SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 0-23306
PROPHET 21, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2746447
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
19 West College Ave., 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)
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 April 30, 1998:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 3,696,592
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PROPHET 21, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION........................................ 1
Item 1. Financial Statements....................... 1
Consolidated Balance Sheets
as at June 30, 1997 and
March 31, 1998 (unaudited).......................... 2
Consolidated Statements of Income
for the three months and the six months ended
March 31, 1997 and 1998 (unaudited)................ 3
Consolidated Statements of Cash Flows
for the nine months ended
March 31, 1997 and 1998 (unaudited)................. 4
Notes to Consolidated Financial Statements
(unaudited)......................................... 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition.................................. 8
PART II. OTHER INFORMATION............................................ 13
Item 6. Exhibits and Reports on Form 8-K........... 13
SIGNATURES............................................................ 14
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- 1 -
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<TABLE>
<CAPTION>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, March 31,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................... $ 1,829 $ 2,869
Marketable securities .......................... 4,082 1,143
Accounts receivable, net of allowance for
doubtful accounts of $218 and $429,
respectively ................................. 12,172 14,931
Inventories .................................... 1,117 1,727
Deferred income taxes .......................... 163 163
Prepaid and other current assets ............... 437 510
-------- --------
Total current assets .................... 19,800 21,343
Long-term marketable securities ................... 2,835 3,250
Equipment and improvements, net ................... 2,536 2,768
Software development costs, net ................... 2,271 3,730
Other assets ...................................... 239 138
-------- --------
Total assets............................. $ 27,681 $ 31,229
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................ $ 3,367 $ 3,158
Accrued expenses and other liabilities ......... 1,171 1,399
Commissions payable ............................ 479 572
Taxes payable .................................. 620 876
Profit sharing plan contribution payable ....... 290 285
Deferred income ................................ 2,153 2,400
-------- --------
Total current liabilities ............... 8,080 8,690
-------- --------
Commitments and contingent liabilities:
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 and 4,122,500
shares issued, respectively; 3,559,600 and
3,679,600 shares outstanding, respectively... 40 41
Additional paid-in capital ..................... 8,835 9,665
Retained earnings .............................. 12,407 14,514
Treasury stock at cost, 442,900 shares ......... (2,518) (2,518)
-------- --------
Total stockholders' equity .............. 18,764 21,702
-------- --------
Total liabilities and stockholders' equity $ 27,681 $ 31,229
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
----------------------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
System sales ............... $ 5,213 $ 7,415 $15,758 $19,826
Service and support ........ 3,427 4,292 10,195 11,919
------- ------- ------- -------
8,640 11,707 25,953 31,745
------- ------- ------- -------
Cost of revenue:
System sales ............... 3,065 3,739 9,065 10,839
Service and support ........ 1,766 2,427 5,246 6,386
------- ------- ------- -------
4,831 6,166 14,311 17,225
------- ------- ------- -------
Gross profit ........... 3,809 5,541 11,642 14,520
------- ------- ------- -------
Operating expenses:
Sales and marketing ........ 1,859 2,717 6,100 7,120
General and administrative . 555 699 1,739 2,087
Research and development ... 595 864 1,921 2,257
------- ------- ------- -------
3,009 4,280 9,760 11,464
------- ------- ------- -------
Operating income ....... 800 1,261 1,882 3,056
Interest income ............... 92 78 275 236
------- ------- ------- -------
Income before taxes ........... 892 1,339 2,157 3,292
Provision for income taxes .... 357 482 863 1,185
------- ------- ------- -------
Net income .................... $ 535 $ 857 $ 1,294 $ 2,107
======= ======= ======= =======
Basic earnings per share:
Net income per share .......... $ 0.14 $ 0.24 $ 0.33 $ 0.59
======= ======= ======= =======
Weighted average common
shares outstanding ......... 3,771 3,594 3,894 3,571
======= ======= ======= =======
Diluted earnings per share:
Net income per share .......... $ 0.14 $ 0.22 $ 0.33 $ 0.55
======= ======= ======= =======
Weighted average common
and common equivalent shares
outstanding ................ 3,821 3,969 3,922 3,884
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine Months Ended March 31,
-----------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 1,294 $ 2,107
------- -------
Adjustments to reconcile net income to net
cash provided by (used by) operating activities:
Depreciation and amortization .................. 727 1,095
Gain on sale of equipment ...................... (13) (3)
Provision for losses on accounts receivable .... 134 210
Decreases (increases) in operating assets:
Accounts receivable ............................ 1,599 (2,969)
Inventories .................................... 214 (610)
Prepaid expenses and other assets .............. 151 28
Increases (decreases) in operating liabilities:
Accounts payable ............................... (620) (209)
Accrued expenses ............................... (413) 440
Income taxes payable ........................... 668 137
Profit sharing plan contribution payable ....... (34) (5)
Deferred income ................................ 126 247
------- -------
Total adjustments .............................. 2,539 (1,639)
------- -------
Net cash provided by operating activities ........... 3,833 468
------- -------
Cash flows from (used by) investing activities:
Cash purchases of equipment .................... (881) (1,188)
Software development costs ..................... (1,162) (1,566)
Purchase of marketable securities .............. (4,000) (2,975)
Maturity of marketable securities .............. 2,500 5,470
------- -------
Net cash used by investing activities ............... (3,543) (259)
------- -------
Cash flows from financing activities:
Stock options exercised ........................ -- 831
Purchase of treasury stock ..................... (2,069) --
------- -------
Net cash (used by)provided by financing activities .. (2,069) 831
------- -------
Net (decrease) increase in cash and cash equivalents. (1,779) 1,040
Cash and cash equivalents at beginning of period .... 2,860 1,829
------- -------
Cash and cash equivalents at end of period .......... $ 1,081 $ 2,869
======= =======
Supplemental cash flow disclosures:
Income taxes paid .............................. $ 84 $ 1,046
======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
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PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Information for March 31, 1997 and 1998 is unaudited)
Note 1 -- Basis of Presentation:
- -------------------------------
The information presented for March 31, 1997 and 1998, and for the
three-month and the nine-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 March 31, 1998 and the
results of its operations and its cash flows for the three-month and the
nine-month periods ended March 31, 1997 and 1998. 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.
Note 2 -- Inventories (in thousands):
- ------------------------------------
A summary of the major components of inventories are as follows:
June 30, March 31,
--------- ------------
1997 1998
---- ----
Finished goods........................ $ 1,043 $ 1,721
Used equipment inventory.............. 74 6
--------- ---------
$ 1,117 $ 1,727
========= =========
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PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Information for March 31, 1997 and 1998 is unaudited)
(Continued)
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 only after technological feasibility has been
demonstrated. Beginning when the products are offered for sale, the software
development costs are amortized to cost of revenue on a straight-line basis over
the lesser of three years or the estimated economic lives of the products.
The unamortized portion of capitalized software development costs
amounted to $2,271 and $3,837 at June 30, 1997 and March 31, 1998, respectively.
Amortization of capitalized software development costs amounted to $0 and $107
in the year ended June 30, 1997, and the nine months ended March 31, 1998,
respectively. 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 may determine.
Note 5 -- Stock Repurchase Program:
- ----------------------------------
In fiscal 1997, the Company's Board approved resolutions to repurchase
up to 600,000 shares of its Common Stock in open market purchases. As of March
31, 1998, the Company repurchased an aggregate of 442,900 shares at a cost of
$2,518,000. All of such repurchases occurred during fiscal 1997. Such shares are
held in treasury.
Note 6 -- New Accounting Standards:
- ----------------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings per Share" ("SFAS 128") which has replaced the former rules
for earnings per share computations, presentation and disclosure. Under the 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 128 requires a
dual presentation of basic and diluted earnings per share on the face of the
income statement.
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<PAGE>
The Company has adopted SFAS 128 during fiscal year 1998 and, as
required by the standard, has restated all prior period earnings per share data.
The Company's new earnings per share amounts as calculated under SFAS 128 are
not materially different from those computed under the former accounting
standard.
The following table sets forth the computation of basic and dilutive
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended, Nine Months Ended,
--------------------------------- -----------------------------
March 31, March 31,
1997 1998 1997 1998
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<S> <C> <C> <C> <C>
Net Income ....................................... $ 535,000 $ 857,000 $ 1,294,000 $2,107,000
Weighted average common shares outstanding........ 3,771,000 3,594,000 3,894,000 3,571,000
Basic earnings common share....................... $ 0.14 $ 0.24 $ 0.33 $ 0.59
Effect of dilutive securities:
Stock Options ................................. 50,000 375,000 28,000 313,000(1)
Weighted average common and common equivalent
shares outstanding .......................... 3,821,000 3,969,000 3,922,000 3,884,000
Diluted earnings per share ....................... $ 0.14 $ 0.22 $ 0.33 $ 0.55
</TABLE>
(1) Options to purchase 25,000 shares of Common Stock with a weighted
average exercise price of $13.25 per share were outstanding during the first
nine months of fiscal 1998, but were not included in the computation of diluted
earnings per share because the exercise price of such options was greater than
the average market price of the Common Stock.
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130"), which was issued in June 1997, is effective
for fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
believes that it does not have a significant amount of comprehensive income
(loss), as defined, if any. Accordingly, the Company believes that this
statement will not have a material effect on its future financial statement
presentations.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") was also issued. This pronouncement is effective for fiscal years
beginning after December 15, 1997 and requires disclosures about operating
segments and enterprise-wide disclosures about products and services, geographic
areas and major customers. Effective July 1, 1998, the Company will comply with
the requirements of SFAS 131 and make the necessary disclosures.
- 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 Acclaim Systems,
maintenance contracts which provide for software support and equipment
maintenance, the sale of optional software products and services provided by the
Company's Educational Services division which began operations in fiscal 1998.
Each Prophet 21 Acclaim System includes the Prophet 21 Acclaim Software, an IBM
RISC System/6000 computer, various optional third party software products and
hardware components, training, support and installation. The Company's
Educational Services division develops a variety of educational tools and
programs to train customers in the Prophet 21 Systems. Such programs include
fully-interactive computer-based training, video training and nationwide
instructor-based training seminars. The Company'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.
In the second quarter of fiscal 1998, the Company introduced its newest
product, Servent, a fully-integrated Microsoft Windows NT-based client/server
software suite. Servent is targeted for medium-sized companies looking to
leverage the Windows NT client/server environment and integrate their financial
statements with order entry, inventory management and purchasing. The Servent
product is suitable for general business and distribution companies and should
enable the Company to expand its market within the general distribution
marketplace. The general release of Servent began in the third quarter of fiscal
1998.
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<PAGE>
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 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 March 31, 1997 and 1998
------------------------------------------
Revenue. Revenue increased by 35.5%, or $3,067,000, from $8,640,000 in
the three months ended March 31, 1997 ("Third Quarter of Fiscal 1997") to
$11,707,000 in the three months ended March 31, 1998 ("Third Quarter of Fiscal
1998"). System sales revenue increased by 42.2%, or $2,202,000, from $5,213,000
in the Third Quarter of Fiscal 1997 to $7,415,000 in the Third Quarter of Fiscal
1998. This increase was attributable primarily to the increase in sales of the
Company's Prophet 21 Acclaim product and to sales of the Company's new Servent
product, which began in the Third Quarter of Fiscal 1998. Also contributing to
the increase in system sales revenue was the increase in the sale of optional
Prophet 21 software. Service and support revenue increased by 25.2%, or
$865,000, from $3,427,000 in the Third Quarter of Fiscal 1997 to $4,292,000 in
the Third Quarter of Fiscal 1998. This increase was attributable primarily to an
increase in the number of new users who have entered into maintenance contracts,
an increase in services performed by the Company in connection with its new
Educational Services division and to services related to the Company's new
Servent product.
Gross profit. The Company's gross profit increased by 45.5%, or
$1,732,000, from $3,809,000 in the Third Quarter of Fiscal 1997 to $5,541,000 in
the Third Quarter of Fiscal 1998.
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<PAGE>
Gross profit margin increased from 44.1% of revenue in the Third Quarter of
Fiscal 1997 to 47.3% of revenue in the Third Quarter of Fiscal 1998. Gross
profit from system sales increased by 71.1%, or $1,528,000, from $2,148,000 in
the Third Quarter of Fiscal 1997 to $3,676,000 in the Third Quarter of Fiscal
1998. Gross profit margin attributable to system sales increased from 41.2% of
system sales revenue in the Third Quarter of Fiscal 1997 to 49.6% in the Third
Quarter of Fiscal 1998. The increases in such gross profit and gross profit
margin were attributable primarily to the sales of the Company's new Servent
product. Gross profit from service and support revenue increased by 12.3%, or
$204,000, from $1,661,000 in the Third Quarter of Fiscal 1997 to $1,865,000 in
the Third Quarter of Fiscal 1998. Gross profit margin attributable to service
and support revenue decreased from 48.5% of service and support revenue in the
Third Quarter of Fiscal 1997 to 43.5% of service and support revenue in the
Third Quarter of Fiscal 1998. The increase in such gross profit was attributable
primarily to an increase in the number of new users who have entered into
maintenance contracts. The decrease in such gross profit margin was attributable
primarily to an increase in salary and staffing expenses associated with the
Company's Servent support division.
Sales and marketing expenses. Sales and marketing expenses increased by
46.2%, or $858,000, from $1,859,000 in the Third Quarter of Fiscal 1997 to
$2,717,000 in the Third Quarter of Fiscal 1998, and increased as a percentage of
revenue from 21.5% to 23.2%, respectively. Such expenses increased in absolute
dollars and as a percentage of revenue due primarily to increased commission
expenses associated with the Company's increased sales and increased costs
associated with the Company's annual User's Conference, held in the Third
Quarter of Fiscal 1998.
General and administrative expenses. General and administrative
expenses increased by 25.9%, or $144,000, from $555,000 in the Third Quarter of
Fiscal 1997 to $699,000 in the Third Quarter of Fiscal 1998, but decreased as a
percentage of revenue from 6.4% to 6.0%, respectively. General and
administrative expenses increased in absolute dollars due primarily to increases
in compensation expenses, but decreased as a percentage of revenue as a result
of increased sales volume.
Research and development expenses. Research and development expenses
increased by 45.2%, or $269,000, from $595,000 in the Third Quarter of Fiscal
1997 to $864,000 in the Third Quarter of Fiscal 1998, and increased as a
percentage of revenue from 6.9% to 7.4%, 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. The Company also
capitalized $352,000 in software development expenditures during the Third
Quarter of Fiscal 1998.
Income taxes. The Company's effective tax rate was 40% and 36% in the
Third Quarter of Fiscal 1997 and 1998, respectively.
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<PAGE>
Nine Months Ended March 31, 1997 and 1998
-----------------------------------------
Revenue. Revenue increased by 22.3%, or $5,792,000, from $25,953,000 in
the first nine months of fiscal 1997 to $31,745,000 in the first nine months of
fiscal 1998. System sales revenue increased by 25.8%, or $4,068,000, from
$15,758,000 in the first nine months of fiscal 1997 to $19,826,000 in the first
nine months of fiscal 1998. This increase was attributable primarily to sales of
the Company's Prophet 21 Acclaim. Also contributing to the increase in system
sales revenue was the increase in the sale of optional Prophet 21 software and,
to a lesser extent, sales of the Company's new Servent product, which began in
the Third Quarter of Fiscal 1998. Service and support revenue increased by
16.9%, or $1,724,000, from $10,195,000 in the first nine months of fiscal 1997
to $11,919,000 in the first nine months of fiscal 1998. This increase was
attributable primarily to an increase in the number of new users who have
entered into maintenance contracts, an increase in services performed by the
Company in connection with its new Educational Services division and, to a
lesser extent, sales of services related to the Company's new Servent product.
Gross profit. The Company's gross profit increased by 24.7%, or
$2,878,000, from $11,642,000 in the first nine months of fiscal 1997 to
$14,520,000 in the first nine months of fiscal 1998. Gross profit margin
increased from 44.9% of revenue in the first nine months of fiscal 1997 to 45.7%
of revenue in the first nine months of fiscal 1998. Gross profit from system
sales increased by 34.3%, or $2,294,000, from $6,693,000 in the first nine
months of fiscal 1997 to $8,987,000 in the first nine months of fiscal 1998.
Gross profit margin attributable to system sales increased from 42.5% of system
sales revenue in the first nine months of fiscal 1997 to 45.3% in the first nine
months of fiscal 1998. The increases in such gross profit and gross profit
margin were attributable primarily to the increased sales of the Company's
Prophet 21 Acclaim product and to the sales of the Company's new Servent
product. Gross profit from service and support revenue increased by 11.8%, or
$584,000, from $4,949,000 in the first nine months of fiscal 1997 to $5,533,000
in the first nine months of fiscal 1998. Gross profit margin attributable to
service and support revenue decreased from 48.5% of service and support revenue
in the first nine months of fiscal 1997 to 46.4% in the first nine months of
fiscal 1998. The increase in such gross profit was attributable primarily to an
increase in the number of new users who have entered into maintenance contracts.
The decrease in such gross profit margin was attributable primarily to an
increase in salary and staffing expenses associated with the Company's
Educational Services division and Servent support division.
Sales and marketing expenses. Sales and marketing expenses increased by
16.7%, or $1,020,000, from $6,100,000 in the first nine months of fiscal 1997 to
$7,120,000 in the first nine months of fiscal 1998, but decreased as a
percentage of revenue from 23.5% to 22.4%, respectively. Such expenses increased
in absolute dollars due primarily to increased commission expenses associated
with the Company's increased sales, and to a lesser extent, increased costs
associated with the Company's annual User's Conference, held in the Third
Quarter of Fiscal 1998. Sales and marketing expenses decreased as a percentage
of revenue as a result of increased sales volume.
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<PAGE>
General and administrative expenses. General and administrative
expenses increased by 20.0%, or $348,000, from $1,739,000 in the first nine
months of fiscal 1997 to $2,087,000 in the first nine months of fiscal 1998, but
remained constant as a percentage of revenue at 6.6%. General and administrative
expenses increased in absolute dollars due primarily to increases in fees paid
to the Company's outside professionals and compensation expenses.
Research and development expenses. Research and development expenses
increased by 17.5%, or $336,000, from $1,921,000 in the first nine months of
fiscal 1997 to $2,257,000 in the first nine months of fiscal 1998, but decreased
as a percentage of revenue from 7.4% to 7.1%, respectively. Research and
development expenses increased in absolute dollars due primarily to an increase
in salary expenses and staffing. Research and development expenses decreased as
a percentage of revenue as a result of increased sales volume. The Company also
capitalized $1,565,000 in software development expenditures during the first
nine months of fiscal 1997.
Income taxes. The Company's effective tax rate was 40% and 36% in the
first nine months of fiscal 1997 and 1998, respectively.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has funded its operations primarily
from cash generated by operations and available cash. The Company's cash flow
provided by operations was $468,000 for the nine months ended March 31, 1998.
The Company's working capital was approximately $14,087,000 and
$12,653,000 at March 31, 1997 and 1998, respectively.
The Company invested $1,188,000 in capital equipment and leasehold
improvements in the nine months ended March 31, 1998. There are no other
material commitments for capital expenditures currently outstanding. The Company
also invested $1,566,000 in software development during the nine months
ended March 31, 1998.
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.
- 12 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits.
None.
(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.
- 13 -
<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: May 15, 1998 By: /s/ Charles L. Boyle, III
-------------------------
Charles L. Boyle, III,
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: May 15, 1998 By: /s/ Thomas M. Giuliani
----------------------
Thomas M. Giuliani,
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S FORM 10-Q FOR THE
PERIODS ENDED MARCH 31, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000917823
<NAME> Prophet 21, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> MAR-31-1998 MAR-31-1997
<EXCHANGE-RATE> 1,000 1,000
<CASH> 2,869 1,081
<SECURITIES> 1,143 7,442
<RECEIVABLES> 15,360 10,639
<ALLOWANCES> (429) (343)
<INVENTORY> 1,727 1,332
<CURRENT-ASSETS> 21,343 20,665
<PP&E> 3,863 2,989
<DEPRECIATION> (1,095) (727)
<TOTAL-ASSETS> 31,229 24,784
<CURRENT-LIABILITIES> 8,690 6,578
<BONDS> 0 0
0 0
0 0
<COMMON> 41 40
<OTHER-SE> 21,661 18,166
<TOTAL-LIABILITY-AND-EQUITY> 31,229 24,784
<SALES> 31,745 25,953
<TOTAL-REVENUES> 31,745 25,953
<CGS> 17,225 14,311
<TOTAL-COSTS> 17,225 14,311
<OTHER-EXPENSES> 11,464 9,760
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (236) (275)
<INCOME-PRETAX> 0 0
<INCOME-TAX> 1,185 863
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,107 1,294
<EPS-PRIMARY> 0.59<F1> 0.33 <F3>
<EPS-DILUTED> 0.55<F2> 0.33 <F4>
<FN>
<F1> This amount represents basic earnings per share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share."
<F2> This amount represents basic earnings per share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share."
<F3> This amount represents basic earnings per share in accordance with
accordance with the requirements of Statement of Financial Accounting
Standards No. 128 - "Earnings per Share."
<F4> This amount represents basic earnings per share in accordance with
accordance with the requirements of Statement of Financial Accounting
Standards No. 128 - "Earnings per Share."
</FN>
</TABLE>
