10-Q 1 a2070586z10-q.txt 10-Q CONFORMED COPY 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 December 31, 2001 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 Incorporation or (I.R.S. Employer Organization) Identification No.) 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 February 1, 2002: Class Number of Shares ----- ---------------- Common Stock, $.01 par value 3,810,638 PROPHET 21, INC. AND SUBSIDIARIES TABLE OF CONTENTS PAGE PART I FINANCIAL INFORMATION..................................................1 Item 1. Financial Statements..........................................1 Consolidated Balance Sheets as of June 30, 2001 and December 31, 2001 (unaudited)....................................2 Consolidated Statements of Operations (unaudited) for the three months and the six months ended December 31, 2000 and 2001...........................................3 Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2000 and 2001..................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....................................................15 Item 4. Submission of Matters to a Vote of Security Holders..........15 Item 6. Exhibits and Reports on Form 8-K.............................15 SIGNATURES...................................................................16 -i- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. -1- PROPHET 21, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts)

The accompanying notes are an integral part of these financial statements. -2- PROPHET 21, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands, Except Per Share Amounts)

The accompanying notes are an integral part of these financial statements. -3- PROPHET 21, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)

The accompanying notes are an integral part of these financial statements. -4- PROPHET 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (dollars in thousands, except shares) NOTE 1 -- BASIS OF PRESENTATION: The information presented for December 31, 2001, and for the three-month and the six-month periods ended December 31, 2000 and 2001, 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 a fair presentation of the Company's financial position as of December 31, 2001 and the results of its operations and its cash flows for the three-month and six-month periods ended December 31, 2000 and 2001. 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 consolidated financial statements for the year ended June 30, 2001, which were included as part of the Company's Annual Report on Form 10-K, as amended. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances have been eliminated. Certain items in the prior period consolidated 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 Statement of Financial Accounting Standards ("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. Under the provisions of SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the Company capitalizes costs associated with internally developed and/or purchased software systems for new products and enhancements to existing products that have reached the application development stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software, and payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use software project. -5- Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. These capitalized costs are amortized on a straight-line basis over the economic useful life of five years beginning when the asset is ready for its intended use. Amortization of capitalized software development costs ($320 and $185 for each of the quarters ended December 31, 2000 and 2001, respectively and $639 and $370 for each of the six months ended December 31, 2000 and December 31, 2001, respectively) is charged to cost of sales. For the six months ended December 31, 2000 and 2001, the Company capitalized $1,946 and $-0-, respectively, of software development costs. All other research and development costs have been expensed. 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 December 31, 2001, no impairment was indicated. NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142, "Goodwill and other Intangible Assets", which will be effective for the Company on July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company does not expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes both SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset -6- that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The Company is required to adopt SFAS No. 144 effective July 1, 2002. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of SFAS No. 144 will have on the Company's consolidated financial statements. -7- 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 CommerceCenter or Prophet 21 Acclaim software solutions and support maintenance contracts for those products. Other sources of revenue include: Trading Partner Connect products and services, equipment maintenance (when purchased via Prophet 21), the sale of professional services and optional third-party software products. Each Prophet 21 CommerceCenter solution includes the Prophet 21 CommerceCenter software, training and support. 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. 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 also 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. 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. 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 users of the traditional Prophet 21 System can move to the Prophet 21 Acclaim product while preserving their existing technology infrastructure. -8- Trading Partner Connect is aimed at streamlining the commerce process of this heavily fragmented marketplace through promoting collaborative commerce among manufacturers, distributors and customers, as well as establishing interconnectivity with leading Internet trading communities. Fully operable with Prophet 21 CommerceCenter or Prophet 21 Acclaim, Trading Partner Connect serves to preserve and enhance collaborative commerce among trading partners and streamline the procurement process between distributors and their suppliers. Forward Looking Statements 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. 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, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2001 REVENUE. Revenue decreased by 5.5%, or $616,000, from $11,101,000 in the three months ended December 31, 2000 ("Second Quarter of Fiscal 2001") to $10,485,000 in the three months ended December 31, 2001 ("Second Quarter of Fiscal 2002"). Software and hardware sales revenue decreased by 17.1%, or $666,000, from $3,894,000 in the Second Quarter of Fiscal 2001 to $3,228,000 in the Second Quarter of Fiscal 2002. This decrease was attributable primarily to decreased hardware costs paid by the Company which in turn has reduced its charges to its customers and to decreased third party peripheral software sales because of reduced demand for these products. Service and support revenue decreased by 8.4%, or $602,000, from $7,207,000 in the Second Quarter of Fiscal 2001 to $6,605,000 in the Second -9- Quarter of Fiscal 2002. This decrease was attributable primarily to a decrease in professional services related to the development of custom web sites, which services were made obsolete by the introduction of our Trading Partner Connect products. Trading Partner Connect revenue was $652,000 in the Second Quarter of Fiscal 2002. No revenue was derived from Trading Partner Connect in the Second Quarter of Fiscal 2001. GROSS PROFIT. The Company's gross profit decreased by 6.1%, or $358,000, from $5,897,000 in the Second Quarter of Fiscal 2001 to $5,539,000 in the Second Quarter of Fiscal 2002. Gross profit margin remained relatively constant at 53.1% of revenue in the Second Quarter of Fiscal 2001 compared to 52.8% of revenue in the Second Quarter of Fiscal 2002. Gross profit from software and hardware sales decreased by 16.9%, or $366,000, from $2,166,000 in the Second Quarter of Fiscal 2001 to $1,800,000 in the Second Quarter of Fiscal 2002. Gross profit margin attributable to software and hardware sales remained relatively constant at 55.6% in the Second Quarter of Fiscal 2001 compared to 55.8% in the Second Quarter of Fiscal 2002. Gross profit from service and support revenue decreased by 2.7%, or $99,000, from $3,731,000 in the Second Quarter of Fiscal 2001 to $3,632,000 in the Second Quarter of Fiscal 2002. Gross profit margin attributable to service and support revenue increased from 51.8% of service and support revenue in the Second Quarter of Fiscal 2001 to 55.0% of service and support revenue in the Second Quarter of Fiscal 2002. The increase in such gross profit margin was attributable primarily to the efficiencies gained through customer utilization of web-based support as opposed to manual telephone-based support. Gross profit from Trading Partner Connect revenue was $107,000 in the Second Quarter of Fiscal 2002. Gross profit margin attributable to Trading Partner Connect revenue was 16.4% in the Second Quarter of Fiscal 2002. SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased by 22.2%, or $598,000, from $2,692,000 in the Second Quarter of Fiscal 2001 to $2,094,000 in the Second Quarter of Fiscal 2002, and decreased as a percentage of revenue from 24.3% to 20.0%, respectively. Such expenses decreased in absolute dollars and as a percentage of revenue due primarily to a change in strategy in two areas. One is that marketing programs are now run internally, thereby eliminating outside marketing costs. The second is that the direct sales force is utilizing fewer but more senior sales professionals with more experience. These changes in strategy during the current fiscal year appear not to have caused any fall off in sales, nor does the Company anticipate any fall off in the future because of these changes. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by 6.2%, or $109,000, from $1,745,000 in the Second Quarter of Fiscal 2001 to $1,854,000 in the Second Quarter of Fiscal 2002, and increased as a percentage of revenue from 15.7% to 17.7%, respectively. Research and development expenses increased in absolute dollars and as a percentage of revenue due primarily to an increase in salaries. In addition, certain costs related to the creation of the Company's new Trading Partner Connect product were capitalized in the Second Quarter of Fiscal Year 2001, whereas no costs were capitalized in the Second Quarter of Fiscal Year 2002. The Company does not currently capitalize any research and development expenses. -10- GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased by 12.9%, or $155,000, from $1,203,000 in the Second Quarter of Fiscal 2001 to $1,048,000 in the Second Quarter of Fiscal 2002, and decreased as a percentage of revenue from 10.8% to 10.0%, respectively. General and administrative expenses decreased in absolute dollars and as a percentage of revenue due primarily to improvements in accounts receivable aging that resulted in a decrease in the allowance for bad debt. INCOME TAXES. The Company's effective tax rate was 36.1% and 35.9% in the Second Quarter of Fiscal 2001 and 2002, respectively. SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2001 REVENUE. Revenue increased by 9.0%, or $1,743,000, from $19,309,000 in the first six months of fiscal 2001 to $21,052,000 in the first six months of fiscal 2002. Software and hardware sales revenue increased by 16.2%, or $921,000 from $5,691,000 in the first six months of fiscal 2001 to $6,612,000 in the first six months of fiscal 2002. This increase was attributable primarily to an increase in the number of systems sold. Service and support revenue decreased by 4.2%, or $568,000, from $13,618,000 in the first six months of fiscal 2001 to $13,050,000 in the first six months of fiscal 2002. This decrease was attributable primarily to a decrease in professional services related to the development of custom web sites, which services were made obsolete by the introduction of our Trading Partner Connect products. Trading Partner Connect revenue was $1,390,000 in the first six months of fiscal 2002. No revenue was derived from Trading Partner Connect in the prior year. GROSS PROFIT. The Company's gross profit increased by 23.4%, or $2,099,000, from $8,957,000 in the first six months of fiscal 2001 to $11,056,000 in the first six months of fiscal 2002. Gross profit margin increased from 46.4% of revenue in the first six months of fiscal 2001 to 52.5% of revenue in the first six months of fiscal 2002. Gross profit from software and hardware sales increased by 52.4%, or $1,322,000, from $2,522,000 in the first six months of fiscal 2001 to $3,844,000 in the first six months of fiscal 2002. Gross profit margin attributable to software and hardware sales increased from 44.3% in the first six months of fiscal 2001 to 58.1% in the first six months of fiscal 2002. The increase in such gross profit and gross profit margin was attributable primarily to increased sales volume of higher margin items, such as the Company's enterprise software licenses and the fact that the capitalized software costs related to the Prophet 21 CommerceCenter product became fully amortized in the third quarter of fiscal 2001. Gross profit from service and support revenue increased by 8.0%, or $514,000, from $6,435,000 in the first six months of fiscal 2001 to $6,949,000 in the first six months of fiscal 2002. Gross profit margin attributable to service and support revenue increased from 47.3% of service and support revenue in the first six months of fiscal 2001 to 53.2% of service and support revenue in the first six months of fiscal 2002. The increase in such gross profit and gross profit margin was attributable primarily to the efficiencies gained through customer utilization of web-based support as opposed to manual telephone-based support. Gross profit from Trading Partner Connect revenue was $263,000 in the first six months of fiscal 2002. Gross profit margin attributable to Trading Partner Connect revenue was 18.9% in the first six months of fiscal 2002. -11- SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased by 20.3%, or $1,065,000, from $5,253,000 in the first six months of fiscal 2001 to $4,188,000 in the first six months of fiscal 2002, and decreased as a percentage of revenue from 27.2% to 19.9%, respectively. Such expenses decreased in absolute dollars and as a percentage of revenue due to a change in strategy in two areas. One is that marketing programs are now run internally, thereby eliminating outside marketing costs. The second is that the direct sales force is utilizing fewer but more senior sales professionals. These changes in strategy during the current fiscal year appear not to have caused any fall off in sales, nor does the Company anticipate any fall off in the future because of these changes. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by 7.9%, or $277,000, from $3,517,000 in the first six months of fiscal 2001 to $3,794,000 in the first six months of fiscal 2002, and decreased slightly as a percentage of revenue from 18.2% to 18.0%, respectively. Research and development expenses increased in absolute dollars due primarily to an increase in salaries in the first six months of fiscal 2002. In addition, certain costs related to the creation of the Company's new Trading Partner Connect product were capitalized in the first six months of fiscal 2001, whereas no costs were capitalized in the first six months of fiscal 2002. The Company does not currently capitalize any research and development expenses. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased by 6.1%, or $148,000, from $2,429,000 in the first six months of fiscal 2001 to $2,281,000 in the first six months of fiscal 2002, and decreased as a percentage of revenue from 12.6% to 10.8%, respectively. General and administrative expenses decreased in absolute dollars and as a percentage of revenue due to decreased salaries and to a lesser extent, to a decrease in bad debt expense. INCOME TAXES. The Company's effective tax rate was 36.0% and 36.0% in the first six months of fiscal 2001 and 2002, 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 $2,692,000 and $2,304,000 for the six months ended December 31, 2000 and 2001, respectively. The Company's working capital was $20,668,000 at December 31, 2001. The Company invested $1,696,000 and $72,000 in capital equipment and leasehold improvements and $1,946,000 and $0 for software development costs in the six months ended December 31, 2000 and 2001, 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 -12- 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 July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142, "Goodwill and other Intangible Assets", which will be effective for the Company on July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company does not expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes both SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The Company is required to adopt SFAS No. 144 effective July 1, 2002. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, -13- management cannot determine the potential effects that adoption of SFAS No. 144 will have on the Company's consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND PRACTICES Revenue from software arrangements involving multiple elements is allocated to each element based on vendor specific objective evidence of fair values of the elements. Software license revenue is recognized when a contract has been executed, the product has been shipped to customers, uncertainty surrounding customer acceptance becomes insignificant and collection of the related receivable is probable. Revenue allocated to hardware is recognized when the hardware is shipped, as the functionality of the hardware is not dependent on any other services provided by the Company. Revenue allocated to maintenance services is recognized ratably over the contract term and revenue allocated to professional services is recognized as the services are performed. The professional services that the Company provides to its customers are available from other vendors, and are not deemed to be essential to the functionality of any of the other elements. In addition, such professional services do not involve significant production, modification or customization of the underlying software. The Company amortizes capitalized costs associated with internally developed and/or purchased software systems for internal use over an estimated economic life of five years. It is reasonably possible that the remaining estimated economic life of the internal use software could be reduced significantly in the future due to the effects of obsolescence, technology, competition and other factors. -14- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. At the 2001 Annual Meeting of Stockholders of the Company, held on October 25, 2001, the following matters were approved by the requisite vote of the Stockholders, as follows: 1. Management's nominees, John E. Meggitt, Ph.D., Charles L. Boyle, III, Dorothy M. Meggitt, David D. Gathman, Daniel J. Malcolm and Donald M. Gleklen, were elected to fill the available positions as directors. Voting (expressed in number of shares) was as follows: Dr. Meggitt: 3,727,021 for, 9,650 against or withheld and no abstentions or broker non-votes; Mr. Boyle: 3,726,984 for, 9,687 against or withheld and no abstentions or broker non-votes; Mrs. Meggitt: 3,727,021 for, 9,650 against or withheld and no abstentions or broker non-votes; Mr. Gathman: 3,727,021 for, 9,650 against or withheld and no abstentions or broker non-votes; Mr. Malcolm: 3,727,021 for, 9,650 against or withheld and no abstentions or broker non-votes; and Mr. Gleklen: 3,727,021 for, 9,650 against or withheld and no abstentions or broker non-votes. 2. The Stockholders approved the ratification of KPMG LLP as the Company's independent public accountants for the fiscal year ending June 30, 2002. Voting (expressed in number of shares) was as follows: 3,728,461 for, 4,185 against and 4,025 abstentions or broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report on Form 10-Q is filed. -15- 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 14, 2002 By: /s/ Charles L. Boyle ---------------------------- Charles L. Boyle, III, President and Chief Executive Officer (Principal Executive Officer) DATE: February 14, 2002 By: /s/ Thomas M. Giuliani --------------------------- Thomas M. Giuliani, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) -16-

PROPHET 21 INC 10-Q