SEC Company Response from COVER ALL TECHNOLOGIES INC (CIK 0000737300) — Dec 1, 2005
COVER ALL TECHNOLOGIES INC (CIK 0000737300)
Date: Dec. 1, 2005 · CIK: 0000737300 · Accession: 0001188112-05-002079
AI Filing Summary & Sentiment
File numbers found in text: 000-13124
Referenced dates: November 2, 2005
Letter
December 1, 2005 VIA EDGAR Mr. Brad Skinner Accounting Branch Chief Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549
Re: Cover-All Technologies Inc. Form 10-K for Fiscal Year Ended December 31, 2004 Filed March 25, 2005 File No. 000-13124
Dear Mr. Skinner:
On behalf of Cover-All Technologies Inc., a Delaware corporation ("Cover-All" or the "Company"), we are transmitting responses to your letter of additional comments dated November 2, 2005, relating to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the "10-K").
The responses are numbered to correspond to the numbers and headings of the paragraphs set forth in your November 2, 2005 letter (which are reproduced below).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES, PAGE 24
1. WE HAVE READ YOUR RESPONSE TO PRIOR COMMENT NUMBER 1 AND BELIEVE THAT YOU HAVE PROVIDED US WITH INFORMATION THAT WOULD BE USEFUL TO READERS OF YOUR MD&A. PLEASE CONFIRM TO US THAT YOU WILL EXPAND YOUR DISCLOSURES TO INCLUDE THE SUBSTANTIVE INFORMATION PROVIDED IN YOUR RESPONSE.
RESPONSE: The Company confirms that it will expand its disclosures to include the substantive information provided in its September 16, 2005 response to comment number 1.
<PAGE>
Mr. Brad Skinner December 1, 2005 Page 2
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE F-9
2. WE HAVE READ YOUR RESPONSE TO PRIOR COMMENT NUMBER 2 AND IT IS UNCLEAR TO US HOW YOU ESTABLISH VSOE FOR MAINTENANCE RELATED TO YOUR FIVE-YEAR TERM ARRANGEMENTS. TO AID OUR UNDERSTANDING, PLEASE ADDRESS THE FOLLOWING:
o DESCRIBE TO US THE RENEWAL PROCESS FOR THE SOFTWARE LICENSE AND THE MAINTENANCE AT THE CONCLUSION OF THE ORIGINAL FIVE-YEAR LICENSE TERM. PROVIDE US WITH THE RELEVANT CONTRACTUAL RENEWAL PROVISIONS THAT ARE INCLUDED IN A TYPICAL ARRANGEMENT.
RESPONSE: Cover-All typically licenses its product to its customers for a period of five years and agrees to provide maintenance and support for a concurrent five-year term; generally, the customer license and maintenance and support agreements are contained in one customer contract. Prior to the conclusion of the five-year license term, Cover-All typically will contact the customer to begin the renewal process, which entails a review with the customer of its current license and maintenance and support agreement, including the customer's specific list of licensed software components and lines of business and states.
If the customer decides to proceed with a renewal of the license upon the conclusion of the original five-year license term, Cover-All typically will offer the customer the licensed software components, lines of business and states for use in perpetuity at a negotiated license fee. The negotiated license fee is based on the various software components, lines of business and states licensed and number of users. The fee charged by Cover-All for the perpetual and multi-year time-based licenses are substantially the same.
If the customer wishes to continue maintenance and support services upon the conclusion of the original five-year maintenance and support term, Cover-All will offer the customer these services for a period of one year and thereafter the arrangement will be subject to renewal automatically for one-year terms unless terminated sooner. The negotiated maintenance and support services fees are based on standard percentages of the license fees for the software components and lines of business. After the initial
<PAGE>
Mr. Brad Skinner December 1, 2005 Page 3
one-year renewal term, Cover-All reserves the right to alter the annual maintenance and support services fees once per year.
Cover-All also reviews with the customer the fee schedule for professional services. Professional services are separate and distinct from maintenance and support services and are provided on an as-needed basis.
Once Cover-All and the customer agree on the parameters to and changes, if any, of, their original arrangement, Cover-All then either will amend the customer's existing license, maintenance and support agreement or, more often, will prepare a new such agreement altogether.
Attached to this letter as ANNEX A are sample renewal provisions that are contained in a typical Cover-All customer contract whereby the customer has renewed its license by entering into a new license, maintenance and support agreement with Cover-All.
o EXPLAIN TO US WHEN MAINTENANCE IS ACTUALLY SOLD SEPARATELY (I.E. RENEWED) CONSIDERING IT APPEARS THAT YOUR CUSTOMERS MUST RENEW BOTH THE LICENSE AND THE MAINTENANCE TOGETHER AT THE CONCLUSION OF THE INITIAL FIVE YEAR TERM.
RESPONSE: Our maintenance is sold separately the year after a customer has renewed to a perpetual license. Following the conclusion of the initial five-year term, our customers typically renew maintenance for a period of one year, and thereafter they renew maintenance automatically for one-year terms unless terminated sooner. Our customers have the option not to renew maintenance after the first year. The renewal of the maintenance for the period of one year would be considered maintenance sold separately. (Please note that the maintenance offered to our customers is made up of a combination of bureau updates and break/fix services; neither of these services is required on an ongoing basis by the customer in order for them to use the software.)
Our customers are not required to renew both the license and the maintenance together at the conclusion of an initial five-year term. Upon renewal of PCS (maintenance), the annual renewal rate offered is not significantly different from the rate charged for the PCS (maintenance) in the original multiple element agreement for that particular customer. The PCS (maintenance) renewal rate is a consistent percentage of our stipulated license fees.
<PAGE>
Mr. Brad Skinner December 1, 2005 Page 4
We believe that the renewal rate for the PCS (maintenance) provides vendor-specific objective evidence (VSOE) of the fair value of the PCS (maintenance) element included in our multiple element agreements in accordance with paragraphs 10 and 57 of SOP 97-2.
There are other factors which support our belief that the maintenance and the software license are indeed two independent elements, sold separately.
First, the fee for our software license element is not subject to refund or forfeiture or other concession if the maintenance (PCS) is cancelled during the agreed upon term. There are no additional services to be provided with respect to the software, nor are there any other obligations to the customer, after delivery and acceptance of the software occurs. The earnings process for the software license element is complete at this point.
Second, payment terms for one element under a multiple element agreement do not coincide with either the payment terms or the performance criteria of the other element contained in the agreement. Our software license fee is billed and payable upon delivery of the software to the customer. By contrast, our maintenance is billed on a quarterly basis.
Third, maintenance may be cancelled by the customer pursuant to the termination provisions of the contract, and such cancellation would not result in any change in the customer's rights to the software license as stated in the initial multiple element agreement. In fact, on several occasions our customers have canceled their maintenance contracts during the license term.
o EXPLAIN TO US WHY YOU BELIEVE THAT ANNUAL RENEWALS SUBSEQUENT TO THE INITIAL LICENSE AND MAINTENANCE TERM ARE SUBSTANTIVE. WE NOTE THAT THE LENGTH OF THE INITIAL BUNDLED MAINTENANCE TERM AND THE SUBSEQUENT RENEWAL TERM APPEAR TO SUGGEST OTHERWISE. SEE AICPA TECHNICAL PRACTICE AID 5100.54.
RESPONSE: Certain of our multiple element agreements include bundled PCS (maintenance) services for a period that is relatively short (one year) compared to the term of the initial software license (five years) included in those agreements and also include a renewal term (one year) for PCS (maintenance) which is equal to the initial (bundled) PCS period (one year) Under these circumstances, we believe that the PCS renewal rate and term are substantive (under AICPA Technical Practice Aid 5100.54)
<PAGE>
Mr. Brad Skinner December 1, 2005 Page 5
and that the renewal rate constitutes VSOE of the fair value of the PCS under paragraphs 10 and 57 of SOP 97-2.
More typically, our initial multiple element agreements include bundled PCS (maintenance) services for a period that is relatively long (five years) compared to the term of the software license (five years or perpetual) included in those agreements and also include a renewal term (one year) for PCS (maintenance) which is less than the initial (bundled) PCS period (five years). Although AICPA Technical Practice Aid 5100.54 states that these circumstances (in connection with our five-year licenses) indicate that the PCS (maintenance) renewal rate would not be substantive and, therefore, cannot be used to establish VSOE of the fair value of the PCS (maintenance) services, we believe that with respect to such arrangements we can establish VSOE of the fair value of the PCS (maintenance) services under AICPA Technical Practice Aid 5100.68, which applies in instances where the software licenses for the same product are offered by the vendor as a perpetual license and as a multi-year time-based license.
Typically, our perpetual licenses have renewal terms for PCS (maintenance) services of one year and automatic renewal terms of one year thereafter. We believe the PCS renewal terms in our perpetual licenses provide VSOE of the fair value of the PCS (maintenance) services element included (bundled) in our multi-year time-based software arrangements because, under AICPA Technical Practice Aid 5100.68, each of the following two circumstances exist: (1) the term of our multi-year time-based software arrangements (five years) typically is substantially the same as the estimated economic life of our software product; and (2) the fees charged for our perpetual (including fees from the assumed renewal of PCS for the estimated economic life of the software) license and multi-year time-based license are substantially the same.
Cover-All also offers multi-year time-based licenses for the same product that include bundled PCS services for a portion of the license period (instead of only including bundled PCS services for the entire license term). Accordingly, pursuant to AICPA Technical Practice Aid 5100.68, we believe the renewal terms of those transactions provide VSOE of the fair value of the PCS services element that are bundled for the entire license term.
<PAGE>
Mr. Brad Skinner December 1, 2005 Page 6
3. PLEASE EXPLAIN TO US HOW YOU HAVE CONCLUDED THAT ANNUAL RENEWALS SUBSEQUENT TO THE INITIAL FIVE-YEAR MAINTENANCE TERM IN YOUR PERPETUAL LICENSE ARRANGEMENTS ARE SUBSTANTIVE AS REQUIRED BY AICPA TECHNICAL PRACTICE AID 5100.52.
RESPONSE: Our conclusion that annual renewals subsequent to the initial five-year maintenance term in our perpetual license arrangements are substantive is based upon the fact that the annual renewal rate offered in our perpetual license arrangements, subsequent to
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COVER-ALL TECHNOLOGIES INC.
55 LANE ROAD, SUITE 300 o FAIRFIELD, N.J. o 07004
PHONE: 973.461.5200 o FAX: 973.461.5257
December 1, 2005
VIA EDGAR
Mr. Brad Skinner
Accounting Branch Chief
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Cover-All Technologies Inc.
Form 10-K for Fiscal Year Ended December 31, 2004
Filed March 25, 2005
File No. 000-13124
Dear Mr. Skinner:
On behalf of Cover-All Technologies Inc., a Delaware corporation ("Cover-All" or
the "Company"), we are transmitting responses to your letter of additional
comments dated November 2, 2005, relating to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2004 (the "10-K").
The responses are numbered to correspond to the numbers and headings of the
paragraphs set forth in your November 2, 2005 letter (which are reproduced
below).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES, PAGE 24
1. WE HAVE READ YOUR RESPONSE TO PRIOR COMMENT NUMBER 1 AND BELIEVE THAT YOU
HAVE PROVIDED US WITH INFORMATION THAT WOULD BE USEFUL TO READERS OF YOUR
MD&A. PLEASE CONFIRM TO US THAT YOU WILL EXPAND YOUR DISCLOSURES TO INCLUDE
THE SUBSTANTIVE INFORMATION PROVIDED IN YOUR RESPONSE.
RESPONSE: The Company confirms that it will expand its disclosures to
include the substantive information provided in its September 16,
2005 response to comment number 1.
<PAGE>
Mr. Brad Skinner
December 1, 2005
Page 2
FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE F-9
2. WE HAVE READ YOUR RESPONSE TO PRIOR COMMENT NUMBER 2 AND IT IS UNCLEAR TO
US HOW YOU ESTABLISH VSOE FOR MAINTENANCE RELATED TO YOUR FIVE-YEAR TERM
ARRANGEMENTS. TO AID OUR UNDERSTANDING, PLEASE ADDRESS THE FOLLOWING:
o DESCRIBE TO US THE RENEWAL PROCESS FOR THE SOFTWARE LICENSE AND THE
MAINTENANCE AT THE CONCLUSION OF THE ORIGINAL FIVE-YEAR LICENSE TERM.
PROVIDE US WITH THE RELEVANT CONTRACTUAL RENEWAL PROVISIONS THAT ARE
INCLUDED IN A TYPICAL ARRANGEMENT.
RESPONSE: Cover-All typically licenses its product to its customers
for a period of five years and agrees to provide maintenance
and support for a concurrent five-year term; generally, the
customer license and maintenance and support agreements are
contained in one customer contract. Prior to the conclusion
of the five-year license term, Cover-All typically will
contact the customer to begin the renewal process, which
entails a review with the customer of its current license
and maintenance and support agreement, including the
customer's specific list of licensed software components
and lines of business and states.
If the customer decides to proceed with a renewal of the
license upon the conclusion of the original five-year
license term, Cover-All typically will offer the customer
the licensed software components, lines of business and
states for use in perpetuity at a negotiated license fee.
The negotiated license fee is based on the various software
components, lines of business and states licensed and number
of users. The fee charged by Cover-All for the perpetual and
multi-year time-based licenses are substantially the same.
If the customer wishes to continue maintenance and support
services upon the conclusion of the original five-year
maintenance and support term, Cover-All will offer the
customer these services for a period of one year and
thereafter the arrangement will be subject to renewal
automatically for one-year terms unless terminated sooner.
The negotiated maintenance and support services fees are
based on standard percentages of the license fees for the
software components and lines of business. After the initial
<PAGE>
Mr. Brad Skinner
December 1, 2005
Page 3
one-year renewal term, Cover-All reserves the right to alter
the annual maintenance and support services fees once per
year.
Cover-All also reviews with the customer the fee schedule
for professional services. Professional services are
separate and distinct from maintenance and support services
and are provided on an as-needed basis.
Once Cover-All and the customer agree on the parameters to
and changes, if any, of, their original arrangement,
Cover-All then either will amend the customer's existing
license, maintenance and support agreement or, more often,
will prepare a new such agreement altogether.
Attached to this letter as ANNEX A are sample renewal
provisions that are contained in a typical Cover-All
customer contract whereby the customer has renewed its
license by entering into a new license, maintenance and
support agreement with Cover-All.
o EXPLAIN TO US WHEN MAINTENANCE IS ACTUALLY SOLD SEPARATELY (I.E.
RENEWED) CONSIDERING IT APPEARS THAT YOUR CUSTOMERS MUST RENEW BOTH
THE LICENSE AND THE MAINTENANCE TOGETHER AT THE CONCLUSION OF THE
INITIAL FIVE YEAR TERM.
RESPONSE: Our maintenance is sold separately the year after a customer
has renewed to a perpetual license. Following the conclusion
of the initial five-year term, our customers typically renew
maintenance for a period of one year, and thereafter they
renew maintenance automatically for one-year terms unless
terminated sooner. Our customers have the option not to
renew maintenance after the first year. The renewal of the
maintenance for the period of one year would be considered
maintenance sold separately. (Please note that the
maintenance offered to our customers is made up of a
combination of bureau updates and break/fix services;
neither of these services is required on an ongoing basis by
the customer in order for them to use the software.)
Our customers are not required to renew both the license and
the maintenance together at the conclusion of an initial
five-year term. Upon renewal of PCS (maintenance), the
annual renewal rate offered is not significantly different
from the rate charged for the PCS (maintenance) in the
original multiple element agreement for that particular
customer. The PCS (maintenance) renewal rate is a consistent
percentage of our stipulated license fees.
<PAGE>
Mr. Brad Skinner
December 1, 2005
Page 4
We believe that the renewal rate for the PCS (maintenance)
provides vendor-specific objective evidence (VSOE) of the
fair value of the PCS (maintenance) element included in our
multiple element agreements in accordance with paragraphs 10
and 57 of SOP 97-2.
There are other factors which support our belief that the
maintenance and the software license are indeed two
independent elements, sold separately.
First, the fee for our software license element is not
subject to refund or forfeiture or other concession if the
maintenance (PCS) is cancelled during the agreed upon term.
There are no additional services to be provided with respect
to the software, nor are there any other obligations to the
customer, after delivery and acceptance of the software
occurs. The earnings process for the software license
element is complete at this point.
Second, payment terms for one element under a multiple
element agreement do not coincide with either the payment
terms or the performance criteria of the other element
contained in the agreement. Our software license fee is
billed and payable upon delivery of the software to the
customer. By contrast, our maintenance is billed on a
quarterly basis.
Third, maintenance may be cancelled by the customer pursuant
to the termination provisions of the contract, and such
cancellation would not result in any change in the
customer's rights to the software license as stated in the
initial multiple element agreement. In fact, on several
occasions our customers have canceled their maintenance
contracts during the license term.
o EXPLAIN TO US WHY YOU BELIEVE THAT ANNUAL RENEWALS SUBSEQUENT TO THE
INITIAL LICENSE AND MAINTENANCE TERM ARE SUBSTANTIVE. WE NOTE THAT THE
LENGTH OF THE INITIAL BUNDLED MAINTENANCE TERM AND THE SUBSEQUENT
RENEWAL TERM APPEAR TO SUGGEST OTHERWISE. SEE AICPA TECHNICAL PRACTICE
AID 5100.54.
RESPONSE: Certain of our multiple element agreements include bundled
PCS (maintenance) services for a period that is relatively
short (one year) compared to the term of the initial
software license (five years) included in those agreements
and also include a renewal term (one year) for PCS
(maintenance) which is equal to the initial (bundled) PCS
period (one year) Under these circumstances, we believe that
the PCS renewal rate and term are substantive (under AICPA
Technical Practice Aid 5100.54)
<PAGE>
Mr. Brad Skinner
December 1, 2005
Page 5
and that the renewal rate constitutes VSOE of the fair value
of the PCS under paragraphs 10 and 57 of SOP 97-2.
More typically, our initial multiple element agreements
include bundled PCS (maintenance) services for a period that
is relatively long (five years) compared to the term of the
software license (five years or perpetual) included in those
agreements and also include a renewal term (one year) for
PCS (maintenance) which is less than the initial (bundled)
PCS period (five years). Although AICPA Technical Practice
Aid 5100.54 states that these circumstances (in connection
with our five-year licenses) indicate that the PCS
(maintenance) renewal rate would not be substantive and,
therefore, cannot be used to establish VSOE of the fair
value of the PCS (maintenance) services, we believe that
with respect to such arrangements we can establish VSOE of
the fair value of the PCS (maintenance) services under AICPA
Technical Practice Aid 5100.68, which applies in instances
where the software licenses for the same product are offered
by the vendor as a perpetual license and as a multi-year
time-based license.
Typically, our perpetual licenses have renewal terms for PCS
(maintenance) services of one year and automatic renewal
terms of one year thereafter. We believe the PCS renewal
terms in our perpetual licenses provide VSOE of the fair
value of the PCS (maintenance) services element included
(bundled) in our multi-year time-based software arrangements
because, under AICPA Technical Practice Aid 5100.68, each of
the following two circumstances exist: (1) the term of our
multi-year time-based software arrangements (five years)
typically is substantially the same as the estimated
economic life of our software product; and (2) the fees
charged for our perpetual (including fees from the assumed
renewal of PCS for the estimated economic life of the
software) license and multi-year time-based license are
substantially the same.
Cover-All also offers multi-year time-based licenses for the
same product that include bundled PCS services for a portion
of the license period (instead of only including bundled PCS
services for the entire license term). Accordingly, pursuant
to AICPA Technical Practice Aid 5100.68, we believe the
renewal terms of those transactions provide VSOE of the fair
value of the PCS services element that are bundled for the
entire license term.
<PAGE>
Mr. Brad Skinner
December 1, 2005
Page 6
3. PLEASE EXPLAIN TO US HOW YOU HAVE CONCLUDED THAT ANNUAL RENEWALS SUBSEQUENT
TO THE INITIAL FIVE-YEAR MAINTENANCE TERM IN YOUR PERPETUAL LICENSE
ARRANGEMENTS ARE SUBSTANTIVE AS REQUIRED BY AICPA TECHNICAL PRACTICE AID
5100.52.
RESPONSE: Our conclusion that annual renewals subsequent to the initial
five-year maintenance term in our perpetual license arrangements
are substantive is based upon the fact that the annual renewal
rate offered in our perpetual license arrangements, subsequent to