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LAWSON SOFTWARE, INC. Form 10-Q Index

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2002

OR

FOR THE TRANSITION PERIOD FROM                          TO                         

Commission file number 000-33335

LAWSON SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

380 ST. PETER STREET
ST. PAUL, MINNESOTA 55102
(Address of principal executive offices)

(651) 767-7000
(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 ý    No o

        The number of shares of the registrant's common stock outstanding as of October 3, 2002 was 98,403,609.

LAWSON SOFTWARE, INC.

Form 10-Q

Index

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PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

LAWSON SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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LAWSON SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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LAWSON SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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LAWSON SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

1.    BASIS OF PRESENTATION

        The unaudited condensed consolidated financial statements included herein reflect all adjustments, in the opinion of management, necessary to fairly state Lawson Software, Inc.'s (the Company's) consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. The results of operations for the period ended August 31, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending May 31, 2003. The condensed consolidated financial statements and notes are presented as permitted by the requirements for Form 10-Q and do not contain certain information included in the Company's annual financial statements and notes. The accompanying interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended May 31, 2002.

2.    OTHER GENERAL EXPENSES

        During the three months ended August 31, 2001, the Company recognized $486 in expenses related to business process improvement initiatives designed to prepare the Company for an initial public offering. Such costs were expensed as incurred. The Company did not incur similar expenses in the three months ended August 31, 2002.

3.    PER SHARE DATA

        Basic net (loss) income per share is computed using the net (loss) income applicable to common stockholders and the weighted-average number of shares of common stock outstanding. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Diluted net loss per common share does not differ from basic net loss per common share in the three months ended August 31, 2002 as potential shares of common stock from conversion of stock options and warrants were anti-dilutive.

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        The following table sets forth the computation of basic and diluted net (loss) income per share:

        Diluted net income per share for the three months ended August 31, 2001 assumes the conversion of all outstanding shares of preferred stock into shares of common stock, as if the shares had converted immediately upon their issuance. Diluted net loss per share for the three months ended August 31, 2002 excluded 25,788 potential shares of common stock from conversion of stock options and warrants as they were anti-dilutive.

4.    COMPREHENSIVE (LOSS) INCOME

        The following table presents the calculation of comprehensive (loss) income:

5.    RESTRUCTURING RESERVE

        The following table sets forth the Company's remaining restructuring reserves as of August 31, 2002, which are included in other accrued liabilities:

        The cash payments related to lease obligations are expected to be made through June 2005.

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6.    COMMITMENTS AND CONTINGENCIES

        Certain employees who were ESOP participants have the right to require the Company to repurchase any vested ESOP shares they receive at the market price. Consequently, shares held by those ESOP participants are considered mandatorily redeemable common stock and are recorded at the estimated fair market value at each balance sheet date. There were 59 mandatorily redeemable shares outstanding as of August 31, 2002 and May 31, 2002. In May 2002, the Company terminated the plan, subject to completion of applicable government filings. After final approval by the Internal Revenue Service, all remaining shares held in the plan will vest and be distributed to the participants. As a result, the mandatory redemption feature will be terminated. The termination will not have a material impact on the Company's financial position, results of operations or cash flows.

        The Company has a $25.0 million revolving credit facility, which expires September 30, 2003. At August 31, 2002, no amounts were outstanding under this facility. The arrangements with the bank contain limitations on dividends and capital expenditures and require the compliance with specific financial ratios and covenants, which includes no net loss in excess of $4.0 million in any fiscal quarter and no net loss in each of any two consecutive fiscal quarters. The Company does not expect to be in compliance with that covenant for the fiscal quarter ending November 30, 2002. The Company believes that cash flow from operations, together with its cash, cash equivalents and marketable securities will be sufficient to meet its cash requirements for the foreseeable future.

        The Company is involved in various claims and legal actions in the normal course of business. Management is of the opinion that the outcome of such legal actions will not have a significant adverse effect on the Company's financial position, results of operations or cash flows.

7.    SEGMENT AND GEOGRAPHIC AREAS

        The Company views its operations and manages its business as one segment, the development and marketing of computer software and related services. Factors used to identify the Company's single operating segment include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The Company markets its products and services through the Company's offices in the United States and its wholly-owned branches and subsidiaries operating in Canada, the United Kingdom, Germany, France and the Netherlands.

        The following table presents a summary of revenues and long-lived assets summarized by geographic region:

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8.    ACQUISITIONS

        These following acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of operations subsequent to the acquisition date are included in the accompanying condensed consolidated financial statements. The acquired assets and liabilities were recorded based upon their relative fair values at the date of acquisition.

        On June 28, 2002, Lawson Software Limited, a wholly owned subsidiary of Lawson Software, Inc., acquired certain assets of Armature Limited and Armature Group Limited (collectively, Armature) for approximately $8,140. These assets consist of all software applications, related trademarks, technologies, intangibles, and certain fixed assets used in Armature's business. Armature provided merchandising/category management and supply chain management solutions for retailers, consumer goods manufacturers and wholesalers.

        The following table summarizes the estimated fair values of the Armature assets acquired and liabilities assumed as of the acquisition date. These amounts are based on preliminary estimates, accordingly the allocation of the purchase price is subject to refinement:

        The total purchase price was allocated to tangible assets and liabilities, and intangible assets. Accrued severance cost represents the estimated severance related benefits for one terminated employee. Intangible assets include acquired technology and a customer list. The acquired technology totaling $1,582 will be amortized on a straight-line basis over five years and the customer list totaling $1,808 will be amortized on a straight-line basis over ten years.

        On July 11, 2001, the Company completed the acquisition of Account4, Inc. (Account4). Account4 provided web-based professional services automation software that enables services organizations to more efficiently manage their businesses and workforce.

        The following table presents the consolidated results of operations on an unaudited pro forma basis as if the acquisitions of Armature and Account4 had taken place at the beginning of the periods presented:

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        The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the periods presented or the results which may occur in the future. The pro forma data gives effect to actual operating results prior to the acquisitions, and adjustments to reflect interest income foregone, eliminate interest expense, increased intangible asset amortization, and income taxes. No effect has been given to cost reductions or operating synergies in this presentation. As a result, these pro forma amounts are not necessarily indicative of the results that would have been obtained if the acquisitions had occurred as of the beginning of the periods presented or that may occur in the future.

9.    NEW ACCOUNTING PRONOUNCEMENTS

        Effective June 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121 and 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." Upon adoption, the Company did not have any long-lived assets that were impaired.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. The provisions of this statement related to the rescission of FASB Statement No. 4 were effective for the Company beginning on June 1, 2002. All other provisions of this statement were effective for transactions occurring after May 15, 2002. The adoption of this statement did not have a material impact on the Company's consolidated financial position, results of operations or cash flows, but in accordance with the transition provisions will result in the Company's fiscal 2002 extraordinary item being reclassified in the statement of operations.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS No. 146). The new statement addresses the accounting for costs associated with exit or disposal activities. The provisions of the statement will be effective for disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

10.    SUBSEQUENT EVENT

        Subsequent to the three months ended August 31, 2002, the Company took measures to realign projected expenses with anticipated revenue levels. In September 2002, the Company announced that it would reduce its workforce by 12%, or approximately 240 employees and consolidate training facilities. As a result, the Company expects to record a charge of $5,000 to $6,000 in the three months ending November 30, 2002.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

        In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. The forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Our Future Results or the Market Price of Our Stock." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements based on circumstances or events which occur in the future. Readers should carefully review the risk factors described in the Annual Report on Form 10-K and in other documents the Company files from time to time with the Securities and Exchange Commission.

Overview

        We are a provider of enterprise software solutions for specific services industries. We derive revenues from licensing software solutions and providing comprehensive professional services, including consulting, training and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation services are separately priced and generally are available from a number of suppliers and are not essential to the functionality of our software products. Accordingly, revenues from these services are generally recorded separately from the license fee. Additionally, we generate a portion of our revenues from reselling our software solutions through third-party vendors.

        Since the fourth quarter of fiscal 2002, we have been adversely affected by the general economic slowdown in information technology spending by our current and prospective customers. This has affected the demand for our products and services, and as a result, had a negative impact on our revenues and earnings. In response, we undertook an initiative to reduce our cost structure at the end of fiscal 2002 by implementing a reduction in our workforce, closing a leased office facility, and implementing other cost savings initiatives. Subsequent to the end of the first quarter of fiscal 2003, we took additional measures to realign our projected expenses with anticipated revenue levels. In September 2002, we announced that we would reduce our workforce by an additional 12% or approximately 240 employees and consolidate training facilities. As a result, we expect to record a charge of $5.0 million to $6.0 million in the quarter ending November 30, 2002.

Acquisition

        On June 28, 2002, Lawson Software Limited, a wholly owned subsidiary of Lawson Software, Inc., acquired certain assets of Armature Limited and Armature Group Limited (collectively, Armature) for approximately $8.1 million. These assets consist of all software applications, related trademarks, technologies, intangibles, and certain fixed assets used in Armature's business. Armature provided merchandising/category management and supply chain management solutions for retailers, consumer goods manufacturers and wholesalers.

        The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations subsequent to the acquisition date are included in the accompanying condensed consolidated financial statements, and the assumed assets and liabilities were recorded based upon their relative fair values at the date of acquisition. These amounts are based on preliminary estimates as of that date.

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        We allocated the excess purchase price over the fair value of the net tangible assets acquired of $8.1 million to the following assets and liabilities: $1.6 million to technology, $1.8 million to a customer list, and $4.4 million to goodwill. The technology and customer list are being amortized on a straight-line basis over estimated useful lives of five years for technology and ten years for the customer list. In accordance with SFAS No. 142, goodwill recorded as a result of the acquisition will be subject to an annual impairment test and will not be amortized.

Critical Accounting Policies and Estimates

        Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosures of contingent assets and liabilities. The Notes to Condensed Consolidated Financial Statements contained herein describes our significant accounting polices used in the preparation of the consolidated financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to bad debts, intangible assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.

        We believe the critical accounting polices listed below affect significant judgments and estimates used in the preparation of our consolidated financial statements.

        Revenue Recognition.    We recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." We license software under non-cancelable license agreements and provide related professional services, including consulting, training, and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation services are not essential to the functionality of our software products, are sold separately and also are available from a number of third-party service providers. Accordingly, revenues from these services are generally recorded separately from the license fee. Software arrangements which include fixed-fee service components are recognized using contract accounting. Our specific revenue recognition policies are as follows:

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Software License Fees—License fee revenues from end-users and resellers are generally recognized using the residual method when the software product has been shipped, provided a non-cancelable license agreement has been signed, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and collection of the related receivable is considered probable. We do not generally offer rights of return, acceptance clauses or price protection to our customers. Typically, our software license fees are due within a twelve-month period from the date of shipment. If the fee due from the customer is not fixed or determinable, including payment terms greater than twelve months from shipment, revenue is recognized as payments become due and all other conditions for revenue recognition have been satisfied. In software arrangements that include rights to multiple software products, specified upgrades, maintenance or services, we allocate the total arrangement fee among each deliverable using the fair value of each of the deliverables determined using vendor-specific objective evidence. Vendor-specific objective evidence of fair value is determined using the price charged when that

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element is sold separately. In software arrangements in which we do not have vendor-specific objective evidence of fair value of undelivered elements, revenue is deferred until fair value is determined or all elements have been delivered.

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Services—Revenues from training and consulting services are recognized as services are provided to customers. Revenues from maintenance contracts are deferred and recognized ratably over the term of the maintenance agreements. Revenues for customer support and maintenance that are bundled with the initial license fee are deferred based on the fair value of the bundled support services and recognized ratably over the term of the agreement; fair value is based on the renewal rate for continued support arrangements.

        Allowance for Doubtful Accounts.    We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required or revenue could be deferred until collectibility becomes probable.

        Valuation of Long-Lived and Intangible Assets and Goodwill.    We review identifiable intangible and other long-lived assets for impairment annually or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used or a significant adverse change in the business climate. If such events or changes in circumstances are present, the undiscounted cash flow method is used to determine whether the asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. To the extent that the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, the impairment is measured using the discounted cash flows. The discount rate utilized would be based on our best estimate of the related risks and return at the time the impairment assessment is made. In accordance with the new accounting standard SFAS No. 142, "Goodwill and Other Intangible Assets", we test goodwill and other indefinite lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. All of our goodwill was assigned to a single reporting unit, which is our sole operating segment.

        Contingencies.    We are subject to the possibility of various loss contingencies in the normal course of business. We accrue for loss contingencies when a loss is estimable and probable.

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Results of Operations

        The following table sets forth certain line items in our consolidated statement of operations as a percentage of total revenues for the periods indicated:

Three Months Ended August 31, 2002 Compared To Three Months Ended August 31, 2001

Revenues

        Total Revenues.    We license software under non-cancelable license agreements and provide related professional services including consulting, training, and implementation services, as well as ongoing customer support and maintenance. Total revenues decreased to $87.4 million for the three months ended August 31, 2002 from $103.9 million for the three months ended August 31, 2001, representing a decrease of 15.9%. This decrease was primarily due to lower demand for our products as a result of the continued general economic slowdown in information technology spending by our current and prospective customers.

        License Fees.    Revenues from license fees decreased to $18.1 million for the three months ended August 31, 2002 from $35.1 million for the three months ended August 31, 2001, representing a decrease of 48.4%. As a result of the continued economic slowdown in information technology spending, customers continue to delay purchasing new products, or purchase individual products, rather than multi-product suites or systems. This has resulted in a decline in the volume of licensing activity and the average sales price. Revenues from license fees as a percentage of total revenues for the three months ended August 31, 2002 and 2001 were 20.7% and 33.8%, respectively. The decrease in license fees as a percentage of revenues was primarily a result of the decrease in license fees.

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        Services.    Revenues from services increased to $69.3 million for the three months ended August 31, 2002 from $68.8 million for the three months ended August 31, 2001, representing an increase of 0.7%. Services revenues as a percentage of total revenues for the three months ended August 31, 2002 and 2001 were 79.3% and 66.2%, respectively.

        The current technology recession and decline in overall technology spending may cause our customers to continue to reduce or eliminate their information technology spending, which could substantially reduce the number of new software licenses we sell, the average sales price for these licenses and the need for our services. Historically, we have lower sales in our second fiscal quarter than our first fiscal quarter. Given the continuing economic slowdown in information technology spending, projections of future revenue and operating results are difficult to predict. There can be no assurance that our future revenue and operating results will not be adversely affected by the aforementioned factors.

Cost of Revenues

        Cost of License Fees.    Cost of license fees includes royalties to third parties, amortization of acquired software and software delivery expenses. Our software solutions may include embedded components of third-party vendors, for which a fee is paid to the vendor upon sale of our products. In addition, we resell third-party products in conjunction with the license of our software solutions. The cost of license fees is higher when we resell products of third-party vendors. As a result, gross margins vary depending on the proportion of third-party product sales in our revenue mix. Cost of license fees decreased to $3.2 million for the three months ended August 31, 2002 from $10.7 million for the three months ended August 31, 2001, representing a decrease of 70.4%. This decline primarily resulted from a decline in third party product sales and the overall decline in license fees. Cost of license fees as a percentage of total revenues for the three months ended August 31, 2002 and 2001 were 3.6% and 10.3%, respectively. Gross margin on revenue from license fees was 82.5% and 69.5% for the three months ended August 31, 2002 and 2001, respectively. The increase in gross margin on license fees was primarily attributable to a decreased proportion of third-party product sales in our revenue mix due, in part to the termination of our Siebel Systems reseller agreement in the fourth quarter of fiscal 2002.

        Cost of Services.    Cost of services includes the personnel and related travel and overhead costs for providing consulting, training, implementation and support services to customers. The cost of services is higher when such services are provided by third-party vendors. As a result, gross margins vary depending on the proportion of services provided by third parties in our revenue mix. Cost of services increased to $37.8 million for the three months ended August 31, 2002 from $37.1 million for the three months ended August 31, 2001, representing an increase of 2.0%. The increase in cost of services was primarily due to an increase in third-party party support expenses and due to the addition of headcount as a result of the Armature acquisition, partially offset by decreased compensation expense as the result of our workforce reduction in May 2002. Cost of services as a percentage of total revenues for the three months ended August 31, 2002 and 2001 were 43.3.% and 35.7%, respectively. Gross margin on services revenues were 45.4% and 46.1% for the three months ended August 31, 2002 and 2001. The increase in cost of services as a percentage of total revenues is due to the higher amount of revenue derived from services in relation to license fees. The decrease in gross margin on services was primarily attributable to an increase in billable travel costs in our revenue mix.

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Operating Expenses

        Research and Development.    Research and development expenses consist primarily of salaries, employee benefits, related overhead costs and consulting fees relating to product development, enhancements, upgrades, testing, quality assurance and documentation. Research and development expenses decreased to $15.3 million for the three months ended August 31, 2002 from $16.8 million for the three months ended August 31, 2001, representing a decrease of 9.1%. The decrease in expense is due to a decrease in compensation expense related to our workforce reduction in May 2002 and a decline in foreign language translation services, partially offset by an increase in headcount as a result of the Armature acquisition. Research and development expenses as a percentage of total revenues for the three months ended August 31, 2002 and 2001 were 17.5% and 16.2%, respectively.

        Sales and Marketing.    Sales and marketing expenses consist primarily of salaries and incentive compensation, employee benefits and related travel and overhead costs related to our sales and marketing personnel, as well as trade show activities and advertising costs. Sales and marketing expenses decreased to $28.5 million for the three months ended August 31, 2002 from $30.0 million for the three months ended August 31, 2001, representing a decrease of 5.1%. The decrease in these expenses was primarily the result of cost saving initiatives and a reduction in sales incentive compensation due to decreased license revenue. Sales and marketing expenses as a percentage of total revenues for the three months ended August 31, 2002 and 2001 were 32.6% and 28.9%, respectively.

        General and Administrative.    General and administrative expenses consist primarily of salaries, employee benefits and related overhead costs for administrative employees, as well as legal and accounting fees, consulting fees and bad debt expense. General and administrative expenses increased to $6.5 million for the three months ended August 31, 2002 from $6.2 million for the three months ended August 31, 2001, representing an increase of 5.5%. This increase is primarily due to additional headcount as a result of the Armature acquisition, $0.4 million non-recurring cost incurred for the audit of Armature in preparation for the required Form 8-K/A filing, and an increase in insurance costs. General and administrative expenses included non-cash charges for stock-based compensation of $0.6 and $1.4 million for the three months ended August 31, 2002 and 2001, respectively. General and administrative expenses as a percentage of total revenues for the three months ended August 31, 2002 and 2001 were 7.5% and 5.9%, respectively.

        Other General Expenses.    Other general expenses for the three months ended August 31, 2001 consisted of $0.5 million in consulting fees related to business process improvement initiatives designed to prepare our organization for our initial public offering. We did not incur similar expenses for the three months ended August 31, 2002.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles of $0.2 million and $0.1 million for the three months ended August 31, 2002 and 2001, respectively, consisted of amortization expense related to the acquisition of Account 4 in July 2001, Keyola in April 2002, and Armature in June 2002.

Other Income (Expense), Net

        Other income (expense), net increased to $1.1 million of net interest income for the three months ended August 31, 2002 from $(0.6) million of net interest expense for the three months ended August 31, 2001. We earned interest income of $1.1 million and $0.6 million for the three months ended August 31, 2002 and 2001, respectively. This was offset by interest expense of $44,000 and $1.1 million for the three months ended August 31, 2002 and 2001, respectively. The increase in

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interest income is due to the interest received on the invested proceeds from our initial public offering in December 2001. The decrease in interest expense is due to the repayment of Senior Subordinated Convertible Notes, subsequent to our initial public offering, that were outstanding during the three months ended August 31, 2001.

(Benefit) Provision for Income Taxes

        We recognized an income tax benefit of $(1.2) million for the three months ended August 31, 2002 compared to an income tax provision of $0.8 million for the three months ended August 31, 2001. Our income tax (benefit) provision is comprised primarily of federal and state taxes. Our effective rate was 39.0% and 40.0% for the three months ended August 31, 2002 and 2001, respectively. The decrease in the effective tax rate was primarily due to a decrease in permanent non-deductible expenses.

Liquidity and Capital Resources

        We finance our operations primarily with cash generated through operations. As of August 31, 2002, we had $214.2 million in cash, cash equivalents and marketable securities and $198.3 million in working capital.

        Net cash used in operating activities was $13.9 million and $9.4 million for the three months ended August 31, 2002 and 2001, respectively. The increase in cash used in operations was primarily due to the net loss, an increase in prepaid and other assets, and a decrease in liabilities, partially offset by a decrease in accounts receivable.

        We completed all actions related to the workforce reduction plan approved in the fourth quarter of fiscal 2002. We made cash payments totaling $2.9 million for severance related costs and lease payments. At August 31, 2002, the remaining accrual was $0.4 million and consisted of remaining lease obligations, which we expect to pay over the remaining lease term through June 2005.

        Net cash provided by (used in) investing activities was $18.7 million and $(24.5) million for the three months ended August 31, 2002 and 2001, respectively. Cash flows provided by investing activity for the three months ended August 31, 2002 consisted of $27.3 million of net sales of marketable securities, partially offset by $7.8 million used for the purchase of Armature assets, and $0.8 million for the purchase of property and equipment.    Cash flows used in investing activities for the three months ended August 31, 2001 consisted of $26.0 million paid for the acquisition of Account4, $3.5 million used for the purchase of equipment, partially offset by $5.0 million provided by the net sales of marketable securities. We have generally funded capital expenditures through the use of cash generated through operations and stockholder transactions. We believe that the combination of cash and cash equivalents, marketable securities, and potential cash flows from operations will be sufficient for our expected purchases of property and equipment for at least the foreseeable future.

        Net cash provided by financing activities was $7.3 million and $0.5 million for the three months ended August 31, 2002 and 2001, respectively. Net cash provided by financing activities for the three months ended August 31, 2002 reflects $2.4 million received from the exercise of stock options, and $5.2 million received for the purchase of treasury shares from contributions made to our employee stock purchase plan, partially offset by $0.3 million used for repayment of debt. Net cash provided by financing activities for the three months ended August 31, 2001 reflects $0.7 million received from the exercise of stock options, partially offset by $0.2 million used for repayment of debt.

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        We disclosed our significant lease obligations in our Annual Report on Form 10-K for the year ended May 31, 2002. There have been no significant changes to these obligations subsequent to our Form 10-K. We have no other off-balance sheet financing

        We have a $25.0 million revolving credit facility, which expires September 30, 2003. As of August 31, 2002, no amounts were outstanding under this facility. The arrangements with the bank contain limitations on dividends and capital expenditures and require the compliance with specific financial ratios and covenants, including no net loss in excess of $4.0 million in any fiscal quarter and no net loss in each of any two consecutive fiscal quarters. We do not expect to be in compliance with that covenant for the fiscal quarter ending November 30, 2002.

        We believe that cash flow from operations, together with our cash, cash equivalents and marketable securities will be sufficient to meet our cash requirements for the foreseeable future.

New Accounting Pronouncements

        Effective June 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121 and 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." Upon adoption, the Company did not have any long-lived assets which were impaired.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. The provisions of this statement related to the rescission of FASB Statement No. 4 were effective for the Company beginning on June 1, 2002. All other provisions of this statement were effective for transactions occurring after May 15, 2002. The adoption of this statement did not to have a material impact on the Company's consolidated financial position, results of operations or cash flows, but in accordance with the transition provisions will result in the Company's fiscal 2002 extraordinary item being reclassified in the statement of operations.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS No. 146). The new statement addresses the accounting for costs associated with exit or disposal activities. The provisions of the statement will be effective for disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Factors That May Affect Future Results or the Market Price of Our Stock

        An investment in our common stock involves a high degree of risk. Investors evaluating our company and its business should carefully consider the factors described below and all other information contained in this report on Form 10-Q. This section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended May 31, 2002 contained in the Company's Annual Report on Form 10-K. Any of the following factors could materially harm our business, operating results and

18

financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial could also harm our business, operating results and financial condition. The Company may make forward-looking statements from time to time, both written and oral. We undertake no obligation to revise or publicly release the results of any revisions to these forward- looking statements based on circumstances or events which occur in the future. The actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this report on Form 10-Q.

A continuing reduction in information technology spending may decrease our revenues, lower our growth rate or adversely affect our operating results.

        During the first quarter of fiscal 2003, our license revenue was lower than the prior year period because prospective customers continued to delay or cancel their information technology projects, or purchase individual products, rather than multi-product suites or systems. Demand for enterprise software and demand for our solutions are affected by general economic conditions and technology lifecycles. The current technology recession and decline in overall technology spending, terrorist activity and threats of hostilities in the Middle East may cause our customers to continue to reduce or eliminate their information technology spending, which could substantially reduce the number of new software licenses we sell, the average sales price for these licenses and the need for our services. Because of these market and economic conditions, we believe the level of demand for our products and services, and projections of future revenue and operating results, are difficult to predict. In May 2002, we took measures to reduce expenses because of the shortfall in revenue, and incurred a restructuring charge for severance related benefits and the closure of a leased office facility. Subsequent to the end of the first quarter of fiscal 2003, we took additional measures to realign our projected expenses with anticipated revenue. In September 2002, we announced that we would reduce our workforce by an additional 12% or approximately 240 employees and consolidate training facilities.

        We may need to make further expense reductions to address shortfalls in revenue caused by these or other conditions and we cannot assure you that those reductions will be available to offset revenue declines.

There are a large number of shares that may be sold in the market which may depress our stock price.

        A substantial number of shares of our common stock are held by our founders, their family members, current or former employees, or directors. Sale of a significant portion of these shares in the public market, or the perception that such sales are likely to occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.

Because our customers are concentrated in targeted service industries, our operating results may be adversely affected by adverse changes in one or more of these industries.

        As a result of our focus on targeted service industries, our financial results depend, in significant part, upon economic conditions in the healthcare, professional services, retail, public sector and financial services industries. An economic downturn, or adverse change in the regulatory environment or business prospects for one or more of these industries may decrease our revenues or lower our growth rate. In addition, we must continue to develop industry specific functionality for our solutions, which satisfies the changing, specialized requirements of prospective customers in our target industries.

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We may experience fluctuations in quarterly revenue that could adversely impact our stock price and our operating results.

        Our actual revenues in a quarter could fall below expectations, which could lead to a decline in our stock price. Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter to quarter. Revenues from license fees in any quarter depend substantially upon our licensing activity and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies. Our quarterly revenue may fluctuate and may be difficult to forecast for a variety of reasons, including the following:

•

a significant number of our existing and prospective customers' decisions regarding whether to enter into license agreements with us are made within the last few weeks or days of each quarter;



•

we have historically had a higher concentration of sales in the second half of our fiscal year due to the nature of our sales personnel compensation programs;



•

the size of license transactions can vary significantly;



•

a decrease in license fee revenue may result in a decrease in services revenue in the same or subsequent quarters;



•

customers may unexpectedly postpone or cancel orders due to changes in their strategic priorities, project objectives, budget or personnel;



•

customer evaluations and purchasing processes vary significantly from company to company, and a customer's internal approval and expenditure authorization process can be difficult and time consuming to complete, even after selection of a vendor;



•

the number, timing and significance of software product enhancements and new software product announcements; and



•

we may have to defer revenues under our revenue recognition policies.

        Fluctuation in our quarterly revenues may adversely affect our operating results. In each fiscal quarter our expense levels, operating costs and hiring plans are based on projections of future revenues and are relatively fixed. If our actual revenues fall below expectations we could experience a reduction in operating results.

Our lengthy and variable sales cycle makes it difficult to predict our operating results.

        It is difficult for us to forecast the timing and recognition of revenues from sales of our products because our existing and prospective customers often take significant time evaluating our products before licensing them. The period between initial customer contact and a purchase by a customer may vary from six months to more than one year. During the evaluation period, prospective customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:

•

reduced demand for enterprise software solutions;



•

introduction of products by our competitors;



•

lower prices offered by our competitors;



•

changes in budgets and purchasing priorities; and

20

•

reduced need to upgrade existing systems.

Our existing and prospective customers routinely require education regarding the use and benefit of our products. This may also lead to delays in receiving customers' orders.

A reduction in our licensing activity may result in reduced services revenues in future periods.

        Our ability to maintain or increase service revenue primarily depends on our ability to increase the number of our licensing agreements. Variances or slowdowns in licensing activity may impact our consulting, training and maintenance service revenues in future periods.

We may be required to delay revenue recognition into future periods which could adversely impact our operating results.

        We have in the past had to, and in the future may have to, defer revenue recognition for license fees due to several factors, including the following situations:

•

the license agreements include applications that are under development or have other undelivered elements;



•

we must deliver services, including significant modifications, customization or complex interfaces, which could delay product delivery or acceptance;



•

the transaction includes acceptance criteria;



•

the transaction includes contingent payment terms or fees;



•

a third-party vendor, whose technology is incorporated into our software products, delays delivery of the final software product to the customer;



•

we are required to accept a fixed-fee services contract; or



•

we are required to accept extended payment terms.

        Because of the factors listed above and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our license agreements to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend the sales cycle, and sometimes we do not obtain terms and conditions that permit revenue recognition at the time of delivery or even as work on the project is completed.

A number of our competitors are well-established software companies that have advantages over us.

        We face competition from a number of software companies that have advantages over us due to their larger customer bases, greater name recognition, long operating and product development history, greater international presence and substantially greater financial, technical and marketing resources. These competitors include well-established companies such as Oracle Corporation, PeopleSoft Inc. and SAP AG, all of which have larger installed customer bases. Furthermore, Oracle is capable of bundling its software with its database applications, which underlie a significant portion of our installed applications.

21

        In addition, we compete with a variety of more specialized software and services vendors, including:

•

Internet software vendors;



•

single-industry software vendors;



•

emerging enterprise resource optimization software vendors;



•

human resource management software vendors;



•

financial management software vendors;



•

merchandising software vendors; and



•

outsourced services providers.

        As a result, the market for enterprise software applications has been and continues to be intensely competitive. Some competitors have become more aggressive with their pricing, payment terms and/or issuance of contractual warranties, implementation terms or guarantees. We may be unable to continue to compete successfully with new and existing competitors without lowering prices or offering other favorable terms. We expect competition to persist and intensify, which could negatively impact our operating results and market share.

Changes in the terms on which we license technologies from third-party vendors, could result in the loss of potential revenues or increased costs or delays in the production and improvement of our products.

        We license complementary third-party software products that we incorporate into, or resell with, our own software products. For example, we have reseller relationships with Hyperion Solutions Corporation and Crystal Decisions, Inc. that allows us to resell their technology with our products. These licenses and other technology licenses are subject to periodic renewal and may include minimum sales requirements. Specifically, the failure to meet such minimum sales requirements under the Hyperion contract would permit Hyperion to terminate our agreement. A failure to renew, or early termination of, this license or other technology licenses could adversely impact our business. If any of the third-party software vendors change their product offerings or terminate our licenses, we may lose potential revenues and may need to incur additional development costs. In addition, if the cost of licensing any of these third-party software products significantly increases, or if there is a change in the relative mix of products we offer, our gross margins could significantly decrease. We rely on existing relationships with software vendors who are also competitors. If these vendors change their business practices, we may be compelled to find alternative vendors with complementary software, which may not be available on attractive terms or at all, or may not be as widely accepted or as effective as the software provided by our existing vendors. Our relationships with these and other third-party vendors are an important part of our business, and a deterioration of these relationships could adversely impact our business and operating results.

A deterioration in our relationship with resellers, systems integrators and other third parties that market and sell our products could reduce our revenues.

        Our ability to achieve revenue growth will depend in large part on adding new partners to expand our sales channels, as well as leveraging our relationships with existing partners, such as Siemens Medical Solutions Health Services Corporation. If our relationships with these resellers, system integrators and strategic and technology partners deteriorate or terminate, we may lose important sales

22

and marketing opportunities. Our reseller arrangements from time to time give rise to disputes regarding marketing strategy, exclusive territories and customer relationships which could negatively affect our business or result in costly litigation.

        Our current and potential customers often rely on third-party systems integrators to implement and manage new and existing applications. These systems integrators may increase their promotion of competing enterprise software applications, or may otherwise discontinue their relationships with or support of us.

        We also may enter into joint arrangements with strategic partners to develop new software products or extensions, or to sell our software as part of integrated products. Our business may be adversely affected if these strategic partners change their business priorities or experience difficulties in their operations, which in either case causes them to terminate or reduce their support for the joint arrangements. Furthermore, the financial condition of our channel partners impacts our business. If our partners are unable to recruit and adequately train a sufficient number of consulting personnel to support the implementation of our software products, or they otherwise do not adequately perform implementation services, we may lose customers. Our relationships with resellers, systems integrators and other third-party vendors are an important part of our business, and a deterioration of these relationships could adversely impact our business and operating results.

We may be unable to retain or attract clients if we do not develop new products and enhance our current products in response to technological changes.

        As a software company, we have been required to migrate our products and services from mainframe to client-server to web-based environments. In addition, we have been required to adapt our products to emerging standards for operating systems, databases and other technologies. We will be unable to compete effectively if we are unable to:

•

maintain and enhance our technological capabilities to correspond to these emerging environments and standards;



•

develop and market products and services that meet changing customer needs; and



•

anticipate or respond to technological changes on a cost-effective and timely basis.

        Our core technologies face competition from new or revised technologies that may render our existing technology less competitive or obsolete, reducing the demand for our solutions. As a result, we must continually redesign our products to incorporate these new technologies and to adapt our software products to operate on, and comply with, evolving industry standards for hardware and software platforms. In addition, conflicting new technologies present us with difficult choices of which new technologies to adopt. If we fail to anticipate or respond adequately to technological developments, or experience significant delays in product development or introduction, our business and operating results will be negatively impacted.

        In addition, to the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies may require us to make significant capital investments. We may not be able to obtain capital for these purposes and investments in new technologies may not result in commercially viable technological products. The loss of revenue and increased costs to us from such changing technologies would adversely affect our business and operating results.

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Our programs are deployed in large and complex systems and may contain defects that are not detected until after our programs have been installed, which could damage our reputation and cause us to lose customers or incur liabilities.

        Our software programs are often deployed in large and complex computer networks. Because of the nature of these programs, they can only be fully tested for reliability when deployed in networks for long periods of time. Our software programs may contain undetected defects when first introduced or as new versions are released, and our customers may discover defects in our products or experience corruption of their data only after our software programs have been deployed. As a consequence, from time to time we have received customer complaints following installation of our products. In addition, our products are combined with products from other vendors. As a result, should problems occur, it may be difficult to identify the source of the problem. These conditions increase the risk that we could experience, among other things:

•

loss of customers;



•

damage to our brand reputation;



•

failure to attract new customers or achieve market acceptance;



•

diversion of development and services resources; and



•

legal actions by our customers.

        In addition, we may not be able to avoid or limit liability for disputes relating to product performance or the provision of services. The occurrence of any one or more of the foregoing factors could cause us to experience losses, incur liabilities and adversely affect our operating results.

We may not be able to develop our international operations successfully.

        Currently, we have a limited international presence on which to base expectations for international sales. Additionally, we must adapt our products to meet the requirements of local markets, primarily in Asia. We may not be successful in developing business outside of the United States despite continued investment in our international operations. Factors that could have an adverse effect on our ability to develop our international operations include:

•

lack of experience in a particular geographic market;



•

significant presence of our competitors in international markets;



•

increased cost and development time required to modify and translate our products for local markets;



•

inability to recruit personnel in a specific country or region;



•

failure to enter into relationships with local resellers, systems integrators or other third-party vendors;



•

differing foreign technical standards; and



•

regulatory, social, political, labor or economic conditions in a specific country or region.

        If our international operations expand, our business may become subject to unexpected, uncontrollable and rapidly changing events and circumstances in addition to those experienced in the

24

United States. The following factors, among others, could have an adverse effect on our business and operating results:

•

operating costs in many countries are higher than in the United States;



•

conducting business in currencies other than United States dollars subjects us to currency controls and fluctuations in currency exchange rates;



•

we may be unable to hedge some transactions because of uncertainty or the inability to reasonably estimate our foreign exchange exposure;



•

we may hedge some anticipated transactions and transaction exposures, but could still experience losses due to exchange rate fluctuations;



•

laws, policies and other regulatory requirements affecting trade and investment including loss or modification of exemptions for taxes and tariffs, and import and export license requirements; and



•

exposure to different legal standards or risks.

We may be unable to identify or complete suitable acquisitions and investments, and any acquisitions and investments we do complete may create business difficulties or dilute our stockholders.

        As part of our business strategy, we intend to pursue strategic acquisitions. We may be unable to identify suitable acquisitions or investment candidates. Even if we identify suitable candidates, we cannot assure you that we will be able to make acquisitions or investments on commercially acceptable terms. If we acquire a company, we may have difficulty integrating its personnel and operations into our operations. In addition, its key personnel may decide not to work for us. We may also have difficulty integrating acquired businesses, products, services and technologies into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our operating results. We may also incorrectly judge the value or worth of an acquired company or business. Furthermore, we may incur significant debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of equity securities may be dilutive to our stockholders.

Increases in services revenue as a percentage of total revenues could decrease overall margins and adversely affect our operating results.

        We realize lower margins on service revenue than on license revenue. We subcontract certain consulting services to systems integrators which generally causes such services to carry lower gross margins than services provided by our employees. Therefore, an increase in the percentage of services provided by systems integrators versus services provided by our employees could have a detrimental impact on our overall gross margins and could adversely affect operating results.

We may be unable to compete effectively in the application service provider market.

        Some businesses choose to access enterprise software applications through application service providers, or ASPs, which are businesses that host applications and provide access to software on a subscription basis. We have limited experience selling our solutions through ASPs and may not be successful in generating revenue from this distribution channel. Moreover, the use of ASPs as a distribution channel may occur more rapidly than we anticipate, and we may not be able to compete effectively in this environment.

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In the event our products infringe on the intellectual property rights of third parties, our business may suffer if we are sued for infringement or cannot obtain licenses to these rights on commercially acceptable terms.

        We are subject to the risk of adverse claims and litigation alleging infringement by us of the intellectual property rights of others. Many participants in the technology industry have an increasing number of patents and patent applications and have frequently demonstrated a readiness to take legal action based on allegations of patent and other intellectual property infringement. Further, as the number and functionality of our products increase, we believe that we may become increasingly subject to the risk of infringement claims. If infringement claims are brought against us, these assertions could distract management and we may have to expend potentially significant funds and resources to defend or settle such claims. If we were found to infringe on the intellectual property rights of others, we could be forced to pay significant license fees or damages for infringement.

        As part of our standard license agreements, we agree to indemnify our customers for some types of infringement claims under the laws of the United States and some foreign jurisdictions that may arise from the use of our products. If a claim against us were successful, we may be required to incur significant expense and pay substantial damages as we are unable to insure against this risk. Even if we were to prevail, the accompanying publicity could adversely impact the demand for our software. Provisions attempting to limit our liability in our standard agreements may be invalidated by unfavorable judicial decisions or by federal, state, local or foreign laws or ordinances.

If we are unable to attract and retain qualified personnel, specifically sales and marketing personnel and software engineers, we will be unable to develop new products and increase our revenue.

        If we are unable to attract, train and retain highly-skilled technical, managerial, sales and marketing personnel, we may be at a competitive disadvantage and unable to increase our revenue. Competition for personnel in the software industry is intense, and, at times, we have had difficulty locating qualified candidates within desired geographic locations, or with certain industry-specific domain expertise. We may grant large numbers of options or other stock-based awards to attract and retain personnel, which could be highly dilutive to our stockholders. The failure to attract, train, retain and effectively manage employees could negatively impact our development and sales efforts and cause a degradation of our customer service. In particular, the loss of sales personnel could lead to lost sales opportunities because it can take several months to hire and train replacement sales personnel. Uncertainty created by turnover of key employees could adversely affect our business, operating results and stock price.

We have limited protection of our intellectual property and, if we fail to adequately protect our intellectual property, we may not be able to compete.

        We consider certain aspects of our internal operations, software and documentation to be proprietary, and rely on a combination of contract, copyright, trademark and trade secret laws and other measures to protect this information. In addition, to date we have filed only one patent application but we intend to file additional patent applications. Outstanding applications may not result in issued patents and, even if issued, the patents may not provide any competitive advantage. Existing copyright laws afford only limited protection. Our competitors may independently develop technologies that are less expensive or better than our technology. In addition, when we license our products to customers, we provide source code for many of our products. We may also permit customers to obtain access to our other source code through a source code escrow arrangement. This access to our source code may increase the likelihood of misappropriation or other misuse of our intellectual property. In

26

addition, the laws of some countries in which our software products are or may be licensed do not protect our software products and intellectual property rights to the same extent as the laws of the United States. Defending our rights could be costly.

Business disruptions may interfere with our ability to conduct business.

        Business disruptions could affect our future operating results. Our operating results and financial condition could be adversely affected in the event of a major fire or other catastrophic event, such the recent terrorist attacks on the United States. Impaired access or significant damage to our data center at our headquarters in St. Paul, Minnesota due to such an event could cause a disruption of our information systems and loss of financial data and certain customer data, which could adversely impact results of operations and business financial conditions.

Financial outlook

        From time to time in press releases and otherwise, we may publish forecasts or other forward-looking statements regarding our future results, including estimated revenues or net earnings. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further, the achievement of any forecast depends on numerous risks and other factors (including those described in this discussion), many of which are beyond our control. As a result, we cannot provide assurance that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. Current and potential stockholders are cautioned not to base their entire analysis of our business and prospects upon isolated predictions, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information affecting us, our products and services, and the software industry when evaluating our prospective results of operations.

ITEM 3.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

        Currently, we have minimal monetary assets, liabilities and operating expenses denominated in foreign currencies. If our international operations expand and we decide to enter into hedging transactions to minimize foreign currency rate risk, the adoption of SFAS No. 133, as amended by SFAS Nos. 137 and 138, could have a material impact on our operating results.

        We do not utilize any derivative security instruments. Our investments are based on the Company's investment policies. We invest our cash in financial instruments consisting principally of tax-exempt money market funds and highly liquid debt securities of corporations and municipalities. These investments are denominated in U.S. dollars. Investments with original maturities of three months or less are classified as cash and cash equivalents. As of August 31, 2002, the average maturity of our investment securities was less than 3 months and all investment securities had maturities less than 24 months. As of August 31, 2002, we consider the reported amounts of these investments to be reasonable approximations of their values. Therefore, changes in the market interest rates will not have a material impact on our financial position.

        Through August 31, 2002, interest expense was not sensitive to the general levels of United States interest rates because all of our notes payable bear fixed interest rates.

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ITEM 4.    EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures.

        Under the supervision and with the participation of our management, including the Company's Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.

(b)

Changes in internal controls.

        There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II.    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        The Company is involved in various claims and legal actions in the normal course of business.

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)

None

(d)

Use of Proceeds

        As of August 31, 2002, we held $169.0 million of net proceeds from our initial public offering in interest-bearing, investment grade securities. During the three months ended August 31, 2002, we used approximately $7.8 million for the acquisition of Armature and $0.8 million of capital expenditures.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

ITEM 5.    OTHER INFORMATION

        None

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

        99.1     Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350

        99.2     Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350

28

(b)

Reports on Form 8-K

        During the quarter ended August 31, 2002, the Company filed on July 15, 2002 a Report on Form 8-K reporting under Item 2 its completion of the acquisition of assets of Armature Limited and Armature Group Limited (collectively "Armature").

        Subsequent to the quarter ended August 31, 2002, the Company filed on September 10, 2002 a Report on Form 8-K/A amending Items 2 and 7 of the Report on Form 8-K filed July 15, 2002, to provide pro forma information and financial statements for Armature as required under Item 7.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

30

CERTIFICATIONS

Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

        I, John J. Coughlan, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Lawson Software, Inc.:

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

31

Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

        I, Robert G. Barbieri, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Lawson Software, Inc.;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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EXHIBIT INDEX

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