SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File No. 0-23306
PROPHET 21, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2746447
- -------------------------------------------- ------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
19 West College Ave., Yardley, Pennsylvania 19067
- -------------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 493-8900
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
-------- --------
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of September 30, 1997:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 3,559,600
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
Page
----
PART I. FINANCIAL INFORMATION....................................... 1
Item 1. Financial Statements..................................... 1
Consolidated Balance Sheets
as of June 30, 1997 and
September 30, 1997 (unaudited).............................. 2
Consolidated Statements of Income
for the three months ended
September 30, 1996 and 1997 (unaudited)..................... 3
Consolidated Statements of Cash Flows
for the three months ended
September 30, 1996 and 1997 (unaudited)..................... 4
Notes to Consolidated Financial Statements (unaudited)...... 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............ 8
Results of Operations....................................... 9
Liquidity and Capital Resources............................. 11
PART II. OTHER INFORMATION........................................... 12
Item 6. Exhibits and Reports on Form 8-K......................... 12
SIGNATURES ............................................................ 13
- i -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
- 1 -
<PAGE>
<TABLE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<CAPTION>
June 30, September 30,
1997 1997
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................... $ 1,829 $ 487
Marketable securities ......................... 4,082 2,351
Accounts receivable, net of allowance for
doubtful accounts of $218 and $288,
respectively ............................... 12,172 13,943
Inventories ................................... 1,117 1,641
Deferred income taxes ......................... 163 163
Prepaid and other current assets .............. 437 376
-------- --------
Total current assets ....................... 19,800 18,961
Long-term marketable securities .................. 2,835 3,310
Equipment and improvements, net .................. 2,536 2,574
Software development costs, net .................. 2,271 2,835
Other assets ..................................... 239 226
-------- --------
Total assets ............................... $ 27,681 $ 27,906
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .............................. $ 3,367 $ 3,303
Accrued expenses and other liabilities ........ 1,171 801
Commissions payable ........................... 479 355
Taxes payable ................................. 620 666
Profit sharing plan contribution payable ...... 290 365
Deferred income ............................... 2,153 2,220
-------- --------
Total current liabilities .................. 8,080 7,710
-------- --------
Deferred income taxes ............................ 837 837
-------- --------
Stockholders' equity:
Preferred stock -- $0.01 par value, 1,500,000
shares authorized; no shares issued or
outstanding ................................. -- --
Common stock -- $0.01 par value, 10,000,000
shares authorized; 4,002,500 shares issued;
3,559,600 outstanding ....................... 40 40
Additional paid-in capital .................... 8,835 8,835
Retained earnings ............................. 12,407 13,002
Treasury stock at cost, 442,900 shares ........ (2,518) (2,518)
-------- --------
Total stockholders' equity ................. 18,764 19,359
-------- --------
Total liabilities and stockholders' equity . $ 27,681 $ 27,906
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
- 2 -
<PAGE>
<TABLE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
<CAPTION>
For the Three Months
Ended September 30,
---------------------------
1996 1997
---- ----
<S> <C> <C>
Revenue:
System sales............................... $ 5,375 $ 5,983
Service and support........................ 3,236 3,742
-------- --------
8,611 9,725
Cost of revenue:
System sales............................... 3,087 3,454
Service and support........................ 1,712 1,951
-------- --------
4,799 5,405
-------- --------
Gross profit............................ 3,812 4,320
-------- --------
Operating expenses:
Sales and marketing........................ 2,176 2,096
General and administrative................. 593 654
Research and development................... 615 726
-------- --------
3,384 3,476
-------- --------
Operating income........................ 428 844
Interest income.............................. 89 86
-------- --------
Income before taxes.......................... 517 930
Provision for income taxes................... 207 335
-------- --------
Net income................................... $ 310 $ 595
======== ========
Net income per share......................... $ 0.08 $ 0.16
======== ========
Weighted average common
and common equivalent shares
outstanding................................ 4,030 3,780
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In Thousands)
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 310 $ 595
------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................... 250 333
Provision for losses on accounts receivable ...... 72 69
Decreases (increases) in operating assets:
Accounts receivable .............................. 312 (1,840)
Inventories ...................................... 61 (524)
Prepaid expenses and other assets ................ 132 74
Increases (decreases) in operating liabilities:
Accounts payable ................................. (388) (64)
Accrued expenses ................................. (191) (494)
Taxes payable .................................... 131 46
Profit sharing plan contribution payable ......... 57 75
Deferred income .................................. 73 67
------- -------
Total adjustments ................................ 509 (2,258)
------- -------
Net cash provided (used) by operating activities ........ 819 (1,663)
------- -------
Cash flows from investing activities:
Cash purchases of equipment .......................... (335) (340)
Software development costs ........................... (365) (564)
Purchase of marketable securities .................... (2,000) (1,475)
Maturity of marketable securities .................... 1,000 2,700
------- -------
Net cash (used) provided by investing activities ........ (1,700) 321
------- -------
Cash flows from financing activities:
Purchase of treasury stock ........................... (84) --
------- -------
Net cash used by financing activities ................... (84) --
------- -------
Net decrease in cash and cash equivalents ............... (965) (1,342)
Cash and cash equivalents at beginning
of period ............................................ 2,860 1,829
------- -------
Cash and cash equivalents at end of period .............. $ 1,895 $ 487
======= =======
Supplemental cash flow disclosures:
Income taxes paid .................................... $ 19 $ 351
======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
- 4 -
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1996 and 1997 is unaudited)
Note 1 -- Basis of Presentation:
- -------------------------------
The information presented for September 30, 1996 and 1997, and for the
three-month periods then ended, is unaudited, but, in the opinion of the
Company's management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for the fair presentation of the
Company's financial position as of September 30, 1997 and the results of its
operations and its cash flows for the three-month periods ended September 30,
1996 and 1997. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These consolidated financial statements should be read in conjunction
with the Company's audited financial statements for the year ended June 30,
1997, which were included as part of the Company's Annual Report on Form 10-K.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances have been
eliminated.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
- 5 -
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1996 and 1997 is unaudited)
Note 2 -- Inventories (in thousands):
- ------------------------------------
A summary of the major components of inventories are as follows:
June 30, September 30,
-------- -------------
1997 1997
---- ----
Finished goods $ 1,043 $ 1,635
Used equipment inventory 74 6
-------- -------
$ 1,117 $ 1,641
======== ========
Note 3 -- Capitalized Software Development Costs (in thousands):
- ---------------------------------------------------------------
The Company has capitalized certain software development costs in
accordance with the Statement of Financial Accounting Standards Board ("SFAS")
No. 86. Such costs are capitalized after technological feasibility has been
demonstrated. Such capitalized amounts will be amortized commencing with product
introduction on a straight-line basis utilizing the estimated economic life of
three years. Amortization of capitalized software development costs will be
charged to cost of sales. At June 30, 1997 and September 30, 1997, the Company
had capitalized $2,271 and $2,835 of software development costs, respectively,
none of which had been amortized. All other research and development costs have
been expensed.
Note 4 -- Stockholders' Equity:
- ------------------------------
Preferred Stock
---------------
The Company has an authorized class of 1,500,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board of Directors may determine.
- 6 -
<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1996 and 1997 is unaudited)
Note 5 -- Stock Repurchase Program:
- ----------------------------------
In fiscal 1997, the Company's Board of Directors approved resolutions to
repurchase up to 600,000 shares of the Company's Common Stock in open market
purchases. As of September 30, 1997, the Company had repurchased 442,900 shares
at a cost of $2,518,000. Such shares are held in treasury.
Note 6 -- New Accounting Standard:
- ---------------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which will replace the current rules for earnings per
share computations, presentation and disclosure. Under the new standard, basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share on the face of the income
statement.
The Company will be required to adopt SFAS No. 128 during fiscal year 1998
and, as required by the standard, will restate all prior period earnings per
share data. The Company's new earnings per share amounts as calculated under
SFAS No. 128 are not expected to be materially different from those computed
under the present accounting standard.
- 7 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
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 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 XL Software, an IBM RISC System/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 RISC System/6000
computer. The Company's adoption of an open system solution broadened the market
for the Prophet 21 System, 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 Quarterly Report on Form 10-Q 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
- 8 -
<PAGE>
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.
Results of Operations
- ---------------------
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1997
--------------------------------------------------------------------
Revenue. Revenue increased by 12.9%, or $1,114,000, from $8,611,000 in the
three months ended September 30, 1996 ("First Quarter of Fiscal 1997") to
$9,725,000 in the three months ended September 30, 1997 ("First Quarter of
Fiscal 1998"). System sales revenue increased by 11.3%, or $608,000, from
$5,375,000 in the First Quarter of Fiscal 1997 to $5,983,000 in the First
Quarter of Fiscal 1998. This increase was attributable primarily to sales of the
Company's new Prophet 21 Acclaim product. Also contributing to the increase in
system sales revenue was the increase in the average selling price, which
resulted from the Company's focus on larger system sales. This increase was
offset, in part, by a decrease in system sales revenue attributable to the sale
of optional Prophet 21 XL software. Service and support revenue increased by
15.6%, or $506,000, from $3,236,000 in the First Quarter of Fiscal 1997 to
$3,742,000 in the First Quarter of Fiscal 1998. 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 of 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 13.3%, or $508,000,
from $3,812,000 in the First Quarter of Fiscal 1997 to $4,320,000 in the First
Quarter of Fiscal 1998. Gross profit margin remained relatively constant at
44.3% of revenue in the First Quarter of Fiscal 1997 as compared to 44.4% of
revenue in the First Quarter of Fiscal 1998. Gross profit from system sales
increased by 10.5%, or $241,000, from $2,288,000 in the First Quarter of Fiscal
1997 to $2,529,000 in the First Quarter of Fiscal 1998. The increase in gross
profit from system sales was attributable primarily to sales of the Company's
new Prophet 21 Acclaim product. Gross profit margin attributable to system sales
decreased slightly from 42.6% of system sales revenue in the First Quarter of
Fiscal 1997 to 42.3% in the First Quarter of Fiscal 1998. The decrease in gross
profit margin from system sales was attributable primarily to
- 9 -
<PAGE>
decreased sales volume of optional Prophet 21 software which, in general,
carries higher margins. Gross profit from service and support revenue increased
by 17.5%, or $267,000, from $1,524,000 in the First Quarter of Fiscal 1997 to
$1,791,000 in the First Quarter of Fiscal 1998. Gross profit margin attributable
to service and support revenue increased from 47.1% of service and support
revenue in the First Quarter of Fiscal 1997 to 47.9% of service and support
revenue in the First Quarter of Fiscal 1998. The increases in such gross profit
and gross profit margin from service and support revenue 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 by
3.7%, or $80,000, from $2,176,000 in the First Quarter of Fiscal 1997 to
$2,096,000 in the First Quarter of Fiscal 1998, and decreased as a percentage of
revenue from 25.3% to 21.6%, respectively. Such expenses decreased in absolute
dollars and as a percentage of revenue due primarily to decreased marketing
costs associated with the Company's XL Software products and, to a lesser
extent, decreased staffing in the marketing department.
General and administrative expenses. General and administrative expenses
increased by 10.3%, or $61,000, from $593,000 in the First Quarter of Fiscal
1997 to $654,000 in the First Quarter of Fiscal 1998, but decreased slightly as
a percentage of revenue at 6.9% and 6.7%, respectively. The increase in absolute
dollars in general and administrative expenses was due to modest increases in
compensation expenses. The slight decrease in general and administrative
expenses as a percentage of revenue was due to increased sales volume.
Research and development expenses. Research and development expenses
increased by 18.0%, or $111,000, from $615,000 in the First Quarter of Fiscal
1997 to $726,000 in the First Quarter of Fiscal 1998, and increased slightly as
a percentage of revenue at 7.1% and 7.5%, respectively. Research and development
expenses increased in absolute dollars and as a percentage of revenue due
primarily to an increase in salary expenses and staffing.
Income taxes. The Company's effective tax rate was 40.0% and 36.0% in the
First Quarter of Fiscal 1997 and 1998, respectively.
- 10 -
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has funded its operations primarily from
cash generated by operations and available cash. The Company's cash flow used in
operations was $1,663,000 for the three months ended September 30, 1997.
The Company's working capital was $15,837,000 and $11,251,000 at September
30, 1996 and 1997, respectively.
The Company invested $340,000 in capital equipment and leasehold
improvements in the three months ended September 30, 1997. There are no other
material commitments for capital expenditures currently outstanding. The Company
also invested $564,000 in software development during the three months ended
September 30, 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 not to exceed a purchase price of $6.00 per share. As of September 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.
- 11 -
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report on Form 10-Q is filed.
- 12 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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.
Prophet 21, Inc.
DATE: November 12, 1997 By: /s/ Charles L. Boyle, III
-------------------------
Charles L. Boyle, III,
President and Chief
Executive Officer
(Principal Executive
Officer)
DATE: November 12, 1997 By: /s/ Thomas M. Giuliani
----------------------
Thomas M. Giuliani,
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THIS FORM
10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000917823
<NAME> Prophet 21, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 487
<SECURITIES> 2,351
<RECEIVABLES> 14,231
<ALLOWANCES> (288)
<INVENTORY> 1,641
<CURRENT-ASSETS> 18,961
<PP&E> 2,907
<DEPRECIATION> (333)
<TOTAL-ASSETS> 27,906
<CURRENT-LIABILITIES> 7,710
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 19,319
<TOTAL-LIABILITY-AND-EQUITY> 27,906
<SALES> 9,725
<TOTAL-REVENUES> 9,725
<CGS> 5,405
<TOTAL-COSTS> 5,405
<OTHER-EXPENSES> 3,476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (86)
<INCOME-PRETAX> 930
<INCOME-TAX> 335
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 595
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
