<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File No. 0-23306
PROPHET 21, INC.
------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2746447
- ------------------------------------ -----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
19 West College Ave., Yardley, Pennsylvania 19067
- -------------------------------------------- --------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 493-8900
---------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 1, 1996:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 3,919,500
Page 1 of 15 Pages
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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 of June 30, 1996 and
September 30, 1996 (unaudited)............................ 2
Consolidated Statements of Income
for the three months ended
September 30, 1995 and 1996 (unaudited)................... 3
Consolidated Statements of Cash Flows
for the three months ended
September 30, 1995 and 1996 (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......................................... 12
Item 6. Exhibits and Reports on Form 8-K...................... 12
SIGNATURES.......................................................... 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1996 1996
---- ----
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 2,860 $ 1,895
Marketable securities.................................... 5,795 6,862
Accounts receivable, net of allowance for
doubtful accounts of $209 and $281, respectively....... 12,029 11,645
Inventories.............................................. 1,546 1,485
Prepaid and other current assets......................... 618 371
---------- ----------
Total current assets................................. 22,848 22,258
Equipment and improvements, net............................. 2,242 2,281
Deferred income taxes....................................... 19 19
Software development costs.................................. 458 823
Other assets................................................ 265 247
---------- ----------
Total assets......................................... $25,832 $25,628
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................... $ 2,922 $ 2,534
Accrued expenses and other liabilities................... 957 754
Commissions payable...................................... 381 393
Taxes payable............................................ 391 409
Profit sharing plan contribution payable................. 250 308
Deferred income.......................................... 1,950 2,023
---------- ----------
Total current liabilities............................ 6,851 6,421
---------- ----------
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock -- $0.01 par value, 1,500,000
shares authorized; no shares issued or
outstanding............................................ -- --
Common stock -- $0.01 par value, 10,000,000 shares
authorized; 4,002,500 and 3,986,500 shares
issued and outstanding, respectively................... 40 40
Additional paid-in capital............................... 8,821 8,821
Retained earnings........................................ 10,120 10,430
Less: treasury stock at cost,
16,000 shares at September 30, 1996 -- (84)
---------- ----------
Total stockholders' equity........................... 18,981 19,207
---------- ----------
Total liabilities and stockholders' equity........... $ 25,832 $ 25,628
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
--------------------
1995 1996
---- ----
Revenue:
<S> <C> <C>
System sales............................ $5,108 $5,375
Service and support..................... 2,740 3,236
------ ------
7,848 8,611
Cost of revenue:
System sales............................ 2,696 3,087
Service and support..................... 1,468 1,712
------ ------
4,164 4,799
------ ------
Gross profit....................... 3,684 3,812
------ ------
Operating expenses:
Sales and marketing..................... 1,968 2,176
General and administrative.............. 546 593
Research and development................ 568 615
------ ------
3,082 3,384
------ ------
Operating income................... 602 428
Interest income........................... 109 89
------ ------
Income before taxes....................... 711 517
Provision for income taxes................ 282 207
------ ------
Net income................................ $ 429 $ 310
====== ======
Net income per share...................... $0.11 $0.08
====== ======
Weighted average common
and common equivalent shares
outstanding............................. 4,003 4,030
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In Thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------- ----------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................... $ 429 $ 310
------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........ 266 250
Provision for losses on
accounts receivable............... 36 72
Decreases (increases) in operating
assets:
Accounts receivable................. (1,033) 312
Inventories......................... (180) 61
Prepaid expenses and other assets... 199 132
Increases (decreases) in operating
liabilities:
Accounts payable.................... 204 (388)
Accrued expenses.................... (106) (247)
Income taxes payable................ 137 187
Profit sharing plan
contribution payable............... 89 57
Deferred income..................... 45 73
------- -------
Total adjustments................... (343) 509
Net cash provided by operating ------- -------
activities.............................. 86 819
------- -------
Cash flows from investing activities:
Cash purchases of equipment.......... (163) (335)
Software development costs........... -- (365)
Purchase of marketable securities.... (2,000) (2,000)
Maturity of marketable securities.... 1,000 1,000
------- -------
Net cash used by investing activities.... (1,163) (1,700)
------- -------
Cash flows from financing activities:
Purchase of treasury stock........... -- (84)
------- -------
Net cash used by financing activities.... -- (84)
Net decrease in cash and cash ------- -------
equivalents............................. (1,077) (965)
Cash and cash equivalents at beginning
of period............................... 7,064 2,860
------- -------
Cash and cash equivalents at end of
period.................................. $ 5,987 $ 1,895
Supplemental cash flow disclosures: ======= =======
Income taxes paid....................... $ 62 $ 19
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PROPHET 21, INC. AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1995 and 1996 is unaudited)
Note 1 -- Basis of Presentation:
The information presented for September 30, 1995 and 1996, and for the
three-month periods then ended, is unaudited, but, in the opinion of the
Company's management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for the fair presentation of the
Company's financial position as of September 30, 1996 and the results of its
operations and its cash flows for the three-month periods ended September 30,
1995 and 1996. 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,
1996, 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.
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PROPHET 21, INC. AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1995 and 1996 is unaudited)
Note 2 -- Inventories (in thousands):
A summary of the major components of inventories are as follows:
<TABLE>
<CAPTION>
June 30, September 30,
-------- -------------
1996 1996
-------- -------------
<S> <C> <C>
Finished goods $1,412 $1,359
Used equipment inventory 134 126
------ ------
$1,546 $1,485
====== ======
</TABLE>
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 are amortized commencing with product
introduction on a straight-line basis utilizing the estimated economic life of
three years. Amortization of capitalized software development is charged to
cost of sales. At June 30, 1996 and September 30, 1996, the Company had
capitalized $458 and $823 of software development costs, respectively, none of
which had been amortized. All other research and development costs have been
expensed.
Note 4 -- Stockholders' Equity:
Preferred Stock
The Company has an authorized class of 1,500,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board of Directors may determine.
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PROPHET 21, INC. AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1995 and 1996 is unaudited)
Note 5 -- Stock Repurchase Program:
In August 1996, the Company's Board approved a resolution to repurchase up
to 400,000 shares of its Common Stock in open market purchases. The Company
repurchased 16,000 shares at a cost of $84,000 during the first quarter of
fiscal 1997. As of November 1, 1996, the Company had repurchased an additional
67,000 shares at a cost of $375,125.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
The Company was founded in 1967 to provide custom programming services and,
in 1974, it began to design, develop, market and support automated business
management systems for distributors, wholesalers and dealers. The Company's
revenue is derived primarily from the sale of Prophet 21 Systems, maintenance
contracts which provide for software support and equipment maintenance and the
sale of optional software products. Each Prophet 21 System includes the Prophet
21 XL Software, an IBM RISC System/6000 computer, various optional third party
software products and hardware components, training, support and installation.
The Company's cost of revenue consists principally of the costs of hardware
components, customer support, installation and training and, to a lesser extent,
third party software.
The Company implemented a strategic decision early in 1992 to move from its
internally developed proprietary hardware system to an open system platform,
based on the UNIX/AIX operating system running on an IBM RISC System/6000
computer. The Company's adoption of an open system solution broadened the
market for the Prophet 21 System, facilitated greater customer acceptance and
allowed successful integration of industry standard third party software and
hardware.
In fiscal 1996, the Company introduced its next generation product, Prophet
21 Acclaim, a complete business management system that combines the
functionality of the traditional Prophet 21 System with the technology of
Progress Software Corporation's DBMS. Prophet 21 Acclaim is targeted for sales
to new and current customers. It has been designed so that current customers
can move to this new product while preserving their existing technology
infrastructure. Prophet 21 Acclaim is currently in beta testing, and the
Company estimates that it will begin a general release of the new product in the
second quarter of fiscal 1997. The timing of such release will depend upon
successful results from the beta program.
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Results of Operations
Three Months Ended September 30, 1995 Compared to Three Months Ended
September 30, 1996
Revenue. Revenue increased by 9.7%, or $763,000, from $7,848,000 in the
three months ended September 30, 1995 ("First Quarter of Fiscal 1996") to
$8,611,000 in the three months ended September 30, 1996 ("First Quarter of
Fiscal 1997"). System sales revenue increased by 5.2%, or $267,000, from
$5,108,000 in the First Quarter of Fiscal 1996 to $5,375,000 in the First
Quarter of Fiscal 1997. This increase was attributable primarily to sales
attributed to the beta release of the Company's new Prophet 21 Acclaim product.
The beta program includes a controlled number of customers. The general release
of Prophet 21 Acclaim is scheduled to begin in the second quarter of this fiscal
year. Also contributing to the increase in system sales revenue was the increase
in average selling price, which resulted from the Company's focus on larger
systems sales. Such increases were offset, in part, by lower sales volume of
Prophet 21 XL Software upgrades as many existing customers are evaluating
whether to upgrade to XL9, the latest version of the Company's current software
product, or purchase the new Prophet 21 Acclaim product. Service and support
revenue increased by 18.1%, or $496,000, from $2,740,000 in the First Quarter of
Fiscal 1996 to $3,236,000 in the First Quarter of Fiscal 1997. This increase was
attributable primarily to an increase in the number of new users who have
entered into maintenance contracts, and to a lesser extent, to the
implementation by the Company of a new maintenance program which offers multiple
levels of service at different prices.
Gross profit. The Company's gross profit increased by 3.5%, or $128,000,
from $3,684,000 in the First Quarter of Fiscal 1996 to $3,812,000 in the First
Quarter of Fiscal 1997. Gross profit margin decreased from 46.9% of revenue in
the First Quarter of Fiscal 1996 to 44.3% of revenue in the First Quarter of
Fiscal 1997. Gross profit margin attributable to system sales decreased from
47.2% of system sales revenue in the First Quarter of Fiscal 1996 to 42.6% in
the First Quarter of Fiscal 1997. The decrease in such gross profit margin was
attributable primarily to the decrease in the sales of certain Prophet 21
software upgrades which generally carry higher margins and, to a lesser extent,
the result of special pricing for the customers participating in the Prophet 21
Acclaim beta program. Gross profit margin attributable to service and support
revenue increased from 46.4% of service and support revenue in the First Quarter
of Fiscal 1996 to 47.1% in the First Quarter of Fiscal 1997. The increase in
such gross profit margin was attributable primarily to an increase in the number
of new users who have entered into the maintenance program, and to a lesser
extent, the implementation by the Company of a new maintenance program which
offers multiple levels of service at different prices.
Sales and marketing expenses. Sales and marketing expenses increased by
10.6%, or $208,000, from $1,968,000 in the First Quarter of Fiscal 1996 to
$2,176,000 in the First Quarter of Fiscal 1997, but remained relatively constant
as a percentage of revenue at 25.1% and 25.3%, respectively. The increase in
absolute dollars was attributable primarily to increased salesperson
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compensation and to increased marketing costs associated with the new Prophet 21
Acclaim product.
General and administrative expenses. General and administrative expenses
increased by 8.6%, or $47,000, from $546,000 in the First Quarter of Fiscal 1996
to $593,000 in the First Quarter of Fiscal 1997, but remained relatively
constant as a percentage of revenue at 7.0% and 6.9%, respectively. The
increase in absolute dollars in general and administrative expenses was due to
modest increases in salary expenses and staffing.
Research and development expenses. Research and development expenses
increased by 8.3%, or $47,000, from $568,000 in the First Quarter of Fiscal 1996
to $615,000 in the First Quarter of Fiscal 1997, but remained relatively
constant as a percentage of revenue at 7.2% and 7.1%, respectively. Research
and development expenses increased in absolute dollars due primarily to modest
increases in salary expenses and staffing. The Company also capitalized
$365,000 in software development expenditures during the First Quarter of Fiscal
1997.
Income taxes. The Company's effective tax rate was 39.7% and 40.0% in the
First Quarter of Fiscal 1996 and 1997, 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 from
operations was $819,000 for the three months ended September 30, 1996.
The Company's working capital was $15,997,000 and $15,837,000 at September
30, 1995 and 1996, respectively.
The Company invested $335,000 in capital equipment and leasehold
improvements in the three months ended September 30, 1996. There are no other
material commitments for capital expenditures currently outstanding. The Company
also invested $365,000 in software development during the three months ended
September 30, 1996.
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 August 1996, the Company's Board of Directors approved a resolution to
repurchase up to 400,000 shares of its Common Stock in open market purchases.
As of September 30, 1996, the Company had repurchased 16,000 shares at a cost of
$84,000. As of November 1, 1996, the Company repurchased an additional 67,000
shares at a cost of $375,125.
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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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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report on Form 10-Q is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Prophet 21, Inc.
DATE: November 13, 1996 By:/s/ Charles L. Boyle, III
--------------------------
Charles L. Boyle, III,
President and Chief
Executive Officer
(Principal Executive
Officer)
DATE: November 13, 1996 By:/s/ Thomas M. Giuliani
----------------------
Thomas M. Giuliani,
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,895
<SECURITIES> 6,862
<RECEIVABLES> 11,926
<ALLOWANCES> (281)
<INVENTORY> 1,485
<CURRENT-ASSETS> 22,258
<PP&E> 2,281
<DEPRECIATION> (250)
<TOTAL-ASSETS> 25,628
<CURRENT-LIABILITIES> 6,421
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 19,167
<TOTAL-LIABILITY-AND-EQUITY> 25,628
<SALES> 8,611
<TOTAL-REVENUES> 8,611
<CGS> 4,799
<TOTAL-COSTS> 4,799
<OTHER-EXPENSES> 3,384
<LOSS-PROVISION> 428
<INTEREST-EXPENSE> (89)
<INCOME-PRETAX> 517
<INCOME-TAX> 207
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
