SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
Commission file number 0-23306
PROPHET 21, INC.
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(Exact Name of Registrant as Specified In Its Charter)
Delaware 23-2746447
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
19 West College Avenue, Yardley, Pennsylvania 19067
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(Address of Principal Executive Offices) (Zip Code)
(215) 493-8900
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(Registrant's Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $19,601,405 at August 14, 1998 based on the last sales price
on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of August 14, 1998:
Class Number of Shares
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Common Stock, $.01 par value 3,718,842
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business................................................4
2. Properties.............................................11
3. Legal Proceedings......................................12
4. Submission of Matters to a Vote of Security Holders....12
PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters........................13
6. Selected Financial Data................................14
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations .........15
8. Financial Statements and Supplementary Data............22
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................22
PART III 10. Directors and Executive Officers of the Company........23
11. Executive Compensation.................................23
12. Security Ownership of Certain Beneficial Owners
and Management.........................................23
13. Certain Relationships and Related Transactions.........23
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................24
SIGNATURES...............................................................25
EXHIBIT INDEX............................................................27
FINANCIAL DATA AND SCHEDULES............................................F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Prophet 21, Inc. ("Prophet 21" or the "Company") is a provider
distribution-centric business management solutions developed exclusively for use
by distribution and wholesale oriented businesses. Prophet 21 Solutions are
enterprise-wide solutions consisting of business application software, EDI, VMI,
DMI, electronic commerce, business application training, consulting, software
customization, application hardware (when desired), system installation and
implementation services, supported by a dedicated customer service organization
and educational services.
The Company addresses the automation needs of its customers through
comprehensive, feature-rich and user-friendly solutions for both UNIX and
Microsoft Windows NT environments. The Company's lead UNIX offering is Prophet
21 Acclaim, a complete distribution industry management solution that combines
the functionality of the traditional Prophet 21 System with the technology of
Progress Software Corporation's DBMS. Prophet 21 Acclaim is targeted for sales
to new and current Prophet 21 XL customers. The Company's Microsoft Windows NT
offering is Prophet 21 Servent, a fully integrated Microsoft Windows NT-based
client/server software suite. Prophet 21 Servent is targeted for medium-sized
companies seeking to solve their distribution-centric business requirements with
a Windows NT client/server solution. These companies desire a solution that
provides a transaction-intensive sales order management and inventory management
solution to meet their customer service needs. They also require a solution that
integrates with an accounting solution and can be implemented in a
cost-effective manner. The Prophet 21 Servent product is suitable for
distribution companies, as well as businesses that have a distribution component
of their operations.
Prophet 21 markets its products and services to approximately 45,000 of the
roughly 300,000 distributors and wholesalers operating in the United States and
Canada and, as of June 30, 1998, had an installed base of 1,800 systems across
the United States and Canada. The Company's customers vary in size from small
distributors and wholesalers with a few users to larger companies with several
hundred users linking multiple geographically dispersed branches. The Company
sells its Prophet 21 Acclaim and Servent solutions through its 47-person direct
sales force located in sales and service offices throughout the United States to
a wide range of industry segments including industrial, electrical, plumbing,
electronic, hardware, heating and air conditioning, medical and dental,
janitorial, tile and general distribution. The Company believes that one of its
competitive advantages is its accumulated knowledge of the distribution industry
gained over thirty years, which has enabled it to develop an industry-focused
solution to satisfy the needs of its customers.
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The Company is a holding company incorporated in Delaware in December 1993.
The principal operations of the Company are conducted through its indirect
wholly-owned subsidiary, Prophet 21 (New Jersey), Inc., a New Jersey corporation
incorporated in 1967 under the name Programmed Control Corporation.
Prophet 21 System, Prophet 21 Acclaim, Prophet 21 Servent and the Company's
logo are trademarks of the Company. All other trademarks and trade names
referred to in this Form 10-K are the property of the respective owners and are
not the property of the Company.
PROPHET 21'S MARKET
Of the roughly 300,000 distributors and wholesalers operating in the United
States and Canada, Prophet 21 markets its products and services to approximately
45,000 businesses in a wide range of industry segments including industrial,
electrical, plumbing, electronic, hardware, heating and air conditioning,
medical and dental, janitorial, tile and general distribution. Distributors and
wholesalers warehouse products and handle the movement of large quantities of
inventory across a wide range of industries and play a critical role in the flow
of goods from manufacturers to retailers and consumers. The Company believes
that as the industry supply chains undergo changes, distributors and wholesalers
increasingly are finding that the changing business environment dictates the
need for automated business management systems. The Company believes that it has
the ability to provide "best of breed" order management and inventory management
to companies. This unique ability provides significant market opportunities
beyond the existing pure distribution market.
The Company's target market is highly fragmented, consisting of companies
ranging from small one-location companies to multi-location distributors and
wholesalers. Distributors and wholesalers, regardless of size, tend to operate
with relatively low margins and, in order to compete effectively, must move
goods quickly at the least possible expense and maintain minimal inventories.
Distributors and wholesalers with multiple locations also must manage inventory
in a cost-effective manner across their various branches. In addition to the
competitive pressures inherent in the distribution industry, suppliers and
customers increasingly require that distributors and wholesalers possess
sophisticated technology, including EDI and electronic commerce capabilities,
which enable goods to be ordered and billed computer-to-computer, and bar code
labeling capabilities, which allow for automated and accurate product tracking.
The Company believes that a majority of distributors and wholesalers
presently rely on ineffective or outmoded systems to manage their businesses. In
addition, changes in technology, Year 2000 issues, Euro currency conversion and
compliance, evolving distributor needs and consolidation in the distribution
industry supply chain dictate that companies upgrade their computer systems on a
continuing basis in order to maintain a competitive edge.
PROPHET 21 ACCLAIM
Prophet 21 Acclaim is an enterprise-wide solution consisting of business
application software, business application training, consulting, software
customization, hardware, and
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implementation services. These products are supported by a dedicated customer
service organization and educational training. The Company has designed the
system to address the business management automation needs of distributors and
distribution-centric companies.
Many of the features of Prophet 21 Acclaim have been designed to meet the
specific needs of the distribution industry, with emphasis on features
automating order processing, inventory management and control, communications
networking and product pricing. In addition, the Company offers electronic
commerce such as EDI, VMI, DMI and Internet enabling capabilities which provide
links between its customers and an expanding number of trading partners who are
their customers and suppliers.
The Company provides a single, comprehensive, feature-rich system. The
Company believes that this standardization permits systems to be installed
rapidly and supported effectively because installers, trainers and customer
support personnel have a high level of expertise with a single system. In
addition, this standardization permits the Company's customers to incorporate
readily the Company's periodic software enhancements. To facilitate the very
specific and unique needs of some of our customers the Company does provide
custom software modifications through a separate custom software department.
Prophet 21 Acclaim's design facilitates its use by distributors and
wholesalers with multi-branch operations. The system permits distributors and
wholesalers to determine system-wide inventory status instantaneously and to
ship orders efficiently. Prophet 21 Acclaim also allows for centralized
purchasing, inventory control, billing and accounting, thereby eliminating
certain branch-level expenses and permitting goods to be moved quickly while
minimizing inventories. The Company's communications capabilities include
configuration of wide area networks and integration with local area networks.
Prophet 21 Acclaim is an open system that allows the integration of
third-party software products such as report writers, faxing software, warehouse
automation, forms creation and executive information systems. The Company has
successfully developed seamless integration to a number of third-party products.
PROPHET 21 SERVENT
Prophet 21 Servent is an enterprise-wide solution consisting of business
application software, application training, consulting, software customization,
and implementation services. This product is supported by a dedicated customer
support organization. The Company has designed the system to address the
business management automation needs of distributors and distribution-centric
companies.
Many of the features of Prophet 21 Servent have been designed to meet the
specific needs of the distribution industry and distribution-centric companies,
with emphasis on features automating order management, order configuration,
inventory management and control, product pricing and financials. In addition,
the Company offers electronic commerce such as EDI and Internet enabling
capabilities which provide links between its customers and an expanding
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number of trading partners who are their customers and suppliers. Prophet 21
Servent extends the supply chain. Servent is aimed at customers desiring a
Microsoft Windows NT solution.
The Company provides a single, comprehensive, feature-rich system. The
Company believes that this standardization permits systems to be installed
rapidly and supported effectively because trainers and customer support
personnel have a high level of expertise with a single system. In addition, this
standardization permits the Company's customers to incorporate readily the
Company's periodic software enhancements. To facilitate the very specific and
unique needs of certain of its customers the Company provides custom software
modifications.
Prophet 21 Servent's design facilitates its use by wholesalers,
distributors and distribution-centric companies with multi-branch operations.
The system permits these companies to determine system-wide inventory status
instantaneously and to ship orders efficiently. Prophet 21 Servent also allows
for centralized purchasing, inventory control, billing and accounting, thereby
eliminating certain branch-level expenses and permitting goods to be moved
quickly while minimizing inventories. The Company's communications capabilities
include configuration of wide area networks and integration with local area
networks.
Prophet 21 Servent is an open system that allows the integration of
third-party software products such as report writers, faxing software, warehouse
automation, forms creation and executive information systems. The Company has
successfully developed seamless integration to a number of third-party products.
SALES AND MARKETING
The Company sells its products and services through its 47-person direct
sales force located in sales and service offices throughout the United States.
The field sales force is supervised by a Vice President of Sales with two
directors, one for Prophet 21 Acclaim and one for Servent, who monitor and
manage sales performance and assist in sales activity under the direction of the
Vice President of Sales. The Company's direct sales force focuses on the
distribution industry and understands the specific needs and mission-critical
applications of distributors and wholesalers within targeted industry segments.
The Company employs a solution selling methodology. All sales personnel are
trained and managed in accordance with this doctrine. The Company believes that
its direct sales approach leads to long-term relationships with customers that
increase customer satisfaction and provide opportunities for follow-on sales to
its existing customer base. The Company believes that as the distribution
industry continues to evolve and face new challenges, a knowledgeable and
solutions oriented sales force will bring great value to our customers.
The Company's marketing strategy is to provide focused marketing on the
industry segments served by the Company, in particular, the industrial,
electrical, plumbing, electronic, hardware, heating and air conditioning,
medical and dental, janitorial, tile and general distribution industries. The
Company generates leads through telemarketing, direct mail, advertising,
national and regional trade shows and Company-sponsored seminars.
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The Company's marketing department has the responsibility of identifying
the market to be served by the Company's products and services. The marketing
department further guides the direction and strategy of the Company's products
and services. Information is gathered aggressively by the marketing department
from the Company's customer base, distribution market, distribution-centric
companies and leading supply chain consultants and industry experts. This data
is then presented for consideration in regard to enhancing current products and
for creating new products to serve new market opportunities.
CUSTOMERS
The Company had, as of June 30, 1998, an installed base of approximately
1,800 systems. The Company's customers vary in size from small distributors or
wholesalers with a few users to larger companies with several hundred users
linking multiple geographically dispersed branches. Currently, approximately 50%
of the Company's customers have multiple locations connected by communications
networks. The Company serves a wide range of industry segments, including
industrial, electrical, plumbing, electronic, hardware, heating and air
conditioning, medical and dental, janitorial, tile and general distribution.
During the three fiscal years ended June 30, 1998, no one customer accounted for
10% or more of the Company's revenue.
SYSTEMS TRAINING AND TECHNICAL SUPPORT SERVICES
A key element of the Company's business strategy is to provide extensive
training and support to its customers. The Company has established a customer
service and support, and installation organization, consisting of 143 persons,
that provides installation, implementation and post-sales support for systems
under warranty or maintenance contract. Additionally, commencing in fiscal 1998,
the Company began providing services through its Educational Services division.
Once Prophet 21 receives an order, the Company provides training and
consultation, including advice on how to best operate the customer's business
using the Prophet 21 Solutions, before the system is installed. After
installation, the Company typically provides applications training at the
customer's location. Customers have telephone access and Internet access to
technical specialists who respond to hardware, software and applications
questions. These technical support specialists diagnose and solve technical
problems and assist customers with systems integration and use. The Company
tracks service reports through a state-of-the-art customer support product which
maintains current status reports as well as historical logs of customer
interaction. The Company's Educational Services division develops a variety of
educational tools and programs to train customers in the Prophet 21 Systems.
Such programs include fully-interactive computer-based training, video training
and nationwide instructor-based training seminars.
The Company provides Prophet 21 Acclaim and Prophet 21 XL users a one-year
hardware warranty and a 90-day software warranty. Ninety days after the sale,
customers typically enter into a fee-based maintenance contract covering
software and hardware support. The Company offers software enhancements at
discounted prices to customers who have entered
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into maintenance contracts. As of June 30, 1998, approximately 85% of the
Company's customers were covered by maintenance contracts following the initial
warranty period. There can be no assurance, however, that customers will
continue to enter into maintenance contracts at this rate. Maintenance contracts
have an initial term of one year and continue thereafter unless terminated.
The Company provides Prophet 21 Servent users a one-year software warranty.
The Company offers to its customers fee-based maintenance contract covering
software support and product enhancements. There can be no assurance, however,
that customers will enter into maintenance contracts. Maintenance contracts have
terms of one year.
Prophet 21 conducts annual international user conferences to provide
training, exchange of ideas and demonstrations of new products and features. The
Company also conducts regional training and support conferences.
SOFTWARE DEVELOPMENT
The distribution industry is characterized by changing needs and the
Company's success depends, to a large extent, on its ability to continually
modify and enhance its software to meet such changing needs. The Company places
great emphasis on software development and expects to continue to introduce
modifications or enhancements to its software on a periodic basis. The Company
presently releases a modified or enhanced version of Prophet 21 software
(Acclaim and Servent) approximately every eight to twelve months. The Company
identifies customer and marketplace product needs by direct and frequent
interaction with users of Prophet 21 software, through customer satisfaction
surveys and by following the trends of the distribution and distribution-centric
marketplace. In fiscal 1998, the Company released its newest product, Servent, a
fully-integrated Microsoft Windows NT-based client/server software suite.
Servent is targeted for medium-sized companies attempting to leverage the
Windows NT client/server environment and integrate their financial management
with order, inventory and purchasing management. The Servent product is suitable
for distribution companies and distribution-centric companies which should
enable the Company to expand its market beyond the pure general distribution
marketplace. In addition, the Company develops modifications and enhancements to
its software to address the specific needs of targeted segments in order to
continue to increase the number of features and improve the applications for
such industry segments. Sixty-four employees are directly involved in
programming and software development.
The Company's lead UNIX offering is Prophet 21 Acclaim, a complete business
management system that combines the functionality of the traditional Prophet 21
System with the technology of Progress Software Corporation's DBMS. Prophet 21
Acclaim is targeted for sales to new and current customers. It has been designed
so that current Prophet 21 XL users can easily move to this new product while
preserving their existing technology infrastructure.
The Company's research and development expenses were approximately $2.2
million, $2.7 million and $3.5 million in the fiscal years ended June 30, 1996,
1997 and 1998, respectively. In 1996, the Company also began capitalizing
certain software development costs
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in connection with the general release of Servent. Such capitalized software
development costs amounted to $1,813,000 and $1,565,000 in the fiscal years
ended June 30, 1997 and 1998, respectively, of which $426,000 has been
amortized.
ASSEMBLY AND SUPPLIERS
The Company relies on third-party vendors to develop, manufacture and
supply all of the hardware components of Prophet 21 solutions. Manufacturing by
the Company consists of light assembly and systems integration.
The Company believes that several vendors are capable of providing most of
the components and parts used in the Company's systems. In certain instances,
despite the availability of multiple sources, the Company elects to procure
certain components or parts from a single source to maintain quality control or
to develop a strategic relationship with a supplier. The Company has not entered
into any long-term supply contracts with its vendors, electing to purchase
components and parts on a purchase order basis. As a result, the Company has no
assurance that components and parts will be available as required, or that
prices of such components and parts will not increase. In addition, certain
components of Prophet 21 Acclaim, including IBM RS/6000 computers and Progress
software, are available only from a single source.
In July 1991, Prophet 21 entered into an Authorized Dealers and Industry
Remarketers Agreement with IBM. The agreement grants to the Company a
non-exclusive right to purchase and license certain hardware products from IBM,
including IBM RS/6000 computers, for remarketing by the Company in the United
States. Although the agreement contains no minimum purchase requirements, the
volume of systems purchased by Prophet 21 affects the percentage discount
received by the Company and may be a factor considered by IBM in connection with
Prophet 21's continued authorization as an IBM industry remarketer. The
agreement is subject to annual renewal and may be terminated by IBM with or
without cause on three-months written notice. During the fiscal years ended June
30, 1996, 1997 and 1998, the Company's hardware purchases from IBM totaled $5.2
million, $5.4 million and $7.4 million, respectively.
BACKLOG
The Company normally ships systems within 30 days of receiving an order
and, therefore, does not customarily have a significant backlog.
COMPETITION
The market for business management automation systems for the distribution
industry is highly competitive. The Company believes that it has approximately
30 direct competitors, represented by a mix of small, closely-held companies and
divisions of larger companies that sell software or systems directly competitive
with those of the Company. Certain of such competitors serve only a limited
number of industry segments within the distribution industry.
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The Company believes that the principal competitive factors in the
distributor and wholesaler automation industry include product features,
technical capabilities, system price/performance, vendor and product reputation,
financial stability, customer service and support, and timeliness of product
modifications and enhancements and that it competes effectively with respect to
all of these factors.
INTELLECTUAL PROPERTY
The Company's success is heavily dependent upon its intellectual property,
including its software technology. Prophet 21 relies principally on a
combination of copyright, trademark and trade secret laws, employee and
third-party non-disclosure agreements, and license agreements to protect its
intellectual property. Nonetheless, there can be no assurance that the steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation or unlawful copying of its technology or software
programs. Copyright and trade secret laws do not limit the rights of others to
independently develop similar technology and software programs. Although the
Company believes that its software products do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future.
The Company believes that, due to the rapid pace of innovation within the
computer industry, factors such as technological and creative skill of
personnel, knowledge and experience of management, reputation, maintenance and
support and the ability to develop, enhance, market and acquire software
products and services are more important for establishing and maintaining a
competitive position within the industry than are patent, copyright and other
legal protections for its technology.
EMPLOYEES
As of June 30, 1998, the Company employed 305 persons full-time, of whom 63
were engaged in sales and marketing; 143 were engaged in customer service and
support, and installation; 64 were engaged in programming and software
development and quality assurance; and 35 were engaged in finance,
administration and management. In addition, 34 were employed on a part-time
basis (17 of whom were engaged in administrative functions). None of the
Company's employees are covered by collective bargaining agreements. The Company
believes that it has been successful in attracting skilled personnel.
Competition for experienced sales and marketing personnel and software
programmers is intense. The Company's future success will depend in part on its
ability to continue to attract, retain and motivate highly qualified personnel.
The Company considers relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company leases facilities in Yardley, Pennsylvania totaling 60,000
square feet from Dr. John E. Meggitt, the Company's Chairman of the Board, and
Mrs. Dorothy M. Meggitt, the Company's Secretary. This lease expires on June 30,
2003. The leased space in Pennsylvania is
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used for administration, a substantial portion of sales and marketing, customer
service and support, assembly, quality assurance and software development. The
Company also leases sales and service offices in Atlanta and Chicago.
ITEM 3. LEGAL PROCEEDINGS.
There is no material litigation pending to which the Company is a party or
to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Prior to March 1994, there was no established market for the Company's
Common Stock. Since March 11, 1994, the Common Stock has traded on the Nasdaq
National Market ("NNM") under the symbol "PXXI."
The following table sets forth the high and low sales prices for the Common
Stock for each of the quarters since the quarter ended September 30, 1996 as
reported on NNM. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Quarter Ended High Low
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September 30, 1996 $ 6.25 $ 4.75
December 31, 1996 $ 6.50 $ 5.00
March 31, 1997 $ 6.50 $ 5.625
June 30, 1997 $ 6.00 $ 4.50
September 30, 1997 $13.625 $ 5.375
December 31, 1997 $16.125 $10.375
March 31, 1998 $16.25 $10.125
June 30, 1998 $19.50 $12.75
As of August 14, 1998, the approximate number of holders of record of the
Common Stock was 179.
The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain any future earnings to finance the growth of
the business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated historical financial
data of the Company as of the dates and for the periods indicated. The selected
financial data set forth below for the Company as of June 30, 1997 and 1998 and
for each of the three years ended June 30, 1998 are derived from the audited
financial statements included elsewhere herein. The selected financial data set
forth below for the Company as of June 30, 1994, 1995 and 1996 and for each of
the years ended June 30, 1994 and 1995 are derived from the financial statements
not included elsewhere herein. The selected financial information should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
appearing elsewhere herein. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere in
this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
1994(1) 1995 1996 1997 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue:
System sales........................... $27,871 $21,295 $20,905 $22,537 $30,157
Service and support...... 9,598 9,948 12,145 13,866 16,457
------ ------- ------- ------- -------
37,469 31,243 33,050 36,403 46,614
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Cost of revenue:
System sales........................... 14,563 12,610 11,672 12,640 16,064
Service and support.................... 5,275 5,723 6,624 7,144 8,952
------- ------- ------- ------- -------
19,838 18,333 18,296 19,784 25,016
------- ------- ------- ------- -------
Gross profit......................... 17,631 12,910 14,754 16,619 21,598
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.................... 8,765 8,146 8,346 8,306 10,078
General and administrative............. 2,550 2,251 2,296 2,434 2,839
Research and development............... 2,620 2,907 2,248 2,693 3,455
Severance expense...................... -- 378 -- -- --
------- ------- ------- ------- -------
Total operating expenses............. 13,935 13,682 12,890 13,433 16,372
------- ------- ------- ------- -------
Operating income (loss) 3,696 (772) 1,864 3,186 5,226
Interest income......................... 129 374 408 376 304
------- ------- ------- ------- -------
Income (loss) before taxes........... 3,825 (398) 2,272 3,562 5,530
Provision (benefit) for income taxes.... 1,474 (171) 922 1,275 1,991
------- ------- ------- ------- -------
Net income (loss).................... $ 2,351 $ (227) $ 1,350 $ 2,287 $ 3,539
======= ======= ======= ======= =======
Basic earnings per share:
Net income (loss) per share............ $ 0.69 $ (0.06) $ 0.34 $ 0.60 $ 0.98
======= ======= ======= ======= =======
Weighted average common
shares outstanding.................... 3,410 4,002 4,003 3,813 3,601
======= ======= ======= ======= =======
Diluted earnings per share:
Net income (loss) per share............ $ 0.69 $ (0.06) $ 0.34 $ 0.60 $ 0.90
======= ======= ======= ======= =======
Weighted average common and
common equivalent shares
outstanding........................... 3,410 4,002 4,011 3,838 3,928
======= ======= ======= ======= =======
BALANCE SHEET DATA
(AT PERIOD END):
Working capital......................... $15,222 $15,172 $14,797(2) $11,720 $15,832
Total assets............................ 25,157 23,145 25,832 27,681 34,615
Stockholders' equity.................... 17,838 17,631 18,981 18,764 23,856
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<FN>
(1) Includes in general and administrative expenses a compensation expense of
$240,500 resulting from the difference between the exercise price and the fair
market value of the Common Stock underlying the 370,000 stock options granted in
December 1993. Excluding this charge, general and administrative expenses,
operating income, net income and net income per share would have been
$2,309,000, $3,937,000, $2,592,000 and $0.76, respectively.
(2) Certain items in prior years financial statements have been reclassified for
comparative purposes. See "Note 1. Summary of Significant Accounting Policies,"
to the audited financial statements included elsewhere herein.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company was established to provide innovative software solutions that
meet the changing business demands of distribution operations within the
extended supply chain. Prophet 21 develops, markets and supports a complete
suite of Year 2000 compliant, distribution-centric enterprise applications for
either Windows NT or UNIX for finance, order management, inventory management,
purchasing and electronic commerce. In addition, Prophet 21 provides
industry-specific, distribution-centric enterprise solutions for select markets
including industrial, automotive, aerospace and defense, electrical supply,
electronics, and plumbing and HVAC.
The Company's revenue is derived primarily from the sale of either Prophet
21 Acclaim or Prophet 21 Servent Software Solutions. Other sources of revenue
include: customer support maintenance contracts, equipment maintenance (when
purchased via Prophet 21), the sale of optional third-party software products
and training services provided by the Company's Educational Services Department
which began operations in fiscal 1998. Each Prophet 21 Acclaim Solution includes
the Prophet 21 Acclaim Software, an IBM RISC System/6000 computer, various
optional third-party software products and hardware components, training,
support and installation. Each Prophet 21 Servent Solution includes the Prophet
21 Servent Software, training, support and installation. The Company's
Educational Services Department develops a variety of educational tools and
programs to train customers in the Prophet 21 Systems. Such programs include
interactive computer-based training, video training and remote training. The
Company's cost of revenue consists principally of the costs of hardware
components, customer support, installation and training and, to a lesser extent,
third-party software.
In fiscal 1996, the Company introduced its next generation UNIX product,
Prophet 21 Acclaim. A complete distribution industry management solution that
combines the functionality of the traditional Prophet 21 System with the
technology of Progress Software Corporation's DBMS. Prophet 21 Acclaim is
targeted for sales to new and current Prophet 21 XL customers. It has been
designed so that current XL users can move to this new product while preserving
their existing technology infrastructure. The general release of Prophet 21
Acclaim began late in the second quarter of fiscal 1997.
In the second quarter of fiscal 1998, the Company introduced its newest
product, Prophet 21 Servent, a fully integrated Microsoft Windows NT-based
client/server software suite. Servent is targeted for medium-sized companies
looking to solve their distribution-centric business requirements with a Windows
NT client/server solution. These companies desire a solution that provides a
transaction-intensive sales order management and inventory management solution
to meet their customer service needs. They also require a solution that
integrates with an accounting solution and can be implemented in a
cost-effective manner. The Servent product is suitable for distribution oriented
companies, as well as businesses that have a distribution component of their
own. The general release of Servent began in the third quarter of fiscal 1998.
-15-
<PAGE>
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
anticipated future revenues, capital expenditures, Year 2000 compliance and
other statements regarding matters that are not historical facts, involve
predictions. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Potential risks and uncertainties that could affect
the Company's future operating results include, but are not limited to: (i)
economic conditions, including economic conditions related to the computer
industry; (ii) the availability of components and parts from the Company's
vendors at current prices and levels; (iii) the intense competition in the
markets for the Company's products and services; (iv) the Company's ability to
protect its intellectual property; (v) potential infringement claims against the
Company for its software development products; (vi) the Company's ability to
obtain customer maintenance contracts at current levels; and (vii) the Company's
ability to develop, market, provide, and achieve market acceptance of new
service offerings to new and existing clients.
-16-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenue and the percentage change in the dollar amount
of such data compared to the prior comparable period:
<TABLE>
<CAPTION>
Percentage of Revenue Percentage Increase (Decrease)
--------------------- ------------------------------
Fiscal Fiscal
Fiscal Year Ended 1997 over 1998 over
June 30, Fiscal Fiscal
------------------------
1996 1997 1998 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
System sales................. 63.3% 61.9% 64.7% 7.8% 33.8%
Service and support.......... 36.7 38.1 35.3 14.2 18.7
----- ----- -----
100.0 100.0 100.0 10.1 28.0
----- ----- -----
Cost of revenue:
System sales................. 35.3 34.7 34.5 8.3 27.1
Service and support.......... 20.0 19.6 19.2 7.9 25.3
----- ----- -----
55.3 54.3 53.7 8.1 26.4
----- ----- -----
Gross profit............... 44.7 45.7 46.3 12.6 30.0
----- ----- -----
Operating expenses:
Sales and marketing.......... 25.3 22.8 21.6 (0.5) 21.3
General and administrative... 6.9 6.7 6.1 6.0 16.6
Research and development..... 6.8 7.4 7.4 19.8 28.3
----- ----- -----
Total operating expenses... 39.0 36.9 35.1 4.2 21.9
----- ----- -----
Operating income........... 5.7 8.8 11.2 70.9 64.0
Interest income............... 1.2 1.0 0.7 (7.8) (19.1)
Income before income
taxes...................... 6.9 9.8 11.9 56.8 55.2
Provision for income taxes.... 2.8 3.5 4.3 38.3 56.2
----- ----- -----
Net income................. 4.1% 6.3% 7.6% 69.4 54.7
===== ===== =====
</TABLE>
-17-
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUE. Revenue increased by 28.0% or $10,211,000, from $36,403,000 in
fiscal 1997 to $46,614,000 in fiscal 1998. System sales revenue increased by
33.8% or $7,620,000, from $22,537,000 in fiscal 1997 to $30,157,000 in fiscal
1998. This increase was attributable primarily to sales of the Company's Prophet
21 Acclaim product. Also contributing to the increase in system sales revenue
were sales of the Company's new Servent product, which began in the Third
Quarter of Fiscal 1998 and, to a lesser extent, the increase in the sale of
optional Prophet 21 software. Service and support revenue increased by 18.7% or
$2,591,000, from $13,866,000 in fiscal 1997 to $16,457,000 in fiscal 1998. This
increase was attributable primarily to an increase in the number of new users
who have entered into maintenance contracts, an increase in services performed
by the Company in connection with its new Educational Services division and, to
a lesser extent, sales of services related to the Company's new Servent product.
GROSS PROFIT. The Company's gross profit increased by 30.0%, or $4,979,000,
from $16,619,000 in fiscal 1997 to $21,598,000 in fiscal 1998. Gross profit
margin increased from 45.7% of revenue in fiscal 1997 to 46.3% of revenue in
fiscal 1998. Gross profit from system sales increased by 42.4%, or $4,196,000,
from $9,897,000 in fiscal 1997 to $14,093,000 in fiscal 1998. Gross profit
margin attributable to system sales increased from 43.9% of system sales revenue
in fiscal 1997 to 46.7% in fiscal 1998. The increases in such gross profit and
gross profit margin were attributable primarily to the increased sales of the
Company's Prophet 21 Acclaim product and to the sales of the Company's new
Servent product. Gross profit from service and support revenue increased by
11.6%, or $783,000, from $6,722,000 in fiscal 1997 to $7,505,000 in 1998. Gross
profit margin attributable to service and support revenue decreased from 48.5%
of service and support revenue in fiscal 1997 to 45.6% in fiscal 1998. The
increase in such gross profit was attributable primarily to an increase in the
number of new users who have entered into maintenance contracts. The decrease in
such gross profit margin was attributable primarily to an increase in salary and
staffing expenses associated with the Company's Education Services division and
Servent support division.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
21.3%, or $1,772,000, from $8,306,000 in fiscal 1997 to $10,078,000 in fiscal
1998, but decreased as a percentage of revenue from 22.8% to 21.6%,
respectively. Such expenses increased in absolute dollars due primarily to
increased commission expenses associated with the Company's increased sales, and
to a lesser extent, increased costs associated with the Company's annual User's
Conference. Sales and marketing expenses decreased as a percentage of revenue as
a result of increased sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 16.6%, or $405,000, from $2,434,000 in fiscal 1997 to $2,839,000 in
fiscal 1998, but decreased as a percentage of revenue from 6.7% to 6.1%,
respectively. The increase in absolute dollars in general and administrative
expenses was due to increases in compensation expenses and fees paid to the
Company's outside professionals. General and administrative expenses decreased
as a percentage of revenue as a result of increased sales volume.
-18-
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 28.3%, or $762,000, from $2,693,000 in fiscal 1997 to $3,455,000 in
fiscal 1998, but remained constant as a percentage of revenue at 7.4%. Research
and development expenses increased in absolute dollars due primarily to an
increase in salary expenses and staffing. Research and development expenses
remained constant as a percentage of revenue as a result of increased sales
volume. The Company also capitalized $1,565,000 in software development
expenditures during fiscal 1998.
INCOME TAXES. The Company's effective tax rate was 35.8% and 36.0% in
fiscal 1997 and 1998, respectively.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
REVENUE. Revenue increased by 10.1%, or $3,353,000, from $33,050,000 in
fiscal 1996 to $36,403,000 in fiscal 1997. System sales revenue increased by
7.8%, or $1,632,000, from $20,905,000 in fiscal 1996 to $22,537,000 in fiscal
1997. This increase was attributable primarily to sales of the Company's new
Prophet 21 Acclaim product which began late in the second quarter of fiscal
1997. Such increase was offset, in part, by a decrease in programming revenue
and by lower sales volume of Prophet 21 XL Software upgrades as many existing
customers, during the first quarter of fiscal 1997, were evaluating whether to
upgrade to XL9, the latest version of the Company's XL Software, or purchase the
new Prophet 21 Acclaim product. Service and support revenue increased by 14.2%,
or $1,721,000, from $12,145,000 in fiscal 1996 to $13,866,000 in fiscal 1997.
This increase was attributable primarily to an increase in the number of new
users who have entered into maintenance contracts and, to a lesser extent, to a
price increase implemented by the Company on such maintenance contracts during
the second quarter of fiscal 1997 and to an increase in services performed by
the Company in connection with the general release of the new Prophet 21 Acclaim
product.
GROSS PROFIT. The Company's gross profit increased by 12.6%, or $1,865,000,
from $14,754,000 in fiscal 1996 to $16,619,000 in fiscal 1997. Gross profit
margin increased from 44.7% of revenue in fiscal 1996 to 45.7% of revenue in
fiscal 1997. Gross profit from system sales increased by 7.2%, or $664,000, from
$9,233,000 in fiscal 1996 to $9,897,000 in fiscal 1997. Gross profit margin
attributable to system sales decreased from 44.2% of system sales revenue in
fiscal 1996 to 43.9% in fiscal 1997. The increase in gross profit from system
sales was attributable primarily to sales of the Company's new Prophet 21
Acclaim product which began late in the second quarter of fiscal 1997. The
decrease in gross profit margin from system sales was attributable primarily to
decreased sales volume of optional Prophet 21 software which, in general,
carries higher margins. Gross profit from service and support revenue increased
by 21.8%, or $1,201,000, from $5,521,000 in fiscal 1996 to $6,722,000 in fiscal
1997. Gross profit margin attributable to service and support revenue increased
from 45.5% of service and support revenue in fiscal 1996 to 48.5% in fiscal
1997. The increases in such gross profit and gross profit margin were
attributable primarily to an increase in the number of new users who have
entered into maintenance contracts and, to a lesser extent, to a price increase
implemented by the Company on such maintenance contracts during the second
quarter of fiscal 1997 and to an
-19-
<PAGE>
increase in services performed by the Company in connection with the general
release of the new Prophet 21 Acclaim product.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased
slightly by 0.5%, or $40,000, from $8,346,000 in fiscal 1996 to $8,306,000 in
fiscal 1997, and decreased as a percentage of revenue from 25.3% to 22.8%,
respectively. Sales and marketing expenses decreased in absolute dollars and as
a percentage of revenue due primarily to the fact that the User's Conference was
scheduled only once in fiscal 1997 and, to a lesser extent, reduced marketing
costs related to a decrease in staffing. Such decreases were offset, in part, by
increased salesperson compensation and to increased marketing costs associated
with the new Prophet 21 Acclaim product.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 6.0%, or $138,000, from $2,296,000 in fiscal 1996 to $2,434,000 in
fiscal 1997, but decreased as a percentage of revenue from 6.9% to 6.7%,
respectively. The increase in absolute dollars in general and administrative
expenses was due to an increase in compensation expenses. General and
administrative expenses decreased as a percentage of revenue as a result of
increased sales volume.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 19.8%, or $445,000, from $2,248,000 in fiscal 1996 to $2,693,000 in
fiscal 1997, and increased as a percentage of revenue from 6.8% to 7.4%,
respectively. Such increases were due primarily to an increase in salary
expenses and staffing. The Company also capitalized $1,813,000 in software
development expenditures during fiscal 1997.
INCOME TAXES. The Company's effective tax rate was 40.6% and 35.8% in
fiscal 1996 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily from
cash generated by operations and available cash, including funds raised in the
Company's initial public offering completed in March 1994. The Company's cash
flow from (used by) operations was $1,263,000, $5,773,000 and ($638,000) for the
fiscal years ended June 30, 1996, 1997 and 1998, respectively.
The Company's working capital was $11,720,000 and $15,832,000 at June 30,
1997 and 1998, respectively.
The Company invested $1,069,000, $1,440,000 and $1,657,000 in capital
equipment and leasehold improvements in fiscal 1996, 1997 and 1998,
respectively. There are no other material commitments for capital expenditures
currently outstanding. The Company also invested $1,813,000 and $1,565,000 in
software development costs which were capitalized during the fiscal years ended
June 30, 1997 and 1998.
-20-
<PAGE>
The Company does not have a significant concentration of credit risk with
respect to accounts receivable due to the large number of customers comprising
the Company's customer base and their dispersion across different geographic
regions. The Company performs on-going credit evaluations and generally does not
require collateral. The Company maintains reserves for potential credit losses,
and, to date, such losses have been within the Company's expectations.
In fiscal 1997, the Company's Board of Directors approved resolutions to
repurchase up to 600,000 shares of the Company's Common Stock in open market
purchases. As of June 30, 1998, the Company had repurchased 442,900 shares at a
cost of $2,518,000.
The Company believes that available funds and the cash flow expected to be
generated from operations will be adequate to satisfy its current and planned
operations for at least the next 24 months.
YEAR 2000 COMPLIANCE
The Company believes that it has sufficiently assessed its state of
readiness with respect to its Year 2000 compliance. The Company does not believe
that Year 2000 compliance will result in material investments by the Company,
nor does the Company anticipate that the Year 2000 Problem will have any adverse
effects on the business operations or financial performance of the Company. The
Company does not believe that it has any material exposure to the Year 2000
Problem with respect to its own information systems. There can be no assurance,
however, that the Year 2000 Problem will not adversely affect the Company's
business, operating results and financial condition.
The Company believes that each of its products is Year 2000 compliant,
however, it has no control over whether software modification made by third
parties or the combination of its products with the software developed by third
parties and combined with the Company's products will be Year 2000 compliant.
Additionally, there can be no assurance that such potential instances of
non-compliance will not adversely affect the Company's business, operating
results and financial condition. The Company has established no reserve for
auditing its software products or for correcting Year 2000 compliance issues
with such products.
Although the Company believes its products are Year 2000 compliant, the
purchasing patterns of customers and potential customers may be affected by
issues associated with the Year 2000 Problem. As companies expend significant
resources to correct their current data storage solutions, these expenditures
may result in reduced funds to purchase products as those offered by the
Company. There can be no assurance that the Year 2000 Problem will not adversely
affect the Company's business, operating results and financial condition.
Conversely, the Year 2000 Problem may cause other companies to accelerate
purchases, thereby causing an increase in short-term demand and a consequent
decrease in long-term demand for the Company's products.
-21-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-22-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1998 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1998
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
-23-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements and Schedule
on Page F-1.
(a) (2) Financial Statement Schedule.
Reference is made to the Index to Financial Statements and Schedule
on Page F-1.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 26.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the fiscal year ended
June 30, 1998.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 23rd day of
September, 1998.
PROPHET 21, INC.
By: /s/Charles L. Boyle, III
--------------------------------
Charles L. Boyle, III, President
and Chief Executive Officer
-25-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Charles L. Boyle, III President, Chief Executive September 23, 1998
- ------------------------
Charles L. Boyle, III Officer and Director
(Principal Executive Officer)
/s/Thomas M. Giuliani Chief Financial Officer and September 23, 1998
- ------------------------
Thomas M. Giuliani Treasurer (Principal
Financial and Accounting
Officer)
/s/John E. Meggitt, Ph.D Chairman of the Board and September 23, 1998
- ------------------------
John E. Meggitt, Ph.D. Director
/s/Dorothy M. Meggitt Secretary and Director September 23, 1998
- ------------------------
Dorothy M. Meggitt
/s/Louis J. Cissone Director September 23, 1998
- ------------------------
Louis J. Cissone
/s/Mark A. Timmerman Director September 23, 1998
- ------------------------
Mark A. Timmerman
-26-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Certificate of Incorporation. (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (File Number 33-74276) which became effective on
March 10, 1994.)
3.2 By-laws. (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10,
1994.)
4.1* 1993 Stock Plan of the Company adopted December 6, 1993,
as amended December 15, 1993. (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File Number 33-74276) which became effective on
March 10, 1994.)
4.2* 1997 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1997.)
10.1* Employment Agreement dated as of July 1, 1993 between the
Company and John E. Meggitt. (Incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement
on Form S-1 (File Number 33-74276) which became effective
on March 10, 1994.) Employment Agreement amended by
Amendments to Employment Agreement dated January 26, 1995
and February 3, 1995, such amendments filed herewith.
10.2* Employment Agreement dated as of July 1, 1993 between the
Company and Charles L. Boyle, III. (Incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.) Employment Agreement
amended by Amendments to Employment Agreement dated
January 27, 1995 and April 20, 1995, such amendments
filed herewith.
10.3* Employment Agreement dated as of July 1, 1993 between the
Company and Neil Jaffe. (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (File Number 33-74276), which became effective
on March 10, 1994.) Employment Agreement amended by
Amendments to Employment Agreement dated January 26, 1995
and April 20, 1995, such amendments filed herewith.
-27-
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.4* Indemnification Agreement dated as of December 6, 1993
between the Company and John E. Meggitt. (Incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)
10.5* Indemnification Agreement dated as of December 6, 1993
between the Company and Dorothy M. Meggitt.
(Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10,
1994.)
10.6* Indemnification Agreement dated as of December 6, 1993
between the Company and Charles L. Boyle, III.
(Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10,
1994.)
10.7* Indemnification Agreement dated as of December 6, 1993
between the Company and Thomas F. Ward. (Incorporated
by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File Number
33-74276) which became effective on March 10, 1994.)
10.8* Indemnification Agreement dated as of December 6, 1993
between the Company and Neil Jaffe. (Incorporated by
reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)
10.9* Indemnification Agreement dated as of December 6, 1993
between the Company and Richard Hercus. (Incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)
10.10** Lease dated July 1, 1998 by and between John E. Meggitt
and Dorothy M. Meggitt as Landlord, and the Company, as
Tenant.
10.11 Form of Employment Agreement by and between the Company
and each salesman. (Incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form S-1
(File Number 33-74276) which became effective on March
10, 1994.)
10.12 Form of Employee's Invention Assignment,
Non-Competition and Confidential Information
Agreement. (Incorporated by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1
(File Number 33-74276) which became effective on March
10, 1994.)
-28-
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.13 International Business Machines Corporation Agreement for
Authorized Dealers and Industry Remarketers, as amended,
with exhibits. (Incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form S-1
(File Number 33-74276) which became effective on March
10, 1994.)
10.14 Progress Software Value Added Reseller Agreement.
(Incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10,
1994.)
10.15* Indemnification Agreement dated as of May 18, 1994
between the Company and Louis J. Cissone.
(Incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1994.)
10.16* Indemnification Agreement dated as of May 18, 1994
between the Company and Mark A. Timmerman. (Incorporated
by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1994.)
10.17* Indemnification Agreement dated as of September 24,
1996 between the Company and Thomas M. Giuliani.
(Incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1996.)
21 List of subsidiaries of the Company. (Incorporated by
reference to Exhibit 21 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)
27 Financial Data Schedule.
- ---------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed herewith. All other exhibits previously filed.
-29-
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL DATA
AND SCHEDULE
Page
----
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets as of
June 30, 1997 and 1998...................................................F-3
Consolidated Statements of Operations for the
years ended June 30, 1996, 1997 and 1998.................................F-4
Consolidated Statements of Stockholders'
Equity for the years ended
June 30, 1996, 1997 and 1998.............................................F-5
Consolidated Statements of Cash Flows for the
years ended June 30, 1996, 1997 and 1998.................................F-6
Notes to Consolidated Financial Statements.................................F-7
Report of Independent Accountants..........................................S-1
Schedule II................................................................S-2
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Prophet 21, Inc. and its Subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, 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 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 audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
August 17, 1998
F-2
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)
<TABLE>
June 30,
---------------------------------
1997 1998
---- ----
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents............................ $ 1,829 $ 2,206
Marketable securities................................ 4,082 1,555
Accounts receivable, net of allowance
for doubtful accounts of $218
and $240, respectively.............................. 10,412 17,201
Billed and unearned maintenance contracts............ 1,760 2,016
Inventories.......................................... 1,117 1,402
Deferred income taxes................................ 163 203
Prepaid and other current assets..................... 437 797
------- --------
Total current assets............................... 19,800 25,380
Long-term marketable securities........................ 2,835 2,825
Equipment and improvements, net........................ 2,536 2,887
Software development costs, net........................ 2,271 3,410
Other assets........................................... 239 113
-------- --------
Total assets...................................... $ 27,681 $ 34,615
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................................... $ 3,367 $ 3,690
Accrued expenses and other liabilities................ 1,171 1,540
Commissions payable................................... 479 808
Taxes payable......................................... 620 668
Profit sharing plan contribution payable.............. 290 391
Deferred income....................................... 2,153 2,451
-------- --------
Total current liabilities........................... 8,080 9,548
-------- --------
Deferred income taxes................................... 837 1,211
-------- --------
Commitments and contingent liabilities
Stockholders' equity
Preferred stock--$0.01 par value,
1,500,000 shares authorized; no
shares issued or outstanding......................... -- --
Common stock--$0.01 par value, 10,000,000 shares
authorized; 4,002,500 and 4,153,642 shares issued,
respectively; 3,559,600 and 3,710,742 outstanding,
respectively......................................... 40 42
Additional paid-in capital............................ 8,835 10,386
Retained earnings..................................... 12,407 15,946
Treasury stock at cost, 442,900 shares................ (2,518) (2,518)
-------- --------
Total stockholders' equity.......................... 18,764 23,856
-------- --------
Total liabilities and stockholders' equity.......... $ 27,681 $ 34,615
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year Ended June 30,
----------------------------------------
1996 1997 1998
---- ---- ----
Revenue:
System sales....................... $20,905 $22,537 $30,157
Service and support................ 12,145 13,866 16,457
------- ------- -------
33,050 36,403 46,614
------- ------- -------
Cost of revenue:
System sales....................... 11,672 12,640 16,064
Service and support................ 6,624 7,144 8,952
------- ------- -------
18,296 19,784 25,016
------- ------- -------
Gross profit....................... 14,754 16,619 21,598
------- ------- -------
Operating expenses:
Sales and marketing................ 8,346 8,306 10,078
General and administrative......... 2,296 2,434 2,839
Research and development........... 2,248 2,693 3,455
------- ------- -------
12,890 13,433 16,372
------- ------- -------
Operating income.................. 1,864 3,186 5,226
Interest income...................... 408 376 304
------- ------- -------
Income before taxes.................. 2,272 3,562 5,530
Provision for income taxes........... 922 1,275 1,991
------- ------- -------
Net income........................... $ 1,350 $ 2,287 $ 3,539
======= ======= =======
Basic earnings per share:
Net income per share............... $ .34 $ .60 $ .98
======= ======= =======
Weighted average common shares
outstanding...................... 4,003 3,813 3,601
======= ======= =======
Diluted earnings per share:
Net income per share............... $ .34 $ .60 $ .90
======= ======= =======
Weighted average common and common
equivalent shares outstanding.... 4,011 3,838 3,928
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Treasury Stockholders'
------------
Shares Amount Capital Earnings Stock Equity
------ ------ ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 ........ 4,002 $ 40 $ 8,821 $ 8,770 $ -- $ 17,631
Net income .................... 1,350 1,350
-------- ------- -------- -------- ------- --------
Balance, June 30, 1996 ........ 4,002 40 8,821 10,120 -- 18,981
Repurchase of common stock .... (443) (2,518) (2,518)
Stock option transactions ..... 14 14
Net income .................... 2,287 2,287
-------- ------- -------- -------- ------- --------
Balance, June 30, 1997 ........ 3,559 40 8,835 12,407 (2,518) 18,764
Issuance of common stock in
connection with exercise of
stock options................ 142 1 1,038 1,039
Income tax benefit from stock
options exercised ........... 413 413
Employee stock purchase plan... 10 1 100 101
Net income .................... 3,539 3,539
-------- ------- -------- -------- ------- --------
Balance, June 30, 1998 ........ 3,711 $ 42 $ 10,386 $ 15,946 $ (2,518) $ 23,856
======== ======= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 1,350 $ 2,287 $ 3,539
------- ------- -------
Adjustments to reconcile net income to
net cash provided by (used by) operating activities:
Depreciation and amortization......................... 1,006 1,047 1,778
Gain on sale of equipment............................. -- (13) (3)
Provision for losses on accounts receivable........... 247 233 259
Deferred taxes........................................ 150 693 334
(Increases) decreases in operating assets:
Accounts receivable................................... (2,232) (243) (7,266)
Billed and unearned maintenance....................... (62) (133) (38)
Inventories........................................... (574) 429 (285)
Prepaid expenses and other current assets............. 41 181 (360)
Increases in operating liabilities:
Accounts payable...................................... 456 445 323
Accrued expenses...................................... 337 407 634
Taxes payable......................................... -- 197 48
Profit sharing plan contribution payable 225 40 101
Deferred income....................................... 319 203 298
------- ------- -------
Total adjustments..................................... (87) 3,486 (4,177)
------- ------- -------
Net cash provided (used) by operating activities........ 1,263 5,773 (638)
-------- -------- -------
Cash flows from investing activities:
Cash purchases of equipment and improvements.......... (1,069) (1,440) (1,657)
Software development costs............................ (458) (1,813) (1,565)
Purchase of marketable securities..................... (9,160) (5,550) (2,975)
Maturity of marketable securities..................... 5,450 4,540 5,470
Other assets.......................................... (230) 26 126
-------- -------- -------
Net cash used by investing activities................... (5,467) (4,237) (601)
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock............................ -- (2,518) --
Stock option transactions............................. -- (49) 49
Employee stock purchase plan.......................... -- -- 101
Stock options exercised including tax benefits........ -- -- 1,466
------- ------- -------
Net cash (used) provided by financing activities...... -- (2,567) 1,616
------- ------- -------
Net (decrease) increase in cash and cash equivalents.. (4,204) (1,031) 377
Cash and cash equivalents at beginning of period...... 7,064 2,860 1,829
------- ------- -------
Cash and cash equivalents at end of period............ $ 2,860 $ 1,829 $ 2,206
======= ======= =======
Supplemental cash flow disclosures:
Income taxes paid................................... $ 847 $ 395 $ 1,468
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Prophet 21,
Inc. and its wholly-owned Subsidiaries (the "Company"). All intercompany
transactions have been eliminated. The Company is a leading provider of fully
integrated, on-line business management systems developed exclusively for use by
distributors and wholesalers.
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 amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Certain
items in prior year financial statements have been reclassified for comparative
purposes.
CASH AND CASH EQUIVALENTS:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. At various times throughout the year, the
Company maintains cash balances in excess of FDIC limits.
MARKETABLE SECURITIES:
Marketable securities consist primarily of governmental debt instruments
with an initial maturity of three months or more. The Company accounts for
investments in accordance with Statement of Financial Accounting Standards Board
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's policy is to protect the value of its investment
portfolio and to minimize principal risk by earning returns based on current
interest rates. All of the Company's marketable securities are classified as
held-to-maturity as of the balance sheet date and are reported at cost plus an
adjustment for amortization, which approximates fair market value.
INVENTORIES:
Inventories primarily consist of purchased hardware and software.
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost on a first-in-first-out method.
F-7
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
EQUIPMENT AND IMPROVEMENTS:
Equipment and improvements are recorded at cost and are depreciated using
the straight line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
remaining lease term. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the income statement for the period. The
cost of maintenance and repairs is charged to expense as incurred, whereas
significant renewals and betterments are capitalized.
REVENUE RECOGNITION AND DEFERRED INCOME:
Revenue from software is recognized when a contract has been executed, the
product has been shipped to customers, uncertainty surrounding customer
acceptance becomes insignificant and collection of the related receivable is
probable. Maintenance revenues from hardware and software support fees are
deferred and recognized ratably over the contract period. As the functionality
of the hardware is not dependent on any other services provided by the Company,
hardware sales are recognized upon shipment. Deferred income represents accruals
for billed and unearned maintenance and advance payments by customers for
maintenance. Billed and unearned maintenance at June 30, 1997 and 1998
represents amounts billed in advance to customers for maintenance in accordance
with contract terms.
WARRANTY:
The Company provides warranties on its hardware and proprietary software
against design defects. A provision for future claims is recorded on historical
experience.
CAPITALIZED SOFTWARE:
The Company capitalizes software development costs associated with a new
product pursuant to SFAS No. 86. Such costs were capitalized only after
technological feasibility has been demonstrated. Such capitalized amounts are
amortized commencing with product introduction on a straight-line basis
utilizing the estimated economic life of three years. Amortization of
capitalized software development costs are charged to cost of sales. At June 30,
1997 and 1998, the Company had capitalized $1,813 and $1,565 of software
development costs. All other research and development costs have been expensed.
F-8
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES:
The Company utilizes the asset and liability approach for income taxes
which requires the recognition of deferred tax liability and assets for the
expected future tax consequences of temporary differences between the carrying
amount and the tax bases of assets and liabilities.
NET INCOME PER SHARE:
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share" ("SFAS 128") which has replaced the former rules for
earnings per share computations, presentation and disclosure. Under the new
standard, basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
Common Stock were exercised or converted into Common Stock. SFAS 128 requires a
dual presentation of basic and diluted earnings per share on the face of the
income statement.
The Company has adopted SFAS 128 during fiscal year 1998 and, as required
by the standard, has restated all prior period earnings per share data. The
Company's diluted earnings per share amounts as calculated under SFAS 128 are
not materially different from those computed under the former accounting
standard.
The following table sets forth the computation of basic and dilutive
earnings per share:
Years Ended,
June 30,
1996 1997 1998
---- ---- ----
Net Income ................................. $1,350 $2,287 $3,539
Weighted average common shares outstanding.. 4,003 3,813 3,601
Basic earnings per share ................... $ 0.34 $ 0.60 $ 0.98
Effect of dilutive securities:
Stock Options............................. 8 25 327
Weighted average common and common
equivalent shares outstanding ............. 4,011 3,838 3,928
Diluted earnings per share ................. $ 0.34 $ 0.60 $ 0.90
F-9
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING STANDARDS:
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130"), which was issued in June 1997, is effective
for fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
believes that it does not have a significant amount of comprehensive income
(loss), as defined, if any. Accordingly, the Company believes that this
statement will not have a material effect on its future financial statement
presentations.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") was also issued. This pronouncement is effective for fiscal years
beginning after December 15, 1997 and requires disclosures about operating
segments and enterprise-wide disclosures about products and services, geographic
areas and major customers. Effective July 1, 1998, the Company will comply with
the requirements of SFAS 131 and make the necessary disclosures.
During 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition", which is
effective for transactions entered into in fiscal years beginning after December
15, 1997, and supersedes SOP 91-1. Management does not anticipate that the
implementation of the guidance set forth in SOP 97-2 will have a material impact
on its current revenue recognition policies.
2. EQUIPMENT AND IMPROVEMENTS:
A summary of the major components of equipment and improvements are as
follows:
June 30,
--------
1997 1998
---- ----
Equipment............................................... $ 2,197 $ 2,123
Computer systems........................................ 3,971 5,196
Furniture and fixtures.................................. 767 929
Leasehold improvements.................................. 525 627
------- -------
7,460 8,875
Accumulated depreciation
and amortization....................................... (4,924) (5,988)
------- --------
$2,536 $2,887
====== ======
Depreciation and amortization expense of $1,006, $1,047 and $1,778 was
charged to operations for the years ended June 30, 1996, 1997 and 1998,
respectively.
F-10
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
3. LEASING ARRANGEMENTS:
The Company leases certain facilities and equipment under various operating
lease agreements with initial terms greater than one year. Future minimum
payments under noncancelable operating leases at June 30, 1998 are:
FISCAL YEAR RELATED PARTY THIRD PARTY TOTAL
- ----------- ------------- ----------- -----
1999.................... $ 432 $ 26 $ 458
2000.................... 446 -- 446
2001.................... 461 -- 461
2002.................... 475 -- 475
2003.................... 490 -- 490
------- ------- ------
$ 2,304 $ 26 $2,330
======= ======= ======
Rent expense, including related party transactions, for the years ended
June 30, 1996, 1997 and 1998 was $535, $539 and $542, respectively.
4. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30,
------------------------------------
1996 1997 1998
---- ---- ----
Federal:
Current.............................. $ 675 $ 611 $1,146
Deferred............................. 113 569 334
---- ----- -----
788 1,180 1,480
---- ----- -----
State:
Current.............................. 60 2 98
Deferred............................. 37 124 --
---- ----- -----
97 126 98
---- ----- -----
Foreign:
Current.............................. 37 (31) --
Additional paid in capital from
benefit of stock options exercised..... -- -- 413
---- ---- -----
$ 922 $1,275 $1,991
==== ===== =====
F-11
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES (CONTINUED):
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current
depending on the classification of the assets and liabilities to which they
relate.
The provision for income taxes differs from the amount computed using the
statutory Federal income tax rate as follows:
YEAR ENDED JUNE 30,
---------------------------
1996 1997 1998
---- ---- ----
Statutory tax rate............................. 34% 34% 34%
State taxes, net of Federal benefit............ 3 2 1
Prior period tax............................... -- 3 --
Non-deductible expense......................... 2 (1) 1
Other.......................................... 2 (2) --
----- ----- -----
41% 36% 36%
===== ===== =====
F-12
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
4. INCOME TAXES (CONTINUED):
Deferred income taxes reflect the tax impact of temporary differences
between the assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Amounts giving rise to deferred
income taxes are as follows:
June 30,
----------------------
1997 1998
----------------------
Current deferred tax asset:
Allowance for doubtful accounts............. $ 84 $ 88
Accrued vacation............................ 57 89
Inventory capitalization.................... 22 26
------- ------
163 203
Non-current deferred tax asset:
Depreciation................................ 37 46
Non-current deferred tax liability:
Software development costs.................. (874) (1,257)
------- -------
Total..................................... $ (674) $(1,008)
======= =======
5. RELATED PARTY TRANSACTIONS:
The Company rents office space from its principal stockholders under lease
terms expiring on June 30, 2003. The lease agreement includes a five-year
renewal provision at the Company's option. Rent expense under the lease for the
years ended June 30, 1996, 1997 and 1998 was $438, $452 and $467, respectively.
F-13
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Shares)
6. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents, marketable
securities and accounts receivable. The Company places its cash and cash
equivalents with high quality financial institutions, thereby limiting its
credit exposure. The Company currently invests primarily in government
obligations. The Company believes that no significant credit risk exists with
respect to these investments. There is not a significant concentration of credit
risk with respect to accounts receivable due to the large number of customers
comprising the Company's customer base and their dispersion across different
geographic regions. The Company performs on-going credit evaluations and
generally does not require collateral. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations.
7. EMPLOYEE BENEFIT PLANS:
The Company has a qualified profit sharing plan covering employees who meet
certain eligibility requirements. Contributions are at the discretion of the
Board of Directors and may not exceed the maximum amount allowable for federal
income tax deduction. The Company did not make any contributions to its
qualified profit sharing plan for the years ended June 30, 1996, 1997 and 1998.
The Company maintains a 401(k) Retirement Savings Plan. The Company's
contributions are at the discretion of management and for the years ended June
30, 1996, 1997 and 1998 were $250, $290 and $378, respectively.
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
The Company has an authorized class of 1,500,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board may determine.
STOCK OPTION PLAN:
Under the Company's 1993 Stock Plan (the "Plan"), the Company has reserved
1,000,000 shares of Common Stock for issuance of both incentive and
non-qualified options. Under the Plan, options to purchase shares of Common
Stock may be granted to key employees and consultants. The Plan provides that
the exercise price of incentive options shall not be less than the fair market
value of the shares on the date of the grant, that the exercise price of
non-qualified
F-14
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY (CONTINUED):
options shall not be less than 75% of the fair market value of the shares on the
date of grant and, in either case, that no portion of such options may be
exercised beyond ten years from the date of grant.
Under the Plan, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in various forms, including incentive stock options
(intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended), non-qualified stock options, and other similar stock-based Awards. The
Company granted stock options in 1995 under the Plan in the form of
non-qualified stock options.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB25") and related interpretations in accounting for the Plan. In
1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company did not elect
these provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in fiscal years 1997 and
1998 are required by SFAS 123 and are presented below.
The Company granted stock options in 1996, 1997 and 1998 to employees which
have contractual terms of 10 years. All options granted to the employees and
directors have an exercise price no less than the fair market value of the stock
at grant date. The options granted in 1996, 1997 and 1998 vest one-third each
year, beginning on the first anniversary of the date of grant.
In accordance with APB 25, the Company has not recognized any compensation
cost for these stock options granted in 1996, 1997 and 1998.
F-15
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY (CONTINUED):
A summary of the status of the Company's stock options as of June 30, 1996,
1997 and 1998 and the changes during the years then ended is presented below:
- --------------------------------------------------------------------------------
Exercise Price Weighted
Shares(1) Per Share Average
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1995 474,900 $4.125 to $7.00 $6.51
Granted 105,000 $4.80 to $5.25 $5.12
Canceled (7,400) $5.00 $5.00
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1996 572,500 $4.125 to $7.00 $6.27
Granted 140,000 $5.25 $5.25
Canceled (15,000) $4.80 $4.80
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1997 697,500 $4.125 to $7.00 $6.10
Granted 98,000 $8.50 to $15.25 $9.71
Canceled (22,500) $5.25 to $12.75 $11.92
Exercised (136,600) $4.75 to $7.00 $6.84
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1998 636,400 $4.125 to $15.25 $6.27
Non-qualified Options Granted 10,000 $5.375 $5.375
-------
646,400 $4.125 to $15.25 $6.27
Options exercisable at June 30,
1996 367,500 $4.125 to $7.00 $6.53
1997 497,500 $4.125 to $7.00 $6.45
1998 440,066 $4.125 to $7.00 $6.11
================================================================================
(1) Not reported in thousands
The weighted average fair value of options granted during 1996, 1997 and
1998 was $1.80, $1.84 and $3.38, respectively.
F-16
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY (CONTINUED):
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1998:
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------
Weighted Weighted Weighted
Range of Number of Average Average Number of Average
Exercise Options(1) Remaining Exercise Price Options Exercise
Prices Life Price
- --------------------------------------------------------------------------------
$4.125 to $6.00 325,900 7.78 $4.81 197,566 $5.03
$7.00 to $8.50 315,500 6.34 $7.36 242,500 $7.00
$15.25 5,000 9.32 $15.25 0 N/A
- --------------------------------------------------------------------------------
$4.125 to $15.25 646,400 7.11 $6.27 440,066 $6.11
- --------------------------------------------------------------------------------
(1) Not reported in thousands
Had the compensation cost for the Company's stock-based compensation plan
been recorded consistent with SFAS 123, the Company's net income and diluted net
income per common share would approximate the pro forma amounts below:
June 30,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
Net Income: As reported $1,350 $2,287 $3,539
Pro forma 1,334 2,200 3,317
Income per Share: As reported $ 0.34 $ 0.60 $ 0.90
Pro forma 0.33 0.57 0.84
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards granted prior to
the 1996 fiscal year.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996, 1997 and 1998: dividend yield
of 0.00%; risk-free interest rates of 5.48%, 6.43% and 6.05%; respectively, the
expected life of options is estimated to be 4 years; and a volatility of 32.75%
for all grants.
F-17
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK REPURCHASE PROGRAM:
In fiscal 1997, the Company's Board of Directors approved resolutions to
repurchase up to 600,000 shares of the Company's Common Stock in open market
purchases. As of June 30, 1998, the Company had repurchased 442,900 shares at a
cost of $2,518,000.
1997 EMPLOYEE STOCK PURCHASE PLAN:
In fiscal 1997, the Company's Board of Directors and shareholders approved
the adoption of the 1997 Employee Stock Purchase Plan to make available 100,000
shares of the Company's Common Stock for purchase by the Company's employees. As
of June 30, 1998, the Company's employees had purchased 9,542 shares at a cost
of $99,713.
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries:
Our report on the consolidated financial statements of Prophet 21, Inc. and
Subsidiaries is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
August 17, 1998
S-1
<PAGE>
SCHEDULE II
PROPHET 21, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
BALANCE AT CHARGED TO
YEAR ENDED BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
JUNE 30, PERIOD EXPENSES WRITE-OFFS END OF PERIOD
- ---------- ------------ ---------- ---------- -------------
1996............. $205,000 $247,337 $242,940 $209,397
1997............. 209,397 232,660 223,946 218,111
1998............. 218,111 259,404 237,515 240,000
S-2
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease") is made as of the 1st day of July, 1998, by
and between John E. Meggitt and Dorothy Meggitt, both individuals having an
address of 5950 Pidcock Creek Road, New Hope, Pennsylvania 18938 (hereinafter
collectively referred to as "Landlord") and Prophet 21, Inc. (the "Tenant"), a
New Jersey corporation having an address of 19 West College Avenue, Yardley,
Pennsylvania 19067.
STATEMENT OF FACTS
A. Bucks County Industrial Development Authority ("the Authority"), a
Pennsylvania body politic and corporate, is the owner of all those lands and
premises situated in the Borough of Yardley, Bucks County, Pennsylvania,
commonly known as 19 West College Avenue, Yardley, Bucks County, Pennsylvania,
consisting of ten (10) acres, more or less (the "Real Estate") more particularly
described on the metes and bounds legal description which is attached hereto,
made a part hereof, and labeled Exhibit "A", and a certain building and other
structures situate thereon (collectively, the "Improvements").
B. The Real Estate and the Improvements shall hereinafter be collectively
be referred to as the "Leased Premises".
C. The Authority, a public agency incorporated to finance industrial and
commercial development in Bucks County, Pennsylvania, is the "Seller" and
Landlord is the "Buyer" of the Leased Premises pursuant to an Installment Sale
Agreement (the "Sale Agreement"), dated December 21, 1983, by and between the
Authority and Landlord.
D. Simultaneous with the execution of the Sale Agreement, the Authority and
Landlord entered into a certain Loan Agreement (the "Loan Agreement") with the
Broad Street National Bank of Trenton ("Mortgagee") to finance the purchase of
the Leased Premises by Landlord.
E. Landlord and Tenant were parties to a certain Lease Agreement, dated
August 21, 1987, and a certain Amended Lease dated February 29, 1988, as amended
March 10, 1990 and a certain Lease Agreement dated July 1, 1993 (collectively,
the "Prior Agreements").
F. Landlord desires to lease the Leased Premises to Tenant, and Tenant
desires to lease the Leased Premises, upon the terms and conditions hereinafter
set forth.
NOW THEREFORE, in consideration of the rents and the mutual covenants and
conditions hereinafter set forth, Landlord and Tenant, intending to be legally
bound, hereby agree as follows:
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1. TERMINATION OF PRIOR AGREEMENTS. The Prior Agreements are hereby
terminated, rendered null and void, and of no further force or effect, and the
Landlord and Tenant shall have no further liability to each other with respect
thereto.
2. PREMISES. Landlord hereby demises and leases to Tenant and Tenant hereby
hires and rents, subject to the terms and conditions hereof, from Landlord, the
Leased Premises together with all rights, privileges, tenements, hereditaments,
easements and appurtenances belonging or appertaining thereto, to have and hold
unto Tenant, subject to the covenants and conditions contained herein which
Landlord and Tenant respectively agree to keep and perform.
3. TERM. The term of this Lease shall be for a period of five years (5)
years, commencing as of the 1st day of July, 1998 and terminating on the 30th
day of June, 2003.
4. POSSESSION.
4.1 Tenant shall be entitled to continued possession of the Leased
Premises to be used and occupied for any lawful purpose (including, but not
limited to, activities incident to the Tenant's business of selling computer
systems) as of July 1, 1998, and shall surrender possession of the Leased
Premises at the expiration of the Lease Term as herein provided. Tenant agrees
to give up quiet and peaceable possession of the Leased Premises at the end of
the term without further notice from Landlord.
4.2 Tenant, its employees, agents and invitees, shall comply with all
reasonable rules and regulations adopted by Landlord and with such reasonable
changes or additions thereto as Landlord may from time to time adopt and submit
to Tenant. All such rules and regulations shall be applied by Landlord in a
nondiscriminatory manner to all tenants and invitees. Any such rules and/or
regulations shall go into effect on the earlier of thirty (30) days after
receipt thereof in writing by Tenant, or thirty (30) days after actual knowledge
thereof by Tenant.
5. BASE RENT.
5.1 The annual base rent for the first year of the Lease Term shall
be Four Hundred and Thirty-Two Thousand Dollars ($432,000.00) payable in
consecutive, successive, and equal monthly installments of Thirty-Six Thousand
Dollars ($36,000.00) each, with the first installment due as of July 1,1998, and
thereafter payable in advance on the first (1st) day of each month at the
address of Landlord, as set forth above or such other place as Landlord may
designate by written notice to Tenant.
5.2 The annual base rent shall be increased on each July 1st of the
Lease Term by an annual amount of Fourteen Thousand Four Hundred Dollar
($14,400.00) above the annual base rent of the previous year of the Lease Term,
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payable in monthly increases of One Thousand Two Hundred Dollars ($1,200.00) per
month.
5.3 All monthly payments of annual base rent shall be paid on the
first (1st) day of each month in advance in equal, consecutive, and successive
installments at the address of Landlord set forth herein or such other place as
Landlord may designate by written notice to Tenant.
6. ADDITIONAL RENT. Tenant shall pay as rent in addition to the annual
base rent herein reserved any and all sums which may become due by reason of
the obligations imposed on the Tenant under the terms of this Lease.
7. PAYMENT BY TENANT. Tenant shall pay, without demand, the rent and all
other charges herein reserved as rent on the days and times and at the place
that the same are made payable, without fail, and if Landlord shall at any time
or times accept said rent or rent charges after the same shall have become due
and payable, such acceptance shall not excuse delay upon subsequent occasions,
or constitute or be construed as a waiver of any of Landlord's rights. Any
charge or payment herein reserved, included or agreed to be treated or collected
as rent and/or any other charges or taxes, expenses, or costs herein agreed to
be paid by Tenant may be proceeded for and recovered by Landlord by distraint or
other process in the same manner as rent due and in arrears.
8. SERVICES PAID FOR BY LANDLORD. Landlord, at its sole cost, shall only
be responsible for the following matters and expenses with respect to the Leased
Premises during the Lease Term:
(a) provide fuel oil sufficient to operate the fuel oil fired heating
system of the Leased Premises for the periods comencing on October 1 and
terminating on May 31;
(b) maintain and repair the roof deck, foundation, structural and
load-bearing portion of the building, grounds, sidewalks, landscaping and
parking areas consisting of the Leased Premises;
(c) provide prompt and efficient snow removal for the parking areas of
the Leased Premises, and provide cindering of the entrance drive of the Leased
Premises, as necessary; and
(d) pay for the cost of municipal water and sanitary sewage disposal
for the Leased Premises.
9. SERVICES, TAXES AND COSTS TO BE PAID FOR BY TENANT. Tenant shall be
responsible for the following with respect to the Leased Premises during the
Lease Term, and for all costs, expenses, interest and penalty charges associated
therewith:
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(a) Real estate taxes, county, township, school, special or general
assessments, and all governmental charges of whatsoever kind assessed or levied
against the Leased Premises, based on the per diem rate for the year. The amount
owed by Tenant shall be paid to Landlord within thirty (30) days after the date
on which Landlord has supplied Tenant with a bill for each tax, assessment and
charge.
(b) All personal property taxes, or other governmental assessments
or taxes, assessed on account of Tenant's personal property or on account of any
equipment located in, or affixed to, the Leased Premises.
(c) Janitorial services within the interior of the Leased Premises
including, but not limited to, the walls, floors, ceilings, carpets, windows and
closets, and for the removal from the Leased Premises of garbage and any other
refuse or solid waste including the cost of maintaining a dumpster or other
similar receptacle, including acquiring and maintaining any receptacles, bins or
containers to facilitate recycling.
(d) All electric utility costs and costs relating to the
maintenance and operation of the electrical system of the Leased Premises,
including all charges for electricity used in connection with cooling and
heating the Leased Premises.
(e) All general maintenance and upkeep of the Leased Premises,
including the repair of the electrical, heating, sanitary, air conditioning and
plumbing systems, appliances, sidewalks and the parking areas of the Leased
Premises. All maintenance and repairs by Tenant shall be made in a first class,
workmanlike manner by personnel or contractors previously approved by Landlord,
whose approval shall not be unreasonably withheld or delayed. Tenant shall
require its personnel and contractors to comply with all building standards,
code standards, and other reasonable requirements of Landlord.
(f) Making such alterations and improvements as Tenant shall
undertake and as shall be approved by Landlord pursuant to paragraph 17 hereof.
(g) Compliance with all statutes, ordinances, rules, orders,
regulations and requirements of the federal, state and municipal government and
any and all of their departments or bureaus relating to Tenant's operations on
the Leased Premises.
(h) All improvements to the Leased Premises made or ordered to be
made by any governmental authority having jurisdiction of the Leased Premises,
and compliance with all notices received from any public authority having
jurisdiction of the Leased Premises during the Lease Term.
Tenant shall not cause liens of any kind (whether for
materials, wages, labor or services) to be placed against the Leased Premises.
If
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any such liens are filed, with or without Tenant's knowledge, Tenant shall
immediately, at Tenant's sole cost and expense take whichever action is
necessary to cause such liens to be satisfied and discharged. Tenant shall
obtain, file, and have properly indexed appropriate lien waivers prior to the
commencement of any work by Tenant on the Leased Premises.
Notwithstanding anything contained herein to the contrary,
Landlord shall be liable for and/or provide only such services as it shall
expressly undertake to provide in this Lease. Any other cost associated with the
Leased Premises shall be the responsibility and the expense of Tenant. In
particular, Tenant is responsible for every expense and service not explicitly
set forth in paragraphs 8 or 11.3 of this Lease.
10. RIGHT TO CONTEST. Tenant shall have the right to contest, by legal
proceeding, or by such other manner as Tenant shall reasonably deem suitable,
the validity or amount of any sum which Tenant is obligated to pay under
paragraph 9 herein, provided that such contest shall be free of any expense to
Landlord. Landlord agrees to cooperate in any such contest and execute all
documents reasonably required in connection therewith.
11. CONDITION OF LEASED PREMISES AND REPAIRS.
11.1 Tenant has examined the Leased Premises and accepts the Leased
Premises in its present condition, and, except as set forth herein, without any
representations on the part of Landlord or its agents as to the present or
future condition of the leased Premises. LANDLORD MAKES NO WARRANTIES, EXPRESS
OR IMPLIED, RELATING TO THE CONDITIONS IN OR ABOUT THE LEASED PREMISES.
11.2 Tenant shall take good care of the Leased Premises, and the
fixtures and appurtenances thereto, and shall take necessary action to ensure
that the Leased Premises shall suffer no waste or injury. Tenant shall further
make all minor repairs to the Leased Premises, keeping the Leased Premises
generally in good repair, order and condition, reasonable wear and tear
excepted, and, at the end of the Lease Term, Tenant shall vacate and surrender
the same to Landlord broom clean, free of debris, and in good order and
condition, reasonable wear and tear excepted. In addition, Tenant shall deliver
to Landlord all keys and entry devices to the Leased Premises.
11.3 Landlord shall maintain and make all structural repairs
(including the roof deck, foundation and load bearing portion of the
improvements), except those repairs necessitated by the negligence of Tenant. As
to those repairs and replacements necessitated by the negligence of Tenant,
Tenant shall immediately reimburse Landlord for the repair and replacement costs
incurred. Landlord shall use its best efforts to incur only reasonable costs in
connection with any repair or replacement to the Leased Premises for which
Tenant is obligated to reimburse Landlord. Landlord shall not be liable for any
injury to or interference with Tenant's business arising from the performance of
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any repairs, maintenance or improvements in or to the Leased Premises or to any
appurtenances or equipment therein; provided, however, that Landlord shall
perform all such work with due diligence and in a manner so as to minimize
interference with Tenant's business.
11.4 Tenant shall not use any machinery or equipment at the Leased
Premises which produces excessive noise, vibration, odors or fumes without the
written consent of the Landlord, which consent shall not be unreasonably
withheld or delayed.
11.5 Tenant shall not do or permit to be done any act, or bring or
permit to be brought any material onto the Leased Premises, which shall be
deemed to be a fire hazard by any federal, state, or local law, statute,
ordinance or regulation, other than fuel oil.
12. COMPLIANCE WITH LAWS. Tenant shall comply with all statutes,
ordinances, rules, orders, regulations and requirements of the federal, state
and local government and of any and all of their departments and bureaus having
jurisdiction of the Leased Premises, for the correction, prevention and
abatement of nuisances, violations or other grievances, in, upon or connected
with the Leased Premises during the Lease Term, and shall also comply with all
rules, orders, and regulations of the Board of Fire Underwriters, or any other
similar body, for the prevention of fires, at Tenant's own cost and expense.
13. ENVIRONMENTAL. "Environmental Laws" means and includes all now and
hereafter existing statutes, laws, ordinances, codes, regulations, rules,
rulings, orders, decrees, directives, policies and requirements by any federal,
state or local governmental authority regulating, relating to, or imposing
liability or standards of conduct concerning public health and safety or the
environment.
"Hazardous Materials" means:
(a) any material or substance: (i) which is defined or becomes defined
as a "hazardous substance," "hazardous waste," "infectious waste," "chemical
mixture or substance," or "air pollutant" under Environmental Laws; (ii)
containing petroleum, crude oil or any fraction thereof which is liquid at
standard conditions of temperature and pressure; (iii) containing
polychlorinated biphenyls (PCBs); (iv) containing asbestos; or (v) which is
radioactive; or
(b) any other pollutant or contaminant or hazardous, toxic, flammable
or dangerous chemical, waste, material or substance, as all such terms are used
in their broadest sense, and defined, regulated or to become regulated
by Environmental Laws, or which cause a nuisance upon or waste to the Leased
Premises.
"Handle," "handled," or "handling" shall mean any installation,
handling, generation, storage, treatment, use, disposal, discharge, release,
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manufacture, refinement, presence, migration, emission, abatement, removal,
transportation, or any other activity of any type in connection with or
involving Hazardous Materials.
No Hazardous Materials shall be handled, upon, about, above or
beneath the Leased Premises or any portion thereof by or on behalf of Tenant,
its subtenants or its assignees, or their respective contractors, clients,
officers, directors, employees, agents, or invitees except by express written
permission and consent of the Landlord. Any such Hazardous Materials so handled
shall be known as Tenant's Hazardous Materials. Notwithstanding the foregoing,
normal quantities of those Hazardous Materials customarily used in the conduct
of general administrative and executive office activities (e.g., copies fluids
and cleaning supplies) may be used and stored on the leased Premises without
Landlord's prior written consent, but only in compliance with all applicable
Environmental laws as defined herein.
Notwithstanding the obligation of Tenant to indemnify Landlord
pursuant to this Lease, Tenant shall, at its sole cost and expense, promptly
take all actions required by any federal, state or local governmental agency or
political subdivision, or necessary for Landlord to make full economic use of
the Leased Premises which requirements or necessity arises from the handling of
Tenant's Hazardous Materials upon, about, above or beneath the Leased Premises.
Such actions shall include, but not be limited to, the preparation of any
feasibility studies or reports and the performance of any cleanup, remedial,
removal or restoration work. Tenant shall take all actions necessary to restore
the Leased Premises to the condition existing prior to the introduction of
Tenant's Hazardous Materials, notwithstanding any less stringent standards or
remediation allowable under applicable Environmental Laws. Tenant shall
nevertheless obtain Landlord's written approval prior to undertaking any actions
required by this paragraph, which approval shall not be unreasonably withheld or
delayed so long as such actions would not potentially have a material adverse
long-term or short-term effect on the Leased Premises.
Notwithstanding anything contained herein to the contrary, Tenant
shall indemnify, defend, and hold Landlord harmless from and against any and all
suits, actions, damages, liabilities, and expenses, including reasonable
attorneys fees, arising out of the handling of Tenant's Hazardous Materials.
Notwithstanding anything contained herein to the contrary, Landlord
shall indemnify, defend, and hold Tenant harmless from and against any and all
suits, actions, damages, liabilities, and expenses, including reasonable
attorneys fees, arising out of the handling of any Hazardous Materials upon,
about, above or beneath the Leased premises or any portion thereof prior to the
date of this Lease, or not handled by or on behalf of Tenant, its subtenants or
its assignees, or their respective contractors, clients, officers, directors,
employees, agents, or invitees.
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14. TENANT'S INSURANCE OBLIGATIONS.
14.1 Tenant shall insure, at its own expense, all of its own
equipment and other personal property situate on the Leased premises. Tenant
shall also insure, at its own expense, the Leased Premises by purchasing and
maintaining a single insurance policy in which Landlord is listed as a named
insured and the Leased Premises is insured for at least Five Million Dollars
($5,000,000.00), and which policy provides general liability coverage for Tenant
and Landlord in a policy amount of at least Two Million Dollars ($2,000,000.00),
and with umbrella liability coverage in an amount of at least Five Million
Dollars ($5,000,000.00), with deductibles which are reasonable and consistent
with commercial practice in similar circumstances. A certificate of insurance
stating the coverages obtained by Tenant shall be provided to Landlord within
thirty (30) days of the date of this Lease, and thereafter on each yearly
anniversary date of the date of this Lease. The certificate will indicate that
coverages are provided by a reputable and responsible insurance company licensed
to do business in the Commonwealth of Pennsylvania. The certificate will
stipulate that the insurer will give Landlord at least thirty (30) days advance
written notice of any impending cancellation or imposition of a major change in
such policy.
14.2 Tenant shall be responsible to provide fire and extended
coverage insurance on all leasehold improvements on the Leased premises,
including, but not limited to, all of Tenant's equipment, trade fixtures,
appliances, furniture, furnishing and personal property in or about the Leased
Premises. Such insurance shall include an all-risk legal liability endorsement
to cover property damage for which Tenant is responsible.
14.3 Landlord and Tenant each hereby release the other, and their
respective officers, directors, employees and agents from liability or
responsibility (to the other or anyone claiming through or under them by way of
subrogation or otherwise) for any loss or damage from liability for damage or
destruction to the Leased Premises, covered by any insurance policy, even if
such loss or damage shall have been caused by the fault or negligence of the
other party, or anyone for whom such party may be responsible, to the extent of
insurance proceeds. Landlord and Tenant each agree that any insurance policy
covering the Leased Premises will include such a clause or endorsement.
15. LIABILITY AND INDEMNIFICATION.
15.1 During the Lease Term, Landlord, or its employees or agents,
shall not be liable for any injury, loss, claims or damage to any person or
property occurring in or about the Leased premises, arising out of the use or
occupancy of the Leased Premises by the Tenant, or for any injury, expense,
loss, claim or damage, including attorneys fees and expenses, to any person or
property anywhere occasioned by any act, neglect or default of Tenant, unless
caused by the negligence of Landlord, or its agents or employees. Tenant shall
save Landlord
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harmless and indemnify it from any such losses, claim or expense caused in whole
or in part by the negligence of Tenant, or its agents or employees.
15.2 During the Lease Term, Landlord, including Landlord's officers,
directors, employees, servants, invitees, licensees and agents, shall not be
liable for any injury or damage to persons or property occurring by reason of
any existing or future condition or latent defect in the Leased Premises
including, but not limited to, any mechanical or electrical equipment wiring or
appurtenances being out of repair, any damage or impairment of parking
facilities, curbs, walks or lawns, injury or damage resulting from falling
plaster, steam, gas, electricity, water, rain or snow (except as provided in
paragraph 8(c) hereof), which may leak from any part of the Improvements or from
pipes, appliances or plumbing work of the same, or from the outside or
subsurface or from any other place, or by dampness or any other cause of
whatever nature, or by fire, explosion, collapse or broken glass, or bursting,
leaking or running of any basin, tank, tub, wastepipe, gutter or downspout, nor
shall Landlord, or its agents, be liable for any such damage caused by other
tenants, if any, or persons in the Improvements, or caused by vandalism or
malicious mischief.
15.3. Tenant agrees to protect, indemnify and save harmless the
Landlord, its officers, directors, employees, and agents from and against any
and all claims, demands and causes of action (including without limitation,
reasonable attorneys fees and costs to pursue this indemnification), unless due
to the negligence of Landlord, its employees, or third parties, for any matter
growing out of or connected with the Tenant's use or occupation of the Leased
Premises during the Lease Term.
16. ASSIGNMENT AND SUBLETTING. Tenant shall not assign this Lease or sublet
the Leased premises, or any interest herein or therein, or allow others to use
or occupy the Leased Premises without obtaining the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. An
assignment of this Lease shall be deemed to have occurred: (a) if in a single
transaction or in a series or related transactions (other than resulting from
the death of a holder or owner) more than fifty percent (50%) of the interest in
Tenant or any subtenant (whether stock, partnership interests or otherwise) is
transferred, diluted, reduced, or otherwise impacted, with the result that the
present holders or owners of Tenant or such subtenant, have less than a fifty
percent (50% interest in Tenant or subtenant or; (b) any general partnership
interest in Tenant or such subtenant or a controlling interest (i.e. fifty
percent (50% or more) in any general partner of Tenant or such subtenant is sold
or otherwise transferred with the result that the then present general partners
of Tenant or such subtenant are no longer general partners of Tenant or
subtenant, or with the result that the then general partners of Tenant or such
subtenant no longer control such general partner or subtenant.
17. ALTERATIONS AND IMPROVEMENTS. Tenant shall make no alterations,
additions or improvements to the Leased Premises without the written consent of
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Landlord, which consent shall not be unreasonably withheld or delayed. All
alterations, additions, and improvements shall belong to the Landlord, unless
the terms of Landlord's consent shall require their removal. Tenant shall have
the right to remove from the Leased Premises only those trade fixtures installed
by Tenant in accordance with this Lease.
17.1 All such work shall be carried on at Tenant's cost, and in a
first class, workmanlike manner in accordance with building standards and other
reasonable requirements of Landlord and in compliance with all governmental
orders, regulations and permits. Such work shall be performed by responsible
contractors approved by Landlord who will, prior to commencement of work, submit
satisfactory proof of insurance coverage naming Landlord as an additional
insured.
17.2 Following completion of such alterations, additions or
improvements by Tenant, Tenant shall furnish Landlord with current "as built"
plans and specifications reflecting such alterations, additions or improvements.
17.3 Tenant, with the prior written consent of landlord, may remove
any alterations, additions, fixtures, improvements, appliances or equipment
installed by Tenant which can be removed without damage to or leaving incomplete
the Leased Premises; provided, however (and anything herein to the contrary
notwithstanding), Landlord may direct Tenant at the end of the Lease Term or of
any prior termination, and whether or not Tenant is in default hereunder, to
remove all alterations, additions, improvements, trade fixtures, appliances or
other personal property brought into or placed about the Leased Premises by
Tenant or constructed or installed therein by Tenant (including but not limited
to, partitions, cabinets, shelving, drapes, shades, furniture, wiring and
plumbing) as may be specified in writing by Landlord.
18. DAMAGE TO THE LEASED PREMISES. If the Leased Premises shall be
partially damaged or rendered untenantable by fire or other causes, without
being due to the fault or neglect of Tenant, or Tenant's servants, employees,
agents or licensees, the Leased premises so damaged or rendered untenantable
shall be repaired promptly and within a reasonable time, by and at the expense
of Landlord and the rent from the time of such damage or untenantability until
such repairs shall be completed shall abate in proportion to the part of the
Leased Premises which is not reasonably useable by Tenant; in such event, any
rent paid in advance shall be apportioned and refunded. If such partial damage
or untenantability is due to the fault or negligence of Tenant, or Tenant's
servants, employees, agents or licensees, the Leased Premises so damaged shall
be repaired promptly and within a reasonable time by Landlord, but there shall
be no apportionment or abatement of rent. In the event of the Leased premises
being so badly damaged that it cannot be repaired within ninety (90) days from
the date of such damage, then the Lease Term hereby created shall, at the option
of either the Landlord or the Tenant, cease thirty (30) days after written
notice from either party to the other party, and Tenant shall surrender the
Leased Premises and all
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of Tenant's interest therein to Landlord, and shall be liable for rent only to
the time of the surrender, and Landlord may reenter and repossess the Leased
Premises.
19. INSPECTION OF LEASED PREMISES; SHOWING LEASE PREMISES. Landlord and its
agents shall have the right to enter into and upon the Leased Premises, or any
part thereof, at all reasonable hours and with reasonable advance written notice
of at least twenty-four (24) hours, except that such notice shall not be
required in the event of an emergency, for the purpose of examining the same, or
making repairs or alterations therein. Landlord and its agents may show the
Leased Premises to persons wishing to hire or purchase the same at reasonable
hours and upon reasonable prior written notice to Tenant of at least twenty-four
(24) hours.
20. FAILURE TO SUPPLY UTILITIES/INTERRUPTION OF SERVICES. Landlord shall
not be responsible for the failure to furnish heat or other utilities or
services which are its obligation herein, provided the failure to furnish these
services results from reasons beyond Landlord's control.
20.1 This Lease shall not be affected and there will be no
diminution or abatement of rent or other payments and no constructive eviction
shall be claimed or allowed because of the interruption or curtailment of any
services or utilities in or to the Leased Premises from causes beyond Landlord's
control nor for any inconvenience arising from repairs in or about the Leased
Premises or from improvements made to the same.
21. CONDEMNATION. If the whole of the Leased Premises shall be acquired or
condemned by eminent domain for any public or quasi-public use, then, in that
event, the Lease Term shall cease and terminate from the date that title vested
in such proceeding. Tenant shall have no claim against Landlord for the value of
the unexpired Lease Term. No part of any condemnation award shall belong to
Tenant. Tenant expressly waives any right or claim to any part thereof and
assigns to Landlord any such right or claim to which Tenant might become
entitled (except as set forth in subparagraphs 21.3 and 21.4 hereof) and the
rent shall abate in proportion to the square footage taken or condemned.
21.1 If any part, but not the whole, of the Leased Premises shall be
so taken or conveyed, and in the event that such partial taking or conveyance
shall render the Leased Premises unsuitable for the business of Tenant, then the
Lease Term shall terminate as of the date on which possession of the Leased
Premises is required to be surrendered to the condemning authority, all rent and
other charges shall be paid up to that date, and Tenant shall have no claim
against Landlord for the value of any unexpired Lease Term. In the event of a
partial taking, partial condemnation, or conveyance supported by a power of
eminent domain which is not extensive enough to render the Leased Premises
unsuitable for the business of Tenant, then Landlord shall promptly restore the
Leased Premises to the extent of condemnation proceeds available for such
purpose to a
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condition comparable to its condition at the time of such condemnation, less the
portion lost in the taking, and Tenant shall promptly make all necessary
repairs, restorations and alterations of Tenant's fixtures, equipment and
furnishings and shall promptly re-enter the Leased Premises and commence doing
business in accordance with the provisions of this Lease and this Lease shall
continue in full force and effect.
In the case of a partial condemnation, rent shall abate only to the
extent that the annual fair market rental value of the Leased Premises has been
diminished. The fair market value shall be determined by the agreement of two
licensed real estate appraisers - one selected by the Landlord and one selected
by the Tenant. If they cannot agree, then they shall jointly select a third
licensed real estate appraiser whose decision shall be binding on the parties,
except that Landlord reserves the right to declare that a complete condemnation
has taken place and in which case the Lease Term shall cease and terminate.
21.2 For purposes of determining the amount of funds available for
restoration of the Leased Premises from the condemnation award, said amount
shall be deemed to be that part of the award which remains after payment of
Landlord's reasonable expenses incurred in recovering same and any amounts due
to any mortgagee of Landlord, and which represents a portion of the total sum so
available (excluding any award or other compensation for land) which is
equitably allocable to the Leased Premises.
21.3 Although all damages in the event of any condemnation shall
belong to Landlord and any mortgagee of Landlord, Tenant shall have the right,
to the extent that same shall not diminish Landlord's or such mortgagee's award,
to claim and recover from the condemning authority, but not from Landlord or
such mortgagee, such compensation as may be separately awarded or recoverable by
Tenant in Tenant's own right for, or on account of, and limited solely to, any
cost to which Tenant might be put in removing Tenant's merchandise, furniture,
fixtures, leasehold improvements and equipment.
21.4 Tenant waives all claims against Landlord by reason of the
complete or partial taking of the Leased Premises and hereby relinquishes and
assigns unto Landlord any rights and damages to which Tenant might.otherwise be
entitled for condemnation of the leasehold estate created by this Lease;
provided, however, that Tenant shall nevertheless be entitled to make any claims
which Tenant may have against the condemning authority for relocation damages,
damages for tenant improvements and any other payments lawfully due tenants as
such, without diminution of the sums due Landlord.
22. NO OBSTRUCTIONS. Tenant shall not obstruct the entrance drive,
sidewalks, parking areas, or loading areas, nor allow the stairs within the
Leased Premises, or the internal halls to be obstructed or encumbered in any
manner.
12
<PAGE>
23. SIGNS. No signs, advertising, notices or other lettering shall be
exhibited, inscribed, painted or affixed by Tenant on any part of the outside of
the Improvements or anywhere on the Real Estate, without the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed, and where required by law without proper license and permission by
municipal and governmental agencies regulation the same. However, Landlord
hereby consents to Tenant's placing and maintaining any appropriate sign next to
the entrance drive of the Leased Premises during the Lease Term, subject to
compliance with applicable governmental regulations.
24. NON-DISTURBANCE AND ATTORNMENT. Landlord and the Authority hereby
represent and warrant that neither Landlord nor the Authority are in default of
any of the terms, conditions, or provisions of the Sale Agreement, and neither
Landlord nor the Authority are aware of any condition which, with the passing of
time, would give rise to a default by either party under the Sale Agreement.
Both Landlord and the Authority shall give prompt written notice to Tenant of
any default by either party under the Sale Agreement.
Landlord, the Authority and Mortgagee hereby represent and warrant
that neither Landlord, the Authority, nor the Mortgagee are in default of any of
the terms, conditions, or provisions of the Loan Agreement, and neither
Landlord, the Authority, nor the Mortgagee are aware of any condition which,
with the passing of time, would give rise to a default by either party under the
Loan Agreement. Landlord, the Authority, and the Mortgagee shall give prompt
written notice to Tenant of any default by any party under the Loan Agreement.
So long as Tenant is not in default of any of the terms, conditions,
or provisions of this Lease, Tenant shall not, by reason of foreclosure of the
mortgage in favor of Mortgagee, acceptance by Mortgagee of a deed in lieu of
foreclosure, or the exercise of any remedy provided in the Loan Agreement, the
mortgage in favor of Mortgagee, or in the Sale Agreement, be disturbed in
Tenant's occupancy of the Leased Premises during the Lease Term.
Tenant shall attorn to and recognize as Tenant's landlord the
Authority, the Mortgagee, any purchaser at a foreclosure or judicial sale
relating to the mortgage in favor of Mortgagee or the debt secured thereby, or
any transferee by deed or assignment in lieu thereof, and its successors and
assigns.
25. MORTGAGE SUBORDINATION. This Lease shall be subject and subordinate at
all times to the lien of any mortgage, or any other hypothecation for security,
given or to be given, now on record or to be hereafter placed on the property of
which the Leased Premises are a part, without the necessity of any further
instrument or act of the part of the Tenant to effectuate such subordination.
Tenant hereby covenants and agrees to execute and deliver, upon demand, such
instrument or instruments evidencing such subordination of this Lease to the
lien of any such mortgage or mortgages, as shall be desired by any mortgagee or
proposed mortgagee and to further effectuate this covenant, Tenant
13
<PAGE>
hereby appoints and constitutes Landlord to act as Tenant's attorney-in-fact,
authorized irrevocably to execute and deliver any such instrument or instruments
required in this paragraph for and in the name of Tenant.
26. COLLECTION OF DELINQUENT RENT. In the event that it shall become
necessary for Landlord to engage the services of an attorney or collection
agency to collect delinquent rent from Tenant, Tenant shall pay all reasonable
costs associated therein, including but not limited to attorneys fees, or
collection agency fees, together with all court costs and disbursement. Tenant
shall pay, as additional rent, all reasonable attorneys fees and other expenses
incurred by Landlord in enforcing any of the other obligations under this Lease.
27. DEFAULT PROVISIONS. Any of the following events shall be an "Event of
Default" by Tenant under this Lease:
(a) If default shall be made in the due and punctual payment of any
rent or additional rent payable under this Lease when and if the same shall
become due and payable, and such default shall continue for a period of ten (10)
days; or
(b) If any default shall be made by Tenant in the performance of, or
compliance with, any of the covenants, agreements, terms or provisions contained
in this Lease, other than those referred to in the foregoing subparagraph (a),
and such default shall continue for a period of thirty (30) days after written
notice thereof from Landlord to Tenant, or if such default is of a nature which
cannot be cured within thirty (30) days, if Tenant fails to commence to cure
such default within thirty (30) days after written notice thereof from Landlord
to Tenant, and thereafter fails to diligently cure such default; or
(c) If the Leased Premises shall be deserted or vacated by Tenant
prior to the expiration of the Lease Term; or
(d) If a voluntary or involuntary petition in bankruptcy shall be
filed by or against Tenant, or if Tenant shall be adjudicated a bankrupt or
insolvent, or shall make an assignment for the benefit of creditors, or shall
file any petition of answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under the
present or any future federal or state insolvency act, all of which is not
either dismissed or terminated within sixty (60) days.
Landlord may, upon an Event of Default, terminate this Lease by
written notice to Tenant, and the Lease Term shall terminate on the date
specified in such notice, which date shall not be less than five (5) business
days after the date of the notice.
27.1 Upon any such termination of this Lease for an Event of
Default, Tenant shall quit and peacefully surrender the Leased Premises to
14
<PAGE>
Landlord, and Landlord, upon or at any time after such termination, may without
further notice, enter upon the Leased Premises and repossess itself thereof, by
force, summary proceedings, ejectment or otherwise, and may dispossess Tenant
and remove Tenant and all other persons and property from the Leased Premises,
without being liable for any prosecution or damage therefor.
27.2 At any time or from time to time after such termination after
an Event of Default, Landlord may relet the Leased Premises or any part thereof,
in the name of Landlord or otherwise, for such term or terms (which may be
greater or less than the period which would otherwise have constituted the
balance of the Lease Term) and on such conditions and at such rental as Landlord
in its discretion shall deem to be appropriate.
27.3 No such termination of this Lease after an Event of Default or
re-entry by Landlord, whether or not the Leased Premises be relet, shall relieve
Tenant of its liability and obligations under this Lease; such liability and
obligations shall survive any such termination or re-entry and shall continue
during the remainder of the Lease Term.
27.4 For the purpose of reletting the Leased Premises after an Event
of Default, Landlord may make such repairs to the Leased Premises as may be
necessary to place the same in good order. Tenant shall be liable to Landlord
for the reasonable cost of such repairs and alterations, and all expenses of
reletting. If the sum realized from the reletting is insufficient to satisfy the
rent and additional rent required by this Lease, Tenant shall be liable for the
deficiency, which the Landlord may require Tenant to pay either month by month
or in a lump sum in advance. Tenant shall not be entitled to any surplus
accruing as a result of the reletting.
27.5 Tenant shall pay all reasonable costs, including attorneys
fees, collection agency fees, court costs and disbursements that shall be
incurred by Landlord in collecting delinquent rent or additional rent, obtaining
possession and other expenses incurred by Landlord in enforcing any of the other
obligations and covenants under this Lease including, but not limited to, Events
of Default.
27.6 No acceptance of full or partial rent during the continuance of
any Event of Default, shall constitute a waiver of any such Event of Default.
28. LANDLORD'S DEFAULT. In the event that Landlord shall fail in any
material respect to perform or observe any covenant or condition required to be
performed by Landlord under the terms and provisions of this Lease (which
failure materially and substantially affects Tenant's ability to quietly enjoy
the Leased Premises), and such failure is not cured within fifteen (15) days
after written notice shall have been given by Tenant to Landlord, Tenant may, at
its option, terminate this Lease at the end of such fifteen (15) day period or
invoke any of Tenant's other remedies at law or in equity; provided, however, if
Landlord's obligation is of such nature that more than fifteen (15) days are
required for its
15
<PAGE>
performance, then Landlord shall be deemed to have complied with said notice if
Landlord shall commence such performance within said fifteen (15) day period and
thereafter proceeds diligently to prosecute the same to completion.
28.1 A termination of this Lease by Tenant due to Landlord's default
shall not be deemed a waiver by Tenant of any other rights or remedies which
Tenant may have against Landlord hereunder, at law or in equity, nor shall such
termination relieve Landlord of its liability to Tenant for any damages or
losses Tenant has suffered by reason of failure to perform.
29. NOTICES. All notices required under this Lease shall be in writing and
shall be sent by United States certified mail, return receipt requested, postage
pre-paid, or hand delivered, to the addresses of Landlord or Tenant, as the case
may be, set forth in the preamble to this Lease, or to such other address as
such party may in writing designate.
30. SECURITY DEPOSIT. As security for the performance by Tenant of all the
terms and conditions to be performed by Tenant hereunder, Tenant has heretofore
deposited with Landlord the sum of Twenty Thousand Dollars ($20,000.00), which
sum shall be returned to Tenant upon the expiration of the Lease Term or earlier
termination of this Lease, provided Tenant has fully completed such performance.
In the event of the sale or transfer of the Leased Premises, Landlord shall have
the right to transfer the security deposit to its successor for the benefit of
Tenant, and upon such transfer, Tenant acknowledges and agrees that Landlord
shall be released by Tenant from all liability for the return of said security
deposit.
31. HOLDING OVER BY TENANT. If Tenant shall remain in possession of the
Leased Premises after the expiration of the Lease Term, without having executed
a new or renewal lease, such holding over shall not constitute a renewal or
extension of this Lease and Landlord shall, at its option, be entitled to all
remedies available at law against a tenant holding over, or may elect to treat
the holding over as a tenancy from month-to-month, subject to all terms and
conditions of this Lease, except as to duration, but this shall not preclude
Landlord from increasing the monthly base rent amount during the holdover
period. Tenant shall be deemed to remain in possession until it shall vacate and
surrender the Leased Premises to the Landlord as described in paragraphs 11.2
and 17.3.
32. REMEDIES CUMULATIVE. All of the remedies hereinbefore given to
Landlord and all rights and remedies given by law and/or in equity shall be
cumulative and concurrent. No determination of this Lease or the taking or
recovering of the Leased Premises shall deprive Landlord of any of its remedies
or actions against Tenant for rent due at the time or which, under the terms
hereof, would in the future become due as if there has been no determination, or
for any and all sums due at the time or which, under the terms hereof, would in
the future become due as if there has been no determination, nor shall the
bringing of any action for rent or breach of covenant, or the resort to any
other remedy herein
16
<PAGE>
provided for the recovery of rent be construed as a waiver of the right to
obtain possession of the Leased Premises.
33. QUIET POSSESSION. Landlord covenants that Tenant, on paying the said
rent, and performing the covenants aforesaid, shall and may peacefully and
quietly have, hold and enjoy the said Leased Premises during the Lease Term,
without hindrance or interruption by Landlord or any other person or persons
lawfully claiming through, by, or under Landlord.
34. INTEGRATION AND GOVERNING LAW. This Lease constitutes the entire
agreement between the parties hereto and there are no understanding, promises
representations or warranties, oral or written, relating to the subject matter
of this Lease, which exist or bind any of the parties hereto, their respective
heirs, executors, administrators, successors or assigns, except as set forth
herein. No amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and signed by both parties. It is
mutually understood and agreed that this Lease shall be interpreted in
accordance with the laws of the Commonwealth of Pennsylvania and that no
presumption shall be deemed to exist in favor or against either party hereto as
a result of the preparation or negotiation of the same.
35. BINDING EFFECT; SEVERABILITY. The covenants and agreements herein
contained are binding on the parties hereto and upon their respective
successors, heirs, executors, administrators and assigns. If any of the
provisions of this Lease are determined by a court of competent jurisdiction to
be illegal or unenforceable, the remaining provisions of this Lease shall
continue to be effective.
36. NO WAIVER OF ENFORCEMENT. Landlord shall have the right all times to
enforce the covenants and provisions of this Lease in strict accordance with the
terms hereof, notwithstanding any conduct or custom on the part of the Landlord
in refraining from so doing at any time or times; and, further, that the failure
of Landlord at any time or times to enforce its rights under said covenants and
provisions strictly in accordance with the same shall not be construed as having
created a custom in any way or manner contrary to the specific terms, provisions
and covenants of this Lease or as having in any way or manner modified the same.
37. FORCE MAJEURE. In the event that Landlord or Tenant shall be delayed,
hindered in or prevented from the performance of any act required hereunder by
reason of acts of God, strikes, blackouts, labor troubles, inability to procure
materials, failure of power, restrictive governmental laws or regulations,
riots, insurrection, the act, failure to act or default of the other party, war
or other reason beyond their control, then performance of such act shall be
excused for the period of the delay and the period for the performance of any
such act shall be extended for a period equivalent to the period of such delay
but in no event shall
17
<PAGE>
this clause postpone, delay or excuse payment of rent by Tenant to Landlord or
taxes to the proper governmental authority.
38. RECORDING. This Lease shall not be recorded in any public office, but
upon the request of either party hereto, the other party shall join in the
execution of a memorandum or short form of this Lease for the purpose of
recording. The memorandum or short form of this Lease shall comply with the laws
of the Commonwealth of Pennsylvania and shall describe the parties, the Leased
Premises and the Lease Term and shall incorporate this Lease by reference.
39. HEADINGS; CONSTRUCTION. Captions of the paragraphs or parts of this
Lease are for convenience only, and shall not be considered or referred to in
resolving questions of interpretation or construction. The language in all parts
of this Lease shall in all cases be construed as a whole and in accordance with
its fair meaning, and shall not be construed strictly for or against Landlord or
Tenant.
40. COUNTERPARTS. The Lease, and the required consents of the Authority
and Mortgagee hereto, may be executed in counterparts, each of which shall be
deemed an original, all of which shall be deemed one and the same document.
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals as of the day ind year first above mentioned.
Witnesses: LANDLORD:
/s/ Thomas M. Giuliani /s/ John E. Meggitt
- ------------------------ ---------------------------
John E. Meggitt
/s/ Thomas M. Giuliani /s/ Dorothy Meggitt
- ------------------------ ---------------------------
Dorothy Meggitt
TENANT:
Prophet 21, Inc. a New Jersey
business corporation
(Corporate Seal)
Attest: /s/ Thomas M. Giuliani By: /s/ Charles L. Boyle, III
---------------------- -------------------------
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 1998 AND FOR THE TWELVE MONTH
PERIOD ENDED JUNE 30, 1998 WHICH ARE INCLUDED IN THE REGISTRANT'S FORM 10-K AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000917823
<NAME> PROPHET 21, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,206
<SECURITIES> 1,555
<RECEIVABLES> 19,457
<ALLOWANCES> (240)
<INVENTORY> 1,402
<CURRENT-ASSETS> 25,380
<PP&E> 2,887
<DEPRECIATION> (1,778)
<TOTAL-ASSETS> 34,615
<CURRENT-LIABILITIES> 9,548
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 23,814
<TOTAL-LIABILITY-AND-EQUITY> 34,615
<SALES> 46,614
<TOTAL-REVENUES> 46,614
<CGS> 25,016
<TOTAL-COSTS> 25,016
<OTHER-EXPENSES> 16,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (304)
<INCOME-PRETAX> 5,530
<INCOME-TAX> 1,991
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,539
<EPS-PRIMARY> .98
<EPS-DILUTED> .90
</TABLE>
