PROPHET 21 INC, 10-K, 1997-09-05

PROPHET 21 INC
10-K, 1997-09-05
COMPUTER INTEGRATED SYSTEMS DESIGN

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

--------------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 1997
Commission file number 0-23306

PROPHET 21, INC.
-------------------------------------------------------------------
(Exact Name of Registrant as Specified In Its Charter)

Delaware 23-2746447
- ---------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

19 West College Avenue, Yardley, Pennsylvania 19067
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

(215) 493-8900
---------------------------------------
(Registrant's Telephone Number,
Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
----------------------- -----------------------

- ------------------------------- ----------------------------------

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

<PAGE>

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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]

State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $8,029,425 at August 15, 1997 based on the last sales price
on that date.

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of August 15, 1997:

Class Number of Shares
- ----- ----------------

Common Stock, $.01 par value 3,559,600

The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 1997 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.

- 2 -
<PAGE>

TABLE OF CONTENTS
-----------------

Item Page
---- ----

PART I 1. Business...................................................4

2. Properties................................................11

3. Legal Proceedings.........................................11

4. Submission of Matters to a Vote of Security Holders.......11

PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters...........................12

6. Selected Financial Data...................................13

7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................14

8. Financial Statements and Supplementary Data...............20

9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................20

PART III 10. Directors and Executive Officers of the Company...........21

11. Executive Compensation....................................21

12. Security Ownership of Certain Beneficial Owners and
Management................................................21

13. Certain Relationships and Related Transactions............21

PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...................................22

SIGNATURES.................................................................23

EXHIBIT INDEX..............................................................25

FINANCIAL DATA AND SCHEDULES..............................................F-1

- 3 -
<PAGE>

PART I

Item 1. Business.

General

Prophet 21, Inc. ("Prophet 21" or the "Company") is a provider of fully
integrated, on-line business management systems developed exclusively for use by
distributors and wholesalers. The Prophet 21 System is an enterprise-wide
solution consisting of business application software, business application
training, consulting, software customization, application hardware, system
installation and implementation services, supported by a dedicated customer
service organization. The Company addresses the automation needs of its
customers through a comprehensive, feature-rich and user-friendly computer
system. The system enhances a customer's efficiency and profitability by
performing critical business functions, including flexible order entry, customer
service, inventory management and control, integrated purchasing, accounting,
general ledger and electronic commerce such as EDI, VMI, DMI and internet
enablement. Prophet 21 offers a total solution for its customers, including
system design, configuration, installation, network communications, training,
support and maintenance.

Prophet 21 markets its products and services to approximately 45,000 of the
roughly 300,000 distributors and wholesalers operating in the United States and
Canada and, as of June 30, 1997, had an installed base of 1,550 systems across
the United States and Canada. The Company's customers vary in size from small
distributors and wholesalers with a few users to larger companies with several
hundred users linking multiple geographically dispersed branches. The Company
sells the Prophet 21 System through its 38-person direct sales force located in
sales and service offices throughout the United States to a wide range of
industry segments including industrial, electrical, plumbing, electronic,
hardware, heating and air conditioning, medical and dental, janitorial and
general distribution. The Company believes that one of its competitive
advantages is its accumulated knowledge of the distribution industry gained over
thirty years, which has enabled it to develop an industry-focused solution to
satisfy the needs of its customers.

The Company implemented a strategic decision early in 1992 to move from its
internally developed proprietary hardware system to an open system platform,
based on the UNIX/AIX operating system running on an IBM RS/6000 computer. The
Company's adoption of an open system solution broadened the market for the
Prophet 21 System, facilitated greater customer acceptance and allowed
successful integration of industry standard third-party software and hardware.

In fiscal 1996, the Company introduced its next generation product, Prophet
21 Acclaim, a complete business management system that combines the
functionality of the traditional Prophet 21 System with the technology of
Progress Software Corporation's DBMS. Prophet 21 Acclaim is targeted for sales
to new and current customers. It has been designed so that current customers can
move to this new product while preserving their existing technology
infrastructure. The general release of Prophet 21 Acclaim began late in the
second quarter of fiscal 1997.

- 4 -
<PAGE>

The Company is a holding company incorporated in Delaware in December 1993.
The principal operations of the Company are conducted through its indirect
wholly-owned subsidiary, Prophet 21 (New Jersey), Inc., a New Jersey corporation
incorporated in 1967 under the name Programmed Control Corporation.

Prophet 21 System, Prophet 21 Acclaim and the Company's logo are trademarks
of the Company. All other trademarks and trade names referred to in this Form
10-K are the property of the respective owners and are not the property of the
Company.

Prophet 21's Market

Of the roughly 300,000 distributors and wholesalers operating in the United
States and Canada, Prophet 21 markets its products and services to approximately
45,000 businesses in a wide range of industry segments including industrial,
electrical, plumbing, electronic, hardware, heating and air conditioning,
medical and dental, janitorial and general distribution. Distributors and
wholesalers warehouse products and handle the movement of large quantities of
inventory across a wide range of industries and play a critical role in the flow
of goods from manufacturers to retailers and consumers. The Company believes
that distributors and wholesalers increasingly are finding that the changing
business environment dictates the need for automated business management
systems.

The Company's target market is highly fragmented, consisting of companies
ranging from small one-location companies to multi-location distributors and
wholesalers. Distributors and wholesalers, regardless of size, tend to operate
with relatively low margins and, in order to compete effectively, must move
goods quickly at the least possible expense and maintain minimal inventories.
Distributors and wholesalers with multiple locations also must manage inventory
in a cost-effective manner across their various branches. In addition to the
competitive pressures inherent in the distribution industry, suppliers and
customers increasingly require that distributors and wholesalers possess
sophisticated technology, including EDI capabilities, which enable goods to be
ordered and billed computer-to-computer, and bar code labeling capabilities,
which allow for automated and accurate product tracking.

The Company believes that a majority of distributors and wholesalers
presently rely on ineffective or outmoded systems to manage their businesses. In
addition, changes in technology, evolving distributor needs and consolidation in
the distribution industry dictate that companies upgrade their computer systems
on a continuing basis in order to maintain a competitive edge.

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<PAGE>

The Prophet 21 System

The Prophet 21 System is an enterprise-wide solution consisting of business
application software, business application training, consulting, software
customization, application hardware, system installation and implementation
services. These products are supported by a dedicated customer service
organization. The Company has designed the system to address the business
management automation needs of distributors and wholesalers of all sizes. Set
forth below are several ranges of configurations of Prophet 21 Systems currently
offered by the Company:

Approximate Approximate Approximate Base
User Base Monthly Maintenance Contract
Capacity Price Range(1) Fee(1)
- ------------------ --------------------- -----------------------------

8 - 32 . $30,000 to $70,000 $350 to $650
32 - 80 $70,000 to $155,000 $850 to $1,400
80 - 128 $115,000 to $145,000 $1,400 to $1,900
128+ $ 225,000 $ 2,500+

(1) Actual prices and maintenance fees vary depending upon the size and
features of the system purchased, including optional software products and
hardware components.

Many of the features of the Prophet 21 System have been designed to meet
the specific needs of the distribution industry, with emphasis on features
automating order processing, inventory management and control, communications
networking and product pricing. In addition, the Company offers electronic
commerce such as EDI, VMI, DMI and internet enabling capabilities which provide
links between its customers and an expanding number of trading partners who are
their customers and suppliers.

The Company provides a single, comprehensive, feature-rich system. The
Company believes that this standardization permits systems to be installed
rapidly and supported effectively because installers, trainers and customer
support personnel have a high level of expertise with a single system. In
addition, this standardization permits the Company's customers to incorporate
readily the Company's periodic software enhancements. To facilitate the very
specific and unique needs of some of our customers the Company does provide
custom software modifications through a separate custom software department.

The Prophet 21 System's design facilitates its use by distributors and
wholesalers with multi-branch operations. The system permits distributors and
wholesalers to determine system-wide inventory status instantaneously and to
ship orders expeditiously and efficiently. The Prophet 21 System also allows for
centralized purchasing, inventory control, billing and accounting, thereby
eliminating certain branch-level expenses and permitting goods to be moved
quickly while minimizing inventories. The Company's communications capabilities
include configuration of wide area networks and integration with local area
networks.

The Prophet 21 System is an open system that allows the integration of
third-party software products such as report writers, faxing software, warehouse
automation, forms creation and executive information system. The Company has
successfully developed seamless integration to a number of third-party products.

- 6 -
<PAGE>

Sales and Marketing

The Company sells its products and services through its 38-person direct
sales force located in sales and service offices throughout the United States.
The field sales force is supervised by a Director of Sales and three other
regional sales managers who monitor and manage sales performance and assist in
sales activity under the direction of the Vice President of Sales. The Company's
direct sales force focuses on the distribution industry and understands the
specific needs and mission-critical applications of distributors and wholesalers
within targeted industry segments. The Company employs a solution selling
methodology. All sales personnel are trained and managed in accordance with this
doctrine. The Company believes that its direct sales approach leads to long-term
relationships with customers that increase customer satisfaction and provide
opportunities for follow-on sales to its existing customer base. The Company
believes that as the distribution industry continues to evolve and face new
challenges a knowledgeable and solutions oriented sales force should bring great
value to our customers.

The Company's marketing strategy is to provide focused marketing on the
industry segments served by the Company, in particular, the industrial,
electrical, plumbing and general distribution industries. The Company generates
leads through telemarketing, direct mail, advertising, national and regional
trade shows and Company-sponsored seminars.

The Company's marketing department has the responsibility of identifying
the market to be served by the Company's products and services. The marketing
department further guides the direction of the Company's products and services.
Information is gathered aggressively by the marketing department from the
Company's customer base and from the distribution market. This data is then
presented for consideration in regard to enhancing current products and for
creating new products.

Customers

The Company had, as of June 30, 1997, an installed base of approximately
1,550 systems. The Company's customers vary in size from small distributors or
wholesalers with a few users to larger companies with several hundred users
linking multiple geographically dispersed branches. Currently, approximately 50%
of the Company's customers have multiple locations connected by communications
networks. The Company serves a wide range of industry segments, including
industrial, electrical, plumbing, electronic, hardware, heating and air
conditioning, medical and dental, janitorial and general distribution. During
the three fiscal years ended June 30, 1997, no one customer accounted for 10% or
more of the Company's revenue.

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<PAGE>

Systems Training and Technical Support Services

A key element of the Company's business strategy is to provide extensive
training and support to its customers. The Company has established a customer
service and support, and installation organization, consisting of 121 persons,
that provides installation and post-sales support for systems under warranty or
maintenance contract.

Once Prophet 21 receives an order, the Company provides training and
consultation, including advice on how to best operate the customer's business
using the Prophet 21 System, before the system is installed. After installation,
the Company typically provides applications training at the customer's location.
Customers have telephone access and internet access to technical specialists who
respond to hardware, software and applications questions. These technical
support specialists diagnose and solve technical problems and assist customers
with systems integration and use. The Company tracks service reports through a
customer database which maintains current status reports as well as historical
logs of customer interaction.

The Company provides a one-year hardware warranty and a 90-day software
warranty. Ninety days after the sale, customers typically enter into a fee-based
maintenance contract covering software and hardware support. The Company offers
software enhancements at discounted prices to customers who have entered into
maintenance contracts. As of June 30, 1997, approximately 85% of the Company's
customers were covered by maintenance contracts following the initial warranty
period. There can be no assurance, however, that customers will continue to
enter into maintenance contracts at this rate. Maintenance contracts have an
initial term of one year and continue thereafter unless terminated.

Prophet 21 conducts annual international user conferences to provide
training, exchange of ideas and demonstrations of new products and features. The
Company also conducts regional training and support conferences.

Software Development

The distribution industry is characterized by changing needs and the
Company's success depends, to a large extent, on its ability to continually
modify and enhance its software to meet such changing needs. The Company places
great emphasis on software development and expects to continue to introduce
modifications or enhancements to its software on a periodic basis. The Company
presently releases a modified or enhanced version of the Prophet 21 Software
approximately every eight to twelve months. The Company identifies customer and
marketplace product needs by direct and frequent interaction with users of the
Prophet 21 System, through customer satisfaction surveys and by following the
trends of the distribution market. In fiscal 1997, the Company released XL9, the
latest version of the Prophet 21 XL Software incorporating many new features and
enhancements. In addition, the Company develops modifications and enhancements
to its software to address the specific needs of targeted segments in order to
continue to increase the number of features and improve the applications for
such industry segments. Fifty employees are directly involved in programming and
software development.

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<PAGE>

The Company's research and development expenses were approximately $2.9
million, $2.2 million and $2.7 million in the fiscal years ended June 30, 1995,
1996 and 1997, respectively. In 1996, the Company also began capitalizing
certain software development costs. Such capitalized software development costs
amounted to $458,000 and $1,813,000 in the fiscal years ended June 30, 1996 and
1997, respectively.

Assembly and Suppliers

The Company relies on third-party vendors to develop, manufacture and
supply all of the hardware components of the Prophet 21 System. Manufacturing by
the Company consists of light assembly and systems integration.

The Company believes that several vendors are capable of providing most of
the components and parts used in the Company's systems. In certain instances,
despite the availability of multiple sources, the Company elects to procure
certain components or parts from a single source to maintain quality control or
to develop a strategic relationship with a supplier. The Company has not entered
into any long-term supply contracts with its vendors, electing to purchase
components and parts on a purchase order basis. As a result, the Company has no
assurance that components and parts will be available as required, or that
prices of such components and parts will not increase. In addition, certain
components of the Prophet 21 System, including IBM RS/6000 computers and
Progress software, are available only from a single source.

In July 1991, Prophet 21 entered into an Authorized Dealers and Industry
Remarketers Agreement with IBM. The agreement grants to the Company a
non-exclusive right to purchase and license certain hardware products from IBM,
including IBM RS/6000 computers, for remarketing by the Company in the United
States. Although the agreement contains no minimum purchase requirements, the
volume of systems purchased by Prophet 21 affects the percentage discount
received by the Company and may be a factor considered by IBM in connection with
Prophet 21's continued authorization as an IBM industry remarketer. The
agreement is subject to annual renewal and may be terminated by IBM with or
without cause on three-months written notice. During the fiscal years ended
June 30, 1996 and 1997, the Company's hardware purchases from IBM totaled $5.2
million and $5.4 million, respectively.

Backlog

The Company normally ships systems within 30 days of receiving an order
and, therefore, does not customarily have a significant backlog.

- 9 -
<PAGE>

Competition

The market for business management automation systems for the distribution
industry is highly competitive. The Company believes that it has approximately
30 direct competitors, represented by a mix of small, closely-held companies and
divisions of larger companies that sell software or systems directly competitive
with those of the Company. Certain of such competitors serve only a limited
number of industry segments within the distribution industry.

The Company believes that the principal competitive factors in the
distributor and wholesaler automation industry include product features,
technical capabilities, system price/performance, vendor and product reputation,
financial stability, customer service and support, and timeliness of product
modifications and enhancements and that it competes effectively with respect to
all of these factors.

Intellectual Property

The Company's success is heavily dependent upon its intellectual property,
including its software technology. Prophet 21 relies principally on a
combination of copyright, trademark and trade secret laws, employee and
third-party non-disclosure agreements, and license agreements to protect its
intellectual property. Nonetheless, there can be no assurance that the steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation or unlawful copying of its technology or software
programs. Copyright and trade secret laws do not limit the rights of others to
independently develop similar technology and software programs. Although the
Company believes that its software products do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future.

The Company believes that, due to the rapid pace of innovation within the
computer industry, factors such as technological and creative skill of
personnel, knowledge and experience of management, reputation, maintenance and
support and the ability to develop, enhance, market and acquire software
products and services are more important for establishing and maintaining a
competitive position within the industry than are patent, copyright and other
legal protections for its technology.

Employees

As of June 30, 1997, the Company employed 249 persons full-time, of whom 49
were engaged in sales and marketing; 121 were engaged in customer service and
support, and installation; 50 were engaged in programming and software
development and quality assurance; and 29 were engaged in finance,
administration and management. In addition, 29 were employed on a part-time
basis (18 of whom were engaged in administrative functions). None of the
Company's employees are covered by collective bargaining agreements. The Company
believes that it has been successful in attracting skilled personnel.
Competition for experienced sales and marketing personnel and software
programmers is intense. The Company's future success will depend in part on its
ability to continue to attract, retain and motivate highly qualified personnel.
The Company considers relations with its employees to be good.

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<PAGE>

Item 2. Properties.

The Company leases facilities in Yardley, Pennsylvania totaling 60,000
square feet from Dr. John E. Meggitt, the Company's Chairman of the Board, and
Mrs. Dorothy M. Meggitt, the Company's Secretary. This lease expires on June 30,
1998 and contains a renewal option for an additional five-year term. The leased
space in Pennsylvania is used for administration, a substantial portion of sales
and marketing, customer service and support, assembly, quality assurance and
software development. The Company also leases sales and service offices in
Atlanta and Chicago.

Item 3. Legal Proceedings.

There is no material litigation pending to which the Company is a party or
to which any of its property is subject.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

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<PAGE>

PART II

Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.

Prior to March 1994, there was no established market for the Company's
Common Stock. Since March 11, 1994, the Common Stock has traded on the Nasdaq
National Market ("NNM") under the symbol "PXXI."

The following table sets forth the high and low sales prices for the Common
Stock for each of the quarters since the quarter ended September 30, 1995 as
reported on NNM. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

Quarter Ended High Low
- ------------------------------- ----------------- -----------------

September 30, 1995 $ 5.25 $ 4.375
December 31, 1995 $ 5.25 $ 4.125
March 31, 1996 $ 5.50 $ 4.375
June 30, 1996 $ 6.50 $ 4.125
September 30, 1996 $ 6.25 $ 4.75
December 31, 1996 $ 6.50 $ 5.00
March 31, 1997 $ 6.50 $ 5.625
June 30, 1997 $ 6.00 $ 4.50

As of August 15, 1997, the approximate number of holders of record of the
Common Stock was 180 and the approximate number of beneficial holders of the
Common Stock was 1,000.

The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain any future earnings to finance the growth of
the business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.

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<PAGE>

Item 6. Selected Financial Data.

The following table sets forth selected consolidated historical financial
data of the Company as of the dates and for the periods indicated. The selected
financial data set forth below for the Company as of June 30, 1996 and 1997 and
for each of the three years ended June 30, 1997 are derived from the audited
financial statements included elsewhere herein. The selected financial data set
forth below for the Company for each of the two years ended June 30, 1994 are
derived from the financial statements not included elsewhere herein. The
selected financial information should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto appearing elsewhere
herein. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations," which are included elsewhere in this Annual Report
on Form 10-K.

Fiscal Year Ended June 30,
1993 1994(1) 1995 1996 1997
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
Statement of Operations Data:
Revenue:
<S> <C> <C> <C> <C> <C>
System sales ...................... $ 21,688 $ 27,871 $ 21,295 $ 20,905 $ 22,537
Service and support ............... 8,645 9,598 9,948 12,145 13,866
-------- -------- -------- -------- --------
30,333 37,469 31,243 33,050 36,403
-------- -------- -------- -------- --------
Cost of revenue:
System sales ...................... 11,937 14,563 12,610 11,672 12,640
Service and support ............... 4,460 5,275 5,723 6,624 7,144
-------- -------- -------- -------- --------
16,397 19,838 18,333 18,296 19,784
-------- -------- -------- -------- --------
Gross profit .................... 13,936 17,631 12,910 14,754 16,619
-------- -------- -------- -------- --------

Operating expenses:
Sales and marketing ............... 7,350 8,765 8,146 8,346 8,306
General and administrative ........ 2,060 2,550 2,251 2,296 2,434
Research and development .......... 2,157 2,620 2,907 2,248 2,693
Severance expense ................. -- -- 378 -- --
-------- -------- -------- -------- --------
Total operating expenses ........ 11,567 13,935 13,682 12,890 13,433
-------- -------- -------- -------- --------
Operating income (loss) ......... 2,369 3,696 (772) 1,864 3,186
Interest income ..................... 71 129 374 408 376
-------- -------- -------- -------- --------
Income (loss) before taxes ...... 2,440 3,825 (398) 2,272 3,562
Provision (benefit) for income taxes 944 1,474 (171) 922 1,275
-------- -------- -------- -------- --------
Net income (loss) ............... $ 1,496 $ 2,351 $ (227) $ 1,350 $ 2,287
======== ======== ======== ======== ========
Net income (loss) per share ......... $ 0.48 $ 0.69 $ (0.06) $ 0.34 $ 0.60
======== ======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding ...................... 3,111 3,410 4,002 4,011 3,838

Balance Sheet Data
(at period end):
Working capital ..................... $ 4,382 $ 15,222 $ 15,172 $ 14,797(2) $ 11,720
Total assets ........................ 12,978 25,157 23,145 25,832 27,681
Stockholders' equity ................ 6,676 17,838 17,631 18,981 18,764

<FN>
(1) Includes in general and administrative expenses a compensation expense of $240,500
resulting from the difference between the exercise price and the fair market value of the
Common Stock underlying the 370,000 stock options granted in December 1993. Excluding this
charge, general and administrative expenses, operating income, net income and net income
per share would have been $2,309,000, $3,937,000, $2,592,000 and $0.76, respectively.

(2) Certain items in prior year financial statements have been reclassified for comparative
purposes. See "Note 1. Summary of Significant Accounting Policies," to the audited
financial statements included elsewhere herein.
</FN>
</TABLE>

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<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

General

The Company was founded in 1967 to provide custom programming services and,
in 1974, it began to design, develop, market and support automated business
management systems for distributors, wholesalers and dealers. The Company's
revenue is derived primarily from the sale of Prophet 21 Systems, maintenance
contracts which provide for software support and equipment maintenance, and the
sale of optional software products. Each Prophet 21 system includes the
Prophet 21 Software, an IBM RS/6000 computer, various optional third-party
software products and hardware components, training, support and installation.
The Company's cost of revenue consists principally of the costs of hardware
components, customer support, installation and training and, to a lesser extent,
third-party software.

The Company implemented a strategic decision early in 1992 to move from its
internally developed proprietary hardware system to an open system platform,
based on the UNIX/AIX operating system running on an IBM RS/6000 computer. The
Company's adoption of an open system solution broadened the market for the
Prophet 21 systems, facilitated greater customer acceptance, and allowed
successful integration of industry standard third-party software and hardware.

In fiscal 1996, the Company introduced its next generation product, Prophet
21 Acclaim, a complete business management system that combines the
functionality of the traditional Prophet 21 system with the technology of
Progress Software Corporation's DBMS. Prophet 21 Acclaim is targeted for sales
to new and current customers. It has been designed so that current customers can
move to this new product while preserving their existing technology
infrastructure. The general release of Prophet 21 Acclaim began late in the
second quarter of fiscal 1997.

The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
anticipated future revenues, capital expenditures, and other statements
regarding matters that are not historical facts, involve predictions. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Potential risks and uncertainties that could affect the Company's future

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<PAGE>

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.

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<PAGE>

Results of Operations

The following table sets forth for the periods indicated certain financial
data as a percentage of revenue and the percentage change in the dollar amount
of such data compared to the prior comparable period:

Percentage of Revenue Percentage Increase (Decrease)
-------------------------- ------------------------------
Fiscal Fiscal
Fiscal Year Ended 1996 over 1997 over
June 30, Fiscal Fiscal
-------------------------- ----------- ----------
1995 1996 1997 1995 1996

Revenue:
<S> <C> <C> <C> <C> <C>
System sales ................. 68.2% 63.3% 61.9% (1.8)% 7.8%
Service and support .......... 31.8 36.7 38.1 22.1 14.2
----- ----- -----
100.0 100.0 100.0 5.8 10.1
----- ----- -----
Cost of revenue:
System sales ................. 40.4 35.3 34.7 (7.4) 8.3
Service and support .......... 18.3 20.0 19.6 15.7 7.9
----- ----- -----
58.7 55.3 54.3 (0.2) 8.1
----- ----- -----
Gross profit .............. 41.3 44.7 45.7 14.3 12.6
----- ----- -----

Operating expenses:
Sales and marketing .......... 26.1 25.3 22.8 2.5 (0.5)
General and administrative ... 7.2 6.9 6.7 2.0 6.0
Research and development ..... 9.3 6.8 7.4 (22.7) 19.8
Severance expense ............ 1.2 -- -- (100.0) --
----- ----- -----
Total operating expenses... 43.8 39.0 36.9 (5.8) 4.2
----- ----- -----
Operating (loss) income ... (2.5) 5.7 8.8 341.5 70.9
Interest income ................ 1.2 1.2 1.0 9.1 (7.8)
(Loss) income before
income taxes ............. (1.3) 6.9 9.8 670.9 56.8
(Benefit) provision for income..
taxes ......................... (0.5) 2.8 3.5 639.2 38.3
----- ----- -----
Net (loss) income ......... (0.8)% 4.1% 6.3% 694.7 69.4
===== ===== =====
</TABLE>

- 16 -
<PAGE>

Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996

Revenue. Revenue increased by 10.1%, or $3,353,000, from $33,050,000 in
fiscal 1996 to $36,403,000 in fiscal 1997. System sales revenue increased by
7.8%, or $1,632,000, from $20,905,000 in fiscal 1996 to $22,537,000 in fiscal
1997. This increase was attributable primarily to sales of the Company's new
Prophet 21 Acclaim product which began late in the second quarter of fiscal
1997. Such increase was offset, in part, by a decrease in programming revenue
and by lower sales volume of Prophet 21 XL Software upgrades as many existing
customers, during the first quarter of fiscal 1997, were evaluating whether to
upgrade to XL9, the latest version of the Company's XL Software, or purchase the
new Prophet 21 Acclaim product. Service and support revenue increased by 14.2%,
or $1,721,000, from $12,145,000 in fiscal 1996 to $13,866,000 in fiscal 1997.
This increase was attributable primarily to an increase in the number of new
users who have entered into maintenance contracts and, to a lesser extent, to a
price increase implemented by the Company on such maintenance contracts during
the second quarter of fiscal 1997 and to an increase in services performed by
the Company in connection with the general release of the new Prophet 21 Acclaim
product.

Gross profit. The Company's gross profit increased by 12.6%, or $1,865,000,
from $14,754,000 in fiscal 1996 to $16,619,000 in fiscal 1997. Gross profit
margin increased from 44.7% of revenue in fiscal 1996 to 45.7% of revenue in
fiscal 1997. Gross profit from system sales increased by 7.2%, or $664,000, from
$9,233,000 in fiscal 1996 to $9,897,000 in fiscal 1997. Gross profit margin
attributable to system sales decreased from 44.2% of system sales revenue in
fiscal 1996 to 43.9% in fiscal 1997. The increase in gross profit from system
sales was attributable primarily to sales of the Company's new Prophet 21
Acclaim product which began late in the second quarter of fiscal 1997. The
decrease in gross profit margin from system sales was attributable primarily to
decreased sales volume of optional Prophet 21 software which, in general,
carries higher margins. Gross profit from service and support revenue increased
by 21.8%, or $1,201,000, from $5,521,000 in fiscal 1996 to $6,722,000 in fiscal
1997. Gross profit margin attributable to service and support revenue increased
from 45.5% of service and support revenue in fiscal 1996 to 48.5% in fiscal
1997. The increases in such gross profit and gross profit margin were
attributable primarily to an increase in the number of new users who have
entered into maintenance contracts and, to a lesser extent, to a price increase
implemented by the Company on such maintenance contracts during the second
quarter of fiscal 1997 and to an increase in services performed by the Company
in connection with the general release of the new Prophet 21 Acclaim product.

Sales and marketing expenses. Sales and marketing expenses decreased
slightly by 0.5%, or $40,000, from $8,346,000 in fiscal 1996 to $8,306,000 in
fiscal 1997, and decreased as a percentage of revenue from 25.3% to 22.8%,
respectively. Sales and marketing expenses decreased in absolute dollars and as
a percentage of revenue due primarily to the fact that the User's Conference was
scheduled only once in fiscal 1997 and, to a lesser extent, reduced marketing
costs related to a decrease in staffing. Such decreases were offset, in part, by
increased salesperson compensation and to increased marketing costs associated
with the new Prophet 21 Acclaim product.

- 17 -
<PAGE>

General and administrative expenses. General and administrative expenses
increased by 6.0%, or $138,000, from $2,296,000 in fiscal 1996 to $2,434,000 in
fiscal 1997, but decreased as a percentage of revenue from 6.9% to 6.7%,
respectively. The increase in absolute dollars in general and administrative
expenses was due to an increase in compensation expenses. General and
administrative expenses decreased as a percentage of revenue as a result of
increased sales volume.

Research and development expenses. Research and development expenses
increased by 19.8%, or $445,000, from $2,248,000 in fiscal 1996 to $2,693,000 in
fiscal 1997, and increased as a percentage of revenue from 6.8% to 7.4%,
respectively. Such increases were due primarily to an increase in salary
expenses and staffing. The Company also capitalized $1,813,000 in software
development expenditures during fiscal 1997.

Income taxes. The Company's effective tax rate was 40.6% and 35.8% in
fiscal 1996 and 1997, respectively.

Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995

Revenue. Revenue increased by 5.8%, or $1,807,000, from $31,243,000 in
fiscal 1995 to $33,050,000 in fiscal 1996. System sales revenue decreased by
1.8%, from $21,295,000 in fiscal 1995 to $20,905,000 in fiscal 1996. This
decrease was attributable primarily to the Company's focus on larger system
sales which resulted in increased average price of systems sold but a decrease
in the number of units sold. In addition, the Company continued to experience a
longer sales cycle during fiscal 1996 as a result of its focus on larger system
sales. The decrease in system sales was offset, in part, by an increase in sales
of optional software products. Service and support revenue increased 22.1% from
$9,948,000 in fiscal 1995 to $12,145,000 in fiscal 1996. This increase was
attributable primarily to an increase in the number of users who entered into
maintenance contracts and, to a lesser extent, to the implementation by the
Company of a new maintenance program which offers multiple levels of service at
different prices.

Gross Profit. The Company's gross profit increased by 14.3%, or $1,844,000,
from $12,910,000 in fiscal 1995 to $14,754,000 in fiscal 1996. Gross profit
margin increased from 41.3% of revenue in fiscal 1995 to 44.7% of revenue in
fiscal 1996. Gross profit from system sales increased by 6.3%, or $548,000, from
$8,685,000 in fiscal 1995 to $9,233,000 in fiscal 1996. Gross profit margin
attributable to system sales increased from 40.8% of systems sales revenue in
fiscal 1995 to 44.2% in fiscal 1996. The increases in such gross profit and
gross profit margin were attributable primarily to increased sales volume of
optional Prophet 21 software which, in general, carries higher margins and to a
lesser extent, to the Company's sales focus on larger system sales. Gross profit
from service and support revenue increased by 30.7%, or $1,296,000, from
$4,225,000 in fiscal 1995 to $5,521,000 in fiscal 1996. Gross profit margin
attributable to service and support revenue increased from 42.5% of service and
support revenue in fiscal 1995 to 45.5% in fiscal 1996. The increases in such
gross profit and gross profit margin were attributable primarily to an increase
in the number of new users who have entered into the maintenance program and, to
a lesser extent, the implementation by the Company of a new maintenance program
which offers multiple levels of service at different prices, offset in part by a
severance payment of $190,000.

- 18 -
<PAGE>

Sales and marketing expenses. Sales and marketing expenses increased by
2.5%, or $200,000, from $8,146,000 in fiscal 1995 to $8,346,000 in fiscal 1996,
but decreased as a percentage of revenue from 26.1% to 25.3% respectively. Sales
and marketing expenses increased due to the Company's increased marketing
efforts in direct mail and software catalogue sales and to a lesser extent,
higher salespersons compensation associated with higher sales.

General and administrative expenses. General and administrative expenses
increased by 2.0%, or $45,000, from $2,251,000 in fiscal 1995 to $2,296,000 in
fiscal 1996, but decreased as a percentage of revenue from 7.2% to 6.9%,
respectively. The increase in general and administrative expenses was due to
increases in compensation expense.

Research and development expenses. Research and development expenses
decreased by 22.7%, or $659,000, from $2,907,000 in fiscal 1995 to $2,248,000 in
fiscal 1996, and decreased as a percentage of revenue from 9.3% to 6.8%,
respectively. The decrease in research and development expenses was due
primarily to a reduction in related salary expenses and staffing requirements
resulting from the Company's creation of new, more efficient programming tools
for use by the Company's programmers and the capitalization of certain software
development costs.

Income taxes. The Company's effective tax rate was 43.0% and 40.6% in
fiscal 1995 and fiscal 1996, 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 from operations was $1,184,000, $1,263,000 and $5,710,000 for the fiscal
years ended June 30, 1995, 1996 and 1997, respectively.

The Company's working capital was $14,797,000 and $11,720,000 at June 30,
1996 and 1997, respectively.

The Company invested $876,000, $1,069,000 and $1,440,000 in capital
equipment and leasehold improvements in fiscal 1995, 1996 and 1997,
respectively. There are no other material commitments for capital expenditures
currently outstanding. The Company also invested $458,000 and $1,813,000 in
software development costs which were capitalized during the fiscal years ended
June 30, 1996 and 1997.

The Company does not have a significant concentration of credit risk with
respect to accounts receivable due to the large number of customers comprising
the Company's customer base and their dispersion across different geographic
regions. The Company performs on-going credit evaluations and generally does not
require collateral. The Company maintains reserves for potential credit losses,
and, to date, such losses have been within the Company's expectations.

- 19 -
<PAGE>

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. As of June 30, 1997, the Company had repurchased 442,900 shares at a
cost of $2,518,000.

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.

Item 8. Financial Statements and Supplementary Data.

The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K."

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

Not applicable.

- 20 -
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Company.

The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1997 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.

Item 11. Executive Compensation.

The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1997 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1997
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

Item 13. Certain Relationships and Related Transactions.

The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1997 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

- 21 -
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) (1) Financial Statements.

Reference is made to the Index to Financial Statements and
Schedules on Page F-1.

(a) (2) Financial Statement Schedules.

Reference is made to the Index to Financial Statements and
Schedules on Page F-1.

(a) (3) Exhibits.

Reference is made to the Index to Exhibits on Page 25.

(b) Reports on Form 8-K.

No reports on Form 8-K have been filed during the fiscal year
ended June 30, 1997.

- 22 -
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 this 5th day of
September, 1997.

PROPHET 21, INC.

By:/s/ Charles L. Boyle, III
-------------------------
Charles L. Boyle, III, President
and Chief Executive Officer

- 23 -
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Charles L. Boyle, III President, Chief Executive September 5, 1997
- ------------------------- Officer and Director
Charles L. Boyle, III (Principal Executive Officer)

/s/ Thomas M. Giuliani Chief Financial Officer and September 5, 1997
- ---------------------- Treasurer (Principal
Thomas M. Giuliani Financial and Accounting
Officer)

/s/ John E. Meggitt, Ph.D. Chairman of the Board September 5, 1997
- -------------------------- and Director
John E. Meggitt, Ph.D.

/s/ Dorothy M. Meggitt Secretary and Director September 5, 1997
- ----------------------
Dorothy M. Meggitt

/s/ Louis J. Cissone Director September 5, 1997
- --------------------
Louis J. Cissone

/s/ Mark A. Timmerman Director September 5, 1997
- ---------------------
Mark A. Timmerman

- 24 -
<PAGE>

EXHIBIT INDEX

Exhibit
No. Description of Exhibit
- ---------------- ----------------------

3.1 Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (File Number 33-74276) which became effective on March
10, 1994.)

3.2 By-laws. (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File Number
33-74276) which became effective on March 10, 1994.)

4.1* 1993 Stock Plan of the Company adopted December 6, 1993, as
amended December 15, 1993. (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (File Number 33-74276) which became effective on March
10, 1994.)

10.1* Employment Agreement dated as of July 1, 1993 between the
Company and John E. Meggitt. (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (File Number 33-74276) which became effective on March
10, 1994.) Employment Agreement amended by Amendments to
Employment Agreement dated January 26, 1995 and February 3,
1995, such amendments filed herewith.

10.2* Employment Agreement dated as of July 1, 1993 between the
Company and Charles L. Boyle, III. (Incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.) Employment Agreement amended
by Amendments to Employment Agreement dated January 27, 1995
and April 20, 1995, such amendments filed herewith.

10.3* Employment Agreement dated as of July 1, 1993 between the
Company and Neil Jaffe. (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (File Number 33-74276), which became effective on March
10, 1994.) Employment Agreement amended by Amendments to
Employment Agreement dated January 26, 1995 and April 20,
1995, such amendments filed herewith.

10.4* Indemnification Agreement dated as of December 6, 1993
between the Company and John E. Meggitt. (Incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

- 25 -
<PAGE>

Exhibit
No. Description of Exhibit
- ---------------- ----------------------

10.5* Indemnification Agreement dated as of December 6, 1993
between the Company and Dorothy M. Meggitt. (Incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

10.6* Indemnification Agreement dated as of December 6, 1993
between the Company and Charles L. Boyle, III. (Incorporated
by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

10.7* Indemnification Agreement dated as of December 6, 1993
between the Company and Thomas F. Ward. (Incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

10.8* Indemnification Agreement dated as of December 6, 1993
between the Company and Neil Jaffe. (Incorporated by
reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

10.9* Indemnification Agreement dated as of December 6, 1993
between the Company and Richard Hercus. (Incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

10.10 Lease dated July 1, 1993 by and between John E. Meggitt and
Dorothy M. Meggitt as Landlord, and the Company, as Tenant.
(Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (File Number 33-74276)
which became effective on March 10, 1994.)

10.11 Form of Employment Agreement by and between the Company and
each salesman. (Incorporated by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10, 1994.)

10.12 Form of Employee's Invention Assignment, Non-Competition and
Confidential Information Agreement. (Incorporated by
reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

10.13 International Business Machines Corporation Agreement for
Authorized Dealers and Industry Remarketers, as amended,
with exhibits. (Incorporated by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (File
Number 33-74276) which became effective on March 10, 1994.)

- 26 -
<PAGE>

Exhibit
No. Description of Exhibit
- ---------------- ----------------------

10.14 Progress Software Value Added Reseller Agreement.
(Incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (File Number 33-74276)
which became effective on March 10, 1994.)

10.15* Indemnification Agreement dated as of May 18, 1994 between
the Company and Louis J. Cissone. (Incorporated by reference
to Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1994.)

10.16* Indemnification Agreement dated as of May 18, 1994 between
the Company and Mark A. Timmerman. (Incorporated by
reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1994.)

10.17* Indemnification Agreement dated as of September 24, 1996
between the Company and Thomas M. Giuliani. (Incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1996.)

21* List of subsidiaries of the Company. (Incorporated by
reference to Exhibit 21 to the Company's Registration
Statement on Form S-1 (File Number 33-74276) which became
effective on March 10, 1994.)

27 Financial Data Schedule.

* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.

- 27 -
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL DATA
AND SCHEDULES

Page
----

Report of Independent Accountants............................................F-2

Consolidated Balance Sheets as of
June 30, 1996 and 1997.....................................................F-3

Consolidated Statements of Operations for the
years ended
June 30, 1995, 1996 and 1997..............................................F-4

Consolidated Statements of Stockholders'
Equity for the years ended
June 30, 1995, 1996 and 1997...............................................F-5

Consolidated Statements of Cash Flows for the
years ended June 30, 1995, 1996 and 1997...................................F-6

Notes to Consolidated Financial Statements...................................F-7

Report of Independent Accountants............................................S-1

Schedule II..................................................................S-2

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Prophet 21,
Inc. and Subsidiaries as of June 30, 1996 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prophet 21,
Inc. and Subsidiaries as of June 30, 1996 and 1997 and the consolidated results
of their operations and their cash flows for each of the three years ended June
30, 1997, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 22, 1997

F-2
<PAGE>
<TABLE>
<CAPTION>

PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)

June 30,
------------------
1996 1997
---- ----
ASSETS

Current assets
<S> <C> <C>
Cash and cash equivalents .................................... $ 2,860 $ 1,829
Marketable securities ........................................ 4,595 4,082
Accounts receivable, net of allowance
for doubtful accounts of $209
and $218, respectively ..................................... 12,029 12,172
Inventories .................................................. 1,546 1,117
Deferred income taxes ........................................ -- 163
Prepaid and other current assets ............................. 618 437
-------- --------
Total current assets ...................................... 21,468 19,800
Long-term marketable securities.................................. 1,200 2,835
Equipment and improvements, net ................................. 2,242 2,536
Software development costs, net ................................. 458 2,271
Other assets .................................................... 284 239
-------- --------
Total assets ............................................. $ 25,832 $ 27,681
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable ............................................. $ 2,922 $ 3,367
Accrued expenses and other liabilities ....................... 957 1,171
Commissions payable .......................................... 381 479
Taxes payable ................................................ 391 620
Profit sharing plan contribution payable ..................... 250 290
Deferred income .............................................. 1,950 2,153
-------- --------
Total current liabilities ................................. 6,851 8,080
-------- --------
Commitments and contingent liabilities........................... -- --
Deferred income taxes ........................................... -- 837
-------- --------

Stockholders' equity
Preferred stock--$0.01 par value,
1,500,000 shares authorized; no
shares issued or outstanding ............................... -- --
Common stock--$0.01 par value, 10,000,000
shares authorized; 4,002,500 shares issued;
4,002,500 and 3,559,600 shares outstanding, respectively ... 40 40
Additional paid-in capital ................................... 8,821 8,835
Retained earnings ............................................ 10,120 12,407
Treasury stock at cost, 442,900 shares........................ -- (2,518)
-------- --------
Total stockholders' equity ................................ 18,981 18,764
-------- --------
Total liabilities and stockholders' equity ................ $ 25,832 $ 27,681
======== ========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

F-3
<PAGE>
<TABLE>
<CAPTION>

PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)

Year Ended June 30,
-------------------------------
1995 1996 1997
---- ---- ----

Revenue:
<S> <C> <C> <C>
System sales .................... $ 21,295 $ 20,905 $ 22,537
Service and support ............. 9,948 12,145 13,866
-------- -------- --------
31,243 33,050 36,403
-------- -------- --------
Cost of revenue:
System sales .................... 12,610 11,672 12,640
Service and support ............. 5,723 6,624 7,144
-------- -------- --------
18,333 18,296 19,784
-------- -------- --------
Gross profit .................... 12,910 14,754 16,619
-------- -------- --------

Operating expenses:
Sales and marketing ............. 8,146 8,346 8,306
General and administrative ...... 2,251 2,296 2,434
Research and development ........ 2,907 2,248 2,693
Severance expense ............... 378 -- --
-------- -------- --------
13,682 12,890 13,433
-------- -------- --------
Operating (loss) income ....... (772) 1,864 3,186
Interest income .................... 374 408 376
-------- -------- --------
(Loss) income before taxes ......... (398) 2,272 3,562
(Benefit) provision for income taxes (171) 922 1,275
-------- -------- --------
Net (loss) income .................. $ (227) $ 1,350 $ 2,287
======== ======== ========
Net (loss) income per share ........ $ (0.06) $ 0.34 $ 0.60
======== ======== ========
Weighted average common and
common equivalent shares
outstanding ..................... 4,002 4,011 3,838
======== ======== ========

The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

F-4
<PAGE>

<TABLE>
<CAPTION>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)

Common Stock Additional Total
--------------- Paid-In Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
------ ------ ---------- ---------- -------- -------------

<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 .......... 4,000 $ 40 $ 8,801 $ 8,997 $ -- 17,838
Issuance of common stock
in connection with exercise
of stock options ............. 2 20 20
Net loss ........................ (227) (227)
----- ------- ------- ------- ------- -------
Balance, June 30, 1995 .......... 4,002 40 8,821 8,770 -- 17,631
Net income ...................... 1,350 1,350
----- ------- ------- ------- ------- -------
Balance, June 30, 1996 .......... 4,002 40 8,821 10,120 -- 18,981
Repurchase of common stock ...... (443) (2,518) (2,518)
Repurchase of stock options ..... 14 14
Net income ...................... 2,287 2,287
----- ------- ------- ------- ------- -------
Balance, June 30, 1997 .......... 3,559 $ 40 $ 8,835 $12,407 $(2,518) $18,764
===== ======= ======= ======= ======= =======

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

F-5
<PAGE>

<TABLE>
<CAPTION>
PROPHET 21, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

Year Ended June 30,
---------------------------
1995 1996 1997
-------- ------- -------

Cash flows from operating activities:
<S> <C> <C> <C>
Net (loss) income .................................. $ (227) $ 1,350 $ 2,287
------- ------- -------
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization ................... 1,160 1,006 1,047
Gain on sale of equipment ....................... (5) -- (13)
Provision for losses on accounts receivable ..... 110 247 233
Deferred taxes .................................. (44) 150 693
Decreases (increases) in operating assets:
Accounts receivable ............................. 1,756 (2,294) (376)
Inventories ..................................... 124 (574) 429
Prepaid expenses and other current assets ....... 115 41 181
(Decreases) increases in operating liabilities:
Accounts payable ................................ (605) 456 445
Accrued expenses ................................ (318) 337 407
Taxes payable ................................... (652) -- 197
Profit sharing plan contribution payable ........ (452) 225 40
Deferred income ................................. 222 319 203
------- ------- -------
Total adjustments ............................... 1,411 (87) 3,486
------- ------- -------
Net cash provided by operating activities .......... 1,184 1,263 5,773
------- ------- -------
Cash flows from investing activities:
Cash purchases of equipment ..................... (876) (1,069) (1,440)
Software development costs ...................... -- (458) (1,813)
Purchase of marketable securities ............... -- (9,160) (5,550)
Maturity of marketable securities ................ 5,797 5,450 4,540
Other assets ..................................... -- (230) 26
------- ------- -------
Net cash provided (used) by investing activities ... 4,921 (5,467) (4,237)
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock ...................... -- -- (2,518)
Repurchase of stock options ..................... -- -- (49)
Stock options exercised .......................... 20 -- --
------- ------- -------
Net cash provided (used) by financing activities ... 20 -- (2,567)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 6,125 (4,204) (1,031)
Cash and cash equivalents at beginning of period ... 939 7,064 2,860
------- ------- -------
Cash and cash equivalents at end of period ......... $ 7,064 $ 2,860 $ 1,829
======= ======= =======

Supplemental cash flow disclosures:
Income taxes paid ............................... $ 826 $ 847 $ 395
======= ======= =======

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

F-6
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

1. Summary of Significant Accounting Policies:

Basis of Presentation:

The consolidated financial statements include the accounts of Prophet 21,
Inc. and its wholly-owned Subsidiaries (the "Company"). All intercompany
transactions have been eliminated. The Company is a leading provider of fully
integrated, on-line business management systems developed exclusively for use by
distributors and wholesalers.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Certain
items in prior year financial statements have been reclassified for comparative
purposes.

Cash and Cash Equivalents:

For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. At various times throughout the year, the
Company maintains cash balance in excess of FDIC limits.

Marketable Securities:

Marketable securities consist primarily of governmental debt instruments
with an initial maturity of three months or more. The Company accounts for
investments in accordance with Statement of Financial Accounting Standards Board
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's policy is to protect the value of its investment
portfolio and to minimize principal risk by earning returns based on current
interest rates. All of the Company's marketable securities are classified as
held-to-maturity as of the balance sheet date and are reported at cost plus an
adjustment for amortization, which approximates fair market value.

Inventories:

Inventories primarily consist of purchased hardware and software.
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost on a first-in-first-out method.

F-7
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

1. Summary of Significant Accounting Policies (continued):

Equipment and Improvements:

Equipment and improvements are recorded at cost and are depreciated using
the straight line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
remaining lease term. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the income statement for the period. The
cost of maintenance and repairs is charged to expense as incurred, whereas
significant renewals and betterments are capitalized.

Revenue Recognition:

Revenue is recorded by the Company when products are shipped to the
customer, at which time the cost of installation and other obligations
associated with the sale are accrued. Maintenance revenues from hardware and
software support fees are recognized ratably over the contract period.

Warranty:

The Company provides warranties on its hardware and proprietary software
against design defects. A provision for future claims is recorded on historical
experience.

Capitalized Software:

The Company capitalizes software development costs associated with a new
product pursuant to SFAS No. 86. Such costs are capitalized only after
technological feasibility has been demonstrated. Such capitalized amounts will
be amortized commencing with product introduction on a straight-line basis
utilizing the estimated economic life of three years. Amortization of
capitalized software development costs will be charged to cost of sales. At June
30, 1996 and 1997, the Company had capitalized $458 and $1,813 of software
development costs, none of which had been amortized. All other research and
development costs have been expensed.

Income Taxes:

The Company utilizes the asset and liability approach for income taxes
which requires the recognition of deferred tax liability and assets for the
expected future tax consequences of temporary differences between the carrying
amount and the tax bases of other assets and liabilities.

F-8
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

1. Summary of Significant Accounting Policies (continued):

Net Income Per Share:

Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period.

New Accounting Standard:

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which will replace the current rules for earnings per
share computations, presentation and disclosure. Under the new standard, basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share on the face of the income
statement.

The Company will be required to adopt SFAS No. 128 during fiscal year 1998
and, as required by the standard, will restate all prior period earnings per
share data. The Company's new earnings per share amounts as calculated under
SFAS No. 128 are not expected to be materially different from those computed
under the present accounting standard.

2. Inventories:

A summary of the major components of inventories are as follows:

<TABLE>
<CAPTION>
June 30,
--------------
1996 1997
---- ----

<S> <C> <C>
Finished goods ......................................... $ 1,412 $ 1,043
Used equipment inventory ............................... 134 74
------- -------
$ 1,546 $ 1,117
======= =======
</TABLE>

3. Equipment and Improvements:

A summary of the major components of equipment and improvements are as
follows:

<TABLE>
<CAPTION>
June 30,
--------------
1996 1997
---- ----

<S> <C> <C>
Equipment............................................... $ 2,347 $ 2,197
Computer systems........................................ 2,840 3,971
Furniture and fixtures.................................. 716 767
Leasehold improvements.................................. 429 525
------- -------
6,332 7,460
Accumulated depreciation
and amortization....................................... (4,090) (4,924)
------- -------
$ 2,242 $ 2,536
======= =======
</TABLE>

Depreciation and amortization expense of $1,160, $1,006 and $1,047 was
charged to operations for the years ended June 30, 1995, 1996 and 1997,
respectively.

F-9
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

4. Leasing Arrangements:

The Company leases certain facilities and equipment under various operating
lease agreements with initial terms greater than one year. Future minimum
payments under noncancelable operating leases at June 30, 1997 are:

Fiscal Year Related Party Third Party Total
- ----------- ------------- ----------- -----

1998.................................. $ 418 $ 43 $ 461
1999.................................. -- 26 26
Thereafter............................ -- -- --
------ ----- -----
$ 418 $ 69 $ 487
====== ===== =====

Rent expense, including related party transactions, for the years ended
June 30, 1995, 1996 and 1997 was $556, $535 and $539, respectively.

5. Income Taxes:

The components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1995 1996 1997
---- ---- ----

Federal:
<S> <C> <C> <C>
Current ............................ $ (147) $ 675 $ 611
Deferred ........................... (33) 113 569
------- ------- -------
(180) 788 1,180
------- ------- -------

State:
Current ............................ (160) 60 2
Deferred ........................... (11) 37 124
------- ------- -------
(171) 97 126
------- ------- -------
Foreign:
Current ............................ 20 37 (31)
------- ------- -------

Valuation allowance:................... 160 -- --
------- ------- -------
$ (171) $ 922 $ 1,275
======= ======= =======
</TABLE>

Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current
depending on the classification of the assets and liabilities to which they
relate. The sources of the timing differences reported are due primarily to
different depreciation methods, bad debts expense and the use of the uniform
capitalization method for inventory.

F-10
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

5. Income Taxes (continued):

The provision for income taxes differs from the amount computed using the
statutory Federal income tax rate as follows:

<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1995 1996 1997
---- ---- ----

<S> <C> <C> <C>
Statutory tax rate ........................ (34)% 34% 34%
State taxes, net of Federal benefit........ -- 3 2
Tax credits ............................... (15) -- --
Prior period tax .......................... -- -- 3
Non-deductible expense .................... 4 2 (1)
Other ..................................... 2 2 (2)
--- --- ---
(43)% 41% 36%
=== === ===
</TABLE>

Deferred income taxes reflect the tax impact of temporary differences
between the assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Amounts giving rise to deferred
income taxes are as follows:

June 30,
-----------------
1996 1997
---- ----
Current deferred tax asset:
<S> <C> <C>
Allowance for doubtful accounts......... $ 85 $ 84
Accrued vacation........................ 56 57
Inventory capitalization................ 31 22
----- ------
172 163

Non-current deferred tax asset:
Depreciation............................ 32 37

Non-current deferred tax liability:
Depreciation............................ (185) --
Software development costs.............. -- (874)
----- ------

Total................................ $ 19 $ (674)
===== ======
</TABLE>

6. Related Party Transactions:

The Company rents office space from its principal stockholders under lease
terms expiring on June 30, 1998. The lease agreement includes a five-year
renewal provision at the Company's option. Rent expense under the lease for the
years ended June 30, 1995, 1996 and 1997 was $423, $438 and $452, respectively.

F-11
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

7. Concentration of Credit Risk:

Financial instruments which potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents, marketable
securities and accounts receivable. The Company places its cash and cash
equivalents with high quality financial institutions, thereby limiting its
credit exposure. The Company currently invests primarily in government
obligations that have maturities of less than one year. The Company believes
that no significant credit risk exists with respect to these investments. There
is not 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 such
losses have been within management's expectations.

8. Employee Benefit Plans:

The Company has a qualified profit sharing plan covering employees who meet
certain eligibility requirements. Contributions are at the discretion of the
Board of Directors and may not exceed the maximum amount allowable for federal
income tax deduction. The Company did not make any contributions to its
qualified profit sharing plan for the years ended June 30, 1995, 1996 and 1997.

On October 1, 1993, the Company implemented a 401(k) Retirement Savings
Plan. The Company's contributions are at the discretion of management and for
the years ended June 30, 1995, 1996 and 1997 were $0, $250 and $290,
respectively.

9. Commitments and Contingencies:

The Company has entered into employment agreements with certain key
employees. Such agreements, which have been revised from time to time, provide
for an annual salary of $405.

F-12
<PAGE>

10. 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.

Stock Option Plan:

Under the Company's 1993 Stock Plan (the "Plan"), the Company has reserved
600,000 shares of Common Stock for issuance of both incentive and non-qualified
options. Under the Plan, options to purchase shares of Common Stock may be
granted to key employees and consultants. The Plan provides that the exercise
price of incentive options shall not be less than the fair market value of the
shares on the date of the grant, that the exercise price of non-qualified
options shall not be less than 75% of the fair market value of the shares on the
date of grant and, in either case, that no portion of such options may be
exercised beyond ten years from the date of grant.

The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employee" ("APB25") and related interpretations in accounting for the Plan. In
1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company did not elect
these provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in fiscal years 1996 and
1997 are required by SFAS 123 and are presented below.

Under the Plan, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in various forms, including incentive stock options
(intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended), non-qualified stock options, and other similar stock-based Awards. The
Company granted stock options in 1995 under the Plan in the form of
non-qualified stock options.

The Company granted stock options in 1996 and 1997 to employees. The stock
options granted in 1996 and 1997 have contractual terms of 10 years. All options
granted to the employees and directors have an exercise price no less than the
fair market value of the stock at grant date. The options granted in 1996 and
1997 vest one-third each year, beginning on the first anniversary of the date of
grant.

F-13
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

10. Stockholders' Equity (continued):

In accordance with APB 25, the Company has not recognized any compensation
cost for these stock options granted in 1996 and 1997.

A summary of the status of the Company's stock options as of June 30, 1995,
1996 and 1997 and the changes during the years then ended is presented below:

Exercise Price Weighted
Shares Per Share Average
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1994 370,000 $7.00 $7.00

Granted 113,200 $4.125 to $5.00 $4.83
Canceled (5,800) $5.00 $5.00
Exercised (2,500) $7.00 $7.00
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1995 474,900 $4.125 to $7.00 $6.51

Granted 105,000 $4.500 to $4.80 $5.12
Canceled (7,400) $5.00 $5.00
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1996 572,500 $4.125 to $7.00 $6.27

Granted 140,000 $4.500 to $4.80 $5.25
Canceled (112,500) $5.00 $6.71
- --------------------------------------------------------------------------------
Options outstanding at June 30, 1997 600,000 $4.125 to $7.00 $5.95
================================================================================
Options exercisable at June 30,
1995 302,502 $4.125 to $7.00 $6.80
1996 367,500 $4.125 to $7.00 $6.53
1997 400,000 $4.125 to $7.00 $6.31
================================================================================
Non-qualified options in fiscal 1997

Granted 10,000 $5.375 $5.375

F-14
<PAGE>

PROPHET 21, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL DATA
(In Thousands)

10. Stockholders' Equity (continued):

The weighted average fair value of options granted during fiscal 1996 was
$1.80 and $1.84 during fiscal 1997.

The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1997:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ -----------------------------
Range of Number of Weighted Average Weighted Average Number of Weighted Average
Exercise Prices Options Remaining Life Exercise Price Options Exercise Price
- --------------- --------- ---------------- -------------- --------- ----------------

Had the compensation cost for the Company's stock-based compensation plan
been determined consistent with SFAS 123, the Company's net income and net
income per common share would approximate the pro forma amounts below:

June 30,
--------------------
1996 1997
------ ------
<S> <C> <C>
Net Income: As reported $1,350 $2,287
Pro forma 1,334 2,200

Income per Share: As reported $0.34 $0.60
Pro forma 0.33 0.57
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards granted prior to
the 1996 fiscal year.

The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1997: dividend yield of
0.00% for both years; risk-free interest rate ranges from 5.48% to 6.43%; the
expected life of options is estimated to be 4 years; and a volatility of 32.75%
for all grants.

Stock Repurchase Program:

F-15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Prophet 21, Inc. and Subsidiaries:

Our report on the consolidated financial statements of Prophet 21, Inc. and
Subsidiaries is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page F-1 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 22, 1997

S-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

SCHEDULE II

Prophet 21, Inc.
Schedule II - Valuation and Qualifying Accounts

Allowance for Doubtful Accounts

Balance at Charged to
Year Ended Beginning of Costs and Deductions Balance at
June 30, Period Expenses Write-Offs End of Period
- ---------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
1995..................... 228,262 107,373 130,635 205,000
1996..................... 205,000 247,337 242,940 209,397
1997..................... 209,397 232,660 223,946 218,111
</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 1997 AND FOR THE TWELVE MONTH
PERIOD ENDED JUNE 30, 1997 WHICH ARE INCLUDED IN THE REGISTRANT'S FORM 10-K 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> 12-MOS
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-START> Jul-01-1996
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,829
<SECURITIES> 4,082
<RECEIVABLES> 12,390
<ALLOWANCES> (218)
<INVENTORY> 1,117
<CURRENT-ASSETS> 19,800
<PP&E> 2,536
<DEPRECIATION> (1,047)
<TOTAL-ASSETS> 27,681
<CURRENT-LIABILITIES> 8,080
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 18,724
<TOTAL-LIABILITY-AND-EQUITY> 27,681
<SALES> 36,403
<TOTAL-REVENUES> 36,403
<CGS> 19,784
<TOTAL-COSTS> 19,784
<OTHER-EXPENSES> 13,433
<LOSS-PROVISION> 3,186
<INTEREST-EXPENSE> (376)
<INCOME-PRETAX> 3,562
<INCOME-TAX> 1,275
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,287
<EPS-PRIMARY> .60
<EPS-DILUTED> .60

</TABLE>