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, 1999
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. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $13,449,062 at August 31, 1999 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 31, 1999:
Class Number of Shares
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Common Stock, $.01 par value 3,593,613
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 1999 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
Item Page
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PART I 1. Business.................................................... 4
2. Properties.................................................. 12
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
7A. Quantitative and Qualitative Disclosures
About Market Risk........................................... 22
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 SCHEDULE................................................F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Prophet 21, Inc. ("Prophet 21" or the "Company") is a provider of
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 UNIX, Microsoft
Windows NT and AS/400 environments. The Company's UNIX offering is Prophet 21
Acclaim, a complete distribution industry management solution using 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 Wholesale (formerly known as Prophet 21 Servent), built on the
scalable and fully integrated platform, Microsoft Windows NT client/server
software, with Microsoft SQL Server 7.0. Prophet 21 Wholesale is targeted for
large-sized companies (greater than $100m) looking to solve distribution-centric
business requirements with a Windows SQL Server or AS/400 client/server
solution. These companies desire a transaction-intensive sales order and
inventory management solution to meet customer service requirements that meet
the needs of growing companies. They also require a solution that integrates
with an accounting solution and can be implemented in a cost-effective manner.
The Prophet 21 Wholesale 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 70,000 of the
roughly 300,000 distributors and wholesalers operating in the United States and
Canada and, as of June 30, 1999, has sold over 2,600 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 Prophet 21 Wholesale solutions through its 51-person
direct sales force located in sales and service offices throughout the United
States to a wide range of industry segments including industrial manufacturer
representative organizations ("MRO"), automotive, aerospace and defense,
electrical supply, electronics, medical and dental, tile, plumbing, HVAC,
hardware, janitorial and general distribution. The Company believes that one of
its competitive advantages is its accumulated knowledge of the distribution
industry gained over three decades, 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 Wholesale 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
70,000 businesses in a wide range of industry segments including industrial
(MRO), automotive, aerospace and defense, electrical supply, electronics,
medical and dental, tile, plumbing, HVAC, hardware, janitorial 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 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 wholesale distribution
market.
The Company's target market is diverse, 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, XML, BizTalk and electronic commerce
capabilities. This technology enables goods to be ordered and billed
computer-to-computer, and the addition of 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.
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PROPHET 21 ACCLAIM
Prophet 21 Acclaim is an enterprise-wide solution consisting of business
application software, business application training, consulting, software
customization, hardware, and implementation services. These products are
supported by dedicated customer service and educational training teams. 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. Prophet
21 believes that this standardization enables its product 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 its customers to incorporate readily the
Company's periodic software enhancements. To facilitate the very specific and
unique needs of some of Prophet 21's 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
management, forms creation and executive information systems. The Company has
successfully developed integrations to a number of third-party products.
PROPHET 21 WHOLESALE
Prophet 21 Wholesale is an enterprise-wide solution, extending through the
supply chain, 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 who desire Microsoft Backoffice certified
product supporting Microsoft SQL Server 7.0, a leading database for Microsoft
Windows NT environments or IBM's AS/400 platform using DB2/400.
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Many of the features of Prophet 21 Wholesale 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 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 allows 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 its customers the Company provides custom software
modifications.
Prophet 21 Wholesale'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 Wholesale 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 Wholesale is an open system that allows the integration of
third-party software products such as report writers, faxing software, warehouse
management, 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 51-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. 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 its customers.
The Company's marketing strategy is to provide focused marketing on the
industry segments served by the Company, in particular, the industrial (MRO),
automotive, aerospace and defense, electrical supply, electronics, medical and
dental, tile, plumbing, HVAC, hardware, janitorial and general distribution. 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 has, as of June 30, 1999, sold approximately 2,600 systems. The
Company's customers vary in size from small distributors or wholesalers with a
few users to large companies with several hundred users linking multiple
geographically dispersed branches. The Company serves a wide range of industry
segments, including industrial (MRO), automotive, aerospace and defense,
electrical supply, electronics, medical and dental, tile, plumbing, HVAC,
hardware, janitorial and general distribution. During the three fiscal years
ended June 30, 1999, 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 177 employees,
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
department.
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 department 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 users a one-year hardware warranty
and a 90-day software warranty. Ninety days after the sale, customers typically
enter into a fee-based support contract covering software and hardware support.
The Company offers software enhancements at discounted prices to customers who
have active support contracts. As of June 30, 1999, approximately 85% of the
Company's customers were covered by support contracts
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following the initial warranty period. There can be no assurance, however, that
customers will continue to enter into support contracts at this rate. Support
contracts have an initial term of one year and continue thereafter unless
terminated.
The Company provides Prophet 21 Wholesale users a one-year software
warranty. The Company offers to its customers a fee-based support contract
covering software support and product enhancements. As of June 30, 1999, all of
the Company's active customers were covered by support contracts following the
initial warranty period. There can be no assurance, however, that customers will
enter into support contracts. Support 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
(Prophet 21 Acclaim and Prophet 21 Wholesale) 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 understanding the trends of the
distribution and distribution-centric marketplace. In the second quarter of
fiscal 1998, the Company introduced a controlled release of its newest product,
Prophet 21 Wholesale, a fully integrated Microsoft Windows SQL Server based
client/server software suite. Prophet 21 Wholesale is targeted for large
companies attempting to leverage the Windows SQL Server client/server
environment and integrates their financial management with order, inventory and
purchasing management. The Prophet 21 Wholesale 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. Seventy-eight employees are directly involved in
programming and software development. During fiscal year 1999, the Wholesale
product continued under a controlled release environment as staffing and
education occurred and infrastructure was developed.
During the third quarter of fiscal 1999, Prophet 21 announced the future
availability of Wholesale on the IBM AS/400e. This combination makes Prophet 21
Wholesale AS/400e Edition an excellent choice for wholesale distribution-centric
companies looking for rapid deployment, low cost of ownership and easy-to-use
integrated business software. Prophet 21 Wholesale was upgraded to version 1.6
during the fourth fiscal quarter of 1999. The upgraded version supports
Microsoft SQL Server 7.0. Additional functionalities included the ability to
purchase commodity items from unlimited suppliers, enhanced material receipt
reconciliation,
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serialized multi-tiered assemblies, workflow alerts for automated notification
of customer orders on credit hold and pricing by customer part number.
The Company's research and development expenses were approximately $3.0
million, $3.8 million and $5.8 million in the fiscal years ended June 30, 1997,
1998 and 1999, respectively. In 1996, the Company also began capitalizing
certain software development costs in connection with the general release of
Prophet 21 Wholesale. Such capitalized software development costs amounted to
$458,000, $1,813,000, $1,565,000 and $0 in the fiscal years ended June 30, 1996,
1997, 1998 and 1999, respectively, of which $1,705,000 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, 1997, 1998 and 1999, the Company's hardware purchases from IBM totaled $5.4
million, $7.4 million and $5.1, respectively.
BACKLOG
The Company normally ships systems within 30 days of receiving an order
and, therefore, does not customarily have a significant backlog.
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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.
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, 1999, the Company employed 369 persons full-time, of whom 74
were engaged in sales and marketing; 177 were engaged in customer service and
support, and installation; 78 were engaged in programming and software
development and quality assurance; and 40 were engaged in finance,
administration and management. In addition, 32 were employed on a part-time
basis (16 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.
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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 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, 1997 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, 1997 $15.50 $ 5.375
December 31, 1997 $16.75 $10.00
March 31, 1998 $17.625 $10.00
June 30, 1998 $20.25 $11.625
September 30, 1998 $18.75 $ 9.00
December 31, 1998 $14.625 $ 9.25
March 31, 1999 $14.00 $ 9.875
June 30, 1999 $10.75 $ 7.25
As of August 31, 1999, the approximate number of holders of record of the
Common Stock was 185 and the approximate number of beneficial holders of the
common stock was 1,450.
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, 1998 and 1999 and
for each of the three years ended June 30, 1999 are derived from the audited
financial statements included elsewhere herein. The selected financial data set
forth below for the Company as of June 30, 1995, 1996 and 1997 and for each of
the years ended June 30, 1995 and 1996 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,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue:
System sales......................... $21,295 $20,905 $22,537 $30,157 $29,786
Service and support.................. 9,948 12,145 13,866 16,457 22,201
------- ------- ------- ------- -------
31,243 33,050 36,403 46,614 51,987
------- ------- ------- ------- -------
Cost of revenue:
System sales......................... 12,610 11,672 12,640 16,064 15,533
Service and support.................. 5,723 6,624 6,836 8,596 10,085
------- ------- ------- ------- -------
18,333 18,296 19,476 24,660 25,618
------- ------- ------- ------- -------
Gross profit....................... 12,910 14,754 16,927 21,954 26,369
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.................. 8,146 8,346 8,306 10,078 12,759
Research and development............. 2,907 2,248 3,001 3,811 5,822
General and administrative........... 2,251 2,296 2,434 2,839 3,017
Severance expense.................... 378 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses........... 13,682 12,890 13,741 16,728 21,598
------- ------- ------- ------- -------
Operating (loss) income............ (772) 1,864 3,186 5,226 4,771
Interest income....................... 374 408 376 304 286
------- ------- ------- ------- -------
(Loss) income before taxes......... (398) 2,272 3,562 5,530 5,057
(Benefit) provision for income taxes.. (171) 922 1,275 1,991 1,664
------- ------- ------- ------- -------
Net (loss) income.................. $ (227) $ 1,350 $ 2,287 $ 3,539 $ 3,393
======= ======= ======= ======= =======
Basic earnings per share:
Net (loss) income per share.......... $ (0.06) $ 0.34 $ 0.60 $ 0.98 $ 0.92
======= ======= ======= ======= =======
Weighted average common
shares outstanding.................. 4,002 4,003 3,813 3,601 3,705
======= ======= ======= ======= =======
Diluted earnings per share:
Net (loss) income per share.......... $ (0.06) $ 0.34 $ 0.60 $ 0.90 $ 0.85
======= ======= ======= ======= =======
Weighted average common and
common equivalent shares
outstanding......................... 4,002 4,011 3,838 3,928 3,990
======= ======= ======= ======= =======
BALANCE SHEET DATA
(at period end):
Working capital....................... $15,172 $14,797(1) $11,720 $15,832 $18,388
Total assets.......................... 23,145 25,832 27,681 34,615 36,557
Stockholders' equity.................. 17,631 18,981 18,764 23,856 26,101
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<FN>
(1) 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 provides 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,
UNIX or AS/4000 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 (MRO), automotive, aerospace and defense, electrical supply,
electronics, medical and dental, tile, plumbing, HVAC, hardware, janitorial and
general distribution.
The Company's revenue is derived primarily from the sale of either Prophet
21 Acclaim or Prophet 21 Wholesale 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 Wholesale Solution includes the
Prophet 21 Wholesale 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 customers 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 fiscal 1998, the Company introduced and released Prophet 21 Wholesale, a
fully integrated Microsoft Windows NT-based client/server software suite.
Prophet 21 Wholesale 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 Prophet 21 Wholesale product is
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<PAGE>
suitable for distribution-oriented companies, as well as businesses that have a
distribution component of their own.
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 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; (vii) the Company's ability to develop, market, provide, and achieve
market acceptance of new service offerings to new and existing clients; and
(viii) Year 2000 compliance of the Company's and other vendors' products and
related issues, including impact of the Year 2000 problem on customer buying
patterns.
-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 1998 over 1999 over
June 30, Fiscal Fiscal
---------------------------------
1997 1998 1999 1997 1998
---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
System sales.................. 61.9% 64.7% 57.3% 33.8% (1.2)%
Service and support........... 38.1 35.3 42.7 18.7 34.9
----- ----- -----
100.0 100.0 100.0 28.0 11.5
----- ----- -----
Cost of revenue:
System sales.................. 34.7 34.5 29.9 27.1 (3.3)
Service and support........... 18.8 18.4 19.4 25.7 17.3
----- ----- -----
53.5 52.9 49.3 26.6 3.9
----- ----- -----
Gross profit............... 46.5 47.1 50.7 29.7 20.1
----- ----- -----
Operating expenses:
Sales and marketing........... 22.8 21.6 24.5 21.3 26.6
Research and development...... 8.2 8.2 11.2 27.0 52.8
General and administrative.... 6.7 6.1 5.8 16.6 6.3
----- ----- -----
Total operating expenses... 37.7 35.9 41.5 21.7 29.1
----- ----- -----
Operating income........... 8.8 11.2 9.2 64.0 (8.7)
Interest income................ 1.0 0.7 0.6 (19.1) (5.9)
Income before income
taxes...................... 9.8 11.9 9.7 55.2 (8.6)
Provision for income taxes..... 3.5 4.3 3.2 56.2 (16.4)
----- ----- -----
Net income................ 6.3% 7.6% 6.5% 54.7 (4.1)
====== ====== ======
</TABLE>
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<PAGE>
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Revenue. Revenue increased by 11.5%, or $5,373,000, from $46,614,000 in
fiscal 1998 to $51,987,000 in fiscal 1999. System sales revenue decreased by
1.2%, or $371,000, from $30,157,000 in fiscal 1998 to $29,786,000 in fiscal
1999. Such decrease was attributable primarily to the reclassification of
certain revenue items (application, implementation and installation consulting
services) that were formerly bundled into system sales in fiscal 1998. Had it
not been for this reclassification, system sales revenue would have increased by
3.0%, or $915,000, from $30,157,000 in fiscal 1998 to $31,072,000 in fiscal
1999. This decrease in systems sales was offset in part by the increase in the
number of systems sold. Service and support revenue increased by 34.9%, or
$5,744,000, from $16,457,000 in fiscal 1998 to $22,201,000 in fiscal 1999. 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 educational services department and sales
of consulting services which were previously included in system sales revenue.
However, had it not been for the reclassification, service and support revenue
would have only increased by 27.0%, or $4,458,000, from $16,457,000 in fiscal
1998 to $20,915,000 in fiscal 1999.
Gross profit. The Company's gross profit increased by 20.1%, or $4,415,000,
from $21,954,000 in fiscal 1998 to $26,369,000 in fiscal 1999. Gross profit
margin increased from 47.1% of revenue in fiscal 1998 to 50.7% in fiscal 1999.
Gross profit from system sales increased by 1.1%, or $160,000, from $14,093,000
in fiscal 1998 to $14,253,000 in fiscal 1999. Gross profit margin attributable
to system sales increased from 46.7% of system sales revenue in fiscal 1998 to
47.9% in fiscal 1999. The increase in such gross profit and gross profit margin
were attributable primarily to favorable sales mix, with a larger percentage of
revenue being derived from sales of the Company's Prophet 21 Wholesale product
and, to a lesser extent, to increased sales of the Company's optional software
offerings, each of which carries higher margins. Gross profit from service and
support revenue increased by 54.1%, or $4,255,000, from $7,861,000 in 1998 to
$12,116,000 in 1999. Gross profit margin attributable to service and support
revenue increased from 47.8% of service and support revenue in fiscal 1998 to
54.6% in fiscal 1999. The increase in such gross profit and gross profit margin
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 the general release of the Prophet 21 Wholesale and
Prophet 21 Acclaim products, and an increase in revenue from the Company's
education services. These increases were offset in part by the costs associated
with increased staffing required by the Company's continued growth.
Sales and marketing expenses. Sales and marketing expenses increased by
26.6%, or $2,681,000, from $10,078,000 in fiscal 1998 to $12,759,000 in fiscal
1999, and increased as a percentage of revenue from 21.6% to 24.5%,
respectively. Such expenses increased in absolute dollars and as a percentage of
revenue due primarily to increased compensation expenses associated with
staffing and increased investment in marketing.
Research and development expenses. Research and development expenses
increased by 52.8%, or $2,011,000, from $3,811,000 in fiscal 1998 to $5,822,000
in fiscal 1999, and increased as a percentage of revenue from 8.2% to 11.2%,
respectively. Research and development
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<PAGE>
expenses increased in absolute dollars and as a percentage of revenue due
primarily to an increase in salary expenses and professional fees associated
with the Company's new product release, Prophet 21 Wholesale.
General and administrative expenses. General and administrative expenses
increased by 6.3%, or $178,000, from $2,839,000 in fiscal 1998 to $3,017,000 in
fiscal 1999, and decreased as a percentage of revenue from 6.1% to 5.8%,
respectively. Increases in compensation expenses were offset in part by
decreased 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.
Income taxes. The Company's effective tax rate was 36.0% and 32.9% in
fiscal 1998 and 1999, respectively.
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 Wholesale 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 department and,
to a lesser extent, sales of services related to the Company's new Wholesale
product.
Gross profit. The Company's gross profit increased by 29.7%, or $5,027,000,
from $16,927,000 in fiscal 1997 to $21,954,000 in fiscal 1998. Gross profit
margin increased from 46.5% of revenue in fiscal 1997 to 47.1% 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
Wholesale product. Gross profit from service and support revenue increased by
11.8%, or $831,000, from $7,030,000 in fiscal 1997 to $7,861,000 in 1998. Gross
profit margin attributable to service and support revenue decreased from 50.7%
of service and support revenue in fiscal 1997 to 47.8% 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 department
and Wholesale 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
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<PAGE>
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.
Research and development expenses. Research and development expenses
increased by 27.0%, or $810,000, from $3,001,000 in fiscal 1997 to $3,811,000 in
fiscal 1998, but remained constant as a percentage of revenue at 8.2%. 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.
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.
Income taxes. The Company's effective tax rate was 35.8% and 36.0% in
fiscal 1997 and 1998, 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 $5,773,000, ($638,000) and $3,448,000 for the
fiscal years ended June 30, 1997, 1998 and 1999, respectively.
The Company's working capital was approximately $15,832,000 and $18,388,000
at June 30, 1998 and 1999, respectively.
The Company invested $1,440,000, $1,657,000 and $1,714,000 in capital
equipment and leasehold improvements in fiscal years 1997, 1998 and 1999,
respectively. There are no other material commitments for capital expenditures
currently outstanding. The Company also invested $1,565,000 and $0 in software
development costs which were capitalized during the fiscal years ended June 30,
1998 and 1999.
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.
-20-
<PAGE>
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 not to exceed a purchase price of $6.00 per share. From the time of
such approval until the fourth quarter of fiscal 1997, the Company repurchased
an aggregate of 442,900 shares at a total cost of $2,518,000. In the third
quarter of fiscal 1999, the Company's Board of Directors approved resolutions to
repurchase the remaining 157,100 shares of the Company's common stock in open
market purchases not to exceed a purchase price of $13.00 per share, including
commissions. In the fourth quarter of fiscal 1999, the Company repurchased an
aggregate of 157,090 shares at a total cost of $1,496,000. Accordingly, to date,
the Company has repurchased an aggregate of 599,990 shares at a total cost of
$4,014,000.
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
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company believes that it
has sufficiently assessed its state of readiness with respect to its Year 2000
compliance. As the assessment was completed using internal personnel, costs and
time for such personnel were not specifically tracked. The Company, however,
estimates that such costs were immaterial.
There were no external costs incurred by the Company relating to its Year
2000 assessment. Costs incurred to date to address the Year 2000 problem have
been immaterial and the Company does not believe that Year 2000 compliance will
result in material investments by the Company in the future. 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 and believes that
all of its business-critical systems correctly define the Year 2000 and
subsequent years. There can be no assurance, however, that the Year 2000 Problem
will not adversely affect the Company's business, operating results and
financial condition.
Some of the Company's older products, which are no longer sold, are not
Year 2000 compliant, however, the Company offers compliant upgrades for such
products. The Company believes that each of its current products is Year 2000
compliant, however, it has no control over whether software modification made by
third parties will be Year 2000 compliant. There can be no assurance that the
Company's products will not be integrated by the Company or its customers or
interact with non-compliant software or other products which may expose the
Company to claims. 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
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<PAGE>
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 such 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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.
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<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
1999 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 1999 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 1999
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 1999 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
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<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 27.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the fiscal year
ended June 30, 1999.
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<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 15th day of
September, 1999.
PROPHET 21, INC.
By:/s/Charles L. Boyle, III
--------------------------------
Charles L. Boyle, III, President
and Chief Executive Officer
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<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 15, 1999
- --------------------------
Charles L. Boyle, III Officer and Director
(Principal Executive Officer)
/s/Thomas M. Giuliani Chief Financial Officer and September 15, 1999
- --------------------------
Thomas M. Giuliani Treasurer (Principal
Financial and Accounting
Officer)
/s/John E. Meggitt, Ph.D. Chairman of the Board and September 15, 1999
- --------------------------
John E. Meggitt, Ph.D. Director
/s/Dorothy M. Meggitt Secretary and Director September 15, 1999
- --------------------------
Dorothy M. Meggitt
/s/Louis J. Cissone Director September 15, 1999
- --------------------------
Louis J. Cissone
/s/Mark A. Timmerman Director September 15, 1999
- --------------------------
Mark A. Timmerman
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<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, as amended.
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.
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.)
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<PAGE>
Exhibit
No. Description of Exhibit
- -------------- -----------------------
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.
(Incorporated by reference to exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended June 30,
1998.)
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.)
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.)
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<PAGE>
Exhibit
No. Description of Exhibit
- -------------- -----------------------
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.)
23+ Consent of PricewaterhouseCoopers LLP
27.1+ Financial Data Schedule for the year ended June 30, 1999.
27.2+ Financial Data Schedule for the year ended June 30, 1998.
27.3+ Financial Data Schedule for the year ended June 30, 1997.
- ---------------------
* 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.
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<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, 1998 and 1999...................................................F-3
Consolidated Statements of Operations for the
years ended June 30, 1997, 1998 and 1999.................................F-4
Consolidated Statements of Stockholders'
Equity for the years ended
June 30, 1997, 1998 and 1999.............................................F-5
Consolidated Statements of Cash Flows for the
years ended June 30, 1997, 1998 and 1999.................................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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, 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 11, 1999
F-2
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1998 1999
---- ----
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents.............................. $ 2,206 $ 2,520
Marketable securities.................................. 1,555 1,661
Accounts receivable, net of allowance for
doubtful accounts of $240 and $261, respectively..... 17,201 19,743
Advanced billings...................................... 2,016 2,140
Inventories............................................ 1,402 666
Deferred income taxes.................................. 203 156
Prepaid and other current assets....................... 797 1,230
---------- ----------
Total current assets................................ 25,380 28,116
Long-term marketable securities.......................... 2,825 3,175
Equipment and improvements, net.......................... 2,887 3,100
Software development costs, net.......................... 3,410 2,131
Other assets............................................. 113 35
---------- ----------
Total assets....................................... $ 34,615 $ 36,557
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $ 3,690 $ 2,737
Accrued expenses and other liabilities................. 1,540 1,715
Commissions payable.................................... 808 708
Taxes payable.......................................... 668 1,206
Profit sharing plan contribution payable............... 391 403
Deferred income........................................ 2,451 2,959
---------- ----------
Total current liabilities........................... 9,548 9,728
---------- ----------
Deferred income taxes.................................... 1,211 728
---------- ----------
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; 4,153,642 and 4,193,603 shares issued,
respectively; 3,710,742 and 3,593,613 outstanding,
respectively......................................... 42 42
Additional paid-in capital............................. 10,386 10,734
Retained earnings...................................... 15,946 19,339
Treasury stock at cost, 442,900 and 599,990 shares..... (2,518) (4,014)
---------- ----------
Total stockholders' equity.......................... 23,856 26,101
---------- ----------
Total liabilities and stockholders' equity.......... $ 34,615 $ 36,557
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue:
System sales............................... $22,537 $30,157 $29,786
Service and support........................ 13,866 16,457 22,201
------- ------- -------
36,403 46,614 51,987
------- ------- -------
Cost of revenue:
System sales............................... 12,640 16,064 15,533
Service and support........................ 6,836 8,596 10,085
------- ------- -------
19,476 24,660 25,618
------- ------- -------
Gross profit............................... 16,927 21,954 26,369
------- ------- -------
Operating expenses:
Sales and marketing........................ 8,306 10,078 12,759
Research and development................... 3,001 3,811 5,822
General and administrative................. 2,434 2,839 3,017
------- ------- -------
13,741 16,728 21,598
------- ------- -------
Operating income......................... 3,186 5,226 4,771
Interest income.............................. 376 304 286
------- ------- -------
Income before taxes.......................... 3,562 5,530 5,057
Provision for income taxes................... 1,275 1,991 1,664
------- ------- -------
Net income................................... $ 2,287 $ 3,539 $ 3,393
======= ======= =======
Basic earnings per share:
Net income per share....................... $ 0.60 $ 0.98 $ 0.92
======= ======= =======
Weighted average common shares
outstanding............................. 3,813 3,601 3,705
======= ======= =======
Diluted earnings per share:
Net income per share....................... $ 0.60 $ 0.90 $ 0.85
======= ======= =======
Weighted average common and common
equivalent shares outstanding
3,838 3,928 3,990
======= ======= =======
</TABLE>
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> <C> <C>
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
Repurchase of common stock...... (157) (1,496) (1,496)
Issuance of common stock in
connection with exercise of
stock options................. 9 60 60
Income tax benefit from stock
options exercised............. 26 26
Employee stock purchase plan.... 31 262 262
Net income...................... 3,393 3,393
------ ----- ------- ------- ------- --------
Balance, June 30, 1999.......... 3,594 $ 42 $10,734 $ 19,339 $(4,014) $ 26,101
====== ===== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 2,287 $ 3,539 $ 3,393
------- ------- -------
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization...................... 1,047 1,778 2,677
Gain on sale of equipment.......................... (13) (3) (2)
Provision for losses on accounts receivable........ 233 259 845
Deferred taxes..................................... 693 334 (437)
(Increases) decreases in operating assets:
Accounts receivable................................ (243) (7,266) (3,387)
Advanced billings.................................. (133) (38) (124)
Inventories........................................ 429 (285) 736
Prepaid expenses and other current assets.......... 181 (360) (433)
Increase (decreases) in operating liabilities:
Accounts payable................................... 445 323 (953)
Accrued expenses................................... 407 634 75
Taxes payable...................................... 197 48 538
Profit sharing plan contribution payable........... 40 101 12
Deferred income.................................... 203 298 508
------- ------- -------
Total adjustments.................................. 3,486 (4,177) 55
------- ------- -------
Net cash provided (used) by operating activities..... 5,773 (638) 3,448
------- ------- -------
Cash flows from investing activities:
Net purchases of equipment and improvements........ (1,440) (1,657) (1,714)
Software development costs......................... (1,813) (1,565) --
Purchase of marketable securities.................. (5,550) (2,975) (2,600)
Maturity of marketable securities.................. 4,540 5,470 2,250
Other assets....................................... 26 126 78
------- ------- -------
Net cash used by investing activities................ (4,237) (601) (1,986)
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock......................... (2,518) -- (1,496)
Stock option transactions.......................... (49) 49 --
Employee stock purchase plan....................... -- 101 262
Stock options exercised including tax benefits..... -- 1,466 86
------- ------- -------
Net cash (used) provided by financing activities..... (2,567) 1,616 (1,148)
------- ------- -------
Net (decrease) increase in cash and cash equivalents. (1,031) 377 314
Cash and cash equivalents at beginning of period..... 2,860 1,829 2,206
------- ------- -------
Cash and cash equivalents at end of period........... $ 1,829 $ 2,206 $ 2,520
======= ======= =======
Supplemental cash flow disclosures:
Income taxes paid.................................. $ 395 $ 1,468 $ 1,528
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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 years' 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:
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, Software Revenue Recognition which stipulates
that revenue recognized from software arrangements be allocated to each element
of the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support,
installation or training. The Company offers the various elements individually,
and has used the individual prices as a basis for allocation of revenues. SOP
97-2 was adopted by the Company effective July 1, 1998 and did not result in
significant changes to the Company's revenue recognition policy.
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. Advanced billings at June 30, 1998 and 1999 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 based upon
historical experience.
F-8
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 is charged to cost of sales. At June 30,
1998 and 1999, the Company had capitalized $1,565 and $0 of software development
costs. All other research and development costs have been expensed.
Income Taxes:
The Company utilizes the asset and liability approach for income taxes
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amount and the tax basis of assets and liabilities.
Net Income Per Share:
In 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
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 adopted SFAS 128 during 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.
F-9
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The following table sets forth the computation of basic and dilutive
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED,
JUNE 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net Income.................................. $ 2,287 $ 3,539 $ 3,393
Weighted average common shares outstanding.. 3,813 3,601 3,705
Basic earnings per share............... $ 0.60 $ 0.98 $ 0.92
Effect of dilutive securities:
Stock Options............................. 25 327 285
Weighted average common and common
equivalent shares outstanding.............. 3,838 3,928 3,990
Diluted earnings per share.................. $ 0.60 $ 0.90 $ 0.85
</TABLE>
2. EQUIPMENT AND IMPROVEMENTS:
A summary of the major components of equipment and improvements are as
follows:
JUNE 30,
----------------------
1998 1999
---- ----
Equipment........................................... $ 2,123 $ 2,042
Computer systems.................................... 5,196 6,554
Furniture and fixtures.............................. 929 1,051
Leasehold improvements.............................. 627 771
-------- --------
8,875 10,418
Accumulated depreciation
and amortization................................... (5,988) (7,318)
-------- --------
$ 2,887 $ 3,100
======== ========
Depreciation and amortization expense of $1,047, $1,778 and $2,677 was
charged to operations for the years ended June 30, 1997, 1998 and 1999,
respectively.
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, 1999 are:
F-10
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
3. LEASING ARRANGEMENTS (CONTINUED):
FISCAL YEAR RELATED PARTY THIRD PARTY TOTAL
- ----------- ------------- ----------- -----
2000.................... $ 446 $ 39 $ 485
2001.................... 461 40 501
2002.................... 475 13 488
2003.................... 490 -- 490
------- -------- -------
$ 1,872 $ 92 $ 1,964
======= ======== =======
Rent expense, including related party transactions, for the years ended
June 30, 1997, 1998 and 1999 was $539, $542 and $537, respectively.
4. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEAR ENDED JUNE 30,
------------------------------------------
1997 1998 1999
---- ---- ----
Federal:
Current......................... $ 611 $1,559 $1,926
Deferred........................ 569 334 (395)
----- ----- -----
1,180 1,893 1,531
----- ----- -----
State:
Current......................... 2 98 175
Deferred........................ 124 -- (42)
----- ----- -----
126 98 133
----- ----- -----
Foreign:
Current......................... (31) -- --
----- ----- -----
$1,275 $1,991 $1,664
===== ===== =====
The income tax benefits related to the exercise of stock options amounting
to $26 and $413 for 1999 and 1998, respectively, reduce taxes currently payable
and is credited to additional paid-in capital.
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.
F-11
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES (CONTINUED):
The provision for income taxes differs from the amount computed using the
statutory Federal income tax rate as follows:
YEAR ENDED JUNE 30,
------------------------------
1997 1998 1999
---- ---- ----
Statutory tax rate............................ 34% 34% 34%
State taxes, net of Federal benefit........... 2 1 3
Prior period tax.............................. 3 -- --
Non-deductible expense........................ (1) 1 --
Other......................................... (2) -- (4)
----- ----- -----
36% 36% 33%
===== ===== =====
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,
--------------------
1998 1999
Current deferred tax assets:
Allowance for doubtful accounts...................... $ 88 $ 99
Accrued vacation..................................... 89 45
Inventory capitalization............................. 26 12
------- ------
203 156
Non-current deferred tax asset:
Depreciation......................................... 46 88
Non-current deferred tax liability:
Software development costs........................... (1,257) (816)
-------- -------
Total............................................. $(1,008) $ (572)
======= =======
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, 1997, 1998 and 1999 was $452, $467 and $481, 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 no 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, 1997, 1998 and 1999.
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, 1997, 1998 and 1999 were $290, $378 and $380 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 1998 and
1999 are required by SFAS 123 and are presented below.
The Company granted stock options in 1997, 1998 and 1999 for employees. The
stock options granted in 1997, 1998 and 1999 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 1997, 1998 and 1999 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 1997, 1998 and 1999.
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, 1997,
1998 and 1999 and the changes during the years then ended is presented below:
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Exercise Price Weighted
Shares(1) Per Share Average
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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) $5.00 to $7.00 $6.71
- ---------------------------------------------------------------------------------------------
Options outstanding at June 30, 1997 697,500 $4.125 to $7.00 $5.95
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 $6.83
Non-qualified Options in 1997
Granted 10,000 $5.375 $5.375
- ---------------------------------------------------------------------------------------------
Options outstanding at June 30, 1998 646,400 $4.125 to $15.25 $6.14
Granted 125,000 $16.125 to $16.25 $16.19
Canceled (3,500) $16.125 $16.125
Exercised (13,700) $5.00 to $7.00 $6.72
- ---------------------------------------------------------------------------------------------
Options outstanding at June 30, 1999 754,200 $4.75 to $16.25 $7.91
Options exercisable at June 30,
1997 400,000 $4.125 to $7.00 $6.31
1998 332,580 $4.125 to $7.00 $5.83
1999 531,823 $4.125 to $15.25 $6.16
=============================================================================================
</TABLE>
(1) Not reported in thousands
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, 1999:
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER OF AVERAGE EXERCISE PRICE NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS(1) REMAINING LIFE OPTIONS EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.125 to $6.00 321,700 6.81 $5.11 272,511 $5.08
$7.00 to $8.50 303,000 5.35 $7.36 254,312 $7.14
$15.25 to $16.25 129,500 9.04 $16.15 5,000 $15.25
- ---------------------------------------------------------------------------------------------------------
$4.125 to $15.25 754,200 6.61 $7.91 531,823 $6.16
- ---------------------------------------------------------------------------------------------------------
(1) Not reported in thousands
</TABLE>
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with SFAS 123, the Company's net income and net income per
common share would approximate the pro forma amounts below:
JUNE 30,
-------------------------------------------
1997 1998 1999
----------- ----------- -----------
Net Income: As reported $2,287 $3,539 $3,393
Pro forma 2,200 3,317 3,212
Income per Share: As reported $0.60 $0.90 $0.85
Pro forma 0.57 0.84 0.81
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 1999: dividend yield of 0.00%;
risk-free interest rate of 5.47%; the expected life of options is estimated to
be 4 years; and a volatility of 45.66% for all grants.
The weighted average fair value of options granted during the fiscal year
of 1999 was $6.83.
F-17
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Amounts)
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, 1999, the Company had repurchased 599,990 shares at a
cost of $4,014.
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, 1999, the Company's employees had purchased 40,803 shares at a cost
of $362.
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 11, 1999
S-1
<PAGE>
SCHEDULE II
PROPHET 21, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
YEAR ENDED BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
JUNE 30, PERIOD EXPENSES WRITE-OFFS END OF PERIOD
-------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
1997................. $ 209,397 $ 232,660 $ 223,946 $ 218,111
1998................. 218,111 259,404 237,515 240,000
1999................. 240,000 845,054 824,063 260,991
</TABLE>
S-2
PROPHET 21, INC.
1993 STOCK PLAN, AS AMENDED
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Certain Definitions. As used herein, the following definitions shall
--------------------
apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company
(c) "Code" means the Internal Revenue Code of 1986, as amended
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Prophet 21, Inc., a Delaware corporation.
(g) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Employee shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Board, provided that such leave is for a period of not
more than ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) transfers between
locations of the Company or between the Company, its Subsidiaries or its
successor.
<PAGE>
(i) "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such system or exchange for the last market trading day prior to the time of
determination as reported in the Wall Street Journal or such other source as the
Administrator deems reliable or;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high and low asked prices for the Common Stock or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(1) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
(o) "Optioned Stock" means the Common Stock subject to an Option.
(p) "Optionee" means an Employee or Consultant who receives an
option.
(q) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 1993 Stock Plan.
(s) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of stock purchase rights under Section 11 below.
- 2 -
<PAGE>
(t) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(u) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 1,000,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
(i) Administration With Respect to Directors and officers.
With respect to grants of Options or stock purchase rights to Employees who are
also officers or directors of the Company, the Plan shall be administered by (A)
the Board if the Board may administer the Plan in compliance with Rule 16b-3
promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with
respect to a plan intended to qualify thereunder as a discretionary plan, or (B)
a Committee designated by the Board to administer the Plan, which Committee
shall be constituted in such a manner as to permit the Plan to comply with Rule
16b-3 with respect to a plan intended to qualify thereunder as a discretionary
plan. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan.
(ii) Multiple Administrative Bodies. If permitted by Rule
16b-3, the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors nor
officers.
(iii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Options or stock purchase rights to
Employees or Consultants who are neither directors nor officers of the Company,
the Plan shall be administered by (A) the Board or (B) a Committee designated by
the Board, which Committee shall be constituted in such a manner as to satisfy
the legal requirements relating to the administration of incentive stock option
plans, if any, of Delaware corporate and securities laws and of the Code (the
"Applicable Laws"). Once
- 3 -
<PAGE>
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution therefor, fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options and stock purchase rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and
stock purchase rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation or waiver of
forfeiture restrictions regarding any Option or other award and/or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator shall determine, in its sole discretion);
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of the
participant (including providing for and determining the amount, if any, of any
deemed earnings on any deferred amount during any deferral period);
(ix) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted; and
- 4 -
<PAGE>
(x) to determine the terms and restrictions applicable to
stock purchase rights and the Restricted Stock purchased by exercising such
stock purchase rights.
(c) Effect of Committee's Decision. All decisions, determinations
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5 (b) Incentive Stock options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the Company's right
to terminate his employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
- 5 -
<PAGE>
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of the grant.
(B) granted to any person, the per Share exercise
price shall be no less than 75% of the Fair Market Value per Share on the date
of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option either have been owned by the Optionee for
more than six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, (5) authorization from the Company to retain from the
total number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of Shares as to which the option is exercised, (6) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) by delivering an irrevocable
subscription agreement for the Shares which irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to
- 6 -
<PAGE>
accept, the Board shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8 (b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment. In the event of termination of an
Optionee's consulting relationship or Continuous Status as an Employee with the
Company (as the case may be), such Optionee may, but only within ninety (90)
days (or such other period of time as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option and not exceeding ninety (90) days) after the date of such
termination (but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), exercise his Option to the extent
that Optionee was entitled to exercise it at the date of such termination. To
the extent that Optionee was not entitled to exercise the Option at the date of
such termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of his total and
permanent disability (as defined in Section 22 (e) (3) of the Code), Optionee
may, but only within twelve (12) months from the date of such termination (but
in no event later than the expiration date of the term of such Option as set
forth in the Option
- 7 -
<PAGE>
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options. The Option may not be sold, pledged,
-------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. The terms of the Option shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock purchase rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer stock purchase rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 50% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the stock purchase right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable
- 8 -
<PAGE>
upon the voluntary or involuntary termination of the purchaser's employment with
the Company for any reason (including death or Disability). The purchase price
for Shares repurchased pursuant to the Restricted Stock purchase agreement shall
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The repurchase option shall
lapse at such rate as the Committee may determine.
(c) Other Provisions. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the stock purchase right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the stock purchase right is exercised, except as provided in Section 13
of the Plan.
12. Stock Withholding to Satisfy Withholding Tax Obligations. At the
------------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or stock purchase right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option, or the Shares to be issued in connection with the stock purchase right,
if any, that number of Shares having a Fair Market Value equal to the amount
required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Right as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is subject to Rule 16b-3, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
- 9 -
<PAGE>
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83 (b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or stock purchase right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
13. Adjustments Upon Changes in Capitalization or Merger. Subject to any
----------------------------------------------------
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company,
the Board shall notify the Optionee at least fifteen (15) days prior to such
proposed action. To the extent it has not been previously exercised, the Option
will terminate immediately prior to the consummation of such proposed action. In
the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets
(hereinafter, a "merger"), the Option shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation. In the event that such successor corporation does
not agree to assume the option or to substitute an equivalent option, the Board
shall, in lieu of such assumption or substitution, provide for the Optionee to
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. If the Board
makes an option fully exercisable in lieu of assumption or substitution in the
event of a merger, the Board shall notify the Optionee that the option shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the Option will terminate upon the expiration of such period. For
the purposes of this paragraph, the Option shall be considered assumed if,
following the merger, the Option or right confers the right to purchase, for
each Share of stock subject to the Option immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property) received in
the merger by holders of Common Stock for each Share held on the effective date
of the transaction (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger
was not solely common stock of the successor corporation or its Parent,
- 10 -
<PAGE>
the Board may, with the consent of the successor corporation and the
participant, provide for the consideration to be received upon the exercise of
the Option, for each Share of stock subject to the Option, to be solely common
stock of the successor corporation or its Parent equal in Fair Market Value to
the per share consideration received by holders of Common Stock in the merger or
sale of assets.
14. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
--------------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
- 11 -
<PAGE>
17. Reservation of Shares. The Company, during the term of this Plan,
----------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
18. Agreements. Options and stock purchase rights shall be evidenced by
----------
written agreements in such form as the Board shall approve from time to time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
----------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.
20. Information to Optionees. The Company shall provide to each Optionee,
------------------------
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
- 12 -
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (File No. 333-38035) of our report dated August 11, 1999, on our
audits of the consolidated financial statements of Prophet 21, Inc. and its
Subsidiaries as of June 30, 1998 and 1999 and for each of the three years in the
period ended June 30, 1999, which report is included in the Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report dated
August 11, 1999 relating to the financial statement schedule, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
September 14, 1999
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