SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
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
---------------------------------
(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
--------------------- ----------------------------
--------------------------- ----------------------------
--------------------------- ----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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<PAGE>
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
-------- --------
Indicate by check mark 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: $26,024,994 at August 31, 2000 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, 2000:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 3,721,377
The following documents are incorporated by reference into the Annual
Report on Form 10-K: None
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<PAGE>
EXPLANATORY NOTE
Prophet 21, Inc. (the "Company") hereby amends Item 8 of Part II and Items
10, 11, 12 and 13 of Part III of its Annual Report on Form 10-K, which was filed
with the Securities and Exchange Commission on September 27, 2000, by including
the disclosures set forth herein.
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<PAGE>
PART II
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. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
At the Company's Annual Meeting of Stockholders (the "Meeting"), five
Directors are to be elected (which number shall constitute the entire Board of
Directors of the Company) to hold office until the next Annual Meeting of
Stockholders and until their successors shall have been elected and qualified.
All of the persons whose names and biographies appear below are at present
Directors of the Company. In the event any of the nominees should become
unavailable or unable to serve as a Director, it is intended that votes will be
cast for a substitute nominee designated by the Board of Directors. The Board of
Directors has no reason to believe that the nominees named will be unable to
serve if elected. Each of the nominees has consented to being named in this
Proxy Statement and to serve if elected.
The current Board of Directors and nominees for election to the Board are
as follows:
SERVED AS A POSITIONS WITH
NAME AGE DIRECTOR SINCE THE COMPANY
---- --- -------------- -----------
John E. Meggitt, Ph.D 69 1967 Chairman of the Board and
Director
Charles L. Boyle, III 47 1993 President, Chief Executive
Officer and Director
Dorothy M. Meggitt 66 1967 Secretary and Director
Louis J. Cissone 65 1994 Director
Mark A. Timmerman 39 1994 Director
Other than Dr. John E. Meggitt and Dorothy M. Meggitt, who are husband and
wife, there are no family relationships among any of the Directors, executive
officers and key employees of the Company.
The principal occupations and business experience, for at least the past
five years, of each Director and nominee is as follows:
Dr. Meggitt founded the Company and has served as a Director of the Company
since its inception in 1967. From the Company's inception through August 13,
1996, he was also President and Chief Executive Officer of the Company. In
addition, Dr. Meggitt served as Treasurer of the Company from its inception
through December 1993. Prior to founding the Company, he directed system
programming operations for Electronic Associates, Inc. and, earlier, conducted
computer research for IBM.
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<PAGE>
Mr. Boyle joined the Company in 1984 and, effective August 13, 1996, was
elected to the offices of President and Chief Executive Officer. Prior to
serving in his current capacities, Mr. Boyle served as Executive Vice President
from September 1992 to August 1996, Chief Financial Officer from September 1992
to December 1995, Chief Operating Officer from December 1995 to August 1996 and
Treasurer from December 1993 to August 1996. He has been a Director since
December 1993. Prior to joining the Company, Mr. Boyle held various financial
and management positions with Colt Industries, Inc.
Mrs. Meggitt joined the Company upon its inception in 1967 and has served
as Secretary and a Director since that time. Mrs. Meggitt managed the Company's
human resources and facilities departments from 1967 through 1987.
Mr. Cissone has been on the Board of Directors since May 1994. From 1986
until his retirement in December 1995, Mr. Cissone served as Senior Vice
President and Chief Financial Officer of Sun Distributors L.P., a wholesale
distributor of industrial products. In addition, Mr. Cissone has served on the
Board of Directors of Robec, Inc., a national value-added distributor of
micro-computer systems, since 1991.
Mr. Timmerman has been on the Board of Directors since May 1994. Since
1986, Mr. Timmerman has worked for and currently is a partner in the
Chicago-based investment banking firm of William Blair & Company which managed
the Company's initial public offering of Common Stock in March 1994. In
addition, Mr. Timmerman has served on the Board of Directors of DIY Home
Warehouse, a retailer of home products, since 1993.
COMPENSATION OF DIRECTORS
Non-employee Directors receive an annual fee of $5,000 for services on the
Board of Directors or any committee thereof plus $1,000 and reimbursement of
their expenses for each quarterly meeting attended and $500 and reimbursement of
their expenses for each special meeting attended. The Company may from time to
time, and at the discretion of the Board of Directors, grant stock options to
Directors for their service on the Board of Directors. During fiscal 2000, each
non-employee Director (consisting solely of Messrs. Timmerman and Cissone)
received options to purchase 2,000 shares of the Company's Common Stock, each at
an exercise price of $9.125 per share, the fair market value of the Company's
Common Stock on the date of the grant.
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<PAGE>
EXECUTIVE OFFICERS
The following table identifies the current executive officers of the
Company:
<TABLE>
<CAPTION>
CAPACITIES IN IN CURRENT
NAME AGE WHICH SERVED POSITION SINCE
---- --- ------------ --------------
<S> <C> <C> <C>
John E. Meggitt, Ph.D 69 Chairman of the Board and 1967
Director
Charles L. Boyle, III 47 President, Chief Executive 1996
Officer and Director
Thomas M. Giuliani, CPA (1) 43 Chief Financial Officer 1996
and Treasurer
Dorothy M. Meggitt 66 Secretary and Director 1967
</TABLE>
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(1) Mr. Giuliani joined the Company in 1989 and currently serves as its Chief
Financial Officer and Treasurer. Prior to joining the Company, Mr. Giuliani
held various accounting and financial positions for Deloitte & Touche,
Commodore International Ltd., Fox Chase Cancer Center and Robinson Alarm
Company.
Other than Dr. John E. Meggitt and Dorothy M. Meggitt, who are husband and
wife, there are no family relationships among any of the Directors, executive
officers and key employees of the Company. Executive officers of the Company are
elected annually by the Board of Directors and serve until their successors are
duly elected and qualified.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors, officers and stockholders who
beneficially own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act (collectively, the
"Reporting Persons") to file initial statements of beneficial ownership of
securities and statements of changes in beneficial ownership of securities with
respect to the Company's equity securities with the Securities and Exchange
Commission (the "SEC"). All Reporting Persons are required by SEC regulation to
furnish the Company with copies of all reports that such Reporting Persons file
with the SEC pursuant to Section 16(a).
Based solely on the Company's review of the copies of such forms received
by the Company and upon written representations of the Company's Reporting
Persons received by the Company, the Company believes that there has been
compliance with all Section 16(a) filing requirements applicable to such
Reporting Persons.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF COMPENSATION IN FISCAL 2000, 1999 AND 1998.
The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to (i)
each person who served as the Company's Chief Executive Officer for fiscal 2000
and (ii) the most highly compensated executive officer of the Company whose
aggregate cash compensation exceeded $100,000 and who was serving as executive
officer at the end of fiscal 2000 (collectively, the "Named Executives") during
the years ended June 30, 2000, 1999 and 1998.
<TABLE>
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SUMMARY COMPENSATION TABLE
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<CAPTION>
Annual Long-Term
Compensation Compensation
---------------------------------------------------
Awards
-------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
(a) (b) ($)(c) ($)(d) (#)(g) ($)(i)(1)
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<S> <C> <C> <C> <C> <C>
Charles L. Boyle, III, President and
Chief Executive Officer............ 2000 $230,198 $55,000 15,000 $ 9,733
1999 $200,000 $90,000 14,000 $14,096
1998 $199,643 $90,000 20,000 $ 9,698
Thomas M. Giuliani, Chief
Financial Officer and Treasurer.... 2000 $143,279 $18,750 10,000 $ 5,747
1999 $124,949 $31,050 10,000 $ 6,431
1998 $114,577 $30,950 10,000 $ 4,628
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</TABLE>
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(1) Includes Company contributions to its 401(k) plan and supplemental life
insurance and long-term disability premiums paid by the Company on
behalf of its executive officers.
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<PAGE>
OPTION GRANTS IN FISCAL 2000
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1993 Stock Plan during fiscal 2000
to each of the Named Executives. The Company has never granted any stock
appreciation rights.
<TABLE>
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OPTION GRANTS IN LAST FISCAL YEAR
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<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
Annual Rates of Stock
Price Appreciation for
Option Term(2)
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Number of
Securities % of Total
Underlying Options
Options Granted Exercise or
Granted to Employees Base Price Expiration
Name (#)(1) in Fiscal Year ($/Sh) Date 5%($) 10%($)
(a) (b) (c) (d) (e) (f) (g)
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<S> <C> <C> <C> <C> <C> <C>
Charles L. Boyle, III 15,000 10.1 $9.125 7/27/09 $86,081 $218,138
Thomas M. Giuliani... 10,000 6.8 $9.125 7/27/09 $57,387 $145,425
------------------------------------------------------------------------------------------------------
</TABLE>
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(1) The options disclosed herein were granted pursuant to the Company's 1993
Stock Plan and become exercisable to the extent of one-third of the
options on the first anniversary from the date of grant (July 27, 1999)
with an additional one-third of the options granted becoming exercisable
on each of the second and third anniversary of the date of grant. The
options terminate on the expiration date, subject to earlier termination
on the optionee's death, disability or termination of employment with
the Company. Options are not assignable or otherwise transferable except
by will or the laws of descent and distribution.
(2) Based on a grant date fair market value of $9.125.
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<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning each exercise of
options during fiscal 2000 by each of the Named Executives and the year end
value of unexercised in-the-money options.
<TABLE>
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
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<CAPTION>
Number of Value of Unexercised
Securities In-The-Money Options
Underlying at Fiscal
Unexercised Year-End
Options at Fiscal ($)(1)
Year-End
(#)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized($) Unexercisable Unexercisable
(a) (#)(b) (c) (d) (e)
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<S> <C> <C> <C> <C>
Charles L. Boyle, III..... -- -- 197,999 / 31,001 $1,589,998 / 120,627
Thomas M. Giuliani........ -- -- 40,999 / 20,001 $339,416 / 73,754
----------------------------- ------------- ------------- -------------------- -----------------------
</TABLE>
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(1) Based on a closing price of $14.50 per share of Common Stock as listed
on the Nasdaq National Market at June 30, 2000.
EMPLOYMENT ARRANGEMENTS AND TERMINATION OF EMPLOYMENT
Each of Dr. Meggitt, Mr. Boyle and Mr. Giuliani are employed by the Company
as employees at will. In fiscal 2000, Messrs. Boyle and Giuliani earned bonuses
of $55,000 and $18,750, respectively. Such bonuses were paid to such executive
officers subsequent to June 30, 2000.
In addition to the requirement of each of Dr. Meggitt and Mr. Boyle to
maintain the confidentiality of Company information and assign inventions to the
Company, each of such executive officers has agreed that during the term of his
respective employment and thereafter for the greater of two years or the period
of time for which such executive officer is being compensated under such
employment, such person will not compete with the Company by engaging in any
capacity in any business which is competitive with the business of the Company.
The Company has executed indemnification agreements with each of its
executive officers and Directors pursuant to which the Company has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
Director, officer, employee, agent or fiduciary of the Company.
The Company has executed change in control agreements with each of Mr.
Boyle and Mr. Giuliani. The terms and conditions of such agreements become
effective only if a change in control occurs on or before December 31, 2000. If,
during the three-month period immediately preceding a
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<PAGE>
change in control or during the three-year period immediately following a change
in control, such executive officer's employment with the Company is terminated
by (i) the Company for no reason or any reason other than cause or (ii) such
executive officer for good reason, then such executive officer receives (a)
three times base salary in the case of Mr. Boyle and two times base salary in
the case of Mr. Giuliani, (b) continuation of health care benefits for 36 months
and (c) immediate vesting of all stock options owned.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of John E. Meggitt, Ph.D., Charles
L. Boyle, III, Mark A. Timmerman and Louis J. Cissone.
The Company's headquarters in Yardley, Pennsylvania are leased to the
Company by John E. Meggitt, Ph.D., the Chairman of the Board, and Dorothy M.
Meggitt, his wife and Secretary of the Company. Dr. and Mrs. Meggitt also are
Directors and majority stockholders of the Company. See "Security Ownership of
Certain Beneficial Owners and Management." On July 1, 1998, the Company and Dr.
and Mrs. Meggitt entered into a five-year lease for the Yardley facilities.
Under such lease arrangement, the Company made rental payments to Dr. and Mrs.
Meggitt totaling $446,400 during the year ended June 30, 2000. In addition, the
Company paid $63,261 during the year ended June 30, 2000 for property taxes due
on such property. The Company believes that the terms of the lease are at least
as favorable to the Company as the terms that may have been available from
unrelated third parties. In addition, the Company has determined that any future
transactions between the Company and its officers, Directors, principal
stockholders and their affiliates shall be on terms no less favorable to the
Company than could be obtained from unrelated third parties.
In fiscal 2000, the Company paid $83,359 in salary and $58,915 in
compensation from stock options exercised to Peter Meggitt, the son of Dr. and
Mrs. Meggitt. Mr. Meggitt serves as a systems programmer for the Company.
-8-
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's Common Stock with the cumulative total return on the Nasdaq Composite
Index and the S&P Computer Systems Index (capitalization weighted) for the
period beginning on June 30, 1995.
COMPARISON OF CUMULATIVE TOTAL RETURN (1)(2)(3)
Among the Company, the Nasdaq Composite Index and the S&P Computer Systems Index
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
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06/30/95 06/30/96 06/30/97 06/30/98 06/30/99 06/30/00
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prophet 21, Inc. $ 100.00 $ 138.89 $ 119.44 $ 325.00 $ 161.11 $ 322.22
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Nasdaq Composite Index $ 100.00 $ 126.95 $ 154.49 $ 202.98 $ 287.76 $ 424.89
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S&P Computer Systems Index $ 100.00 $ 111.51 $ 169.04 $ 239.57 $ 434.93 $ 614.44
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</TABLE>
(1) Graph assumes $100.00 invested on June 30, 1995 in the Company's Common
Stock, the Nasdaq Composite Index and the S&P Computer Systems Index.
(2) Total return assumes reinvestment of dividends.
(3) Fiscal year ending June 30.
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<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has furnished the following report:
The Company's executive compensation policy is designed to attract and
retain highly qualified individuals for its executive positions and to provide
incentives for such executives to achieve maximum Company performance by
aligning the executives' interest with that of shareholders by basing a portion
of compensation on corporate performance.
The Compensation Committee generally determines base salary levels for
executive officers of the Company, who are not subject to an employment
agreement, at or about the start of the fiscal year and determines actual
bonuses after the end of the fiscal year based upon Company and individual
performance. Each of Dr. Meggitt, Mr. Boyle and Mr. Giuliani are employed by the
Company as employees at will.
The Company's executive officer compensation program is comprised of base
salary, conditional cash bonuses, stock options granted at the discretion of the
Option Committee and various other benefits, including stock purchase rights,
medical insurance and a 401(k) Plan which are generally available to all
employees of the Company.
Salaries, whether established pursuant to contract or otherwise, are
established in accordance with industry standards through review of publicly
available information concerning the compensation of officers of comparable
companies. Consideration is also given to relative responsibility, seniority,
individual experience and performance. Salaries for each of Dr. Meggitt, Mr.
Boyle and Mr. Giuliani are determined by the Board of Directors. Salary
increases for other executives are generally made based on increases in the
industry for similar companies with similar performance profiles and/or
attainment of certain division or Company goals.
The stock option and stock purchase programs are designed to relate
executives' long-term interests to stockholders' long-term interests. Stock
options and stock purchase rights will be awarded on the basis of individual
performance and/or the achievement of internal strategic objectives.
Based on review of available information, the Committee believes that the
Chief Executive Officer's total annual compensation is reasonable and
appropriate given the size, complexity and historical performance of the
Company's business, the Company's position as compared to its peers in the
industry, and the specific challenges faced by the Company during the year, such
as changes in the market for computer products and manufacturers' product lines,
as well as variations in prices and distribution channels, and other industry
factors. No specific weight was assigned to any of the criteria relative to the
Chief Executive Officer's compensation.
Compensation Committee Members
John E. Meggitt, Ph.D.
Charles L. Boyle, III
Louis J. Cissone
Mark A. Timmerman
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There are, as of September 11, 2000, approximately 151 holders of record
and 1,772 beneficial holders of the Company's Common Stock. The following table
sets forth certain information, as of September 11, 2000, regarding the
beneficial ownership of the Company's Common Stock by (i) each person who is
known to the Company to own beneficially more than 5% of the total number of
shares of Common Stock outstanding as of such date, (ii) each of the Company's
current Directors (which includes all nominees) and Named Executives, and (iii)
all Directors and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
of Beneficial Owner(1) of Beneficial Ownership(1) of Class(2)
------------------- ----------------------- --------
<S> <C> <C>
(i) Certain Beneficial Owners:
John E. Meggitt, Ph.D. and
Dorothy M. Meggitt 2,179,020 (3)(8) 58.5
(ii) Directors (which includes all
nominees) and Named Executives:
Charles L. Boyle, III 221,795 (4)(8) 5.6
Thomas M. Giuliani 52,512 (5)(8) 1.4
Louis J. Cissone 4,332 (6)(8) *
Mark A. Timmerman 5,832 (7)(8) *
(iii) All current Directors and executive
officers as a group (6 persons) 2,463,491 (3)(4)(5)(6)(7) 61.6
</TABLE>
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* Less than one percent.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have
sole voting and investment power with respect to all shares.
(2) Applicable percentage of ownership is based on 3,726,377 shares of
Common Stock outstanding on September 11, 2000.
(3) John E. Meggitt, Ph.D., Chairman of the Board and Director, and
Dorothy M. Meggitt, Secretary and Director, are husband and wife.
Includes 1,787,692 shares of Common Stock held by Dr. Meggitt and
391,328 shares of Common Stock held by Mrs. Meggitt. Does not include
shares of Common Stock owned of record by Dr. and Mrs. Meggitt's adult
children (and their spouses) and grandchildren, as to which shares Dr.
and Mrs. Meggitt disclaim beneficial ownership.
(4) Represents 7,462 shares of Common Stock owned of record and 214,333
shares of Common Stock subject to options which were exercisable as of
September 11, 2000 or which will become exercisable within 60 days after
such date. Excludes 39,667 shares underlying options which become
exercisable over time after such period.
(5) Represents 1,513 shares of Common Stock owned of record and 50,999
shares of Common Stock subject to options which were exercisable as of
September 11, 2000 or which will become exercisable within 60 days after
such date. Excludes 25,001 shares underlying options which become
exercisable over time after such period.
(6) Represents 500 shares of Common Stock owned of record and 3,832 shares
of Common Stock subject to options which were exercisable as of
September 11, 2000 or which will become exercisable within 60 days after
such date. Excludes 4,168 shares underlying options which become
exercisable over time after such period.
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<PAGE>
(7) Represents 2,000 shares of Common Stock owned of record and 3,832 shares
of Common Stock subject to options which were exercisable as of
September 11, 2000 or which will become exercisable within 60 days after
such date. Excludes 4,168 shares underlying options which become
exercisable over time after such period.
(8) The address for each of the persons noted is 19 West College Avenue,
Yardley, PA 19067.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has executed indemnification agreements with each of its
Directors and executive officers pursuant to which the Company has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
Director, officer, employee, agent or fiduciary of the Company.
Transactions involving Dr. and Mrs. Meggitt are reported in "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
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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 27th day of
October, 2000.
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Charles L. Boyle, III President, Chief Executive October 27, 2000
-------------------------
Charles L. Boyle, III Officer and Director
(Principal Executive Officer)
/s/Thomas M. Giuliani Chief Financial Officer and October 27, 2000
-------------------------
Thomas M. Giuliani Treasurer (Principal Financial
and Accounting Officer)
/s/John E. Meggitt, Ph.D. Chairman of the Board and October 27, 2000
-------------------------
John E. Meggitt, Ph.D. Director
/s/Dorothy M. Meggitt Secretary and Director October 27, 2000
-------------------------
Dorothy M. Meggitt
/s/Louis J. Cissone Director October 27, 2000
-------------------------
Louis J. Cissone
/s/Mark A. Timmerman Director October 27, 2000
-------------------------
Mark A. Timmerman
</TABLE>
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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* Indemnification Agreement dated as of December 6, 1993
between the Company and John E. Meggitt. (Incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)
10.4* 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.)
10.5* 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.)
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<PAGE>
10.6 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.)
10.7 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.)
10.8 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.)
10.9 International Business Machines Corporation Agreement for
Authorized Dealers and Industry Remarketers, as amended,
with exhibits. (Incorporated by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10, 1994.)
10.10 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.)
10.11* 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.)
10.12* 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.)
10.13* 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.)
10.14* Change in Control Severance Pay Agreement dated as of July
25, 2000 by and between the Company and Charles L. Boyle,
III.
10.15* Change in Control Severance Pay Agreement dated as of July
25, 2000 by and between the Company and Thomas M. Giuliani.
-16-
<PAGE>
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.)
23.1+ Consent of KPMG LLP.
23.2+ Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the year ended June 30, 2000.
27.2 Financial Data Schedule for the year ended June 30, 1999.
27.3 Financial Data Schedule for the year ended June 30, 1998.
------------
* 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.
-17-
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
----
Report of Independent Accountants......................................... F-2
Independent Auditors' Report.............................................. F-3
Consolidated Balance Sheets as of
June 30, 1999 and 2000.................................................. F-4
Consolidated Statements of Operations for the
years ended June 30, 1998, 1999 and 2000................................ F-5
Consolidated Statements of Stockholders'
Equity for the years ended
June 30, 1998, 1999 and 2000............................................ F-6
Consolidated Statements of Cash Flows for the
years ended June 30, 1998, 1999 and 2000................................ F-7
Notes to Consolidated Financial Statements................................ F-8
Report of Independent Accountants......................................... S-1
Independent Auditors' Report.............................................. S-2
Schedule II............................................................... S-3
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 sheet as of June 30, 1999
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended June 30, 1999 present
fairly, in all material respects, the financial position, results of operations
and cash flows of Prophet 21, Inc. and its Subsidiaries at June 30, 1999 and for
each of the two years in the period ended June 30, 1999, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 the opinion expressed above. We have not audited the
consolidated financial statements of Prophet 21, Inc. and its Subsidiaries for
any period subsequent to June 30, 1999.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 11, 1999
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Prophet 21, Inc.
and subsidiaries as of June 30, 2000 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prophet 21, Inc. and
subsidiaries as of June 30, 2000, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Philadelphia, Pennsylvania
September 15, 2000
F-3
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1999 2000
---- ----
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents.............................. $ 2,520 $ 8,219
Marketable securities.................................. 1,661 2,415
Accounts receivable, net of allowance for
doubtful accounts of $261 and $398, respectively..... 19,743 12,869
Advanced billings...................................... 2,140 2,084
Inventories............................................ 666 698
Deferred income taxes.................................. 156 711
Prepaid and other current assets....................... 1,148 978
--------- ---------
Total current assets................................ 28,034 27,974
Long-term marketable securities.......................... 3,175 4,620
Equipment and improvements, net.......................... 3,100 3,078
Software development costs, net.......................... 2,131 1,233
Other assets............................................. 35 268
--------- ---------
Total assets....................................... $ 36,475 $ 37,173
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $ 2,737 $ 2,385
Accrued expenses and other liabilities................. 1,715 1,714
Commissions payable.................................... 708 549
Taxes payable.......................................... 1,206 819
Profit sharing plan contribution payable............... 403 158
Deferred income........................................ 2,959 3,697
--------- ---------
Total current liabilities........................... 9,728 9,322
--------- ---------
Deferred income taxes.................................... 728 244
--------- ---------
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; 4,193,603 and 4,320,808 shares issued,
respectively; 3,593,613 and 3,720,818 shares
outstanding, respectively............................ 42 43
Additional paid-in capital............................. 10,734 11,764
Retained earnings...................................... 19,339 19,935
Accumulated other comprehensive loss................... (82) (121)
Treasury stock at cost, 599,990 shares................. (4,014) (4,014)
---------- ----------
Total stockholders' equity.......................... 26,019 27,607
--------- ---------
Total liabilities and stockholders' equity.......... $ 36,475 $ 37,173
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenue:
Software and hardware sales................... $30,157 $29,786 $18,014
Service and support........................... 16,457 22,201 28,101
------- ------- -------
46,614 51,987 46,115
------- ------- -------
Cost of revenue:
Software and hardware sales.................. 15,805 11,866 8,792
Service and support.......................... 8,596 12,783 14,971
------- ------- -------
24,401 24,649 23,763
------- ------- -------
Gross profit................................. 22,213 27,338 22,352
------- ------- -------
Operating expenses:
Sales and marketing.......................... 10,078 12,559 11,598
Research and development..................... 3,811 6,109 6,700
General and administrative................... 3,098 3,899 4,346
------- ------- -------
16,987 22,567 22,644
------- ------- -------
Operating income (loss) ................... 5,226 4,771 (292)
Interest income................................ 304 286 397
------- ------- -------
Income before taxes............................ 5,530 5,057 105
Provision (benefit) for income taxes............ 1,991 1,664 (491)
------- ------- -------
Net income..................................... $ 3,539 $ 3,393 $ 596
======= ======= =======
Basic earnings per share:
Net income per share......................... $ 0.98 $ 0.92 $ 0.16
======= ======= =======
Weighted average common shares outstanding... 3,601 3,705 3,627
======= ======= =======
Diluted earnings per share:
Net income per share.......................... $ 0.90 $ 0.85 $ 0.15
======= ======= =======
Weighted average common and common
equivalent shares outstanding............... 3,928 3,990 3,913
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
Additional Compre- Compre- Stock-
Common Stock Paid-In Retained hensive Treasury hensive holders'
Shares Amount Capital Earnings Loss Stock Income Equity
------ ------ ------- -------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997........... 4,002 $ 40 $ 8,835 $ 12,407 $ (21) $(2,518) $18,743
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
Other comprehensive loss......... (46) $ (46) (46)
Net income....................... 3,539 3,539 3,539
------
Comprehensive income............. 3,493
------- ----- -------- -------- ------- ------- ====== -------
Balance, June 30, 1998........... 4,154 42 10,386 15,946 (67) (2,518) 23,789
Repurchase of common stock....... (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
Other comprehensive loss......... (15) (15) (15)
Net income....................... 3,393 3,393 3,393
------
Comprehensive income............. 3,378
------- ----- -------- -------- ------- ------- ====== -------
Balance, June 30, 1999........... 4,194 42 10,734 19,339 (82) (4,014) 26,019
Issuance of common stock in
connection with exercise of
stock options.................. 101 1 669 670
Income tax benefit from stock
options exercised.............. 144 144
Employee stock purchase plan..... 26 217 217
Other comprehensive loss......... (39) (39) (39)
Net income....................... 596 596 596
------
Comprehensive income............. $ 557
------- ----- -------- -------- ------- ------- ====== -------
Balance, June 30, 2000 4,321 $ 43 $ 11,764 $ 19,935 $ (121) $(4,014) $27,607
======= ===== ======== ======== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 3,539 $ 3,393 $ 596
------- ------- -------
Adjustments to reconcile net income to
net cash (used) provided by operating activities:
Depreciation and amortization...................... 1,778 2,677 3,105
Gain on sale of equipment.......................... (3) (2) (2)
Provision for losses on accounts receivable........ 259 845 904
Deferred taxes..................................... 334 (437) (1,039)
Tax benefit deriving from exercise and sale of
stock option shares............................. 413 26 144
(Increases) decreases in operating assets:
Accounts receivable................................ (7,266) (3,387) 5,970
Advanced billings.................................. (38) (124) 56
Inventories........................................ (285) 736 (32)
Prepaid expenses and other current assets.......... (314) (418) 170
Other assets....................................... 126 78 (233)
Increases (decreases) in operating liabilities:
Accounts payable................................... 323 (953) (352)
Accrued expenses................................... 634 75 (160)
Taxes payable...................................... 48 538 (387)
Profit sharing plan contribution payable........... 101 12 (245)
Deferred income.................................... 298 508 738
------- ------- -------
Total adjustments.................................. (3,592) 174 8,637
------- ------- -------
Net cash (used) provided by operating activities..... (53) 3,567 9,233
------- ------- -------
Cash flows from investing activities:
Purchases of equipment and improvements, net....... (1,657) (1,714) (1,711)
Software development costs......................... (1,565) -- (381)
Purchase of marketable securities.................. (2,975) (2,600) (4,690)
Maturity of marketable securities.................. 5,470 2,250 2,400
------- ------- -------
Net cash used by investing activities................ (727) (2,064) (4,382)
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock......................... -- (1,496) --
Stock option transactions.......................... 49 -- --
Employee stock purchase plan....................... 101 262 217
Stock options exercised............................ 1,053 60 670
------- ------- -------
Net cash provided (used) by financing activities.... 1,203 (1,174) 887
------- ------- -------
Effect of exchange rate changes on cash.............. (46) (15) (39)
------- ------- --------
Net increase in cash and cash equivalents........... 377 314 5,699
Cash and cash equivalents at beginning of period..... 1,829 2,206 2,520
------- ------- --------
Cash and cash equivalents at end of period........... $ 2,206 $ 2,520 $ 8,219
======= ======= =======
Supplemental cash flow disclosures:
Income taxes paid.................................. $ 1,468 $ 1,528 $ 647
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
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 liabilities at the date of the financial
statements and amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. Certain items in the 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.
Marketable Securities:
Marketable securities consist primarily of state governmental debt
instruments with an initial maturity of more than three months. The Company
accounts for investments in accordance with Statement of Financial Accounting
Standards ("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.
The Company's marketable securities are scheduled to mature over the next 38
months.
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-8
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Equipment and Improvements:
Equipment and improvements are recorded at cost and are depreciated using
the straight line method over their estimated useful lives of three to ten
years. Leasehold improvements are amortized over the shorter of their estimated
useful lives or remaining lease term (including renewal periods in certain
instances). 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 statement of operations 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, 1999 and 2000 represent amounts
billed in advance to customers for maintenance in accordance with contract
terms.
In December 1999, the Securities and Exchange Commission Staff issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, is
required to be implemented in the quarter ended June 30, 2001. The Company is
currently analyzing the potential impact of SAB No. 101 (as amended) on its
revenue recognition policies. Although the Company believes its historical
accounting policies and practices conform with generally accepted accounting
F-9
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
principles, there can be no assurance that the formal implementation of SAB No.
101 (as amended) will not result in changes to its historical accounting
policies and practices or to the manner in which certain transactions are
presented and disclosed in the consolidated financial statements.
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.
Capitalized Software:
The Company capitalizes software development costs associated with a new
product pursuant to SFAS No. 86 "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed". Such costs are 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 ($426, $1,279 and $1,279 for the years
ended June 30, 1998, 1999 and 2000, respectively) is charged to cost of sales.
For the years ended June 30, 1999 and 2000, the Company capitalized $0 and $381,
respectively, of software development costs. All other research and development
costs have been expensed.
When events or circumstances so indicate, the Company assesses the
potential impairment of its intangible assets and other long-lived assets based
on anticipated undiscounted cash flows from operations. Such events and
circumstances include a sale of all or a significant part of the operations
associated with the long-lived asset, or a significant decline in the operating
performance of the asset. If an impairment is indicated, the amount of
impairment charge would be calculated by comparing the anticipated discounted
future cash flows to the carrying value of the long-lived asset. At June 30,
2000, no impairment was indicated.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires net foreign exchange gains or losses on
translation to be included in accumulated other comprehensive loss in the
consolidated balance sheet and in the disclosure of comprehensive income. The
totals of other comprehensive loss items and comprehensive income (which
includes net income) are displayed separately in the consolidated statements of
stockholders' equity.
F-10
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes:
The Company utilizes the asset and liability approach for income taxes
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amount and the tax basis of assets and liabilities and operating loss and tax
credit carryforwards.
Net Income Per Share:
Net earnings per common share is computed in accordance with the Financial
Accounting Standards Board ("FASB") SFAS No. 128 "Earnings per Share" ("SFAS
128"). Under SFAS 128, basic earnings per share excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed by dividing
net earnings by the weighted average number of common shares and common share
equivalents outstanding during each year. The dilutive effect of stock options
is calculated using the treasury stock method.
The following table sets forth the computation of basic and dilutive
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net income................................... $ 3,539 $ 3,393 $ 596
Weighted average common shares outstanding... 3,601 3,705 3,627
Effect of dilutive securities:
Stock options.............................. 327 285 286
-------- -------- --------
Weighted average common and common
equivalent shares outstanding.............. 3,928 3,990 3,913
======== ======== ========
Basic earnings per share..................... $ 0.98 $ 0.92 $ 0.16
Diluted earnings per share................... $ 0.90 $ 0.85 $ 0.15
</TABLE>
F-11
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
2. EQUIPMENT AND IMPROVEMENTS:
A summary of the major components of equipment and improvements are as
follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 2000
---- ----
<S> <C> <C>
Equipment.......................................... $ 2,042 $ 2,000
Computer systems................................... 6,554 7,618
Furniture and fixtures............................. 1,051 1,275
Leasehold improvements............................. 771 813
-------- --------
10,418 11,706
Accumulated depreciation and amortization.......... (7,318) (8,628)
-------- ---------
$ 3,100 $ 3,078
======== ========
</TABLE>
Depreciation and amortization expense of $1,352, $1,398 and $1,826 was
charged to operations for the years ended June 30, 1998, 1999 and 2000,
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, 2000 are:
<TABLE>
<CAPTION>
FISCAL YEAR RELATED PARTY THIRD PARTY TOTAL
----------- ------------- ----------- -----
<S> <C> <C> <C>
2001........................ $ 461 $ 40 $ 501
2002........................ 475 13 488
2003........................ 490 -- 490
------------ ---------- ---------
$ 1,426 $ 53 $ 1,479
============ ========== =========
</TABLE>
Rent expense, including related party transactions, for the years ended
June 30, 1998, 1999 and 2000 was $542, $537 and $562, respectively.
F-12
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
4. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Federal:
Current...................................... $ 1,559 $ 1,926 $ 402
Deferred..................................... 334 (395) (893)
------- ------- ------
1,893 1,531 (491)
------- ------- ------
State:
Current...................................... 98 175 129
Deferred..................................... -- (42) (129)
------- ------- ------
98 133 --
------- ------- ------
$ 1,991 $ 1,664 $ (491)
======= ======= ======
</TABLE>
The income tax benefits related to the exercise of stock options amounted
to $413, $26 and $144 for 1998, 1999 and 2000, respectively, and were 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 primarily classified as current or
non-current depending on the classification of the assets and liabilities to
which they relate.
The provision (benefit) for income taxes differs from the amount computed
using the statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate...................................... 34% 34% 34%
State taxes, net of Federal benefit..................... 1 3 (41)
Research and development credit......................... -- -- (371)
Provision to return adjustment.......................... -- -- (95)
Non-deductible expense.................................. 1 -- 5
Other................................................... -- (4) --
----- ----- -----
36% 33% (468)%
===== ===== =====
</TABLE>
F-13
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
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 and operating loss and tax
credit carryforwards. Amounts giving rise to deferred income taxes are as
follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1999 2000
---------- -----------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts......................... $ 99 $ 152
Accrued vacation........................................ 45 72
Inventory capitalization................................ 12 13
State net operating loss carryforward................... -- 82
Research and development credit carryforward............ -- 392
------ ------
156 711
Non-current deferred tax asset:
Depreciation............................................ 88 227
Non-current deferred tax liability:
Software development costs.............................. (816) (471)
------- ------
Total................................................ $ (572) $ 467
======= ======
</TABLE>
In assessing the ability to realize the deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. In order
to fully realize the total deferred tax assets, the Company will need to
generate future taxable income prior to the expiration of net operating loss and
credit carryforwards, which expire at various years through 2020. Based upon the
level of historical taxable income and projections for future taxable income
over the periods in which the temporary differences are deductible, management
believes it is more likely than not the Company will realize the benefit of the
deferred tax asset at June 30, 2000. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
F-14
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
5. RELATED PARTY TRANSACTIONS:
The Company leases 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, 1998, 1999 and 2000 was $467, $481 and $510, respectively.
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, 1998, 1999 and 2000.
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, 1998, 1999 and 2000 were $378, $380 and $150, respectively.
8. STOCKHOLDERS' EQUITY:
Preferred Stock:
The Company has an authorized class of 1,500 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.
F-15
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock Option Plan:
Under the Company's 1993 Stock Plan (the "Plan"), the Company has reserved
1,000 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
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 applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") 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 method 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, 1999
and 2000 are required by SFAS 123 and are presented below.
The Company granted stock options in 1998, 1999 and 2000 for employees. The
stock options granted in 1998, 1999 and 2000 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 the grant date. The options
granted in 1998, 1999 and 2000 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 1998, 1999 and 2000.
F-16
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
8. STOCKHOLDERS' EQUITY (CONTINUED):
A summary of the status of the Company's stock options as of June 30, 1998,
1999 and 2000 and the changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Weighted
Exercise Price Average
Shares(1) Per Share Exercise Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at June 30, 1997 697,500 $4.125 to $7.000 $5.950
Granted 98,000 $8.500 to $15.250 $9.710
Canceled (22,500) $5.250 to $12.750 $11.920
Exercised (136,600) $4.750 to $7.000 $6.830
Non-qualified Options in 1997
Granted 10,000 $5.375 $5.375
-------------------------------------------------------------------------------------------------
Options outstanding at June 30, 1998 646,400 $4.125 to $15.250 $6.140
Granted 125,000 $16.000 to $16.125 $16.065
Canceled (3,500) $16.125 $16.125
Exercised (13,700) $5.000 to $7.000 $6.720
-------------------------------------------------------------------------------------------------
Options outstanding at June 30, 1999 754,200 $4.750 to $16.000 $7.910
Granted 148,000 $9.250 to $22.375 $13.948
Canceled 57,500 $16.000 $16.000
Exercised 100,688 $4.500 to $16.125 $6.470
-------------------------------------------------------------------------------------------------
Options outstanding at June 30, 2000 744,012 $4.125 to $22.375 $8.585
Options exercisable at June 30,
1998 332,580 $4.125 to $7.000 $5.830
1999 531,823 $4.125 to $15.250 $6.160
2000 532,567 $4.125 to $22.375 $6.500
=================================================================================================
(1) Not reported in thousands
</TABLE>
F-17
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
8. STOCKHOLDERS' EQUITY (CONTINUED):
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 2000:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Number of Remaining Average Number of Average
Exercise Prices Options(1) Life Exercise Price Options(1) Exercise Price
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.125 to $5.375 265,245 5.82 $4.950 265,245 $4.950
$7.000 to $9.250 334,100 5.33 $7.750 243,601 $7.260
$15.250 to $18.125 126,167 8.85 $16.600 23,721 $16.000
$20.000 to $22.375 18,500 9.77 $21.090 0 $0.000
------------------------------------------------------------------------------------------------------
$4.125 to $22.375 744,012 6.21 $8.585 532,567 $6.500
------------------------------------------------------------------------------------------------------
(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:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1998 1999 2000
------------- -------------- -------------
<S> <C> <C> <C>
Net Income: As reported $3,539 $3,393 $596
Pro forma 3,317 3,212 533
Basic earnings per share: As reported $0.98 $0.92 $0.16
Pro forma 0.92 0.87 0.15
Diluted earnings per share: As reported $0.90 $0.85 $0.15
Pro forma 0.84 0.81 0.14
</TABLE>
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 fiscal years ended June 30, 1998,
1999 and 2000: dividend yield of 0.00%; risk-free interest rate of 6.05%, 5.47%
and 6.30%, respectively; the expected life of options is estimated to be 4
years; and a volatility of 32.75%, 45.66% and 60.61%, respectively.
F-18
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
8. STOCKHOLDERS' EQUITY (CONTINUED):
The weighted average fair value of options granted during the fiscal years
ending June 30, 1998, 1999 and 2000 was $3.31, $6.83 and $7.29, respectively.
Stock Repurchase Program:
In fiscal 1997, the Company's Board of Directors approved resolutions to
repurchase up to 600 shares of the Company's Common Stock in open market
purchases. As of June 30, 2000, the Company had repurchased 600 shares at a cost
of $4,014.
1997 Employee Stock Purchase Plan:
In fiscal 1997, the Company's Board of Directors and stockholders approved
the adoption of the 1997 Employee Stock Purchase Plan to make available 100
shares of the Company's Common Stock for purchase by the Company's employees. As
of June 30, 2000, the Company's employees had purchased 67 shares at a cost of
$580.
F-19
<PAGE>
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following table presents certain condensed unaudited quarterly
consolidated financial information for each of the most recent eight quarters in
the period ended June 30, 2000. This information is derived from unaudited
consolidated financial statements of the Company that include, in the opinion of
the Company, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of results of operations for such periods. The
operating results for any quarter are not necessarily indicative of results
which may be obtained for any future period. Although the Company has not
experienced fluctuations in quarterly results due to seasonality, the Company's
quarterly results may fluctuate as a result of other factors, including the
timing of orders, delays of shipments to customers due to delays in delivery of
hardware components by the Company's vendors, delays in new software releases,
new product introductions by the Company or its competitors or levels of market
acceptance for new products, or the hiring of additional staff. Furthermore,
certain of the Company's costs, including personnel and facilities, are
relatively fixed in nature and, therefore, a decline in revenue in any fiscal
quarter typically results in lower profitability in that quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $11,165 $12,136 $11,535 $17,151 $9,286 $11,847 $11,541 $13,441
Gross profit....... 5,507 6,326 5,574 8,962 3,552 6,034 5,711 6,736
Operating income
(loss)............. 1,144 1,197 220 2,210 (1,438) 528 408 210
Net income (loss).. 827 867 198 1,501 (910) 405 337 763
Basic net income
(loss) per share... $0.22 $0.23 $0.05 $0.42 $(0.25) $0.11 $0.09 $0.21
Diluted net income
(loss) per share... $0.21 $0.22 $0.05 $0.39 $(0.25) $0.11 $0.08 $0.21
</TABLE>
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Prophet 21, Inc. and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report
dated August 11, 1999 included on page F-2 of this Form 10-K also included an
audit of the financial statement schedule as of and for each of the two years in
the period then ended June 30, 1999, listed in the index on page F-1 of this
Form 10-K. In our opinion, this financial statement schedule as of and for each
of the two years in the period then ended June 30, 1999 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 11, 1999
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries:
Under date of September 15, 2000, we reported on the consolidated balance
sheet of Prophet 21, Inc. and subsidiaries as of June 30, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended, which are included herein. In connection with our audit of
the aforementioned consolidated financial statements, we have also audited the
related financial statement schedule included herein. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
September 15, 2000
S-2
<PAGE>
SCHEDULE II
PROPHET 21, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Allowance for Doubtful Accounts
<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>
1998.................. $ 218,111 $ 259,404 $ 237,515 $ 240,000
1999.................. 240,000 845,054 824,063 260,991
2000.................. 260,991 904,415 767,166 398,240
</TABLE>
S-3
