SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
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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- ------------------------- -------------------------------
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $8,029,425 at August 15, 1997 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 15, 1997:
Class Number of Shares
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Common Stock, $.01 par value 3,559,600
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 1997 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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EXPLANATORY NOTE
Prophet 21, Inc., a Delaware corporation (the "Company"), hereby amends
Items 5 and 7 of Part II of its Annual Report on Form 10-K, which was filed with
the Securities and Exchange Commission on September 5, 1997. Item 5 of Part II
is being amended to change the number of beneficial holders of the Common Stock
from 1,000 to 632. Item 7 of Part II is being amended to change the cash flow
from operations for fiscal 1997 from $5,710,000 to $5,773,000.
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, 1995 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, 1995 $ 5.25 $ 4.375
December 31, 1995 $ 5.25 $ 4.125
March 31, 1996 $ 5.50 $ 4.375
June 30, 1996 $ 6.50 $ 4.125
September 30, 1996 $ 6.25 $ 4.75
December 31, 1996 $ 6.50 $ 5.00
March 31, 1997 $ 6.50 $ 5.625
June 30, 1997 $ 6.00 $ 4.50
As of August 15, 1997, the approximate number of holders of record of the
Common Stock was 180 and the approximate number of beneficial holders of the
Common Stock was 632.
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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company was founded in 1967 to provide custom programming services and,
in 1974, it began to design, develop, market and support automated business
management systems for distributors, wholesalers and dealers. The Company's
revenue is derived primarily from the
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sale of Prophet 21 Systems, maintenance contracts which provide for software
support and equipment maintenance, and the sale of optional software products.
Each Prophet 21 system includes the Prophet 21 Software, an IBM RS/6000
computer, various optional third-party software products and hardware
components, training, support and installation. 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.
The Company implemented a strategic decision early in 1992 to move from its
internally developed proprietary hardware system to an open system platform,
based on the UNIX/AIX operating system running on an IBM RS/6000 computer. The
Company's adoption of an open system solution broadened the market for the
Prophet 21 systems, facilitated greater customer acceptance, and allowed
successful integration of industry standard third-party software and hardware.
In fiscal 1996, the Company introduced its next generation product, Prophet
21 Acclaim, a complete business management system that combines the
functionality of the traditional Prophet 21 system with the technology of
Progress Software Corporation's DBMS. Prophet 21 Acclaim is targeted for sales
to new and current customers. It has been designed so that current customers can
move to this new product while preserving their existing technology
infrastructure. The general release of Prophet 21 Acclaim began late in the
second quarter of fiscal 1997.
The statements contained in this Annual Report on Form 10-K/A that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
anticipated future revenues, capital expenditures, and other statements
regarding matters that are not historical facts, involve predictions. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Potential risks and uncertainties that could affect the Company's future
operating results include, but are not limited to: (i) economic conditions,
including economic conditions related to the computer industry; (ii) the
availability of components and parts from the Company's vendors at current
prices and levels; (iii) the intense competition in the markets for the
Company's products and services; (iv) the Company's ability to protect its
intellectual property; (v) potential infringement claims against the Company for
its software development products; (vi) the Company's ability to obtain customer
maintenance contracts at current levels; 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)
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Fiscal Fiscal
Fiscal Year Ended 1996 over 1997 over
June 30, Fiscal Fiscal
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1995 1996 1997 1995 1996
Revenue:
<S> <C> <C> <C> <C> <C>
System sales ............... 68.2% 63.3% 61.9% (1.8)% 7.8%
Service and support ........ 31.8 36.7 38.1 22.1 14.2
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100.0 100.0 100.0 5.8 10.1
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Cost of revenue:
System sales ............... 40.4 35.3 34.7 (7.4) 8.3
Service and support ........ 18.3 20.0 19.6 15.7 7.9
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58.7 55.3 54.3 (0.2) 8.1
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Gross profit ........... 41.3 44.7 45.7 14.3 12.6
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Operating expenses:
Sales and marketing ........ 26.1 25.3 22.8 2.5 (0.5)
General and administrative . 7.2 6.9 6.7 2.0 6.0
Research and development ... 9.3 6.8 7.4 (22.7) 19.8
Severance expense .......... 1.2 -- -- (100.0) --
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Total operating expenses 43.8 39.0 36.9 (5.8) 4.2
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Operating (loss) income (2.5) 5.7 8.8 341.5 70.9
Interest income .............. 1.2 1.2 1.0 9.1 (7.8)
(Loss) income before
income taxes .......... (1.3) 6.9 9.8 670.9 56.8
(Benefit) provision for income
taxes ....................... (0.5) 2.8 3.5 639.2 38.3
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Net (loss) income ...... (0.8)% 4.1% 6.3% 694.7 69.4
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</TABLE>
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Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Revenue. Revenue increased by 10.1%, or $3,353,000, from $33,050,000 in
fiscal 1996 to $36,403,000 in fiscal 1997. System sales revenue increased by
7.8%, or $1,632,000, from $20,905,000 in fiscal 1996 to $22,537,000 in fiscal
1997. This increase was attributable primarily to sales of the Company's new
Prophet 21 Acclaim product which began late in the second quarter of fiscal
1997. Such increase was offset, in part, by a decrease in programming revenue
and by lower sales volume of Prophet 21 XL Software upgrades as many existing
customers, during the first quarter of fiscal 1997, were evaluating whether to
upgrade to XL9, the latest version of the Company's XL Software, or purchase the
new Prophet 21 Acclaim product. Service and support revenue increased by 14.2%,
or $1,721,000, from $12,145,000 in fiscal 1996 to $13,866,000 in fiscal 1997.
This increase was attributable primarily to an increase in the number of new
users who have entered into maintenance contracts and, to a lesser extent, to a
price increase implemented by the Company on such maintenance contracts during
the second quarter of fiscal 1997 and to an increase in services performed by
the Company in connection with the general release of the new Prophet 21 Acclaim
product.
Gross profit. The Company's gross profit increased by 12.6%, or $1,865,000,
from $14,754,000 in fiscal 1996 to $16,619,000 in fiscal 1997. Gross profit
margin increased from 44.7% of revenue in fiscal 1996 to 45.7% of revenue in
fiscal 1997. Gross profit from system sales increased by 7.2%, or $664,000, from
$9,233,000 in fiscal 1996 to $9,897,000 in fiscal 1997. Gross profit margin
attributable to system sales decreased from 44.2% of system sales revenue in
fiscal 1996 to 43.9% in fiscal 1997. The increase in gross profit from system
sales was attributable primarily to sales of the Company's new Prophet 21
Acclaim product which began late in the second quarter of fiscal 1997. The
decrease in gross profit margin from system sales was attributable primarily to
decreased sales volume of optional Prophet 21 software which, in general,
carries higher margins. Gross profit from service and support revenue increased
by 21.8%, or $1,201,000, from $5,521,000 in fiscal 1996 to $6,722,000 in fiscal
1997. Gross profit margin attributable to service and support revenue increased
from 45.5% of service and support revenue in fiscal 1996 to 48.5% in fiscal
1997. The increases in such gross profit and gross profit margin were
attributable primarily to an increase in the number of new users who have
entered into maintenance contracts and, to a lesser extent, to a price increase
implemented by the Company on such maintenance contracts during the second
quarter of fiscal 1997 and to an increase in services performed by the Company
in connection with the general release of the new Prophet 21 Acclaim product.
Sales and marketing expenses. Sales and marketing expenses decreased
slightly by 0.5%, or $40,000, from $8,346,000 in fiscal 1996 to $8,306,000 in
fiscal 1997, and decreased as a percentage of revenue from 25.3% to 22.8%,
respectively. Sales and marketing expenses decreased in absolute dollars and as
a percentage of revenue due primarily to the fact that the User's Conference was
scheduled only once in fiscal 1997 and, to a lesser extent, reduced marketing
costs related to a decrease in staffing. Such decreases were offset, in part, by
increased salesperson compensation and to increased marketing costs associated
with the new Prophet 21 Acclaim product.
General and administrative expenses. General and administrative expenses
increased by 6.0%, or $138,000, from $2,296,000 in fiscal 1996 to $2,434,000 in
fiscal 1997, but decreased as a percentage of revenue from 6.9% to 6.7%,
respectively. The increase in absolute dollars in
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general and administrative expenses was due to an increase in compensation
expenses. General and administrative expenses decreased as a percentage of
revenue as a result of increased sales volume.
Research and development expenses. Research and development expenses
increased by 19.8%, or $445,000, from $2,248,000 in fiscal 1996 to $2,693,000 in
fiscal 1997, and increased as a percentage of revenue from 6.8% to 7.4%,
respectively. Such increases were due primarily to an increase in salary
expenses and staffing. The Company also capitalized $1,813,000 in software
development expenditures during fiscal 1997.
Income taxes. The Company's effective tax rate was 40.6% and 35.8% in
fiscal 1996 and 1997, respectively.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Revenue. Revenue increased by 5.8%, or $1,807,000, from $31,243,000 in
fiscal 1995 to $33,050,000 in fiscal 1996. System sales revenue decreased by
1.8%, from $21,295,000 in fiscal 1995 to $20,905,000 in fiscal 1996. This
decrease was attributable primarily to the Company's focus on larger system
sales which resulted in increased average price of systems sold but a decrease
in the number of units sold. In addition, the Company continued to experience a
longer sales cycle during fiscal 1996 as a result of its focus on larger system
sales. The decrease in system sales was offset, in part, by an increase in sales
of optional software products. Service and support revenue increased 22.1% from
$9,948,000 in fiscal 1995 to $12,145,000 in fiscal 1996. This increase was
attributable primarily to an increase in the number of users who entered into
maintenance contracts and, to a lesser extent, to the implementation by the
Company of a new maintenance program which offers multiple levels of service at
different prices.
Gross Profit. The Company's gross profit increased by 14.3%, or $1,844,000,
from $12,910,000 in fiscal 1995 to $14,754,000 in fiscal 1996. Gross profit
margin increased from 41.3% of revenue in fiscal 1995 to 44.7% of revenue in
fiscal 1996. Gross profit from system sales increased by 6.3%, or $548,000, from
$8,685,000 in fiscal 1995 to $9,233,000 in fiscal 1996. Gross profit margin
attributable to system sales increased from 40.8% of systems sales revenue in
fiscal 1995 to 44.2% in fiscal 1996. The increases in such gross profit and
gross profit margin were attributable primarily to increased sales volume of
optional Prophet 21 software which, in general, carries higher margins and to a
lesser extent, to the Company's sales focus on larger system sales. Gross profit
from service and support revenue increased by 30.7%, or $1,296,000, from
$4,225,000 in fiscal 1995 to $5,521,000 in fiscal 1996. Gross profit margin
attributable to service and support revenue increased from 42.5% of service and
support revenue in fiscal 1995 to 45.5% in fiscal 1996. The increases in such
gross profit and gross profit margin were attributable primarily to an increase
in the number of new users who have entered into the maintenance program and, to
a lesser extent, the implementation by the Company of a new maintenance program
which offers multiple levels of service at different prices, offset in part by a
severance payment of $190,000.
Sales and marketing expenses. Sales and marketing expenses increased by
2.5%, or $200,000, from $8,146,000 in fiscal 1995 to $8,346,000 in fiscal 1996,
but decreased as a percentage of revenue from 26.1% to 25.3% respectively. Sales
and marketing expenses
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increased due to the Company's increased marketing efforts in direct mail and
software catalogue sales and to a lesser extent, higher salespersons
compensation associated with higher sales.
General and administrative expenses. General and administrative expenses
increased by 2.0%, or $45,000, from $2,251,000 in fiscal 1995 to $2,296,000 in
fiscal 1996, but decreased as a percentage of revenue from 7.2% to 6.9%,
respectively. The increase in general and administrative expenses was due to
increases in compensation expense.
Research and development expenses. Research and development expenses
decreased by 22.7%, or $659,000, from $2,907,000 in fiscal 1995 to $2,248,000 in
fiscal 1996, and decreased as a percentage of revenue from 9.3% to 6.8%,
respectively. The decrease in research and development expenses was due
primarily to a reduction in related salary expenses and staffing requirements
resulting from the Company's creation of new, more efficient programming tools
for use by the Company's programmers and the capitalization of certain software
development costs.
Income taxes. The Company's effective tax rate was 43.0% and 40.6% in
fiscal 1995 and fiscal 1996, respectively.
Liquidity and Capital Resources
Since its inception, the Company has funded its operations primarily from
cash generated by operations and available cash, including funds raised in the
Company's initial public offering completed in March 1994. The Company's cash
flow from operations was $1,184,000, $1,263,000 and $5,773,000 for the fiscal
years ended June 30, 1995, 1996 and 1997, respectively.
The Company's working capital was $14,797,000 and $11,720,000 at June 30,
1996 and 1997, respectively.
The Company invested $876,000, $1,069,000 and $1,440,000 in capital
equipment and leasehold improvements in fiscal 1995, 1996 and 1997,
respectively. There are no other material commitments for capital expenditures
currently outstanding. The Company also invested $458,000 and $1,813,000 in
software development costs which were capitalized during the fiscal years ended
June 30, 1996 and 1997.
The Company does not have a significant concentration of credit risk with
respect to accounts receivable due to the large number of customers comprising
the Company's customer base and their dispersion across different geographic
regions. The Company performs on-going credit evaluations and generally does not
require collateral. The Company maintains reserves for potential credit losses,
and, to date, such losses have been within the Company's expectations.
In fiscal 1997, the Company's Board of Directors approved resolutions to
repurchase up to 600,000 shares of the Company's Common Stock in open market
purchases. As of June 30, 1997, the Company had repurchased 442,900 shares at a
cost of $2,518,000.
The Company believes that available funds and the cash flow expected to be
generated from operations will be adequate to satisfy its current and planned
operations for at least the next 24 months.
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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 29th day of
September, 1997.
PROPHET 21, INC.
By: /s/Charles L. Boyle, III
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Charles L. Boyle, III, President
and Chief Executive Officer
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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
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/s/Charles L. Boyle, III President, Chief Executive September 29, 1997
- -------------------------- Officer and Director
Charles L. Boyle, III (Principal Executive Officer)
/s/Thomas M. Giuliani Chief Financial Officer September 29, 1997
- -------------------------- and Treasurer
Thomas M. Giuliani (Principal Financial and
Accounting Officer)
/s/John E. Meggitt, Ph. D. Chairman of the Board September 29, 1997
- -------------------------- and Director
John E. Meggitt, Ph.D.
/s/Dorothy M. Meggitt Secretary and Director September 29, 1997
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Dorothy M. Meggitt
/s/Louis J. Cissone Director September 29, 1997
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Louis J. Cissone
/s/Mark A. Timmerman Director September 29, 1997
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Mark A. Timmerman
