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 September 30, 2000
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:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 13, 2000:
Class Number of Shares
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Common Stock, $.01 par value 3,734,280
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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 (unaudited)
as of June 30, 2000 and September 30, 2000.................. 2
Consolidated Statements of Operations (unaudited)
for the three months ended September 30, 1999 and 2000...... 3
Consolidated Statements of Cash Flows (unaudited)
for the three months ended September 30, 1999 and 2000...... 4
Notes to Consolidated Financial Statements (unaudited)...... 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............... 7
PART II. OTHER INFORMATION........................................... 11
Item 6. Exhibits and Reports on Form 8-K............................ 11
SIGNATURES............................................................... 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 8,219 $ 8,938
Marketable securities................................ 2,415 3,105
Accounts receivable, net of allowance for
doubtful accounts of $398 and $276, respectively.. 12,869 8,668
Advanced billings.................................... 2,084 2,367
Inventories.......................................... 698 925
Deferred income taxes................................ 711 711
Prepaid and other current assets..................... 978 1,485
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Total current assets............................ 27,974 26,199
Long-term marketable securities......................... 4,620 3,420
Equipment and improvements, net......................... 3,078 3,159
Software development costs, net......................... 1,233 1,476
Other assets............................................ 268 252
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Total assets.................................... $ 37,173 $ 34,506
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... 2,385 2,476
Accrued expenses and other liabilities .............. 1,714 1,359
Commissions payable.................................. 549 207
Taxes payable........................................ 819 --
Profit sharing plan contribution payable ............ 158 153
Deferred income ..................................... 3,697 3,834
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Total current liabilities ...................... 9,322 8,029
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Deferred income taxes................................... 244 244
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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; 4,320,808 and 4,332,120 shares issued,
respectively; 3,720,818 and 3,732,130 outstanding,
respectively......................................... 43 43
Additional paid-in capital........................... 11,764 11,857
Retained earnings ................................... 19,935 18,455
Accumulated other comprehensive loss................. (121) (108)
Treasury stock at cost, 599,990 shares............... (4,014) (4,014)
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Total stockholders' equity ..................... 27,607 26,233
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Total liabilities and stockholders' equity ..... $ 37,173 $ 34,506
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
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1999 2000
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<S> <C> <C>
Revenue:
Software and hardware sales......................... $ 2,938 $ 1,797
Service and support................................. 6,348 6,411
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9,286 8,208
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Cost of revenue:
Software and hardware sales......................... 1,933 1,441
Service and support................................. 3,752 3,707
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5,685 5,148
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Gross profit.................................... 3,601 3,060
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Operating expenses:
Sales and marketing................................. 2,496 2,561
Research and development............................ 1,718 1,772
General and administrative.......................... 826 1,226
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5,040 5,559
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Operating loss.................................. (1,439) (2,499)
Interest income....................................... 60 186
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Loss before taxes..................................... (1,379) (2,313)
Income tax benefit.................................... (469) (833)
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Net loss.............................................. $ (910) $ (1,480)
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Basic loss per share:
Net loss per share.................................. $ (0.25) $ (0.40)
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Weighted average common shares outstanding.......... 3,594 3,723
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Diluted loss per share:
Net loss per share.................................. $ (0.25) $ (0.40)
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Weighted average common and common equivalent
shares outstanding............................... 3,594 3,723
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</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)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
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1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (910) $ (1,480)
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Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........................... 750 825
Provision for losses on accounts receivable............. 49 166
Decreases (increases) in operating assets:
Accounts receivable..................................... 4,722 4,035
Advanced billings....................................... (126) (283)
Inventories............................................. (444) (227)
Prepaid expenses and other current assets............... (221) (507)
Other assets............................................ 5 16
(Decreases) increases in operating liabilities:
Accounts payable........................................ (328) 91
Accrued expenses........................................ (478) (697)
Taxes payable........................................... (1,083) (819)
Profit sharing plan contribution payable................ (138) (5)
Deferred income......................................... 93 137
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Total adjustments....................................... 2,801 2,732
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Net cash provided by operating activities.................... 1,891 1,252
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Cash flows from investing activities:
Purchases of equipment and improvements, net............... (430) (551)
Software development costs................................. -- (563)
Maturity of marketable securities.......................... -- 475
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Net cash used by investing activities........................ (430) (639)
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Cash flows from financing activities:
Stock options exercised.................................... 24 24
Employee stock purchase plan............................... 55 69
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Net cash provided by financing activities.................... 79 93
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Effect of exchange rate changes on cash...................... -- 13
Net increase in cash and cash equivalents.................... 1,540 719
Cash and cash equivalents at beginning of period............. 2,520 8,219
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Cash and cash equivalents at end of period................... $ 4,060 $ 8,938
========= =========
Supplemental cash flow disclosures:
Income taxes paid.......................................... $ 403 $ 256
========= =========
</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
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(Unaudited)
(In Thousands, Except Shares)
NOTE 1 -- BASIS OF PRESENTATION:
The information presented for September 30, 2000, and for the three-month
periods ended September 30, 1999 and 2000, 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, 2000 and the results of its
operations and its cash flows for the three-month periods ended September 30,
1999 and 2000. 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,
2000, which were included as part of the Company's Annual Report on Form 10-K/A.
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:
The Company capitalizes software development costs associated with a new
product pursuant to SFAS No. 86 "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed". Such costs are capitalized only 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 costs ($320 for the quarters ended September
30, 1999 and 2000, respectively) is charged to cost of sales. For the quarters
ended September 30, 1999 and 2000, the Company capitalized $0 and $563,
respectively, of software development costs. All other research and development
costs have been expensed.
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When events or circumstances so indicate, the Company assesses the
potential impairment of its intangible assets and other long-lived assets based
on anticipated undiscounted cash flows from operations. Such events and
circumstances include a sale of all or a significant part of the operations
associated with the long-lived asset, or a significant decline in the operating
performance of the asset. If an impairment is indicated, the amount of
impairment charge would be calculated by comparing the anticipated discounted
future cash flows to the carrying value of the long-lived asset. At September
30, 2000, no impairment was indicated.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company provides enterprise software and service for the continuously
changing market demands of high-volume distribution-centric organizations in the
$1.7 trillion durable goods industry. Prophet 21 develops, markets and supports
a complete suite of fully integrated, industry-specific enterprise applications
consisting of order and inventory management, pricing and promotions, warehouse
automation, procurement, finance, business analysis and reporting, and customer
relationship modules. In addition, Prophet 21 provides industry-specific,
distribution-centric enterprise solutions for select markets including
industrial MRO (Manufacturer, Repair and Operations), electrical equipment,
plumbing supplies/HVAC, fasteners and building materials marketplace.
A significant portion of the Company's revenue is derived from the sale of
either Prophet 21 Acclaim or Prophet 21 CommerceCenter software solutions. Other
sources of revenue include: customer support maintenance contracts, equipment
maintenance (when purchased via Prophet 21), the sale of professional services
and optional third-party software products. 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 CommerceCenter solution
includes the Prophet 21 CommerceCenter software, training and support. The
Company 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.
Prophet 21 Acclaim is a complete distribution industry management solution
that combines the functionality of the traditional Prophet 21 System with the
technology of Progress Software. It has been designed so that current Prophet 21
users can move to this new product while preserving their existing technology
infrastructure.
Prophet 21 CommerceCenter utilizes the Microsoft Windows NT/Windows 2000
operating environment. Prophet 21 CommerceCenter is targeted for medium-sized
companies looking to solve their distribution-centric business requirements with
the Microsoft Windows NT/Windows 2000 operating environment. 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 CommerceCenter product is
suitable for distribution-oriented companies, as well as businesses that have a
distribution component of their own.
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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; and (vii) the Company's ability to develop, market, provide, and achieve
market acceptance of new service offerings to new and existing clients.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue. Revenue decreased by 11.6%, or $1,078,000, from $9,286,000 in the
three months ended September 30, 1999 ("First Quarter of Fiscal 2000") to
$8,208,000 in the three months ended September 30, 2000 ("First Quarter of
Fiscal 2001"). Software and hardware sales revenue decreased by 38.8%, or
$1,141,000, from $2,938,000 in the First Quarter of Fiscal 2000 to $1,797,000 in
the First Quarter of Fiscal 2001. This decrease was attributable primarily to a
decrease in volume due to the general slowdown in the ERP market due to the Y2K
issues. Another factor contributing to the decrease was a shift in demand to
e-commerce products. Service and support revenue increased by 1.0%, or $63,000,
from $6,348,000 in the First Quarter of Fiscal 2000 to $6,411,000 in the First
Quarter of Fiscal 2001. This increase was attributable primarily to an increase
in the number of new users who have entered into maintenance contracts.
Gross profit. The Company's gross profit decreased by 15.0%, or $541,000,
from $3,601,000 in the First Quarter of Fiscal 2000 to $3,060,000 in the First
Quarter of Fiscal 2001. Gross profit margin decreased from 38.8% of revenue in
the First Quarter of Fiscal 2000 to
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37.3% of revenue in the First Quarter of Fiscal 2001. Gross profit from software
and hardware sales decreased by 64.6%, or $649,000, from $1,005,000 in the First
Quarter of Fiscal 2000 to $356,000 in the First Quarter of Fiscal 2001. Gross
profit margin attributable to software and hardware sales decreased from 34.2%
in the First Quarter of Fiscal 2000 to 19.8% in the First Quarter of Fiscal
2001. The decrease in such gross profit and gross profit margin was attributable
primarily to a decrease in sales volume and the relatively fixed nature of
certain costs that are spread over a smaller sales base. Gross profit from
service and support revenue increased by 4.2%, or $108,000, from $2,596,000 in
the First Quarter of Fiscal 2000 to $2,704,000 in the First Quarter of Fiscal
2001. Gross profit margin attributable to service and support revenue increased
from 40.9% of service and support revenue in the First Quarter of Fiscal 2000 to
42.2% of service and support revenue in the First Quarter of Fiscal 2001. The
increase in such gross profit and gross profit margin was attributable primarily
to increased revenues which increased faster than the fixed expenses associated
with the delivery of service and support.
Sales and marketing expenses. Sales and marketing expenses increased by
2.6%, or $65,000, from $2,496,000 in the First Quarter of Fiscal 2000 to
$2,561,000 in the First Quarter of Fiscal 2001, and increased as a percentage of
revenue from 26.9% to 31.2%, respectively. Such expenses increased in absolute
dollars and as a percentage of revenue due primarily to increased compensation
expenses associated with staffing and increased investment in marketing.
Research and development expenses. Research and development expenses
increased by 3.1%, or $54,000, from $1,718,000 in the First Quarter of Fiscal
2000 to $1,772,000 in the First Quarter of Fiscal 2001, and increased as a
percentage of revenue from 18.5% to 21.6%, respectively. Research and
development expenses increased in absolute dollars and as a percentage of
revenue due primarily to an increase in contract services utilized in the first
quarter as the Company continues to invest in product development.
General and administrative expenses. General and administrative expenses
increased by 48.4%, or $400,000, from $826,000 in the First Quarter of Fiscal
2000 to $1,226,000 in the First Quarter of Fiscal 2001, and increased as a
percentage of revenue from 8.9% to 14.9%, respectively. General and
administrative expenses increased in absolute dollars and as a percentage of
revenue due primarily to increased professional fees and salaries.
Income taxes. The Company's effective tax rate was 34.0% and 36.0% in the
First Quarter of Fiscal 2000 and 2001, respectively.
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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 $1,891,000 and $1,252,000 for the three months
ended September 30, 1999 and 2000, respectively.
The Company's working capital was $17,931,000 and $18,170,000 at September
30, 1999 and 2000, respectively.
The Company invested $430,000 and $551,000 in capital equipment and
leasehold improvements in the three months ended September 30, 1999 and 2000,
respectively. There are no other material commitments for capital expenditures
currently outstanding.
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 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission Staff issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, is
required to be implemented no later than the quarter ended June 30, 2001. The
Company is currently analyzing the potential impact of SAB No. 101 (as amended)
on its revenue recognition policies. Although the Company believes its
historical accounting policies and practices conform with generally accepted
accounting principles, there can be no assurance that the formal implementation
of SAB No. 101 (as amended) will not result in changes to its historical
accounting policies and practices or to the manner in which certain transactions
are presented and disclosed in the consolidated financial statements.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule for the period ended September 30, 2000.
(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 14, 2000 By: /s/ Charles L. Boyle, III
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Charles L. Boyle, III,
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: November 14, 2000 By: /s/ Thomas M. Giuliani
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Thomas M. Giuliani,
Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
