Back to GetFilings.com

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

FORM 10-Q

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

        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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ý    NO o

        The number of shares of the registrant's common stock outstanding as of April 3, 2003 was 97,559,648.

LAWSON SOFTWARE, INC.
Form 10-Q
Index

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

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

3

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.

4

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.

5

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 February 28, 2003 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 unaudited 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.    RECLASSIFICATION OF EARLY EXTINGUISHMENT OF DEBT EXPENSE

        The Company adopted Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145") effective June 1, 2002. Among other matters, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which required all gains and losses from extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. In connection with its adoption, gains and losses from extinguishments of debt are no longer classified as extraordinary items in the Company's statement of operations. In addition, prior period financial statements were reclassified to reflect the new standard. As such, the Company reclassified the $2,321 extraordinary loss on early extinguishment of debt recorded in the three and nine months ended February 28, 2002 as a separate component of other income (expense) in its condensed consolidated statements of operations.

3.    OTHER GENERAL EXPENSES

        The Company recognized $655 during the nine months ended February 28, 2002, 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 February 28, 2002 or in the three or nine months ended February 28, 2003.

4.    PER SHARE DATA

        Basic net loss per share is computed using the net loss applicable to common stockholders and the weighted-average number of shares of common stock outstanding. Diluted earnings per share reflects the weighted-average number of shares of common stock outstanding plus 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 and nine months ended February 28, 2003 and 2002 as potential shares of common stock from conversion of stock options and warrants were anti-dilutive. Diluted net loss per share for the three months and nine months ended February 28, 2003 and 2002 excluded 23,561 and 27,624, respectively, of potential shares of common stock from

6

conversion of stock options and warrants as they were anti-dilutive. Net loss available to common shareholders for the three and nine months ended February 28, 2002 includes a $29,996 non-cash charge related to the unamortized value of the beneficial conversion feature of our preferred stock. The Company also recognized accretion on the preferred stock of $6 and $102 for the three and nine months ended February 28, 2002, respectively. These charges adversely impacted basic and fully diluted net loss per share, but had no impact on net (loss) income.

5.    COMPREHENSIVE (LOSS) INCOME

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

6.    RESTRUCTURING

Fiscal 2003 Restructuring

        During the three months ended November 30, 2002, the Company approved a restructuring plan to realign projected expenses with anticipated lower revenue levels and incurred a restructuring charge of $5,823, which included $4,763 of severance and related benefits and $1,060 for the closure and consolidation of facilities. The plan included the termination of 244 employees in various functions including administrative, professional and managerial in the United States, Canada and Europe, all of which were terminated during the three months ended November 30, 2002. During the three months ended February 28, 2003, the Company recorded additional charges of $281. The incremental charges resulted from an increase in the estimated office closure liability upon the finalization of lease termination agreements and an increase in our estimated severance related benefits. The Company expects to pay all termination benefits during calendar year 2003. The cash payments related to lease obligations are expected to be made through October 2003.

        The following table sets forth the Company's remaining restructuring reserves related to the fiscal 2003 restructuring plan as of February 28, 2003, which are included in other accrued liabilities:

Fiscal 2002 Restructuring

        During the three months ended February 28, 2003, the Company recorded additional charges related to the fiscal 2002 restructuring accrual of $189. The incremental charges resulted from an

7

increase in the estimated office closure liability upon the finalization of lease termination agreements. The following table sets forth the Company's remaining restructuring reserves related to the fiscal 2002 restructuring plan as of February 28, 2003, which are included in other accrued liabilities:

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

7.    COMMITMENTS AND CONTINGENCIES

        In May 2002, the Company terminated the Company's ESOP plan, subject to completion of applicable government filings. In December 2002, the Company received final approval by the Internal Revenue Service. Prior to the termination, certain employees who were ESOP participants had the right to require the Company to repurchase any vested ESOP shares they received at the market price. Consequently, shares held by those ESOP participants were considered mandatorily redeemable common stock and were recorded at the estimated fair market value at each balance sheet date. As a result of the plan termination, the mandatory redemption feature terminated, and the mandatorily redeemable common stock amounts were eliminated from the accompanying balance sheet as of February 28, 2003. There were zero and 59 mandatorily redeemable shares outstanding as of February 28, 2003 and May 31, 2002, respectively. The Company expects that all remaining shares held in the plan will be distributed to the participants by May 2003. The termination did not have a material effect on the Company's financial position, results of operations or cash flows.

        The Company has a $25,000 revolving credit facility, which expires on September 30, 2003. At February 28, 2003, the Company had no amounts outstanding under the revolving credit facility. The agreement with the bank contains limitations on dividends and capital expenditures and requires the compliance with specific financial ratios and covenants. The Company was in compliance with or had obtained waivers for all covenants and restrictions under the debt agreement at February 28, 2003.

        The Company has a contingent consideration agreement related to the acquisition of Keyola in fiscal 2002. Under the terms of the agreement, additional cash payments ranging from zero to $2,250 are contingent upon the future performance of Keyola, measured annually through fiscal 2005, and will be recorded as additional goodwill if earned. At February 28, 2003, no amounts had been earned under this agreement.

        The Company's operating lease commitments are disclosed in detail in the Company's Form 10-K for the year-ended May 31, 2002. As a result of a new leased facility in the United Kingdom, the

8

Company's total future operating lease commitments have changed at February 28, 2003, and are summarized as follows:

        Future minimum lease payments:

        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.

        In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." The Interpretation requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The Interpretation also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material effect on the Company's consolidated financial position; however, management is continuing to evaluate the impact on future financial statements. The following is a summary of the Company's agreements that management has determined are within the scope of FIN No. 45.

        The Company licenses its software products to customers under end user license agreements and to certain resellers or other business partners under business partner agreements. These agreements generally include certain provisions for indemnifying the customer or business partner against losses, expenses and liabilities from damages that may be awarded against them if our software, or the third party-owned software the Company resells, is found to infringe a patent, copyright, trademark or other proprietary right of a third party. These agreements generally limit the Company's indemnification obligations based on industry-standards and geographical parameters, and give the Company the right to replace an infringing product. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company believes its internal development processes and other practices limit its exposure under these indemnification provisions. In addition, the invention and nondisclosure agreements signed by the Company's employees, assign to it various intellectual property rights. The Company has not incurred significant costs payable to a customer or business partner to defend lawsuits or settle claims related to these indemnification agreements. As a result, management believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of February 28, 2003.

9

        The Company enters into services agreements with customers for the implementation of its software. The Company also may subcontract those services to its business partners. From time to time, the Company includes in those services agreements, certain provisions for indemnifying the customer against losses, expenses and liabilities from those services, including, for example, personal injury or tangible property damage. Lease agreements and other contracts with the Company's vendors may also impose similar indemnification obligations on the Company for personal injury, tangible property damage or other claims. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general liability and umbrella insurance policies that enable it to recover a portion of certain amounts paid. The Company has not incurred significant costs payable to a customer to defend lawsuits or settle claims related to these indemnification agreements. As a result, management believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of February 28, 2003.

        When, as part of an acquisition, the Company acquires all of the stock or all of the assets and liabilities of a company, it assumes the liability for certain events or occurrences that took place before the date of acquisition. The maximum potential amount of future payments the Company could be required to make for such obligations is undeterminable at this time. All of these obligations were grandfathered under the provisions of Interpretation 45 as they were in effect prior to December 31, 2002. Accordingly, there are no liabilities recorded for these liabilities as of February 28, 2003.

        The Company has arrangements with certain vendors whereby it guarantees the expenses incurred by certain of its employees. The term is from execution of the arrangement until cancellation and payment of any outstanding amounts. Unless otherwise limited in the contract, the Company would be required to pay any unsettled employee expenses upon notification from the vendor. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not significant. As a result, management believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of February 28, 2003.

        Delaware law and the Company's certificate of incorporation and bylaws provide that the Company shall, under certain circumstances and subject to certain limitations, indemnify any person made or threatened to be made a party to a proceeding by reason of that person's former or present official capacity with the Company against judgments, penalties, fines, settlements and reasonable expenses. Any such person also is entitled, subject to limitations, to payment or reimbursement of reasonable expenses in advance of the final disposition of the proceeding. The Company has also entered into an agreement with one of its directors that requires the Company to indemnify him for expenses and liabilities incurred by him in any proceeding by reason of his status as a director with the Company to the extent permitted by Delaware law and as authorized in our certificate of incorporation. The maximum potential amount of future payments the Company could be required to make under these indemnification arrangements is unlimited; however, the Company has insurance policies that enables the Company to recover a portion of certain amounts paid. The Company has not incurred significant costs payable to an indemnitee to defend lawsuits or settle claims related to these indemnification arrangements. As a result, management believes the estimated fair value of these arrangements is minimal. Accordingly, there are no liabilities recorded for these agreements as of February 28, 2003.

        When a customer purchases support for the Company's software products, the Company generally warrant that those products then eligible for support will operate materially and substantially as described in the documentation that is provided with that software. The Company also generally warrants that its services will be provided by trained personnel and in a professional manner using commercially reasonable efforts.    If necessary, the Company provides for the estimated cost of product and service warranties based on specific warranty claims and claim history.

10

8.    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:

9.    ACQUISITIONS

        The 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 due to

11

the finalization of certain tax attributes; accordingly the allocation of the purchase price is subject to refinement:

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

        The pro forma results for the three months ended February 28, 2003 do not differ from actual reported results because Armature and Account4 were owned for the entire period. 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. 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.

10.  COMMON STOCK REPURCHASE

        In December 2002, the Board of Directors authorized the repurchase, from time to time, of up to $15,000 of shares of the Company's common stock. Shares repurchased under the stock repurchase program will be used for general corporate purposes. The Company's repurchases of shares of common stock are recorded as treasury stock and result in a reduction of stockholders' equity. During the three and nine months ended February 28, 2003 a total of 1,020 shares were repurchased for a total of $6,050.

12

        Additionally, during the three and nine months ended February 28, 2002 the Company repurchased a total of 72 shares totaling $1,242 to repurchase mandatorily redeemable shares related to the Company's ESOP plan (see Note 7).

11.  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.

        As described in Note 2, the Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." which resulted in the Company's fiscal 2002 extraordinary item being reclassified in the statement of operations to other income (expense) for the three and nine months ended February 28, 2002 in the accompanying condensed consolidated statements of operations.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The new statement addresses the accounting for costs associated with exit or disposal activities. Commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, SFAS 146 requires exit or disposal costs be recorded when they are "incurred" and can be measured at fair value. SFAS 146 further requires that the recorded liability be adjusted for changes in estimated cash flows. The provisions of the statement are effective for exit and disposal activities initiated after December 31, 2002. The adoption of this statement did not have an impact on the Company's consolidated financial position, results of operations or cash flows, but will change on a prospective basis, the timing of when restructuring charges are recorded from the commitment date to when the liability is incurred.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. The statement amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of FASB Statement No. 123. The transition provisions are effective for fiscal years ending after December 15, 2002. The disclosure provisions are effective for interim periods beginning after December 15, 2002, with early application encouraged. The Company currently does not plan to change to the fair value method of accounting for stock-based compensation. 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. The Company will implement the year-end disclosure provisions as of May 31, 2003 and the interim period disclosure provisions in the quarter ending August 31, 2003.

        In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." FIN No. 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. However, if the Company enters into any such arrangement with a variable interest entity in the future, the Company's consolidated financial position or results of operations may be adversely effected.

13

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 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. 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 sales of 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. During the nine months ended February 28, 2003 we took additional measures to realign our projected expenses with anticipated lower revenue levels and approved a restructuring plan, which included reducing our workforce and consolidating certain training facilities. The plan included the termination of 244 employees in various functions including administrative, professional and managerial, in the United States, Canada and Europe. As a result, we recorded a restructuring charge of $6.3 million in the nine months ended February 28, 2003. At February 28, 2003, the remaining accrual of $1.7 million represents remaining lease obligations for office and training facilities closed or consolidated which will be paid over the remaining lease terms through June 2005, and unpaid employee termination costs which will be paid during calendar year 2003.

Acquisition

        On June 28, 2002, Lawson Software Limited, a wholly owned subsidiary of Lawson Software, Inc. (Lawson) 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.

14

        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.

        We allocated the excess purchase price over the fair value of the net tangible assets acquired of $7.8 million to the following assets: $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 and ten years, respectively. 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 license fees. Software arrangements which include fixed-fee service components are recognized using contract accounting. Our specific revenue recognition policies are as follows:

•

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,

15

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 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.

•

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.

        Deferred Taxes.    Significant judgment is required in determining our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Although we believe our assessments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions, benefits and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such a determination is made.

16

        We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, we must include an expense within the tax provision in the statement of operations. We have not recorded a valuation allowance as of February 28, 2003, as we expect to be able to utilize all of our deferred tax assets. The ability to utilize our deferred tax assets is solely dependent on our ability to generate future taxable income. In the event that we adjust our estimates of future taxable income, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.

        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.

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:

17

Three Months Ended February 28, 2003 Compared To Three Months Ended February 28, 2002

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 $78.4 million for the three months ended February 28, 2003 from $118.8 million for the three months ended February 28, 2002, representing a decrease of 34.0%. The decrease was primarily due to a decrease in revenues from license fees. The general economic slowdown in information technology spending has continued to negatively impact the sales of our products to our customers and prospective customers.

        License Fees.    Revenues from license fees decreased to $14.2 million for the three months ended February 28, 2003 from $49.1 million for the three months ended February 28, 2002, representing a decrease of 71.1%. 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 average sales price. Revenues from license fees as a percentage of total revenues for the three months ended February 28, 2003 and 2002 were 18.1% and 41.4%, respectively. The decrease in license fees as a percentage of total revenues was primarily a result of the decrease in license fees in proportion to revenues from services.

        Services.    Revenues from services decreased to $64.2 million for the three months ended February 28, 2003 from $69.7 million for the three months ended February 28, 2002, representing a decrease of 7.9%. The decrease was primarily due to a decrease in demand for consulting services, partially offset by an increase in maintenance revenue. The increase in maintenance revenue was primarily due to an expanded customer base and increased maintenance prices. Services revenues as a percentage of total revenues for the three months ended February 28, 2003 and 2002 were 81.9% and 58.6%, 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. Given continued weak economic conditions and the uncertainty regarding the war in Iraq and threats of hostilities elsewhere, 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 $3.1 million for the three months ended February 28, 2003 from $9.2 million for the three months ended February 28, 2002, representing a decrease of 66.0%. Cost of license fees as a percentage of total revenues for the three months ended February 28, 2003 and 2002 were 4.0% and 7.7%, respectively. This decline reflects the overall decline in license fees and a decline in third party products in relation to total sales, due, in part, to the termination of our Siebel Systems reseller agreement in the fourth quarter of fiscal 2002. Gross margin on revenue from license fees was 78.1% and 81.4% for the three months ended February 28, 2003 and 2002, respectively. The decrease in gross margin on license fees was primarily attributable to the relatively fixed nature of certain costs including amortization expense for acquired software and software delivery expenses in relation to license fees.

18

        Cost of Services.    Cost of services includes the salaries, employee benefits and related travel and overhead costs for providing consulting, training, implementation and support services to customers. Cost of services decreased to $34.0 million for the three months ended February 28, 2003 from $39.2 million for the three months ended February 28, 2002, representing a decrease of 13.4%. The decrease in cost of services was primarily due to lower compensation expense as a result of our May and September 2002 workforce reductions and a decline in third-party consulting expenses due to a lower proportion of third-party services in our revenue mix. These declines are partially offset by an increase in expenses due to the addition of headcount as a result of the Armature acquisition. Cost of services as a percentage of total revenues for the three months ended February 28, 2003 and 2002 were 43.3% and 33.0%, respectively. The increase in cost of services as a percentage of total revenues is due to the decrease in total revenues. Gross margin on services revenues were 47.1% and 43.7% for the three months ended February 28, 2003 and 2002, respectively. The increase in gross margin on services was primarily attributable to the increase in maintenance revenue in proportion to consulting and other service revenue.

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 $14.3 million for the three months ended February 28, 2003 from $17.1 million for the three months ended February 28, 2002, representing a decrease of 16.5%. The decrease in expense is due to a decrease in compensation expense related to our May and September 2002 workforce reductions, 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 February 28, 2003 and 2002 were 18.2% and 14.4%, respectively.

        Sales and Marketing.    Sales and marketing expenses consist primarily of salaries and incentive compensation, employee benefits and 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 $24.0 million for the three months ended February 28, 2003 from $31.8 million for the three months ended February 28, 2002, representing a decrease of 24.6%. The decrease in these expenses was primarily the result of a decrease in compensation expense reflecting our May and September 2002 workforce reductions, a reduction in marketing activities, lower sales incentive compensation due to lower license revenues and decreased non-cash stock based compensation expense. Marketing activities decreased in the three months ended February 28, 2003 due to cost containment efforts. Sales and marketing expenses included a non-cash stock-based compensation charge of $0.3 and $0.7 million for the three months ended February 28, 2003 and 2002, respectively. Sales and marketing expenses as a percentage of total revenues for the three months ended February 28, 2003 and 2002 were 30.5% and 26.8%, 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 decreased to $4.7 million for the three months ended February 28, 2003 from $9.8 million for the three months ended February 28, 2002, representing a decrease of 51.9%. The decrease in expense is primarily due to a decline in bad debt expense and a decrease in compensation expense reflecting our May and September 2002 workforce reductions. The decline in bad debt expense in the three months ended February 28, 2003 reflects the decrease in the trade accounts receivable balance and our recent collection history. In the prior fiscal quarter, during the three months ended February 28, 2002, we experienced a higher than normal amount of bad debt expense due to the deteriorating financial condition of several customers. The decreases were partially offset by an increase in insurance costs.

19

General and administrative expenses included non-cash charges for stock-based compensation of $0.4 million and $1.0 million for the three months ended February 28, 2003 and 2002, respectively. General and administrative expenses as a percentage of total revenues for the three months ended February 28, 2003 and 2002 were 6.0% and 8.2%, respectively. We expect our general and administrative expenses to increase sequentially in the fourth quarter of fiscal 2003.

        Restructuring charge.    During the three months ended November 30, 2002, we approved a restructuring plan in response to the general economic downturn and incurred restructuring charges of $5.8 million. The plan included the termination and payment of severance-related benefits for 244 employees in various functions including administrative, professional and managerial, in the United States, Canada and Europe. The charge also included expenses related to the closure and consolidation of facilities. During the three months ended February 28, 2003, we recorded an additional $0.5 million in restructuring expenses. The incremental charge resulted from an increase in the estimated office closure liability upon the finalization of lease termination agreements and an increase in our estimated severance related benefits. All terminations have been completed and associated payments are expected to be completed during calendar year 2003. The remaining facility closure expenses will be paid under the existing lease payment terms through June 2005.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles of $0.2 million for the three months ended February 28, 2003 and 2002 consisted of amortization expense related to the acquisition of Account4 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 other income, net, for the three months ended February 28, 2003 from $1.6 million of other expense, net, for the three months ended February 28, 2002. We earned interest income of $1.2 million and $0.9 million for the three months ended February 28, 2003 and 2002, respectively. During the three months ended February 28, 2002, we recorded a non-cash charge of $2.3 million related to the early extinguishment of debt. The charge reflects the write-off of unamortized debt issuance costs upon the repayment of senior subordinated convertible notes with the proceeds from our initial public offering in December 2001.

(Benefit) Provision for Income Taxes

        We recognized an income tax benefit of $0.5 million for the three months ended February 28, 2003 compared to an income tax provision of $4.0 million for the three months ended February 28, 2002. 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 February 28, 2003 and 2002, respectively. The decrease in the effective tax rate was primarily due to an increase in tax-exempt income.

Nine Months Ended February 28, 2003 Compared To Nine Months Ended February 28, 2002

Revenues

        Total Revenues.    Total revenues decreased to $253.7 million for the nine months ended February 28, 2003 from $321.4 million for the nine months ended February 28, 2002, representing a decrease of 21.1%. The decrease was primarily due to a decrease in revenues from license fees. The general economic slowdown in information technology spending has continued to negatively impact the sales of our products to our customers and prospective customers

        License Fees.    Revenues from license fees decreased to $51.3 million for the nine months ended February 28, 2003 from $114.3 million for the nine months ended February 28, 2002, representing a decrease of 55.1%. As a result of the continued economic slowdown in information technology spending, customers continue to delay purchasing new products, or purchase individual products, rather

20

than multi-product suites or systems. This has resulted in a decline in the average sales price. Revenues from license fees as a percentage of total revenues for the nine months ended February 28, 2003 and 2002 were 20.2% and 35.6%, respectively. The decrease in license fees as a percentage of total revenues was primarily a result of the decrease in license fees in proportion to revenues from services.

        Services.    Revenues from services decreased to $202.3 million for the nine months ended February 28, 2003 from $207.0 million for the nine months ended February 28, 2002, representing a decrease of 2.3%. The decrease was primarily due to a decrease in demand for consulting services, partially offset by an increase in maintenance revenue. The increase in maintenance revenue was primarily due to an expanded customer base and increased maintenance prices. Services revenues as a percentage of total revenues for the nine months ended February 28, 2003 and 2002 were 79.8% and 64.4%, respectively.

Cost of Revenues

        Cost of License Fees.    Cost of license fees decreased to $9.9 million for the nine months ended February 28, 2003 from $24.9 million for the nine months ended February 28, 2002, representing a decrease of 60.3%. This decline reflects the overall decline in license fees as well as a decline in the percentage of third-party product sales in our license revenue mix. Cost of license fees as a percentage of total revenues for the nine months ended February 28, 2003 and 2002 were 3.9% and 7.8%, respectively. Gross margin on revenue from license fees was 80.7% and 78.2% for the nine months ended February 28, 2003 and 2002, 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 decreased to $107.7 million for the nine months ended February 28, 2003 from $114.1 million for the nine months ended February 28, 2002, representing a decrease of 5.6%. The decrease in cost of services was primarily due to a reduction in compensation expense and related employee costs as a result of our May and September 2002 workforce reductions, a decline in third-party consulting expenditures due to a lower proportion of third-party services in our revenue mix, and lower travel costs due to reduced headcount. These decreases are partially offset by an increase in third party support expenses related to third party product sales in fiscal 2002 and due to the addition of headcount as a result of the Armature acquisition. Cost of services as a percentage of total revenues for the nine months ended February 28, 2003 and 2002 were 42.5% and 35.5%, respectively. The increase in cost of services as a percentage of total revenues is due to the decrease in total revenues. Gross margin on services revenues were 46.8% and 44.9% for the nine months ended February 28, 2003 and 2002, respectively. The increase in gross margin on services was primarily attributable to the increase in maintenance revenue in proportion to consulting and other service revenue.

Operating Expenses

        Research and Development.    Research and development expenses decreased to $43.9 million for the nine months ended February 28, 2003 from $50.3 million for the nine months ended February 28, 2002, representing a decrease of 12.7%. The decrease is due to a decrease in compensation expense related to our May and September 2002 workforce reductions, a decrease in non-cash charges for stock-based compensation, and a decline in costs for foreign language translation, partially offset by an increase in headcount as a result of the Armature acquisition. Research and development expenses included non-cash charges for stock-based compensation of $0.5 and $1.3 million for the nine months ended February 28, 2003 and 2002, respectively. Research and development expenses as a percentage of total revenues for the nine months ended February 28, 2003 and 2002 were 17.3% and 15.6%, respectively.

21

        Sales and Marketing.    Sales and marketing expenses decreased to $77.3 million for the nine months ended February 28, 2003 from $92.2 million for the nine months ended February 28, 2002, representing a decrease of 16.2%. The decrease in these expenses was primarily the result a decrease in compensation expenses reflecting our May and September 2002 workforce reductions, a decrease in non-cash charges for stock-based compensation, cost savings initiatives and a reduction in sales incentive compensation due to decreased license revenue. Sales and marketing expenses included non-cash charges for stock-based compensation of $0.5 million and $2.2 million for the nine months ended February 28, 2003 and 2002, respectively. Sales and marketing expenses as a percentage of total revenues for the nine months ended February 28, 2003 and 2002 were 30.4% and 28.7%, respectively.

        General and Administrative.    General and administrative expenses decreased to $21.2 million for the nine months ended February 28, 2003 from $24.0 million for the nine months ended February 28, 2002, representing a decrease of 11.5%. The decrease in expense is primarily due to a decline in bad debt expense reflecting the decrease in the trade accounts receivable balance and our recent collection history, a decrease in compensation expense reflecting our May and September 2002 workforce reductions and a decrease in non-cash charges for stock-based compensation. The decrease was partially offset by increased lease termination expense related to our former headquarters of $0.7 million, an asset impairment charge related to a discontinued project of $0.7 million, an increase in insurance costs of $0.7 million and non-recurring costs of $0.5 million incurred for the audit of Armature in preparation for the required Form 8-K/A filing. General and administrative expenses included non-cash charges for stock-based compensation of $1.5 million and $3.5 million for the nine months ended February 28, 2003 and 2002, respectively. General and administrative expenses as a percentage of total revenues for the nine months ended February 28, 2003 and 2002 were 8.3% and 7.4%, respectively.

        Other General Expenses.    Other general expenses for the nine months ended February 28, 2002 consisted of $0.7 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 nine months ended February 28, 2003.

        Restructuring charge.    During the nine months ended February 28, 2003, we recorded $6.3 million of restructuring charges. In the second quarter of fiscal 2003, we approved a restructuring plan in response to the general economic downturn. The plan included the termination and payment of severance-related benefits for 244 employees in various functions including administrative, professional, and managerial, in the United States, Canada and Europe. The charge also included expenses related to the closure and consolidation of facilities. All terminations have been completed and associated payments are expected to be completed in calendar year 2003. The remaining facility closure expenses are expected to be paid through June 2005.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles of $0.7 million and $0.6 million for the nine months ended February 28, 2003 and 2002, respectively, consisted of amortization expense related to the acquisition of Account4 in July 2001, Keyola in April 2002, and Armature in June 2002.

Other Income (Expense), Net

        Other income (expense), net, increased to $3.3 million of other income, net, for the nine months ended February 28, 2003 compared to $2.6 million of other expense, net, for the nine months ended February 28, 2002. We earned interest income of $3.4 million and $1.7 million for the nine months ended February 28, 2003 and 2002, respectively. This was offset by interest expense of $0.1 million and $2.0 million for the nine months ended February 28, 2003 and 2002, respectively. The increase in interest income is due to an increase in our invested cash, cash equivalents and marketable securities balances. The decrease in interest expense is due to the repayment of senior subordinated convertible notes subsequent to our initial public offering in December 2001. As a result of the early repayment of the notes, we recorded a non-cash charge of $2.3 million to write-off of unamortized debt issuance costs for the nine months ended February 28, 2002.

22

(Benefit) Provision for Income Taxes

        We recognized an income tax benefit of $3.9 million for the nine months ended February 28, 2003 compared to an income tax provision of $4.9 million for the nine months ended February 28, 2002. Our income tax (benefit) provision is comprised primarily of federal and state taxes. Our effective rate was 39.0% and 40.0% for the nine months ended February 28, 2003 and 2002, respectively. The decrease in the effective tax rate was primarily due to an increase in tax-exempt income.

Liquidity and Capital Resources

        We finance our operations primarily with cash generated through operations. As of February 28, 2003, we had $249.2 million in cash, cash equivalents and marketable securities and $208.7 million in working capital.

        Net cash provided by operating activities was $26.6 million and $1.0 million for the nine months ended February 28, 2003 and 2002, respectively. The increase in cash provided in operations was primarily due to a decrease in accounts receivable, partially offset by our net loss and a decrease in accounts payable and other liabilities.

        Net cash provided by (used in) investing activities was $28.5 million and $(42.5) million for the nine months ended February 28, 2003 and 2002, respectively. Cash flows provided by investing activities for the nine months ended February 28, 2003 consisted of $41.1 million of net sales of marketable securities, partially offset by $7.8 million used for the purchase of Armature assets, and $4.8 million for the purchase of property and equipment. Cash flows used in investing activities for the nine months ended February 28, 2002 included $26.0 million related to the acquisition of Account4, $11.3 million related to the purchases of property and equipment, the majority of which consisted of computer equipment, and net marketable securities purchases and maturities of $5.2 million. We have generally funded capital expenditures through the use of cash generated through operations and stockholder transactions.

        Net cash provided by financing activities was $5.9 million and $186.6 million for the nine months ended February 28, 2003 and 2002, respectively. Net cash provided by financing activities for the nine months ended February 28, 2003 reflects $6.2 million received from the exercise of stock options and $6.7 million from the issuance of treasury shares for our employee stock purchase program, partially offset by $6.1 million used to repurchase shares of our common stock and $0.9 million used for repayment of debt. Net cash provided by financing activities for the nine months ended February 28, 2002 reflects the proceeds of our initial public offering of $197.4 million. We used proceeds of $10.2 million from the offering to repay senior subordinated convertible notes.

        We have a contingent consideration agreement related to the acquisition of Keyola in fiscal 2002. Under the terms of the agreement additional cash payments ranging from zero to $2.3 million are contingent upon the future performance of Keyola, measured annually through fiscal 2005, and will be recorded as additional goodwill if earned. At February 28, 2003, no amounts had been earned under this agreement.

        Our Board of Directors has authorized us to repurchase, from time to time, up to $15.0 million of our common shares. We expect that the share repurchase will be largely funded by cash proceeds obtained throughout calendar year 2002 from exercise of employee stock options and the employee stock purchase plan. The repurchased shares will be used for general corporate purposes. We repurchased a total of 1.0 million shares for $6.1 million during the nine months ended February 28, 2003.

        We disclosed our significant lease obligations in our Annual Report on Form 10-K for the year ended May 31, 2002. We have summarized future minimum lease commitments at February 28, 2003 in note 7 to the condensed consolidated financial statements included in this Form 10-Q.

23

        We have a $25.0 million revolving credit facility, which expires on September 30, 2003. At February 28, 2003, we had no amounts outstanding under the revolving credit facility. The agreement with the bank contains limitations on dividends and capital expenditures and requires the compliance with specific financial ratios and covenants. We were in compliance with or had obtained waivers for all covenants and restrictions under the debt agreement at February 28, 2003.

        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 working capital, capital expenditures and investments for the foreseeable future.

New Accounting Pronouncements

        Effective June 1, 2002, we 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, we 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." 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 us beginning on June 1, 2002. All other provisions of this statement were effective for transactions occurring after May 15, 2002. In accordance with the transition provisions the adoption resulted in our fiscal 2002 extraordinary item being reclassified in the statement of operations to other income (expense) beginning in the quarter ended February 28, 2003.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." The new statement addresses the accounting for costs associated with exit or disposal activities. Commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, SFAS 146 requires exit or disposal costs be recorded when they are "incurred" and can be measured at fair value. SFAS 146 further requires that the recorded liability be adjusted for changes in estimated cash flows. The provisions of the statement will be effective for exit and disposal activities initiated after December 31, 2002. The adoption of this statement did not have an impact on our consolidated financial position, results of operations or cash flows, but will change on a prospective basis, the timing of when restructuring charges are recorded from the commitment date to when the liability is incurred.

        In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." The Interpretation requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The Interpretation also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material effect on our consolidated financial position; however, management is continuing to evaluate the impact on future financial statements. A summary of our agreements that we have determined are within the scope of FIN No. 45 is in note 7 to the condensed consolidated financial statements included in this Form 10-Q.

24

        In December 2002, the FASB issued SFAS No. 148,"Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. The statement amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. We account for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and comply with the disclosure provisions of FASB Statement No. 123. The transition provisions are effective for fiscal years ending after December 15, 2002. The disclosure provisions are effective for interim periods beginning after December 15, 2002, with early application encouraged. We currently have no plans to change to the fair value method of accounting for stock-based compensation. The adoption of this statement is not expected to have a material impact on our consolidated financial position, results of operations or cash flows. We will implement the year-end disclosure provisions as of May 31, 2003 and the interim period disclosure provisions in the quarter ending August 31, 2003.

        In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." FIN No. 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. We currently have no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 did not have a material effect on our consolidated financial position, results of operations or cash flows. However, if we enter into any such arrangement with a variable interest entity in the future, our consolidated financial position or results of operations may be adversely effected.

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 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 nine months of fiscal 2003, our license revenue was lower than the prior year period because prospective customers continued to delay or cancel their information technology

25

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, competition, product acceptance and technology lifecycles. The current technology recession and decline in overall technology spending, terrorist activity, war in Iraq, and threats of hostilities elsewhere 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 factors, 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 and related benefits and the closure of a leased office facility. In the nine months ended February 28, 2003, we took additional measures to realign our projected expenses with anticipated revenue, and incurred restructuring charges for severance and related benefits and facility closure and consolidation charges.

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

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 and market conditions in the healthcare, professional services, retail, public sector and financial services industries. Because the healthcare marketplace for our products is maturing, we will need to expand our product offerings to achieve long-term revenue growth at our historical rate in that market. Many state and local governments are facing budget shortfalls and are reducing capital spending, including spending on software and services. The economic downturn has also reduced capital spending in the professional services and financial services industries. A continued economic downturn, or adverse change in the regulatory environment or business prospects for one or more of these industries may further 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.

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, but there is no assurance that this pattern will continue;



•

the size of license transactions can vary significantly;

26

•

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 projects 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;



•

prospective customers may decline or defer the purchase of new products or releases if we don't have sufficient customer references for those products; 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 nine 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



•

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;

27

•

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.

If we account for employee stock option and employee stock purchase plans using the fair value method, it could significantly reduce our net income and earnings per share.

        There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have material accounting charges. Although we are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value method.

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.

        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.

28

        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 incorporate Micro Focus International, Inc.'s software in many of our products and have reseller relationships with Business Software Incorporated, Crystal Decisions, Inc. and Hyperion Solutions Corporation 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. A failure to renew, or early termination of these licenses 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 and seek alternative third-party relationships. 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 and marketing opportunities. Our reseller arrangements from time to time give rise to disputes regarding marketing strategy, exclusive territories, payment of fees and customer relationships, which could negatively affect our business or result in costly litigation.

29

        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, sell our software as part of integrated products or serve as an application service provider for our 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;



•

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

        New products require significant development investment. We face uncertainty when we develop or acquire new products because there is no assurance that a sufficient market will develop for those products. For example, we have made a significant investment in the acquisition and development of services automation and retail merchandising software products. If we do not attract sufficient customer interest in those products, we will not realize a return on our investment and our operating results will be adversely affected.

        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.

30

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. Software and data security are becoming increasingly important because of regulatory restrictions on data privacy and the significant legal exposures and business disruptions stemming from computer viruses and other unauthorized entry or use of computer systems. 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 or government regulators.

        In addition, we may not be able to avoid or limit liability for disputes relating to product performance, software security 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.

        We may not be successful in developing business outside of the United States despite continued investment in our international operations. Additionally, we must adapt our products to meet the requirements of local markets, primarily in Asia. 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

31

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 products, personnel and operations into our business. 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.

32

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 are 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.

It may become increasingly expensive to obtain and maintain liability insurance.

        We contract for insurance to cover several, but not all, potential risks and liabilities. In the current market, insurance coverage is becoming more restrictive, and, when insurance coverage is offered, the deductible for which we are responsible is larger. In light of these circumstances, it may become more difficult to maintain insurance coverage at historical levels, or if such coverage is available, the cost to obtain or maintain it may increase substantially. This may result in our being forced to bear the burden of an increased portion of risks for which we have traditionally been covered by insurance, which could negatively impact our results of operations.

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 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 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 security breach, major fire, war, terrorist attack or other catastrophic event. Impaired access or significant damage to our data center at our

33

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.

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

        In January 2003, we announced that our Chairman, H. Richard Lawson, had entered into a selling plan to sell up to 500,000 shares of our stock over a six-month period and that our Chief Executive Officer, John Coughlan, and three other executive officers had each entered into selling plans to sell up to an aggregate of 664,000 shares of our stock over a 12-month period. These executives may also elect to sell or transfer other shares apart from these selling plans. A substantial number of shares of our common stock are held by our founders, their family members, current or former employees, officers or directors. Sale of a 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.

Control by existing shareholders could significantly influence matters requiring stockholder approval.

        As of February 28, 2003, our executive officers, directors, and affiliated entities, in the aggregate, beneficially owned approximately 30% of our outstanding common stock. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by stockholders, including the election of directors and the approval of mergers or other business combinations.

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 consistent with 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 February 28, 2003, the average maturity of our investment securities was less than three months and all investment securities had maturities less than 24 months. As of February 28, 2003, we consider the reported amounts of these

34

investments to be reasonable approximations of their values. Changes in the market interest rates will not have a material impact on our financial position.

        Through February 28, 2003, interest expense was not sensitive to the general levels of United States interest rates because all of our notes payable bear fixed interest rates.

ITEM 4. 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.

35

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

        (d)  Use of Proceeds

        As of February 28, 2003, we held $164.2 million of net proceeds from our initial public offering in interest-bearing, investment grade securities. During the three months ended February 28, 2003, we used approximately $1.3 million for capital expenditures and $0.3 million for repayment of debt.

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

        (b)  Reports on Form 8-K

None

36

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.

37

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");



c)

and 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.

38

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.

39

EXHIBIT INDEX

40

QuickLinks

ITEM 1. FINANCIAL STATEMENTS

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

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES

ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K