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 December 31, 1997
Commission File No. 0-23306
PROPHET 21, INC.
(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 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 December 31, 1997:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 3,561,800
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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
December 31, 1997 (unaudited)....................... 2
Consolidated Statements of Income
for the three months and the six months ended
December 31, 1996 and 1997 (unaudited).............. 3
Consolidated Statements of Cash Flows
for the six months ended
December 31, 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
PART II. OTHER INFORMATION............................................ 13
Item 4. Submission of Matters to a Vote of
Security Holders........................... 13
Item 6. Exhibits and Reports on Form 8-K........... 14
SIGNATURES............................................................ 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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<TABLE>
<CAPTION>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................... $ 1,829 $ 176
Marketable securities .......................... 4,082 1,832
Accounts receivable, net of allowance for
doubtful accounts of $218 and $426,
respectively ................................. 12,172 12,993
Inventories .................................... 1,117 1,961
Deferred income taxes .......................... 163 163
Prepaid and other current assets ............... 437 314
-------- --------
Total current assets .................... 19,800 17,439
Long-term marketable securities ................... 2,835 3,810
Equipment and improvements, net ................... 2,536 2,697
Software development costs, net ................... 2,271 3,484
Other assets ...................................... 239 162
-------- --------
Total assets............................. $ 27,681 $ 27,592
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................ $ 3,367 $ 2,278
Accrued expenses and other liabilities ......... 1,171 752
Commissions payable ............................ 479 465
Taxes payable .................................. 620 400
Profit sharing plan contribution payable ....... 290 597
Deferred income ................................ 2,153 2,239
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Total current liabilities ............... 8,080 6,731
-------- --------
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; 4,004,700 shares issued; 3,561,800
shares outstanding .......................... 40 40
Additional paid-in capital ..................... 8,835 8,846
Retained earnings .............................. 12,407 13,656
Treasury stock at cost, 442,900 shares ......... (2,518) (2,518)
-------- --------
Total stockholders' equity .............. 18,764 20,024
-------- --------
Total liabilities and stockholders' equity $ 27,681 $ 27,592
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<CAPTION>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months For the Six Months
Ended December 31, Ended December 31,
----------------------------------------------
1996 1997 1996 1997
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Revenue:
System sales ............... $ 5,171 $ 6,428 $10,546 $12,411
Service and support ........ 3,532 3,885 6,768 7,627
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8,703 10,313 17,314 20,038
------- ------- ------- -------
Cost of revenue:
System sales ............... 2,914 3,646 6,001 7,100
Service and support ........ 1,767 2,008 3,479 3,959
------- ------- ------- -------
4,681 5,654 9,480 11,059
------- ------- ------- -------
Gross profit ........... 4,022 4,659 7,834 8,979
------- ------- ------- -------
Operating expenses:
Sales and marketing ........ 2,065 2,307 4,241 4,403
General and administrative . 591 734 1,184 1,388
Research and development ... 711 667 1,326 1,393
------- ------- ------- -------
3,367 3,708 6,751 7,184
------- ------- ------- -------
Operating income ....... 655 951 1,083 1,795
Interest income ............... 93 71 182 157
------- ------- ------- -------
Income before taxes ........... 748 1,022 1,265 1,952
Provision for income taxes .... 299 368 506 703
------- ------- ------- -------
Net income .................... $ 449 $ 654 $ 759 $ 1,249
======= ======= ======= =======
Basic earnings per share:
Net income per share .......... $ 0.11 $ 0.18 $ 0.19 $ 0.35
======= ======= ======= =======
Weighted average common
shares outstanding ......... 3,927 3,560 3,961 3,560
======= ======= ======= =======
Diluted earnings per share:
Net income per share .......... $ 0.11 $ 0.17 $ 0.19 $ 0.33
======= ======= ======= =======
Weighted average common
and common equivalent shares
outstanding ................ 3,985 3,879 3,985 3,835
======= ======= ======= =======
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)
Six Months Ended December 31,
-----------------------------
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 759 $ 1,249
------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 539 673
Provision for losses on accounts receivable .... 69 207
Decreases (increases) in operating assets:
Accounts receivable ............................ 1,578 (1,028)
Inventories .................................... (255) (844)
Prepaid expenses and other assets .............. 311 200
Increases (decreases) in operating liabilities:
Accounts payable ............................... (43) (1,089)
Accrued expenses ............................... (21) (433)
Income taxes payable ........................... 333 (77)
Profit sharing plan contribution payable ....... 127 164
Deferred income ................................ 148 86
------- -------
Total adjustments .............................. 2,786 (2,141)
------- -------
Net cash provided (used) by operating activities .... 3,545 (892)
------- -------
Cash flows from investing activities:
Cash purchases of equipment .................... (589) (784)
Software development costs ..................... (699) (1,213)
Purchase of marketable securities .............. (2,000) (1,475)
Maturity of marketable securities .............. 1,000 2,700
------- -------
Net cash used by investing activities ............... (2,288) (772)
------- -------
Cash flows from financing activities:
Stock options exercised ........................ -- 11
Purchase of treasury stock ..................... (837) --
------- -------
Net cash (used) provided by financing activities .... (837) 11
------- -------
Net increase (decrease) in cash and cash equivalents. 420 (1,653)
Cash and cash equivalents at beginning of period .... 2,860 1,829
------- -------
Cash and cash equivalents at end of period .......... $ 3,280 $ 176
======= =======
Supplemental cash flow disclosures:
Income taxes paid .............................. $ 40 $ 756
======= =======
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 December 31, 1996 and 1997 is unaudited)
Note 1 -- Basis of Presentation:
The information presented for December 31, 1996 and 1997, and for the
three-month and the six-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 December 31, 1997 and the
results of its operations and its cash flows for the three-month and the
six-month periods ended December 31, 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.
Note 2 -- Inventories (in thousands):
A summary of the major components of inventories are as follows:
June 30, December 31,
--------- ------------
1997 1997
---- ----
Finished goods........................ $ 1,043 $ 1,955
Used equipment inventory.............. 74 6
--------- ---------
$ 1,117 $ 1,961
========= =========
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PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for December 31, 1996 and 1997 is unaudited)
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 will be charged to
cost of sales. At June 30, 1997 and December 31, 1997, the Company had
capitalized $2,271 and $3,484 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 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
December 31, 1997, the Company had repurchased an additional 442,900 shares at a
cost of $2,518,000. 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.
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.
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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.
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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 (as defined below).
In the Second Quarter of Fiscal 1998 (as defined below), the Company
introduced its new 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
outside the distribution marketplace.
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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 December 31, 1996 and 1997
Revenue. Revenue increased by 18.5%, or $1,610,000, from $8,703,000 in
the three months ended December 31, 1996 ("Second Quarter of Fiscal 1997") to
$10,313,000 in the three months ended December 31, 1997 ("Second Quarter of
Fiscal 1998"). System sales revenue increased by 24.3%, or $1,257,000, from
$5,171,000 in the Second Quarter of Fiscal 1997 to $6,428,000 in the Second
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 sale of optional Prophet 21
software. Service and support revenue increased by 10.0%, or $353,000, from
$3,532,000 in the Second Quarter of Fiscal 1997 to $3,885,000 in the Second
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 its new
Educational Services division.
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<PAGE>
Gross profit. The Company's gross profit increased by 15.8%, or $637,000,
from $4,022,000 in the Second Quarter of Fiscal 1997 to $4,659,000 in the Second
Quarter of Fiscal 1998. Gross profit margin decreased from 46.2% of revenue in
the Second Quarter of Fiscal 1997 to 45.2% of revenue in the Second Quarter of
Fiscal 1998. Gross profit from system sales increased by 23.3%, or $525,000,
from $2,257,000 in the Second Quarter of Fiscal 1997 to $2,782,000 in the Second
Quarter of Fiscal 1998. Gross profit margin attributable to system sales
decreased from 43.6% of system sales revenue in the Second Quarter of Fiscal
1997 to 43.3% in the Second Quarter of Fiscal 1998. The increase in such gross
profit was attributable primarily to sales of the Company's new Prophet 21
Acclaim product. The decrease in such gross profit margin was attributable
primarily to a decrease in the average selling price of systems sold. Gross
profit from service and support revenue increased by 6.3%, or $112,000, from
$1,765,000 in the Second Quarter of Fiscal 1997 to $1,877,000 in the Second
Quarter of Fiscal 1998. Gross profit margin attributable to service and support
revenue decreased from 50.0% of service and support revenue in the Second
Quarter of Fiscal 1997 to 48.3% in the Second 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 increased investment
in the Company's Educational Services division.
Sales and marketing expenses. Sales and marketing expenses increased by
11.7%, or $242,000, from $2,065,000 in the Second Quarter of Fiscal 1997 to
$2,307,000 in the Second Quarter of Fiscal 1998, but decreased as a percentage
of revenue from 23.7% to 22.4%, respectively. Such expenses increased in
absolute dollars due primarily to increased compensation expenses associated
with the Company's increased sales. Sales and marketing expenses decreased as a
percentage of revenue as a result of increased sales volume.
General and administrative expenses. General and administrative
expenses increased by 24.2%, or $143,000, from $591,000 in the Second Quarter of
Fiscal 1997 to $734,000 in the Second Quarter of Fiscal 1998, and increased as a
percentage of revenue from 6.8% to 7.1%, respectively. General and
administrative expenses increased in absolute dollars and as a percentage of
revenue due primarily to increases in fees paid to the Company's outside
professionals and compensation expenses.
Research and development expenses. Research and development expenses
decreased by 6.2%, or $44,000, from $711,000 in the Second Quarter of Fiscal
1997 to $667,000 in the Second Quarter of Fiscal 1998, and decreased as a
percentage of revenue from 8.2% to 6.5%, respectively. Research and development
expenses decreased in absolute dollars and as a percentage of revenue due
primarily to a decrease in purchases of outside services related to the release
of the new Prophet 21 Acclaim product.
Income taxes. The Company's effective tax rate was 40.0% and 36.0% in
the Second Quarter of Fiscal 1997 and the Second Quarter of Fiscal 1998,
respectively.
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<PAGE>
Six Months Ended December 31, 1996 and 1997
Revenue. Revenue increased by 15.7%, or $2,724,000, from $17,314,000 in
the first six months of fiscal 1997 to $20,038,000 in the first six months of
fiscal 1998. System sales revenue increased by 17.7%, or $1,865,000, from
$10,546,000 in the first six months of fiscal 1997 to $12,411,000 in the first
six months 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 sale of optional Prophet 21
software. Service and support revenue increased by 12.7%, or $859,000, from
$6,768,000 in the first six months of fiscal 1997 to $7,627,000 in the first six
months 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 during the Second
Quarter of Fiscal 1997 and to an increase in services performed by the Company
in connection with its new Educational Services division.
Gross profit. The Company's gross profit increased by 14.6%, or $1,145,000,
from $7,834,000 in the first six months of fiscal 1997 to $8,979,000 in the
first six months of fiscal 1998. Gross profit margin decreased from 45.2% of
revenue in the first six months of fiscal 1997 to 44.8% of revenue in the first
six months of fiscal 1998. Gross profit from system sales increased by 16.9%, or
$766,000, from $4,545,000 in the first six months of fiscal 1997 to $5,311,000
in the first six months of fiscal 1998. Gross profit margin attributable to
system sales decreased from 43.1% of system sales revenue in the first six
months of fiscal 1997 to 42.8% in the first six months of fiscal 1998. The
increase in such gross profit was attributable primarily to the sales of the
Company's new Prophet 21 Acclaim product. The decrease in such gross profit
margin was attributable primarily to a decrease in the average selling price of
systems sold. Gross profit from service and support revenue increased by 11.5%,
or $379,000, from $3,289,000 in the first six months of fiscal 1997 to
$3,668,000 in the first six months of fiscal 1998. Gross profit margin
attributable to service and support revenue decreased from 48.6% of service and
support revenue in the first six months of fiscal 1997 to 48.1% in the first six
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 increased investment in the Company's Educational Services
division.
Sales and marketing expenses. Sales and marketing expenses increased by
3.8%, or $162,000, from $4,241,000 in the first six months of fiscal 1997 to
$4,403,000 in the first six months of fiscal 1998, but decreased as a percentage
of revenue from 24.5% to 22.0%, respectively. Such expenses increased in
absolute dollars due primarily to increased compensation expenses associated
with the Company's increased sales. Sales and marketing expenses decreased as a
percentage of revenue as a result of increased sales volume.
General and administrative expenses. General and administrative
expenses increased by 17.2%, or $204,000, from $1,184,000 in the first six
months of fiscal 1997 to $1,388,000 in the first six months of fiscal 1998, and
increased slightly as a percentage of revenue from 6.8% to
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6.9%, respectively. General and administrative expenses increased in absolute
dollars and as a percentage of revenue 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 5.1%, or $67,000, from $1,326,000 in the first six months of fiscal
1997 to $1,393,000 in the first six months of fiscal 1998, but decreased as a
percentage of revenue from 7.7% to 7.0%, 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.
Income taxes. The Company's effective tax rate was 40.0% and 36.0%
in the first six 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
used in operations was $892,000 for the six months ended December 31, 1997.
The Company's working capital was $15,252,000 and $10,708,000 at
December 31, 1996 and 1997, respectively.
The Company invested $784,000 in capital equipment and leasehold
improvements in the six months ended December 31, 1997. There are no other
material commitments for capital expenditures currently outstanding. The Company
also invested $1,213,000 in software development during the six months ended
December 31, 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 its Common Stock in open market purchases
not to exceed a purchase price of $6.00 per share. As of December 31, 1997, the
Company had repurchased 442,900 shares at a cost of $2,518,000. Such shares are
held in treasury.
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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<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on October
23, 1997.
There were 3,378,757 shares present at the meeting in person or by
proxy. The results of the vote taken at such meeting with respect to each
nominee for director were as follows:
Nominee For Withheld
- ------- --- --------
John E. Meggitt, Ph.D. 3,378,057 700
Charles L. Boyle, III 3,378,057 700
Dorothy M. Meggitt 3,378,057 700
Louis J. Cissone 3,378,057 700
Mark A. Timmerman 3,378,057 700
A vote was taken on the proposal to amend the Company's 1993 Stock Plan
to increase the number of shares of Common Stock reserved for issuance upon the
exercise of options granted under such plan from 600,000 to 1,000,000. Of the
3,378,757 shares present at the meeting in person or by proxy, 2,736,146 shares
were voted in favor of such proposal, 166,634 shares were voted against such
proposal, and 28,037 shares abstained from voting.
A vote was taken on the proposal to adopt the 1997 Employee Stock
Purchase Plan. Of the 3,378,757 shares present at the meeting in person or by
proxy, 2,883,480 shares were voted in favor of such proposal, 13,750 shares were
voted against such proposal, and 35,237 shares abstained from voting.
Finally, a vote was taken on the proposal to ratify the appointment of
Coopers & Lybrand L.L.P. as the independent auditors of the Company for the
fiscal year ending June 30, 1998. Of the 3,378,757 shares present at the meeting
in person or by proxy, 3,374,720 shares were voted in favor of such proposal,
1,500 shares were voted against such proposal, and 2,537 shares abstained from
voting.
- 13 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description of Exhibit
----------- ----------------------
4.1* 1997 Employee Stock Purchase Plan.
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.
- ------------------------------
* A management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 6(a) of Form 10-Q.
- 14 -
<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: February 13, 1998 By:/s/ Charles L. Boyle, III
-------------------------
Charles L. Boyle, III,
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: February 13, 1998 By:/s/ Thomas M. Giuliani
----------------------
Thomas M. Giuliani,
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
- 15 -
PROPHET 21, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
I. DEFINITIONS
--------------
Account means the Employee Stock Purchase Plan Account established for a
Participant under Section IX hereunder.
Board of Directors shall mean the Board of Directors of the Company.
Code shall mean the Internal Revenue Code of 1986, as amended.
Committee shall mean the Stock Purchase Plan Committee appointed and acting
in accordance with the terms of the Plan.
Common Stock shall mean shares of the Company's Common Stock, par value
$.01 per share, and any security into which such stock shall be converted or
shall become by reason of changes in its nature such as by way of
recapitalization, reclassification, changes in par value, merger, consolidation
or similar transaction.
Company shall mean Prophet 21, Inc., a Delaware corporation. When used in
the Plan with reference to employment, Company shall include Subsidiaries.
Compensation shall mean the total cash compensation paid to an Eligible
Employee by the Company, as reportable on IRS Form W-2. Notwithstanding the
foregoing, Compensation shall not include bonuses, overtime pay or commissions
based on sales.
Effective Date shall mean October 23, 1997.
Eligible Employees shall mean only those persons who, as of the first day
of a Purchase Period, are Employees of the Company and who are not, as of the
day preceding the first day of the Purchase Period, deemed for purposes of
Section 423(b)(3) of the Code to own stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company.
Employees shall mean all persons who are employed by the Company as
common-law employees, excluding persons (i) whose customary employment is 20
hours or less per week, or (ii) whose customary employment is for not more than
five months in a calendar year.
Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
<PAGE>
Exercise Date shall mean the last day of a Purchase Period.
Fair Market Value shall mean as of any date: (i) the average of the closing
bid and asked prices on such date of the Common Stock as quoted by Nasdaq; or
(ii), as the case may be, the last reported sales price of the Common Stock on
such date as reported by the Nasdaq National Market or the principal national
securities exchange on which such stock is listed and traded, or in each such
case where there is no trading on such date, on the first previous date on which
there is such trading.
Participant shall mean an Eligible Employee who elects to participate in
the Plan under Section VII hereunder.
Plan shall mean the Prophet 21, Inc. 1997 Employee Stock Purchase Plan, as
set forth herein and as amended from time to time.
Purchase Period shall mean (a) for 1997, the period commencing on the
Effective Date and ending on January 1, 1998; and (b) thereafter, purchase
periods shall be annual, semi-annual or quarterly, in each case as elected by
the Committee not less than 60 days in advance of the commencement of such
period. A Purchase Period shall begin on the first business day of, and end on
the last business day of, each such calendar period. In the absence of any such
election, Purchase Periods subsequent to the first period shall be for one
calendar year. The last Purchase Period under the Plan shall terminate on or
before the date of termination of the Plan provided in Section XXIII.
Subsidiary shall mean any corporation which is a subsidiary of the Company
within the meaning of Section 425(f) of the Code.
Termination of Service shall mean the earliest of the following events with
respect to a Participant: his retirement, death, quit, discharge or permanent
separation from service with the Company.
The masculine gender includes the feminine, the singular number includes
the plural and the plural number includes the singular unless the context
otherwise requires.
II. PURPOSE
-----------
It is the purpose of this Plan to provide a means whereby Eligible
Employees may purchase Common Stock through payroll deductions. It is intended
to provide a further incentive for Employees to promote the best interests of
the Company and to encourage stock ownership by Employees in order to
participate in the Company's economic progress.
- 2 -
<PAGE>
It is the intention of the Company to have the Plan qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Code and the
provisions of the Plan shall be construed in a manner consistent with the Code.
III. ADMINISTRATION
-------------------
The Plan shall be administered by a Committee selected by the Board of
Directors from among its members, which shall consist of not less than two
members. The Committee shall have authority to make rules and regulations for
the administration of the Plan, and its interpretation and decisions with regard
thereto shall be final and conclusive. The Committee shall have all necessary
authority to communicate, from time to time, with Eligible Employees and
Participants for purposes of administering the Plan, and shall notify Eligible
Employees promptly of its election of the term of each forthcoming Purchase
Period, if other than a calendar year, and of its election to utilize the Trust
Administration Option referred to in Section IX.
IV. SHARES
----------
There shall be 100,000 shares of Common Stock reserved for issuance to and
purchase by Participants under the Plan, subject to adjustment in accordance
with Section XXI hereof. The shares of Common Stock subject to the Plan shall be
either shares of authorized but unissued Common Stock or shares of Common Stock
reacquired by the Company. Shares of Common Stock involved in any unexercised
portion of any terminated option may again be subject to options to purchase
granted under the Plan.
V. PURCHASE PRICE
-----------------
The purchase price per share of the shares of Common Stock sold to
Participants under this Plan for any Purchase Period shall be the lesser of (a)
85% of the Fair Market Value of a share of Common Stock on the first day of such
Purchase Period, or (b) 85% of the Fair Market Value of a share of Common Stock
on the Exercise Date of such Purchase Period.
VI. GRANT OF OPTION TO PURCHASE SHARES
--------------------------------------
Each Eligible Employee shall be granted an option effective on the first
day of each Purchase Period to purchase a number of full shares of Common Stock
(subject to adjustment as provided in Section XXI). The maximum number of shares
an Eligible Employee shall be eligible to purchase for any Purchase Period is
$5,000 ($2,500 for a Purchase Period of six months or $1,250 for a Purchase
Period of three months) divided by 100% of the Fair Market Value of a share of
Common Stock on the first day of the Purchase Period.
- 3 -
<PAGE>
Anything herein to the contrary notwithstanding, if, as of the first day of
a Purchase Period, any Eligible Employee entitled to purchase shares hereunder
would be deemed for the purposes of Section 423(b)(3) of the Code to own stock
(including any number of shares which such person would be entitled to purchase
hereunder) possessing 5% or more of the total combined voting power or value of
all classes of stock of the Company, the maximum number of shares which such
person shall be entitled to purchase pursuant to the Plan shall be reduced to
that number which when added to the number of shares of stock of the Company
which such person is so deemed to own (excluding any number of shares which such
person would be entitled to purchase hereunder), is one less than such 5%.
VII. ELECTION TO PARTICIPATE
----------------------------
An Eligible Employee may elect to become a Participant in this Plan by
completing a "Stock Purchase Agreement" form prior to the first day of the
Purchase Period. In the Stock Purchase Agreement, the Eligible Employee shall
authorize regular payroll deductions from his Compensation subject to the
limitations in Section VIII below. Options granted to Eligible Employees who
fail to authorize payroll deductions will automatically lapse. If a
Participant's payroll deductions allow him to purchase fewer than the maximum
number of shares of Common Stock to which his option entitles him, the option
with respect to the shares which he does not purchase will lapse as of the last
day of the Purchase Period.
The execution and delivery of the Stock Purchase Agreement as between the
Participant and the Company shall be conditioned upon the compliance by the
Company at such time with Federal (and any applicable state) securities laws.
VIII. PAYROLL DEDUCTIONS
------------------------
An Eligible Employee may authorize payroll deductions from his Compensation
for each payroll period of a specified percentage of such Compensation, not less
than 1% and not more than 10%, in multiples of 1/2%.
The amount of payroll deduction shall be established at the beginning of a
Purchase Period and may not be altered, except for complete discontinuance under
Section XI, XIII or XIV hereunder.
IX. EMPLOYEE STOCK PURCHASE ACCOUNT
AND TRUST ADMINISTRATION OPTION
-----------------------------------
An Employee Stock Purchase Account will be established for each Participant
in the Plan. Payroll deductions made under Section VIII will be credited to the
individual Accounts. In the event the Committee determines with respect to any
Purchase Period, not to utilize the "Trust
- 4 -
<PAGE>
Administration Option" set forth in the next paragraph, no interest or other
earnings will be credited to a Participant's Account.
With respect to any one or more Purchase Periods, the Committee may elect
to utilize, in addition to the separate accounting for payroll deductions
provided in the Plan, the option to administer the funding of the Accounts
through a trust established pursuant to a trust agreement between the Company
and an institution exercising fiduciary powers (the "Trust Administration
Option") as hereinafter set forth in this paragraph. The Company shall provide
for the funding of each Account on a regular basis during each Purchase Period
reflecting payroll deductions of Participants and shall cause such sums to be
deposited within 15 days following such deductions in a trust account at such
institution and upon such terms as are established by the Committee. The trust
account assets shall be invested in shares of a tax-exempt money-market
registered investment company designated in the trust agreement, which
designation shall not be changed during the Purchase Period. Assets deposited in
the aforesaid trust account shall be commingled, but a separate accounting shall
be kept for each Participant's interest therein. Each Participant shall be
credited with his allocable share of the earnings of the trust account, which
credits shall be reflected in each Participant's Account balance hereunder. At
all times, the funds in such trust account shall be considered the property of
the respective Participants, and no part of the trust account assets may at any
time revert to, or be subject to any lien or claim of, the Company; provided,
however, that such trust account assets may be used only for the purchase of
shares as provided in Section X hereof or for withdrawal by or return to
Participants (or their beneficiaries) as provided in Sections XI, XIII or XXIII
hereof.
X. PURCHASE OF SHARES
---------------------
If, as of any Exercise Date, there is credited to the Account of a
Participant an amount at least equal to the purchase price of one share of
Common Stock for the current Purchase Period, as determined in Section V, the
Participant shall buy and the Company shall sell at such price the largest
number of whole shares of Common Stock which can be purchased with the amount in
his Account.
Any balance remaining in a Participant's Account at the end of a Purchase
Period will be carried forward into the Participant's Account for the following
Purchase Period. In no event will the balance carried forward be equal to or
exceed the purchase price of one share of Common Stock as determined in Section
V above. Notwithstanding the foregoing provisions of this paragraph, if as of
any Exercise Date the provisions of Section XV are applicable to the Purchase
Period ending on such Exercise Date, and the Committee reduces the number of
shares which would otherwise be purchased by Participants on such Exercise Date,
the entire balance remaining credited to the Account of each Participant after
the purchase of the applicable number of shares of Common Stock on such Exercise
Date shall be refunded to each such Participant. Except with respect to a
Purchase Period for which the Trust Administration Option has been elected, no
refund of an Account balance made pursuant to the Plan shall include any amount
in respect of interest or other imputed earnings.
- 5 -
<PAGE>
Anything herein to the contrary notwithstanding, no Participant may, in any
calendar year, purchase a number of shares of Common Stock under this Plan
which, together with all other shares of stock of the Company and its
Subsidiaries which he may be entitled to purchase in such year under all other
employee stock purchase plans of the Company and its subsidiaries which meet the
requirements of Section 423(b) of the Code, have an aggregate Fair Market Value
(measured as of the first day of each applicable Purchase Period) in excess of
$5,000. The limitation described in the preceding sentence shall be applied in a
manner consistent with Section 423(b)(8) of the Code.
XI. WITHDRAWAL
--------------
A Participant may withdraw from the Plan at any time prior to the Exercise
Date of a Purchase Period by filing a notice of withdrawal. Upon a Participant's
withdrawal, the payroll deductions shall cease for the next payroll period and
the entire amount credited to his Account shall be refunded to him. Any
Participant who withdraws from the Plan may again become a Participant hereunder
at the start of the next Purchase Period in accordance with Section VII.
XII. ISSUANCE OF STOCK CERTIFICATES
-----------------------------------
The shares of Common Stock purchased by a Participant shall, for all
purposes, be deemed to have been issued and sold at the close of business on the
Exercise Date. Prior to that date, none of the rights or privileges of a
stockholder of the Company shall exist with respect to such shares. Stock
certificates shall be registered either in the Participant's name or jointly in
the names of the Participant and his spouse, as the Participant shall designate
in his Stock Purchase Agreement. Such designation may be changed at any time by
filing notice thereof. Certificates representing shares of purchased Common
Stock shall be delivered promptly to the Participant following issuance.
XIII. TERMINATION OF SERVICE
----------------------------
(a) Upon a Participant's Termination of Service for any reason other than
retirement or death, no payroll deduction may be made from any Compensation due
him as of the date of his Termination of Service and the entire balance credited
to his Account shall be automatically refunded to him.
(b) Upon a Participant's retirement from the Company after age 55, no
payroll deduction shall be made from any Compensation due him as of the date of
his retirement. Such a Participant may, prior to Retirement, elect:
(1) to have the entire amount credited to his Account as of the date of
his retirement refunded to him, or
- 6 -
<PAGE>
(2) to have the entire amount credited to his Account held therein and
utilized to purchase shares on the Exercise Date as provided in
Section X.
(c) Upon the death of a Participant, no payroll deduction shall be made
from any Compensation due him at time of death, and the entire balance in the
deceased Participant's Account shall be paid to the Participant's designated
beneficiary, or otherwise to his estate.
XIV. TEMPORARY LAYOFF, AUTHORIZED LEAVE
OF ABSENCE, DISABILITY
---------------------------------------
Payroll deductions shall cease during a period of absence without pay from
work due to a Participant's temporary layoff, authorized leave of absence,
disability or for any other reason. If such Participant shall return to active
service prior to the Exercise Date for the current Purchase Period, payroll
deductions shall be resumed in accordance with his prior authorization.
If the Participant shall not return to active service prior to the Exercise
Date for the current Purchase Period, the balance of his Stock Purchase Account
will be used to purchase shares on the Exercise Date as provided in Section X,
unless the Participant elects to withdraw from the Plan in accordance with
Section XI.
XV. PROCEDURE IF INSUFFICIENT SHARES AVAILABLE
----------------------------------------------
In the event that on any Exercise Date the aggregate funds available for
the purchase of shares of Common Stock pursuant to Section X hereof would result
in purchases of shares in excess of the number of shares of Common Stock then
available for purchase under the Plan, the Committee shall proportionately
reduce the number of shares which would otherwise be purchased by each
Participant on the Exercise Date in order to eliminate such excess, and the
provisions of the second paragraph of Section X shall apply.
XVI. RIGHTS NOT TRANSFERABLE
----------------------------
The right to purchase shares of Common Stock under this Plan is exercisable
only by the Participant during his lifetime and is not transferable by him. If a
Participant attempts to transfer his right to purchase shares under the Plan, he
shall be deemed to have requested withdrawal from the Plan and the provisions of
Section XI hereof shall apply with respect to such Participant.
XVII. NO OBLIGATION TO EXERCISE OPTION
--------------------------------------
Granting of an option under this Plan shall impose no obligation on an
Eligible Employee to exercise such option.
- 7 -
<PAGE>
XVIII. NO GUARANTEE OF CONTINUED EMPLOYMENT
-------------------------------------------
Granting of an option under this Plan shall imply no right of continued
employment with the Company for any Eligible Employee.
XIX. NOTICE
-----------
Any notice which an Eligible Employee or Participant files pursuant to this
Plan shall be in writing and shall be delivered personally or by mail addressed
to the Committee, c/o Chief Executive Officer at 19 West College Avenue,
Yardley, Pennsylvania 19067, or such other person or location as may be
specified by the Committee.
XX. REPURCHASE OF STOCK
-----------------------
The Company shall not be required to repurchase from any Participant shares
of Common Stock acquired under this Plan.
XXI. ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC.
--------------------------------------------------
The aggregate number of shares of Common Stock which may be purchased
pursuant to options granted hereunder, the number of shares of Common Stock
covered by each outstanding option, and the purchase price thereof for each such
option shall be appropriately adjusted for any increase or decrease in the
number of outstanding shares of Common Stock resulting from a stock split or
other subdivision or consolidation of shares of Common Stock or for other
capital adjustments or payments of stock dividends or distributions or other
increases or decreases in the outstanding shares of Common Stock affected
without receipt of consideration of the Company.
Subject to any required action by the stockholders, if the Company shall be
the surviving corporation in any merger, reorganization or other business
combination, any option granted hereunder shall cover the securities or other
property to which a holder of the number of shares of Common Stock would have
been entitled pursuant to the terms of the merger. A dissolution or liquidation
of the Company or a merger or consolidation in which the Company is not the
surviving entity shall cause every option outstanding hereunder to terminate.
The foregoing adjustments and the manner of application of the foregoing
provisions shall be determined by the Committee in its sole discretion. Any such
adjustment shall provide for the elimination of any fractional share which might
otherwise become subject to an option.
- 8 -
<PAGE>
XXII. AMENDMENT OF THE PLAN
---------------------------
The Board of Directors may, without the consent of the Participants, amend
the Plan at any time, provided that no such action shall adversely affect
options theretofore granted hereunder, and provided that no such action by the
Board of Directors, without approval of the Company's stockholders, may:
(a) increase the total number of shares of Common Stock which may be
purchased by all Participants, except as contemplated in Section XXI;
(b) change the class of Employees eligible to receive options under the
Plan;
(c) decrease the minimum purchase price under Section V;
(d) extend a Purchase Period hereunder; or
(e) extend the term of the Plan.
XXIII. TERM OF THE PLAN
-----------------------
This Plan shall become effective as of the Effective Date upon its adoption
by the Board of Directors, provided that it is approved at a duly-held meeting
of stockholders of the Company, by an affirmative majority of the total votes
present and voting thereat, within 12 months after the earlier of the Effective
Date or the date of adoption by the Board of Directors. If the Plan is not so
approved, no Common Stock shall be purchased under the Plan and the balance of
each Participant's Account shall be promptly returned to the Participant. The
Plan shall continue in effect through the December 31st following the fourth
anniversary of the Effective Date, unless terminated prior thereto pursuant to
Section XV or XXI hereof, or pursuant to the next succeeding sentence. The Board
of Directors shall have the right to terminate the Plan at any time, effective
as of the next succeeding Exercise Date. In the event of the expiration of the
Plan or its termination, outstanding options shall not be affected, except to
the extent provided in Section XV and any remaining balance credited to the
Account of each Participant as of the applicable Exercise Date shall be refunded
to each such Participant.
- 9 -
<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-QSB FOR THE
PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000917823
<NAME> Prophet 21, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 176
<SECURITIES> 1,832
<RECEIVABLES> 13,419
<ALLOWANCES> (426)
<INVENTORY> 1,961
<CURRENT-ASSETS> 17,439
<PP&E> 3,370
<DEPRECIATION> (673)
<TOTAL-ASSETS> 27,592
<CURRENT-LIABILITIES> 6,731
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 19,984
<TOTAL-LIABILITY-AND-EQUITY> 27,592
<SALES> 20,038
<TOTAL-REVENUES> 20,038
<CGS> 11,059
<TOTAL-COSTS> 11,059
<OTHER-EXPENSES> 7,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (157)
<INCOME-PRETAX> 1,952
<INCOME-TAX> 703
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,249
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.33
</TABLE>
