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, 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
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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: $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
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Common Stock, $.01 par value 3,721,377
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 2000 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.................................................... 1
2. Properties.................................................. 7
3. Legal Proceedings........................................... 7
4. Submission of Matters to a Vote of Security Holders......... 7
PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters............................. 8
6. Selected Financial Data..................................... 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 10
7A. Quantitative and Qualitative Disclosures
About Market Risk........................................... 16
8. Financial Statements and Supplementary Data................. 16
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 16
PART III 10. Directors and Executive Officers of the Company............. 17
11. Executive Compensation...................................... 17
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 17
13. Certain Relationships and Related Transactions.............. 17
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................................... 18
SIGNATURES.................................................................. 19
EXHIBIT INDEX............................................................... 21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE.....................F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
With over 2000 customers conducting over $35 billion in highly complex
supply chain transactions annually, Prophet 21, Inc. ("Prophet 21" or the
"Company") provides enterprise software and services for the continuously
changing market demands of high-volume distribution-centric organizations in the
$1.7 trillion durable goods industry. For more than 30 years, the Company has
provided innovative, adaptive solutions essential to running complex and
fast-moving organizations.
The Company develops, markets, and supports a complete suite of
fully-integrated, industry-specific enterprise applications consisting of order
and inventory management, pricing and promotions, warehouse automation,
procurement, finance, business analysis and reporting, and customer relationship
management modules. Prophet 21 Acclaim(R) is a comprehensive solution for the
UNIX platform and is powered by Progress Software Corporation's DBMS, while
Prophet 21 CommerceCenter (formerly known as Prophet 21 Wholesale) utilizes the
Microsoft Windows NT/Windows 2000 operating environment.
Prophet 21 markets its products and services to approximately 58,000 of the
approximately 120,000 durable goods distributors and wholesalers operating in
the United States and Canada and, as of June 30, 2000, has sold over 2,700
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 CommerceCenter
solutions through its 45 person direct sales force located in sales and service
offices throughout the United States to a wide range of industry segments
including industrial MRO (Manufacturer, Repair and Operations), electrical
equipment, plumbing supplies/HVAC (Heating, Ventilation and Air Conditioning),
fasteners, and building materials marketplace.
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 and Prophet 21 Acclaim 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.
TRADINGPARTNERCONNECT
In April 2000, Prophet 21 announced its next phase of e-business with
TradingPartnerConnect. The venture is aimed at streamlining the commerce process
of this heavily fragmented marketplace through promoting collaborative commerce
among
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manufacturers, distributors and customers, as well as establishing
interconnectivity with leading Internet trading communities.
Fully interoperable with Acclaim or CommerceCenter, TradingPartnerConnect
serves to preserve and enhance collaborative commerce among trading partners --
streamlining the procurement process between distributors and their suppliers;
facilitating interaction and excess inventory visibility among distributors;
providing a comprehensive business-to-business (B2B) and business-to-consumer
(B2C) distribution-centric "sell-side" solution; and enabling connectivity to
best of breed end-user focused vertical marketplaces, corporate exchanges and
e-procurement solutions. In addition to its ability to conduct supply-chain
transactions, TradingPartnerConnect also offers commerce process services such
as supply chain optimization and business analysis and reporting, as well as
content and community infrastructure designed to support news and information
publishing, advertising management, discussion forums, and customer relationship
management. TradingPartnerConnect is expected to be rolled out in phases with
the formal launch set for 2001.
PROPHET 21 ACCLAIM AND PROPHET 21 COMMERCECENTER
Prophet 21 Acclaim is a UNIX based, fully integrated, scaleable software
solution. Acclaim's design philosophy is simple: provide adaptive, easy-to-use
software to assist the distributor in streamlining daily business processes,
improve customer service, increase employee productivity and maximize profit.
Acclaim provides the application functionality to support complex supply chain
transactions, coupled with financial tools designed to synchronize the
money-management chain and analysis and reporting tools developed to help
customers make more informed business decisions.
Bridging the gap between the traditional marketplace and e-commerce,
Acclaim offers the middleware needed to perform real-time Internet transactions
24 hours a day, 7 days a week via Prophet 21's digital marketplace,
TradingPartnerConnect. Acclaim should enable customers to maximize return on
investment through efficient, effective supply chain management; provide
first-rate customer service; respond and adapt to changing business demands
necessary to gain a competitive advantage; and harness the power of the
Internet.
Prophet 21 CommerceCenter is an enterprise-wide solution, extending through
the supply chain, that addresses key business issues such as e-business,
customer service, margin shrinkage, asset management and cash flow. The Company
has designed the system to address the business management automation needs of
distribution-centric companies who desire a Microsoft Backoffice certified
product that supports Microsoft SQL Server 7.0, a leading database for the
Microsoft Windows NT/Windows 2000 operating environment.
Both Acclaim and CommerceCenter are comprehensive, feature-rich systems.
The Company believes these systems can be installed rapidly and supported
effectively because its trainers and customer support personnel have a high
level of expertise with a single system. In addition, these solutions permit 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.
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Both solutions are designed for use by distribution-centric companies with
multi-branch operations. The solutions permit these companies to determine
system-wide inventory status instantaneously and to ship orders efficiently.
These solutions also allow 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 and Prophet 21 CommerceCenter are open systems that
allow the integration of complementary 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 45 person direct
sales force located in sales and service offices throughout the United States.
The field sales force is supervised by an Executive Vice President. 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. The Company generates leads through
telemarketing, direct mail, advertising, national and regional trade shows and
Company-sponsored seminars.
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.
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.
CUSTOMERS
The Company has, as of June 30, 2000, sold approximately 2,700 systems. The
Company's customers vary in size from small distributors with a few users to
large companies with several hundred users linking multiple geographically
dispersed branches.
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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, 2000, approximately 85% of the
Acclaim users were covered by support contracts 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 CommerceCenter 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, 2000, all of
the Company's active CommerceCenter customers were covered by support contracts
following the initial warranty period. There can be no assurance, however, that
customers will continue to enter into support contracts. Support contracts have
terms of one year and continue thereafter unless terminated.
PROFESSIONAL SERVICES
Prophet 21 measures its success by how quickly and efficiently it puts its
enterprise solutions to work for its customers. Through its professional
services team, the Company employs more than 180 consultants, educators and
technical support staff dedicated to maximizing return on investment, providing
the latest technology and streamlining daily operations. The professional
services team understands that the key to a successful business lies not only
with purchasing the right software, but also with establishing a life-long
partnership with a team who has the application expertise, real world business
experience and training skills to ensure a customer's financial and
organizational growth.
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 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.
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
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Acclaim and Prophet 21 CommerceCenter) 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 fiscal 2000, the Company released Prophet
21 CommerceCenter version 7.5 which featured complete credit card integration, a
warehouse management system and was Microsoft Windows 2000 certified. Eighty
employees are directly involved in programming and software development.
The Company's research and development expenses were approximately $3.8
million, $6.1 million and $6.7 million in the fiscal years ended June 30, 1998,
1999 and 2000, respectively. In 1996, the Company began capitalizing certain
software development costs in connection with the general release of Prophet 21
CommerceCenter. In 2000, the Company also began to capitalize certain software
costs in connection with TradingPartnerConnect. Such capitalized software
development costs amounted to $0 and $381,000 in the fiscal years ended June 30,
1999 and 2000, respectively.
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 has elected 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, 1998, 1999 and 2000, the Company's hardware purchases from IBM totaled $7.4
million, $5.1 million and $3.1 million, respectively.
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BACKLOG
The Company normally ships systems within 30 days of receiving an order
and, therefore, does not customarily have a significant backlog.
COMPETITION
The market for business management automation systems for the distribution
industry is highly competitive. The Company believes that it has approximately
30 direct competitors, represented by a mix of small, closely held companies and
divisions of larger companies that sell software or systems directly competitive
with those of the Company. Certain of such competitors serve only a limited
number of industry segments within the distribution industry.
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, 2000, the Company employed 367 persons full-time, of whom 75
were engaged in sales and marketing; 173 were engaged in customer service and
support, and installation; 80 were engaged in programming and software
development and quality assurance; and 39 were engaged in finance,
administration and management. In addition, 38 were employed on a part-time
basis (17 of whom were engaged in administrative functions). None of the
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Company's employees are covered by collective bargaining agreements. The Company
believes that it has been successful in attracting skilled personnel.
Competition for experienced sales and marketing personnel and software
programmers is intense. The Company's future success will depend in part on its
ability to continue to attract, retain and motivate highly qualified personnel.
The Company considers relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company leases facilities in Yardley, Pennsylvania totaling 60,000
square feet from Dr. John E. Meggitt, the Company's Chairman of the Board, and
Mrs. Dorothy M. Meggitt, the Company's Secretary. This lease expires on June 30,
2003. The leased space in Pennsylvania is 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 Los Angeles.
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, 1998 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, 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
September 30, 1999 $13.75 $6.875
December 31, 1999 $10.25 $5.25
March 31, 2000 $20.25 $9.563
June 30, 2000 $25.00 $10.891
As of September 11, 2000, the approximate number of holders of record of
the Common Stock was 151 and the approximate number of beneficial holders of the
common stock was 1,772.
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, 1999 and 2000 and
for each of the three years ended June 30, 2000 are derived from the audited
consolidated financial statements included elsewhere herein. The selected
financial data set forth below for the Company as of June 30, 1996, 1997 and
1998 and for each of the years ended June 30, 1996 and 1997 are derived from
audited consolidated 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 is included elsewhere in this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software and hardware sales........... $ 20,905 $ 22,537 $ 30,157 $ 29,786 $ 18,014
Service and support................... 12,145 13,866 16,457 22,201 28,101
-------- -------- -------- -------- --------
33,050 36,403 46,614 51,987 46,115
-------- -------- -------- -------- --------
Cost of revenue:
Software and hardware sales........... 11,425 12,407 15,805 11,866 8,792
Service and support................... 6,624 6,836 8,596 12,783 14,971
-------- -------- -------- -------- --------
18,049 19,243 24,401 24,649 23,763
-------- -------- -------- -------- --------
Gross profit........................ 15,001 17,160 22,213 27,338 22,352
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing................... 8,346 8,306 10,078 12,559 11,598
Research and development.............. 2,248 3,001 3,811 6,109 6,700
General and administrative............ 2,543 2,667 3,098 3,899 4,346
-------- -------- -------- -------- --------
Total operating expenses............ 13,137 13,974 16,987 22,567 22,644
-------- -------- -------- -------- --------
Operating income (loss)............. 1,864 3,186 5,226 4,771 (292)
Interest income........................ 408 376 304 286 397
-------- -------- -------- -------- --------
Income before taxes................. 2,272 3,562 5,530 5,057 105
Provision (benefit) for income taxes... 922 1,275 1,991 1,664 (491)
-------- -------- -------- -------- --------
Net income.......................... $ 1,350 $ 2,287 $ 3,539 $ 3,393 $ 596
======== ======== ======== ======== ========
Basic earnings per share:
Net income per share.................. $ 0.34 $ 0.60 $ 0.98 $ 0.92 $ 0.16
======== ======== ======== ======== ========
Weighted average common
shares outstanding................... 4,003 3,813 3,601 3,705 3,627
======== ======== ======== ======== ========
Diluted earnings per share:
Net income per share.................. $ 0.34 $ 0.60 $ 0.90 $ 0.85 $ 0.15
======== ======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding.......................... 4,011 3,838 3,928 3,990 3,913
======== ======== ======== ======== ========
Balance Sheet Data
(at period end):
Working capital........................ $ 14,792 $ 11,699 $ 15,765 $ 18,306 $ 18,652
Total assets........................... 25,827 27,660 34,548 36,475 37,173
Stockholders' equity................... 18,976 18,743 23,789 26,019 27,607
---------------------
Note: Certain items in prior years' financial statements have been reclassified for comparative purposes.
See "Note 1. Summary of Significant Accounting Policies," to the audited consolidated financial statements
included elsewhere herein.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company provides enterprise software and service for the continuously
changing market demands of high-volume distribution-centric organizations in the
$1.7 trillion durable goods industry. Prophet 21 develops, markets and supports
a complete suite of fully integrated, industry-specific enterprise applications
consisting of order and inventory management, pricing and promotions, warehouse
automation, procurement, finance, business analysis and reporting, and customer
relationship modules. In addition, Prophet 21 provides industry-specific,
distribution-centric enterprise solutions for select markets including
industrial MRO, electrical equipment, plumbing supplies/HVAC, fasteners and
building materials marketplace.
A significant portion of the Company's revenue is derived from the sale of
either Prophet 21 Acclaim or Prophet 21 CommerceCenter software solutions. Other
sources of revenue include: customer support maintenance contracts, equipment
maintenance (when purchased via Prophet 21), the sale of professional services
and optional third-party software products. 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
and support. Each Prophet 21 CommerceCenter solution includes the Prophet 21
CommerceCenter software, training and support. The Company 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.
Prophet 21 Acclaim is a complete distribution industry management solution
that combines the functionality of the traditional Prophet 21 System with the
technology of Progress Software. It has been designed so that current Prophet 21
users can move to this new product while preserving their existing technology
infrastructure.
Prophet 21 CommerceCenter utilizes the Microsoft Windows NT/Windows 2000
operating environment. Prophet 21 CommerceCenter is targeted for medium-sized
companies looking to solve their distribution-centric business requirements with
the Microsoft Windows NT/Windows 2000 operating environment. 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 CommerceCenter product is
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
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"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; and (vii) the Company's ability to
develop, market, provide, and achieve market acceptance of new service offerings
to new and existing clients.
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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 1999 over 2000 over
June 30, Fiscal Fiscal
---------------------------------
1998 1999 2000 1998 1999
---- ---- ---- -------- ------
<S> <C> <C> <C> <C> <C>
Revenue:
Software and hardware sales.......... 64.7% 57.3% 39.1% (1.2)% (39.5)%
Service and support.................. 35.3 42.7 60.9 34.9 26.6
------ ------ ------
100.0 100.0 100.0 11.5 (11.3)
------ ------ ------
Cost of revenue:
Software and hardware sales.......... 33.9 22.8 19.1 (24.9) (25.9)
Service and support.................. 18.4 24.6 32.5 48.7 17.1
------ ------ ------
52.3 47.4 51.6 1.0 (3.6)
------ ------ ------
Gross profit...................... 47.7 52.6 48.4 23.1 (18.2)
------ ------ ------
Operating expenses:
Sales and marketing.................. 21.6 24.1 25.2 24.6 (7.7)
Research and development............. 8.2 11.8 14.5 60.3 9.7
General and administrative........... 6.6 7.5 9.4 25.9 11.5
------ ------ ------
Total operating expenses.......... 36.4 43.4 49.1 32.8 0.4
------ ------ ------
Operating income (loss)........... 11.2 9.2 (0.7) (8.7) (106.1)
Interest income....................... 0.7 0.6 0.9 (5.9) 38.8
------ ------ ------
Income before income taxes........ 11.9 9.8 0.2 (8.6) (97.9)
Provision (benefit) for income taxes.. 4.3 3.2 (1.1) (16.4) (129.5)
------ ------ ------
Net income........................ 7.6% 6.6% 1.3% (4.1) (82.4)
====== ====== ======
</TABLE>
-12-
<PAGE>
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Revenue. Revenue decreased by 11.3%, or $5,872,000, from $51,987,000 in
fiscal 1999 to $46,115,000 in fiscal 2000. Software and hardware sales revenue
decreased by 39.5%, or $11,772,000, from $29,786,000 in fiscal 1999 to
$18,014,000 in fiscal 2000. This decrease was attributable primarily to a
slowdown in software market sales caused by potentially new and existing
customer concerns relating to issues in connection with the Year 2000 and a
shift in demand to e-commerce products. Other factors contributing to the
decrease included the Company's focus on larger accounts which typically require
a longer sales cycle than traditionally targeted Prophet 21 customers. Service
and support revenue increased by 26.6%, or $5,900,000, from $22,201,000 in
fiscal 1999 to $28,101,000 in fiscal 2000. This increase was attributable
primarily to an increase in services sold and an increase in the number of new
users who have entered into maintenance contracts.
Gross profit. The Company's gross profit decreased by 18.2%, or $4,986,000,
from $27,338,000 in fiscal 1999 to $22,352,000 in fiscal 2000. Gross profit
margin decreased from 52.6% of revenue in fiscal 1999 to 48.4% of revenue in
fiscal 2000. Gross profit from software and hardware sales decreased by 48.5%,
or $8,698,000, from $17,920,000 in fiscal 1999 to $9,222,000 in fiscal 2000.
Gross profit margin attributable to software and hardware sales decreased from
60.2% in fiscal 1999 to 51.2% in fiscal 2000. The decrease in such gross profit
and gross profit margin was attributable primarily to a decrease in sales volume
and a change in product mix. Gross profit from service and support revenue
increased by 39.4%, or $3,712,000, from $9,418,000 in fiscal 1999 to $13,130,000
in fiscal 2000. Gross profit margin attributable to service and support revenue
increased from 42.4% of service and support revenue in fiscal 1999 to 46.7% of
service and support revenue in fiscal 2000. The increase in such gross profit
and gross profit margin was attributable primarily to increased revenues which
increased faster than the fixed expenses associated with the delivery of service
and support.
Sales and marketing expenses. Sales and marketing expenses decreased by
7.7%, or $961,000, from $12,559,000 in fiscal 1999 to $11,598,000 in fiscal
2000, and increased as a percentage of revenue from 24.2% to 25.2%,
respectively. Such expenses decreased in absolute dollars due primarily to
decreased compensation expenses associated with decreased revenues. Such
expenses increased as a percentage of revenue due to decreased sales volume.
Research and development expenses. Research and development expenses
increased by 9.7%, or $591,000, from $6,109,000 in fiscal 1999 to $6,700,000 in
fiscal 2000, and increased as a percentage of revenue from 11.8% to 14.5%,
respectively. Research and development expenses increased in absolute dollars
and as a percentage of revenue due primarily to an increase in salary expenses
related to increased staffing as the Company continues to invest in product
development.
General and administrative expenses. General and administrative expenses
increased by 11.5%, or $447,000, from $3,899,000 in fiscal 1999 to $4,346,000 in
fiscal 2000, and increased as a percentage of revenue from 7.5% to 9.4%,
respectively. General and administrative expenses increased in absolute dollars
and as a percentage of revenue due primarily to increased salary and
professional fees.
-13-
<PAGE>
Income taxes. The Company's effective tax rate was 32.9% and (467.6)% in
fiscal 1999 and 2000, respectively.
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. Software and hardware 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, software and hardware 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. The decrease in software and hardware 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 would have only increased by 27.1%, 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 23.1%, or $5,125,000,
from $22,213,000 in fiscal 1998 to $27,338,000 in fiscal 1999. Gross profit
margin increased from 47.7% of revenue in fiscal 1998 to 52.6% in fiscal 1999.
Gross profit from software and hardware sales increased by 24.9%, or $3,568,000,
from $14,352,000 in fiscal 1998 to $17,920,000 in fiscal 1999. Gross profit
margin attributable to software and hardware sales increased from 47.6% of
software and hardware sales revenue in fiscal 1998 to 60.2% in fiscal 1999. The
increase in such gross profit and gross profit margin was attributable primarily
to favorable sales mix, with a larger percentage of revenue being derived from
sales of the Company's Prophet 21 CommerceCenter 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 19.8%, or $1,557,000, from $7,861,000 in 1998 to $9,418,000 in
1999. Gross profit margin attributable to service and support revenue decreased
from 47.8% of service and support revenue in fiscal 1998 to 42.4% in fiscal
1999. 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 gross profit margin was attributable to an increase in staff in
the consulting departments.
Sales and marketing expenses. Sales and marketing expenses increased by
24.6%, or $2,481,000, from $10,078,000 in fiscal 1998 to $12,559,000 in fiscal
1999, and increased as a percentage of revenue from 21.6% to 24.2%,
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 60.3%, or $2,298,000, from $3,811,000 in fiscal 1998 to $6,109,000
in fiscal 1999, and increased as a percentage of revenue from 8.2% to 11.8%,
respectively. Research and development
-14-
<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 CommerceCenter.
General and administrative expenses. General and administrative expenses
increased by 25.9%, or $801,000, from $3,098,000 in fiscal 1998 to $3,899,000 in
fiscal 1999, and increased as a percentage of revenue from 6.6% to 7.5%,
respectively. General and administrative expenses increased in absolute dollars
and as a percentage of revenue due primarily to an increase in bad debt and
compensation expenses. These increases were offset in part by decreased fees
paid to the Company's outside professionals.
Income taxes. The Company's effective tax rate was 36.0% and 32.9% in
fiscal 1998 and 1999, 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 (used) provided by operations was ($53,000), $3,567,000 and $9,233,000 for
the fiscal years ended June 30, 1998, 1999 and 2000, respectively.
The Company's working capital was approximately $18,306,000 and $18,652,000
at June 30, 1999 and 2000, respectively.
The Company invested $1,657,000, $1,714,000 and $1,711,000 in capital
equipment and leasehold improvements in fiscal years 1998, 1999 and 2000,
respectively. There are no material commitments for capital expenditures
currently outstanding. The Company also invested $1,565,000, $0 and $381,000 in
software development costs which were capitalized during fiscal years ended June
30, 1998, 1999 and 2000, respectively.
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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
-15-
<PAGE>
No. 101 (as amended) on its revenue recognition policies. Although the Company
believes its historical accounting policies and practices conform with generally
accepted accounting 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.
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.
On January 26, 2000, the Company dismissed PricewaterhouseCoopers LLP
("PWC"), as its independent accountants. In connection with its audits for each
of the two years in the period ended June 30, 1999 and through January 26, 2000,
there were no disagreements with PWC on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
caused disagreements which if not resolved to the satisfaction of PWC would have
caused them to make reference thereto in their reports on the financial
statements of the Company for such years. The report of PWC on the Company's
financial statements for each of the two years in the period ended June 30, 1999
contained no adverse opinion or disclaimer of opinion and was not modified or
qualified as to uncertainty, audit scope, or accounting principle. The decision
to dismiss PWC was approved by both the Audit Committee of the Board of
Directors and by the full Board of Directors of the Company. PWC has furnished
the Company with a letter addressed to the Securities and Exchange Commission
stating their agreement with the above statements.
On February 1, 2000, the Company retained KPMG LLP as its independent
accountants.
-16-
<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
2000 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 2000 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 2000
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 2000 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
-17-
<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 Consolidated Financial Statements
and Schedule on Page F-1.
(a) (2) Financial Statement Schedule.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 21.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter ended June
30, 2000.
-18-
<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
September, 2000.
PROPHET 21, INC.
By: /s/ Charles L. Boyle, III
--------------------------------------
Charles L. Boyle, III, President
and Chief Executive Officer
-19-
<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 27, 2000
-------------------------
Charles L. Boyle, III Officer and Director
(Principal Executive Officer)
/s/Thomas M. Giuliani Chief Financial Officer and September 27, 2000
-------------------------
Thomas M. Giuliani Treasurer (Principal Financial
and Accounting Officer)
/s/John E. Meggitt, Ph.D. Chairman of the Board and September 27, 2000
-------------------------
John E. Meggitt, Ph.D. Director
/s/Dorothy M. Meggitt Secretary and Director September 27, 2000
-------------------------
Dorothy M. Meggitt
/s/Louis J. Cissone Director September 27, 2000
-------------------------
Louis J. Cissone
/s/Mark A. Timmerman Director September 27, 2000
-------------------------
Mark A. Timmerman
-20-
<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.)
-21-
<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.
-22-
<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 PricewaterhouseCoopers LLP.
23.2+ Consent of KPMG 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.
-23-
<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>
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
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<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
