007, the FASB issued Statement No.
141 (revised), Business Combinations. The standard changes the
accounting for business combinations including the measurement of acquirer
shares issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for preacquisition gain and loss
contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition-related restructuring cost accruals,
the treatment of acquisition related transaction costs and the recognition of
changes in the acquirer’s income tax valuation allowance. Statement
141(R) is effective for fiscal years beginning after December 15, 2008, with
early adoption prohibited. We are currently evaluating the impact, if
any, of the pending adoption of Statement 141(R) on our consolidated financial
statement.
29
Accounting and Reporting of
Noncontrolling Interests: In December 2007, the FASB issued
Statement No. 160, Noncontrolling Interests in Consolidated Financial Statement,
an amendment of ARB No. 51. The standard changes the accounting for
noncontrolling (minority) interests in consolidated financial statements
including the requirements to classify noncontrolling interests as a component
of consolidated stockholders’ equity, and the elimination of “minority interest”
accounting in results of operations with earnings attributable to noncontrolling
interests reported as part of consolidated earnings. Additionally,
Statement 160 revises the accounting for both increases and decreases in a
parent’s controlling ownership interest. Statement 160 revises the
accounting for both increases and decreases in a parent’s controlling ownership
interest. Statement 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. We are currently
evaluating the impact, if any, of the pending adoption of Statement 160 on our
consolidated financial statements.
Fair Value
Measurements: In September 2006, the FASB issued Statement No.
157, Fair Value Measurements. Statement 157 defines fair value,
establishes a framework for measuring fair value and expands fair value
measurement disclosures. Statement 157 is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the
impact, if any, of the pending adoption of Statement 157 on our consolidated
financial statements.
Fair Value Option for Financial
Assets and Financial Liabilities: In February 2007, the FASB
issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115, which
allows an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on an
instrument-by-instrument basis. Subsequent measurements for the
financial assets and liabilities an entity elects to record at fair value will
be recognized in earnings. Statement 159 also establishes additional
disclosure requirements. Statement 159 is effective for fiscal years
beginning after November 15, 2007, with early adoption permitted provided that
the entity also adopts Statement 157. We are currently evaluating the
impact, if any, of the pending adoption of Statement 159 on our consolidated
financial statements.
Accounting for Advanced Payments for
Future Research and Development: In June 2007, the FASB
ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities (EITF
07-3). EITF 07-3 requires that nonrefundable advance payments for
goods or services that will be used or rendered for future research and
development activities be deferred and capitalized and recognized as an expense
as the goods are delivered or the related services are
performed. EITF 07-3 is effective, on a prospective basis, for fiscal
years beginning after December 15, 2007. We are currently evaluating
the impact, if any, of the pending adoption of EITF 07-3 on our consolidated
financial statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a
smaller reporting company and this Item is not applicable to us.
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 F-1 herein.
30
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A(T).
CONTROLS AND PROCEDURES
DISCLOSURE
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 of 1934, as
amended (the “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.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Exchange Act defines
internal control over financial reporting in Rule 13a-15(f) and 15d-15(f) as a
process designed by, or under the supervision of, the company’s principal
executive and principal financial officers and effected by the company’s board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the consolidated financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007. In making this
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations, or COSO, of the Treadway Commission in
“Internal Control – Integrated Framework”.
Based
upon its assessment, management concluded that, as of December 31, 2007, the
Company’s internal control over financial reporting is effective based upon
those criteria.
31
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has
been no change in our internal control over financial reporting during the
quarter ended December 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER
INFORMATION
Not
applicable.
PART
III
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 27, 2008, regarding
our executive officers:
|
Name
|
Age
|
Position
|
||
|
John
W. Roblin
|
63
|
President
and Chief Executive Officer
|
||
|
Maryanne
Z. Gallagher
|
46
|
Chief
Operating Officer
|
||
|
Manish
D. Shah
|
36
|
Chief
Technology Officer
|
||
|
Ann
F. Massey
|
49
|
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.
32
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. EXECUTIVE COMPENSATION
The
information required by this Item will be included in the Proxy Statement and is
incorporated herein by reference.
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. 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. 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. EXHIBITS, FINANCIAL STATEMENTS 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 35.
33
|
(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. | |
See
Exhibit Index.
34
COVER-ALL
TECHNOLOGIES INC.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets - December 31, 2007 and 2006
|
F-2
|
|
Consolidated
Statements of Operations - Years Ended December 31, 2007, 2006 and
2005
|
F-4
|
|
Consolidated
Statements of Changes in Stockholders' Equity [Deficit] - Years Ended December
31, 2007, 2006 and 2005
|
F-6
|
|
Consolidated
Statements of Cash Flows - Years Ended December 31, 2007, 2006 and
2005
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
|
Financial
Statement Schedule II - Valuation and
Qualifying Accounts
|
F-25
|
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, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders' equity
[deficit], and cash flows for each of the three years in the period ended
December 31, 2007. 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, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, 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 28,
2008
F-1
COVER-ALL
TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
December 31,
|
||||||||
|
2 0 0 7
|
2 0 0 6
|
|||||||
|
Assets:
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and Cash Equivalents
|
$ | 10,914 | $ | 131,847 | ||||
|
Accounts
Receivable [Less Allowance for Doubtful Accounts
|
||||||||
|
of
$25,000 in 2007 and 2006]
|
3,672,421 | 1,356,069 | ||||||
|
Prepaid
Expenses
|
293,396 | 322,372 | ||||||
|
Total
Current Assets
|
3,976,731 | 1,810,288 | ||||||
|
Property and Equipment - At
Cost:
|
||||||||
|
Furniture,
Fixtures and Equipment
|
466,622 | 449,796 | ||||||
|
Less:
Accumulated Depreciation
|
(297,074 | ) | (251,304 | ) | ||||
|
Property
and Equipment - Net
|
169,548 | 198,492 | ||||||
|
Capitalized
Software [Less Accumulated Amortization of
|
||||||||
|
$10,180,752
and $9,301,096 in 2007 and 2006, Respectively]
|
1,580,971 | 1,376,437 | ||||||
|
Deferred
Financing Costs [Net of Accumulated Amortization of
|
||||||||
|
$215,038
and $180,565 in 2007 and 2006, Respectively]
|
26,273 | 60,746 | ||||||
|
Other
Assets
|
110,151 | 110,151 | ||||||
|
Total
Assets
|
$ | 5,863,674 | $ | 3,556,114 | ||||
See Notes
to Consolidated Financial Statements.
F-2
COVER-ALL
TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
December 31,
|
||||||||
|
2 0 0 7
|
2 0 0 6
|
|||||||
|
Liabilities
and Stockholders' Equity [Deficit]:
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
Payable
|
$ | 579,446 | $ | 459,879 | ||||
|
Accrued
Liabilities
|
1,080,136 | 609,510 | ||||||
|
Deferred
Charges
|
22,503 | 2,532 | ||||||
|
Convertible
Debentures
|
196,699 | 325,796 | ||||||
|
Convertible
Debentures - Related Party
|
65,566 | 13,002 | ||||||
|
Unearned
Revenue
|
1,487,545 | 1,297,581 | ||||||
|
Total
Current Liabilities
|
3,431,895 | 2,708,300 | ||||||
|
Long-Term
Liabilities:
|
||||||||
|
Deferred
Charges
|
146,347 | 163,787 | ||||||
|
Convertible
Debentures
|
-- | 1,642,926 | ||||||
|
Convertible
Debentures - Related Party
|
-- | 65,566 | ||||||
|
Total
Long-Term Liabilities
|
146,347 | 1,872,279 | ||||||
|
Total
Liabilities
|
3,578,242 | 4,580,579 | ||||||
|
Commitments
and Contingencies
|
-- | -- | ||||||
|
Stockholders'
Equity [Deficit]:
|
||||||||
|
Common
Stock, $.01 Par Value, Authorized 75,000,000 Shares;
|
||||||||
|
23,192,302
and 19,491,504 Shares Issued and 23,192,302 and
|
||||||||
|
16,991,504
Shares Outstanding in 2007 and 2006, Respectively
|
231,923 | 194,915 | ||||||
|
Capital
In Excess of Par Value
|
28,073,659 | 26,735,207 | ||||||
|
Accumulated
Deficit
|
(26,020,150 | ) | (27,251,587 | ) | ||||
|
Treasury
Stock - At Cost - 2,500,000 Shares
|
-- | (703,000 | ) | |||||
|
Total
Stockholders' Equity [Deficit]
|
2,285,432 | (1,024,465 | ) | |||||
|
Total
Liabilities and Stockholders' Equity [Deficit]
|
$ | 5,863,674 | $ | 3,556,114 | ||||
See Notes
to Consolidated Financial Statements.
F-3
COVER-ALL
TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Y e a r s e n d e
d
|
||||||||||||
|
D e c e m b e r 3
1,
|
||||||||||||
|
2 0 0 7
|
2 0 0 6
|
2 0 0 5
|
||||||||||
|
Revenues:
|
||||||||||||
|
Licenses
|
$ | 2,682,840 | $ | 1,375,713 | $ | 1,322,733 | ||||||
|
Maintenance
|
3,210,423 | 3,471,480 | 3,637,470 | |||||||||
|
Professional
Services
|
2,316,211 | 1,176,562 | 1,063,933 | |||||||||
|
Application
Service Provider ["ASP"] Services
|
1,567,843 | 1,264,740 | 1,230,750 | |||||||||
|
Total
Revenues
|
9,777,317 | 7,288,495 | 7,254,886 | |||||||||
|
Costs
of Revenues:
|
||||||||||||
|
Licenses
|
1,142,824 | 1,280,232 | 1,566,018 | |||||||||
|
Maintenance
|
2,796,465 | 3,013,900 | 2,834,195 | |||||||||
|
Professional
Services
|
1,278,004 | 570,222 | 498,254 | |||||||||
|
ASP
Services
|
470,781 | 379,767 | 188,851 | |||||||||
|
Total
Costs of Revenues
|
5,688,074 | 5,244,121 | 5,087,318 | |||||||||
|
Direct
Margin
|
4,089,243 | 2,044,374 | 2,167,568 | |||||||||
|
Operating
Expenses:
|
||||||||||||
|
Sales
and Marketing
|
800,322 | 943,187 | 1,221,511 | |||||||||
|
General
and Administrative
|
1,441,842 | 1,461,209 | 1,431,361 | |||||||||
|
Research
and Development
|
509,629 | 464,088 | 808,847 | |||||||||
|
Provision
for Doubtful Accounts
|
50,661 | -- | -- | |||||||||
|
Total
Operating Expenses
|
2,802,454 | 2,868,484 | 3,461,719 | |||||||||
|
Operating
Income [Loss]
|
1,286,789 | (824,110 | ) | (1,294,151 | ) | |||||||
|
Other
Expense [Income]:
|
||||||||||||
|
Interest
Expense
|
49,782 | 170,829 | 181,367 | |||||||||
|
Interest
Expense - Related Party
|
5,579 | 6,512 | 7,169 | |||||||||
|
Interest
Income
|
(9 | ) | (15 | ) | (9,883 | ) | ||||||
|
Other
Expense
|
-- | 1,377 | -- | |||||||||
|
Other
Income
|
-- | (2,948 | ) | (38,600 | ) | |||||||
|
Total
Other Expense
|
55,352 | 175,755 | 140,053 | |||||||||
|
Income
[Loss] Before Income Taxes Expense
|
1,231,437 | (999,865 | ) | (1,434,204 | ) | |||||||
|
Income
Taxes Expense
|
-- | -- | -- | |||||||||
|
Net
Income [Loss]
|
$ | 1,231,437 | $ | (999,865 | ) | $ | (1,434,204 | ) | ||||
See Notes
to Consolidated Financial Statements.
F-4
COVER-ALL
TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Y e a r s e n d e
d
|
||||||||||||
|
D e c e m b e r 3
1,
|
||||||||||||
|
2 0 0 7
|
2 0 0 6
|
2 0 0 5
|
||||||||||
|
Basic
Income [Loss] Earnings Per Common Share
|
$ | .06 | $ | (.06 | ) | $ | (.09 | ) | ||||
|
Diluted
Income [Loss] Earnings Per Common Share
|
$ | .05 | $ | (.06 | ) | $ | (.09 | ) | ||||
|
Weighted
Average Number of Common Shares
|
||||||||||||
|
Outstanding
for Basic Earnings Per
|
||||||||||||
|
Common
Share
|
21,806,000 | 16,732,000 | 16,141,000 | |||||||||
|
Weighted
Average Number of Common Shares
|
||||||||||||
|
Outstanding
for Diluted Income Earnings Per
|
||||||||||||
|
Common
Share [See Note 6]
|
23,463,000 | 16,732,000 | 16,141,000 | |||||||||
See Notes
to Consolidated Financial Statements.
F-5
COVER-ALL
TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIT]
|
Total
|
||||||||||||||||||||
|
Capital in
|
Stockholders'
|
|||||||||||||||||||
|
Excess of
|
Accumulated
|
Treasury
|
Equity
|
|||||||||||||||||
|
Common Stock
|
Par Value
|
Deficit
|
Stock
|
[Deficit]
|
||||||||||||||||
|
Balance
at January 1, 2005
|
$ | 182,481 | $ | 26,265,976 | $ | (24,817,518 | ) | $ | (703,000 | ) | ||||||||||