-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E1Oyhnx5/MU9CYGt7/+2c9WqJdDBbzIXb1NghTFge/is6MACI/AtnFfRPMpi/GxU x3gyiH9mmZ1vPNgCV1pVmg== 0001188112-07-001475.txt : 20070511 0001188112-07-001475.hdr.sgml : 20070511 20070511163026 ACCESSION NUMBER: 0001188112-07-001475 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070511 DATE AS OF CHANGE: 20070511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COVER ALL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000737300 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 132698053 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13124 FILM NUMBER: 07842679 BUSINESS ADDRESS: STREET 1: 18 01 POLLITT DR CITY: FAIR LAWN STATE: NJ ZIP: 07410 BUSINESS PHONE: 2017944800 MAIL ADDRESS: STREET 1: 17 01 POLLIT DRIVE CITY: FAIR LAWN STATE: NJ ZIP: 07410 FORMER COMPANY: FORMER CONFORMED NAME: WARNER INSURANCE SERVICES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WARNER COMPUTER SYSTEMS INC DATE OF NAME CHANGE: 19920407 10-Q 1 t14327_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2007 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number: 0-13124 COVER-ALL TECHNOLOGIES INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2698053 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 LANE ROAD, FAIRFIELD, NEW JERSEY 07004 (Address of principal executive offices) (Zip Code) 917-461-5200 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 1, 2007 - -------------------------------------- -------------------------- Common Stock, $.01 par value per share 23,013,104 shares COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007 - -------------------------------------------------------------------------------- PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006 (Audited)................................ 3 Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (Unaudited)............... 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (Unaudited)............... 6 Notes to Consolidated Financial Statements (Unaudited)......... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 11 ITEM 3. Qualitative and Quantitative Disclosures About Market Risk.............................................. 18 ITEM 4. Controls and Procedures........................................ 18 PART II: OTHER INFORMATION ITEM 1A. Risk Factors................................................... 20 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 20 ITEM 6. Exhibits....................................................... 20 SIGNATURES ............................................................... 21 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. --------------------- COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, 2007 2006 ---------- ------------ (UNAUDITED) (AUDITED) ASSETS: Current Assets: Cash and Cash Equivalents .................................. $ 496,819 $ 131,847 Accounts Receivable (Less Allowance for Doubtful Accounts of $25,000 in 2007 and 2006) ............................ 1,117,323 1,356,069 Prepaid Expenses ........................................... 348,003 322,372 ---------- ---------- Total Current Assets ....................................... 1,962,145 1,810,288 ---------- ---------- Property and Equipment - At Cost: Furniture, Fixtures and Equipment .......................... 449,796 449,796 Less: Accumulated Depreciation ............................. (266,383) (251,304) ---------- ---------- Property and Equipment - Net ............................... 183,413 198,492 ---------- ---------- Capitalized Software (Less Accumulated Amortization of $9,513,725 and $9,301,096 respectively) .................... 1,429,212 1,376,437 ---------- ---------- Deferred Financing Costs (Net of Accumulated Amortization of $189,183 and $180,565, respectively) ....................... 52,128 60,746 ---------- ---------- Other Assets .................................................. 110,026 110,151 ---------- ---------- Total Assets ............................................... $3,736,924 $3,556,114 ========== ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 3 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, 2007 2006 ------------ ------------ (UNAUDITED) (AUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Accounts Payable ............................................. $ 493,547 $ 459,879 Income Taxes Payable ......................................... -- -- Accrued Liabilities .......................................... 411,560 609,510 Deferred Charges ............................................. 4,979 2,532 Convertible Debentures ....................................... 31,083 325,796 Convertible Debenture - Related Party ........................ 10,361 13,002 Unearned Revenue ............................................. 1,463,409 1,297,581 ------------ ------------ Total Current Liabilities .................................... 2,414,939 2,708,300 ------------ ------------ Long-Term Liabilities: Deferred Charges ............................................. 162,640 163,787 Convertible Debentures ....................................... 190,827 1,642,926 Convertible Debenture - Related Party ........................ 63,609 65,566 ------------ ------------ Total Long-Term Liabilities .................................. 417,076 1,872,279 ------------ ------------ Total Liabilities ............................................ 2,832,015 4,580,579 ------------ ------------ Commitments and Contingencies ................................... -- -- ------------ ------------ Stockholders' Equity: Common Stock, $.01 Par Value, Authorized 75,000,000 Shares; 22,991,675 and 19,059,823 Shares Issued and 22,991,675 and 16,559,823 Shares Outstanding, Respectively ........... 229,917 194,915 Capital In Excess Of Par Value .................................. 27,787,034 26,735,207 Accumulated Deficit ............................................. (27,112,042) (27,251,587) Treasury Stock - At Cost - 2,500,000 Shares ..................... -- (703,000) ------------ ------------ Total Stockholders' Equity ...................................... 904,909 (1,024,465) ------------ ------------ Total Liabilities and Stockholders' Equity ...................... $ 3,736,924 $ 3,556,114 ============ ============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 4 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ---------------------------- 2007 2006 ----------- ------------ REVENUES: Licenses ........................................ $ 203,465 $ 248,229 Maintenance ..................................... 826,074 843,694 Professional Services ........................... 517,308 331,063 Applications Service Provider ("ASP") Services .. 384,618 316,185 ----------- ----------- TOTAL REVENUES .................................. 1,931,465 1,739,171 ----------- ----------- COST OF REVENUES: Licenses ........................................ 215,214 314,710 Maintenance ..................................... 726,487 750,432 Professional Services ........................... 239,917 130,793 ASP Services .................................... 94,592 90,088 ----------- ----------- TOTAL COST OF REVENUES .......................... 1,276,210 1,286,023 ----------- ----------- DIRECT MARGIN ................................... 655,255 453,148 ----------- ----------- OPERATING EXPENSES: Sales and Marketing ............................. 110,196 236,216 General and Administrative ...................... 277,703 288,238 Research and Development ........................ 90,713 174,973 ----------- ----------- TOTAL OPERATING EXPENSES ........................ 478,612 699,427 ----------- ----------- OPERATING INCOME (LOSS) ......................... 176,643 (246,279) ----------- ----------- OTHER INCOME (EXPENSE): Interest Expense ................................ (35,641) (42,308) Interest Expense - Related Party ................ (1,459) (1,646) Interest Income ................................. 2 4 Other Income .................................... -- 243 ----------- ----------- TOTAL OTHER INCOME (EXPENSE) .................... (37,098) (43,707) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) ..... 139,545 (289,986) INCOME TAXES (BENEFIT) ............................. -- -- ----------- ----------- NET INCOME (LOSS) .................................. $ 139,545 $ (289,986) =========== =========== BASIC EARNINGS (LOSS) PER COMMON SHARE ............. $ .01 $ (0.02) =========== =========== DILUTED EARNINGS (LOSS) PER COMMON SHARE ........... $ .01 $ (0.02) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING FOR BASIC EARNINGS (LOSS) PER COMMON SHARE ................................ 17,873,000 16,560,000 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING FOR DILUTED EARNINGS (LOSS) PER COMMON SHARE ................................ 19,431,000 16,560,000 =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 5 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ---------------------------- 2007 2006 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) ........................................... $ 139,545 $(289,986) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided From (Used For) Operating Activities: Depreciation .......................................... 15,079 17,018 Amortization of Capitalized Software .................. 212,629 263,681 Amortization of Deferred Financing Costs .............. 8,618 8,618 Changes in Assets and Liabilities: (Increase) Decrease in: Accounts Receivable ................................... 238,746 833,194 Prepaid Expenses ...................................... (25,631) 38,859 Other Assets .......................................... 125 (294) Increase (Decrease) in: Accounts Payable ...................................... 33,668 (230,375) Accrued Liabilities ................................... (197,952) (27,130) Deferred Charges ...................................... 1,300 1,301 Unearned Revenue ...................................... 165,828 (101,186) --------- --------- Net Cash Provided From (Used For) Operating Activities ...... 591,955 513,700 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures ........................................ -- -- Capitalized Software Expenditures ........................... (265,404) (152,229) --------- --------- Net Cash Provided From (Used For) Investing Activities ...... (265,404) (152,229) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Exercise of Stock Options and Warrants ........ 38,421 -- --------- --------- Net Cash Provided From Financing Activities ................. 38,421 -- --------- --------- CHANGE IN CASH AND CASH EQUIVALENTS ............................ 364,972 361,471 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD ................ 131,847 296,159 --------- --------- CASH AND CASH EQUIVALENTS - END OF PERIOD ...................... $ 496,819 $ 657,630 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE PERIODS FOR: Interest ................................................. $ 35,641 $ 42,308 Interest - Related Party ................................. 1,459 1,646 Income Taxes ............................................. -- --
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements. 6 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- [1] GENERAL For a summary of significant accounting policies, refer to Note 1 of Notes to Consolidated Financial Statements included in Cover-All Technologies Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2006. While the Company believes that the disclosures herein presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report. Certain amounts for the prior period have been reclassified to conform with the current period's financial statement presentation. The financial statements include on a consolidated basis the results of its subsidiary. All material intercompany transactions and balances have been eliminated. In the opinion of management, the accompanying consolidated financial statements include all adjustments which are necessary to present fairly the Company's consolidated financial position as of March 31, 2007, and the results of their operations for the three month periods ended March 31, 2007 and 2006, and their cash flows for the three month periods ended March 31, 2007 and 2006. Such adjustments are of a normal and recurring nature. The results of operations for the three month periods ended March 31, 2007 and 2006 are not necessarily indicative of the results to be expected for a full year. [2] CONVERTIBLE DEBENTURES In 2001, we issued $1,800,000 aggregate principal amount of 8% convertible debentures due 2008, which we refer to as the 2008 Debentures, and in 2002, we issued $700,000 aggregate principal amount of 8% convertible debentures due 2009, which we refer to as the 2009 Debentures. The 2008 Debentures were issued to two funds managed by RENN Capital Group, Inc., for an aggregate of $1,400,000, and the remainder of the 2008 Debentures were issued to John Roblin, our Chairman, President and Chief Executive Officer, and certain other investors. Our 2009 Debentures were issued only to the two RENN funds. Our debentures are convertible at the election of the holders into shares of our common stock, at a conversion price of $0.30 per share, subject to adjustment. In 2006, the holders of the 2008 Debentures and the 2009 Debentures elected to convert a portion of their monthly principal installments due in 2006 totaling $127,254, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 424,181 shares of our common stock. In January 2007, the holders of the 2008 Debentures and the 2009 Debentures elected to convert the remaining portion of their monthly principal installments due in 2006, totaling $119,807, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 399,358 shares of our common stock. We made an aggregate of $173,000 of interest payments on the debentures during 2006. On March 23, 2007, the RENN funds elected to convert all of their remaining unpaid principal amount due on their 2008 Debentures and 2009 Debentures, totaling $1,631,601, into 5,438,670 shares of our common stock. After giving effect to this conversion, as of March 23, 2007, our only outstanding debentures are an aggregate principal amount of $295,880 that remains outstanding on the 2008 Debentures, which, at the conversion price of $0.30 per share, are convertible into an aggregate of 986,267 shares of our common stock. Interest on the unpaid principal amount of the debentures is payable monthly at the rate of 8% per annum. The 2008 Debentures mature on July 1, 2008, unless the debentures are earlier redeemed by us or the holder or converted into shares of our common stock at the holder's option at a conversion price of $0.30 per share, subject to adjustment. We may redeem the debentures for cash at 101% of the principal amount, together with accrued and unpaid interest through the redemption date, upon the occurrence of certain events specified in the debentures. The related financing costs incurred of $187,090 in connection with establishing these debentures have been deferred and are being amortized over the life of the debt. We have been required to repay principal on the 2008 Debentures and 2009 Debentures, since July 1, 2004 and July 1, 2005, respectively, in monthly installments of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount. 7 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- As of March 31, 2006, we were not in compliance with certain of the financial covenants of the convertible loan agreements and, as of such date, we received limited waivers under which the holders of our debentures waived such non-compliance. As consideration for the receipt of such waivers, we issued to the holders an aggregate of 128,000 warrants to purchase such number of shares of our common stock at an exercise price of $0.35 per share. The warrants expire in 2011 and are exercisable in equal installments on each of May 9, 2006, June 30, 2006 and September 30, 2006. As of March 31, 2007, we were not in compliance with one of the financial covenants of the remaining convertible loan agreement and, as of such date, we received limited waivers to the convertible loan agreement under which the holders of our debentures waived such non-compliance. At March 31, 2007, principal payments due on the convertible debentures were as follows: 2007 .................... $ 33,616 2008 .................... 262,264 2009 .................... -- 2010 .................... -- 2011 .................... -- -------- TOTAL $295,880 ======== [3] EARNINGS PER SHARE DISCLOSURES The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations:
FOR THE THREE MONTHS ENDED MARCH 31, 2007 --------------------------------------- INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Basic EPS: (Loss) Available to Common Stockholders ... $139,545 17,873,480 $.01 Interest Reversal Convertible Debentures (Net of Tax) .............................. 3,551 -- -- Effect of Dilutive Securities: Exercise of Options ....................... -- 492,889 -- Exercise of Warrants ...................... -- 78,572 -- Conversion of Convertible Debentures ...... -- 986,272 -- -------- ---------- ---- Diluted EPS: (Loss) Available to Common Stockholders Plus Assumed Conversions............... $143,096 19,431,213 $.01 ======== ========== ====
Options to purchase 1,008,000 shares of common stock at prices ranging from $1.13 to $2.00 per share were outstanding at March 31, 2007, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The Company's options and warrants were not included in the computation of EPS for the period ended March 31, 2007 because to do so would be antidilutive. The Company's convertible debt does not affect the EPS calculation for the period ended March 31, 2007 because it would be antidilutive. 8 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2006 --------------------------------------- INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Basic EPS: Income (Loss) Available to Common Stockholders ............................... $(289,986) 16,559,823 $(0.02) Interest Reversal Convertible Debentures (Net of Tax) ............................... -- -- -- Effect of Dilutive Securities: Exercise of Options ........................ -- -- -- Exercise of Warrants ....................... -- -- -- Conversion of Convertible Debentures ....... -- -- -- --------- ---------- ------ Diluted EPS: Income (Loss) Available to Common Stockholders Plus Assumed Conversions ... $(289,986) 16,559,823 $(0.02) ========= ========== ======
The Company's options and warrants were not included in the computation of EPS for the period ended March 31, 2006 because to do so would be antidilutive. The Company's convertible debt does not affect the EPS calculation for the period ended March 31, 2006 because it would be antidilutive. [4] STOCK OPTION AND STOCK PURCHASE PLANS On January 1, 2006, we adopted SFAS No. 123R, "SHARE-BASED PAYMENT," or SFAS 123R, which is a revision of SFAS No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION," or SFAS 123, and supersedes APB No. 25, "ACCOUNTING FOR STOCK ISSUES TO EMPLOYEES," or APB 25. Among other items, SFAS 123R requires companies to record compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. Our share-based awards include stock options and restricted stock awards. Prior to our adoption of SFAS 123R, we applied the intrinsic value method set forth in APB 25 to calculate the compensation expense for share-based awards. Historically, we have generally set the exercise price for our stock options equal to the market value on the grant date. As a result, the options generally had no intrinsic value on their grant dates, and we did not record any compensation expense unless the terms of the options were subsequently modified. For restricted stock awards, the calculation of compensation expense under APB 25 and SFAS 123R is the same. We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard to all share-based awards issued on or after January 1, 2006 and any outstanding share-based awards that were issued but not vested as of January 1, 2006. In the three months ended March 31, 2006 and 2007, we recognized no stock-based compensation expense in our consolidated financial statements. We did not recognize expense because we did not have any (a) stock options granted prior to January 1, 2006 that had not yet vested as of January 1, 2006, (b) stock options granted subsequent to January 1, 2006 and (c) restricted stock award grants made both before and after January 1, 2006 that had not yet vested. The estimated fair value underlying our calculation of compensation expense for stock options is based on the Black-Scholes pricing model. SFAS 123R requires forfeitures of share-based awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if our estimates change based on the actual amount of forfeitures we have experienced. In the pro-forma information required under SFAS 123 for periods prior to January 1, 2006, we accounted for forfeitures as they occurred. SFAS 123R requires us to calculate the pool of excess tax benefits, or the APIC pool, available as of January 1, 2006, to absorb tax deficiencies recognized in subsequent periods, assuming we had applied the provisions of the standard in prior periods. Pursuant to the provisions of FASB Staff Position 123R-3, "TRANSITION ELECTION RELATED TO ACCOUNTING FOR THE TAX EFFECTS OF SHARE-BASED PAYMENT AWARDS," we adopted the alternative 9 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- method for determining the tax effects of share-based compensation, which, among other things, provides a simplified method for estimating the beginning APIC pool balance. In June 2005, we adopted the 2005 Stock Incentive Plan (which we refer to as the 2005 Plan). Options and stock awards for the purchase of up to 5,000,000 shares may be granted by the Board of Directors to our employees as consultants at an exercise or grant price determined by the Board of Directors on the date of grant. Options may be granted as incentive or nonqualified stock options with a term of not more than ten years. The 2005 Plan allows the Board of Directors to grant restricted or unrestricted stock awards or awards denominated in stock equivalent units, securities or debenture convertible into common stock, or any combination of the foregoing and may be paid in common stock or other securities, in cash, or in a combination of common stock or other securities and cash. At March 31, 2007, 4,780,000 shares were available for grant under the 2005 Plan. In November 1994, we adopted the 1994 Stock Option Plan for Independent Directors. Options for the purchase of up to 300,000 shares may be granted to our directors who are not employees. The Plan was amended in June 2000 to increase the aggregate number of shares of common stock available for grant from 300,000 to 750,000. Each non-employee director who is serving on a "Date of Grant" shall automatically be granted an option to purchase 10,000 shares of common stock at the fair market value of common stock on the date the option is granted. Dates of Grant are November 15, 1994, 1999, 2004 and 2009 for non-employee directors serving on November 15, 1994. For individuals who become non-employee directors after November 15, 1994, such directors' Dates of Grant will be the date such individual becomes a director and the fifth, tenth and fifteenth anniversaries of such date. Options are exercisable in full 6 months after the applicable date of grant and expire 5 years after the date of grant. At March 31, 2007, 750,000 shares were available for grant under the 1994 Stock Option Plan for Independent Directors. A summary of the changes in outstanding common stock options for all outstanding plans is as follows:
WEIGHTED-AVERAGE EXERCISE PRICE REMAINING WEIGHTED-AVERAGE SHARES PER SHARE CONTRACTUAL LIFE EXERCISE PRICE --------- ----------- ---------------- ---------------- Balance, December 31, 2006 ... 2,018,000 $.23 - 2.00 1.8 years $.93 Granted ................... -- -- -- Exercised ................. (55,000) $ .27 - .27 -- $.27 Canceled .................. -- -- -- Expired ................... -- -- -- Balance, March 31, 2006 ...... 1,963,000 $.34 - 2.00 1.6 years $.95
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. 10 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ----------------------------------------------------------------------- CERTAIN OF THE MATTERS DISCUSSED IN THIS REPORT, INCLUDING, WITHOUT LIMITATION, MATTERS DISCUSSED UNDER THIS ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY CONSTITUTE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT) AND ARE SUBJECT TO THE OCCURRENCE OF CERTAIN CONTINGENCIES WHICH MAY NOT OCCUR IN THE TIME FRAMES ANTICIPATED OR OTHERWISE, AND, AS A RESULT, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. IN ADDITION TO OTHER FACTORS AND MATTERS DISCUSSED ELSEWHERE IN THIS REPORT ON FORM 10-Q AND IN OUR FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 2007, AND OTHER PERIODIC REPORTS FILED, THESE RISKS, UNCERTAINTIES AND CONTINGENCY INCLUDE, BUT ARE NOT LIMITED TO, RISKS ASSOCIATED WITH INCREASED COMPETITION, CUSTOMER DECISIONS, THE SUCCESSFUL COMPLETION OF CONTINUING DEVELOPMENT OF NEW PRODUCTS, THE SUCCESSFUL NEGOTIATION, EXECUTION AND IMPLEMENTATION OF ANTICIPATED NEW SOFTWARE CONTRACTS, THE SUCCESSFUL ADDITION OF PERSONNEL IN THE MARKETING AND TECHNICAL AREAS AND OUR ABILITY TO COMPLETE DEVELOPMENT AND SELL AND LICENSE OUR PRODUCTS AT PRICES WHICH RESULT IN SUFFICIENT REVENUES TO REALIZE PROFITS, AND OTHER BUSINESS FACTORS BEYOND OUR CONTROL. 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 ASPs, continuing maintenance fees for servicing the product and professional services. Total revenue for the three months ended March 31, 2007 increased from $1,739,000 to $1,931,000 for the three months ended March 31, 2006, mainly due to an increase in professional services and ASP revenue, which was partially offset by a decrease in license and maintenance revenue. The following is an overview of the key components of our revenue and other important financial data for the three months ended March 31, 2007: SOFTWARE LICENSES. Our license revenue in the three months ended March 31, 2007 of $203,000 was from existing customers who chose to renew, add onto or extend their use of our software. For the three months ended March 31, 2006, we generated $248,000 in license revenue. Our new software license revenue is affected by the strength of general economic and business conditions and the competitive position of our software products. New software license sales are characterized by long sales cycles and intense competition. Timing of new software license sales can substantially affect our quarterly results. MAINTENANCE. Maintenance revenue was $826,000 in the three months ended March 31, 2007 compared to $844,000 in the same period in 2006. The decrease in the first three months of 2007 was mainly due to the non-renewal of existing customers. Maintenance revenue is influenced primarily by the following factors: the renewal rate from our existing customer base, the amount of new maintenance associated with new license sales and annual price increases. PROFESSIONAL SERVICES. The increase in professional services revenue, from $331,000 in the three months ended March 31, 2006 to $517,000 in the same period of 2007, was a result of increased demand for new software capabilities and customizations from our current customer base. ASP SERVICES. ASP services revenue was $385,000 in the first three months of 2007 compared to $316,000 in the same period in 2006, due to an expanded and extended contractual relationship with a large customer. INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES. Income (loss) before provision for income taxes was $140,000 in the three months ended March 31, 2007 compared to $(290,000) in the same period of 2006 primarily due to an increase in professional services and ASP revenue and a reduction in operating expenses. 11 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- NET INCOME (LOSS). Net income (loss) for the three months ended March 31, 2007 increased to $140,000 from $(290,000) in the same period of 2006 as a result of an increase in professional services and ASP revenue and a reduction in operating expenses. CASH FLOW. We generated $592,000 in positive cash flow from operations in the first three months of 2007 and ended the period with $497,000 in cash and cash equivalents and $1,117,000 in accounts receivable. We continue to face competition for growth in 2007 mainly in the marketing and selling of our products and services to new customers, caused by a number of factors, including long sales cycles and general economic and business conditions. 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. RESULTS OF OPERATIONS - --------------------- The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues: THREE MONTHS ENDED MARCH 31, --------------- 2007 2006 ------ ------ REVENUES: License 10.5% 14.3% Maintenance 42.8 48.5 Professional Services 26.8 19.0 Applications Service Provider ("ASP") Services 19.9 18.2 ------ ------ TOTAL REVENUES 100.0 100.0 ------ ------ COST OF REVENUES: License 11.2 18.1 Maintenance 37.6 43.1 Professional Services 12.4 7.5 ASP Services 4.9 5.2 ------ ------ TOTAL COST OF REVENUES 66.1 73.9 ------ ------ DIRECT MARGIN 33.9 26.1 ------ ------ OPERATING EXPENSES: Sales and Marketing 5.7 13.6 General and Administrative 14.4 16.6 Research and Development 4.7 10.1 ------ ------ TOTAL OPERATING EXPENSES 24.8 40.3 ------ ------ OPERATING INCOME (LOSS) 9.1 (14.2) ------ ------ OTHER EXPENSE (INCOME): Interest Expense 1.9 2.5 Interest Income -- -- Other Income -- -- ------ ------ TOTAL OTHER EXPENSE (INCOME) 1.9 2.5 ------ ------ INCOME (LOSS) BEFORE INCOME TAXES 7.2 (16.7) ------ ------ INCOME TAXES -- -- ------ ------ NET INCOME (LOSS) 7.2% (16.7)% ------ ------ 12 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006 - ------------------------------------------------------------------------------- Total revenues for the three months ended March 31, 2007 were $1,931,000 as compared to $1,739,000 for the same period in 2006. License fees were $203,000 for the three months ended March 31, 2007 compared to $248,000 in the same period in 2006 as a result of fewer sales to existing customers in 2007. For the three months ended March 31, 2007, maintenance revenues were $826,000 compared to $844,000 in the same period of the prior year primarily due in part to the non-renewal of a few customers. For the three months ended March 31, 2007, ASP revenues were $385,000 as compared to $316,000 in the same period for the prior year, due to an expanded and extended contractual relationship with a very large customer. Professional services revenue contributed $517,000 in the three months ended March 31, 2007 compared to $331,000 in the first quarter of 2006, as a result of increased demand for new software capabilities and customizations from our current customer base. Cost of sales remained relatively constant at $1,276,000 for the three months ended March 31, 2007 as compared to $1,286,000 for the same period in 2006. Non-cash capitalized software amortization was $213,000 for the three months ended March 31, 2007 as compared to $264,000 for the same period in 2006. The Company capitalized $265,000 of software development costs in the first three months of 2007 as compared to $152,000 in the same period in 2006. Research and development expenses decreased to $91,000 for the three months ended March 31, 2007 as compared to $175,000 for the same period in 2006, primarily as a result of our efforts to streamline research and development projects and shift resources to assist in servicing our customer base. We are continuing our ongoing efforts to enhance the functionality of our products and solutions and believe that investments in research and development are critical to our remaining competitive in the marketplace. Sales and marketing expenses were $110,000 for the three months ended March 31, 2007 as compared to $236,000 in the same period of 2006. This decrease in 2007 was primarily due to a reduction in our marketing and sales headcount, resulting in a decrease in personnel-related costs. General and administrative expenses were $278,000 in the three months ended March 31, 2007 as compared to $288,000 in the same period in 2006. This decrease in 2007 was mainly due to decrease in personnel-related costs. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Sources of Liquidity -------------------- We have funded our operations primarily from cash flow from operations and the proceeds from our 2008 Debentures and our 2009 Debentures. Cash from operations results primarily from net loss from the income statement plus non-cash expenses (depreciation and amortization) and changes in working capital from the balance sheet. Our largest source of operating cash flows is cash collections from our customers following the purchase or renewal of software licenses, product support agreements and other related services. Payments from customers for software licenses are generally received at the beginning of the contract term. Payments from customers for product support and ASP services are generally received in advance on a quarterly basis. Payments for professional services are generally received 30 days after the services are performed. At March 31, 2007, we had cash and cash equivalents of $497,000 compared to cash and cash equivalents of $658,000 at March 31, 2006. The decrease in cash and cash equivalents is primarily attributable to the decrease in license sales and maintenance revenues in the three months ended March 31, 2007. 13 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- Cash Flows ---------- Our ability to generate cash has depended on a number of different factors, primarily our ability to continue to secure and retain customers and generate new license sales and related product support agreements. In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of capital to invest in sales and marketing, technology infrastructure and research and development. Our ability to continue to control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows. We intend to maintain our expenses in line with existing revenue streams from maintenance support, ASP services and professional services. We may require cash to service our indebtedness, which consists primarily of our obligations to make monthly principal and interest payments on our outstanding debentures. Balance sheet items that should be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. Income statement items that should be considered in assessing our liquidity include revenue, cost of revenue (net of depreciation and amortization), operating expenses (net of depreciation and amortization) and other expenses. Statement of cash flows items that should be considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities. At March 31, 2007, we had working capital (deficit) of approximately $(453,000) compared to a working capital (deficit) of approximately $(446,000) at March 31, 2006. This increase in our working capital deficit resulted primarily from a decrease in license and maintenance revenues. For the three months ended March 31, 2007, net cash provided from (used for) operating activities totaled approximately $592,000 compared to approximately $514,000 for the three months ended March 31, 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. The Company had a significant increase in its accounts receivable in 2006 due to the license sale to one large customer offset by non-cash expenses and payment of liabilities. For the three months ended March 31, 2007, net cash used for investing activities was approximately $265,000 compared to approximately $152,000 for the three months ended March 31, 2006 due to an increase in capitalized projects. The Company expects capital expenditures and capital software expenditures to continue to be funded by cash generated from operations. For the three months ended March 31, 2007, net cash provided from financing activities was approximately $38,000 compared to approximately $0 for the three months ended March 31, 2006. The cash provided from financing activities in 2007 consisted of proceeds from the exercise of stock options and warrants. Funding Requirements -------------------- Our primary uses of cash are for personnel-related expenditures, facilities and technology costs. 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. The 2008 Debentures were issued with an aggregate principal amount of $1,800,000, and the 2009 Debentures were issued with an aggregate principal amount of $1,800,000. Interest on the unpaid principal amount of the debentures is payable at the rate of 8% per annum. We have been required to pay, since July 1, 2004 and July 1, 2005, respectively, monthly principal installments in the amount of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount of the 2008 Debentures and 2009 Debentures, and at maturity we will be required to pay the remaining unpaid principal amount. In 2006, the holders of the 2008 Debentures and the 2009 Debentures elected to convert a portion of their monthly principal installments due in 2006 totaling $127,254, under such debentures into shares of our common 14 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 424,181 shares of our common stock. In January 2007, the holders of the 2008 Debentures and the 2009 Debentures elected to convert the remaining portion of their monthly principal installments due in 2006, totaling $119,807, under such debentures into shares of our common stock at the conversion price of $0.30 per share in lieu of receiving such installment payments in cash. In connection with this conversion, we issued to the holders of the 2008 Debentures and the 2009 Debentures an aggregate of 399,358 shares of our common stock. On March 23, 2007, we issued an aggregate of 5,438,670 shares of our common stock to the RENN funds in connection with their election to convert an aggregate of $1,631,601 principal amount of their 2008 Debentures and 2009 Debentures, representing all of their remaining unpaid principal amount due on the debentures, at a conversion price of $0.30 per share. As of March 23, 2007, an aggregate principal amount of $295,880 remains outstanding on the 2008 Debentures. In 2007, we will be required to make payments of $33,616 in principal amount of the 2008 Debentures and we expect to make interest payments of approximately $23,700 in the aggregate during 2007. In addition, upon maturity of our 2008 Debentures in July 2008, we will be required to repay the outstanding principal balance on our 2008 Debentures, which is expected to be approximately $262,264. We prepare monthly cash flow projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, maintenance, ASP and professional services. We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and other specific payments, on a rolling twelve-month basis. Comparing estimated cash receipts to estimated payments, we evaluate our ending cash balance monthly and determine whether our anticipated cash flows from operations will be sufficient to meet our normal operating needs for at least the next twelve months. We believe that our current cash balances and anticipated cash flows from operations will be sufficient to meet our normal operating needs for at least the next twelve months. We do not anticipate any material changes in our sources of and needs for capital. Our ability to fund our working capital needs, address planned capital expenditures and make payments on or refinance our indebtedness will depend on our ability to generate cash in the future. We anticipate generating future working capital through sales to new customers and continued sales and services to our existing customers. We may require a significant amount of cash to service our indebtedness, which consists primarily of our obligations to make monthly principal and interest payments on the debentures. Our future liquidity and capital resource requirements will depend on many factors, including but not limited to the following trends and uncertainties we face: o Our ability to generate cash is subject to general economic, financial, competitive and other factors beyond our control. o Our need to invest resources in product development in order to continue to enhance our current product, develop new products, attract and retain customers and keep pace with competitive product introductions and technological developments. o We experience intense competition in our industry and continuing technological changes. o Insurance companies typically are slow in making decisions and have numerous bureaucratic and institutional obstacles, which can make our efforts to attain new customers difficult. o We compete with a number of larger companies who have greater resources than those of ours. We compete on the basis of insurance knowledge, products, services, price, technological advances and system functionality and performance. o Our operations continue to depend upon the continuing business of our existing customers and our ability to attract new customers. o A decline in software spending in the insurance industry could result in a decrease in our revenue. Material risks to cash flow from operations include delayed or reduced cash payments accompanying sales of new licenses or a decline in our services business. There can be no assurance that changes in our plans or other 15 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- 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 debentures will continue to elect to convert all or a portion of their monthly cash installments of principal into shares of our common stock in any future periods. If we are unable to pay our indebtedness through cash flows from operations, we may need additional financing, and we cannot be certain that we will be able to obtain additional financing with favorable terms. We do not expect for there to be a change in the mix or relative cost of our sources of capital. If we were to seek to obtain additional capital, we would be required to obtain approval from the holders of our debentures. We do not foresee difficulty in obtaining such approval, but we have not recently sought approval to raise additional capital. Net Operating Loss Carryforwards -------------------------------- At December 31, 2006, we had approximately $26,700,000 of federal net operating tax loss carryforwards expiring at various dates through 2026. The Tax Reform Act of 1986 enacted a complex set of rules which limits a company's ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change. These rules define ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period. As a result of stock which may be issued by us from time to time, including the stock which may be issued relating to our outstanding convertible debentures and the conversion of outstanding warrants, or the result of other changes in ownership of our outstanding stock, we may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited. OFF-BALANCE SHEET TRANSACTIONS - ------------------------------ We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ The SEC has issued cautionary advice to elicit more precise disclosure in this Item 2, MD&A, about accounting policies management believes are most critical in portraying our financial results and in requiring management's most difficult subjective or complex judgments. The preparation of financial documents in conformity with accounting principles generally accepted in the United States of America requires management to make judgments and estimates. On an on-going basis, we evaluate our estimates, the most significant of which include establishing allowances for doubtful accounts, a valuation allowance for our deferred tax assets and determining the recoverability of our long-lived assets. The basis for our estimates are historical experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from the amounts estimated and recorded in our financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: o Revenue Recognition o Valuation of Capitalized Software o Valuation of Allowance for Doubtful Accounts Receivable 16 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- 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 and ASP services is recognized ratably over the life of the contract. Revenue from professional consulting services is recognized when the service is provided. Amounts invoiced to our customers in excess of recognized revenues are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period. Our revenue is derived from the licensing of our software products, professional services, maintenance and support and ASP services. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. LICENSE REVENUE. We recognize our license revenue upon delivery, provided collection is determined to be probable and no significant obligations remain. SERVICES AND SUPPORT REVENUE. Our services and support revenue is composed of professional services (such as consulting services and training) and maintenance and support and ASP services. Our professional services revenue is recognized when the services are performed. Our maintenance and support and ASP offerings are recognized ratably over the term of the arrangement. MULTIPLE ELEMENT ARRANGEMENT. We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For maintenance and support, VSOE of fair value is established by renewal rates when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met. VALUATION OF CAPITALIZED SOFTWARE Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, we capitalize costs to produce the finished software products. Capitalization ceases when the product is available for general release to customers. Costs associated with product enhancements that extend the original product's life or significantly improve the original product's marketability are also capitalized once technological feasibility has been established. Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product. If an amount of unamortized capitalized costs of a computer software product is 17 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- 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 of 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 Management's 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. Management believes that accounts receivable credit risk exposure beyond such allowance is limited. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ----------------------------------------------------------- We are exposed to the impact of interest rate changes and changes in the market value of our investments. Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in a major bank money market account. We protect and preserve our invested funds by limiting default, market and reinvestment risk. Investments in this account carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. ITEM 4. 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). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (the "SEC") rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. * * * * * * * * * Statements in this Form 10-Q, other than statements of historical information are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks which may cause the Company's actual results in future periods to differ materially from expected results. Those risks include, among others, risks associated with increased competition, customer decisions, the successful completion of continuing development of new products, the successful negotiation, execution and implementation of anticipated new software contracts, the 18 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- successful addition of personnel in the marketing and technical areas and our ability to complete development and sell and license our products at prices which result in sufficient revenues to realize profits, and other business factors beyond our control. Those and other risks are described in the Company's filings with the SEC over the last 12 months, including our Form 10-K filed with the SEC on April 2, 2007, copies of which are available from the SEC or may be obtained upon request from the Company. 19 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- PART II: OTHER INFORMATION ITEM 1A. RISK FACTORS. ------------- The risk factors included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006, have not materially changed. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. ------------------------------------------------------------ On January 24, 2007, the holders of our debentures elected to convert an aggregate of $119,807, principal amount of such debentures, representing their remaining unpaid principal amount due on the debentures in 2006 (in lieu of receiving such installment payments in cash), for shares of our common stock at the conversion price of $0.30 per share. In connection with this conversion, we issued to the holders of the debentures an aggregate of 399,358 shares of our common stock. On March 23, 2007, we issued an aggregate of 5,438,670 shares of our common stock to the RENN funds in connection with their election to convert an aggregate of $1,631,601 principal amount of the 2008 Debentures and 2009 Debentures, representing all of their remaining unpaid principal amount due on such debentures, at a conversion price of $0.30 per share. No cash proceeds were received by us in connection with each conversion of the debentures. The shares of our common stock issued upon each conversion of the debentures were issued exempt from registration in reliance on Section 3(a)(9) of the Securities Act of 1933 as an exchange of securities by an issuer with its existing security holders where no commission or other renumeration was paid or given directly or indirectly for soliciting such exchange. ITEM 6. EXHIBITS. -------- EXHIBIT NO. DESCRIPTION 10(i)(17) Limited Waiver to the Convertible Loan Agreement, dated as of March 31, 2007, by and between John Roblin and Stuart Sternberg. 31.1 Chief Executive Officer Certification pursuant to Section 13a-15(e) of the Securities Exchange Act. 31.2 Chief Financial Officer Certification pursuant to Section 13a-15(e) of the Securities Exchange Act. 32.1 Certification of John W. Roblin pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Ann F. Massey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 20 COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- SIGNATURES - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COVER-ALL TECHNOLOGIES INC. Date: May 11, 2007 By: /s/ John W. Roblin ------------------------------------ John W. Roblin, Chairman of the Board of Directors, President and Chief Executive Officer Date: May 11, 2007 By: /s/ Ann F. Massey ------------------------------------ Ann F. Massey, Chief Financial Officer 21 Exhibit 10(c)(17) LIMITED WAIVER TO CONVERTIBLE LOAN AGREEMENT This Limited Waiver to the Convertible Loan Agreement ("Limited Waiver") is made, as of this 31st day of March, 2007, by and between John Roblin and Stuart Sternberg, who are the holders of not less than a majority of the outstanding principal amount of the Debentures (as defined below) (the "Holders"). WHEREAS, Cover-All Technologies Inc., a Delaware corporation (the "Company") and John Roblin, Arnold Schumsky and Stuart Sternberg (collectively, the "Lenders"), and Stuart Sternberg, as agent for the Lenders, are parties to that certain Convertible Loan Agreement, dated as of June 28, 2001 (as amended, the "Loan Agreement"), pursuant to which the Lenders purchased from the Company 8% Convertible Debentures due 2008 for an aggregate principal amount of $400,000 (the "Debentures"); and WHEREAS, terms not otherwise defined herein shall have the meanings as set forth in the Loan Agreement; and WHEREAS, for the fiscal quarter ending March 31, 2007, the Company is not in compliance with one of the financial covenants set forth in Section 7.01 of the Loan Agreement; and WHEREAS, the Company has requested that the Lenders, pursuant to Sections 12.02 and 11.04 of the Loan Agreement, waive, solely for the fiscal quarter ending March 31, 2007, the Company's failure to comply with one of the financial covenants set forth in Section 7.01 of the Loan Agreement. NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the undersigned hereby agree as follows: 1. The Holders do hereby waive, solely for the fiscal quarter ending March 31, 2007, the Company's non-compliance with one of the financial covenants contained in Section 7.01 of the Loan Agreement. 2. The Holders do hereby acknowledge and agree that the Company's non-compliance with one of the financial covenants contained in Section 7.01 of the Loan Agreement is not, and shall not be deemed, a Default or an Event of Default under the Loan Agreement. [Remainder of page intentionally left blank.] 22 IN WITNESS WHEREOF, this Limited Waiver is entered into as of the date set forth above. HOLDERS: /s/ John Roblin ---------------------------------------- John Roblin (holding approximately 25% of the outstanding principal amount of the Debentures) /s/ Stuart Sternberg ---------------------------------------- Stuart Sternberg (holding approximately 50% of the outstanding principal amount of the Debentures) 23 EX-31.1 2 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF JOHN W. ROBLIN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John W. Roblin, President and Chief Executive Officer of Cover-All Technologies Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cover-All Technologies Inc. for the period ended March 31, 2007; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 11, 2007 /s/ John W. Roblin - ------------------------------------- Name: John W. Roblin Title: President and Chief Executive Officer EX-31.2 3 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION OF ANN F. MASSEY, CHIEF FINANCIAL OFFICER, PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ann F. Massey, Chief Financial Officer of Cover-All Technologies Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cover-All Technologies Inc. for the period ending March 31, 2007; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 11, 2007 /s/ Ann F. Massey - ------------------------------------- Name: Ann F. Massey Title: Chief Financial Officer EX-32.1 4 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Cover-All Technologies Inc., a Delaware corporation (the "Company"), on Form 10-Q for the quarterly period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John W. Roblin, President and Chief Executive Officer (principal executive officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 11, 2007 /s/ John W. Roblin - ------------------------------------- Name: John W. Roblin Title: President and Chief Executive Officer EX-32.2 5 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Cover-All Technologies Inc., a Delaware corporation (the "Company"), on Form 10-Q for the quarterly period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ann F. Massey, Chief Financial Officer (principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 11, 2007 /s/ Ann F. Massey - ------------------------------------- Name: Ann F. Massey Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----