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, 1999
Commission File No. 0-23306
PROPHET 21, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2746447
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
19 West College 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, 1999:
Class Number of Shares
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Common Stock, $.01 par value 3,741,027
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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, 1998 and
March 31, 1999 (unaudited)................................. 2
Consolidated Statements of Income
for the three months and the nine months ended
March 31, 1998 and 1999 (unaudited) ....................... 3
Consolidated Statements of Cash Flows
for the nine months ended
March 31, 1998 and 1999 (unaudited) ....................... 4
Notes to Consolidated Financial Statements
(unaudited) ............................................... 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition......... 7
Results of Operations...................................... 8
Liquidity and Capital Resources............................ 11
Year 2000 Compliance....................................... 11
PART II. OTHER INFORMATION.......................................... 13
Item 6. Exhibits and Reports on Form 8-K...................... 13
SIGNATURES................................................................ 14
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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<PAGE>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
--------- ----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 2,206 $ 1,350
Marketable securities................................... 1,555 835
Accounts receivable, net of allowance for
doubtful accounts of $240 and $501, respectively...... 17,201 15,502
Advanced billing........................................ 2,016 2,396
Inventories............................................. 1,402 1,840
Deferred income taxes................................... 203 203
Prepaid expenses and other current assets............... 797 1,168
-------- --------
Total current assets............................. 25,380 23,294
Long-term marketable securities........................... 2,825 4,575
Equipment and improvements, net........................... 2,887 3,130
Software development costs, net........................... 3,410 2,451
Other assets.............................................. 113 38
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Total assets..................................... $ 34,615 $ 33,488
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 3,690 $ 1,981
Accrued expenses and other liabilities.................. 1,540 889
Commissions payable..................................... 808 298
Sales taxes payable..................................... 650 440
Income taxes payable.................................... 18 --
Profit sharing plan contribution payable ............... 391 13
Deferred income ........................................ 2,451 2,650
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Total current liabilities ....................... 9,548 6,271
-------- --------
Deferred income taxes..................................... 1,211 1,211
-------- --------
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; 4,153,642 and 4,182,939 shares issued,
respectively; 3,710,742 and 3,740,039 shares
outstanding, respectively............................ 42 42
Additional paid-in capital.............................. 10,386 10,644
Retained earnings ...................................... 15,946 17,838
Treasury stock at cost, 442,900 shares.................. (2,518) (2,518)
-------- --------
Total stockholders' equity ...................... 23,856 26,006
-------- --------
Total liabilities and stockholders' equity ...... $ 34,615 $ 33,488
======== ========
</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 For the Nine Months
Ended March 31, Ended March 31,
------------------------ ---------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
System sales........................ $ 7,415 $ 6,039 $ 19,826 $ 19,344
Service and support................. 4,292 5,496 11,919 15,492
--------- ----------- ----------- -----------
11,707 11,535 31,745 34,836
--------- ----------- ----------- -----------
Cost of revenue:
System sales........................ 3,739 3,344 10,839 10,084
Service and support................. 2,344 2,617 6,155 7,345
--------- ----------- ----------- -----------
6,083 5,961 16,994 17,429
--------- ----------- ----------- -----------
Gross profit........................ 5,624 5,574 14,751 17,407
--------- ----------- ----------- -----------
Operating expenses:
Sales and marketing................. 2,717 2,971 7,120 8,476
Research and development............ 947 1,677 2,488 4,317
General and administrative.......... 699 706 2,087 2,053
--------- ----------- ----------- -----------
4,363 5,354 11,695 14,846
--------- ----------- ----------- -----------
Operating income................. 1,261 220 3,056 2,561
Interest income....................... 78 74 236 221
--------- ----------- ----------- -----------
Income before taxes................... 1,339 294 3,292 2,782
Provision for income taxes............ 482 96 1,185 890
--------- ----------- ----------- -----------
Net income............................ $ 857 $ 198 $ 2,107 $ 1,892
========= =========== =========== ===========
Basic earnings per share:
Net income per share.................. $ 0.24 $ 0.05 $ 0.59 $ 0.51
========= =========== =========== ===========
Weighted average common
shares outstanding.................. 3,594 3,733 3,571 3,725
========= =========== =========== ===========
Diluted earnings per share:
Net income per share.................. $ 0.22 $ 0.05 $ 0.55 $ 0.48
========= =========== =========== ===========
Weighted average common and
common equivalent shares
outstanding......................... 3,969 4,040 3,884 4,037
========= =========== =========== ===========
</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>
For the Nine Months Ended
March 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 2,107 $ 1,892
--------- ---------
Adjustments to reconcile net income to net
cash provided by (used by) operating activities:
Depreciation and amortization.......................... 1,095 1,893
Gain on sale of equipment.............................. (3) (3)
Provision for losses on accounts receivable............ 210 261
(Increases) Decreases in operating assets:
Accounts receivable.................................... (2,868) 1,438
Advanced billing....................................... (101) (380)
Inventories............................................ (610) (438)
Prepaid expenses and other current assets.............. 28 (371)
Other assets........................................... -- 75
(Decreases) Increases in operating liabilities:
Accounts payable....................................... (209) (1,709)
Accrued expenses....................................... 440 (1,161)
Taxes payable.......................................... 137 (228)
Profit sharing plan contribution payable............... (5) (378)
Deferred income........................................ 247 199
--------- ---------
Total adjustments...................................... (1,639) (802)
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Net cash provided by operating activities................... 468 1,090
--------- ---------
Cash flows from investing activities:
Cash purchases of equipment............................... (1,188) (1,354)
Software development costs................................ (1,566) --
Purchases of marketable securities........................ (2,975) (2,600)
Maturity of marketable securities......................... 5,470 1,750
--------- ---------
Net cash used by investing activities....................... (259) (2,204)
--------- ---------
Cash flows from financing activities:
Stock options exercised................................... 831 258
--------- ---------
Net cash provided by financing activities................... 831 258
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,040 (856)
Cash and cash equivalents at beginning of period............ 1,829 2,206
--------- ---------
Cash and cash equivalents at end of period.................. $ 2,869 $ 1,350
========= =========
Supplemental cash flow disclosures:
Income taxes paid......................................... $ 1,046 $ 1,393
========= =========
</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 March 31, 1998 and 1999 is unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The information presented for March 31, 1999, and for the three-month and
the nine-month periods ended March 31, 1998 and 1999, 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, 1999 and the
results of its operations and its cash flows for the three-month and the
nine-month periods ended March 31, 1998 and 1999. 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, 1998 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.
Certain items in prior period financial statements have been reclassified
for comparative purposes.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
NOTE 2 -- 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 were capitalized only after technological feasibility had
been demonstrated. Beginning when the products were 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.
Amortization of capitalized software development amounted to $959 in the
nine months ended March 31, 1999. All other research and development costs have
been expensed.
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PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for March 31, 1998 and 1999 is unaudited)
(Continued)
NOTE 3 -- 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 4 -- STOCK REPURCHASE PROGRAM:
In fiscal 1997, the Company's Board of Directors approved resolutions to
repurchase up to 600,000 shares of the Company's Common Stock in open market
purchases. The Company has repurchased an aggregate of 442,900 shares at a total
cost of $2,518,000. Such shares are held in treasury. The Company's last Common
Stock repurchase occurred in the fourth quarter of fiscal 1997.
NOTE 5 -- NEW ACCOUNTING STANDARDS:
In October 1997, the American Institute of Certified Public Accounts
issued Statement of Position (SOP) 97-2, Software Revenue Recognition. The
statement supersedes SOP 91-1 and provides specific industry guidance and
stipulates that revenue recognized from software arrangements is to be allocated
to each element of the arrangement based on the relative fair values of the
elements, such as software products, upgrades, enhancements, post contract
customer support, installation or training. Under SOP 97-2, the determination of
fair value is based on objective evidence which is specific to the vendor. The
Company offers the various elements individually, and has used the individual
prices as a basis for allocation of revenues. SOP 97-2 was adopted by the
Company effective July 1, 1998. The adoption of SOP 97-2 did not result in
significant changes to the Company's revenue recognition policy.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company provides innovative software solutions that meet the changing
business demands of distribution operations within the extended supply chain.
Prophet 21 develops, markets and supports a complete suite of Year 2000
compliant, distribution-centric enterprise applications for either Windows NT or
UNIX for finance, order management, inventory management, purchasing and
electronic commerce. In addition, Prophet 21 provides industry-specific,
distribution-centric enterprise solutions for select markets including
industrial, automotive, aerospace and defense, electrical supply, electronics,
and plumbing and HVAC.
The Company's revenue is derived primarily from the sale of either Prophet
21 Acclaim or Prophet 21 Wholesale (formerly known as Prophet 21 Servent)
Software Solutions. Other sources of revenue include: customer support
maintenance contracts, equipment maintenance (when purchased via Prophet 21),
the sale of optional third-party software products and training services
provided by the Company's Educational Services department which began operations
in fiscal 1998. Each Prophet 21 Acclaim Solution 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.
Each Prophet 21 Wholesale Solution includes the Prophet 21 Wholesale Software,
training, support and installation. The Company's Educational Services
department develops a variety of educational tools and programs to train
customers in the Prophet 21 Systems. Such programs include interactive
computer-based training, video training and remote training. 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.
In fiscal 1996, the Company introduced its next generation UNIX product,
Prophet 21 Acclaim. A complete distribution industry management solution 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 Prophet 21 XL customers. It has been
designed so that current XL users 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, Prophet 21 Wholesale, a fully integrated Microsoft Windows NT-based
client/server software suite. Prophet 21 Wholesale is targeted for medium-sized
companies looking to solve their distribution-centric business requirements with
a Windows NT client/server solution. These companies desire a solution that
provides a transaction-intensive sales order management and inventory management
solution to meet their customer service needs. They also require a solution that
integrates with an accounting solution and can be implemented in a
cost-effective manner. The Prophet 21 Wholesale product is suitable for
distribution-oriented companies, as well as businesses that have a distribution
component of their own. The general release of Prophet 21 Wholesale began in the
third quarter of fiscal 1998.
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The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) 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; (vii) the Company's ability to develop, market, provide, and achieve
market acceptance of new service offerings to new and existing clients; and
(viii) Year 2000 compliance of the Company's and other vendors' products and
related issues, including impact of the Year 2000 problem on customer buying
patterns.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
Revenue. Revenue remained relatively flat at $11,707,000 in the three
months ended March 31, 1998 ("Third Quarter of Fiscal 1998") and $11,535,000 in
the three months ended March 31, 1999 ("Third Quarter of Fiscal 1999"). System
sales revenue decreased by 18.6%, or $1,376,000, from $7,415,000 in the Third
Quarter of Fiscal 1998 to $6,039,000 in the Third Quarter of Fiscal 1999. Third
quarter performance of fiscal 1999 was attributable to the corporate focus on
larger system sales as well as changes made in preparation of Prophet 21
Wholesale's general release into the wholesale distribution market. Prophet 21
focused attention on larger accounts which typically require a longer sales
cycle than traditionally targeted Prophet 21 customers. Service and support
revenue increased by 28.1%, or $1,204,000 from $4,292,000 in the Third Quarter
of Fiscal 1998 to $5,496,000 in the Third Quarter of Fiscal 1999. This increase
was attributable primarily to an increase in the number of new users who have
entered into maintenance contracts and an increase in services performed by the
Company in connection with its consulting services and educational services.
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<PAGE>
Gross profit. The Company's gross profit remained relatively constant at
$5,624,000 in the Third Quarter of Fiscal 1998 and $5,574,000 in the Third
Quarter of Fiscal 1999. Gross profit margin increased slightly from 48.0% of
revenue in the Third Quarter of Fiscal 1998 to 48.3% of revenue in the Third
Quarter of Fiscal 1999. Gross profit from system sales decreased by 26.7%, or
$981,000, from $3,676,000 in the Third Quarter of Fiscal 1998 to $2,695,000 in
the Third Quarter of Fiscal 1999. Gross profit margin attributable to system
sales decreased from 49.6% of system sales revenue in the Third Quarter of
Fiscal 1998 to 44.6% in the Third Quarter of Fiscal 1999. The decrease in such
gross profit margin was attributable primarily to a change in the product mix
which favored the Acclaim product, which carries a lower margin. Gross profit
from service and support revenue increased by 47.8%, or $931,000, from
$1,948,000 in the Third Quarter of Fiscal 1998 to $2,879,000 in the Third
Quarter of Fiscal 1999. Gross profit margin attributable to service and support
revenue increased from 45.4% of service and support revenue in the Third Quarter
of Fiscal 1998 to 52.4% of service and support revenue in the Third Quarter of
Fiscal 1999. The increase in such gross profit and gross profit margin was
attributable primarily to (i) an increase in the number of new users who have
entered into maintenance contracts, (ii) an increase in consulting services
performed by the Company, and (iii) an increase in revenue from the Company's
education services. These increases were offset in part by the costs associated
with increased staffing required by the Company's continued growth.
Sales and marketing expenses. Sales and marketing expenses increased by
9.3%, or $254,000, from $2,717,000 in the Third Quarter of Fiscal 1998 to
$2,971,000 in the Third Quarter of Fiscal 1999, and increased as a percentage of
revenue from 23.2% to 25.8%, respectively. Such expenses increased in absolute
dollars and as a percentage of revenue due primarily to increased compensation
expenses associated with the Company's increased sales staffing and increased
investment in marketing.
Research and development expenses. Research and development expenses
increased by 77.1%, or $730,000, from $947,000 in the Third Quarter of Fiscal
1998 to $1,677,000 in the Third Quarter of Fiscal 1999, and increased as a
percentage of revenue from 8.1% to 14.5%, respectively. Research and development
expenses increased in absolute dollars and as a percentage of revenue due
primarily to an increase in salary expenses and staffing and the use of outside
professional services associated with the Company's new product release, Prophet
21 Wholesale.
General and administrative expenses. General and administrative expenses
remained virtually flat at $699,000 in the Third Quarter of Fiscal 1998 and
$706,000 in the Third Quarter of Fiscal 1999, and as a percentage of revenue at
6.0% and 6.1%, respectively. Increases in compensation expenses were offset in
part by decreased fees paid to the Company's outside professionals.
Income taxes. The Company's effective tax rate was 36.0% and 32.7% in the
Third Quarter of Fiscal 1998 and 1999, respectively.
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NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31,
1999
Revenue. Revenue increased by 9.7%, or $3,091,000 from $31,745,000 in the
first nine months of fiscal 1998 to $34,836,000 in the first nine months of
fiscal 1999. System sales revenue decreased by 2.4%, or $482,000, from
$19,826,000 in the first nine months of fiscal 1998 to $19,344,000 in the first
nine months of fiscal 1999. This decrease was attributable primarily to the
corporate focus on larger system sales as well as changes made in preparation of
Prophet 21 Wholesale's general release into the wholesale distribution market.
Prophet 21 focused attention on larger accounts which typically require a longer
sales cycle than traditionally targeted Prophet 21 customers. Service and
support revenue increased by 30.0%, or $3,573,000, from $11,919,000 in the first
nine months of fiscal 1998 to $15,492,000 in the first nine months of fiscal
1999. This increase was attributable primarily to an increase in the number of
new users who have entered into maintenance contracts and an increase in
services performed by the Company in connection with its education services and,
to a lesser extent, sales of consulting services.
Gross profit. The Company's gross profit increased by 18.0%, or $2,656,000,
from $14,751,000 in the first nine months of fiscal 1998 to $17,407,000 in the
first nine months of fiscal 1999. Gross profit margin increased from 46.5% of
revenue in the first nine months of fiscal 1998 to 50.0% of revenue in the first
nine months of fiscal 1999. Gross profit from system sales increased by 3.0%, or
$273,000, from $8,987,000 in the first nine months of fiscal 1998 to $9,260,000
in the first nine months of fiscal 1999. Gross profit margin attributable to
system sales increased from 45.3% of system sales revenue in the first nine
months of fiscal 1998 to 47.9% in the first nine months of fiscal 1999. The
increase in such gross profit and gross profit margin was attributable primarily
to favorable sales mix, with a larger percentage of revenue being derived from
sales of the Company's Prophet 21 Wholesale product and, to a lesser extent, to
increased sales of the Company's optional software offerings, each of which
carries higher margins. Gross profit from service and support revenue increased
by 41.3%, or $2,383,000, from $5,764,000 in the first nine months of fiscal 1998
to $8,147,000 in the first nine months of fiscal 1999. Gross profit margin
attributable to service and support revenue increased from 48.4% of service and
support revenue in the first nine months of fiscal 1998 to 52.6% in the first
nine months of fiscal 1999. The increase in such gross profit and gross profit
margin was attributable primarily to (i) an increase in the number of new users
who have entered into maintenance contracts, (ii) an increase in services
performed by the Company in connection with the general release of the Prophet
21 Wholesale and Prophet 21 Acclaim products, and (iii) an increase in revenue
from the Company's education services. These increases were offset in part by
the costs associated with increased staffing required by the Company's continued
growth.
Sales and marketing expenses. Sales and marketing expenses increased by
19.0%, or $1,356,000, from $7,120,000 in the first nine months of fiscal 1998 to
$8,476,000 in the first nine months of fiscal 1999, and increased as a
percentage of revenue from 22.4% to 24.3%, respectively. Such expenses increased
in absolute dollars and as a percentage of revenue due primarily to increased
compensation expenses associated with the Company's increased sales staffing and
increased investment in marketing.
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Research and development expenses. Research and development expenses
increased by 73.5%, or $1,829,000, from $2,488,000 in the first nine months of
fiscal 1998 to $4,317,000 in the first nine months of fiscal 1999, and increased
as a percentage of revenue from 7.8% to 12.4%, respectively. Research and
development expenses increased in absolute dollars and as a percentage of
revenue due primarily to an increase in salary expenses and professional fees
associated with the Company's new product release, Prophet 21 Wholesale.
General and administrative expenses. General and administrative expenses
decreased slightly by 1.6%, or $34,000, from $2,087,000 in the first nine months
of fiscal 1998 to $2,053,000 in the first nine months of fiscal 1999, and
decreased as a percentage of revenue from 6.6% to 5.9%, respectively. Increases
in compensation expenses were offset in part by decreased fees paid to the
Company's outside professionals. General and administrative expenses decreased
as a percentage of revenue primarily as a result of increased sales volume.
Income taxes. The Company's effective tax rate was 36.0% and 32.0% in the
first nine months of fiscal 1998 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily from
cash generated by operations and available cash, including funds raised in the
Company's initial public offering completed in March 1994. The Company's cash
flow provided by operations was $1,090,000 for the nine months ended March 31,
1999.
The Company's working capital was approximately $12,653,000 and $17,023,000
at March 31, 1998 and 1999, respectively.
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.
YEAR 2000 COMPLIANCE
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company believes that it
has sufficiently assessed its state of readiness with respect to its Year 2000
compliance. As the assessment was completed using internal personnel, costs and
time for such personnel were not specifically tracked. The Company, however,
estimates that such costs were immaterial.
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<PAGE>
There were no external costs incurred by the Company relating to its Year 2000
assessment. Costs incurred to date to address the Year 2000 problem have been
immaterial and the Company does not believe that Year 2000 compliance will
result in material investments by the Company in the future. The Company does
not believe that Year 2000 compliance will result in material investments by the
Company, nor does the Company anticipate that the Year 2000 Problem will have
any adverse effects on the business operations or financial performance of the
Company. The Company does not believe that it has any material exposure to the
Year 2000 Problem with respect to its own information systems and believes that
all of its business-critical systems correctly define the Year 2000 and
subsequent years. There can be no assurance, however, that the Year 2000 Problem
will not adversely affect the Company's business, operating results and
financial condition.
Some of the Company's older products, which are no longer sold, are not
Year 2000 compliant, however, the Company offers compliant upgrades for such
products. The Company believes that each of its current products is Year 2000
compliant, however, it has no control over whether software modification made by
third parties will be Year 2000 compliant. There can be no assurance that the
Company's products will not be integrated by the Company or its customers or
interact with non-compliant software or other products which may expose the
Company to claims. Additionally, there can be no assurance that such potential
instances of non-compliance will not adversely affect the Company's business,
operating results and financial condition. The Company has established no
reserve for auditing its software products or for correcting Year 2000
compliance issues with such products.
Although the Company believes its products are Year 2000 compliant, the
purchasing patterns of customers and potential customers may be affected by
issues associated with the Year 2000 Problem. As companies expend significant
resources to correct their current data storage solutions, these expenditures
may result in reduced funds to purchase products such as those offered by the
Company. There can be no assurance that the Year 2000 Problem will not adversely
affect the Company's business, operating results and financial condition.
Conversely, the Year 2000 Problem may cause other companies to accelerate
purchases, thereby causing an increase in short-term demand and a consequent
decrease in long-term demand for the Company's products.
- 12 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule for the period ended March 31, 1999.
(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 13, 1999 By:/s/ Charles L. Boyle, III
-----------------------------
Charles L. Boyle, III,
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: May 13, 1999 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
PERIOD ENDED MARCH 31, 1999 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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,350
<SECURITIES> 835
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<PP&E> 5,023
<DEPRECIATION> (1,893)
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0
0
<COMMON> 42
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<TOTAL-LIABILITY-AND-EQUITY> 33,488
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<OTHER-EXPENSES> 14,846
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<INTEREST-EXPENSE> (221)
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<EPS-PRIMARY> 0.51<F1>
<EPS-DILUTED> 0.48<F2>
<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."
</FN>
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