SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended January 31, 1998
Commission File Number 1-9115
COMPUTRAC, INC.
(Name of small business issuer in its charter)
Texas 75-1540265
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
222 Municipal Drive, Richardson, Texas 75080
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (972) 234-4241
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $.01 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ( )
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporate d by ref erence in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB [X]
The issuer's revenues for the fiscal year ended January 31, 1998 were
$4,816,343.
As of April 23, 1998, the aggregate market value of the voting stock
held by non-affiliates of the issuer was $3,473,042.
As of April 23, 1998, the number of shares outstanding of the issuer's
common stock was 6,263,103.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the issuer's Proxy Statement for the issuer's 1998 Annual
Meeting of Shareholders are incorporated by reference in Part III of
this Form 10-KSB Report.
Transitional Small Business Disclosure Format (check one) Yes ( )
No (X)
<PAGE>
PART I
Item 1. Description of Business
General
The Company was organized under the laws of the State of Texas in
January, 1977. The Company develops, markets, services and supports
integrated computer systems and software applications designed for law
firms. The Company's products assist its customers in such
applications as timekeeping, tracking disbursements, billing,
accounting, management and financial reporting, conflict of interest
and other law firm management applications. The Company markets its
systems throughout the United States and Canada.
The Company believes that, historically, it has been one of the
major suppliers of computer systems and services for medium size law
firms (21 to 50 timekeepers) and large size law firms (51 plus
timekeepers). The majority of customer systems currently in place
utilize Hewlett-Packard equipment, which the Company is authorized to
resell to end-users. Prices for these systems have ranged from
$60,000 for a small law firm (up to 20 timekeepers) to $650,000 or
more for an integrated system for accounting and practice support
applications for a large law firm. All of these systems have been
sold in conjunction with services including a separately priced annual
maintenance agreement, customized conversion services, customer
training, customer support, product enhancements and software
maintenance services. Annual maintenance agreements and ongoing
support services relative to these systems provide the Company with a
continuing source of revenue during the term of the agreement.
During the latter half of fiscal 1998, the Company shifted its
sales and marketing focus away from the Dimension (registered
trademark) software products, which targeted small law firms, and from
the reseller network for which the sale of these software products
were originally designed. The Company's emerging product line is a
new time and billing system designed for small and medium size law
firms called CompuTrac (registered trademark) Law Firm Management
System for Windows (registered trademark) (CompuTrac LFMS for
Windows). This product, which was introduced in January 1998, is a
client/server software system created exclusively with Microsoft
(registered trademark) development tools operating on micro-computers
with 32-bit Windows (registered trademark) 95 or Windows NT
(registered trademark) operating environments.
Software
Software which enables law firms to more efficiently perform and
evaluate administrative and business functions constitutes the
Company's principal products. The Company's earlier generation core
products designed for medium and large size law firms are called the
Law Firm Management System (LFMS) products. These products run on
mini-computers in either the HP3000 Series or the HP9000 Series, while
some peripheral products run on IBM-compatible micro-computers. Full
interoperability support is provided for all popular network operating
systems, including Novell Netware (registered trademark), Banyan Vines
(trademark), and Microsoft NT, thus enabling a law firm to upgrade its
computer hardware without having to replace its operating system
software. The Company's software applications run in several
different operating system environments, including UNIX, MPE/iX
(registered trademark) (native HP), MS-DOS (registered trademark),
Windows (registered trademark) 95 and Windows NT.
The core of the LFMS software includes the ability to capture
time and disbursements incurred on behalf of clients, billing, trust
accounting, accounts payable, accounts receivable, general ledger,
drill-down inquiry, profitability analysis, and management and
financial reporting. Practice management software included within the
LFMS software system consists of modules such as conflict of interest
software developed by the Company and products developed by third-
party software vendors to accomplish functions including marketing,
file management, and overall better management of the client's
business environment.
<PAGE>
The CompuTrac LFMS for Windows products provide the ability for
small and medium size law firms to manage their business using
professional business products. These products were created
exclusively with Microsoft development tools such as MSAccess, SQL-
Server, C++, OLE and ODBC. Use of these products will allow law firms
to integrate with Microsoft Office products to accomplish tasks such
as uploading budgets from Excel, alerting professionals within the
firm when a value has reached a specified percentage of the budget,
and generating client invoices as Microsoft Word files to forward to
the client via the Internet.
Intellectual Property Rights
The Company regards all of its software products as proprietary.
The Company does not sell or transfer title to its software. The
Company's software products are generally licensed to end-users on a
_right to use_ basis pursuant to a perpetual non-transferable license
that restricts the use of the software to the customer's operations at
one or more designated computer sites. The Company relies on a
combination of copyright, trademark, and trade secret laws, as well as
non-disclosure agreements, to establish and maintain its proprietary
rights. Computer software generally cannot be patented and existing
copyright laws afford only limited protection. Also, there can be no
assurance that the Company's competitors will not independently
develop software that is equivalent to the Company's. Further, no
assurance can be given that the Company will have the financial
resources to engage in litigation against parties who may infringe its
intellectual property rights. While the Company realizes that its
competitive position may be affected by its ability to legally protect
its software, the Company believes the impact of this protection is
less significant to its commercial success than factors such as the
level of experience of the Company's personnel, name recognition, and
the successful development and marketing of new products.
Hardware
The LFMS software is designed for use in conjunction with various
network operating systems operating with either the HP3000 or HP9000
UNIX-based computer systems, which the customer typically purchases
from the Company.
The CompuTrac LFMS for Windows client/server software version was
designed to be installed on personal computers connected through a
Microsoft or Novell network environment.
Marketing
The Company markets its products through presentations at state,
regional and national conferences of lawyers, law firm administrators
and information system managers. The Company also advertises in
regional and national publications and engages in telemarketing and
direct mail campaigns focused on the legal market. During fiscal 1998
the Company expended approximately $366,000 in its marketing and
advertising efforts to promote its CompuTrac LFMS for Windows
products.
The CompuTrac LFMS for Windows products offer a significantly
expanded potential market to the Company. With the LFMS earlier
generation products, market focus historically concentrated on medium
and large size law firms. In their current release, the CompuTrac
LFMS for Windows products are designed to meet the needs of small and
medium size law firms. Subsequent releases will again accommodate the
requirements of larger law firms.
Earlier plans to develop and train a reseller network to market
and sell the Company's software products did not produce results that
were satisfactory to the Company and have been replaced by the
Company's more traditional direct sales approach. The Company
currently employs approximately 10 staff members in its sales and
marketing departments. The Company expects to employ additional sales
staff in fiscal 1999 to sell and market its CompuTrac LFMS for Windows
software products.
Installation and Maintenance
The Company and Hewlett-Packard coordinate the installation of
hardware for the LFMS products at the customer's premises. In most
cases, representatives of the Company, Hewlett-Packard and the
<PAGE>
customer meet at the site where the system is to be installed and
examine and approve the suitability of the ambient environment at the
installation site. Subsequently, Hewlett-Packard installs the
hardware and provides its standard warranty. Hewlett-Packard
maintains and services the hardware pursuant to an agreement with the
customer. Following hardware installation, Company personnel then
assist the customer with the installation of the LFMS software.
The Company provides software maintenance for a fixed monthly fee
which covers enhancements, modifications and improvements to the
licensed software. Such services do not generally require customer
site visits by Company personnel.
The CompuTrac LFMS for Windows software products will be
installed by Company representatives on personal computers located at
the law firm client site. Training for the products will be conducted
either on-site at the law firm office or at the Company's training
center located at the Company's corporate offices in Richardson,
Texas. All training will be conducted by trained Company personnel.
Additionally, law firm personnel will soon utilize computer-based
training tutorials developed by the Company for selected software
modules within the CompuTrac LFMS for Windows suite of products.
Competition
The computer software systems industry is highly competitive.
Software designed to accomplish substantially the same purposes as the
products of the Company is readily available from numerous
competitors. The Company competes on the basis of the quality of its
products and services, its insights into the needs of law firms and
its reputation. The Company believes that its pricing policies are
competitive with those of its competitors.
Employees
As of March 31, 1998, the Company employed 59 full-time employees
and 3 part-time employees. During fiscal 1998, 35 employees provided
technical support and product development services, 10 were engaged in
sales and marketing and 17 were employed in finance, accounting and
administration. No employees are represented by a union or covered by
a collective bargaining agreement. The Company believes that its
relationship with its employees is good.
Research and Development
During each of the two years ended January 31, 1998 and 1997, the
Company expended approximately $1.2 million on software research,
development and production costs. Net software research, development
and production expenses, after capitalization of certain software
development costs, amou nted to $4 51,000 for the fis cal year ended
Januar y 31, 1998, and $407,000 for the fiscal year ended January 31,
1997. The Company anticipates its expenditures for research,
development and production in fiscal 1999 will approximate current
levels.
Cautionary Language Regarding Forward-looking Statements
This Form 10-KSB contains "forward-looking" statements, as
defined in Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including
statements about the Company's beliefs and expectations, are forward-
looking statements. These statements contain potential risks and
uncertainties and, therefore, actual results may differ materially.
There are numerous factors, which are not within the Company's
control, that may cause actual results to differ from those
contemplated by such forward-looking statements, including but not
limited to the rapid rate of change in computer hardware and software
technology and the potential obsolescence of the Company's existing
products; the development of superior products by competitors;
increased competition from existing and new competitors; the lack of
acceptance of the Company's new or existing products by customers;
dependence on Hewlett-Packard for the availability of hardware to
<PAGE>
support the LFMS software; and adverse changes in economic conditions
in the legal profession or the economy generally. The Company
recently introduced its new CompuTrac LFMS for Windows software
products and there can be no assurance that the CompuTrac LFMS for
Windows products will be successful in competing with competitors'
software products in the law firm management software market. The
Company undertakes no obligation to update publicly any forward-
looking statements whether as a result of new information, future
events or otherwise.
Year 2000 Issues
The Company is aware of the issues related to the programming
code in existing computer systems as the year 2000 approaches. The
issue is whether new or existing computer systems will correctly
recognize date sensitive information when the year rolls over to 2000.
Obviously, systems that do not correctly recognize this information
could create data errors or even cause a system to fail. The Company
relies on its internal systems in operating and monitoring all aspects
of its business. The Company also relies on the external systems of
its vendors, customers and other organizations with which it does
business. Management has taken action to ensure both the internal
readiness of its computer systems and the compliance of computer
products and software sold by it to customers for handling dates
beginning in the year 2000. Management does not anticipate that the
Company will incur significant expenses or be required to invest
heavily in computer systems improvements to be year 2000 compliant.
To date, no material issue has been identified as a result of the
Company's efforts to identify year 2000 issues. However, despite the
Company's efforts thus far to address year 2000 compliance, the
Company cannot guarantee that all internal or external systems will be
compliant, or that its business will not be materially adversely
affected by any such non-compliance.
Item 2. Description of Property
The Company owns its corporate headquarters and operating
facilities located in Richardson (Dallas County), Texas. The building
contains approximately 20,000 square feet and has a parking area of
approximately 50,000 square feet. At January 31, 1998, these
facilities were subject to a $200,000 mortgage note payable . The
Company believes its current facility is adequate to conduct its
business. The Company also owns 10.97 acres of undeveloped land
located in Frisco, Texas, which it has listed for sale.
In connection with its systems development and servicing
programs, the Company owns and operates one HP 1000 computer, one HP
3000 Micro Classic, one HP 3000 Series 937LX, one HP 3000 Series 957,
one HP 9000 Series 827S and one HP 9000 Series 837S. The Company also
owns and operates various other peripheral equipment, including
printers, micro-computers, UNIX workstations, scanners and other
equipment.
Item 3. Legal Proceedings
The Company is a party to certain legal proceedings arising in
the ordinary course of business, none of which is believed to be
material to the financial position of the Company. The Company is not
aware of any pending or contemplated proceeding against it by
governmental authorities concerning environmental matters. The
Company knows of no legal proceedings, pending or threatened, or
judgments entered against any Director or Officer of the Company in
his or her capacity as such.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of the
Company during the fourth quarter of the fiscal year ended January 31,
1998.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the American Stock
Exchange under the trading symbol "LLB". The Company has not declared
or paid cash dividends since fiscal 1988 and does not anticipate any
dividends will be declared or paid in the foreseeable future. The
Company intends to retain any earnings to finance the development and
expansion of the Company's operations.
At April 23, 1998, there were approximately 300 holders of record
and approximately 1,000 beneficial owners of the Company's Common
Stock. For the periods indicated below, the following table sets
forth the high and low sales prices as reported by the American Stock
Exchange.
Market Price
High Low
1997 Fiscal Year:
First Quarter 2 7/16 1 1/2
Second Quarter 3 3/4 1 7/8
Third Quarter 2 7/8 1 7/8
Fourth Quarter 2 1/2 1 5/8
1998 Fiscal Year:
First Quarter 2 1/4 1 1/8
Second Quarter 1 15/16 1 1/16
Third Quarter 1 5/16 1
Fourth Quarter 1 3/16 11/16
The cl osing sales price per sh are of the C ommon Stock on the
Americ an Stock Exch ange on April 23, 1998 was $ 13/16.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth, for the fiscal years
indicated, items in the Consolidated Statements of Operations
expressed as a percentage of operating revenues:
<TABLE>
Year Ended January 31,
--------------------
1998 1997
<S> <C> <C>
---- ----
Revenues:
System sales 20 % 11%
Services and support 80 89
---- ----
100 100
Costs and expenses:
Cost of system sales 13 8
Cost of services and support 6 6
Amortization of capitalized software 11 7
Operating expenses 23 29
Selling, general and administrative expenses 64 60
Software research and development costs 9 9
---- ----
126 119
---- ----
Loss (26) (19)
Interest income, net 5 5
---- ----
Loss before taxes (21) (14)
Income taxes - -
---- ----
Net loss (21) % (14)%
===== =====
</TABLE>
<PAGE>
Year Ended January 31, 1998 compared to Year Ended January 31, 1997
Total revenues rose slightly from $4.6 million in fiscal 1997 to
$4.8 million in fiscal 1998, an increase of $168,000, or 4% over the
prior fiscal year. System sales revenues increased $444,000, or 86%
from $515,000 in fiscal 1997 to $959,000 in fiscal 1998. The increase
in system sales revenue was a result of a significantly greater number
of client upgrade and peripheral hardware and software sales
activities in fiscal 1998 than in the prior fiscal year. The Company
also recognized $56,000 in sales of its Dimension time and billing
software products during fiscal 1998. Disappointing sales of the
Dimension software products, sold primarily through a reseller network
to the small law firm market, necessitated management instituting
several changes in the Company's sales and marketing strategies. These
changes were implemented in January 1998 and resulted in (1) the
expansion of the Company's software products to form the currently
marketed time and billing management system, CompuTrac LFMS for
Windows and, (2) replacing the Company's recently established reseller
network with the Company's more traditional direct sales approach to
selling its products. The CompuTrac LFMS for Windows products add
more sophisticated features and functionality, allowing the Company to
focus its sales and marketing efforts on the small and medium size law
firm market. The Company currently anticipates the release of its
Microsoft SQL server-based products sometime in the latter half of
fiscal 1999. These products will allow the Company to compete for the
large law firm market. The initial responses to the CompuTrac LFMS
for Windows products have led the Company to be cautiously optimistic
that a return to profitability may be seen sometime during the latter
half of the current fiscal year. However, there can be no assurance
that the CompuTrac LFMS for Windows products will successfully compete
with competitive products or that the Company's revenues or results of
operations will improve in future periods with the CompuTrac LFMS for
Windows time and billing management system.
Services and support revenues declined 7%, or $276,000 from $4.1
million in fiscal 1997 to $3.9 million in fiscal 1998. Services and
support revenues are comprised of software and hardware maintenance
fees, programming support charges and various other service revenue
fees such as training, installation and conversion revenues. The
decrease in services and support revenues in fiscal 1998 was due to
the lack of new system sales revenues as opposed to upgrade and
peripheral sales activities, which typically do not contribute
significantly to the services and support revenue stream.
Cost of system sales as a percentage of system sales revenues was
64% in fiscal 1998 compared to 69% in the prior fiscal year. The cost
margin on system sales generally varies depending on the mix of
hardware sales, Company software and third party software sales, and
the various cost margins associated with each. Cost of services and
support as a percentage of services and support revenue rose slightly,
from 7% in fiscal 1997 to 8% in fiscal 1998. Cost of services and
support is primarily comprised of programming and support staff costs
directly associated with the performance of the requested service and
certain third party costs associated with maintenance fees included in
services and support revenues.
Amortization of capitalized software increased $213,000, or 67%,
from $318,000 in fiscal 1997 to $531,000 in fiscal 1998. This
increase was due to first year amortization expense recognized on the
Company's windows-based legal software products introduced in fiscal
1998.
Operating expenses decreased $244,000, or 18% from $1.4 million
in fiscal 1997 to $1.1 million in fiscal 1998. This decrease relates
primarily to a fiscal 1997 charge of approximately $200,000 to reflect
management's estimate of reduced computer equipment residual values on
older or obsolete equipment.
Selling, general and administrative expenses increased $285,000,
or 10%, from $2.8 million in fiscal 1997 to $3.1 million in fiscal
1998. The increase in selling, general and administrative expenses
was primarily attributable to increased sales and marketing staff to
develop the Company's direct sales efforts in connection with the
CompuTrac LFMS for Windows products, increased advertising costs and
various other administrative fee increases. These increases were
partially off-set by fiscal 1998 decreases in both bad debt expense
and certain other professional corporate fee expenses.
<PAGE>
Software research and development expenses increased $44,000, or
11% from $407,000 in fiscal 1997 to $451,000 in fiscal 1998. This
increase primarily relates to research and development costs
associated with software products not qualifying for capitalization
during the year. The Company will continue to capitalize those costs
associated with continued enhancements and improvements to the
CompuTrac LFMS for Windows software products line.
Net interest income increased a nominal 3%, from $221,000 in
fiscal 1997 to $227,000 in fiscal 1998. In fiscal 1997, net interest
income comprised approximately $278,000 of interest income, relating
primarily to investment interest income, offset by approximately
$44,000 of interest expense of which $32,000 was related to mortgage
interest expense. In fiscal 1998, net interest income comprised
approximately $240,000 of interest income, relating primarily to
investment interest income, offset by approximately $23,000 of
mortgage interest expense.
Recent Accounting Pronouncements
In February 1997 , Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (FAS 128) was issued. FAS
128 specifies the computation, presentation and disclosure
requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. FAS 128 simplifies the
standards for computing EPS previously found in Accounting Principles
Board Opinion No. 15, "Earnings per Share" (APB 15) and makes them
comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
statement of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. FAS 128 is effective
for fi nancial stat ements issue d for periods ending after December
15, 1997, including interim periods. FAS 128 requires restatement of
all prior-period EPS data presented. The Company adopted FAS 128 in
its financial statements for the fiscal year ended January 31, 1998.
In 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. The provision of SFAS No. 130 established new rules for the
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The new rules
require that all items that are recognized under accounting standards
as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. The Company will adopt SFAS No. 130 in fiscal
1999 and does not expect that such adoption will have a material
impact on results of operations, financial position or cash flows.
In 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. The provisions of SFAS No.
131 require public companies to use a management approach to
determining their operating segments. This management approach model
defines operating segments as revenue-producing components of the
enterprise for which separate financial information is produced
internally and are subject to evaluation by the chief operating
decision maker in deciding how to allocate resources to segments.
SFAS No. 131 also expands the financial and descriptive information
disclosures relative to the identified operating segments. The
Company will adopt SFAS No. 131 in fiscal 1999 and does not expect
that such adoption will have a material impact on results of
operations, financial position or cash flows.
Fluctuations in Interim Period Operating Results
Management of the Company believes that, historically, interim
results and period-to-period comparisons have been neither predictable
nor an accurate measure of the annual performance of the Company. The
Company has experienced and expects to continue to experience period-
to-period fluctuations in the number of systems sold, revenues and net
income. Although recent revenues of the Company have primarily been
<PAGE>
derived from service and support revenues, fluctuations in LFMS system
sales revenues have historically resulted from the sale of a small
number of relatively expensive systems, the policy of the Company of
recognizing revenue upon delivery of the hardware and delivery and
acceptance of the software, the equipment availability of hardware
from the Company's hardware supplier, and the desire of the customer
to accelerate or delay the date of delivery. These factors tend to
distort the operating results of an interim period. Additionally,
sales are not made or recognized evenly throughout the fiscal year or
any interim period, thus making meaningful interim period comparisons
difficult. These fluctuations may also have a significant impact on
profitability in any interim period as a result of the relatively
fixed nature of operating costs and selling, general and
administrative expenses.
Liquidity and Capital Resources
Cash provided by operating activities was $11,000 during fiscal
1998 compared to $532,000 during fiscal 1997. Reduced cash provided
by operating activities was attributable to a higher net loss in the
current year, a net decrease in non-cash items and a marginal increase
in working capital requirements. Cash provided by investing activities
during fiscal 1998 was $139,000 compared to $943,000 used in investing
activities during fiscal 1997. The improvement in cash provided by
investing activities was primarily due to a $795,000 net increase in
the sale of short-term investment maturities to fund current operating
needs and a $295,000 decrease in property, furniture and equipment and
capitalized software additions from the prior fiscal year. Cash used
in financing activities during fiscal 1998 was $40,000 compared to
cash provided by financing activities during fiscal 1997 of $52,000.
The increase in cash used in financing activities was primarily due to
the Company's purchase of $45,000 in treasury shares in fiscal 1998
and to a $38,000 decrease in cash receipts from employee stock
purchases from the prior fiscal year.
The Company has not made any material commitments for capital
expenditures, however, the Company anticipates continued expenditures
will be made during fiscal 1999 in the areas of development, sales,
marketing and support of its CompuTrac LFMS for Windows software
products. Until the Company is able to generate positive cash flow
from operations, these expenditures will be funded primarily by cash
flow from investment activities of the Company.
At January 31, 1998 and 1997, the Company has established a 100%
valuation allowance to fully offset the net deferred tax asset
balances of $1,361,000 and $970,000, respectively. Factors considered
in management's assessment that significant uncertainties exist
regarding the realization of these assets include (1) uncertainty
regarding the future success and timing of sales of the Company's new
Windows-based products, and (2) financial and economic pressures in
the Company's primary customer market (i.e. legal industry).
Working capital and the ratio of current assets to current
liabilities are as follows:
Working Current
Capital ratio
At January 31:
1998 $ 4,039,695 7.8 to 1
1997 $ 5,217,305 8.3 to 1
Current assets consist primarily of cash, short-term investments,
accounts receivable and unbilled revenues from system sales and
services.
<PAGE>
Item 7. Financial Statements
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Year Ended January 31,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 558,818 $ 449,304
Short-term investments 3,226,330 4,334,869
Accounts receivable, net of allowance for
doubtful accounts of $100,000 and $180,000
at January 31, 1998 and 1997, respectively 513,744 722,683
Unbilled revenue 13,351 122,584
Other current assets 322,134 304,211
---------- -----------
Total current assets 4,634,377 5,933,651
Property, furniture and equipment, net of
accumulated depreciation 1,476,824 1,627,226
Land held for sale 254,122 254,122
Capitalized software, net of accumulated
amortization 1,833,938 1,637,025
Other assets 470,799 429,898
---------- -----------
Total assets $8,670,060 $9,881,922
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 183,330 $ 191,349
Accrued expenses 218,331 247,424
Accrued contract completion costs 10,000 110,400
Deferred systems revenues 99,006 90,744
Short-term portion of mortgage payable 84,015 76,429
---------- -----------
Total current liabilities 594,682 716,346
Long-term portion of mortgage payable 115,546 199,561
---------- -----------
Total liabilities 710,228 915,907
---------- -----------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, $1.00 par value, 2,000,000
shares authorized, no shares issued
and outstanding
Common stock, $.01 par value, 13,000,000
shares authorized, 6,988,706 shares issued 69,887 69,887
Additional paid-in capital 9,718,527 9,846,543
Retained earnings 460,507 1,503,255
---------- -----------
10,248,921 11,419,685
Less: treasury shares, at cost, 711,008 and
722,631 shares, respectively (2,289,089) (2,453,670)
---------- -----------
Total shareholders' equity 7,959,832 8,966,015
---------- -----------
Total liabilities and shareholders' equity $8,670,060 $9,881,922
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended January 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
System sales $ 958,714 $ 514,830
Services and support 3,857,629 4,133,548
----------- ----------
4,816,343 4,648,378
----------- ----------
Costs and expenses:
Cost of system sales 609,243 355,730
Cost of services and support 294,313 297,121
Amortization of capitalized software 531,148 318,079
Operating expenses 1,110,777 1,354,423
Selling, general and administrative
expenses 3,089,484 2,804,975
Software research and development costs 451,358 406,998
----------- ----------
6,086,323 5,537,326
----------- ----------
Loss (1,269,980) (888,948)
Interest income, net 227,232 220,743
----------- ----------
Loss before taxes (1,042,748) (668,205)
Income taxes - -
----------- ----------
Net loss $(1,042,748) $(668,205)
=========== ==========
Net loss per common share $ (0.17) $ (0.11)
=========== ==========
Weighted average shares
outstanding 6,302,531 6,237,291
=========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
Common Stock Additional Treasury Share-
------------------ paid-in Retained ---------------------- holders'
Shares Amount capital earnings Shares Amount equity
------------------ ----------- ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1996 6,988,706 $ 69,887 $9,928,011 $2,171,460 842,106 $(2,654,769) $9,514,589
Treasury shares reissued (81,468) (119,475) 201,099 119,631
Net Loss
(668,205) (668,205)
----------- --------- ----------- ----------- -------- ----------- -----------
Balance at January 31, 1997 6,988,706 $ 69,887 $9,846,543 $1,503,255 722,631 $(2,453,670) $8,966,015
---------- ---------- ----------- ----------- --------- ----------- -----------
Purchases of treasury shares 50,100 (44,969) (44,969)
Treasury shares reissued (128,016) (61,723) 209,550 81,534
Net loss (1,042,748) (1,042,748)
----------- ---------- ----------- --------- ---------- ---------- -----------
Balance at January 31, 1998 6,988,706 $69,887 $9,718,527 $ 460,507 711,008 $(2,289,089) $7,959,832
=========== ========== =========== ========= ========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended January 31,
--------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,042,748) $ (668,205)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation of property, furniture
and equipment 392,053 723,610
Amortization of capitalized software
costs 531,148 318,079
Changes in assets and liabilities:
Accounts receivable 208,939 438,541
Unbilled revenue 109,233 216,190
Other current assets (17,923) (80,189)
Other assets (40,901) (38,642)
Accounts payable and accrued
expenses (137,512) (377,894)
Deferred systems revenues 8,262 829
------------ -----------
Net cash provided by operating
activities 10,551 532,319
------------ -----------
Cash flows from investing activities:
Additions to property, furniture and
equipment (241,651) (460,606)
Additions to capitalized software (728,061) (804,528)
Purchase of certificates of deposit - (499,000)
Sale of certificates of deposit 666,000 624,000
Sale of U.S. Treasury Bills 442,539 188,905
Sale of fixed assets - 8,365
------------ -----------
Net cash provided by (used in) investing
activities 138,827 (942,864)
------------ -----------
Cash flows from financing activities:
Issuance of treasury shares 81,534 119,631
Principal payments of mortgage note
payable (76,429) (67,747)
Purchase of treasury shares (44,969) -
------------ -----------
Net cash (used in) provided by financing
activities (39,864) 51,884
------------ -----------
Net increase (decrease) in cash and cash
equivalents 109,514 (358,661)
Cash and cash equivalents at end of year 449,304 807,965
------------ -----------
Cash and cash equivalents at beginning
of year $ 558,818 $ 449,304
============ ===========
Supplemental disclosures of cash flow
information:
Interest paid $ 23,061 $ 43,970
Income taxes paid - -
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Significant Accounting Policies
CompuTrac, Inc. (the "Company") was formed in 1977 to develop,
market, service and support integrated turnkey computer systems for
law firms. The Company's significant accounting policies are as
follows:
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant intercompany transactions
and accounts have been eliminated.
Revenue Recognition and Company Operations
The Company develops, markets, services and supports computer
systems for the legal profession. The Company develops the software
and is a Distributor Authorized Reseller of Hewlett-Packard systems
hardware. System sales, service and support revenues are generally
realized pursuant to a contract with the customer. Contracts
typically provide for the shipment of hardware direct from the
supplier to the customer, where it is installed by Hewlett-Packard
personnel. After hardware installation, personnel from the Company
install the software components. Hardware and software installation
is generally provided for all significant components within four to
six weeks after the hardware delivery process begins.
The Company enters into software license agreements whereby the
Company licenses software to a customer, providing that customer with
the right to use the software. In accordance with the provisions of
the American Institute of Certified Public Accountants' Statement of
Position No. 91-1, "Software Revenue Recognition" (SOP 91-1), the
Company recognizes software license revenue upon delivery of the
hardware, software and confirmation of customer acceptance per the
terms of the contract. Each software license agreement is evaluated
by management to determine if significant vendor obligations
exist, suc h as post-contract customer support, and to determine
whether collection of the associated receivable is probable. Post-
contract customer support revenue is deferred and amortized over the
period of the service, usually not exceeding one year from the
inception of the contract.
Other contractual services may include data conversion and
training conducted by Company personnel following installation of the
major components of hardware and software. Revenues related to these
services are deferred and recognized as revenue at the time the
services are rendered, usually not exceeding one year from inception
of the contract. In addition, the contract may provide for add-on
software applications which are still under development and which
complement the core system, but are not integral to the basic
functionality of the core system. Uncompleted add-on software
application revenue is deferred until delivery occurs and evidence of
customer acceptance has been obtained. Unbilled revenue represents the
excess of system sales contracts over progress billings. Accrued
contract completion costs represent estimated software project
completion costs necessary to fulfill client contract obligations.
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-2 "Software Revenue
Recognition" (SOP 97-2). SOP 97-2 replaces the SOP 91-1 method of
distinguishing between significant and insignificant vendor
obligations as a basis for recording revenue with a requirement that
<PAGE>
each element of a software licensing arrangement be separately
identified and accounted for based on the relative fair values of each
element. SOP 97-2 is effective for fiscal years beginning after
December 15, 1997. Management does not expect the adoption of SOP 97-
2 to have a material effect on the Company's financial position or
results of operations.
Cash Equivalents
The Company considers investments with original maturity dates of
90 days or less to be cash equivalents.
Short-Term Investments
The Company considers investments with original maturity dates
that are greater than 90 days, but less than one year, to be short-
term investments. The carrying values of these investments are
approximately equal to their fair market values at the end of each
fiscal year.
Capitalized Software
The Company capitalizes the costs of developing and testing new
or significantly enhanced software products in accordance with the
provisions of Statement of Financial Accounting Standards No. 86,
"Accou nting for the Costs of Com puter Software t o be Sold,
Leased or Otherw ise Markete d_ (SFAS 86). Under SFAS 86, the costs
incurred to establish the technological feasibility of a computer
software product are charged to expense as incurred. After
technological feasibility is established, costs of producing the
computer software product are capitalized until the product is
available for general release to customers. Capitalized software
development costs are amortized on a product-by-product basis using
the greater of the amount computed by the ratio of current year net
revenue to estimated future net revenue, or the amount computed by the
straight-line method over a period which approximates the estimated
economic life of the products, which historically has been four years.
The amount by which unamortized software costs exceed the net
realizable value, if any, is recognized in the period the excess is
determined.
Property, Furniture, Equipment and Depreciation
Property, furniture and equipment are recorded at cost. The cost
of such assets, other than land, is depreciated on a straight-line
basis over the estimated useful life of the asset (generally three to
seven years). The Company's corporate facility is being depreciated
using the straight-line method over an estimated useful life of 30
years. Maintenance and repair expenditures are charged to operations;
renewals and betterments are capitalized.
Income Taxes
The Company presents income ta xes pursu ant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (FAS 109). FAS 109 uses an asset and liability approach to
account for income taxes. In the event differences between the
financial reporting basis and the tax basis of the Company's assets
and liabilities result in deferred tax assets, an evaluation of the
probability of being able to realize the future benefits indicated by
such assets is required. A valuation allowance is provided for a
portion or all of the deferred tax assets when there is sufficient
uncertainty regarding the Company's ability to recognize the benefits
of the assets in future years.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compens ation" (FAS 123), encourages, but does not
require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has elected to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
<PAGE>
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the amount the employee
must pay to acquire the stock.
Earnings (Loss) Per Share
In the fourth quarter of the fiscal year ended January 31, 1998,
the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128, the Company computes basic earnings (loss)
per common share based on the weighted-average number of common shares
outstanding. Diluted earnings (loss) per share is computed based on
the weighted-average number of common shares outstanding plus the
number of additional common shares that would have been outstanding if
all dilutive potential common shares had been issued. For the years
ended January 31, 1998 and 1997, all potential common shares were
anti-dilutive. Accordingly, the adoption of SFAS 128 had no effect on
1998 and 1997 earnings per share amounts.
Financial Instruments
The fair value of the Company's financial instruments, consisting
of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and debt, approximate their carrying
values.
Reclassification
Certain prior year financial statement information has been
reclassified to conform to the current year presentation.
Note 2 - Property, Furniture and Equipment
<TABLE>
Property, furniture and equipment costs are summarized as
follows:
<CAPTION>
January 31,
---------------------
1998 1997
-------- -------
<S> <C> <C>
Equipment $ 7,031,969 $6,882,189
Building 1,420,735 1,410,297
Furniture, fixtures and leasehold
improvements 783,738 758,925
----------- -----------
9,236,442 9,051,411
Less accumulated depreciation (8,059,618) (7,724,185)
----------- -----------
$ 1,176,824 $1,327,226
Land 300,000 300,000
----------- -----------
$ 1,476,824 $1,627,226
=========== ===========
</TABLE>
<PAGE>
Note 3 - Capitalized Software
<TABLE>
Capitalized software costs are summarized as follows:
<CAPTION>
January 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Capitalized software costs $ 4,616,021 $ 3,887,960
Less accumulated amortization (2,782,083) (2,250,935)
----------- -----------
$ 1,833,938 $ 1,637,025
=========== ===========
</TABLE>
Note 4 - Income Taxes
<TABLE>
The effective income tax rates differed from the
Following reasons:
<CAPTION>
January 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Federal income tax benefit at (34) % (34)%
Change in valuation 37 36
(3) (2)
------ ------
0 % 0 %
====== ======
</TABLE>
<TABLE>
The components of the deferred tax accounts consist of the following:
<CAPTION>
January 31,
---------------------------
1998 1997
----------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $(1,463,000) $ (952,000)
Accounts receivable (38,000) (68,000)
Deferred revenue (14,000) (22,000)
Fixed assets (405,000) (256,000)
Accrued liabilities (2,000) (42,000)
Other (81,000) (58,000)
------------ -----------
Total deferred tax assets (2,003,000) (1,398,000)
Deferred tax liabilities:
Capitalized software costs 611,000 387,000
Other 31,000 41,000
------------ -----------
Total deferred tax liabilities 642,000 428,000
------------ -----------
Net deferred tax asset before 1,361,000 970,000
Less valuation allowance 1,361,000 970,000
------------ -----------
$ - $ -
============ ===========
</TABLE>
<PAGE>
At January 31, 1998 and 1997, the Company had net operating loss
carryforwards of approximately $3,800,000 and $2,506,000,
respectively, which begin to expire in 2010.
Note 5 - Mortgage Note Payable
Mortgage note payable consists of a new, ten year, 9.5% fixed
rate mortgage secured by the Company's corporate headquarters. The
amount of principal maturities for the years subsequent to January 31,
1998, are:
Principal
Fiscal Year Maturities
1999 $84,015
2000 $92,353
2001 $23,193
Note 6 - Related Party Transactions
The Company entered into a five-year employment agreement with
its Chairman dated January 1, 1998. The agreement currently provides
for an annual salary of $590,000, and entitles the Chairman to receive
minimum raises equivalent to any annual increase in the Consumer Price
Index for Dallas, Texas during the previous calendar year. The
current employment agreement will expire on December 31, 2002.
Note 7 - Shareholders' Equity
Stock Purchase Plans
In December 1985, the Company's Board of Directors adopted the
CompuTrac, Inc. Employee Stock Purchase Plan and in May 1991, adopted
the CompuTrac, Inc. 1991 Employee Stock Purchase Plan. The Company
reserved 300,000 and 500,000 shares, respectively, of its Common Stock
for purchase by its employees pursuant to the terms of these plans.
Under both plans, eligible participating employees of the Company may
elect to have an amount up to, but not in excess of, 10% of their
regular salary or wages withheld for the purpose of purchasing the
Company's Common Stock. The Company contributes to the participant's
account an amount of money equal to 33 1/3% of the aggregate
contribution made by each participant since the immediately preceding
stock purchase date. All Common Stock of the Company purchased by the
participating employees pursuant to the plans may be voted by the
employee; any shares not so directed to vote are not voted. During
fiscal 1996, the Company amended the 1991 Employee Stock Purchase Plan
to increase by 500,000 the number of shares reserved for future
employee stock purchase activities. At January 31, 1998, 981,198
shares of the Company's Common Stock had been sold pursuant to these
plans.
1990 Stock Option Plan
In May, 1991, the Board of Directors adopted and the shareholders
approved the 1990 Stock Option Plan. Under the terms of the plan, the
Company's Board of Directors is authorized to grant options to
purchase up to 500,000 shares of Common Stock to key employees of the
Company, including officers and directors. Option grants may be in
the form of either Incentive Stock Options or Non-Statutory Stock
Options. Each option granted under the Option Plan must be exercised,
if at all, during a period established in the grant by the Board of
Directors, but not exceeding 10 years from the date of grant. Options
must be exercised by an optionee within three to twelve months after
termination of employment. During fiscal 1998, the Board of Directors
adopted and the shareholders approved an amendment to the Option Plan
to increase by 300,000 the number of shares reserved for future stock
option grants. At January 31, 1998, there were 296,004 shares
available for future grant.
<PAGE>
Stock Repurchase Program
In December 1997, the Board of Directors authorized a stock
repurchase program whereby the Company may purchase, from time-to-
time, up to 600,000 shares of its outstanding Common Stock in the open
marketplace over a ten year period. As of January 31, 1998, the
Company had purchased 50,100 shares of its outstanding Common Stock
pursuant to the terms of the program.
Stock-Based Compensation
Effective in 1997, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123
(FAS 123), "Accounting for Stock-Based Compensation". As permitted
under FAS 123, the Company will continue to measure stock-based
compensation cost using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's capital
stock at the grant date over the amount the employee must pay for the
stock.
FAS 123 requires disclosure of pro forma net income (loss) and
pro forma net income (loss) per common share as if the fair value-
based method had been applied in measuring compensation cost of stock-
based awards granted in fiscal 1998 and 1997. Management believes that
1998 and 1997 pro forma amounts are not representative of the effects
of stock-based awards on future pro forma net income (loss) and pro
forma net income (loss) per share because those pro forma amounts
exclude the pro forma compensation expense related to unvested stock
options granted before fiscal 1996.
Reported and pro forma net loss and net loss per share
amounts for the fiscal year ended January 31, 1998 and 1997,
respectively, are set forth below:
1998 1997
Reported
Net (loss) $ (1,042,748) $ (668,205)
Net (loss) per share $ (0.17) $ (0.11)
Pro forma (unaudited)
Net (loss) $ (1,098,902) $ (739,149)
Net (loss) $ (0.17) $ (0.12)
During fiscal 1998 and 1997, the fair values of the options
granted were estimated on the date of their grant using the Black-
Scholes option-pricing model based on the following weighted average
assumptions:
1998 1997
Risk free interest rate 5.7% 6%
Expected life 6 years 5 years
Expected volatility 55% 60%
Expected dividend yield 0% 0%
<PAGE>
<TABLE>
Stock option activity for 1998 and 1997 is set forth below:
<CAPTION>
1998 1997
-------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 679,346 $ 1.74 609,346 $ 1.65
Granted 18,785 1.11 70,000 2.90
Canceled (83,015) 2.37 -
-------- ---------
Outstanding at end of
year 615,116 1.68 679,346 1.78
======== =========
Exercisable at end of
year 535,498 1.63 491,540 1.74
======== =========
Weighted average fair
value of options
granted during the year $ 0.61 $ 1.65
</TABLE>
<TABLE>
Stock options outstanding at January 31, 1998:
<CAPTION>
Options Outstanding Options Exercisable
---------------------- --------------------
Weighted
Average Weighted Weight
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Price Options Life Price Options Price
--------------- ------- ------------- ------------ -------- ----------
<C> <C> <C> <C> <C> <C> <C>
$ 0.69 to $ 1.25 177,996 4.2 years $ 1.00 131,711 $ 0.98
$ 1.26 to $ 2.57 397,120 3.6 years $ 1.80 390,454 $ 1.79
$ 2.58 to $ 3.50 40,000 5.3 years $ 3.50 13,333 $ 3.50
------- --------
615,116 535,498
======= ========
</TABLE>
Note 8 - 401(k) Retirement Plan
In December, 1987, the Board of Directors authorized a simplified
401(k) Retirement Plan which was implemented in February, 1988. Under
the terms of the plan, eligible participating employees of the Company
may elect to have an amount up to, but not in excess of, 15% of their
regular salary or wages withheld for purposes of setting aside funds
available at retirement. Amounts withheld are invested in one or more
available investment alternatives as selected by the individual
employee. Under current tax law, amounts withheld under the plan,
subject to annual limitations, and any interest earnings thereon, are
tax deferred until such time as distributions are made to the
employee. The Company does not contribute to the employee's account.
All costs and expenses of administering the plan are paid by the
Company.
<PAGE>
Note 9 - Commitments and Contingencies
The Company is subject to certain legal proceedings, claims and
disputes which arise in the ordinary course of its business. Although
the Company cannot predict the outcomes of these legal proceedings,
the Company's management does not believe these actions will have a
material adverse effect on the Company's financial position, results
of operations or liquidity. However, if unfavorably resolved, these
proceedings could have a material adverse effect on the Company's
financial position, results of operations and liquidity.
Note 10 - Trademarks
CompuTrac, Dimension and other names of CompuTrac products
referenced herein are trademarks or registered trademarks of
CompuTrac, Inc. All other product and brand names mentioned herein
are the trademarks or registered trademarks of their respective
owners.
<PAGE>
REPORT OF GRANT THORNTON LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CompuTrac, Inc.
We have audited the accompanying consolidated balance sheet of
CompuTrac, Inc. and subsidiary as of January 31, 1998 and the related
consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of CompuTrac, Inc. and subsidiary as of January 31, 1998, and the
consolidated results of their operations and their consolidated cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Dallas, Texas
March 25, 1998
<PAGE>
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CompuTrac, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operat ions, of ca sh flows and of
changes in shareholders' equity as of and for the year ended
January 31, 1997 present fairly, in all material respects, the
financial position, results of operations and cash flows of CompuTrac,
Inc. and its subsidiary as of and for the year ended January 31 1997,
in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of CompuTrac, Inc. for
any period subsequent to January 31, 1997.
PRICE WATERHOUSE LLP
Dallas, Texas
March 25, 1997
<PAGE>
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
On January 5, 1998, the Company dismissed the accounting firm of
Price Waterhouse LLP, Dallas, Texas, who have acted as certifying
accountants for the Company for the years ending January 31, 1984
through January 31, 1997. None of the prior certifying accountants'
reports on the Company's financial statements for the past two years
contained an adverse opinion or disclaimer of opinion, or were
qualified or modified as to uncertainty, audit scope or accounting
principle. In connection with its audits for the two most recent
fiscal years and through January 5, 1998, there have been no
disagreements with Price Waterhouse LLP, on any matter of accounting
principle or practice, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the
satisfaction of Price Waterhouse LLP, would have caused Price
Waterhouse LLP, to make reference to the subject matter of such
disagreements in their reports on the financial statements for such
years.
Effective January 5, 1998, the Company engaged the accounting
firm of Grant Thornton LLP, Dallas, Texas, to act as certifying
accountants for the year ending January 31, 1998. The change of
principal accountants was approved by the Company's Board of Directors
on December 29, 1997.
There were no written or oral consultations between the Company
and Grant Thornton LLP or Price Waterhouse LLP regarding the
application of accounting principles to a specific completed or
contemplated transaction, or to the type of audit opinion that might
be rendered in connection with the Company's decision to change
accounting firms.
PART III
The information required by Part III is omitted from this Report
and will be included in the registrant's 1998 definitive proxy
statement pursuant to Regulation 14A (the "Proxy Statement") which is
expected to be filed not later than 120 days after the end of the
fiscal year covered by this Report, and the information included
therein is incorporated herein by reference.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by
reference to the information under the heading "Management" in the
Company's Proxy Statement for its 1998 Annual Meeting.
Item 10. Executive Compensation
The information required by this Item is incorporated by
reference to the information under the heading "Executive
Compensation" in the Company's Proxy Statement for its 1998 Annual
Meeting.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The information required by this Item is incorporated by
reference to the information under the heading "Security Ownership" in
the Company's Proxy Statement for its 1998 Annual Meeting.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is incorporated by
reference to the information under the heading "Executive
Compensation-Employment Agreements" in the Company's Proxy Statement
for its 1998 Annual Meeting.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements: Page
Report of Grant Thornton LLP, Independent Certified
Public Accountants 23
Report of Price Waterhouse LLP, Independent
Accountants 24
Consolidated Balance Sheets at January 31, 1998
and 1997 11
Consolidated Statements of Operations for the two
years ended January 31, 1998 12
Consolidated Statements of Changes in Shareholders'
Equity for the two years ended January 31, 1998 13
Consolidated Statements of Cash Flows for the two
years ended January 31, 1998 14
Notes to Consolidated Financial Statements 15-22
3.1* - Restated Articles of Incorporation of
Registrant
3.2** - Bylaws of the Registrant
3.3*** - Articles of Amendment to Articles of
Incorporation of the Registrant dated
December 1, 1987
4.1 - Articles of Incorporation and Bylaws of the
Registrant constituting Instruments Defining
the Rights of Common Stockholders
(incorporated by reference to Exhibits 3.1,
3.2, and 3.3 hereto)
10.1 - Employment Agreement and Indemnity Agreement
between the Registrant and Harry W. Margolis
dated January 1, 1998 and February 4, 1998,
respectively (filed herewith)
10.2* - Incentive Stock Option Plan of the Registrant
10.3**** - CompuTrac, Inc. 1991 Employee Stock Purchase
Plan, as amended
10.4* - Cash Bonus Plan of the Registrant
10.5* - Form of Indemnification Agreement between the
Registrant and Texas E. Schramm, dated as of
July 11, 1983
10.6** - Contract of Sale, dated February 28, 1986,
between Harry W. Margolis and the Registrant
10.7*** - Form of Indemnification Agreement between the
Registrant and its Directors as ratified by
the Registrant's Shareholders in their Annual
Meeting of November 19, 1987
10.8***** - Employment Agreement between the Registrant
and George P. McGraw dated February 1, 1992
10.9***** - Form of Employment Agreement between the
Registrant and its Executive Officers.
23.1 - Consent of Grant Thornton LLP, Independent
Certified Public Accountants
23.2 - Consent of Price Waterhouse LLP, Independent
Accountants
27 - Financial Data Schedule
99 - Annual Report on Form 11-K for the CompuTrac,
Inc. Employee Stock Purchase Plan
____________
* Incorporated by reference to the same numbered exhibit filed
with the Registrant's Registration Statement on Form S-1
and Amendment Nos. 1 and 2 thereto, File No. 2-84218,
which became effective July 19, 1983.
** Incorporated by reference to the same numbered exhibit filed
with the Registrant's Registration Statement on Form S-1 and
Amendment No. 1 thereto, File No. 33-4582, which became
effective April 24, 1986.
*** Incorporated by reference to the same numbered exhibit filed
with the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1988, Commission File No.
1-9115.
**** Incorporated by reference to the Registrant's Registration
Statement on Form S-8, File No. 33-61577, filed with the
Commission on August 4, 1995, Commission File No. 1-9115.
***** Incorporated by reference to the same numbered exhibit filed
with the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1994, Commission File No. 1-
9115.
Management Contracts and Compensatory Plans
The documents filed as Exhibits 10.1, 10.2, 10.3, 10.4, 10.8 and
10.9 constitute management contracts or compensatory plans or
arrangements within the meaning of SEC rules.
(b) Reports on Form 8-K. On January 5, 1998, the Company filed
Form 8-K with the Securities and Exchange Commission to
report a change in the Company's certifying accountant.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
COMPUTRAC, INC.
By: /S/ Harry W. Margolis
Harry W. Margolis
Chairman of the Board of Directors and Chief Executive Officer
Date: April 29, 1998
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
/S/ Harry W. Margolis Chairman of the Board of April 29, 1998
Harry W. Margolis Directors and Chief
Executive Officer
/S/ George P. McGraw President April 29, 1998
George P. McGraw (Principal Operating Officer)
/S/ Cheri L. White Vice President - Finance April 29, 1998
Cheri L. White and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/S/ Dana E. Margolis Secretary, Treasurer April 29, 1998
Dana E. Margolis and Director
/S/ Kenneth R. Nicholas Director April 29, 1998
Kenneth R. Nicholas
/S/ Gerald D. Harris Director April 29, 1998
Gerald D. Harris
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 558,818
<SECURITIES> 3,226,330
<RECEIVABLES> 613,744
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,634,377
<PP&E> 14,406,585
<DEPRECIATION> 10,841,701
<TOTAL-ASSETS> 8,670,060
<CURRENT-LIABILITIES> 594,682
<BONDS> 115,546
0
0
<COMMON> 69,887
<OTHER-SE> 7,889,945
<TOTAL-LIABILITY-AND-EQUITY> 8,670,060
<SALES> 958,714
<TOTAL-REVENUES> 4,816,343
<CGS> 609,243
<TOTAL-COSTS> 903,556
<OTHER-EXPENSES> 5,182,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,061
<INCOME-PRETAX> (1,042,748)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,042,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,042,748)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
Exhibit 99
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
Annual Report Pursuant to Section 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
COMPUTRAC, INC. EMPLOYEE STOCK PURCHASE PLAN
1991 COMPUTRAC, INC. EMPLOYEE STOCK PURCHASE PLAN
(Full title of the plans)
COMPUTRAC, INC.
(Name of issuer of the securities held pursuant to the plans)
COMPUTRAC, INC., 222 MUNICIPAL DRIVE, RICHARDSON, TEXAS 75080
(Address of principal executive office)
<PAGE>
Item 1. Changes in the Plans
There were no material changes in the provisions of the
plans during the year ended December 31, 1997.
Item 2. Changes in Investment Policies
There were no changes in the investment policies of the
plans during the year ended December 31, 1997.
Item 3. Contributions Under the Plans
The Company's contributions are not discretionary and are a
specified percentage of the employee's contributions.
Item 4. Participating Employees
There were 11 participating employees as of December 31,
1997.
Item 5. Administration of the Plans
(a) The plans are administered by a committee designated by
the Board of Directors and composed of the following
members:
Name and Address Position Position with Issuer
Harry W. Margolis Member Chairman of the Board
222 Municipal Drive and Director
Richardson, TX 75080
Cheri L. White Member Vice President of Finance
222 Municipal Drive
Richardson, TX 75080
(b) No member of the committee received any compensation
from the plans during the year ended December 31, 1997.
<PAGE>
Item 6. Custodian of Investments
(a) Alliance Trust Company is the custodian of investments.
The address of Alliance is, 4835 LBJ Freeway, Suite
632, Dallas, Texas 75244.
(b) The plans paid no compensation to the custodian for
service in any capacity for the year ended December 31,
1997.
Item 7. Reports to Participating Employees
During the year ended December 31, 1997, the plans provided
participants with a quarterly statement of activity, as well
as an annual report of the individual account activity.
Item 8. Investment of Funds
No substantial part of the assets of the plans are invested
in securities other than the Registrant's.
Item 9. Financial Statements and Exhibits
(a) Financial Statements:
Page
Statements of Net Assets Available for Plan
Benefits - December 31, 1997 and 1996 4
Statement of Changes in Net Assets Available
for Plan Benefits for the three years ended
December 31, 1997 5
Notes to Financial Statements 6
(b) Exhibits:
None
<PAGE>
<TABLE>
COMPUTRAC, INC.
EMPLOYEE STOCK PURCHASE PLANS
Statement of Net Assets Available for Plan Benefits
(unaudited)
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Assets:
Cash $ 2 $ 18
Common stock of CompuTrac, Inc., 15,575
and 19,993 shares in 1997 and 1996,
respectively, at market, cost was
$30,643 and $50,681, respectively 13,628 42,485
--------- ---------
Total assets 13,630 42,503
Liabilities:
Common stock purchases payable 6,865 10,164
--------- ---------
Total liabilities 6,865 10,164
--------- ---------
Net assets available for plan
benefits $ 6,765 $ 32,339
========= ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
COMPUTRAC, INC.
EMPLOYEE STOCK PURCHASE PLANS
Statement of Changes in Net Assets Available for Plan Benefits
(unaudited)
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net assets available for plan
benefits, January 1 $ 32,339 $ 172,599 $ 27,118
Additions:
Employer cash contributions 21,191 30,238 37,038
Employee cash contributions 63,635 90,793 111,125
Other miscellaneous receipts 1 21 867
Unrealized (depreciation)
appreciation of common stock
of CompuTrac, Inc. (52,517) (20,733) 165,961
-------- -------- -------
Total additions 32,310 100,319 314,991
-------- -------- -------
Deductions:
Distributions to participants 57,873 236,238 169,510
Other distributions 11 4,341 0
-------- -------- -------
Total deductions 57,884 240,579 169,510
-------- -------- -------
Net assets available for plan
benefits, December 31 $ 6,765 $ 32,339 $ 172,599
======== ======== =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COMPUTRAC, INC.
EMPLOYEE STOCK PURCHASE PLANS
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) CompuTrac, Inc. (the "Company") established the Employee Stock
Purchase Plans to provide its employees with an employee benefit plan
whereby its employees can participate in the equity and growth of the
Company.
(B) The investment in common stock of the Company is stated at market
value based upon the closing sales prices as transacted on the
American Stock Exchange. Such closing price was $.875 and $2.125 per
share at December 31, 1997 and 1996, respectively.
(C) The financial statements have been prepared on the accrual basis
of accounting.
NOTE 2 - THE PLANS:
The Company's Board of Directors adopted the CompuTrac, Inc.
Employee Stock Purchase Plan in December 1985 and in May 1991, adopted
the CompuTrac, Inc. 1991 Employee Stock Purchase Plan. The Company
reserved 300,000 and 500,000 shares of its Common Stock for purchase
by its employees pursuant to the terms of the plans, respectively.
Under the plans, eligible participating employees of the Company can
purchase Common Stock from the Company through salary withholding.
The plans are not subject to the provisions of the Employee Retirement
Income Security Act of 1974, nor are they intended to qualify for
special tax treatment under Section 401 (a) of the Internal Revenue
Code. The Company filed Registration Statements in January 1986, and
May 1991 and August 1995 covering stock that can be purchased under
the plans.
Each participating employee may elect to have an amount up to,
but not in excess of, 10% of his or her regular salary or wages
withheld for the purpose of purchasing the Company's Common Stock. On
each monthly stock purchase date, the Company contributes to each
participating employee's account an amount equal to 33 1/3% of the
aggregate contributions of such participant since the immediately
preceding stock purchase date, and funds then accumulated in the
participant's account, including the Company's contribution, are used
to purchase authorized but unissued shares of the Common Stock of the
Company. Any funds remaining in the participant's account after the
purchase of the maximum number of full shares of Common Stock are
retained in the participant's account and treated as part of the
accumulation for the next succeeding calendar month.
<PAGE>
The purchase price of the Common Stock purchased pursuant to the
plans is the lesser of the average of the closing sales prices during
the preceding calendar month or the average of the closing sales
prices for the last five trading days preceding the stock purchase
date. No fees, commissions, or other charges are paid by, or
otherwise charged to, the participants or their accounts in connection
with the purchase of Common Stock under the plans. All expenses of
administering the plans are paid by the Company.
All Common Stock of the Company purchased by the participating
employees pursuant to the plans may be voted by the employee or as
directed by the employee.
The Employee Stock Purchase Plans do not discriminate, in scope,
terms, or operation, in favor of officers or directors of the Company
and are available, subject to the eligibility rules of the plans, to
all employees of the Company on the same basis.
NOTE 3 - FEDERAL INCOME TAXES:
The Employee Stock Purchase Plans are not subject to federal
income taxes. Under current federal income tax law, the difference
between the fair market value of the shares acquired under the plans,
and the amount contributed by the employee is treated as ordinary
income to the employee for federal income tax purposes. Accordingly,
the Company withholds all applicable taxes from the participating
employee's salary. The fair market value of the shares is determined
as of the stock purchase date. The plans are not intended to qualify
for special tax treatment under Section 401 (a) of the Internal
Revenue Code.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees have duly caused this annual report to be signed by
the undersigned, thereunto duly authorized.
COMPUTRAC, INC. EMPLOYEE STOCK PURCHASE PLAN
1991 COMPUTRAC, INC. EMPLOYEE STOCK PURCHASE PLAN
By: ______________________________
Cheri L. White
Vice President of Finance
Date: April 28, 1998
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT (Agreement,) made and entered into as of the 1st
day of January, 1998, by and between CompuTrac, Inc., a corporation
organized under the laws of the State of Texas (CompuTrac), and Harry
W. Margolis, an individual residing in Frisco, Texas (the Executive).
Preliminary Statements:
A.CompuTrac is engaged in the design, development, and sale of
turnkey data and word processing systems for legal firms and
Executive is, and has been since he founded CompuTrac, actively
engaged in the promotion and operation of CompuTrac's business as
the Chief Executive Officer of CompuTrac.
B.The ability of the Executive is required in the conduct and
direction of the business of CompuTrac, and CompuTrac feels that
the success of the business will, to a great extent, be due to
the energy, skill and ability of Executive, and on that account
desires to assure itself of the continued services of Executive.
C.The creative abilities of the Executive in the business of
CompuTrac are unique and necessary at this time for the continued
success of CompuTrac.
D.The Board of Directors of CompuTrac has determined that it is in
the best interests of CompuTrac and its shareholders to assure
that CompuTrac will have the continued dedication of the
Executive, notwithstanding the possibility, threat, or occurrence
of a Change of Control (as defined below) of CompuTrac.
E.The Board of Directors of CompuTrac believes it is important to
diminish the inevitable distraction of the Executive by virtue of
the personal uncertainties and risks created by a pending or
threatened Change of Control, to encourage the Executive's full
attention and dedication to CompuTrac currently and in the event
of any threatened or pending Change of Control, and to provide
the Executive with compensation arrangements upon a Change of
Control which provide the Executive with individual financial
security and which are competitive with those of other
corporations.
F.Executive desires to continue in the service of CompuTrac and to
be actively engaged in the direction of CompuTrac's business.
NOW, THEREFORE, in consideration of the promises and of other
good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:
<PAGE>
1. Employment:
(i) CompuTrac agrees to continue to employee Executive and
Executive hereby agrees to continue to serve as the Chief
Executive Officer of CompuTrac during the term of this
Agreement. Executive shall have such duties, authority and
powers in this capacity and consistent therewith, as are
determined from time-to-time by the Board of Directors of
CompuTrac.
(ii) Consistent with his position, Executive agrees to perform
such duties as are assigned to him from time-to-time by the
Board of Directors and to devote substantially all of his
business time, effort and skill to the performance of his
duties and the promotion of the business of CompuTrac.
Consistent with his position, Executive further agrees to
attend to the business of CompuTrac and to do and perform
all the reasonable duties essential, necessary or desirable
to its efficient management, all as directed by the Board of
Directors of CompuTrac. The Executive will serve as an
officer and Director of CompuTrac, and any subsidiary,
during the term of this Agreement, without further
compensation. During his employment hereunder, Executive
agrees that his other business activities shall be less than
20% of his total business time and these activities shall
not interfere nor conflict with the reasonable performance
of his duties hereunder.
2. Term of Agreement:
Subject to the provisions of this Agreement, the term of
Executive's full-time employment hereunder shall commence January 1,
1998, and end December 31, 2002.
3. Compensation:
For all services rendered by the Executive under this Agreement,
during the term of full-time employment, CompuTrac shall pay and
Executive agrees to accept in full payment therefor, a base salary
(Base Salary) of $590,000.00 per year, plus the other benefits herein
provided.
(i) The Base Salary shall be payable in equal monthly
installments and shall be subject to merit increase during
the term of this Agreement at the sole discretion of the
Board of Directors of CompuTrac, with at least annual review
and a minimum mandatory annual increase commencing on
January 1, 1999, equivalent to the annual increase in the
Consumer Price Index for Dallas, Texas during the previous
calendar year.
(ii) During the term of this Agreement, Executive shall be
furnished with the use of an automobile selected by
Executive and having a fair market value of $75,000, and the
ordinary expenses of maintaining and operating same.
Executive shall be reimbursed for all reasonable expenses
incurred for travel, lodging, business entertainment, and
any other miscellaneous expenses incurred on behalf and for
the benefit of CompuTrac. Payment for such expenses shall
be made by CompuTrac on the basis of itemized statements
submitted by Executive reflecting such expense, with such
reasonable supporting data as CompuTrac may require to
fulfill its reporting obligations to all applicable
governmental agencies.
<PAGE>
(iii) In recognition of the professional and social obligations
which are expected of the Executive in the exercise of his
duties in the promotion of the business of CompuTrac, the
Executive shall be furnished membership and payment of dues
in a local country club to be selected by Executive and
approved by the Board of Directors.
(iv) CompuTrac recognizes that Executive conducts a substantial
amount of business for CompuTrac from Executive's residence.
CompuTrac agrees to provide Executive, at CompuTrac's
expense, adequate telephone service and equipment to permit
Executive to continue to conduct same.
(v) Executive shall be eligible for all Executive benefits
afforded generally to executive employees of CompuTrac,
including participation in health and life insurance plans.
Executive and Executive's dependents shall be covered by
health, dental and orthodontic insurance, paid 100% by
CompuTrac. The Executive's estate or named beneficiary
shall be the beneficiary of $2,500,000, life insurance
policy(s) obtained by CompuTrac and all premiums paid by
CompuTrac. The $2,500,000 shall be net of (i.e. in addition
to) any monies or premiums due to CompuTrac from Executive
as a result of any split dollar or similar type policies.
Executive shall receive a minimum of four weeks paid
vacation per year, with such vacation time that is not
taken, accumulated or paid the cash equivalent of such time,
at the option of the Executive on an annual basis.
(vi) Executive shall be entitled to be considered for an annual
cash bonus (Bonus) for each fiscal year during which
Executive performs services under this Agreement. The Bonus
shall be determined by the Board of Directors, in its sole
discretion, based on the performance of Executive. The
Bonus shall not exceed the Base Salary provided by Section
3(i).
4. Certain Terminations:
Anything in this Agreement to the contrary notwithstanding, if
the Executive's employment with CompuTrac is terminated (a) other than
for Cause (as hereinafter defined,) disability, death or the
expiration of the term of this Agreement; or (b) by the Executive for
Good Reason (as hereinafter defined):
(i) CompuTrac shall pay to the Executive, in a cash lump sum and
within 30 days after the date of termination, the aggregate
of the following amounts:
- to the extent not theretofore paid, the Executive's Base
Salary through the date of termination; and
<PAGE>
- the product of (x) the Bonus paid to the Executive for
the last full fiscal year, and (y) a fraction, the
numerator of which is the number of days in the current
fiscal year through the date of termination, and the
denominator of which is 365; and
- the product of three times (two times if the termination
occurs during the last year of this Agreement) the lump
sum of (i) the Base Salary and (ii) the highest Bonus
paid to Executive during any of the last two years prior
to termination; and
- in the case of compensation previously deferred by the
Executive, all amounts previously deferred (together with
any accrued interest thereon) and not yet paid by
CompuTrac, and any accrued vacation pay not yet paid by
CompuTrac; and
- all other amounts accrued or earned by the Executive
through the date of termination and amounts otherwise
owing under the then existing plans and policies at
CompuTrac; and
(ii) for the remainder of the term of this Agreement or such
longer period as any plan, program or policy may provide,
CompuTrac shall continue benefits to the Executive and/or
the Executive's spouse at least equal to those which would
have been provided to them in accordance with the plans,
programs and policies described in this Agreement if the
Executive's employment had not been terminated.
5. Certain Definitions:
For the purpose of this Agreement, a Change of Control shall mean
the occurrence of one or more of the following:
(i) Individuals who, as of the date hereof, constitute the Board
(as of the date hereof the Incumbent Board) cease for any
reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to
the date hereof whose election or nomination for election by
CompuTrac's shareholders was approved by a vote of at least
a majority of the directors then comprising the Incumbent
Board (other than an election or nomination of an individual
whose initial assumption of office is in connection with an
actual or threatened election contest relating to the
election of the Directors of CompuTrac, as such terms are
used under rules promulgated under the Exchange Act) shall
be, for purposes of this Agreement, considered as though
such person were a member of the Incumbent Board; or
<PAGE>
(ii) Approval by the stockholders of CompuTrac of a
reorganization, merger, consolidation, in each case, with
respect to which persons who were the stockholders of
CompuTrac immediately prior to such reorganization, merger
or consolidation do not, immediately thereafter, own more
than 50% of the combined voting power entitled to vote
generally in the election of directors of the reorganized,
merged or consolidated CompuTrac's then outstanding voting
securities, or a liquidation or dissolution of CompuTrac or
of the sale of all or substantially all of the assets of
CompuTrac.
For purposes of this Agreement, Cause means:
(i) acts of embezzlement by the Executive that are intended to
result in substantial personal enrichment of the Executive
at the expense of CompuTrac,
(ii) violations by the Executive of the Executive's obligations
under this Agreement which are willful and deliberate on the
Executive's part and which are not remedied in a reasonable
period of time after receipt of written notice from
CompuTrac specifying the acts and the required remedial
actions, or
(iii) the conviction of the Executive of a felony.
For purposes of this Agreement, Good Reason shall mean the
occurrence of one or more of the following:
(i) the assignment of the Executive of any duties inconsistent
with the Executive's position (including status, offices,
titles and reporting requirement), authority, duties or
responsibilities as contemplated by this Agreement, or any
other action by CompuTrac which results in a diminution in
such position, authority, duties or responsibilities,
excluding for this purpose inadvertent actions not taken in
bad faith and which are remedied by CompuTrac promptly after
receipt of written notice specifying the actions and the
required remedial action is given by the Executive;
(ii) any failure by CompuTrac to comply with any of the
provisions of this Agreement, other than inadvertent
failures not occurring in bad faith and which are remedied
by CompuTrac promptly after receipt of written notice
specifying the actions and the required remedial action is
given by the Executive;
(iii) CompuTrac's requiring the Executive to be based at any
office or location other than the Dallas Metroplex area,
except for travel reasonably required in the performance of
the Executive's responsibilities;
(iv) any purported termination by CompuTrac of the Executive's
employment otherwise than as expressly permitted by this
Agreement; or
(v) the occurrence of a Change of Control before a Section 18
Termination.
<PAGE>
6. Disability:
If during the term of this Agreement, Executive shall fail to
perform his duties hereunder on account of illness or other incapacity
(except death,) and such illness or incapacity is continued for a
period of more than twelve (12) consecutive weeks, CompuTrac shall
have the right, on thirty (30) days' notice to Executive, to reduce
the pay of Executive to 50% of the Base Salary until Executive is able
to resume full duties under this Agreement or until the expiration of
the term of this Agreement, whichever is earlier. At such time as
Executive is able to resume the full duties required of him pursuant
to this Agreement, he shall, subject to the terms of this Agreement,
be reinstated to full Base Salary for the balance of the term of this
Agreement or until he again becomes disabled or incapacitated.
CompuTrac's obligations under this Section 6. Shall be reduced by the
amount of disability payments actually made to the Executive under
Social Security or insurance policies carried by CompuTrac.
7. Death:
In the event of the Executive's death, similar benefits to those
provided by Section 6. (50% Base Salary for the remaining term of this
Agreement) shall be paid to Executive's estate or designated
beneficiary. These benefits will be reduced by any insurance payments
made to the estate or designated beneficiary of Executive from
insurance policies carried by CompuTrac for the benefit of Executive's
estate or designated beneficiary, including, without limitation, the
policy required by Section 3(v).
8. Termination for Cause:
This Agreement is not terminable by CompuTrac except for Cause or
pursuant to a Section 18 Termination. In the event CompuTrac has
Cause to terminate this Agreement CompuTrac may terminate this
Agreement by providing Executive thirty (30) days written notice of
termination.
9. Non-Compete.
(i) Executive covenants and agrees, which covenant and agreement
is the essence of this Agreement, that during the period of
his employment and for a period of eighteen (18) months
after any termination other than for Good Reason or
termination upon the expiration of the term of this
Agreement, he will not at any time, directly or indirectly,
for himself or for or in conjunction with (whether through
being a controlling person or otherwise, or as agent for or
employee of, any person, partnership, association,
corporation or entity, compete with CompuTrac or affiliated
corporations (or any successor to its or their business by
merger, sale or otherwise,) in the design, development,
operation and/or sale of turnkey data and/or word processing
systems, and/or time-shared computer services for legal
firms.
(ii) The provisions of this Section 9 are not intended to
restrict the Executive from the practice of law following
termination of this Agreement, nor from providing consulting
services to the law firms for which the Executive will
receive professional fees.
<PAGE>
10. Confidential Information - Certain Remedies:
The parties hereto recognize that the services to be performed by
Executive are special and unique and that Executive has acquired and
will acquire confidential information by virtue of his employment with
CompuTrac. Executive agrees to keep such information confidential.
In the event of any breach, threatened or actual, by Executive of his
covenant under Section 9 or Section 10., whether before or subsequent
to any termination of employment, it is expressly agreed that, as the
only remedy available to CompuTrac, CompuTrac shall be entitled as a
matter of right to a writ of injunction to prevent such breach without
the necessity of posting a bond. If Executive challenges the right of
CompuTrac to obtain an injunction and a Court of competent
jurisdiction determines that as a matter of law the remedy of
injunction is not available, CompuTrac may then seek compensatory
damages for any breach of Section 9. or 10.
11. Waiver:
Failure to insist upon strict compliance with any of the terms,
covenants or conditions hereof, shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of
any right or power hereunder at any one or more times or in any one or
more instances, be deemed a waiver or relinquishment of the same or
any other right or power at any other time or in any other instance.
12. Amendment:
This Agreement may not be modified or amended in any manner or to
any extent, except by an instrument in writing duly signed by the
parties hereto.
13. Miscellaneous:
(i) CompuTrac shall not require any change of the normal conduct
of its business that would require the Executive to relocate
his residence outside of the Dallas, Texas area.
(ii) All inventions, tradenames, trademarks, copyrights,
improvements, processes, devices and computer software made,
discovered or developed by Executive during the term of his
employment with CompuTrac which may be directly or
indirectly useful in or which relate to any phase of the
business in which CompuTrac is engaged, is actively planning
to be engaged or in which CompuTrac or its predecessors have
been engaged, shall be the property of CompuTrac. Upon the
request and at the expense of CompuTrac, Executive shall
make application in due form to any domestic or foreign
registry requested by CompuTrac for patents, trademarks,
copyrights or similar protection and will assign to
CompuTrac all his rights, title and interest to said
inventions, improvements, processes, devices, computer
software, patents, trademarks, tradenames and copyr ights,
and sh all
<PAGE>
(iii) execute any instruments necessary or which CompuTrac may
deem desirable and will cooperate with CompuTrac in all
respects in connection with any continuations, renewals or
reissues of patents, trademarks, tradenames, copyrights or
similar protection or in the conduct of any proceedings or
litigation in regard thereto. Upon termination of
employment with CompuTrac, Executive agrees to deliver to
CompuTrac all records, documents, data and computer media
records of CompuTrac in his possession or custody.
Notwithstanding the foregoing, upon termination of
employment for any reason, other than Cause, Executive shall
have a perpetual non-exclusive free license to use, improve,
sell or license any of computer software, invention,
process, device or improvement developed by or under the
direction of Executive during his employment with CompuTrac,
so long as Executive's activities in this area are not
directed to law firms or other markets in which CompuTrac is
then involved or is actively planning to be involved or are
competitive with the activities of CompuTrac at the time of
the termination of Employment.
(iv) Executive shall not be required to mitigate damages.
14. Notice:
Any and all notices to be sent hereunder shall be sufficient, if
in writing and deposited in the United States mail by certified or
registered mail, to the respective parties at the addresses shown
below:
CompuTrac: CompuTrac, Inc.
222 Municipal Drive
Richardson, Texas 75080-3583
Executive: Harry W. Margolis
222 Municipal Drive
Richardson, Texas 75080-3583
or to such other party and/or address as may be hereafter designated
in written notice from one party to the other.
15. Successors:
This Agreement shall be binding upon and inure to the benefit of
CompuTrac, its successors and assigns, upon any merger, consolidation
or sale of substantially all of the assets of CompuTrac. This
Agreement terminates and supersedes all existing agreements between
CompuTrac and Executive, relating to the performance of services by
Executive.
<PAGE>
16. Governing Law:
This Agreement shall be deemed to be made in the State of Texas
and shall be construed in accordance with the laws of the State of
Texas.
17. Severability:
The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement. In the event any provision of Sections
9. and 10. Of this Agreement is deemed broader or to involve a longer
period of time than is enforceable under applicable law, then such
provision shall be forthwith amended to be the broadest and longest
provisions permitted by applicable law.
18. Termination by CompuTrac:
In the event that for any fiscal years ending on or after January
31, 1999, the consolidated after tax return rate of return on average
equity for CompuTrac for such fiscal year is less than the lower of
(i) the average yield for a 30 year U.S. Treasury Bond during the same
year plus 3% or (ii) the average yield for a one year U.S. Treasury
Note during the same year, plus 5%, the Board of Directors of
CompuTrac may, by written notice to Executive, reduce the term of this
Agreement to a date which is no earlier than one year from the date of
the receipt of such written notice (Section 18 Termination). The
average yield of government securities shall be determined by taking
the yield of such securities as reported in the Wall Street Journal
(national edition) for the last business day of each month during the
year being measured and obtaining the average of such end of the month
yields. The consolidated after tax rate of return on average equity
for CompuTrac shall be determined by taking the equity for CompuTrac
for the first day and the last day of the year being measured and
obtaining an average of those two numbers (Average Equity) and
dividing the net income after taxes for CompuTrac for the year being
measured by the Average Equity to obtain a rate of return. The equity
and the net income after taxes for CompuTrac, for purposes of this
Section 18, shall be derived from the audited financial statements of
CompuTrac, provided such financial statements are prepared based on
generally accepted accounting principles consistently applied.
19. Arbitration.
If CompuTrac notifies the Executive that Executive's
employment has been terminated under Section 8, the Executive may
demand that CompuTrac submit this matter to binding arbitration in
accordance with the binding Arbitration Rules of the American
Arbitration Association. If the Executive demands arbitration, both
parties shall cooperate to expedite such arbitration proceedings. If
the arbitrator finds that CompuTrac's actions are justified, then the
Executive shall be entitled only to the pay and benefits designated in
the following sentence of Section 19. after termination of employment
until the arbitration is concluded and each side shall bear its own
expenses for the arbitration. CompuTrac shall be required to maintain
and to pay the Executive during the pendency of the arbitration all
salary and benefits otherwise due Executive under this Agreement for
no longer than 180 days after the notice of termination is deemed
delivered to the Executive. If the Executive prevails in the
arbitration, the Executive shall be
<PAGE>
entitled to all Executive's costs of arbitration including reasonable
attorney's fees and shall be entitled to any compensation lost pending
the outcome of the arbitration together with interest at ten percent
(10%) compounded monthly.
Dated this 4th day of February, 1998.
EMPLOYER:
CompuTrac, Inc.
_____________________________ ______________________________
Gerald D. Harris, Director Kenneth R. Nicholas, Director
EXECUTIVE:
______________________________
Harry W. Margolis
<PAGE>
INDEMNITY AGREEMENT
This Agreement is made effective as of the 4th day of February,
1998, between CompuTrac, Inc., a Texas corporation (the Corporation),
and Harry W. Margolis (Director), with reference to the following
facts:
RECITALS:
WHEREAS, the Director is currently serving as a director of the
Corporation and the Corporation wishes the Director to continue in
such capacity; and
WHEREAS, the Corporation has indicated that it does not regard
the indemnities available under its bylaws and the insurance remaining
in effect as adequate to protect it against the risk associated with
claims of discrimination or sexual harassment that may be filed by
employees of the Corporation against the Corporation as a result of
the alleged conduct of the Director.
As a condition of employment, the Director hereby agrees to
indemnify the Corporation as follows:
1. The Director will hold harmless and indemnify the
Corporation and pay on behalf of the Corporation, any related entities
including parent, subsidiaries or affiliates, and the employees,
officers, trustees, and directors of any of them, any amount which the
Corporation is or becomes legally obligated to pay because any act or
omission which the Director commits solely when acting in his capacity
as a Director of the Corporation in violation of (i) the Age
Discrimination and Employment Act of 1967, as amended, which prohibits
age discrimination in employment; (ii) Title VII of the Civil Rights
Act of 1964, as amended, which prohibits sexual harassment and
discrimination in employment based on race, color, national origin,
religion, or sex; (iii) the Equal Pay Act, which prohibits paying men
and women unequal pay for equal work; (iv) the American with
Disabilities Act of 1990, which prohibits discrimination against
disabled persons; (v) the Family and Medical Leave Act of 1993, which
provides for certain leave rights; (vi) the Vocational Rehabilitation
Act of 1973, which prohibits discrimination against handicapped
persons; or (vii) the policies and procedures of the Corporation
prohibiting acts of sexual harassment and discrimination.
2. The payments which the Director will be obligated to make
hereunder shall include, among other things, settlements and costs,
cost and investigation (excluding salaries of officers or employees of
the Corporation), costs of defense of legal actions, claims or
proceedings and appeals therefrom, and costs of attachment or similar
bonds; provided however, that the Director shall not be obligated to
pay fines or other obligations or fees imposed by law or otherwise
make any payments hereunder which he is prohibited by applicable law
from paying as indemnity or for any other reason.
<PAGE>
3. If a claim under this Agreement is not paid by the
Director, or on his behalf, within ninety (90) days after the written
claim has been received by the Director, the Corporation may at any
time thereafter bring an arbitration claim against the Director to
recover the unpaid amount of the claim and if successful, in whole or
in part, the Corporation shall also be entitled to be paid the expense
of prosecuting such claim.
4. In the event of payment under this Agreement, the
Director shall be subrogated to the extent of such payment to all of
the rights of recovery of the Corporation, which shall execute all
papers required and shall do everything that may be necessary to
secure such rights, including the execution of such documents
necessary to enable the Director effectively to bring an arbitration
claim to enforce such rights.
5. The Director shall NOT be liable under this Agreement to
make any payment in connection with any claim made against the
Corporation:
a. For which payment is actually made to or in behalf of the
Corporation under a valid and collectable insurance policy,
except with respect to any excess beyond the amount of
payment under such insurance;
b. If it is determined by a court of competent jurisdiction or
arbitrator that the alleged conduct of the Director did not
constitute a violation of any statute, law, policy, or
procedure enumerated in Paragraph 1 of this Agreement;
c. For which the Corporation fails to provide notice of a claim
timely or to do what is otherwise required by its insurance
policies;
d. For which the Corporation is entitled to indemnity and/or
payment by reason of having given notice of any
circumstances which might give rise to a claim under any
policy of insurance, the terms which have expired prior to
the effective date of this Agreement;
e. For which the Corporation is indemnified by the Director
otherwise than pursuant to this Agreement;
f. Based upon or attributable to the Corporation gaining in
fact any profit or advantage to which it was not legally
entitled; and
g. Brought about or contributed to by the dishonesty or
wrongful conduct of any director, officer, employee, agent
or representative of the Corporation seeking payment
hereunder; however, notwithstanding the foregoing, the
Corporation shall be protected under this Agreement as to
any claims upon which suit may be brought against it by
reason of any alleged dishonesty or wrongful conduct on the
part of any director, officer, employee, agent or
representative of the Corporation, unless a judgment or
other final adjudication thereof adverse to the Corporation
shall establish that the acts of active and deliberate
dishonesty had been committed with actual dishonest purpose
and intent, which acts were material to the cause of action
so adjudicated.
<PAGE>
h. For any act or event prior to the effective date of this
agreement.
i. For any act or event for which all of the conditions
precedent required hereunder have not been met prior to the
Directors termination of Employment with the Corporation.
6. No cost, charges, or expenses for which indemnity shall
be sought hereunder shall be incurred without the Director's consent,
which consent shall not be unreasonably withheld.
7. The Corporation, as a condition precedent to its right to
be indemnified under this Agreement, shall give to the Director notice
in writing within five (5) days of receipt of any claim made against
it for which indemnity will or could be sought under this Agreement.
Notice to the Director shall be sent via hand delivery to Harry W.
Margolis, 27 Stonebriar Way, Frisco, Texas 75034. In addition, the
Corporation shall give the Director such information and cooperation
as he may reasonably require and as shall be within the authority of
the Corporation.
8. Costs and expenses (including attorney's fees) incurred
by the Corporation in defending and investigating any action, suit,
proceeding, or investigation shall be paid by the Director in advance
of the final disposition of such matter. The Corporation shall repay
any such advances in the event that it is ultimately determined that
the Corporation is not entitled to indemnification under the terms of
this Agreement within thirty (30) days of determination.
Notwithstanding the foregoing or any other provision of this
Agreement, no advance shall be made by the Director if a determination
is reasonably and properly made by him that, based upon the facts
known to the Director at the time such determination is made, the
Corporation acted in bad faith, and as a result of such actions by the
Corporation, it is more likely than not that it will ultimately be
determined that the Corporation is not entitled to indemnification
under the terms of the Agreement.
9. The Corporation, as a condition precedent to its right to
be indemnified under this Agreement , and as a condition precedent to
asserting any claim against the Director, must first pass a corporate
resolution, agreed to by a majority vote of disinterested non employee
directors of the Corporation. In order to comply with the terms of
this agreement, the resolution must (a) authorize a claim against the
Director, and (b) specify the exact amount of the authorized claim,
and (c) set forth in detail the facts and circumstances upon which the
claim is based and (d) be signed by the directors voting in favor of
same, and (d) be hand delivered to the Director within 5 days after
the passage of same. Any claim against the Director shall be limited;
both terms of amount and scope, to the contents of said resolution.
The right of indemnification shall belong solely to the Corporation.
No entity, shareholder or individual director of the Corporation, may
file an arbitration demand or otherwise make claim against the
Director under this Agreement. It is the specific intent of this
agreement to exclude all third party beneficiaries. It is also the
specific intent of this agreement to prohibit any and all persons or
entities, other than the board of directors acting in behalf of the
Corporation, from asserting or making any claim against the Director
under the terms of this agreement.
<PAGE>
10. Any claim or controversy arising out of or relating to
this Agreement that cannot be settled amicably by agreement of the
parties hereto, shall be finally settled by binding arbitration before
the American Arbitration Association in accordance with the Commercial
Rules of Arbitration of the American Arbitration Association, then in
force, by one arbitrator appointed in accordance with those rules;
provided, however, that arbitration proceedings may not be instituted
until the party alleging breach of this Agreement by the other party
has given written notice to the other party and has allowed the other
party not less than sixty (60) days from the date of such notice to
remedy any alleged breach and the other party has failed to do so.
The arbitrators shall be appointed by the American Arbitration
Association. The place of the arbitration shall be Dallas, Texas.
The award rendered shall be final and binding upon both parties.
Judgment upon the award may be entered in any court having
jurisdiction, or application may be made to such court for judicial
acceptance of the award and/or an order of enforcement, as the case
may be. The prevailing party in this arbitration proceeding shall be
entitled to receive its reasonable attorneys' fees and expenses. All
reasonable costs of arbitration shall be borne by the losing party.
11. Nothing herein shall be deemed to diminish or otherwise
restrict the right of the Corporation to indemnification under any
provision of the Certificate of Incorporation or Bylaws of the
Corporation or under Texas law.
12. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, excluding its choice
of law provisions.
13. This Agreement may be signed and executed in multiple
counterparts, each one of which shall be deemed to be an original, and
the parties may sign a facsimile of this Agreement, which shall be
deemed to be an original.
14. This Agreement supersedes any and all prior agreements
between the parties pertaining to the subject matter hereof.
15. The Director and the Corporation have engaged and
acknowledged that they have had the opportunity to consult with
counsel concerning this Agreement, that they have read and fully
understand the terms of this Agreement or have had it analyzed by
their respective counsel with sufficient time and that they are fully
aware of its contents and of its legal effect. The Director and the
Corporation agree that this Agreement shall not be construed against
the other party on the grounds that such party drafted this Agreement.
The Director and the Corporation enter into this Agreement freely and
voluntarily and with a full understanding of its terms.
<PAGE>
16. If any of the provisions, terms, clauses, or waivers or
releases of claims or rights contained in this Agreement are declared
illegal, unenforceable, or ineffective in a legal or other forum or
proceeding, which the Director and the Corporation agree shall be
construed and interpreted under the laws of the State of Texas, such
provisions, terms, clauses, and waivers and releases of claims and
rights contained in this Agreement shall remain valid and binding upon
both parties and the parties agree that there shall be added to this
Agreement such provisions, terms, clauses, waivers, as are legal,
enforceable, and effective, and which most clearly effectuate the
intent and effect of those provisions declared ineffective in whole or
part.
17. This Agreement may not be changed, modified, and/or
altered except by writing signed by the Director and the Corporation.
18. The Director acknowledges that he has been advised to
consult with counsel.
19. This Agreement shall be binding upon all successors and
assigns of the Corporation (including any transferring of all or
substantially all of its assets by any successor by merger or
operation of law) and shall inure to the benefit of the heirs,
personal representative, and estate of the Director.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement
to be duly executed and signed as of the day and year first above
written.
THIS AGREEMENT CONTAINS A MANDATORY ARBITRATION PROVISION CONTAINED IN
PARAGRAPH 10.
THE DIRECTOR ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT, UNDERSTANDS
IT AND HAS VOLUNTARILY ENTERED INTO IT.
COMPUTRAC, INC. DIRECTOR
By: _____________________ _______________________
George P. McGraw Harry W. Margolis
Title: President
CompuTrac, Inc.
Exhibit 23.1 - Consent of Grant Thornton LLP, Independent Certified
Public Accountants
We have issued our report dated March 25, 1998, accompanying the
consolidated financial statements included in the Annual Report of
CompuTrac, Inc. on Form 10-KSB for the year ended January 31, 1998.
We hereby consent to the incorporation by reference of said report in
the Registration Statements of CompuTrac, Inc. on Form S-8 (File Nos.
33-40732; 33-40734; 33-02906; 33-07319; 33-61577).
GRANT THORNTON LLP
Dallas, Texas
April 25, 1998
<PAGE>
CompuTrac, Inc.
Exhibit 23.2 - Consent of Price Waterhouse LLP, Independent
Accountants
We hereby co nsent to the incorpo ration by reference in the
Registration Statements on Form S-8 (Nos. 33-40732 ; 33- 40734;
33-02906; 33-07319; 33-61577) of CompuTrac, In c. of our report
dated March 25 , 1997 appearing on page 24 of this annual report on
Form 10-KSB.
PRICE WATERHOUSE LLP
Dallas, Texas
April 29, 1998
