**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

** **

| ý     | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                            |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|       | ** ** | ** **                                                                                                                           |
| ** ** | ** ** | **FOR THE FISCAL YEAR ENDED MAY 31, 2005**                                                                                 |
| ** ** | ** ** | ** **                                                                                                                           |
| ** ** | ** ** | **OR**                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                           |
| o          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                        |
|       | ** ** | ** **                                                                                                                           |
| ** ** | ** ** | **FOR THE TRANSITION PERIOD FROM        TO        ** |

 

**Commission file number: 000-33335**

 

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**LAWSONSOFTWARE, INC.**

(Exact name of registrant as specified in its charter)

 
| **DELAWARE**                                                    | ** ** | **41-1251159**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer  Identification Number) |

 

**380 ST. PETER STREET**

**ST. PAUL, MINNESOTA 55102**

(Address of principal executive offices)

 

**(651) 767-7000**

(Registrant’s telephone number, including area code)

 

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: **None**

** **

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

**Common Stock, $0.01 Par Value Per Share**

**Preferred Stock Purchase Rights**

** **

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** **

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by Reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes ý  No o

 

Theaggregate market value of the voting and non-voting common stock held bynon-affiliates of the registrant, based upon the closing sale price of CommonStock on November 30, 2004 as reported on the Nasdaq National Market,was approximately $519,488,853.

 

Thenumber of shares of the registrant’s common stock outstanding on July 22, 2005was 101,595,243.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **

PartIII of this Form10-K Report incorporates by reference portions of the proxy statementinformation that will be contained in the Registration Statement on Form S-4that will be filed in connection with the special meeting of stockholdersconcerning the proposed business combination with Intentia International AB andthe election of directors.

 

 

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**LAWSON SOFTWARE, INC.**

**Form 10-K**

**Index**

** **
| **PART I.**   |                                                                                                               | 1      |
|--------------------|--------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.       | Business                                                                                                           | 1      |
| Item 2.       | Properties                                                                                                         | 10     |
| Item 3.       | Legal  Proceedings                                                                                                 | 11     |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                                                               | 11     |
|               |                                                                                                               |   |
| **PART II.**  |                                                                                                               | 11     |
| Item 5.       | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 11     |
| Item 6.       | Selected Consolidated Financial Data                                                                               | 12     |
| Item 7.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        | 13     |
| Item 7A.      | Qualitative and Quantitative Disclosures  About Market Risk                                                        | 44     |
| Item 8.       | Consolidated Financial Statements and  Supplementary Data                                                          | 45     |
| Item 9.       | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                              | 45     |
| Item 9A.      | Controls and Procedures                                                                                            | 45     |
| Item 9B.      | Other  Information                                                                                                 | 46     |
|               |                                                                                                               |   |
| **PART III.** |                                                                                                               | 46     |
| Item 10.      | Directors and Executive Officers of the  Registrant                                                                | 46     |
| Item 11.      | Executive Compensation                                                                                             | 47     |
| Item 12.      | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                    | 47     |
| Item 13.      | Certain Relationships and Related  Transactions                                                                    | 47     |
| Item 14.      | Principal Accounting Fees and Services                                                                             | 47     |
|               |                                                                                                               |   |
| **PART IV.**  |                                                                                                               | 47     |
| Item 15.      | Exhibits, Financial Statement Schedules                                                                            | 47     |
|               | SIGNATURES                                                                                                         | 51     |

 

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**Forward-Looking Statements**

 

In addition to historical information, this Annual Report on Form 10-Kcontains forward-looking statements. The forward-looking statements are made inreliance upon the safe harbor provisions of the Private Securities LitigationReform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,”“forecast,” “project,” “should” and similar expressions are intended toidentify “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward looking statements include,among others, statements about our future performance, the continuation ofhistorical trends, the sufficiency of our sources of capital for future needs,the effects of acquisitions and the expected impact of recently issuedaccounting pronouncements. The forward-looking statements are subject tocertain risks and uncertainties that could cause actual results to differmaterially from those reflected in the forward-looking statements. Factors thatmight cause such a difference include, but are not limited to, those discussedin the section entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Factors That May Affect Our FutureResults or the Market Price of Our Stock.” Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sopinions only as of the date hereof. The Company undertakes no obligation torevise or publicly release the results of any revision to these forward-lookingstatements. Readers should carefully review the risk factors described in thisAnnual Report on Form 10-K and in other documents the Company files fromtime to time with the Securities and Exchange Commission.

 

**Part I**

** **

**Item 1.****Business**

** **

**GENERAL**

** **

Weprovide business application software, services and support to specific marketsincluding healthcare, retail, financial services (banking, insurance and otherfinancial services), education, local/state governments and professionalservices. 

 

Oursoftware includes financials, human resources, procurement, healthcare supplychain, distribution, retail operations, service process optimization, andenterprise performance management applications designed to help manage, analyzeand improve our clients’ businesses. Our applications help automate andintegrate critical business processes, aiding in collaboration among ourclients and their partners, suppliers and employees. Through our consultingservices we primarily help our clients implement their Lawson applications.Through our support services we provide ongoing maintenance and assistance toour clients.

 

Foundedin 1975, we have more than 2,000 clients. We generate revenue through licensefees, fees for consulting, training and implementation services, and fees forclient support and maintenance. We market and sell our software and servicesprimarily through a direct sales force, which is augmented by channel partnersand resellers outside of the United States and Canada.

 

LawsonSoftware is a Delaware corporation. In February 2001, we werereincorporated through a merger with our predecessor, Lawson Associates, Inc.,a Minnesota corporation, which was incorporated in 1975. Our principalexecutive office is located at 380 Saint Peter Street, St. Paul,Minnesota 55102-1302. Our telephone number is (651) 767-7000, and ourwebsite is www.lawson.com.

 

**ENVIRONMENT**

** **

Weface a challenging environment for sales of our software and services resultingfrom lower capital spending by potential clients for new software systems, andcompeting priorities for resources within our clients such as the recent focuson Sarbanes-Oxley compliance by public companies. Two additional factorsaffecting our business and industry are consolidation and midmarketsignificance. 

 

**Consolidation**

** **

Untilrecently, big mergers involving Enterprise Resource Planning (ERP) softwarevendors have been fairly uncommon in the software industry, where companiestypically evolved on their own. Acquisitions tended to be made by

 

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largercompanies seeking to fill a niche with new expertise. This changed when OracleCorporation acquired PeopleSoft Inc. in December 2004. That same month,Symantec Corporation agreed to acquire Veritas Software Corporation. In March 2005,SAP AG attempted to acquire Retek Inc. Oracle out-bid SAP AG and acquired Retekin April 2005.

 

Whilemergers helped those companies doing the acquiring, they caused problems forother players because of the uncertainty they created.  In 2004 for example, Oracle’sacquisition of PeopleSoft led to a drop in industry-wide new license revenues,according to industry analysts.  Becauseit took more than a year for that deal to close, many current and potentialcustomers of PeopleSoft/J.D. Edwards delayed purchases.

 

Becauseof these acquisitions, clients and prospects remained cautious in theirdecisions throughout fiscal 2005. Questions remained about whether theindustry would stabilize or if consolidation would continue.  Even with the completion of theseacquisitions there continues to be a level of uncertainty and volatility in themarket, according to industry analysts. 

 

OurJune 2, 2005 announcement of our intention to combine with Stockholm, Sweden-basedIntentia International AB is consistent with merger activity in theindustry.  For additional information onour pending transaction, refer to Footnote 18 “Subsequent Events” in the Notesto the Consolidated Financial Statements.

 

**MidmarketSignificance**

** **

Lawsonprovides products and services to a variety of mid to large size businesses. Wemarket our services to key industries, such as health care and local/stategovernment. As a result, we have established a respected expertise in theindustries we serve. Because the majority of businesses within these industriesare mid-market in size (annual sales of $250 million to $1 billion), wealso have developed an expertise serving the mid-market, where approximately 75 percentof our client base now resides.

 

Industryanalysts consider midmarket to have the strongest growth potential for ERPvendors during the next five years. Increasingly, businesses within thiscategory are looking to buy, add to or replace what they are using to helpmanage their financials, human resources, procurement, distribution or otherbusiness management processes.

 

**COMPETITION**

** **

Themarkets for our products and services are highly competitive. Many of ourcompetitors may have an advantage over us due to their larger client bases,greater name recognition, operating and product development history, greaterinternational presence and substantially greater financial, technical andmarketing resources. We believe that the principal competitive factorsaffecting our market include:

 

•                  Product features, functionality, performanceand price

•                  Knowledge of a client’s industry and tailoredsolutions

•                  Company stability, resources and reputation

•                  Ease of integration and speed ofimplementation

•                  Level of client service

•                  Sales and marketing efforts

•                  New product and technology introductions

 

Webelieve we have competitive advantages over a number of our competitors. Someof these advantages include:

 

•                  30 years of midmarket experience

•                  Low total cost of ownership

•                  Industry specific experience

•                  Industry focused solutions

•                  Openness and flexibility of our software’sarchitecture

 

Duringfiscal 2005, we further differentiated ourselves from the competition byimproving our consulting and maintenance services, improving overall clientexperiences and loyalty, and introducing a plan for new open softwarearchitecture called Landmark. 

 

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**PRODUCTS**

** **

**Benefitsof Our Software**

** **

Weprovide business application software that helps automate and improve thebusiness processes of our clients. The open architecture of our software givesclients a choice to deploy a pre-configured, industry-tailored application orcustomize the application quickly and easily to conform to the client’s uniquebusiness processes. The benefits of our software include:

 

*Automation, Collaboration, and Analysis.* Our software may automate businessprocesses, enable collaboration among process participants and can be set up todeliver detailed analyses of process results. In addition, our back-office softwaresuites can be implemented with our front-office solutions and tools to deliverbroader benefits to an organization. For example, our service automationsoftware can be set up to enable authorized staff to assess criticalinformation on service projects. The system can be configured to enable managersto easily identify and assign the appropriate personnel to projects based onskills and availability. The service automation software has been designed toallow personnel to enter their time and expenses associated with a project intoour software, which allows these entries to be processed through our financialmanagement software to assist with project accounting; our payroll applicationto update time records; our accounts payable application to reimburse anyemployee expenses; and our enterprise performance management application todeliver financial, project and resource performance reports to appropriatemanagers.

 

*Industry-Tailored Solutions.* We use our expertise in targeted industriesto provide pre-configured functionality that addresses the specific businessneeds of these industries, thus increasing the “out-of-the-box” utility of ourapplications. For example, our healthcare supply chain software streamlines andoptimizes the supply chain operations from start to finish for one hospital oran entire network.

 

*Flexible, Web-Based Architecture.* Our software can be deployed into a client’ssystem with pre-configured functionality or easily customized to conform to theclient’s business processes using our software extension tools. Our openarchitecture enables our software to run on most leading hardware and operatingsystem platforms and to operate with the leading relational database managementsystems. This allows our clients to choose the most appropriate platformsindependently from selecting our applications. Furthermore, our applicationscan integrate with most legacy systems through standard interfaces andintegration protocols. Because many of our applications do not require softwareto reside on the desktop computer and are accessed directly through a standardWeb-browser or a supported wireless device, we believe many of our applicationscan be deployed and used without extensive training. Our software enablesdeployment in large, global enterprises and in small and medium-sizedbusinesses. 

 

*Rapid and Cost-Effective Implementation.* Our industry focus and flexible software canenable fast, efficient deployment. We believe our knowledge of our targetedindustries allows our industry-focused consulting services teams to implementour software with an in-depth understanding of the business needs of theclient, thereby in many cases reducing time, effort and expense.

 

**Typesof Software**

** **

Oursoftware is comprised of core business applications, enterprise performancemanagement applications and software extension tools.

 

CoreBusiness Applicationsinclude ERP and Supply Chain Management (“SCM”) solutions that can automatetasks related to financial management, human resources, procurement, healthcaresupply chain, distribution, retail operations, and service-related projects orprocesses. These core business applications include components in eachfunctional area, which we license separately or bundle together as suitesdesigned for our targeted markets. Our applications enable organizations toexecute standard business processes as well as provide functionality specificto the industries we target. The following list details each core businessapplication:

 

*Lawson Financials Suite.* Lawson Financials applications may enable our clients to create andtrack financial and accounting data across multiple companies, languages,currencies and books of accounts. These applications can provide 

 

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extensiveanalytical capabilities and integrate our clients’ financial managementprocesses with other core business applications. 

 

*Lawson Human Resources Suite.* Lawson Human Resources applications can assist in developing andmanaging employees. These applications interface with our financialsapplications to update the financial reporting functions for changes inemployment and payroll. 

 

*Lawson Procurement Suite.* Lawson Procurement applications may automate the operational andadministrative procurement processes, promote adherence to purchasing policies,assist businesses in negotiating pricing for supplies, lower materials andservices costs and improve inventory practices.

 

*Healthcare Supply Chain Management.* Lawson’s healthcare-specific software streamlines and optimizes thesupply chain operations from start to finish for one hospital or an entirenetwork. Healthcare Supply Chain software can help standardize buyingprocesses, manage supply costs, improve contract utilization, and ensureconsistent supply availability. 

 

*Lawson Distribution Suite.* Lawson Distribution applications can provide sales order management,warehouse fulfillment, client invoicing and accounts receivable in anintegrated solution.

 

*Software for Retailers.* Lawson’s retail-specific software includes Retail Operations and RetailInSight applications. Retail Operations applications are built for high-volumeretail enterprises to manage item information, category planning and review,assortment, pricing, promotions, warehouse replenishment, multi-channelordering, store replenishment, forecasting and order determination. RetailInSight applications can help retailers select store locations, find the rightproduct mix, and run successful promotions.

 

*Lawson Service Process Optimization Suite.*  LawsonService Process Optimization includes Services Automation, which provides professionalservices organizations with tools to manage work, resources, time, expenses,and finances; Portfolio Manager, which analyzes all active and prospectiveengagements to help determine which ones will deliver the best returns; andTime and Expense, which captures time and expense data in one place foremployees, non-employees, offsite workers, and international staff.

 

EnterprisePerformance Management**(“EPM”)is an integrated suite of capabilities and applications designed to optimizecorporate performance and corporate governance. It can access a variety of commondata sources in an organization and application data directly from Lawson andnon-Lawson sources. As a result, Lawson EPM provides actionable, role-basedself-service information from a single data source to help empower the keydecision makers throughout an enterprise. Principal components include: *Lawson Reporting Suite *which canstreamline the way organizations gather, analyze, share, and act on businessdata.; and *Budgeting and Planning,*which may enable organizations toconduct budgeting, periodic forecasting, and dynamic planning—quickly,accurately, and productively.

 

SoftwareExtension Tools canbe added to almost any Lawson application to tailor the application to a client’sspecific needs. These include User Productivity Tools, which provide additionalinformation sharing, collection, and process/analysis capabilities; DataIntegration Tools, which connect Lawson software with legacy systems,transaction systems, custom applications, and handheld devices; DevelopmentTools, which allow developers to customize Lawson’s interface, and deployLawson software in new ways; and System Tools, which allow an IT team tomonitor and manage an organization’s Lawson system.

 

**SERVICES**

** **

Weoffer comprehensive consulting, training and implementation services andongoing client support and maintenance, which support our softwareapplications. Generally, we charge our clients for these services on afee-for-service basis. Client support and maintenance typically is charged as a percentageof license fees and can be renewed annually at the election of our clientsbased on available support offerings. Our in-house services organization alsois responsible for educating Lawson-selected third-party system integrators onthe use of our software to assist them in providing services to our clients.Given our current base of more than 2,000 clients, our services organization isa large and important part of our overall business. As of May 31, 2005,our services organization consisted of approximately 575 employees.

 

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C**onsulting Services**

** **

Ourprofessional services are integral to our ability to provide clients withsuccessful business software. Our experienced, professional consultants workwith clients to design and execute an implementation plan based on theirbusiness objectives. We also provide our clients with education and training.Our training services include providing user documentation and training at ourcorporate offices in St. Paul, Minnesota, in several regional offices andat the client site.  We also provideWeb-based computer-based training that our clients can access from their ownoffices.

 

**Client Support and Maintenance******

** **

Weprovide our clients with software updates, new releases, new versions andcorrections as part of our support services. We offer help desk support throughour Global Support Center (“GSC”), which provides technical and product errorreporting and resolution support. Clients can access the GSC through variousmethods, including online interactive support. We can enable clients to monitorthe progress of their requests for assistance, and offer a wide variety ofup-to-date Lawson-specific product knowledge, including release planning,application descriptions, publications, and training course dates, withintuitive search capabilities on our companywide intranet, a portion of whichis accessible by our partners and clients.

 

**RecentServices Improvements**

** **

Lawsonis a client-centric products company with strong consulting and maintenanceservices. Following the release of industry studies in 2004 that foundclients were unhappy with how software providers were treating them, we decidedto build on our already strong base of client support by implementing a long-termprogram to improve clients’ experiences across every part of our company.

 

Thisinitiative involved creating a new organizational structure, internal efficiencyobjectives and a new inspection process to measure achievement against thesegoals. Lawson Professional Services was restructured from an organizationfocused on installing software, to a group that helps clients focus on thebusiness outcomes resulting from purchasing and using Lawson software. Thisoutcome-based approach allows consultants more flexibility to fulfill clientneeds while also maintaining a firm commitment to the company’s declaredvertical markets. During the fall of 2004, a new leadership team withextensive experience in consulting and services practices was givenresponsibility for our professional services area.

 

Thesechanges are expected to produce higher value-added revenue opportunities andgrowth, as well as more efficient delivery that should yield service marginimprovements in future quarters.

 

**TECHNOLOGYARCHITECTURE**

** **

**Principles**

** **

Lawson’stechnology architectural foundation is based on the concept of separation ofconcerns, in which there is a clear separation of the various layers of Lawson’stechnology stack: the user access layer, the Web server layer, the applicationserver layer, the database server layer, and the connection to externalsystems. This approach gives Lawson the flexibility to deliver releases for thevarious layers on different schedules, adopt new technologies and standardsmore readily, and develop industry-specific applications. This approach alsohelps protect client investment and may ease their transition to new releases.Lawson’s technology architecture adheres to the following principles:

 

*Open architecture.* Lawson’s open architecture and BusinessComponent Integrator (“BCI”) can help our clients connect their other systemsto Lawson, allowing our clients to work with the computing platforms andtechnologies they prefer or have to maintain, such as custom-built legacysystems. With Lawson’s open architecture, there is no need for clients toabandon other technology investments or rebuild infrastructure to fit Lawson.Lawson’s systems operate on most industry standard hardware platforms includingIBM, Sun, and Hewlett-Packard, and industry standard operating systems,including IBM iSeries, Unix, and Windows on Intel servers.

 

*Thin-client architecture.* Many of Lawson’s products use thin-clientarchitecture, which means that a client’s Internet, intranet, or extranetconnection gives quick, easy, and secure access to those applications.Thin-client architecture may reduce staff training time, speed implementation,ease administration costs, and can give clients a more rapid return on theirLawson investment.

 

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*Scalable.* Our architecture is designed to grow with our clients and meet theirevolving strategic needs. Lawson applications are designed to be personalized,extended, and integrated to meet the changing needs of an organization.

 

*Secure.* Lawson’s application and technology infrastructure can allow clientsto build security policies as simple or complex as needed to meet theorganization’s security requirements. Security policies can be created thatauthorize end users to access only the Lawson applications required to gettheir job done. Once an end user is authorized to access a Lawson application,even more restrictive security policies can be created that limit the end userto specific functions required to perform their job.

 

**ArchitectureModel**

** **

Thereare three layers and nine elements in Lawson’s architectural model.

 

UserAccess Layer

 

*Browser.*  Provides user access via a PC,desktop, laptop, or mobile device, an Internet/intranet connection, and abrowser to access the Lawson Portal.

 

Web Server Layer

 

*Web Services*. Encompasses the Web server, Internet Object Services and LawsonPortal, which are key components for deploying Lawson applications via theInternet. Supported Internet technologies include HTTP(s), XML, HTML,JavaScriptÔ, JavaÔ, and COM/DCOM. Certified Web servers includeApache with Tomcat Servlet Engine, Microsoft® IIS with Tomcat Servlet Engine,iPlanet, and WebSphere.

 

*Lawson Portal.* Provides a single place for users to accessall Lawson applications, Lawson extensions, non-Lawson applications, and othersources of information such as Web sites.

 

Application/DatabaseServer Layer

 

*Internet Object Services.* Provides the connection between Lawson andthe World Wide Web and manages the communication between Lawson’s browser-basedinterfaces and Lawson applications and databases. The three main services are:Application Gateway Services, Data Mining Engine, and Drill Around®—a keyfeature that allows drilling down to sub-detail information related to a Lawsonapplication.

 

*Business Logic.* A set of integrated business rules forLawson core applications. These applications can be deployed separately, assuites as fully integrated solutions. Suites include Financials, HumanResources, Procurement, Distribution, Service Process Optimization, and EnterprisePerformance Management.

 

*Database.* Provides clients the flexibility to select their optimal relationaldatabase. Current databases supported include IBM DB2, Oracle and Microsoft SQLServer.

 

*Active Object Repository.* A dynamic enterprise data model thatincludes Interface Form Definitions, Information Relationships, ProcessDefinitions, Logic Definitions, Security Definitions, Transaction ManagementDefinitions, and Open Application Interfaces.

 

*Lawson Environment.* The foundation of Lawson’s architecture andcritical to system performance, scalability, availability, and reliability;oversees all activities on the Lawson application server, including security,system resources, transactions, data access, and job schedules.

 

*Application Server.* Gives clients flexibility to use whateverplatform fits their size, budget or strategic direction. Lawson runs on Compaq,Dell, Hewlett Packard, IBM, Microsoft, and Sun.

 

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**NewArchitecture**

** **

InMay 2005, we announced a new standards-based technology environment called“Landmark,” which will be used for products released in the future.  Landmark is designed to help clients mitigateapplication complexity by reducing the source coding required in developingLawson software applications. In addition to reducing development time,Landmark is designed to generate consistent Java code which shouldsubstantially reduce the risk of errors. 

 

Thenew business applications platform is designed to increase overall applicationquality and improve the product lifecycle experience for Lawson clients, fromconstruction to deployment, implementation, integration, support, and upgrades.

 

Landmark-developedapplications and Web services will share the same data repository as clients’existing Lawson applications, thus enabling clients to perform an upgrade only, rather than a migrationor new implementation.

 

Weplan to develop future Lawson products using Landmark, and as such, thoseproducts are expected to run on a J2EE open-standards applications server. Underour recently expanded partnership with IBM, we plan to optimize ourapplications to work with IBM’s J2EE open-standards application server. 

 

**SALESAND MARKETING**

** **

Wemarket and sell our software and services solutions through a combination of adirect sales force, strategic alliances with systems integrators and resellers.

 

Ourdirect sales force and services organization is aligned with our strategy ofproviding industry-tailored applications. Within each services industry, we have a sales team dedicated toprospective clients, and another team dedicated to sales to existing clients.We also have regional sales teams that focus on specific geographicterritories. Our U.S. sales offices are located in Atlanta, Boston, Chicago,Columbus, Dallas, Los Angeles, New Jersey, Philadelphia, San Francisco,Seattle, St. Paul and Washington, D.C. We also have international salesoffices in Canada, France, the Netherlands and the United Kingdom and sell oursoftware through affiliates in other international locations. 

 

Inaddition to our direct sales teams, we enter into strategic alliances withsystems integrators and resellers to benefit from our partners’ resources,expertise and client base.

 

Businesspartner alliances allow us to expand our market presence through increasedawareness of our software applications within our partners’ organizations andclient bases, and through their personnel who are trained to implement oursoftware. Our channel partners market and promote our software products andtypically provide implementation services to their end-users. Channel partnersgenerate sales leads, make initial client contacts, and assess needs prior toour introduction. In addition, some of our channel partners engage in clientsupport and localization of our products. We also engage in joint marketingprograms, presentations of seminars, attendance at trade shows, and the hostingof conferences with many of our business partners.

 

Wealso use application service providers (“ASPs”) to distribute our products in ahosted environment. ASPs allow us to reach small-to medium-sized businessesthat prefer a hosted solution. Our software’s architecture is easilydistributed over the Internet and is highly scalable to serve many clients. Italso supports multi-tenancy, which lets ASPs securely host multiple clients ona single set of our applications.

 

**STRATEGICPARTNERS**

** **

Wehave relationships with other technology companies that allow us to expand andcomplement our technology, product and service offerings.

 

•         *Technology*: Lawson’s technology partners are marketleaders in hardware systems, databases, operating systems, telecommunicationsequipment, and connectivity services. Examples include Hewlett-Packard, IBM Corporation and Sun Microsystems.

 

InMay 2005, we announced a key strategic partnership with IBM.  Lawson will continue to support all majorhardware and software platforms (Sun, Hewlett-Packard, Dell and others) butplans to optimize and standardize Lawson solutions on IBM’s openstandards-based software, WebSphere Application Server and WebSphere Portal.  IBM and Lawson also plan to jointly marketthe solutions to clients worldwide.  Thisexpanded partnership with IBM – when combined with our new Landmark platform –will allow us to provide service oriented architecture (“SOA”) products andservices in one of our four main technology stacks serving the ERP market.  To keep costs down, businesses areincreasingly interested in

 

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optimizingsoftware vendor partnerships by migrating to one of these stacks: Microsoft,IBM, SAP AG or Oracle.  Our strategicalliance with IBM positions Lawson’s SOA solutions within the IBM stack.

 

•         *Products*: Product partners provide key technology toextend Lawson product solutions. Typically, these products are embedded or re-sold in relation to theLawson application.  Examples includeAscential Software, Business Objects, Business Software, Inc. and MicroFocus International, Inc.

 

Weentered into a strategic and exclusive relationship with the Hackett Group,enabling Lawson clients to measure their business process performance comparedwith world-class companies.  The joinHackett World-Class Passport SM program, unveiledduring the fourth quarter of fiscal 2005, is expected to provide afoundation for Lawson Professional Services’ software implementationmethodology.  Lawson is identifyingapproximately two dozen charter members from its current client base to participatein the program over the next year, and intends to expand this offering to otherclients.

 

•         *Services*: Consulting and service partners are leading providers of systemsintegration expertise, hosting, business process redesign, configuration, andintegration.  These organizations provideindustry and application-specific knowledge that augments Lawson’s servicesofferings.  Examples include Deloitte, AnalystsInternational and IBM Global Services.

 

Aspart of our commitment to provide clients with the lowest total cost ofownership in the industry, we launched a Blended Professional Services (“BPS”)offering that is centered around a relationship with Xansa, our preferredoff-shore services provider, during our fourth quarter of fiscal 2005.  Lawson BPS provides clients with a blendedteam that cost effectively leverages both Lawson’s and Xansa’s servicepersonnel.  Services included technicalintegration, data conversion, custom extensions and custom reporting.  Lawson retains overall program responsibilityas well as responsibility for technical design and development.

 

**RESEARCHAND DEVELOPMENT**

 

Sinceinception, we have made substantial investments in software productdevelopment. We believe that timely development of new software applications,enhancements to existing software applications and the acquisition of rights tosell or incorporate complementary technologies and products into our softwareofferings are essential to maintain our competitive position in the market. Thebusiness application software market is characterized by rapid technologicalchange, frequent introductions of new products, changes in client demands, andrapidly evolving industry standards.

 

Ourtotal research and development expenses were $62.2 million, $64.9 million,and $59.1 million in fiscal 2005, 2004 and 2003, respectively.As of May 31, 2005, our research and development organizationconsisted of approximately 340 employees.

 

**TRADEMARKS**

 

DrillAround, Lawson, Lawson Software and the Lawson logo are registered trademarks ofLawson Software, Inc. Other trademarks and trade names appearing in thisdocument are the property of their respective holders.

 

**Intellectual Property and Product Liability**

** **

We regard certain aspects of our internal operations, software anddocumentation as proprietary, and rely on a combination of contract, copyright,trademark and trade secret laws and other measures, including confidentialityagreements, to protect our proprietary information. Existing copyright lawsafford only limited protection. We believe that, because of the rapid pace oftechnological change in the computer software industry, trade secret andcopyright protection is less significant than factors such as the knowledge,ability and experience of our employees, frequent software productenhancements, and the timeliness and quality of support services. We cannotguarantee that these protections will be adequate or that our competitors willnot independently develop technologies that are substantially equivalent orsuperior to our technology. Historically, we have provided our clients sourcecode for most of our products. We may elect to distribute only object code inthe future. In either case we will permit clients to obtain access to our othersource code through a source code escrow arrangement. Access to our source codemay increase the likelihood of misappropriation or other misuse of ourintellectual property. In addition, the laws of certain countries in which oursoftware products are, or may be licensed, do not protect our software productsand intellectual property rights to the same extent as the laws of the UnitedStates.

 

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Software companies have increasingly applied for, and relied on, theprotection of patents. To date, we hold one patent and have filed severalpatent applications. These applications may not result in issued patents and,even if issued will not provide assurance of a competitive advantage.

 

We do not believe our software products, third-party software productswe offer under sublicense agreements, our trademarks, or other Lawsonproprietary rights infringe the property rights of third parties. However, wecannot guarantee that third parties will not assert infringement claims againstus with respect to current or future software products or that any suchassertion may not require us to enter into royalty arrangements or result incostly litigation.

 

Our license agreements with our clients contain provisions designed tolimit the exposure to potential product liability claims. It is possible,however, that the limitation of liability provisions contained in these licenseagreements may not be valid as a result of future federal, state or local lawsor ordinances or unfavorable judicial decisions.

 

**Employees**

** **

As of May 31, 2005, we had approximately 1,400 employees,including approximately 250 in sales and marketing, approximately 340 inresearch and development, approximately 575 in services and client support andapproximately 200 in administration. Our performance depends to a large extenton our ability to attract, train and retain highly qualified personnel. None ofour employees is represented by a labor union and we believe our relations withour employees are good.

 

Our current executive officers are:

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                                        |
|---------------------|------------|---------|------------|-------------------------------------------------------------------------------------|
| H. Richard Lawson   |       | 60      |       | Chairman                                                                            |
| Harry Debes         |       | 54      |       | President, Chief Executive Officer, Director                                        |
| Robert G. Barbieri  |       | 50      |       | Executive Vice President, Chief Financial and Performance  Officer             |
| Joanne L. Byrd      |       | 50      |       | Executive Vice President of Sales                                                   |
| Brad R. Callahan    |       | 52      |       | Executive Vice President of Professional Services                                   |
| Dean J. Hager       |       | 38      |       | Executive Vice President, Chief Product Officer                                     |
| Scott D. Meyer      |       | 55      |       | Senior Vice President, Chief Marketing and Human Resources  Officer            |
| Bruce B. McPheeters |       | 50      |       | Senior Vice President, Chief Legal Counsel and General Counsel,  and Secretary |

 

*H. Richard Lawson* isone of our founders and has been one of our directors and an executive officersince our inception in 1975. Mr. Lawson has served as the chairman of ourboard of directors since February 2001. From March 2000 until February 2001,Mr. Lawson was our chief executive officer. Prior to that time, Mr. Lawsonserved as our president and chief operating officer from October 1998until March 2000 and our chairman from June 1996 until October 1998.

 

*Harry Debes* hasserved as our president and chief executive officer and as a director since June 2005.From November 2003 until June 2005, Mr. Debes was president andchief executive officer of SPL Worldgroup, a leading provider of enterprisesoftware to the electric utility industry. From May 2001 until joining SPLWorldgroup, he was employed by JD Edwards & Co., an enterprisesoftware company, where he served as senior vice president Americas until JDEdwards was acquired by Peoplesoft, Inc. in August 2003. From 1990until May 2001, Mr. Debes was employed by Geac Computer Corporation,an enterprise software company. While working for Geac, Mr. Debes held avariety of positions including managing director of Geac Asia-Pacific andpresident of Geac Enterprise Solutions for the Americas.

 

*Robert G. Barbieri*has served as our executive vice president and chief financial officer since August 2000,as our executive vice president of operations from June 2003 to June 2004,and as our chief financial and performance officer since June 2004. From January 1997until August 2000, Mr. Barbieri was employed by Apogee Enterprises, Inc.,a publicly traded glass, coatings and service technologies company, servingmost recently as vice president and chief financial officer. From 1984 untiljoining Apogee, Mr. Barbieri was employed by Air Products and Chemicals, Inc.,a global gases and chemicals company, where he held several senior financialmanagement positions, serving most recently as controller for the generalindustries division of the gases group. Mr. Barbieri is a certifiedmanagement accountant.

 

*Joanne L. Byrd* hasserved as executive vice president of sales since September 2004, seniorvice president of industry markets and international since June 2004 untilSeptember 2004, senior vice president of field operations from

 

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June 2002 until June 2004, and senior vice president ofglobal consulting services from June 2000 until June 2002. Ms. Byrdjoined us in 1996 as a regional sales manager in our healthcare group andserved as vice president of sales and services for healthcare from June 1999until June 2000. Before joining us, Ms. Byrd worked 17 years forShared Medical Systems (later acquired by Siemens), where she held variousmanagement positions in sales and services.

 

*Brad R. Callahan*has served as our executive vice president ofprofessional services since November 2004. Before joining us, Mr. Callahanwas vice president and partner with Capgemini (formerly Cap Gemini Ernst &Young and formerly Ernst & Young Consulting), where he held severalglobal and North American leadership roles. He most recently served as theNorth American leader for Capgemini’s Consumer products, retail anddistribution practices, concurrent with a global transformational programleadership role. From 1991 until 1993, Mr. Callahan was the senior vicepresident and chief information officer for Metropolitan Financial Corporation,a multi-billion dollar diversified financial services holding company.

 

*Dean J. Hager* hasserved as an executive vice president since June 2000 and as our chiefproduct officer since June 2004. Mr. Hager served as our executivevice president emerging markets from June 2003 until June 2004, ourexecutive vice president global products division from February 2001 untilMay 2002, our executive vice president worldwide marketing from June 2000to February 2001, our vice president, e-business marketing from June 1999until June 2000, and our director of marketing for our former AS/400business unit from May 1998 until June 1999. From March 1989 to May 1998,Mr. Hager was employed by IBM, where he held several senior managementpositions, serving most recently as senior program manager with its serverproducts division.

 

*Scott D. Meyer* hasserved as our senior vice president and chief marketing officer since December 2003and as our chief marketing and human resources officer since June 2004.Before joining us in December 2003, Mr. Meyer was chief strategyofficer of Weber Shandwick Worldwide from June 2002 until October 2003,and chief executive officer of Shandwick International from January 1997until June 2002. In 1986, Mr. Meyer co-founded the Minneapolis-basedpublic relations firm of Mona Meyer McGrath & Gavin, and served thatfirm in various capacities until the sale of the firm to ShandwickInternational in 1989. Because theposition of Chief Marketing Officer will be restructured as part of thecombination of Lawson and Intentia, Mr. Meyer will resign from Lawsoneffective October 1, 2005.

 

*Bruce B. McPheeters*has served as our chief legal officer since June 2004, our senior vicepresident of administration since June 2002, our vice president ofadministration from April 2000 until May 2002, our general counselsince April 2000, and our corporate secretary since October 1999. Mr. McPheetersjoined us as corporate counsel in September 1999. From 1981 until September 1999,Mr. McPheeters was a business lawyer in private practice, focusingprimarily in the areas of intellectual property, securities, and mergers andacquisitions of privately and publicly held companies. From December 1995until September 1999, he was employed by the law firm of Gray, Plant,Mooty, Mooty & Bennett, P.A.

 

**Available Information**

** **

We make available, free of charge, on our website (www.lawson.com) ourannual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and any amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 as soon as reasonably practicable after we haveelectronically filed or furnished such materials to the Securities and ExchangeCommission. The information posted on our website is not incorporated into thisAnnual Report on Form 10-K.

 

**Financial Information about Geographic Areas**

** **

For financial information about geographic areas see Note 16 “Segmentand Geographic Areas,” of Notes to Consolidated Financial Statements filed aspart of this Annual Report on Form 10-K.

 

**Item 2.****  Properties**

** **

Our corporate headquarters and executive offices are in St. Paul,Minnesota, USA where we lease approximately 300,000 square feet of space. Thelease on this facility expires July 31, 2015. We also lease approximately140,000 square feet of space, primarily for regional sales and support offices,elsewhere in the United States. Additionally, we lease approximately 43,000square feet of office space in Canada, France, the Netherlands and the UnitedKingdom, used primarily

 

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as sales and services offices. Expiration dates of leases on theseoffices range from 2005 to 2017. We believe that our current domestic andinternational facilities will be sufficient to meet our needs for at least thenext 12 months and that, if required, suitable additional or alternativespace will be available on commercially reasonable terms to accommodateexpansion of our operations.

 

**Item 3.****  LegalProceedings**

** **

We are, and from time to time may become, involved in litigation in thenormal course of business concerning our products and services. While theoutcome of these claims cannot be predicted with certainty, we do not believethat the outcome of any one of these legal matters will have a material adverseeffect on our consolidated financial position, results of operations or cashflows. However, depending on the amount and the timing, an unfavorableresolution of some or all of these matters could materially affect our futureresults of operations or cash flows in a particular period.

 

**Item 4.****  Submission ofMatters to a Vote of Security Holders**

** **

No matters were submitted to a vote of security holders during thefourth quarter of the fiscal year ended May 31, 2005.

 

**Part II**

** **

**Item 5.****  Market for theRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities**

** **

(a)           Our common stock istraded in the Nasdaq National Market (Nasdaq) under the symbol LWSN. Thefollowing table lists the high and low closing sale prices by quarter asreported by Nasdaq.

 
| ** **        | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------|------------|----------|------------|---------|------------|
| Fiscal 2005: |       |     |       |    |       |
| Fourth Quarter    |       | $        | 6.07       |    | $          | 4.92 |   |
| Third Quarter     |       | $        | 7.05       |    | $          | 5.80 |   |
| Second Quarter    |       | $        | 6.50       |    | $          | 4.98 |   |
| First Quarter     |       | $        | 7.46       |    | $          | 5.48 |   |
|              |       |     |       |    |       |
| Fiscal 2004: |       |     |       |    |       |
| Fourth Quarter    |       | $        | 9.20       |    | $          | 6.79 |   |
| Third Quarter     |       | $        | 10.26      |    | $          | 7.61 |   |
| Second Quarter    |       | $        | 8.76       |    | $          | 7.07 |   |
| First Quarter     |       | $        | 7.98       |    | $          | 5.45 |   |

 

We have never declared or paid any cash dividends on our common stockand do not anticipate paying cash dividends in the foreseeable future. Weintend to retain future earnings to fund the development and growth of ourbusiness.

 

As of July 22, 2005, the approximate number of stockholdersof record was 184.

 

Between March 1, 2005 and May 31, 2005 we issued474,354 shares of common stock pursuant to the exercise of outstanding stockoptions for an aggregate consideration of $257,858 in reliance upon Rule 701of the Securities Act of 1933, as amended.

 

(b)           As of May 31, 2005,we held $115.9 million of net proceeds from our initial public offering ininterest-bearing, investment grade securities. During the three months ended May 31, 2005,we used $0.6 million for capital expenditures and approximately $35,000for the repayment of debt.

 

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**Item 6.****   Selected Consolidated Financial Data**

** **
| ** **                                             | ** ** | **Year Ended May 31,**               | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**         |       |                                      |       |   |   |   |   |   |   |   |   |
| Revenues:                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| License fees                                           |       | $                                         | 57,743     |   | $ | 92,338 |   | $ | 77,614 |   | $ | 150,243 |   | $ | 152,291 |   |
| Services(1)                                            |       | 277,441                                   |       | 271,245 |   | 266,704 |   | 278,093 |   | 242,033 |   |
| Total revenues(1)                                      |       | 335,184                                   |       | 363,583 |   | 344,318 |   | 428,336 |   | 394,324 |   |
| Cost of revenues:                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Cost of license fees                                   |       | 9,961                                     |       | 15,948 |   | 14,367 |   | 30,864 |   | 23,580 |   |
| Cost of services(1)                                    |       | 140,623                                   |       | 136,299 |   | 141,717 |   | 153,790 |   | 130,894 |   |
| Total cost of revenues(1)                              |       | 150,584                                   |       | 152,247 |   | 156,084 |   | 184,654 |   | 154,474 |   |
| Gross profit                                           |       | 184,600                                   |       | 211,336 |   | 188,234 |   | 243,682 |   | 239,850 |   |
| Operating expenses:                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Research and development                               |       | 62,158                                    |       | 64,888 |   | 59,115 |   | 66,897 |   | 52,600 |   |
| Sales and marketing                                    |       | 75,637                                    |       | 93,138 |   | 102,963 |   | 124,630 |   | 116,667 |   |
| General and administrative                             |       | 36,443                                    |       | 37,721 |   | 29,972 |   | 32,083 |   | 39,105 |   |
| Other general expenses                                 |       | —                                    |       | — |   | — |   | 655 |   | 7,308 |   |
| Restructuring                                          |       | 5,028                                     |       | 2,210 |   | 6,035 |   | 3,258 |   | — |   |
| Amortization of acquired intangibles                   |       | 1,545                                     |       | 1,274 |   | 877 |   | 622 |   | — |   |
| Total operating expenses                               |       | 180,811                                   |       | 199,231 |   | 198,962 |   | 228,145 |   | 215,680 |   |
| Operating income (loss)                                |       | 3,789                                     |       | 12,105 |   | (10,728 | ) | 15,537 |   | 24,170 |   |
| Other income (expense), net(2)                         |       | 4,328                                     |       | 3,209 |   | 4,457 |   | (1,573 | ) | 949 |   |
| Income (loss) before income taxes                      |       | 8,117                                     |       | 15,314 |   | (6,271 | ) | 13,964 |   | 25,119 |   |
| Provision (benefit) for income taxes                   |       | 2,855                                     |       | 7,323 |   | (2,446 | ) | 5,586 |   | 10,550 |   |
| Net income (loss)                                      |       | 5,262                                     |       | 7,991 |   | (3,825 | ) | 8,378 |   | 14,569 |   |
| Accretion on and conversion of preferred  stock(3)     |       | —                                    |       | — |   | — |   | (30,098 | ) | (52 | ) |
| Net income (loss) applicable to common  stockholders   |       | $                                         | 5,262      |   | $ | 7,991 |   | $ | (3,825 | ) | $ | (21,720 | ) | $ | 14,517 |   |
| Net income (loss) per share:                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | $                                         | 0.05       |   | $ | 0.08 |   | $ | (0.04 | ) | $ | (0.27 | ) | $ | 0.21 |   |
| Diluted                                                |       | $                                         | 0.05       |   | $ | 0.07 |   | $ | (0.04 | ) | $ | (0.27 | ) | $ | 0.17 |   |
|                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Shares used in computing net income (loss)  per share: |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                  |       | 99,068                                    |       | 98,462 |   | 98,165 |   | 79,630 |   | 69,907 |   |
| Diluted                                                |       | 104,623                                   |       | 107,000 |   | 98,165 |   | 79,630 |   | 84,367 |   |

 

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(1)   In the fourth quarterof fiscal 2002, we adopted the Emerging Issues Task Force (EITF) Issue 01-14,“Income Statement Characterization of Reimbursement Received for “Out-of-Pocket’Expenses Incurred”. Adoption of the EITF Issue 01-14 resulted inreclassifications that increased both revenues and cost of revenues equally by$13.4 million and $10.4 million for the years ended May 31, 2002,and May 31, 2001, respectively. The change had no effect on net (loss)income or net (loss) income per share.

 

(2)   In fiscal 2002, weused $10.2 million of proceeds from our initial public offering to repaysenior subordinated convertible notes. Due to the repayment of the notes priorto the scheduled maturity date, we recorded early extinguishment of debtexpense consisting of the unamortized debt issuance costs and the discount onthe notes totaling $2.3 million.

 

(3)   In fiscal 2002, as aresult of the conversion of the Series A Preferred Stock to common stock,which accelerated the amortization of the beneficial conversion feature, werecognized a $30.0 million non-cash charge to net income available to

 

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common stockholders for the unamortized value of the beneficialconversion feature of our preferred stock. We also recognized accretion on thepreferred stock of $0.1 million in both fiscal years ended May 31,2002 and 2001.

 

 
| ** **                                        | ** ** | **May 31,**   | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| ** **                                        | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| **Consolidated Balance Sheet Data:**              |       |               |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and marketable  securities |       | $                  | 234,613    |   | $ | 208,982 |   | $ | 260,512 |   | $ | 229,867 |   | $ | 77,608 |   |
| Working capital                                   |       | 178,410            |       | 165,336 |   | 213,258 |   | 204,100 |   | 39,422 |   |
| Total assets                                      |       | 420,718            |       | 423,598 |   | 432,209 |   | 436,468 |   | 236,103 |   |
| Mandatory redeemable common stock warrants        |       | —             |       | — |   | — |   | — |   | 2,560 |   |
| Senior subordinated convertible notes             |       | —             |       | — |   | — |   | — |   | 8,031 |   |
| Other long-term debt, net of current portion      |       | —             |       | 990 |   | 255 |   | 904 |   | 1,010 |   |
| Series A convertible preferred stock         |       | —             |       | — |   | — |   | — |   | 29,750 |   |
| Mandatory redeemable common stock                 |       | —             |       | — |   | — |   | 374 |   | 56,145 |   |
| Stockholders’ equity (deficit)               |       | 293,055            |       | 282,886 |   | 289,399 |   | 285,484 |   | (24,869 | ) |
|                                                   |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

** **

*The following should be read in conjunctionwith our consolidated financial statements, the notes to those statements andother financial information appearing elsewhere in this Annual Report on Form 10-K.*

 

**Forward-Looking Statements**

** **

In addition to historical information, this Form 10-K containsforward-looking statements. These forward-looking statements are made inreliance upon the safe harbor provisions of the Private Securities LitigationReform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,”“forecast,” “project,” “should,” and similar expressions are intended toidentify “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Forward looking statements include, amongothers, statements about our future performance, the continuation of historicaltrends, the sufficiency of our sources of capital for future needs, the effectsof acquisitions and the expected impact of recently issued accountingpronouncements. These forward-looking statements are subject to certain risksand uncertainties that could cause actual results to differ materially fromthose reflected in the forward-looking statements. Factors that might causesuch a difference include, but are not limited to, those discussed in the section entitled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Factors That May Affect Our Future Results or the Market Priceof Our Stock.” Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s opinions only as of thedate hereof. We undertake no obligation to revise or publicly release theresults of any revision to these forward-looking statements based oncircumstances or events, which occur in the future. Readers should carefullyreview the risk factors described in this report on Form 10-K and in otherdocuments we file from time to time with the Securities and ExchangeCommission.

** **

**Business Overview**

** **

We provide business application software, services and support thathelp organizations to manage, analyze and improve their businesses. The marketswe serve include healthcare, retail, financial services (including banking,insurance and other financial services), local/state government, education andprofessional services. We derive revenues from licensing business applicationsoftware and providing comprehensive professional services, including consulting,training and implementation services, as well as ongoing client support andmaintenance. Consulting, training and implementation services are generally notessential to the functionality of our software products, are sold separatelyand also are available from a number of third-party service providers.Accordingly, revenues from these services are generally recorded separatelyfrom the license fee. We have offices and affiliates serving North and SouthAmerica, Europe, Asia, Africa, and Australia.

 

**ChallengingOperating Environment During Fiscal 2005**

** **

Wecontinue to face a challenging environment for sales of our software andservices.  Our license fee revenue

 

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declinedyear-over-year during the fiscal year ended May 31, 2005, due toreduced software demand by our potential and existing clients and increased competitionfrom Oracle Corporation and SAP AG.We believe the reduced purchasing activityresults from lower capital spending by potential clients for new softwaresystems, uncertainty among potential clients due to consolidation and otherfactors in the software industry, and competing priorities for resources withinour clients such as the recent focus on Sarbanes-Oxley compliance by publiccompanies.  

 

Lessnew-software licensing activity in fiscal 2005 also resulted in fewerconsulting engagement opportunities associated with the implementation of newsoftware systems, and associated declining professional services revenue duringthose periods.  During the fall of 2004,a new leadership team with relevant experience in consulting and servicespractices was given responsibility for our professional services. This team hasimplemented enhancements to our services, many of which were completed duringthe fourth quarter of fiscal 2005. Our support revenues increased by $15.8 millionduring fiscal 2005, as compared with prior-year support revenues, dueprimarily to the purchase of client maintenance contracts in April 2004.Continued growth in support revenue depends in part on adding new softwareclients through licensing activity to offset normal client attrition due toclient consolidation, pricing pressures and other factors.

 

**Critical Accounting Policies and Estimates**

** **

Our discussion and analysis of financial condition and results ofoperations are based upon our audited consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these financial statements requires usto make estimates and assumptions that affect the reported amounts of assetsand liabilities at the date of the financial statements, the reported amountsof revenues and expenses during the reporting period, and related disclosuresof contingent assets and liabilities. The Notes to Consolidated FinancialStatements contained herein describe our significant accounting polices used inthe preparation of the consolidated financial statements. On an on-going basis,we evaluate our estimates, including but not limited to, those related to baddebt, intangible assets and contingencies. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from theseestimates.

 

We believe the critical accounting polices listed below reflect our moresignificant judgments, estimates and assumptions used in the preparation of ourconsolidated financial statements.

 

*Revenue Recognition.*  Revenue recognition rules for softwarecompanies are very complex. We follow specific and detailed guidelines in determiningthe proper amount of revenue to be recorded; however, certain judgments affectthe application of our revenue recognition policy. Revenue results aredifficult to predict, and any shortfall in revenue or delay in recognizingrevenue could cause our operating results to vary significantly from quarter toquarter.

 

The significant judgments for revenue recognition typically involvewhether collectibility can be considered probable and whether fees are fixed ordeterminable. In addition, our transactions often consist of multiple elementarrangements, which must be analyzed to determine the relative fair value ofeach element, the amount of revenue to be recognized upon shipment, if any, andthe period and conditions under which deferred revenue should be recognized.

 

We recognize revenues in accordance with the provisions of the AmericanInstitute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”)97-2, “*Software Revenue Recognition*,” asamended and SOP 98-9, “*Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions,*”as well as Technical Practice Aids issued from time to time by the AICPA, andin accordance with the Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, “*Revenue Recognition.*”We license software under non-cancelable license agreements and provide relatedprofessional services, including consulting, training, and implementationservices, as well as ongoing client support and maintenance. Consulting,training and implementation services are generally not essential to thefunctionality of our software products, are sold separately, and also areavailable from a number of third-party service providers. Accordingly, revenuesfrom these services are generally recorded separately from license fees.Software arrangements including fixed-fee service components are recognized asthe services are performed, while corresponding costs to provide these servicesare expensed as incurred. Software arrangements including services that areessential to the functionality of our software products are recognized usingcontract accounting and the percentage-of-completion methodology based onlabor hours input. The amount of judgment involved in addressing significantassumptions, risks, and uncertainties in applying the application of the percentage-of-completionmethodology can impact the amounts of revenue and related expenses reported inthe consolidated financial statements. Our specific revenue recognitionpolicies are as follows:

 

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•                  *Software License Fees*—Licensefee revenues from end-users are recognized when the software product has beenshipped, provided a non-cancelable license agreement has been signed, there areno uncertainties surrounding product acceptance, the fees are fixed ordeterminable, and collection of the related receivable is considered probable.Provided the above criteria are met, license fee revenues from resellers arerecognized when there is a sell-through by a reseller to an end-user. Asell-through is determined when we receive an order form from a reseller for aspecific end-user sale. We do not generally offer rights of return, acceptanceclauses, or price protection to our clients. In situations where we do providerights of return or acceptance clauses, revenue is deferred until the clauseexpires. Typically, our software license fees are due within a twelve-monthperiod from the date of shipment. If the fee due from the client is not fixedor determinable, including payment terms greater than twelve months fromshipment, revenue is recognized as payments become due and all other conditionsfor revenue recognition have been satisfied. In software arrangements thatinclude rights to multiple software products, specified upgrades, maintenanceor services, we allocate the total arrangement fee among each deliverable usingthe fair value of each of the deliverables determined using vendor-specificobjective evidence. Vendor-specific objective evidence of fair value isdetermined using the price charged when that element is sold separately. Insoftware arrangements in which we have fair value of all undelivered elementsbut not of a delivered element, we use the residual method to record revenue.Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is allocated to thedelivered element(s) and is recognized as revenue. In software arrangements inwhich we do not have vendor-specific objective evidence of fair value of allundelivered elements, revenue is deferred until fair value is determined or allelements for which we do not have vendor-specific objective evidence of fairvalue, have been delivered.

 

•                  *Services*—Revenuesfrom training and consulting services are recognized as services are providedto clients. Revenues from maintenance contracts are recognized ratably over theterm of the maintenance agreements. Revenues for client support and maintenancethat are bundled with the initial license fee are deferred based on the fairvalue of the bundled support services and recognized ratably over the term ofthe agreement. Fair value is based on the renewal rate for continued supportarrangements.

 

*Allowance for Doubtful Accounts.*  We maintain an allowance for doubtfulaccounts at an amount we estimate to be sufficient to provide adequateprotection against losses resulting from extending credit to our clients. Injudging the adequacy of the allowance for doubtful accounts, we consider multiplefactors including historical bad debt experience, the general economicenvironment, the need for specific client reserves and the aging of ourreceivables. This provision is included in operating expenses as a general andadministrative expense. A considerable amount of judgment is required inassessing these factors. If the factors utilized in determining the allowancedo not reflect future performance, then a change in the allowance for doubtfulaccounts would be necessary in the period such determination has been madeimpacting future results of operations.

 

*Sales Returns and Allowances.*  Although we do not provide a contractualright of return, in the course of arriving at practical business solutions tovarious warranty and other claims, we have allowed sales returns andallowances. We record a provision for estimated sales returns and allowances onlicense in the same period the related revenues are recorded or when currentinformation indicates additional amounts are required. These estimates arebased on historical experience determined by analysis of specific returnactivity and other known factors. If the historical data we utilize does notreflect future performance, then a change in the allowances would be necessaryin the period such determination has been made impacting future results ofoperations.

 

*Valuation of Long-Lived and Intangible Assetsand Goodwill.* We review identifiable intangible and other long-lived assets forimpairment whenever events or changes in circumstances indicate the carryingamount may not be recoverable. Events or changes in circumstances that indicatethe carrying amount may not be recoverable include, but are not limited to, asignificant decrease in the market value of the business or asset acquired, asignificant adverse change in the extent or manner in which the business orasset acquired is used or a significant adverse change in the business climate.If such events or changes in circumstances are present, the undiscounted cashflows method is used to determine whether the long-lived asset is impaired.Cash flows would include the estimated terminal value of the asset and excludeany interest charges. To the extent the carrying value of the asset exceeds theundiscounted cash flows over the estimated remaining life of the asset, theimpairment is measured using the discounted cash flows. The discount rateutilized would be based on management’s best estimate of the related risks andreturn at the time the impairment assessment is made.

 

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If such events or changes in circumstances are present, the first stepof the goodwill impairment test, used to identify potential impairment,compares the fair value of a reporting unit with its carrying amount, includinggoodwill. We operate as one reporting unit and therefore compare our book valueto market value. Market value is determined utilizing our market capitalizationplus a control premium. If our market value exceeds our book value, goodwill isconsidered not impaired, thus the second step of the impairment test is notnecessary. If our book value exceeds our market value, the second step of thegoodwill impairment test is performed to measure the amount of impairment loss,if any. The second step of the goodwill impairment test, used to measure theamount of impairment loss, compares the implied fair value of the goodwill withthe book value of the goodwill. If the carrying value of the goodwill exceedsthe implied fair value of the goodwill, an impairment loss would be recognizedin an amount equal to the excess. Any loss recognized cannot exceed thecarrying amount of goodwill. After a goodwill impairment loss is recognized,the adjusted carrying amount of goodwill is the new accounting basis. Asubsequent reversal of a previously recognized goodwill impairment loss isprohibited once the measurement of that loss is completed.

 

In accordance with SFAS No. 144 “*Accounting for the Impairment or Disposal of Long-Lived Assets*”,we review long-lived assets for impairment whenever events or changes incircumstances indicate the carrying amount may not be recoverable. Events orchanges in circumstances that indicate the carrying amount may not berecoverable include, but are not limited to, a significant decrease in the marketvalue of the business or asset acquired, a significant adverse change in theextent or manner in which the business or asset acquired is used or asignificant adverse change in the business climate. If such events or changesin circumstances are present, the undiscounted cash flows method is used todetermine whether the asset is impaired. Cash flows would include the estimatedterminal value of the asset and exclude any interest charges. To the extent thecarrying value of the asset exceeds the undiscounted cash flows over theestimated remaining life of the asset, the impairment is measured using thediscounted cash flows. The discount rate utilized would be based on management’sbest estimate of the related risks and return at the time the impairment assessmentis made.

 

*Deferred Taxes.*  Significant judgment is required indetermining our income taxes in each of the jurisdictions in which we operate.This process involves estimating our actual current tax exposure together withassessing temporary differences resulting from differing treatment of items fortax and financial reporting purposes. These differences result in deferred taxassets and liabilities, which are included within our consolidated balancesheets. Although we believe our assessments are reasonable, no assurance can begiven that the final tax outcome of these matters will not be different thanthat which is reflected in our historical income tax provisions, benefits andaccruals. Such differences could have a material effect on our income taxprovision and net income in the period in which such a determination is made.

 

We must assess the likelihood that our net deferred tax assets will berecovered from future taxable income and to the extent we believe that recoveryis not likely, we must establish a valuation allowance. To the extent weestablish a valuation allowance we must include an expense within the taxprovision in the statement of operations. As of May 31, 2005, and May 31, 2004,the consolidated balance sheets include net deferred tax assets in the amountof $30.7 million and $27.7 million, respectively. These amounts arereported net of any accumulated valuation allowance. For the year endedMay 31, 2005, we established a valuation allowance through theprovision for income taxes of $0.4 million for certain deferred tax assetsassociated with federal contributing carryforwards and state net operating losscarryforwards. For the year ended May 31, 2004, we recorded avaluation allowance through the provision for income taxes of $1.2 millionfor federal contribution carryforwards, tax credit carryforwards, andstate net operating loss carryforwards.

 

We have established a full valuation allowance against our foreign taxoperating losses, because it was determined that they are not likely to berealized. As of May 31, 2005, we recorded an accumulated valuationallowance of $20.0 million against these losses.

 

Our methodology for determining the realizability of our deferred taxassets involves estimates of future taxable income from our core business, theestimated impact of future stock option deductions from outstanding stockoptions, and the expiration dates and amounts of net operating losscarryforwards and other tax credits. These estimates are projected through thelife of the related deferred tax assets based on assumptions which managementbelieves to be reasonable and consistent with current operating results.

 

Although we had cumulative pre-tax income for financial reportingpurposes for the three years ended May 31, 2005, we did not pay anysignificant income taxes over that period because tax deductions from theexercise of stock options granted prior to our initial public offeringgenerated tax operating losses for the years ended May 31, 2005, 2004and 2003. In assessing the realizability of our deferred tax assets as of May 31, 2005,we considered evidence regarding our ability to generate sufficient futuretaxable income to realize our deferred tax assets. The primary evidenceconsidered included the cumulative tax operating loss for the past three years;the cumulative pre-tax income for financial reporting purposes for the pastthree years; the estimated impact of future tax deductions from the exercise ofstock options outstanding as of 

 

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May 31, 2005; and the estimated future taxable income basedon historical operating results.

 

We estimate, based largelyon historical income, that it may take 10 years or more before we fullyutilize our current U.S. based deferred tax asset associated with the taxloss and tax credit carryforwards. After giving consideration to these factors,we concluded that it was more likely than not that tax loss carryforwards andother tax credit carryforwards that expire within the next ten years will notbe utilized . As a result, for the year ended May 31, 2005, weestablished a valuation allowance through the provision for income taxes of$0.4 million for certain deferred tax assets associated  primarily with federal contributioncarryforwards and state net operating loss carryforwards.

We also concluded that it was more likely than not that the netdeferred tax assets of $30.7 million as of May 31, 2005, as wellas the estimated future tax deductions from the exercise of stock optionsoutstanding as of May 31, 2005, would be utilized prior to expiringin greater than ten years. Based on this conclusion, we would requireapproximately $110.2 million in cumulative future taxable income to begenerated at various times over the next twenty years to realize the relatednet deferred tax assets of $30.7 million as of May 31, 2005, aswell as the estimated future tax deductions from the exercise of stock optionsoutstanding  as of May 31, 2005.Additionally, we determined that it is likely the net deferred tax assets willcontinue to increase for the next several years prior to utilization of the taxloss carryforwards and could increase in excess of $20.6 million if thestock options outstanding as of May 31, 2005 are exercised.

 

In the event that we adjust estimates of future taxable income or taxdeductions from the exercise of stock options, or our stock price increasessignificantly without a corresponding increase in taxable income, we may needto establish an additional valuation allowance, which could materially impact ourfinancial position and results of operations.

 

*Contingencies.*  We are subject to the possibility of variousloss contingencies in the normal course of business. We accrue forcontingencies when a loss is probable and can be reasonably estimated.

 

**Informal Securities and Exchange Commission Investigation**

** **

OnJanuary 5, 2005, we announced that the Securities and ExchangeCommission (SEC) conducted an informal investigation concerning our revenuerecognition practices. We have fully cooperated with the SEC. In response to atelephone call from the SEC seeking information from us, our Audit Committeeretained independent legal counsel, which retained an independent accountingfirm, to investigate thoroughly the issues identified by the SEC. The AuditCommittee’s investigation was completed in January 2005. Following theAudit Committee’s investigation, we concluded that our financial statements cancontinue to be relied upon and need not be restated. The Audit Committee sharedthe results of its independent investigation with the SEC in early January 2005.We have not received further communication from the SEC since we shared ourresults of the investigation in January 2005. The SEC is not bound by theresults of our independent investigation.

 

Weincurred $2.7 million in fees and expenses for this independentinvestigation in fiscal 2005. If the SEC initiates a formal investigationor initiates other actions, we would incur additional fees and expenses and mayincur other associated costs or liabilities.

 

**Purchase of Client Maintenance Contracts**

** **

On April 30, 2004, we acquired assets consisting of clientmaintenance contracts and client lists from Siemens Medical Solutions HealthServices Corporation (“Siemens”) for $19.8 million in cash and $4.3 millionin other consideration. Of the total purchase price, $22.9 million wasallocated to the maintenance contracts and is being amortized over theremaining life of the contracts based on estimated periodic contractual revenuerecognized. The purchase price allocated to the client list of $1.0 millionis being amortized on a straight-line basis over 7 years. The remainingpurchase price of $0.2 million in transitional support costs was chargedto cost of services as the services were performed in 2004.

 

The asset purchase agreement was part of an overall restructuring of a10-year partner agreement between us and Siemens. As part of the agreement,Siemens became our preferred partner for hosting our software applicationswithin the United States healthcare market, and we became Siemens’ preferredEnterprise Resource Planning (“ERP”) software vendor for healthcare. Under theasset purchase agreement, we assumed responsibility for supporting clients whouse our software applications previously supported by Siemens. The assetpurchase agreement did not qualify as a business combination under the criteriaestablished in Statement of Financial Accounting Standards (SFAS) No. 141,“*Business Combinations*”.

 

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**Acquisitions**

** **

On June 2, 2005, we announced thatwe had entered into an agreement to combine with Stockholm, Sweden-basedIntentia International AB (“Intentia”) in an all-stock transaction. We plan toaffect the business combination through a recommended public offer in Swedenfor (i) all outstanding Intentia Series A and Series B sharesand (ii) all outstanding warrants to purchase Series B shares, ineach case in exchange for shares of our Common Stock. The transaction isexpected to be completed in the second or third quarter of fiscal 2006 subjectto, among other things, shareholder, regulatory and public authority approvalsand sufficient tender of shares by Intentia stockholders. The transaction isexpected to be accounted for under the purchase method of accounting. Refer toFootnote 18, “Subsequent Events” in the notes to the Consolidated FinancialStatements for additional information.  

 

The following acquisitions were accounted for under the purchase methodof accounting. Accordingly, the assets and liabilities acquired were recordedat their estimated fair values at the effective date of the acquisition and theresults of operations have been included in the audited consolidated statementsof operations since the acquisition date. In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “*Goodwill andOther Intangible Assets*,” goodwill recorded as a result of theseacquisitions is subject to an annual impairment test and is not amortized.These acquisitions are intended to enhance our focus on targeted verticalmarkets and to provide additional value-added products and services to ourclients.

 

On October 15, 2003, we acquired all of the outstanding capitalstock of Apexion for $8.0 million in cash, net of cash acquired. Terms ofthe initial agreement provide for additional cash payments ranging from zero to$2.0 million, contingent upon the future performance of Apexion measuredannually through November 30, 2005. As of May 31, 2005, noadditional consideration had been earned or recorded under this agreement.Apexion provided materials and equipment logistics solutions for the healthcareindustry.

 

On September 30, 2003, we acquired all of the outstanding capitalstock of Closedloop for $4.2 million in cash, net of cash acquired.Closedloop provided collaborative budgeting, planning and forecasting solutionsusing real-time, transactional functionality.

 

On July 24, 2003, we acquired all of the outstanding capital stockof Numbercraft for $3.7 million in cash, net of cash acquired and $0.3 millionin notes payable. Terms of the initial agreement provide for additional cashpayments ranging from zero to $9.0 million contingent upon the futureperformance of Numbercraft measured periodically through fiscal 2007. Anycontingent consideration earned is recorded as additional goodwill. During thefiscal years ended May 31, 2005 and May 31, 2004, $0.5 millionand $1.1 million of additional consideration was earned and recorded asadditional goodwill, respectively. This amount and certain elements of theinitial purchase price have been included in notes payable to the formerprincipals of Numbercraft. As of May 31, 2005, the remainingpotential contingent consideration was approximately $5.9 million.Numbercraft provided solutions for retailers and consumer packaged goodscompanies, which enable a quantitative understanding of consumer dynamics,product and offer performance, and client trends.

 

On June 28, 2002, we acquired certain assets of ArmatureHoldings Ltd. for $7.8 million in cash, net of cash acquired.Acquired assets included all software applications, related trademarks andtechnologies. Armature provided merchandising/category management and supplychain management solutions for retailers, consumer goods manufacturers, andwholesalers.

 

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**Results of Operations**

** **

The following table sets forth certain line items in our ConsolidatedStatements of Operations as a percentage of total revenues and the percentageof period over period growth for the periods indicated:

 
| ** **                           | ** ** | **Year Ended May 31,  Percent of Total Revenue** | ** ** | **Percent of Dollar Change  Year over Year** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                              | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2005/2004** | ** ** | **2004/2003** | ** ** |
| Revenues:                            |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| License fees                         |       | 17.2                                                  | %          | 25.4                                         | %          | 22.5 | % | (37.5 | )% | 19.0 | % |
| Services                             |       | 82.8                                                  |       | 74.6                                         |       | 77.5 |   | 2.3 |   | 1.7 |   |
| Total revenues                       |       | 100.0                                                 |       | 100.0                                        |       | 100.0 |   | (7.8 | ) | 5.6 |   |
|                                 |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| Cost of revenues:                    |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| Cost of license fees                 |       | 3.0                                                   |       | 4.4                                          |       | 4.2 |   | (37.5 | ) | 11.0 |   |
| Cost of services                     |       | 41.9                                                  |       | 37.5                                         |       | 41.1 |   | 3.2 |   | (3.8 | ) |
| Total cost of revenues               |       | 44.9                                                  |       | 41.9                                         |       | 45.3 |   | (1.1 | ) | (2.5 | ) |
|                                 |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| Gross profit                         |       | 55.1                                                  |       | 58.1                                         |       | 54.7 |   | (12.7 | ) | 12.3 |   |
|                                 |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| Operating expenses:                  |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| Research and development             |       | 18.5                                                  |       | 17.8                                         |       | 17.2 |   | (4.2 | ) | 9.8 |   |
| Sales and marketing                  |       | 22.6                                                  |       | 25.6                                         |       | 29.9 |   | (18.8 | ) | (9.5 | ) |
| General and administrative           |       | 10.9                                                  |       | 10.4                                         |       | 8.7 |   | (3.4 | ) | 25.9 |   |
| Restructuring                        |       | 1.5                                                   |       | 0.6                                          |       | 1.7 |   | (127.5 | ) | (63.4 | ) |
| Amortization of acquired intangibles |       | 0.5                                                   |       | 0.4                                          |       | 0.3 |   | 21.3 |   | 45.3 |   |
| Total operating expenses             |       | 54.0                                                  |       | 54.8                                         |       | 57.8 |   | (9.2 | ) | 0.1 |   |
|                                 |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| Operating income (loss)              |       | 1.1                                                   |       | 3.3                                          |       | (3.1 | ) | (68.7 | ) | 212.8 |   |
| Other income, net                    |       | 1.3                                                   |       | 0.9                                          |       | 1.3 |   | 34.9 |   | (28.0 | ) |
|                                 |       |                                                  |       |                                         |       |   |   |   |   |   |   |
| Income (loss) before income taxes    |       | 2.4                                                   |       | 4.2                                          |       | (1.8 | ) | (47.0 | ) | 344.2 |   |
| Provision (benefit) for income taxes |       | 0.8                                                   |       | 2.0                                          |       | (0.7 | ) | (61.0 | ) | 399.4 |   |
| Net income (loss)                    |       | 1.6                                                   | %          | 2.2                                          | %          | (1.1 | )% | (34.2 | )% | 308.9 | % |

 

**Fiscal Year Ended May 31, 2005 ComparedWith Fiscal Year Ended May 31, 2004**

** **

***Revenues***

 

*Total Revenues.*  We license software under non-cancelablelicense agreements and provide related professional services includingconsulting, training, and implementation services, as well as ongoing clientsupport and maintenance. Total revenues decreased to $335.2 million infiscal 2005 from $363.6 million in fiscal 2004, or 7.8%. The $28.4 milliondecline in total revenue was attributed to a $34.6 million decrease inlicense fees partially offset by a $6.2 million increase in servicesrevenues.

 

*License Fees.*  Revenues from license fees decreased to $57.7 millionin fiscal 2005 from $92.3 million in fiscal 2004, or 37.5%. The$34.6 million decline in licensefees was primarily due to a reduction in new and existing client businessactivity due to continued consolidation and uncertainty in the industry, aswell as competing priorities such as Sarbanes-Oxley compliance by publiccompanies, reducing capital spending on software. The average overall sellingprice of our licensing transactions in fiscal 2005 decreased 23.5%, whilethe number of licensing transactions decreased 18.1%, as compared to fiscal 2004.Revenues from license fees as a percentage of total revenues, for fiscal 2005and fiscal 2004, were 17.2% and 25.4%, respectively.  

 

*Services.*  Service revenues consist of consulting,maintenance and training services provided to clients. Revenues from services increased to $277.4 million for fiscal 2005from $271.2 million for fiscal 2004, representing an increase of 2.3%.The $6.2 million increase in services was due to a $15.8 millionincrease in support revenue that was partially offset by

 

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a $9.6 million decrease in consulting revenue. The $15.8 millionincrease in support revenue was primarily due to a $10.1 million increasein revenue earned on support contracts purchased in April 2004, and a $4.5 millionincrease in revenue primarily related to price increases. The $9.6 milliondecrease in consulting revenue was due to lower business activity in productsales that directly impacts consulting revenue combined with increasedcompetitive pricing pressures. Services revenues as a percentage of totalrevenues for fiscal 2005 and 2004 were 82.8% and 74.6%, respectively.

 

***Cost of Revenues***

 

*Cost of License Fees.*  Costof license fees includes royalties to third parties, amortization of acquiredsoftware, and software delivery expenses. Our software solutions may includeembedded components of third-party vendors, for which a fee is paid to thevendor upon the sale of our products. In addition, we resell third-partyproducts in conjunction with the license of our software solutions. The cost oflicense fees is higher when we resell products of third-party vendors. As aresult, gross margins vary depending on the proportion of third-party productsales in our revenue mix. 

 

Cost of license fees decreased to $10.0 million for fiscal 2005from $15.9 million for fiscal 2004, representing a decrease of 37.5%.  The $5.9 million decrease was primarilydue to a 37.5% decline in license fees which included a decline in theproportion of third-party product sales in our revenue mix. Cost of licensefees as a percentage of total revenues for fiscal 2005 and fiscal 2004were 3.0% and 4.4%, respectively. Gross margin on revenue from license fees was82.7% for fiscal 2005 and fiscal 2004.

* *

*Cost of Services.*  Costof services includes salaries, employee benefits, and related travel andoverhead costs for providing consulting, training, implementation and supportservices to clients, as well as intangible asset amortization on supportcontracts purchased in April 2004. Cost of services increased to $140.6 millionfor fiscal 2005 from $136.3 million for fiscal 2004 representingan increase of 3.2%. The $4.3 million increase was primarily due to a $5.0 millionincrease in third-party consulting costs resulting from a higher proportion ofthird-party services in our revenue mix, and a $3.7 million increase inamortization related to support contracts purchased in April 2004. Theseincreases were partially offset by a $1.9 million decrease in travelrelated costs; a $0.9 million decrease in employee related costs,including a $2.1 million decrease due to the favorable impacts fromrestructuring activities, and a $0.6 million reduction in incentivecompensation, partially offset by a $2.0 million increase in annual salariesdue to merit increases; a $0.6 million decrease due to general costcontrol activities; and a $0.4 million decrease in our annual rewardprogram. Cost of services as a percentage of total revenues for fiscal 2005and fiscal 2004 were 41.9% and 37.5%, respectively.  Gross margin on services revenues were 49.3%and 49.8% for fiscal 2005 and fiscal 2004, respectively.

 

***Operating Expenses***

*** ***

*Research and Development.* Research and development expenses consist primarily of salaries,employee benefits, related overhead costs, and consulting fees associated withproduct development, enhancements, upgrades, testing, quality assurance, anddocumentation. Research and development expenses decreased to $62.2 millionfor fiscal 2005 from $64.9 million for fiscal 2004, representinga decrease of 4.2%. The $2.7 million decrease in research and developmentwas primarily due to a $4.3 million reduction in employee related costs,including a $1.7 million decrease in salaries due to the favorable impactsfrom restructuring activities, a $2.0 million decrease in incentivecompensation, and a $1.5 million decrease due to a reduction in headcount,partially offset by a $1.3 million increase in annual salaries; and a $1.0 milliondecrease in other development activities. These decreases were partially offsetby a $2.9 million increase in spending on corporate initiatives, including$1.9 million related to the third-party offshore software support servicesagreement we entered into in February 2004. Research and developmentexpenses as a percentage of total revenues for fiscal 2005 and fiscal 2004were 18.5% and 17.8%, respectively.

 

*Sales and Marketing.*  Salesand marketing expenses consist primarily of salaries and incentive compensation,employee benefits, travel, and overhead costs related to our sales andmarketing personnel, as well as trade show activities, advertising costs, andother costs associated with marketing our company.  Sales and marketing expenses decreased to $75.6 millionfor fiscal 2005 from $93.1 million for fiscal 2004, representinga decrease of 18.8%.

 

The$17.5 million decrease in sales and marketing expenses was primarily dueto a $12.6 million decrease in employee related costs, including a $5.9 milliondecrease in incentive compensation, and a $3.4 million decrease insalaries due to the favorable impacts resulting from restructuring activities;a decrease of $1.7 million in payroll taxes and benefits and a 

 

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$1.2 milliondecrease due to a reduction in headcount; and a $4.8 million decrease dueto general cost containment activities, primarily travel related costs. Salesand marketing expenses as a percentage of total revenues for fiscal 2005and fiscal 2004 were 22.6% and 25.6%, respectively.

 

*General and Administrative.* General and administrative expenses consist primarily of salaries,employee benefits and related overhead costs for administrative employees, aswell as legal and accounting expenses, consulting fees and bad debt expense. Generaland administrative expenses decreased to $36.4 million for fiscal 2005from $37.7 million for fiscal 2004, representing a decrease of 3.4%.

 

The$1.3 million decrease in general and administrative expenses was primarilydue to a $2.2 million decline in bad debt expense due primarily to thefavorable impacts from focused collection efforts, a client settlement and a generaldecrease in revenues; and a $2.5 million decrease in other legal relatedcosts. There was a $1.5 million decrease in employee related costs,including a $2.1 million decrease in incentive compensation; and a $0.5 milliondecrease due to the favorable impacts of restructuring activities, partiallyoffset by a $1.0 million increase in salaries; and a $0.9 million decreasein foreign currency transactions. These decreases were partially offset by a $2.7 millionin fees and expenses related to the SEC’s informal investigation, $2.5 millionin costs associated with Sarbanes-Oxley compliance initiatives, and a $0.8 millionincrease due to corporate initiatives designed to increase efficiencies. Generaland administrative expenses as a percentage of total revenues for fiscal 2005and fiscal 2004 were 10.9% and 10.4%, respectively.

 

*Restructuring.* During fiscal 2005 we recorded $5.0 millionof restructuring charges, net of reversals, related to corporate restructuringinitiatives. 

 

OnSeptember 28, 2004, we approved a plan designed to enhance theCompany’s operating effectiveness and profitability. Under the restructuringplan (Phase I), we streamlined structure, consolidated leadership and reducedlong-term costs to realign projected expenses with anticipated revenue levels.The plan included the reduction of 107 employees in the United States and theUnited Kingdom, which in accordance with SFAS No. 112, *Employers Accounting for Post Employment Benefits - an amendment ofFASB Statements No. 5 and 43*, resulted in a charge forseverance and related benefits of $2.9 million, net of a reversal of $0.03 millionsubsequent to the initial charge in the year ended May 31, 2005. Thereduction included employees who worked in operations, marketing, sales,research and development, maintenance and services. Cash payments during fiscal 2005for the Phase I plan were $2.9 million. All employee reductions andrelated cash payments were substantially completed as of May 31, 2005.The remaining cash payments are expected to be completed during fiscal 2006.

 

AtNovember 30, 2004, we also accrued for a plan (Phase II) that includedinitiatives to further reduce costs and realign projected expenses withanticipated revenue levels. It included a reduction of 68 employees in theUnited States and the United Kingdom, and because we were able to determineprobability at the end of the second quarter of fiscal 2005, therestructuring plan resulted in a charge of approximately $2.2 million, netof a reversal of $0.3 million subsequent to the initial charge forseverance and related benefits, in accordance with SFAS No. 112. Thereduction included employees who worked in sales, research and development andservices. Cash payments during fiscal 2005 for the Phase II plan were $2.0 million.All employee reductions and related cash payments were substantially completedas of May 31, 2005. The remaining cash payments are expected to becompleted during fiscal 2006.

 

Duringfiscal 2005, we experienced a reduction in our fully burdened employeerelated costs of approximately $9.9 million due to our fiscal 2005restructuring activities. As a result of our fiscal 2005 restructuringplans, beginning in fiscal 2006 and going forward we anticipate an annualizedreduction in our employee related costs of approximately $19.0 million.

 

Asof May 31, 2005, remaining reserve balances related to prior years’ restructuringsconsist of $0.6 million in employee related costs and $0.03 millionof facility closure liabilities. Although the restructuring plans for fiscal 2004,2003 and 2002 have been fully executed, we continue to make cash payments forcontinuing lease and employee related costs. During fiscal 2005, we madecash payments totaling $0.2 million. The remaining cash payments for theprior years’ restructurings are expected to be completed during fiscal 2006.

 

*Amortization of Acquired Intangibles.*  Amortization of acquired intangibles increasedto $1.5 million for fiscal 2005 from $1.3 million for fiscal 2004.The $0.2 million increase in amortization expense primarily reflects thefull year increases in amortization of intangibles associated with companiesacquired during fiscal 2004.

 

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***Other Income, net***

 

Other income, net which is comprised of interest income earned fromcash, marketable securities and long term investments, was $4.3 millionfor fiscal 2005 compared with $3.2 million for fiscal 2004. The increasein interest income was primarily due to an increase in the average yield oninvestments compared with the same prior-year period, partially offset by anapproximate $20.9 million decrease in average invested balances compared withthe same prior year period.

 

***Provision (Benefit)for Income Taxes***

*** ***

Our provision for income taxes for fiscal 2005 was $2.9 million,compared to $7.3 million for fiscal 2004.  This decrease in income tax expense was dueto a decrease in income before income taxes and a decrease in our effectiveincome tax rate.

 

Our effective income taxrate for fiscal 2005 was 35.2%, compared to 47.8% for fiscal 2004.  This decrease in our effective tax rate wasdue primarily to increased tax benefits as a percentage of income beforeincome taxes from research and development tax credits and tax-exemptincome.  Additionally, a decrease in thechange in the valuation allowance related to state and federal taxcarryforwards contributed to the decrease in the effective tax rate.

 

Our annual effective taxrate may fluctuate from year to year due primarily to changes in the amount andmix of domestic and foreign income, changes in our estimates of federal taxcredits, tax deductions, and tax-exempt income, changes in our valuationallowance related to deferred tax assets, and changes in tax legislation.

 

During fiscal years 2005and 2004, we recorded income tax benefits of $4.2 million and $11.6 million,respectively, related to deductions for employee stock option exercises. Thistax benefit, which decreased current income taxes payable and decreasedadditional paid-in capital by equal amounts, had no effect on our provision forincome taxes.

 

**Fiscal Year Ended May 31, 2004 ComparedWith Fiscal Year Ended May 31, 2003**

** **

***Revenues***

*** ***

*Total Revenues.*  Totalrevenues increased to $363.6 million in fiscal 2004 from $344.3 millionin fiscal 2003, or 5.6%. The $19.3 million increase in total revenues wasattributed to a $14.7 million increase in license fees and a $4.5 millionincrease in services revenues.  

 

*License Fees.* Revenues from license fees increased to $92.3 million in fiscal 2004from $77.6 million in fiscal 2003, representing an increase of 19.0%. The$14.7 million increase in license fees was due to improvements in marketconditions in the most recent six months compared with last year, which improvedthe level of information technology spending. The average overall selling price of ourlicensing transactions increased 5.5%, while the number of licensingtransactions decreased 1.1% as compared with fiscal 2003. Revenuesfrom license fees as a percentage of total revenues for fiscal 2004were 25.4%, compared with 22.5% in fiscal 2003, reflecting the increase inlicense fees in proportion to revenues from services.

 

*Services.*  Revenues from services increased to $271.2 millionfor fiscal 2004 from $266.7 million in fiscal 2003, representing anincrease of 1.7%. The $4.5 million increase in services was due to a $12.3 millionincrease in support revenue that was partially offset by a $7.8 million decreasein consulting revenue. The $12.3 million increase in support revenue wasprimarily due to an expanded client base from new licensing activity since theprior year period combined with price increases. The $7.8 million decreasein consulting revenue was primarily due to the decline in new license activityin fiscal 2003, which resulted in fewer consulting and training opportunitiesin fiscal 2004. New consulting and training opportunities typically laggedbehind new licensing activity by several quarters. Services revenues as a percentageof total revenues for fiscal 2004 and 2003 were 74.6% and 77.5%,respectively.

 

***Cost of Revenues***

 

*Cost of License Fees.*  Cost of license fees increased to $15.9 millionfor fiscal 2004 from $14.4 million for fiscal 2003, representing anincrease of 11.0%. The $1.5 million increase in cost of license fees wasprimarily due to a $1.2 million increase in amortization of acquiredsoftware related to our acquisitions, and a $0.2 million increase in third-partycosts. Cost of license fees as a percentage of total revenues for fiscal 2004and 2003 was 4.4% and 4.2%, respectively. Gross margin on

 

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revenue from license fees was 82.7% and 81.5% for fiscal 2004 and2003, respectively. Gross margin on license fees increased primarily due to theincrease in the mix of Lawson products sold versus third-party products, asLawson products typically carry higher margins than third-party components.This is partially offset by the increased amortization of acquired technology,and by the increase in the mix of embedded third-party products in relation tototal third-party products.

 

*Cost of Services.*  Cost of services decreased to $136.3 millionfor fiscal 2004 from $141.7 million for fiscal 2003, representing adecrease of 3.8%. The $5.4 million decrease in cost of services was due toseveral factors including; a $2.6 million decrease in third-partyconsulting costs as a result of a lower proportion of third-party services inour revenue mix, offset by improved third-party margins; a $2.3 millionnet decrease in expenses due primarily to cost containment initiatives; and a$1.5 million net decrease in employee costs from workforce reductions andattrition. Partially offsetting these decreases was a $0.5 millionincrease in transition services and amortization expense related to supportcontracts purchased in April 2004; and a $0.4 million increase inother third-party maintenance costs primarily due to an overall increase inmaintenance revenues, which is partially reduced by less third-partymaintenance in our revenue mix. Cost of services as a percentage of totalrevenues for fiscal 2004 and 2003 was 37.5% and 41.1%, respectively. Grossmargin on services revenues was 49.8% and 46.9% for fiscal 2004 and 2003,respectively. Gross margin on services increased primarily due to the increasein maintenance revenue in proportion to consulting revenue.

 

***Operating Expenses***

 

*Research and Development.*  Research and development expenses increasedto $64.9 million for fiscal 2004 from $59.1 million for fiscal2003, representing an increase of 9.8%. The $5.8 million increase inresearch and development expenses was due primarily to a $1.8 millionincrease related to the integration of acquisitions; a $1.1 million increasein corporate initiatives designed to improve future efficiencies and enhancefuture functionality; and a $2.3 million net increase in employee costs primarilyrelated to incentives and merit increases. Research and development expenses asa percentage of total revenues for fiscal 2004 and 2003 were 17.8%and 17.2%, respectively.

 

*Sales and Marketing.*  Sales and marketing expenses decreased to$93.1 million for fiscal 2004 from $103.0 million for fiscal2003, representing a decrease of 9.5%. The $9.9 million decrease in salesand marketing expenses was primarily due to a $5.9 million net decrease inemployee costs as a result of our workforce reductions and attrition covering66 employees; a $5.0 million decrease in expenses due to cost containmentinitiatives; and a $0.9 million decrease in marketing costs. Thesedecreases were partially offset by a $2.5 million increase in corporateinitiative spending intended to enhance product development and emphasizecreation of value for our clients. Sales and marketing expenses as a percentageof total revenues for fiscal 2004 and 2003 were 25.6% and 29.9%,respectively.

 

*General and Administrative.*  General and administrative expenses increasedto $37.7 million for fiscal 2004 from $30.0 million for fiscal2003, representing an increase of 25.9%. The $7.7 million increase ingeneral and administrative expenses was primarily due a $2.9 millionincrease in bad debt expense reflecting an increase in the accounts receivablereserve for aged receivables; a $2.0 million increase in costs related tocorporate initiatives and consulting designed to improve efficiency; a $2.0 millionincrease relating to the resolution of certain claims and other legal related expenses;a $0.5 million increase in insurance costs, and a $0.4 million unfavorablevariability year over year from foreign currency translations. These increaseswere partially offset by a $1.3 million decrease in employee costs relatedto lower stock compensation expense, a $0.9 million decrease in expensesdue to a prior year lease termination fee that did not occur in the currentyear; and a $0.4 million decrease in audit expenses due primarily to prioryear costs related to the Armature acquisition that did not occur again in thecurrent year. The decrease in stock compensation expense resulted primarilyfrom decreased amortization of the remaining initial public offering deferredstock compensation balance and the expiration of unvested options related toemployee terminations resulting from workforce reductions. General andadministrative expenses as a percentage of total revenues or fiscal 2004and 2003 were 10.4% and 8.7%, respectively.

 

*Restructuring.*  During fiscal 2004, we recorded $2.2 millionof restructuring charges, net of reversals, related to corporate restructuringinitiatives.

 

In September 2003, we approved the fiscal 2004 restructuringplan to realign projected expenses with anticipated lower revenue levels andincurred restructuring charges of $2.3 million for severance and relatedbenefits. The plan resulted in the termination of 93 employees in the secondquarter of fiscal 2004 from various functions including research anddevelopment, general and administrative, and sales and marketing primarily inthe United States. In addition, during fiscal 2004, 

 

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we recorded a $0.04 million reversal ofcosts related to certain employee costs which we determined would not beincurred for the fiscal 2003 restructuring plan.

 

Although the fiscal 2003 and 2002 restructuring plans have been fullyexecuted, we continue to make cash payments for continuing lease and employeerelated costs. During the fiscal year ended May 31, 2004, we madecash payments of $3.1 million, which reduced liabilities included inaccrued compensation and benefits and other accrued liabilities.

 

*Amortization of Acquired Intangibles.*  Amortization of acquired intangiblesincreased to $1.3 million for fiscal 2004 from $0.9 million forfiscal 2003. The $0.4 million increase was primarily due to the amortizationof acquired intangible assets other than acquired technology, and the amortizationof service contracts purchased in April 2004 which are amortized to costof license fees and cost of services, respectively.

 

***Other Income(Expense), net***

 

Other income (expense), net, decreased to $3.2 million for fiscal 2004from $4.5 million for fiscal 2003. The reduction in interest incomeresulted from a realignment in our investment strategy during the year toshorter-term lower-yielding investments, and from a reduced investment baseresulting from the funding of acquisitions and stock repurchases.

 

***Provision (Benefit)for Income Taxes***

*** ***

We recognized an income tax provision of $7.3 million for fiscal 2004compared with a tax benefit of $2.4 million for fiscal 2003. As of May 31, 2004,we recognized a deferred tax valuation allowance of $1.2 million that isincluded in the current year provision. The valuation allowance is associatedprimarily with federal contribution carryforwards, state net operating losscarryforwards and certain federal tax credit carryforwards not consideredlikely to be realized before they expire within the next ten years. Our incometax provision (benefit) is based on pretax income or loss and consistsprimarily of federal and state income taxes. Our effective rate including thevaluation allowance was 47.8% and 39.0% for fiscal 2004 and 2003,respectively.

 

**Liquidity and Capital Resources**

** **
| ** **                                           | ** ** | **As of and for the Fiscal  Year Ended May 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(in millions,  except%)**                     | ** ** | **2005**                                              | ** ** | **Change** | ** ** | **2004** | ** ** | **Change** | ** ** | **2003** | ** ** |
| Working capital                                      |       | $                                                     | 178.4      |   | 7.9 | % | $ | 165.3 |   | (22.5 | )% | $ | 213.3 |   |
| Cash and cash equivalents and marketable  securities |       | $                                                     | 234.6      |   | 12.3 | % | $ | 209.0 |   | (19.8 | )% | $ | 260.5 |   |
| Cash provided by operating activities                |       | $                                                     | 32.9       |   | 84.5 | % | $ | 17.8 |   | (62.8 | )% | $ | 47.9 |   |
| Cash provided by (used in) investing  activities     |       | $                                                     | 82.2       |   | 399.1 | % | $ | (27.5 | ) | (311.7 | )% | $ | (6.7 | ) |
| Cash provided by (used in) financing  activities     |       | $                                                     | 0.2        |   | 100.8 | % | $ | (27.8 | ) | (889.6 | )% | $ | (2.8 | ) |

 

As of May 31, 2005, we had $234.6 million in cash, cashequivalents and marketable securities and $178.4 million in workingcapital. Our most significant source of operating cash flows is derived fromlicense fees and services to our clients. Days sales outstanding (“DSO”),calculated as net receivables at period-end divided by revenue for the quarter,times 90 days in the quarter, was 45 and 59 as of May 31, 2005,and May 31, 2004, respectively. The decrease in the DSO for the threemonths ended May 31, 2005 as compared with the three months ended May 31, 2004,was due primarily to a decrease in net receivables as a result of focusedcollection efforts. Our primary uses of cash from operating activities are foremployee costs, third-party costs for licenses and services, and facilities.

 

We believe that cash flows from operations, together with our cash,cash equivalents and marketable securities, will be sufficient to meet our cashrequirements for working capital, capital expenditures and investments for theforeseeable future. As part of our business strategy, we may acquire companiesor products from time to time to enhance our product lines.  On June 2, 2005, we entered into anagreement to combine with Stockholm, Sweden-based Intentia InternationalAB.  We intend this to be an all-stocktransaction; however, we may utilize cash to acquire certain shares as well asto fund 

 

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acquisition related costs.  Webelieve we have sufficient cash to fund this business transaction.  For additional information, refer to Footnote18, “Subsequent Events” in the Notes to the Consolidated Financial Statementsas well as the discussion of contingent cash commitments contained below inthis section.

 

***Cash flows from operating activities:***

 

Netcash provided by operating activities was $32.9 million for fiscal 2005compared with $17.8 million for fiscal 2004. Our net income of $5.3 millionwas increased by non-cash charges resulting in $22.9 million of cash fromoperations before working capital changes. The net working capital changes of $4.7 millionincreased the overall cash provided to $32.9 million.

 

Thesignificant activity in cash flows from working capital changes for fiscal 2005primarily related to a $21.2 million increase in cash from trade accountsreceivable, which was partially offset by a $10.2 million net decrease inaccrued expenses and other liabilities, and a $6.9 million decrease indeferred revenue and client deposits. The $21.2 million increase in cashfrom trade accounts receivable was due primarily to focused collection efforts aswell as the effects from a general decrease in revenues.

 

The$10.2 million decrease in accrued expenses and other liabilities was dueprimarily to restructuring related cash payments and the payment of fiscal 2004incentive compensation in the first quarter of fiscal 2005. Fiscal 2005incentive compensation payments were lower due to partial objectives being met.The $6.9 million decrease in deferred revenue and client deposits wasprimarily due to a decrease in cash received on support billings as a result ofa change in client billing cycles. The change in client billing cycles resultedin initially smaller client invoices due to pro-rata billings in an effort toget individual multiple client support billings to a common renewal date. Thecash collections generated by the pro-rata billings will fluctuate according torenewal periods identified by our clients. 

 

Net cash provided by operating activities was $17.8 million forfiscal 2004 compared with $47.9 million for fiscal 2003. Our netincome of $8.0 million was increased by non-cash charges resulting in $25.8 millionof cash from operations before working capital changes. The net working capitalchanges of $16.0 million decreased the overall cash provided to $17.8 million.

 

Thesignificant activity in cash flows from working capital changes for fiscal 2004was due primarily to an $8.2 million decrease in cash from trade accountsreceivable, a $3.6 million net decrease in accrued expenses and otherliabilities, and a$6.5 million decrease in deferred revenue and client deposits.

 

The $8.2 million increase in trade accounts receivable was dueprimarily due to $5.7 million in products billed with payment terms thatextended beyond the end of the period, and $2.7 million from increasedlicensing activity. Prepaid expenses decreased $2.3 million due primarilyto the reclassification of tax benefits to taxes payable due to annualearnings. Accrued expenses decreased by $5.4 million primarily due tolower accruals for third-party maintenance services, payment of acquisitionrelated liabilities, and restructuring related cash payments. Deferred revenueand client deposits decreased $6.5 million due primarily to decreasedmaintenance payments received prior to the support period and a decrease in thesales returns and allowances reserve due to the resolution of certain productclaims.

 

***Cash flows from investing activities:***

 

Netcash provided by investing activities was $82.2 million for fiscal 2005compared with net cash used in investing activities of $27.5 million for fiscal 2004.Cash provided by investing activities for fiscal 2005 primarily related to$89.6 million in proceeds received from sales and maturities of marketablesecurities net of purchases. 

 

Wehave made reclassifications to our Consolidated Statement of Cash Flows for fiscal 2004and 2003 to reflect the gross purchases and gross sales of dutch auction ratesecurities as investing activities rather than as a component of cash and cashequivalents. Refer to Note 2 of Notes to Consolidated Financial Statementsfor additional information.

 

Net cash used in investing activities was $27.5 million for fiscal 2004compared with net cash used in investing activities of $6.7 million forfiscal 2003. Cash used in investing activities for fiscal 2004 primarilyrelated to $19.8 million used to purchase support contracts in April 2004,$15.9 million used in the acquisitions of Numbercraft, Apexion and

 

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Closedloop, and $4.9 million used in the purchases of property andequipment. Cash used in investing activities were partially offset by $13.1 millionin proceeds received from sales and maturities of marketable securities net ofpurchases.

 

***Cash flows from financing activities***:

 

Netcash provided by financing activities was $0.2 million for fiscal 2005compared with net cash used in financing activities of $27.8 million for fiscal 2004.Cash provided by financing activities for fiscal 2005 primarily related to$7.6 million in cash received from the exercise of stock options, and $3.9 millionin cash received from employee contributions to our employee stock purchaseplan that was primarily offset by $10.0 million in cash used to fund therepurchase of common stock and $1.4 million used for repayment of debt.

 

Net cash used in financing activities was $27.8 million for fiscal 2004compared with net cash used in financing activities of $2.8 million forfiscal 2003. Cash used in financing activities reflected $40.0 million incash used to fund the repurchase of common stock and $0.9 million used torepay debt, which was partially offset by $9.4 million in cash provided bythe exercise of stock options, and $3.7 million in cash provided by employeecontributions to our employee stock purchase plan.

 

#### ***Repurchase of common shares***

#### *** ***

InJune 2003, our Board of Directors authorized us to repurchase up to $50.0 millionof our common shares. Shares were repurchased as market conditions warrantedeither through open market transactions, block purchases, private transactionsor other means. No time limit had been set for the completion of the program. Duringfiscal 2004, a total of 4.9 million shares were repurchased for $40.0 millionin cash and $0.1 million in non-cash transactions. During fiscal 2005we completed the authorized stock repurchase plan by purchasing 1.4 millionshares for $10.0 million in cash. 

 

Cashproceeds obtained from maturities of marketable securities, the exercise ofemployee stock options, and contributions to the employee stock purchase planlargely funded the share repurchases. The repurchased shares are recorded astreasury stock and result in a reduction to stockholders equity. The shareswill be used for general corporate purposes.

 

***Contingent cashcommitments***

*** ***

We have contingent consideration agreements related to the acquisitionsof Numbercraft in July 2003 and Apexion in October 2003. As of May 31, 2005,additional cash payments ranging from zero to $5.9 million are contingentupon future performance of Numbercraft measured periodically through fiscal2007 and additional cash payments ranging from zero to $1.0 million arecontingent upon the future performance of Apexion measured annually through November30, 2005. Any contingent consideration earned is recorded as additionalgoodwill. During fiscal 2005 and 2004, $0.5 million and $1.1 millionof additional consideration was earned under the Numbercraft agreement. 

 

In February 2004, we entered into an offshore agreement with athird-party to provide software maintenance services. If we terminate theagreement prior to its initial twenty-four month term, a termination fee willbe incurred equal to the sum of the previous six months service charges,estimated to be approximately $1.6 million. At this time, we do not expectto terminate the agreement within the twenty-four month period.

 

OnMay 9, 2005, the Company and International Business MachinesCorporation (“IBM”) entered into a Master Relationship Agreement (“MRA”) and anOEM Software Agreement, both of which took effect on June 1, 2005.Under these agreements, the Company has agreed to standardize its businessapplications portfolio on IBM’s open standards-based software and hardware, andthe companies will jointly market these software solutions. Total commitmentsunder these agreements are in excess of $6 million over a 3-year term. TheMRA governs the joint marketing activities and has a three-year term. 

 

Underthe OEM Software Agreement, we plan to bundle and distribute WebSphere® andother IBM software products with all of the Company’s business applicationproducts that are designed to operate with these IBM programs. We maysublicense these IBM programs to  ourcurrent clients in consideration of a sublicense fee payable to IBM. Inconsideration of software support provided by IBM  for IBM programs, we have agreed to pay IBM aportion of support fees paid by our clients.

 

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Ifwe merge with or acquires the capital stock or assets of another entity, we mayinclude that entity’s products under the OEM Software Agreement under terms tobe negotiated between Lawson  and IBM. The OEM Software Agreement hasan initial term of three years and may be extended by us for two additionalone-year terms. We may elect to terminate the OEM Software Agreement forconvenience upon 90 days advance notice to IBM. 

 

On May 9, 2005,Lawson and Answerthink, Inc. (“Answerthink”), The Hackett Group, Inc.,a wholly-owned subsidiary of Answerthink (“Hackett”), entered into an AdvisoryAlliance Agreement (the “Agreement”). The Agreement identifies joint programs in which Hackett willprovide Lawson and its clients and prospects with, among other things, accessto Hackett benchmark tools, best practices research and business advisoryservices in exchange for the payment of specified program fees. The term of theAgreement commenced on May 9, 2005 and continues until May 31,2008 unless terminated earlier in accordance with the provisions of the Agreement.Lawson and Hackett have the option to extend the terms of the programs uponmutual written agreement, and Hackett has agreed to provide certain exclusivityrights to us in connection with certain of its programs. 

 

Under the Agreement,we have contractually committed to pay Hackett $1.6 million. As of May 31, 2005,$1.1 million has been recorded as other accrued liabilities and $0.5 millionas other long term liabilities in the Consolidated Balance Sheet. We will payHackett additional fees after sales volumes meet established criteriathroughout the term of the contract and will pay an additional $0.5 millionin fiscal 2007 if we elect to participate in specified programinitiatives.  

 

We will have additional cash commitmentsarising from our pending business combination with Intentia.  If we acquire more than 90%, but fewer thanall of the Intentia securities inthe Exchange Offer, we intend to purchase the remaining Intentia securities for cash, pursuant to compulsory acquisitionproceedings under Swedish law.  Assuming90% of the Intentia securities aretendered in the Exchange Offer and the price that is required to be paidpursuant to the Swedish compulsory acquisition proceedings for the remaining10% of the Intentia securities equalsSEK 22.17 per Series A share and SEK 19.80 per Series B share, wecould be obligated to pay approximately $48 million (approximately SEK 355 millionassuming a currency exchange rate of SEK 7.40 to $1.00 as of May 31, 2005),for the Intentia securities purchasedin the compulsory acquisition. This cash expenditure would normally occurbetween one and three years after the closing of the Exchange Offer. 

 

We estimate that the total cash closingexpenses for Lawson and Intentiawill be approximately $15 million, including investment banking fees,accounting and legal fees, printing, mailing and other out-of-pockettransaction costs.  After payment ofthose expenses, we will have approximately $262 million in available cashand cash equivalents, based on the amount of cash and cash equivalents that weand Intentia had as of May 31, 2005. It is anticipated that we will use an additional amount of approximately$50 million in connection with the transaction, excluding the compulsoryacquisition procedures referenced above and integration related costs, withinone to three years following the closing of the Exchange Offer.  Included in this amount is a junior facilityloan to Tennenbaum valued at $27.4 million, which includes accruedinterest of $0.6 million, as of May 31, 2005, maturing in September 2009,and a make-whole provision of approximately $9.4 million, totaling $36.8 million.  Also included in this amount are theremaining 1999 convertible B notes issued by Intentia valued at $10.1 million,which includes accrued interest of $0.4 million, as of May 31, 2005.

** **

**Disclosures about Contractual Obligations andCommercial Commitments**

** **

The following summarizes our contractual obligations at May 31, 2005,and the effect these contractual obligations are expected to have on ourliquidity and cash flows in future periods (in thousands):

 

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| ** **                                 | ** ** | **Total** | ** ** | **1 Year or  Less** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|--------------------------------------------|------------|-----------|------------|---------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
| **Balance Sheet Contractual Obligations:** |       |      |       |                |       |          |       |          |       |                   |       |
| Debt                                       |       | $         | 1,836      |                | $          | 1,836         |       | $             | —     |                   | $          | — |   | $ | — |   |
| Strategic partner commitments (2) (3) |       | 1,550     |       | 1,050               |       | 500           |       | —        |       | —                 |       |
| Total                                      |       | $         | 3,386      |                | $          | 2,886         |       | $             | 500        |                   | $          | — |   | $ | — |   |
| **Other Contractual Obligations:**         |       |      |       |                |       |          |       |          |       |                   |       |
| Operating leases                           |       | $         | 73,134     |                | $          | 8,348         |       | $             | 15,824     |                   | $          | 15,747 |   | $ | 33,215 |   |
| Purchase obligations (1)                   |       | 8,467     |       | 5,319               |       | 2,672         |       | 476           |       | —                 |       |
| Total                                      |       | $         | 81,601     |                | $          | 13,667        |       | $             | 18,496     |                   | $          | 16,223 |   | $ | 33,215 |   |
|                                       |       |      |       |                |       |          |       |          |       |                   |       |
| **Total Contractual Obligations**          |       | $         | 84,987     |                | $          | 16,553        |       | $             | 18,996     |                   | $          | 16,223 |   | $ | 33,215 |   |

 

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(1)                                  Our purchaseobligations represent those commitments greater than $50,000.

 

(2)                                  Under the agreement with Hackett that commenced May 9, 2005, wehave contractually committed to pay Hackett $1.6 million. As of May 31, 2005,$1.1 million has been recorded as other accrued liabilities and $0.5 millionas other long term liabilities in the Consolidated Balance Sheet and has beenreflected in the above table. We will pay Hackett additional fees after salesvolumes meet established criteria throughout the term of the contract and willpay an additional $0.5 million in fiscal 2007 if we elect to participate inspecified program initiatives. SeeNote 15. Commitments and Contingencies to the Consolidated FinancialStatements for additional information.  

 

(3)                                  On May 9, 2005, Lawson andInternational Business Machines Corporation entered into a Master RelationshipAgreement and OEM Software Agreement, both of which will take effect on June 1, 2005.As of May 31, 2005, no amounts have been accrued within theConsolidated Balance Sheet or included in the above table as the agreement canbe terminated upon 90 days notice by either party. Total commitments underthe agreements are in excess of $6 million over a 3-year term. See Note 15.Commitments and Contingencies to the Consolidated Financial Statements foradditional information.

** **

**Off-Balance-Sheet Arrangements**

** **

Wedo not use off-balance-sheet arrangements with unconsolidated entities, relatedparties or other forms of off-balance-sheet arrangements such as research anddevelopment arrangements. Accordingly, our liquidity and capital resources arenot subject to off-balance-sheet risks from unconsolidated entities. As of May 31, 2005,we did not have any off-balance-sheet arrangements, as defined in Item303(a)(4)(ii) of SEC Regulation S-K.

 

Wehave entered into operating leases for most U.S. and international sales andsupport offices and certain equipment in the normal course of business. Thesearrangements are often referred to as a form of off-balance-sheet financing. Asof May 31, 2005, we leased facilities and certain equipment under non-cancelableoperating leases expiring between 2005 and 2017. Rent expense underoperating leases for fiscal 2005, 2004 and 2003 was $14.2 million,$14.4 million and $16.1 million, respectively. Future minimum leasepayments under our operating leases as of May 31, 2005 are detailed abovein “Disclosures about Contractual Obligations and Commercial Commitments”.

 

**Recent Accounting Pronouncements**

** **

In December 2004the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard No. 123 (revised 2004), *Share-Based Payment (SFAS No. 123(R))*.SFAS No. 123(R) requires compensation cost relating to unvestedshare-based payment transactions that are outstanding as of the effective dateand newly issued

 

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transactions to berecognized in the financial statements. That cost will be measured based on thefair value of the equity or liability instruments issued. SFAS No. 123(R)covers a wide range of share-based compensation arrangements including shareoptions, restricted share plans, performance-based awards, share appreciationrights and employee share purchase plans. SFAS No. 123(R) supersedes SFAS No. 123,*Accounting for Stock-Based Compensation*(SFAS No. 123), and supersedesAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(Opinion 25)*.*SFAS No. 123, as originally issued in 1995, establisheda fair-value-based method of accounting for share-based payment transactionswith employees. However, SFAS No. 123 permitted entities the option ofcontinuing to apply the guidance in Opinion 25, as long as the footnotes tofinancial statements disclosed what net income would have been had thefair-value-based method been used. As disclosed in Note 2 of Notes to theConsolidated Financial Statements, we elected the option of disclosure onlyunder SFAS No. 123. In our disclosures, we have historically used theBlack-Scholes option pricing model to determine the fair value of its sharebased compensation arrangements. Upon the adoption of SFAS No. 123(R), wewill determine whether we will continue to utilize the Black-Scholes model oradopt some other acceptable model. Public entities will be required to applySFAS No. 123(R) as of the beginning of the first annual reporting periodthat begins after June 15, 2005, which is effective with our firstquarter of fiscal 2007. Based on our significant amount of unvested share-basedpayment awards, the adoption of this statement is anticipated to have amaterial impact on our Consolidated Statement of Operations, however we arecurrently evaluating the impact. Note 2 of Notes to Consolidated FinancialStatements describes the pro forma impact of a change to fair value accountingon earnings and earnings per share for the fiscal years ended May 31, 2005, 2004and 2003.

 

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets - An Amendment of APB Opinion No. 29” (“SFAS 153”). Theamendments made by SFAS 153 are based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. Further, the amendments eliminate the narrow exception fornonmonetary exchanges of similar productive assets and replace it with abroader exception for exchanges of nonmonetary assets that do not have “commercialsubstance.” The provisions in SFAS 153 are effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005,which is effective with our second quarter of fiscal 2006. Adoption of thisstandard is not expected to have a material impact on our consolidatedfinancial statements.

 

InMay 2005, the FASB issued SFAS No 154, “Accounting Changes and ErrorCorrections – A replacement of APB Opinion No 20 and FASB Statement No. 30”(“SFAS 154”).  SFAS 154 changes therequirement for the accounting for and reporting of a change in accountingprinciple.  This statement applies to allvoluntary changes in accounting principles and changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. The provisions in SFAS 154 are effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15, 2005,which is effective with our first quarter of 2007.  We intend to adopt the disclosurerequirements upon the effective date of the pronouncement.  Since this pronouncement relates todisclosure only requirements, the adoption will have no impact on ourconsolidated financial statements.

 

**Factors That May Affect Future Resultsor the Market Price of Our Stock**

** **

We operate in a rapidly changing environment that involves numerousuncertainties and risks. Investors evaluating our company and its businessshould carefully consider the factors described below and all other informationcontained in this report on Form 10-K. This section should be read inconjunction with the Consolidated Financial Statements and Notes thereto andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in this report on Form 10-K. Any of the followingfactors could materially harm our business, operating results and financialcondition. Additional factors and uncertainties not currently known to us orthat we currently consider immaterial could also harm our business, operatingresults and financial condition. The Company may make forward-lookingstatements from time to time, both written and oral. We undertake no obligationto revise or publicly release the results of any revisions to these forward-lookingstatements based on circumstances or events which occur in the future. Theactual results may differ materially from those projected in any such forward-lookingstatements due to a number of factors, including those set forth below andelsewhere in this report on Form 10-K.

 

**Risks Relating to the Proposed Business Combination betweenLawson and Intentia International****AB**

** **

OnJune 2, 2005, we announced an agreement to combine Lawson withIntentia International AB in an all-stock transaction Exchange Offer. If thetransaction is completed, Lawson will issue approximately 82 millionshares of Lawson common stock pursuant to the terms of the Exchange Offer. Ifthe Exchange Offer is accepted and the transaction is completed, each Series Ashare of Intentia stock will be entitled to receive 0.5061 newly issued sharesof Lawson common stock; each Series B share of Intentia stock will beentitled to receive 0.4519 newly issued shares of Lawson common stock;

 

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andeach Warrant for the purchase of Intentia stock will be entitled to receive0.2157 newly issued shares of Lawson common stock. These exchange ratios willnot change based on the fluctuations in the market price of our common stock.The closing of the Exchange Offer and business combination with Intentia issubject to several conditions, including approval by our stockholders,sufficient tender of shares by Intentia securityholders and regulatory approvalclearance. Our efforts to close the business combination and integrate our twocompanies will create several additional risks and uncertainties.

 

***Wemay not be able to achieve the anticipated financial and strategic benefits ofour proposed combination with Intentia. ***

*** ***

Among the factors considered by our Board of Directorsin connection with its approval of the Exchange Offer were the anticipatedfinancial and strategic benefits of the combination of Lawson and Intentia,including the opportunities for cost savings from operational efficiencies andthe anticipated increase in sales resulting from the combined efforts of bothcompanies and the combined sales channels. We are not able to guarantee thatthese savings will be realized within the time periods contemplated or thatthey will be realized at all. We are not able to guarantee that the combinationof Lawson and Intentia will result in the realization of the full benefits,including increased sales anticipated by the companies.  

 

***The reconciliation of Intentia’s historicalfinancial statements from Swedish GAAP to United States GAAP may result inmaterial differences.***

*** ***

Intentia has informed us that its historical financialstatements have been prepared based on generally accepted accounting principlesin Sweden, referred to as Swedish GAAP. The documents included in the ExchangeOffer will include a reconciliation of Intentia’s historical financialstatements based on generally accepted accounting principles in the UnitedStates, referred to as U.S. GAAP. That reconciliation has not been completed asof the date of this Report on Form 10-K. Because of the differences between Swedish GAAP and U.S. GAAP,including, for example, differences in software revenue recognition, Intentia’shistorical financial results under U.S. GAAP may show lower revenue, lessfavorable results of operations or other material differences for each of therespective periods presented.  In addition,a portion of Intentia’s deferred revenue, which could be material, will not be recognizablein the future under U.S. GAAP.

 

***Wemay not be able to successfully integrate our business with the business ofIntentia. ***

*** ***

This transaction involves the integration of twocompanies based in different countries that previously have operatedindependently. This integration is a complex, costly and time-consumingprocess. Following the combination of Lawson and Intentia, we may encounterdifficulties in integrating our operations, technology and personnel with thoseof Intentia and this may continue for some time. Lawson management has limitedexperience integrating operations as substantial and geographically diverse asthose of Intentia. The combined company may not successfully integrate theoperations of Lawson and Intentia in a timely manner, or at all. The failure tosuccessfully integrate the two companies’ operations could undermine theanticipated benefits and synergies of the combination, which could adverselyaffect our business, financial condition and results of operations. Theanticipated benefits relate to greater economies of scale and revenueenhancement opportunities resulting from Lawson’s and Intentia’s complementaryproduct offerings, geographic and industry specialties and technologyplatforms. However, these anticipated benefits are based on projections andassumptions, not actual experience, and assume a successful integration.  

 

***Wemay have difficulties adapting Intentia’s operations to US regulatoryrequirements.***

*** ***

As a company governed by Swedish laws and the rules ofthe Stockholm Stock Exchange, Intentia’s operations have not been designed tocomply with financial reporting, disclosure controls and internal controlsrequirements imposed by US GAAP and the Sarbanes-Oxley Act of 2002 and other USsecurities laws and regulations. The implementation of the necessary controlssystems will be costly and time consuming. If Lawson fails to promptlyimplement these controls and systems at Intentia’s operations, Lawson couldfail to comply with US regulatory requirements, which could adversely offsetour business, financial condition and results of operations.

 

***Themarket price of our common stock may decline as a result of the ExchangeOffer. ***

*** ***

In connection with the Exchange Offer, we could issueas many as 82 million shares of our common stock to the holders of Sharesand Warrants if all Intentia securityholders elect to tender their Shares orWarrants in exchange for shares of our common stock. The shares of our commonstock issued in the Exchange Offer, subject to the contractual limitations onthose persons who executed the lock-up agreements, will be freely-tradable uponconsummation of the Exchange Offer. The acquisition of our shares by Intentiasecurityholders who may not wish to hold shares in a US company, as well as theincrease

 

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in the outstanding number of shares of our common stock, may lead tosales of such shares or the perception that such sales may occur, either ofwhich may adversely affect the market for, and the market price of, our commonstock. In addition, the market price of our common stock may decline followingthe closing of the Exchange Offer for a number of reasons, including if theintegration of Intentia’s business is unsuccessful or we do not achieve theanticipated financial and strategic benefits of our combination with Intentiaas rapidly or to the extent anticipated by stock market analysts or investors.The closing price of our common stock was $5.95 on June 1, 2005, thelast day of trading prior to the announcement of the proposed Exchange Offer.Since that date, our stock has fluctuated from a low of $5.02 to a high of $5.70.On July 28, 2005, the closing price of our common stock was $5.51.

 

***Ourshareholders will suffer immediate and substantial dilution to their equity andvoting interests as a result of the Exchange Offer.***

*** ***

In connection with the Exchange Offer, we may issue asmany as 82 million sharesof our common stock to the holders of Shares or Warrants if all Intentiasecurityholders elect to tender their Shares or Warrants in exchange for sharesof our common stock. This means that the Intentia securityholders could own upto approximately 43.3% of the total number of shares of our outstanding commonstock following the Exchange Offer. Accordingly, the Exchange Offer will havethe effect of substantially reducing the percentage of equity and votinginterest held by each of our current stockholders.

 

***TheIntentia securityholders may be able to influence our company significantlyfollowing the Exchange Offer.***

 

After the Exchange Offer, former Intentiasecurityholders could own up to approximately 43.3% of the total number ofshares of our outstanding common stock. Intentia’s largest shareholder,Symphony Technology Group, will own approximately  13% of Lawson’s outstanding common stockfollowing the combination.  Symphony andIntentia securityholders as a group may be able to exercise substantialinfluence on the election of directors and other matters submitted for approvalby our shareholders. This potential concentration of ownership of our commonstock may make it difficult for our other shareholders to successfully approveor defeat matters submitted for shareholder action. It may also have the effectof delaying, deterring or preventing a change in control of our company withoutthe consent of Symphony Technology Group or of the Intentia securityholdersgenerally.  

 

***Unanticipatedcosts relating to the Exchange Offer and resulting combination of Intentia andLawson could reduce our future earnings. ***

*** ***

We believe that we have reasonably estimated thelikely costs of integrating our operations with the operations of Intentia andthat such costs are estimated to be in excess of $15 million for the first12 months following closing of the transaction. Our objective is to minimizeincremental costs of operating as a combined company and we believe that anyincremental costs will be offset by cost savings of the combined company. It ispossible that unexpected transaction costs, such as taxes, fees or professionalexpenses, or unexpected future operating expenses, such as increased personnelcosts or unexpected severance costs, as well as other types of unanticipateddevelopments, could adversely impact our business and profitability.

 

***Theuncertainties associated with our combination with Intentia may cause ourcustomers and Intentia’s customers to delay or defer decisions which may resultin the loss of customers and revenues. ***

*** ***

Our customers and Intentia’s customers may, inresponse to the announcement of the Exchange Offer and resulting combination ofLawson and Intentia, and prior to its effectiveness, delay or defer decisionsconcerning business with either or both of the companies. Any delay or deferralin those decisions by our respective customers could adversely affect our businesses.For example, either company could experience a decrease in expected revenue asa consequence of such delays or deferrals. 

 

***Theuncertainties associated with our combination with Intentia may cause Intentiaor us to lose key personnel. ***

*** ***

Employees of Lawson or Intentia may perceiveuncertainty about their future role with the combined company until strategieswith regard to the combined company are announced or executed. Any uncertaintymay affect either company’s ability to attract and retain key management,sales, marketing, technical and financial personnel.  

 

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***Combination-relatedaccounting charges may delay or reduce our profitability. ***

*** ***

We are accounting for the combination with Intentia asa purchase following accounting principles generally accepted in the UnitedStates. Under the purchase method of accounting, the purchase price of Intentiawill be allocated to the fair value of the identifiable tangible and intangibleassets and liabilities that we acquire from Intentia. In addition, accountingfor the combination of Intentia under the purchase method may require adecrease in deferred revenue to fair value. The excess of the purchase priceover Intentia’s tangible net assets will be allocated to goodwill andintangible assets. We are required to perform periodic impairment tests ongoodwill and certain intangibles to evaluate whether the intangible assets andgoodwill that we acquire from Intentia continue to have fair values that meetor exceed the amounts recorded on our balance sheet. If the fair values of suchassets decline below their carrying value on our balance sheet, we may berequired to recognize an impairment charge related to such decline. We cannotpredict whether or when there will be an impairment charge, or the amount ofsuch charge, if any. However, if the charge is significant, it could cause themarket price of our common stock to decline. 

 

If as of theclosing date there are unknown liabilities in connection with Intentia’sbusiness, and those liabilities are not reflected on the closing date balancesheet, we would be required to record a charge during each period when thoseliabilities became known, probable and estimable.  Those charges, if material, could have an unanticipatedand significant adverse effect on our financial results and stock price.

 

**Inaddition, we will incur transaction and integration costs in our combinationwith Intentia.  As a result, we willincur accounting charges from the combination that may delay and reduce ourprofitability in the accounting period in which the combination is consummated.**

** **

***Weexpect to expend a significant amount of cash in the Exchange Offer, which willpartially deplete our cash balance. ***

*** ***

If we acquire more than 90%, but fewer than all of theIntentia securities in the Exchange Offer, we intend to purchase the remaining Intentiasecurities for cash, pursuant to compulsory acquisition proceedings underSwedish law. Assuming 90% of the Intentia securities are tendered in theExchange Offer and the price that is required to be paid pursuant to theSwedish compulsory acquisition proceedings for the remaining 10% of the Intentiasecurities equals SEK 22.17 per Series A share and SEK 19.80 per Series Bshare, we could be obligated to pay approximately $48 million(approximately SEK 355 million assuming a currency exchange rate of SEK7.40 to $1.00 as of May 31, 2005), for the Intentia securitiespurchased in the compulsory acquisition. This cash expenditure would normallyoccur between one and three years after the closing of the Exchange Offer.  

 

We estimate that the total cash closingexpenses for Lawson and Intentia will be approximately $15 million, includinginvestment banking fees, accounting and legal fees, printing, mailing and otherout-of-pocket transaction costs. After payment of those expenses, we will haveapproximately $262 million in available cash and cash equivalents, basedon the amount of cash and cash equivalents that we and Intentia had as of May 31, 2005.  It is anticipated that we will use anadditional amount of approximately $50 million in connection with thetransaction, excluding the compulsory acquisition procedures referenced aboveand integration related costs, within one to three years following the closingof the Exchange Offer.  Included in thisamount is a junior facility loan to Tennenbaum valued at $27.4 million,which includes accrued interest of $0.6 million, as of May 31, 2005,maturing in September 2009, and a make-whole provision of approximately$9.4 million, totaling $36.8 million. Also included in this amount are the remaining 1999 convertible B notesissued by Intentia valued at $10.1 million, which includes accruedinterest of $0.4 million, as of May 31, 2005.

 

***Fullintegration of our operations with Intentia’s operations may not be achieved ifwe cannot compulsorily acquire all of the issued and outstanding Shares. ***

*** ***

Our obligation to consummate the Exchange Offer issubject to a condition that, before the end of the Exchange Offer period, thereshall have been validly tendered and not properly withdrawn greater than 90% ofeach of the outstanding Shares (including Warrants) and voting power inIntentia on a fully diluted basis (including all shares issuable pursuant tooutstanding warrants but excluding shares issuable pursuant to outstandingconvertible securities). In addition, the compulsory acquisition proceedingsmay be time-consuming.  To effect thecompulsory acquisition under Swedish law, we are required to have a beneficialinterest in greater than 90% of all of the voting power of the Intentiasecurities. It is possible that, at the end of the Exchange Offer period, wewill elect to waive the above condition and consummate the Exchange Offer if wehold at least 70% of the outstanding securities and voting power of Intentia,even though we do not hold more than 90% of the outstanding Intentia securities.As a result, we would not be able to effect a compulsory acquisition of theremaining outstanding securities and voting power of Intentia. This couldprevent or delay us from realizing some or all of the anticipated financial andstrategic benefits of our combination with Intentia.  

 

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***Asa result of the consummation of the Exchange Offer, we will conduct more of ourbusiness internationally, which will expose us to additional and increasedrisks. ***

*** ***

Although international revenues accounted forapproximately 5% of our total revenues during fiscal year 2005, we willsignificantly increase our international operations upon consummation of theExchange Offer, particularly in Europe. There are many risks that currentlyimpact, and will continue to impact our international business andmultinational operations, which risks will increase upon consummation of theExchange Offer.  These risks include thefollowing: 

 

•                                          compliancewith multiple and potentially conflicting regulations in Europe, Asia and NorthAmerica, including export requirements, tariffs, import duties and other tradebarriers, as well as health and safety requirements;  

 

•                                          potentiallabor strikes, lockouts, work slowdowns and work stoppages at U.S. andinternational ports;  

 

•                                          differencesin intellectual property protections in Europe and Asia;  

 

•                                          difficultiesin staffing and managing foreign operations in Europe and Asia;  

 

•                                          restrictionson downsizing foreign operations in Europe and expenses and delays associatedwith any such activities; 

 

•                                          longeraccounts receivable collection cycles in Europe and Asia;  

 

•                                          currencyfluctuations and resulting losses on currency translations;  

 

•                                          economicinstability, including inflation and interest rate fluctuations, such as thosepreviously seen in South Korea and Brazil; 

 

•                                          competitionfor foreign-based suppliers in Asia and Europe; 

 

•                                          overlappingor differing tax structures;  

 

•                                          culturaland language differences among the United States, Europe and Asia; and 

 

•                                          politicalor civil turmoil.  

 

Any failure on our part to manage these riskseffectively would seriously reduce our competitiveness in the businessapplications software marketplace.  

 

***Asa result of the consummation of the Exchange Offer, we will be a larger andbroader organization, and if our management is unable to manage the combinationof our business with Intentia’s, our operating results will suffer. ***

*** ***

As a result of the consummation of the Exchange Offer,we will acquire the worldwide operations and approximately 2,300 employees ofIntentia. Consequently, we will face challenges inherent in efficiently managingan increased number of employees over large geographic distances, including theneed to implement appropriate systems, policies, benefits and complianceprograms. Any inability to successfully manage the geographically more diverseand substantially larger combined organization, or any significant delay inachieving successful management, could have a material adverse effect on ourresults of operations after the Exchange Offer is consummated and, as a result,on the market price of our common stock. 

 

***Thenew management team might not be able to define or successfully implement abusiness plan for the combined companies.***

 

In June 2005, we appointed Harry Debes as our newpresident, chief executive officer, and director. Upon the completion of the ExchangeOffer, we will appoint a new co-chairman, Romesh Wadhwani, who is currently thechairman of the board of Intentia, and a new chief operating officer, BertrandSciard, the current president and chief executive officer of Intentia. While Mr. Wadhwani,Mr. Debes and Mr. Sciard have extensive experience in the softwareindustry and managing 

 

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software companies and while Mr. Debes and Mr. Sciard havealso managed large teams of people at other U.S. software companies neither Mr. Debesnor Mr. Sciard has previously been chief executive or chief operatingofficer of a public company in the U.S. If this new management team is unableto adapt successfully to the demands of managing a U.S. public company or todefine or execute our business plan, our results of operations may be adverselyaffected. 

 

**Risks Relating to Lawson’sBusiness**

** **

Ourbusiness and company will continue to be subject to other risks anduncertainties, regardless of whether we complete the proposed businesscombination with Intentia.

 

***Economic, political and market conditionscan adversely affect our revenue growth and operating results.***

 

Ourrevenue and profitability depend on the overall demand for computer software,support and services, particularly in the industries in which we sell ourproducts and services. Demand for enterprise software and demand for oursolutions are affected by general economic conditions, competition, productacceptance and technology lifecycles. Regional and global changes in theeconomy, governmental budget deficits and political instability in certaingeographic areas have resulted in companies, government agencies andeducational institutions reducing their spending for technology projectsgenerally and delaying or reconsidering potential purchases of our products andrelated services. The uncertainty posed by the long-term effects of the war inthe Middle East, terrorist activities and related uncertainties and risks andother geopolitical issues may impact the purchasing decisions of current orpotential clients. Because of these factors, we believe the level of demand forour products and services, and projections of future revenue and operatingresults, will continue to be difficult to predict. During fiscal 2005 andthe prior three fiscal years, we took measures to realign our projectedexpenses with anticipated revenue, and incurred restructuring charges forseverance and related benefits, facility closure or consolidation charges.There is no assurance that these cost reduction measures will be sufficient tooffset any future revenue declines. Future declines in demand for our productsand/or services could adversely affect our revenues and operating results.

 

***A number of our competitors arewell-established software companies that have advantages over us.***

 

Weface competition from a number of software companies that have advantages overus due to their larger client bases, greater name recognition, long operatingand product development history, greater international presence andsubstantially greater financial, technical and marketing resources. Thesecompetitors include well-established companies such as Oracle Corporation, andSAP AG, both of which have larger installed client bases. If clients or prospectswant to reduce the number of their software vendors, they may elect to purchasecompeting products from Oracle or SAP AG since those larger vendors offer awider range of products. Furthermore, Oracle is capable of bundling itssoftware with its database applications, which underlie a significant portionof our installed applications. When we compete with Oracle or SAP AG for newclients, we believe that both of those larger companies often attempt to usetheir size and staying power as a competitive advantage against us. Oracle’spurchase of Peoplesoft, Inc. and Retek Inc., and other consolidations inthe software industry, have fueled uncertainty among client prospects.

 

Inaddition, we compete with a variety of more specialized software and servicesvendors, including:

 

•                  Internet(on demand) software vendors;

 

•                  single-industrysoftware vendors;

 

•                  emergingenterprise resource optimization software vendors;

 

•                  humanresource management software vendors;

 

•                  financialmanagement software vendors;

 

•                  merchandisingsoftware vendors;

 

•                  servicesautomation software vendors; and

 

•                  outsourcedservices providers.

 

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Asa result, the market for enterprise software applications has been andcontinues to be intensely competitive. Some competitors are increasinglyaggressive with their pricing, payment terms and/or issuance of contractualwarranties, implementation terms or guarantees. We may be unable to continue tocompete successfully with new and existing competitors without lowering pricesor offering other favorable terms to clients. We expect competition to persistand intensify, which could negatively impact our operating results and marketshare.

 

***We may beunable to retain or attract clients if we do not develop new products andenhance our current products in response to technological changes and competingproducts.***

 

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

 

•                  maintainand enhance our technological capabilities to correspond to these emergingenvironments and standards;

 

•                  developand market products and services that meet changing client needs; or

 

•                  anticipateor respond to technological changes on a cost-effective and timely basis.

 

A substantial portion ofour research and development resources is devoted to product upgrades thataddress regulatory and support requirements. Only the remainder of our limitedresearch and development resources is available for new products. New productsrequire significant development investment. That investment is furtherconstrained because of the added costs of developing new products that workwith multiple operating systems or databases. We face uncertainty when wedevelop or acquire new products because there is no assurance that a sufficientmarket will develop for those products. If we do not attract sufficient client interest in those products, wewill not realize a return on our investment and our operating results will beadversely affected. 

 

Our core products facecompetition from new or revised technologies that may render our existingtechnology less competitive or obsolete, reducing the demand for our products.As a result, we must continually redesign our products to incorporate these newtechnologies and to adapt our software products to operate on, and comply withevolving industry standards for hardware and software platforms. Maintainingand upgrading our products to operate on multiple hardware and databaseplatforms reduces our resources for developing new products. Because of theincreased costs of developing and supporting software products across multipleplatforms, we may need to reduce the number of those platforms.  In addition, conflicting new technologiespresent us with difficult choices of which new technologies to adopt. If wefail to anticipate the most popular platforms or fail to respond adequately totechnological developments, or experience significant delays in productdevelopment or introduction, our business and operating results will be negativelyimpacted.

 

In May 2005, weannounced that we intend to produce new software products using a businessapplication platform we are developing, known as “Landmark.” The goals ofLandmark are to simplify software development and improve product quality. Becausewe have not yet released any new products developed using Landmark, it is tooearly to confirm whether we will successfully achieve these goals.

 

In addition, to theextent we determine that new technologies and equipment are required to remaincompetitive, the development, acquisition and implementation of suchtechnologies may require us to make significant capital investments. We may notbe able to obtain capital for these purposes and investments in newtechnologies may not result in commercially viable technological products. Theloss of revenue and increased costs to us from such changing technologies wouldadversely affect our business and operating results.

 

***We may needto change our pricing models to compete successfully.***

 

The intensely competitivemarkets in which we compete can put pressure on us to reduce our prices. If ourcompetitors offer deep discounts on certain products or services in an effortto recapture or gain market share or to sell other products or services, we mayneed to lower prices or offer other favorable terms in order to competesuccessfully. Any such changes would be likely to reduce margins and couldadversely affect operating results.

 

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

*** ***

Weare experiencing increased competition for attracting and retaining softwareengineers and sales personnel. If we are unable to attract, train and retainhighly-skilled technical, managerial, sales and marketing personnel, we may beat a competitive disadvantage and unable to increase our revenue. Competitionfor personnel in the software industry is intense, and at times, we have haddifficulty locating qualified candidates within desired geographic locations,or with certain industry-specific domain expertise. The failure to attract,train, retain and effectively manage employees could negatively impact ourdevelopment and sales efforts and cause a degradation of our client service. Inparticular, the loss of sales personnel could lead to lost sales opportunitiesbecause it can take several months to hire and train replacement salespersonnel. Uncertainty created by turnover of key employees could adverselyaffect our business, operating results and stock price.

 

***Our earningsmay be impacted by the new accounting pronouncement requiring expensing ofequity instruments issued to employees.***

 

We currently account forthe issuance of stock options under APB Opinion No. 25, *Accounting for Stock Issued to Employees*.The FASB has issued SFAS No. 123(R), *Share-BasedPayment* that changes the accounting treatment for grants of options,sale of shares under our employee stock purchase plan and other equityinstruments issued to employees. The provisions of SFAS No. 123(R) requireus to value equity instruments issued to employees and liability-classifiedawards at grant date fair value or based upon certain valuation methods thatapproximate grant date fair value, and to record those values as compensationexpense in our statement of operations. Upon the adoption of SFAS No. 123(R),the Company will determine whether it will continue to utilize theBlack-Scholes model or adopt some other acceptable model. We will be requiredto expense all outstanding non-vested stock options as of June 1, 2006 andstock options and other applicable equity instruments issued to employees on orafter June 1, 2006. Public entities will be required to apply SFAS No. 123(R)as of the first annual reporting period that begins after June 15, 2005,which is effective with the Company’s first quarter of fiscal 2007. Due to thesignificant number of outstanding unvested stock options anticipated as of June 1,2006, we expect to incur material compensation expense after June 1, 2006as those options vest or in the event we decide to accelerate vesting. We maydecide to change our stock based compensation plan strategy for future grants.This could affect our ability to retain existing employees and attractqualified candidates, and also could increase cash compensation. Note 2 ofNotes to Consolidated Financial Statements describes the pro forma impact of achange to fair value accounting on earnings and earnings per share for the fiscalyears ended May 31, 2005, 2004 and 2003.

 

***Because ourclients are concentrated in targeted service industries, our operating resultsmay be adversely affected by adverse changes in one or more of theseindustries.***

 

As a result of our focuson targeted service industries, our financial results depend, in significantpart, upon economic and market conditions in the healthcare, retail, governmentand education and financial services industries. Because the healthcare marketplacefor our products is maturing, we need to expand our product offerings toachieve long-term revenue growth. Many state and local governments are facingbudget shortfalls and are reducing capital spending, including spending onsoftware and services. In addition, we must continue to develop industryspecific functionality for our solutions, which satisfies the changing,specialized requirements of prospective clients in our target industries. Thisneed is becoming more prevalent as the marketplace for our traditional productsis maturing.

 

***We mayexperience fluctuations in quarterly revenue that could adversely impact ourstock price and our operating results.***

 

Our actual revenues in aquarter could fall below expectations, which could lead to a decline in ourstock price. Our revenues and operating results are difficult to predict andmay fluctuate substantially from quarter-to-quarter. Revenues from license feesin any quarter depend substantially upon our licensing activity and our abilityto recognize revenues in that quarter in accordance with our revenuerecognition policies. Our quarterly license and services revenue may fluctuateand may be difficult to forecast for a variety of reasons, including thefollowing:

 

•                  asignificant number of our existing and prospective clients’ decisions regardingwhether to enter into license agreements with us are made within the last fewweeks or days of each quarter;

 

•                  wehave historically had a higher concentration of licensing activities in thesecond half of our fiscal year due to the nature of our sales personnelcompensation programs; however, this pattern was not as prominent in fiscal

 

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2005 as in prior years and there is no assurance that this pattern willor will not continue in the future;

 

•                  thesize of license transactions can vary significantly;

 

•                  adecrease in license fee revenue may likely result in a decrease in servicesrevenue in the same or subsequent quarters;

 

•                  clientsmay unexpectedly postpone or cancel projects due to changes in their strategicpriorities, project objectives, budget or personnel;

 

•                  theuncertainty caused by potential business combinations in the software industrymay cause clients and prospective clients to cancel, postpone or reduce capitalspending projects on software;

 

•                  clientevaluations and purchasing processes vary significantly from company tocompany, and a client’s internal approval and expenditure authorization processcan be difficult and time consuming to complete, even after selection of avendor;

 

•                  thenumber, timing and significance of software product enhancements and newsoftware product announcements;

 

•                  existingclients may decline to renew support for our products, and market pressures maylimit our ability to increase support fees or require clients to upgrade fromolder versions of our products;

 

•                  prospectiveclients may decline or defer the purchase of new products or releases if we donot have sufficient client references for those products; or

 

•                  wemay have to defer revenues under our revenue recognition policies.

 

Fluctuation in ourquarterly revenues may adversely affect our operating results. In each fiscalquarter our expense levels, operating costs and hiring plans are based onprojections of future revenues and are relatively fixed. If our actual revenuesfall below expectations we could experience a reduction in operating results.

 

***Our lengthyand variable sales cycle makes it difficult to predict our operating results.***

 

It is difficult for usto forecast the timing and recognition of revenues from sales of our productsbecause our existing and prospective clients often take significant timeevaluating our products before licensing them. The period between initialclient contact and a purchase by a client may vary from nine months to morethan one year. During the evaluation period, prospective clients may decide notto purchase or may scale down proposed orders of our products for variousreasons, including:

 

•                  reduced demandfor enterprise software solutions;

 

•                  introduction ofproducts by our competitors;

 

•                  lower pricesoffered by our competitors;

 

•                  changes inbudgets and purchasing priorities; and

 

•                  reduced need toupgrade existing systems.

 

Our existing and prospective clients routinely require educationregarding the use and benefits of our products. This may also lead to delays in receiving clients’ orders.

 

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***Our future revenueis dependent in part on our installed client base continuing to renew supportagreements, license additional products, and purchase additional professionalservices.***

 

Our installed clientbase has traditionally generated additional support, license or professionalservice revenues. In future periods, clients may not necessarily make thesepurchases. Support is generally renewable annually at a client’s option, andthere are no mandatory payment obligations or obligations to license additionalsoftware. If our clients decide not to renew their support agreements orlicense additional products or contract for additional services or if theyreduce the scope of the support agreements, our revenues could decrease and ouroperating results could be adversely affected. If we do not license ourproducts to enough clients each quarter to offset the number of existingclients who elect not to renew support, our total client count will declineand, over time, our support revenue will likely decrease.

 

***A reduction in our licensing activity may result in reduced servicesrevenues in future periods.***

 

Ourability to maintain or increase service revenue primarily depends on ourability to increase the number of our licensing agreements. Variances orslowdowns in licensing activity may adversely impact our consulting, trainingand support service revenues in future periods.

 

***While we believe we currently have adequateinternal control over financial reporting, we are required to evaluate ourinternal control over financial reporting under Section 404 of theSarbanes-Oxley Act of 2002 and any adverse results from such evaluation could havea negative market reaction.***

 

Pursuantto Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404),beginning with our Annual Report on Form 10-K for the fiscal year ended May 31, 2005,we are required to furnish a report by our management on our internal controlover financial reporting. That report must contain, among other matters, anassessment of the effectiveness of our internal control over financialreporting as of the end of the fiscal year, including a statement as to whetheror not our internal control over financial reporting is effective. Thisassessment must include disclosure of any material weaknesses in our internalcontrol over financial reporting identified by management.  That report must also contain a statementthat our independent registered public accounting firm have issued anattestation report on management’s assessment of such internal controls. If inthe future we are unable to assert that our internal control over financialreporting is effective as of the end of the then current fiscal year (or, ifour independent registered public accounting firm are unable to attest that ourmanagement’s report is fairly stated or they are unable to express an opinionon the effectiveness of our internal controls), we could lose investorconfidence in the accuracy and completeness of our financial reports, whichwould have a negative market reaction. 

 

***We may berequired to delay revenue recognition into future periods, which could adverselyimpact our operating results.***

 

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

 

•                  thelicense agreements include applications that are under development or haveother undelivered elements;

 

•                  wemust deliver services, including significant modifications, customization orcomplex interfaces, which could delay product delivery or acceptance;

 

•                  thetransaction includes acceptance criteria;

 

•                  thetransaction includes contingent payment terms or fees;

 

•                  athird-party vendor, whose technology is incorporated into our softwareproducts, delays delivery of the final software product to the client;

 

•                  weare required to accept a fixed-fee services contract; or

 

•                  weare required to accept extended payment terms of more than one year or forwhich we do not have adequate support of historical collectibility.

 

Becauseof the factors listed above and other specific requirements under accountingprinciples generally accepted in the United States of America for softwarerevenue recognition, we must have very precise terms in our license agreementsto recognize revenue when we initially deliver software or perform services.Negotiation of mutually acceptable terms and

 

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conditionscan extend the sales cycle, and sometimes we do not obtain terms and conditionsthat permit revenue recognition at the time of delivery or even as work on theproject is completed.  Furthermore,because many contracts within our verticals, including government and educationand healthcare, often include the terms summarized above, the contracts resultin revenue deferrals.

 

If accountinginterpretations relating to revenue recognition change, our reported revenuescould decline or we could be forced to make changes in our business practices. Theaccounting profession and regulatory agencies continue to address and discussaccounting standards and interpretations covering revenue recognition for thesoftware industry with the objective of providing additional guidance on theirapplication. These discussions and the issuance of new interpretations, oncefinalized, could lead to unanticipated reductions in our recognized revenue.They could also drive significant adjustments to our business practices whichcould result in increased administrative costs, lengthened sales cycles andother changes which could adversely affect our reported revenues and results ofoperations.

 

***Futureadjustments in our net deferred tax assets may be materially adverse to ourfinancial results.***

 

OnMay 31, 2005, the consolidated balance sheet includes net deferredtax assets in the amount of $30.7 million. Each quarter, we must assessthe likelihood that our net deferred tax assets will be recovered from futuretaxable income and to the extent we believe that recovery is not likely, wemust establish a valuation allowance. To the extent we establish a valuationallowance, we must include an expense within the tax provision in the statementof operations. For the fiscal year ended May 31, 2004, we recorded avaluation allowance of $1.2 million associated primarily with federalcontribution carryforwards, state net operating loss carryforwards and certainfederal tax loss carryforwards that are estimated to expire prior toutilization. As of May 31, 2005, we updated our analysis to reflectthe necessary changes in estimates and determined that an additional valuationallowance of $0.4 million was necessary. This increase is primarily due toadditional federal contribution carryforwards and state operating losscarryforwards that expire within the next ten years.

 

Inthe event that we adjust our estimates of future taxable income or taxdeductions from the exercise of stock options; or our stock price increasessignificantly without a corresponding increase in taxable income, we may needto establish an additional valuation allowance, which could materiallyadversely impact our financial position and results of operations. 

 

***We may experience fluctuations in quarterlyresults that could adversely impact our annual effective tax rate.***

 

Ourrevenues and operating results are difficult to predict and may fluctuatesubstantially from quarter-to-quarter. Since we must estimate our annual effective tax rate each quarter basedon a combination of actual results and forecasted results of subsequentquarters, any significant change in our actual quarterly or forecasted annualresults may adversely impact the computation of the estimated effective taxrate for the year.  Our estimated annualeffective tax rate may fluctuate for a variety of reasons, including thefollowing:

 

•                  changesin forecasted annual operating income;

 

•                  changesto the valuation allowance on net deferred tax assets;

 

•                  changesto actual or forecasted permanent differences between book and tax reporting;

 

•                  impactsfrom future tax settlements with state, federal or foreign tax authorities; or

 

•                  impactsfrom tax law changes.

 

***Our stockprice may remain volatile.***

*** ***

Thetrading price of our common stock has fluctuated significantly in the past.Changes in our business operations or prospects, regulatory considerations,general market and economic conditions, or other factors may affect the priceof our common stock. Many of these factors are beyond our control. The futuretrading price of our common stock is likely to be volatile and could be subjectto wide price fluctuations in response to such factors, including:

 

•                  actualor anticipated fluctuations in revenues or operating results, including revenueor results of operations in any quarter failing to meet the expectations,published or otherwise, 

 

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ofthe investment community;

 

•                  developmentsin the SEC investigation that we announced on January 5, 2005;

 

•                  announcementsof technological innovations by us or our competitors;

 

•                  developmentswith respect to our intellectual property rights, including patents, or thoseof our competitors;

 

•                  fluctuationsin demand for and sales of our products, which will depend on, among otherthings, the acceptance of our products in the marketplace and the general levelof spending in the software industry;

 

•                  rumorsor dissemination of false and/or misleading information;

 

•                  changesin management;

 

•                  proposedand completed acquisitions or other significant transactions by us or ourcompetitors;

 

•                  introductionand success of new products or significant client wins or losses by us or ourcompetitors;

 

•                  themix of products and services sold by us;

 

•                  thetiming of significant orders by our clients;

 

•                  conditionsand trends in the software industry, or consolidation within the technologyindustry that may impact our clients, partners, suppliers or competitors;

 

•                  adoptionof new accounting standards affecting the software industry;

 

•                  actsof war or terrorism; and

 

•                  generalmarket conditions.

 

***We haveadopted anti-takeover defenses that could make it difficult for another companyto acquire control of Lawson or limit the price investors might be willing topay for our stock.***

 

Provisionsin our amended and restated certificate of incorporation and bylaws, ourstockholder rights plan and under Delaware law could make it more difficult forother companies to acquire us, even if doing so would benefit ourstockholders.  Our amended and restatedcertificate of incorporation and bylaws contain the following provisions, amongothers, which may inhibit an acquisition of our company by a third-party:

 

•                            advance notification procedures for matters to be brought beforestockholder meetings;

 

•                            a limitation on who may call stockholder meetings;

 

•                            a prohibition on stockholder action by written consent; and

 

•                            the ability of our board of directors to issue shares of preferredstock without a stockholder vote.

 

Theissuance of stock under our stockholder rights plan could delay, deter orprevent a takeover attempt that stockholders might consider in their bestinterests. We are also subject to provisions of Delaware law that prohibit usfrom engaging in any business combination with any “interested stockholder,”meaning generally that a stockholder who beneficially owns more than 15% of ourstock cannot acquire us for a period of three years from the date this personbecame an interested stockholder unless various conditions are met, such asapproval of the transaction by our board of directors. Any of theserestrictions could have the effect of delaying or preventing a change incontrol.

 

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***Changes in theterms on which we license technologies from third-party vendors could result inthe loss of potential revenues or increased costs or delays in the productionand improvement of our products.***

 

Welicense third-party software products that we incorporate into, or resell with,our own software products. For example, we incorporate Micro FocusInternational, Inc.’s software in many of our products and have resellerrelationships with IBM, Business Software Incorporated, BusinessObjects, Hyperion Solutions Corporation and other companies that allow usto resell their technology with our products. These licenses and othertechnology licenses are subject to periodic renewal and may include minimumsales requirements. A failure to renew or early termination of these licensesor other technology licenses could adversely impact our business. If any of thethird-party software vendors change their product offerings or terminate ourlicenses, we may lose potential revenues and may need to incur additionaldevelopment costs and seek alternative third-party relationships. In addition,if the cost of licensing any of these third-party software productssignificantly increases, or if there is a change in the relative mix ofproducts we offer, our gross profits could significantly decrease. We rely onexisting relationships with software vendors who are also competitors. If thesevendors change their business practices, we may be compelled to findalternative vendors with complementary software, which may not be available onattractive terms or at all, or may not be as widely accepted or as effective asthe software provided by our existing vendors. Our relationships with these andother third-party vendors are an important part of our business and adeterioration of these relationships could adversely impact our business andoperating results.

 

***Adeterioration in our relationship with resellers, systems integrators and otherthird parties that market and sell our products could reduce our revenues.***

 

Ourability to achieve revenue growth will depend in large part on adding newpartners to expand our sales channels, as well as leveraging our relationshipswith existing partners. If our relationships with these resellers, systemintegrators and strategic and technology partners deteriorate or terminate, wemay lose important sales and marketing opportunities. Our reseller arrangementsmay from time to time give rise to disputes regarding marketing strategy, salesof competing products, exclusive territories, payment of fees and clientrelationships, which could negatively affect our business or result in costlylitigation.

 

Ourcurrent and potential clients often rely on third-party systems integrators toimplement and manage new and existing applications. These systems integratorsmay increase their promotion of competing enterprise software applications, ormay otherwise discontinue their relationships with us.

 

Wealso may enter into joint arrangements with strategic partners to develop newsoftware products or extensions, sell our software as part of integratedproducts or serve as an application service provider for our products. Ourbusiness may be adversely affected if these strategic partners change theirbusiness priorities or experience difficulties in their operations, which ineither case causes them to terminate or reduce their support for the jointarrangements. Furthermore, the financial condition of our channel partnersimpacts our business. If our partners are unable to recruit and adequatelytrain a sufficient number of consulting personnel to support the implementationof our software products, or they otherwise do not adequately performimplementation services, we may lose clients. Our relationships with resellers,systems integrators and other third-party vendors are an important part of ourbusiness, and a deterioration of these relationships could adversely impact ourbusiness and operating results.

 

***Our programsare deployed in large and complex systems and may contain defects that are notdetected until after our programs have been installed, which could damage ourreputation and cause us to lose clients or incur liabilities.***

 

Oursoftware programs are often deployed in large and complex computer networks.Because of the nature of these programs, they can only be fully tested forreliability when deployed in networks for long periods of time. Our softwareprograms may contain undetected defects when first introduced or as newversions are released, and our clients may discover defects in our products,experience corruption of their data or encounter performance or scalingproblems only after our software programs have been deployed. As a consequence,from time to time we have received client complaints following installation ofour products. We are currently a defendant in several lawsuits where clientshave raised these types of issues with our products and services. In addition,our products are combined with products from other vendors. As a result, shouldproblems occur, it may be difficult to identify the source of the problem.Software and data security are becoming

 

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increasinglyimportant because of regulatory restrictions on data privacy and thesignificant legal exposures and business disruptions stemming from computerviruses and other unauthorized entry or use of computer systems. Theseconditions increase the risk that we could experience, among other things:

 

•                  lossof clients;

 

•                  damageto our brand reputation;

 

•                  failureto attract new clients or achieve market acceptance;

 

•                  diversionof development and services resources; and

 

•                  legalactions by our clients or government regulators.

 

Inaddition, we may not be able to avoid or limit liability for disputes relatingto product performance, software security or the provision of services. Theoccurrence of any one or more of the foregoing factors could cause us toexperience losses, incur liabilities and adversely affect our operatingresults.

 

***If ourclients lose confidence in the security of data on the Internet, our revenuescould be adversely affected.***

 

Maintainingthe security of computers and computer networks is an issue of criticalimportance for our clients. Attempts by experienced computer programmers, orhackers, to penetrate client network security or the security of web sites tomisappropriate confidential information are currently an industry-widephenomenon that affects computers and networks across all platforms. Despiteefforts to address these risks, actual or perceived security vulnerabilities inour products (or the Internet in general) could lead some clients to seek toreduce or delay future purchases or to purchase competitors’ products which arenot Internet-based applications. Clients may also increase their spending toprotect their computer networks from attack, which could delay adoption of newtechnologies. Any of these actions by clients could adversely affect ourrevenues.

 

***We may be required to undertake a costlyredesign of our products if third- party software development tools become anindustry standard or cause obsolescence of our toolsets.***

 

Severalcompanies have focused on providing software development tools and each of themis attempting to establish its own tools as the accepted industry standard. Ifa software product were to emerge as a clearly established and widely acceptedindustry standard or if rising expectations of toolsets of applications causeour toolsets to become obsolete, we may not be able to adapt our toolsappropriately or rapidly enough to satisfy market demand. In addition, we couldbe forced to abandon or modify our tools or to redesign our software productsto accommodate the new industry standard. This would be expensive andtime-consuming and may adversely affect results of operations and the financialcondition of our business. Our failure to drive or adapt to new and changingindustry standards or third-party interfaces could adversely affect sales ofour products and services.

 

***We may beunable to identify or complete suitable acquisitions and investments; and anyacquisitions and investments we do complete may create business difficulties ordilute our stockholders.***

 

Aspart of our business strategy, we intend to pursue strategic acquisitions. Wemay be unable to identify suitable acquisitions or investment candidates. Evenif we identify suitable candidates, we cannot provide assurance that we will beable to make acquisitions or investments on commercially acceptable terms. Ifwe acquire a company, we may incur losses in the operations of that company andwe may have difficulty integrating its products, personnel and operations intoour business. In addition, its key personnel may decide not to work for us. Wemay also have difficulty integrating acquired businesses, products, servicesand technologies into our operations. These difficulties could disrupt ourongoing business, distract our management and workforce, increase our expensesand adversely affect our operating results. We may also incorrectly judge thevalue or worth of an acquired company or business. Furthermore, we may incursignificant debt or be required to issue equity securities to pay for futureacquisitions or investments. The issuance of equity securities may be dilutiveto our stockholders. If the products of an acquired company are not successful,those remaining assets could become impaired, which may result in an impairmentloss that could materially adversely impact our financial position and resultsof operations.

 

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***We currentlydo not compete in the software “on demand” or application service providermarkets.***

 

Somebusinesses choose to access enterprise software applications through hosted “ondemand” services or application service providers who distribute enterprise softwarethrough a hosted subscription service. We do not currently have our own “ondemand” hosting program for our products and have had limited success withchannel partners who serve as application service providers for clients. Ifthese alternative distribution models gain popularity, we may not be able tocompete effectively in this environment.

 

***In the eventour products infringe on the intellectual property rights of third parties, ourbusiness may suffer if we are sued for infringement or cannot obtain licensesto these rights on commercially acceptable terms.***

 

Weare subject to the risk of adverse claims and litigation alleging infringementby us of the intellectual property rights of others. Many participants in thetechnology industry have an increasing number of patents and patentapplications and have frequently demonstrated a readiness to take legal actionbased on allegations of patent and other intellectual property infringement.Further, as the number and functionality of our products increase, we believethat we may become increasingly subject to the risk of infringement claims. Ifinfringement claims are brought against us, these assertions could distractmanagement and we may have to expend potentially significant funds andresources to defend or settle such claims. If we are found to infringe on theintellectual property rights of others, we could be forced to pay significantlicense fees or damages for infringement.

 

Ifone of our developers embedded open source components into one of our products,without our knowledge or authorization, our ownership and licensing of thatproduct could be in jeopardy.  Dependingon the open source license terms, the use of an open source component couldmean that all products delivered with that open source component become part ofthe open source community.  In that case,we would not own those delivered products and could not charge license fees forthose products.  We now take steps totrain our developers and monitor the content of products in development, butthere is no assurance that these steps will always be effective.

 

Aspart of our standard license agreements, we agree to indemnify our clients forsome types of infringement claims under the laws of the United States ofAmerica and some foreign jurisdictions that may arise from the use of ourproducts. If a claim against us were successful, we may be required to incursignificant expense and pay substantial damages, as we are unable to insureagainst this risk. Even if we were to prevail, the accompanying publicity couldadversely impact the demand for our software. Provisions attempting to limitour liability in our standard agreements may be invalidated by unfavorablejudicial decisions or by federal, state, local or foreign laws or ordinances.

 

***If the open source community expands into enterprise applicationsoftware, our license fee revenues may decline.***

*** ***

Theopen source community is comprised of many different formal and informal groupsof software developers and individuals who have created a wide variety ofsoftware and have made that software available for use, distribution andmodification, often free of charge. Open source software, such as the Linuxoperating system, has been gaining in popularity among business users. Ifdevelopers contribute enterprise application software to the open sourcecommunity, and that software has competitive features and scale to supportbusiness users in our markets, we will need to change our product pricing anddistribution strategy to compete.

 

***It may becomeincreasingly expensive to obtain and maintain liability insurance.***

 

Wecontract for insurance to cover several, but not all, potential risks andliabilities. In the current market, insurance coverage is becoming morerestrictive, and, when insurance coverage is offered, the deductible for whichwe are responsible is larger. In light of these circumstances, it may becomemore difficult to maintain insurance coverage at historical levels, or if suchcoverage is available, the cost to obtain or maintain it may increasesubstantially. This may result in our being forced to bear the burden of anincreased portion of risks for which we have traditionally been covered byinsurance, which could negatively impact our results of operations.

 

***We havelimited protection of our intellectual property and, if we fail to adequatelyprotect our intellectual property, we may not be able to compete.***

*** ***

Weconsider certain aspects of our internal operations, software and documentationto be proprietary, and rely on a combination of contract, copyright, trademarkand trade secret laws to protect this information. In addition, to date, wehold one patent and have filed several patent applications. Outstandingapplications may not result in issued patents and, even if

 

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issued,the patents may not provide any competitive advantage. Existing copyright lawsafford only limited protection. Our competitors may independently developtechnologies that are less expensive or better than our technology. Inaddition, when we license our products to clients, we provide source code formany of our products. We may also permit clients to obtain access to our othersource code through a source code escrow arrangement. This access to our sourcecode may increase the likelihood of misappropriation or other misuse of ourintellectual property. In addition, the laws of some countries in which oursoftware products are or may be licensed do not protect our software productsand intellectual property rights to the same extent as the laws of the UnitedStates of America. Defending our rights could be costly.

 

***Businessdisruptions may interfere with our ability to conduct business.***

*** ***

Businessdisruptions could affect our future operating results. Our operating resultsand financial condition could be adversely affected in the event of a securitybreach, major fire, war, terrorist attack or other catastrophic event. Impairedaccess or significant damage to our data center at our headquarters in St.Paul, Minnesota due to such an event could cause a disruption of ourinformation, research and development, and client support systems and loss offinancial data and certain client data, which could adversely impact results ofoperations and business financial conditions.

 

***We have limited experience with offshoreoutsourcing.***

 

Tohelp improve margins and gain operational efficiencies, many software companieshave outsourced portions of their software development and software services tocompanies located in India or other parts of the world. In February 2004,we entered into an offshore agreement with a third-party based in India toprovide certain software support services for our products. We have recentlyexpanded our efforts to use this third party to assist us in providing lowercost implementation services for clients. We have limited experience with thesetypes of outsourcing and may be unable to achieve the anticipated economicefficiencies expected****of thisarrangement.

 

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

 

Asubstantial number of shares of our common stock are held by our founders,their family members, a pre-initial public offering investor, current or formeremployees, officers or directors. Sale of a portion of these shares in thepublic market, or the perception that such sales are likely to occur, coulddepress the market price of our common stock and could impair our ability toraise capital through the sale of additional equity securities.

 

***Control byexisting shareholders could significantly influence matters requiringstockholder approval.***

 

Asof July 15, 2005, our executive officers, directors, and affiliatedentities, in the aggregate, beneficially owned 16.7% of our outstanding commonstock. These stockholders, if acting together, would be able to significantlyinfluence all matters requiring approval by stockholders, including theelection of directors and the approval of mergers or other businesscombinations.  Sale of a portion of theseshares in the public market, or the perception that such sales are likely tooccur, could depress the market price of our common stock and could impair ourability to raise capital through the sale of additional equity securities.

 

***Financial outlook.***

*** ***

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

 

**Item 7A.****Qualitative and Quantitative Disclosures About MarketRisk**

** **

Currently, we have minimal monetary assets, liabilities and operatingexpenses denominated in foreign currencies. If our international operationsexpand and we decide to enter into hedging transactions to minimize foreigncurrency rate risk, the adoption of SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*”, as amended bySFAS

 

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Nos. 137, “*Accounting for DerivativeInstruments and Hedging Activities—Deferral of the Effective Date of FASBStatement No. 133—an amendment of FASB Statement No. 133*”,and SFAS No. 138, “Accounting for Derivative Instruments and CertainHedging Activities—an amendment of FASB Statement No. 133”, could have amaterial impact on our operating results.

 

We currently do not utilize any derivative financial instruments. Ourinvestments are consistent with the Company’s investment policies. We investour cash in financial instruments consisting primarily money market funds andhighly liquid debt securities of corporations and municipalities. Theseinvestments are denominated in U.S. dollars. Investments with originalmaturities of three months or less are classified as cash and cash equivalents.As of May 31, 2005, the average maturity of our investment securitieswas less than three months and all investment securities had maturities lessthan 24 months. As of May 31, 2005, we consider the reportedamounts of these investments to be reasonable approximations of fair values.Changes in the market interest rates will not have a material impact on ourfinancial position.

 

Through May 31, 2005, interest expense was not sensitive tothe general levels of United States interest rates because all of our notespayable bear fixed interest rates.

 

**Item 8.****Consolidated Financial Statements and SupplementaryData**

** **

The information required by this Item is included in Part IVItem 14(a)(1) and (2).

 

**Item 9.****Changes In and Disagreements With Accountants onAccounting and Financial Disclosure**

** **

None.

 

**Item 9A.****Controls and Procedures**

** **

**Disclosure Controls and Procedures.**

** **

As required by Rule 13a-15(e) under the Securities ExchangeAct of 1934, as amended, we conducted an evaluation under the supervision andwith the participation of our management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, we evaluated the effectivenessof the design and operation of our disclosure controls and procedures as of theend of the period covered by this report. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our currentdisclosure controls and procedures were effective in ensuring that allinformation required to be disclosed in reports that we file or submit underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission rules andforms. 

 

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**Management’s Report on Internal Control over Financial Reporting**

** **

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting. Our internal control over financialreporting is a process designed under the supervision of our Chief ExecutiveOfficer and Chief Financial Officer to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of our financialstatements for external reporting in accordance with accounting principlesgenerally accepted in the United States of America. Management evaluated theeffectiveness of our internal control over financial reporting using thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control – Integrated Framework. Management, underthe supervision and the participation of the Company’s Chief Executive Officerand Chief Financial Officer, assessed the effectiveness of our internal controlover financial reporting as of May 31, 2005 and concluded that it waseffective.

 

Our independent registered public accounting firm,PricewaterhouseCoopers LLP, has audited the effectiveness of our internalcontrol over financial reporting and management’s assessment of theeffectiveness of our internal control over financial reporting as of May 31, 2005,and has expressed unqualified opinions in their report which appears on pages F-1and F-2.

 

**Changes in Internal Control over Financial Reporting**

 

During our fourth quarter of fiscal 2005 there were no changesmade in our internal control over financial reporting (as defined in Rule 13(a)-15(f) underthe Exchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Item 9B.Other Information**

** **

None

 

**Part III**

 

The information required by Items 10 through 13 is incorporated byreference from our definitive Proxy Statement pursuant to generalinstruction G (3), with the exception of the executive officers section ofItem 10, which is included in Part I of this Form 10-K. We planto include our 2005 Proxy Statement pursuant to Regulation 14A aspart of the Registration Statement on Form S-4 that will be filed inconnection with the special meeting of stockholders concerning the proposedbusiness combination with Intentia and the election of directors.  If the Registration Statement of Form S-4is not effective within 120 days after May 31, 2005, we willamend this Annual Report on Form 10-K to include that information.

 

**Item 10.****Directors and Executive Officers of the Registrant**

** **

The information concerning our officers required by this item isincluded in Part I hereof under the heading “Employees”. The informationcalled for by Item 10, as to compliance with Section 16(a) ofthe Securities Exchange Act of 1934, is incorporated by reference in the 2005Proxy Statement to be filed with the Securities and Exchange Commissionpursuant to Regulation 14A under the heading “Section 16(a) BeneficialOwnership Reporting Compliance.” The information called for by Item 10, asto the audit committee and the audit committee financial expert, isincorporated by reference to that Proxy Statement under the headings “Item 1:Election of Directors” and “Audit Committee Report”.

 

We have adopted a Global Business Code of Conduct that applies to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller, or persons performing similar functions, and all of ourother employees and non-employee directors. This Global Business Code ofConduct is posted on our website (www.lawson.com). We intend to satisfy thedisclosure requirement under Item 10 of Form 8-K regarding anamendment to, or waiver from, a provision of the Global Business Code ofConduct that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller, or persons performingsimilar functions, by posting such information on our website, at the addressspecified above.

 

Our Corporate Governance Policy and charters for each Committee of ourBoard of Directors are also available on our website. Our Global Business Codeof Conduct, Corporate Governance Policy and charters are also available inprint to any stockholder who submits a request to: Lawson Software, Inc.,Attn: Corporate Secretary, 380 St. Peter Street, St. Paul,Minnesota 55102.

 

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Information on our website is not deemed to be incorporated byreference into this Annual Report on Form 10-K.

** **

**Item 11.****Executive Compensation**

** **

Information required under this item is contained in the sectionsentitled “Executive Compensation and other Information” and “EmploymentAgreements” in our 2005 Proxy Statement and is incorporated herein byreference.

 

**Item 12.****Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters**

** **

Information required under this item is contained in the sectionsentitled “Securities Authorized for Issuance Under Equity Compensation Plans”and “Security Ownership of Principal Stockholders and Management” in our 2005Proxy Statement and is incorporated herein by reference.

 

**Item 13.****Certain Relationships and Related Transactions**

** **

Information required under this item is contained in the section entitled“Certain Transactions” in our 2005 Proxy Statement and is incorporatedherein by reference.

 

**Item 14.****Principal Accounting Fees and Services**

** **

The information required by this item is incorporated by reference tothe Proxy Statement under the heading “Ratification of Selection of IndependentRegistered Public Accounting Firm”.

 

**Part IV**

** **

**Item 15.****Exhibits, Financial Statement Schedules**

** **

(a)           Consolidated FinancialStatements, Consolidated Financial Statement Schedules and Exhibits.

 

1.* Financial Statements.* The following Consolidated Financial Statements, and the related Notesthereto, and the Report of Independent Registered Public Accounting Firm arefiled as a part of this Annual Report on Form 10-K.

 

2.* Financial Statement Schedules.*  Schedules not listed below have been omittedbecause they are not applicable or are not required or the information requiredto be set forth in those schedules is included in the financial statements orrelated notes.

 

3.* Exhibits.*  The exhibitsfiled or incorporated by reference in response to Item 601 ofRegulation S-K are listed in the Index to Exhibits.

 

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**Index To Financial Statements and FinancialStatement Schedules (Item 15-(a1))**

** **
| Report of Independent Registered Public Accounting Firm                                                                                              | F-1  |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------|
| Consolidated  Balance Sheets at May 31, 2005 and 2004                                                                                 | F-3  |
| Consolidated Statements of Operations for the years ended  May 31, 2005, 2004 and 2003                                                | F-4  |
| Consolidated Statements of Stockholders’ Equity and Comprehensive  Income (Loss) for the years ended May 31, 2005, 2004 and 2003 | F-5  |
| Consolidated Statements of Cash Flows for the years ended May 31, 2005, 2004  and 2003                                                | F-6  |
| Notes to Consolidated Financial Statements                                                                                                           | F-7  |
| Supplemental Quarterly Financial Information                                                                                                         | F-34 |

 

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**Index to Exhibits (Item 15(a3))**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                         |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2(2)     |       | Merger Agreement between Lawson Software, Inc., Everest  Acquisition, Inc., Apexion Technologies, Inc., and Maher Hakim,  Muwaffa Lahham and Gene Barduson.                              |
| 2.3(6)     |       | Asset Purchase and Sale Agreement dated April 30, 2004  among Siemens Medical Solutions Health Services Corporation, Siemens Medical  Solutions USA, Inc. and Lawson Software, Inc. |
| 3.1(1)     |       | Certificate of Incorporation of the Company.                                                                                                                                                            |
| 3.2(1)     |       | Bylaws of the Company.                                                                                                                                                                                  |
| 4.1(1)     |       | Form of Certificate of Common Stock of the Company.                                                                                                                                                |
| 4.2(4)     |       | Rights Agreement dated July 28, 2004.                                                                                                                                                         |
| 4.3(4)     |       | Certificate of Designations of Series B Junior Participating  Preferred Stock of the Company.                                                                                                      |
| 4.4(5)     |       | First Amendment to the Rights Agreement dated June 2, 2005.                                                                                                                                   |
| 10.1(1)    |       | Amended and Restated 1996 Stock Incentive Plan.                                                                                                                                                         |
| 10.2(1)    |       | 2001 Stock Incentive Plan.                                                                                                                                                                              |
| 10.3       |       | [Reserved]                                                                                                                                                                                              |
| 10.4(1)    |       | 2001 Employee Stock Purchase Plan.                                                                                                                                                                      |
| 10.5(8)    |       | Master Relationship Agreement and an OEM Software Agreement between  Lawson Software, Inc. and International Business Machines Corporation.                                                        |
| 10.6(3)    |       | Value Added Reseller Agreement, effective January 29, 2004,  between the Company and Micro Focus International Holdings LTD, Inc. and  its Affiliates.                                   |
| 10.7(3)    |       | Master Offshore Agreement, effective February 1, 2004,  between the Company and Xansa (India) Ltd.                                                                                       |
| 10.8       |       | [Reserved]                                                                                                                                                                                              |
| 10.9       |       | [Reserved]                                                                                                                                                                                              |
| 10.10      |       | [Reserved]                                                                                                                                                                                              |
| 10.11      |       | [Reserved]                                                                                                                                                                                              |
| 10.12(1)   |       | Employment Agreement, dated February 15, 2001, between the  Company and Robert Barbieri.                                                                                                           |
| 10.13(1)   |       | Director Indemnification Agreement, dated March 19, 2001,  between the Company and David S. B. Lang.                                                                                     |
| 10.14(1)   |       | Stock Purchase and Exchange Agreement, dated February 23, 2001,  between the Company and the investors named therein.                                                                              |
| 10.15(1)   |       | Registration Rights Agreement, dated February 23, 2001, between  the Company and the stockholders, investors and founders named therein.                                                           |
| 10.16(1)   |       | Stockholders’ Agreement, dated February 23, 2001, between the  Company and the stockholders, investors and founders named therein.                                                            |
| 10.17(2)   |       | Form of Change of Control Agreement dated August 11, 2003  with Certain Executive Officers.                                                                                                   |
| 10.18(1)   |       | Form of Stock Option Agreement under 2001 Stock Incentive Plan.                                                                                                                                    |
| 10.19(1)   |       | Form of Stock Option Agreement under 2001 Stock Incentive Plan (with  additional terms regarding acceleration of vesting).                                                                         |
| 10.20(7)   |       | Form of manifesto stock Option Agreement under 2001 Stock  Incentive Plan.                                                                                                                         |
| 10.21(1)   |       | Lease of real property located at 380 St. Peter St., St. Paul,  MN 55102.                                                                                                                          |
| 10.22(7)   |       | Executive Change in Control Severance Pay Plan for Tier 1 Executives.                                                                                                                                   |
| 10.23      |       | [Reserved]                                                                                                                                                                                              |
| 10.24      |       | [Reserved]                                                                                                                                                                                              |
| 10.25(1)   |       | Application Partner Agreement, dated December 31, 1996, between  the Company and Arbor Software Corporation (n/k/a Hyperion Solutions  Corporation), as amended to date.                           |
| 10.26(5)   |       | Transaction Agreement dated June 2, 2005 between Lawson  Software, Inc. and Intentia International AB.                                                                                   |
| 10.27(5)   |       | Stockholder Irrevocable Undertaking by and between Intentia International  AB (publ) and Lawson Software, Inc.                                                                                     |
| 10.28(5)   |       | Stockholder Irrevocable Undertaking by and between Lawson  Software, Inc. and Intentia International AB.                                                                                           |
| 10.29(5)   |       | Separation and Non-compete Agreement and Mutual Release by and  between John J. Coughlan and Lawson Software, Inc.                                                                                 |
| 10.30(5)   |       | Employment Agreement between Lawson Software, Inc. and Harry  Debes.                                                                                                                               |
| 10.31(5)   |       | Stock Option Agreement between Lawson Software, Inc. and Harry  Debes.                                                                                                                             |
| 10.32(5)   |       | Restricted Stock Award Agreement between Lawson Software, Inc.  and Harry Debes.                                                                                                                   |
| 10.33(5)   |       | Notice of Amendment of “Out –Of-The- Money” Stock Options Held by  Officers Subject to Section 16 of the Securities Exchange Act as of  June 1, 2005.                     |

 

49

----

 
| 21.1(6) |   | Subsidiaries of Lawson Software, Inc.                                                      |
|---------|--------|-------------------------------------------------------------------------------------------------|
| 23.1    |   | Consent of PricewaterhouseCoopers LLP.                                                          |
| 24.1    |   | Powers of Attorney (included on signature page).                                                |
| 31.1    |   | Certification Pursuant to Section 302 of Sarbanes-Oxley  Act—Harry Debes.             |
| 31.2    |   | Certification Pursuant to Section 302 of Sarbanes-Oxley  Act—Robert G. Barbieri. |
| 32.1    |   | Certification Pursuant to Section 906 of Sarbanes-Oxley  Act—Harry Debes.             |
| 32.2    |   | Certification Pursuant to Section 906 of Sarbanes-Oxley  Act—Robert G. Barbieri. |

 

----

(1)                                  Incorporated byreference to a similarly numbered exhibit to the Company’s Form S-1Registration Statement (File No. 333-63394) filed on June 20,2001.

 

(2)                                  Incorporated byreference to the Form 10-Q filed on October 9, 2003.

 

(3)                                  Incorporated byreference to the Form 10-Q filed on April 12, 2004.

 

(4)                                  Incorporated byreference to the Form 8-A filed on July 28, 2004.

 

(5)                                  Incorporated byreference to the Form 8-K filed on June 7, 2005.

 
| Exhibit 4.4   | First Amendment to the Rights Agreement originally  filed as exhibit 4.1.                                   |
|--------------------|-------------------------------------------------------------------------------------------------------------|
| Exhibit 10.26 | Transaction Agreement originally filed as  exhibit 10.1.                                                    |
| Exhibit 10.27 | Stockholder Irrevocable Undertaking  originally filed as exhibit 10.2.                                      |
| Exhibit 10.28 | Stockholder Irrevocable Undertaking  originally filed as exhibit 10.3.                                      |
| Exhibit 10.29 | Separation and Non-compete Agreement  originally filed as exhibit 10.4.                                     |
| Exhibit 10.30 | Employment Agreement originally filed as  exhibit 10.5.                                                     |
| Exhibit 10.31 | Stock Option Agreement originally filed as  exhibit 10.6.                                                   |
| Exhibit 10.32 | Restricted Stock Award Agreement originally  filed as exhibit 10.7.                                         |
| Exhibit 10.33 | Notice of Amendment of “Out –Of-The- Money”  Stock Options originally filed as exhibit 10.8. |

 

(6)                                  Incorporated byreference to the Form 10-K filed on July 29, 2004.

 

(7)                                  Incorporated byreference to the Form 8-K filed on January 19, 2005.

 

(8)                                  Filed herewith.Confidential information is omitted from this exhibit and filed separately withthe Securities and Exchange Commission accompanied by a confidential treatmentrequest pursuant to Rule 24b-2 under the securities Exchange Act of 1934,as amended. 

 

50

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities and Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | LAWSON SOFTWARE, INC. |
|--------|----------------------------|
|   | By:                        | /s/ ROBERT G. BARBIERI | * * |
|   |                       |   |
|   |                       | Robert G. Barbieri |
|   |                       | *Executive Vice President and  Chief Financial and Performance Officer  (principal financial and accounting officer)* |

 

Dated: July 29, 2005

 

**POWER OF ATTORNEY**

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signatureappears below hereby constitutes and appoints Harry Debes and Robert G.Barbieri, and each of them, his true and lawful attorney-in-fact and agents,with full powers of substitution and resubstitution, for him and in his name,place and stead, in any and all capacities, to sign any and all amendments tothis Form 10-K and to file the same, with exhibits thereto and otherdocuments in connection therewith, with the Securities and Exchange Commission,and hereby grants to such attorneys-in-fact and agents full power and authorityto do and perform each and every act and thing requisite or necessary to bedone, as fully to all intents and purposes as he might or could do in person,hereby ratifying and confirming all that said attorneys-in-fact and agents orhis substitute or substitutes may lawfully do or cause to be done by virtuehereof.

 

Pursuant to the requirements of the Securities Act of 1934, thefollowing persons in the capacities and on the dates indicated have signed thisAnnual Report on Form 10-K.

 
| **Signature**      | ** **             | **Title**                                                  | ** ** | **Date**                                           |
|--------------------|------------------------|------------------------------------------------------------|------------|----------------------------------------------------|
|               | /s/ H. RICHARD LAWSON  |                                                       |       | Chairman                                           |   | July 29, 2005 |
| H. Richard Lawson  |                   |                                                       |       |                                               |
|               |                   |                                                       |       |                                               |
|               | /s/ HARRY  DEBES       |                                                       |       | President and Chief Executive Officer and Director |   | July 29, 2005 |
| Harry Debes        |                   | *(principal executive officer)*                            |       |                                               |
|               |                   |                                                       |       |                                               |
|               | /s/ ROBERT G. BARBIERI |                                                       |       | Executive Vice President and Chief Financial and   |   | July 29, 2005 |
| Robert G. Barbieri |                   | Performance Officer *(principal  financial and accounting* |       |                                               |
|               |                   | *officer)*                                                 |       |                                               |
|               |                   |                                                       |       |                                               |
|               | /s/ DAVID J. ESKRA     |                                                       |       | Director                                           |   | July 29, 2005 |
| David J. Eskra     |                   |                                                       |       |                                               |
|               |                   |                                                       |       |                                               |
|               | /s/ DAVID R. HUBERS    |                                                       |       | Director                                           |   | July 29, 2005 |
| David R. Hubers    |                   |                                                       |       |                                               |
|               |                   |                                                       |       |                                               |
|               | /s/ THOMAS G. HUDSON   |                                                       |       | Director                                           |   | July 29, 2005 |
| Thomas G. Hudson   |                   |                                                       |       |                                               |
|               |                   |                                                       |       |                                               |
|               | /s/ MICHAEL A. ROCCA   |                                                       |       | Director                                           |   | July 29, 2005 |
| Michael A. Rocca   |                   |                                                       |       |                                               |
|                    |                        |                                                            |            |                                                    |  |  |  |  |  |  |  |

 

51

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

** **

To the Board of Directors and Stockholders of

Lawson Software, Inc.:

 

Wehave completed an integrated audit of Lawson Software, Inc.’s 2005consolidated financial statements and its internal control over financialreporting as of May 31, 2005 and audits of its 2004 and 2003consolidated financial statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Our opinions, basedon our audits, are presented below.

 

Consolidatedfinancial statements

 

Inour opinion, the consolidated financial statements listed in the index appearingunder Item 15(a)(1) present fairly, in all material respects, thefinancial position of Lawson Software, Inc. and its subsidiaries at May 31, 2005and 2004, and the results of their operations and their cash flows foreach of the three years in the period ended May 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit of financial statements includes examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

Internalcontrol over financial reporting

 

Also,in our opinion, management’s assessment, included in Management’s Report onInternal Control over Financial Reporting appearing under Item 9A, that theCompany maintained effective internal control over financial reporting as ofMay 31, 2005 based on criteria established in *Internal Control– Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects based on those criteria. Furthermore, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of May 31, 2005 based on criteria establishedin *Internal Control – Integrated Framework*issued by the COSO. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express opinions on management’s assessment and on theeffectiveness of the Company’s internal control over financial reporting basedon our audit. We conducted our audit of internal control over financialreporting in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

F-1

----

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

 
|                    | /s/  PRICEWATERHOUSECOOPERS LLP |   |
|-------------------------|---------------------------------|--------|
|                    |                            |
|                    |                            |
| Minneapolis,  Minnesota |                            |
| July 28, 2005 |                            |

 

F-2

----

 

**LAWSON SOFTWARE, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share data)**

** **
| ** **                                                                                                                                                                                                  | ** ** | **May 31, 2005** | ** ** | **May 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ASSETS                                                                                                                                                                                                      |       |                       |       |                       |       |
| Current assets:                                                                                                                                                                                             |       |                       |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                   |       | $                          | 187,744    |                       | $          | 72,396 |   |
| Marketable securities                                                                                                                                                                                       |       | 43,099                     |       | 128,065                    |       |
| Trade accounts receivable, net                                                                                                                                                                              |       | 42,907                     |       | 65,236                     |       |
| Deferred income taxes                                                                                                                                                                                       |       | 9,314                      |       | 15,311                     |       |
| Prepaid expenses and other assets                                                                                                                                                                           |       | 19,260                     |       | 20,450                     |       |
| Total current assets                                                                                                                                                                                        |       | 302,324                    |       | 301,458                    |       |
|                                                                                                                                                                                                        |       |                       |       |                       |       |
| Long-term marketable securities                                                                                                                                                                             |       | 3,770                      |       | 8,521                      |       |
| Property and equipment, net                                                                                                                                                                                 |       | 13,574                     |       | 17,235                     |       |
| Goodwill                                                                                                                                                                                                    |       | 43,407                     |       | 43,042                     |       |
| Other intangible assets, net                                                                                                                                                                                |       | 31,939                     |       | 40,767                     |       |
| Deferred income taxes                                                                                                                                                                                       |       | 21,385                     |       | 12,344                     |       |
| Other assets                                                                                                                                                                                                |       | 4,319                      |       | 231                        |       |
| Total assets                                                                                                                                                                                                |       | $                          | 420,718    |                       | $          | 423,598 |   |
|                                                                                                                                                                                                        |       |                       |       |                       |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                   |       |                       |       |                       |       |
| Current liabilities:                                                                                                                                                                                        |       |                       |       |                       |       |
| Current portion of long-term debt                                                                                                                                                                           |       | $                          | 1,836      |                       | $          | 1,652 |   |
| Accounts payable                                                                                                                                                                                            |       | 12,003                     |       | 14,391                     |       |
| Accrued compensation and benefits                                                                                                                                                                           |       | 17,656                     |       | 25,086                     |       |
| Other accrued liabilities                                                                                                                                                                                   |       | 15,848                     |       | 11,898                     |       |
| Deferred revenue                                                                                                                                                                                            |       | 76,571                     |       | 83,095                     |       |
| Total current liabilities                                                                                                                                                                                   |       | 123,914                    |       | 136,122                    |       |
| Long-term debt, less current portion                                                                                                                                                                        |       | —                     |       | 990                        |       |
| Other long-term liabilities                                                                                                                                                                                 |       | 3,749                      |       | 3,600                      |       |
| Total liabilities                                                                                                                                                                                           |       | 127,663                    |       | 140,712                    |       |
| Commitments and contingencies (Note 15)                                                                                                                                                                |       |                       |       |                       |       |
| Stockholders’ equity:                                                                                                                                                                                  |       |                       |       |                       |       |
| Preferred stock; $0.01 par value; 42,562  shares authorized; no shares issued or outstanding                                                                                                                |       | —                     |       | —                     |       |
| Common stock; $0.01 par value; 750,000  shares authorized; 112,414 and 110,074 shares issued, respectively; 100,619  and 98,346 shares outstanding, at May 31, 2005 and 2004,  respectively. |       | 1,124                      |       | 1,099                      |       |
| Additional paid-in capital                                                                                                                                                                                  |       | 338,666                    |       | 327,715                    |       |
| Treasury stock, at cost; 11,795 and 11,728  shares at May 31, 2005 and 2004, respectively.                                                                                                        |       | (72,348                    | )          | (65,555                    | )          |
| Deferred stock-based compensation                                                                                                                                                                           |       | (41                        | )          | (774                       | )          |
| Retained earnings                                                                                                                                                                                           |       | 22,733                     |       | 17,471                     |       |
| Accumulated other comprehensive income                                                                                                                                                                      |       | 2,921                      |       | 2,930                      |       |
| Total stockholders’ equity                                                                                                                                                                             |       | 293,055                    |       | 282,886                    |       |
| Total liabilities and stockholders’ equity                                                                                                                                                             |       | $                          | 420,718    |                       | $          | 423,598 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

F-3

----

 

**LAWSON SOFTWARE, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

** **
| ** **                                             | ** ** | **Year Ended May 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                              |       |                        |       |   |   |   |   |
| License fees                                           |       | $                           | 57,743     |   | $ | 92,338 |   | $ | 77,614 |   |
| Services                                               |       | 277,441                     |       | 271,245 |   | 266,704 |   |
|                                                   |       |                        |       |   |   |   |   |
| Total revenues                                         |       | 335,184                     |       | 363,583 |   | 344,318 |   |
|                                                   |       |                        |       |   |   |   |   |
| Cost of revenues:                                      |       |                        |       |   |   |   |   |
| Cost of license fees                                   |       | 9,961                       |       | 15,948 |   | 14,367 |   |
| Cost of services                                       |       | 140,623                     |       | 136,299 |   | 141,717 |   |
|                                                   |       |                        |       |   |   |   |   |
| Total cost of revenues                                 |       | 150,584                     |       | 152,247 |   | 156,084 |   |
|                                                   |       |                        |       |   |   |   |   |
| Gross profit                                           |       | 184,600                     |       | 211,336 |   | 188,234 |   |
|                                                   |       |                        |       |   |   |   |   |
| Operating expenses:                                    |       |                        |       |   |   |   |   |
| Research and development                               |       | 62,158                      |       | 64,888 |   | 59,115 |   |
| Sales and marketing                                    |       | 75,637                      |       | 93,138 |   | 102,963 |   |
| General and administrative                             |       | 36,443                      |       | 37,721 |   | 29,972 |   |
| Restructuring (Note 3)                            |       | 5,028                       |       | 2,210 |   | 6,035 |   |
| Amortization of acquired intangibles                   |       | 1,545                       |       | 1,274 |   | 877 |   |
|                                                   |       |                        |       |   |   |   |   |
| Total operating expenses                               |       | 180,811                     |       | 199,231 |   | 198,962 |   |
|                                                   |       |                        |       |   |   |   |   |
| Operating income (loss)                                |       | 3,789                       |       | 12,105 |   | (10,728 | ) |
|                                                   |       |                        |       |   |   |   |   |
| Other income:                                          |       |                        |       |   |   |   |   |
| Interest income                                        |       | 4,377                       |       | 3,279 |   | 4,591 |   |
| Interest expense                                       |       | (49                         | )          | (70 | ) | (134 | ) |
|                                                   |       |                        |       |   |   |   |   |
| Total other income                                     |       | 4,328                       |       | 3,209 |   | 4,457 |   |
|                                                   |       |                        |       |   |   |   |   |
| Income (loss) before income taxes                      |       | 8,117                       |       | 15,314 |   | (6,271 | ) |
| Provision (benefit) for income taxes                   |       | 2,855                       |       | 7,323 |   | (2,446 | ) |
| Net income (loss)                                      |       | $                           | 5,262      |   | $ | 7,991 |   | $ | (3,825 | ) |
|                                                   |       |                        |       |   |   |   |   |
| Net income (loss) per share:                           |       |                        |       |   |   |   |   |
| Basic                                                  |       | $                           | 0.05       |   | $ | 0.08 |   | $ | (0.04 | ) |
| Diluted                                                |       | $                           | 0.05       |   | $ | 0.07 |   | $ | (0.04 | ) |
|                                                   |       |                        |       |   |   |   |   |
| Shares used in computing net income (loss)  per share: |       |                        |       |   |   |   |   |
| Basic                                                  |       | 99,068                      |       | 98,462 |   | 98,165 |   |
| Diluted                                                |       | 104,623                     |       | 107,000 |   | 98,165 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

F-4

----

 

**LAWSON SOFTWARE, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

**AND COMPREHENSIVE INCOME (LOSS)**

**(in thousands)**

** **
| ** **                                                                                                                     | ** ** | **Common**  | ** ** | **Additional  Paid-In** | ** ** | **Treasury** | ** ** | **Deferred  Stock-Based** | ** ** | **Retained**     | ** **  | **Accumulated  Other  Comprehensive** | ** ** | **Adjustment  for  Mandatorily  Redeemable** | ** ** | **Total  Stockholders’** | ** ** | **Comprehensive** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|------------------|-------------|---------------------------------------|------------|----------------------------------------------|------------|-------------------------------|------------|-------------------|------------|
| ** **                                                                                                                     | ** ** | **Shares**  | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Stock**                 | ** ** | **Compensation** | ** **  | **Earnings**                          | ** ** | **Loss  (Income)**                           | ** ** | **Common  Stock**             | ** ** | **Equity**        | ** ** | **Income  (Loss)** | ** ** |
| **Balance  at May 31, 2002**                                                                                              |       | 95,361      |       | $                       | 1,020      |         | $          | 298,048                   |       | $                | (16,974     | )                                     | $          | (8,329                                       | )          | $                             | 13,305     |              | $          | (1,212 | ) | $ | (374 | ) | $ | 285,484 |   | $ | 7,925 |   |
| ** **                                                                                                                     |       |        |       |                    |       |         |       |                      |       |             |        |                                  |       |                                         |       |                          |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Deferred  stock-based compensation                                                                                             |       | —      |       | —                  |       | (1,650       | )          | —                    |       | 1,650            |        | —                                |       | —                                       |       | —                        |       | —            |       |   |   |
| Amortization of  stock-based compensation                                                                                      |       | —      |       | —                  |       | —       |       | —                    |       | 3,562            |        | —                                |       | —                                       |       | —                        |       | 3,562             |       |   |   |
| Exercise of stock  options                                                                                                     |       | 3,846       |       | 38                      |       | 5,206        |       | —                    |       | —           |        | —                                |       | —                                       |       | —                        |       | 5,244             |       |   |   |
| Tax benefit from  stockholder transactions                                                                                     |       | —      |       | —                  |       | 4,594        |       | —                    |       | —           |        | —                                |       | —                                       |       | —                        |       | 4,594             |       |   |   |
| Employee stock  purchase plan                                                                                                  |       | 1,370       |       | —                  |       | 3,439        |       | 3,179                     |       | —           |        | —                                |       | —                                       |       | —                        |       | 6,618             |       |   |   |
| Repurchase ESOP  shares                                                                                                        |       | (6          | )          | —                  |       | —       |       | (27                       | )          | —           |        | —                                |       | —                                       |       | —                        |       | (27               | )          |   |   |
| Repurchase of  common stock                                                                                                    |       | (2,875      | )          | —                  |       | —       |       | (15,002                   | )          | —           |        | —                                |       | —                                       |       | —                        |       | (15,002           | )          |   |   |
| Increase in  redemption value of mandatorily redeemable common stock, net of cancellation  of mandatorily redeemable provision |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | —                                |       | —                                       |       | 374                           |       | 374               |       |   |   |
| Change in net  unrealized gains/losses on investments, net of taxes                                                            |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | —                                |       | 146                                          |       | —                        |       | 146               |       | 146 |   |
| Translation  adjustment                                                                                                        |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | —                                |       | 2,231                                        |       | —                        |       | 2,231             |       | 2,231 |   |
| Net loss                                                                                                                       | * *   | —      | * *   | —                  |       | —       |       | —                    |       | —           |        | (3,825                                | )          | —                                       |       | —                        |       | (3,825            | )          | (3,825 | ) |
| **Balance  at May 31, 2003**                                                                                              |       | 97,696      |       | 1,058                   |       | 309,637      |       | (28,824                   | )          | (3,117           | )           | 9,480                                 |       | 1,165                                        |       | —                        |       | 289,399           |       | $ | (1,448 | ) |
| ** **                                                                                                                     |       |        |       |                    |       |         |       |                      |       |             |        |                                  |       |                                         |       |                          |       |              |       |   |   |
| Deferred  stock-based compensation                                                                                             |       | —      |       | —                  |       | (966         | )          | —                    |       | 112              |        | —                                |       | —                                       |       | —                        |       | (854              | )          |   |   |
| Amortization of  stock-based compensation                                                                                      |       | —      |       | —                  |       | —       |       | —                    |       | 2,231            |        | —                                |       | —                                       |       | —                        |       | 2,231             |       |   |   |
| Exercise of stock  options and warrants                                                                                        |       | 4,901       |       | 41                      |       | 5,348        |       | 1,795                     |       | —           |        | —                                |       | —                                       |       | —                        |       | 7,184             |       |   |   |
| Tax benefit from  stockholder transactions                                                                                     |       | —      |       | —                  |       | 11,581       |       | —                    |       | —           |        | —                                |       | —                                       |       | —                        |       | 11,581            |       |   |   |
| Employee stock  purchase plan                                                                                                  |       | 665         |       | —                  |       | 2,115        |       | 1,544                     |       | —           |        | —                                |       | —                                       |       | —                        |       | 3,659             |       |   |   |
| Repurchase of  common stock                                                                                                    |       | (4,916      | )          | —                  |       | —       |       | (40,070                   | )          | —           |        | —                                |       | —                                       |       | —                        |       | (40,070           | )          |   |   |
| Change in net  unrealized gains/losses on investments, net of taxes                                                            |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | —                                |       | (190                                         | )          | —                        |       | (190              | )          | (190 | ) |
| Translation  adjustment                                                                                                        |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | —                                |       | 1,955                                        |       | —                        |       | 1,955             |       | 1,955 |   |
| Net income                                                                                                                     |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | 7,991                                 |       | —                                       |       | —                        |       | 7,991             |       | 7,991 |   |
| **Balance  at May 31, 2004**                                                                                         |       | 98,346      |       | 1,099                   |       | 327,715      |       | (65,555                   | )          | (774             | )           | 17,471                                |       | 2,930                                        |       | —                        |       | 282,886           |       | $ | 9,756 |   |
| ** **                                                                                                                     |       |        |       |                    |       |         |       |                      |       |             |        |                                  |       |                                         |       |                          |       |              |       |   |   |
| Deferred  stock-based compensation                                                                                             |       | —      |       | —                  |       | (471         | )          | —                    |       | 472              |        | —                                |       | —                                       |       | —                        |       | 1                 |       |   |   |
| Amortization of  stock-based compensation                                                                                      |       | —      |       | —                  |       | —       |       | —                    |       | 261              |        | —                                |       | —                                       |       | —                        |       | 261               |       |   |   |
| Exercise of stock  options                                                                                                     |       | 3,055       |       | 25                      |       | 4,807        |       | 1,661                     |       | —           |        | —                                |       | —                                       |       | —                        |       | 6,493             |       |   |   |
| Tax benefit from  stockholder transactions                                                                                     |       | —      |       | —                  |       | 4,215        |       | —                    |       | —           |        | —                                |       | —                                       |       | —                        |       | 4,215             |       |   |   |
| Employee stock  purchase plan                                                                                                  |       | 667         |       | —                  |       | 2,400        |       | 1,546                     |       | —           |        | —                                |       | —                                       |       | —                        |       | 3,946             |       |   |   |
| Repurchase of  common stock                                                                                                    |       | (1,449      | )          | —                  |       | —       |       | (10,000                   | )          | —           |        | —                                |       | —                                       |       | —                        |       | (10,000           | )          |   |   |
| Change in net  unrealized gains/losses on investments, net of taxes                                                            |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | —                                |       | 20                                           |       | —                        |       | 20                |       | 20 |   |
| Translation  adjustment                                                                                                        |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | —                                |       | (29                                          | )          | —                        |       | (29               | )          | (29 | ) |
| Net income                                                                                                                     |       | —      |       | —                  |       | —       |       | —                    |       | —           |        | 5,262                                 |       | —                                       |       | —                        |       | 5,262             |       | 5,262 |   |
| **Balance  at May 31, 2005**                                                                                         | ** ** | **100,619** | ** ** | **$**                   | **1,124**  | ** **   | **$**      | **338,666**               | ** ** | **$**            | **(72,348** | **)**                                 | **$**      | **(41**                                      | **)**      | **$**                         | **22,733** | ** **        | **$**      | **2,921** |   | $ | — | ** ** | **$** | **293,055** | ** ** | **$** | **5,253** | ** ** |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

F-5

----

 

**LAWSON SOFTWARE, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                                | ** ** | **Year Ended May 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                        |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                           | 5,262      |   | $ | 7,991 |   | $ | (3,825 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                        |       |   |   |   |   |
| Depreciation and amortization                                                             |       | 16,065                      |       | 13,324 |   | 13,931 |   |
| Deferred income taxes                                                                     |       | (3,044                      | )          | (4,513 | ) | 1,741 |   |
|                                                                                      |       |                        |       |   |   |   |   |
| Provision for doubtful accounts                                                           |       | 1,141                       |       | 3,317 |   | 423 |   |
| Loss on the disposal of assets                                                            |       | 104                         |       | 149 |   | — |   |
| Tax benefit from stockholder transactions                                                 |       | 4,215                       |       | 11,581 |   | 4,594 |   |
| Tax commitment from exercise of stock options                                             |       | (1,147                      | )          | (2,317 | ) | (1,724 | ) |
| Amortization of stock-based compensation                                                  |       | 262                         |       | 1,377 |   | 3,562 |   |
| Amortization of discounts on notes payable                                                |       | 88                          |       | 68 |   | — |   |
| Amortization of discount on marketable  securities                                        |       | 145                         |       | 652 |   | 774 |   |
| Restructuring                                                                             |       | 5,028                       |       | 2,210 |   | 6,035 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:            |       |                        |       |   |   |   |   |
| Trade accounts receivable                                                                 |       | 21,188                      |       | (8,161 | ) | 37,805 |   |
| Prepaid expenses and other assets                                                         |       | 748                         |       | 2,285 |   | (3,923 | ) |
| Accounts payable                                                                          |       | (2,388                      | )          | 838 |   | (6,872 | ) |
| Accrued and other liabilities                                                             |       | (8,252                      | )          | (5,422 | ) | (4,753 | ) |
| Income taxes payable                                                                      |       | 419                         |       | 999 |   | — |   |
| Deferred revenue and client deposits                                                      |       | (6,936                      | )          | (6,545 | ) | 144 |   |
|                                                                                      |       |                        |       |   |   |   |   |
| Net cash provided by operating activities                                                 |       | 32,898                      |       | 17,833 |   | 47,912 |   |
|                                                                                      |       |                        |       |   |   |   |   |
| **Cash flows from investing activities:**                                                 |       |                        |       |   |   |   |   |
| Cash paid in conjunction with acquisitions,  net of cash acquired                         |       | (3,654                      | )          | (15,879 | ) | (7,823 | ) |
| Purchase of maintenance contracts                                                         |       | —                      |       | (19,751 | ) | — |   |
| Purchases of marketable securities                                                        |       | (536,717                    | )          | (630,699 | ) | (503,119 | ) |
| Sales and maturities of marketable  securities                                            |       | 626,317                     |       | 643,784 |   | 510,374 |   |
| Purchases of property and equipment                                                       |       | (3,724                      | )          | (4,946 | ) | (6,110 | ) |
|                                                                                      |       |                        |       |   |   |   |   |
| Net cash provided by (used in) investing  activities                                      |       | 82,222                      |       | (27,491 | ) | (6,678 | ) |
|                                                                                      |       |                        |       |   |   |   |   |
| **Cash flows from financing activities:**                                                 |       |                        |       |   |   |   |   |
| Principal payments on long-term debt                                                      |       | (1,358                      | )          | (907 | ) | (1,368 | ) |
| Exercise of stock options                                                                 |       | 7,640                       |       | 9,431 |   | 6,968 |   |
| Issuance of treasury shares for employee  stock purchase plan                             |       | 3,946                       |       | 3,659 |   | 6,618 |   |
| Repurchase of common stock                                                                |       | (10,000                     | )          | (40,000 | ) | (15,029 | ) |
| Net cash provided by (used in) financing  activities                                      |       | 228                         |       | (27,817 | ) | (2,811 | ) |
| Increase (decrease) in cash and cash  equivalents                                         |       | 115,348                     |       | (37,475 | ) | 38,423 |   |
| Cash and cash equivalents at beginning of  year                                           |       | 72,396                      |       | 109,871 |   | 71,448 |   |
| Cash and cash equivalents at end of year                                                  |       | $                           | 187,744    |   | $ | 72,396 |   | $ | 109,871 |   |
|                                                                                      |       |                        |       |   |   |   |   |
| Supplemental disclosures:                                                                 |       |                        |       |   |   |   |   |
| Interest paid                                                                             |       | $                           | 11         |   | $ | 39 |   | $ | 133 |   |
| Income taxes refunded                                                                     |       | $                           | (57        | ) | $ | (514 | ) | $ | (3,821 | ) |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

F-6

----

 

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(in thousands, except share and per share data)**

 

**1.****             BusinessDescription**

** **

Lawson Software, Inc. (the “Company”)provides business application software, services and support to specific marketsincluding healthcare, retail, financial services (banking, insurance and otherfinancial services), education, local/state governments, and professionalservices. The Company’s software includes financials, human resources,procurement, healthcare supply chain, distribution, retail operations, serviceprocess optimization, and enterprise performance management applications designedto help manage, analyze and improve its clients’ businesses. The Company’sapplications help automate and integrate critical business processes, aiding incollaboration among its clients and their partners, suppliers and employees. Throughour consulting services we primarily help our clients implement their Lawsonapplications. Through our support services we provide ongoing maintenance andassistance to our clients.

 

The Company is subject to risks and uncertainties, including dependenceon information technology spending by new or existing clients, well-establishedcompetitors, concentration of clients in a limited number of industries,fluctuations of quarterly results, a lengthy and variable sales cycle,dependence on principal products and third-party technology, rapidtechnological change, development of products that gain market acceptance, internationalexpansion and the ability to implement financial controls related to Section 404of Sarbanes Oxley. Additional risks and uncertainties related to the proposedbusiness combination between Lawson and Intentia International AB, include theability to achieve financial and strategic benefits, additional internationalbusiness exposures, management’s ability to manage a more complex organization,effect that the transaction may have on the price of the stock, impact oncompany profitability, and the pressure the combined entity will place on itsworking capital structure. For additional information on the proposed businesscombination between Lawson and Intentia International AB refer to Footnote 18Subsequent Events.

 

**2.****             Summaryof Significant Accounting Policies**

** **

***Basis ofPresentation***

*** ***

The consolidated financial statements include the accounts of theCompany and its wholly-owned branches and subsidiaries operating in Canada, theUnited Kingdom, France, Germany and the Netherlands. All significantintercompany accounts and transactions have been eliminated.

 

***Use of Estimates***

*** ***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America, requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. On an on-going basis, the Companyevaluates its estimates, including those related to revenue recognition,provision for doubtful accounts and sales returns, fair value of investments,fair value of acquired intangible assets and goodwill, useful lives ofintangible assets and property and equipment, income taxes, restructuringobligations and contingencies and litigation, among others. The Company basesits estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities. Actual results could differ from those estimates.

 

***Reclassifications***

*** ***

The accompanying consolidated financial statements for prior fiscalyears contain reclassifications related to dutch auction rate securities toconform prior year’s data to the current presentation. These reclassificationshad no effect on reported earnings. The Company classified its dutchauction rate securities as marketable securities. Such investments had primarily been classifiedas cash and cash equivalents. This change in classification does not affectpreviously reported cash flows.  SeeMarketable Securities below.

 

F-7

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

***Fair Value ofFinancial Instruments***

*** ***

The Company’s financial instruments consist primarily of cash,marketable securities, trade accounts receivable and accounts payable for whichthe current carrying amounts approximate fair market value. Additionally, theborrowing rates currently available to the Company approximate current ratesfor debt agreements with similar terms and average maturities.

 

***Cash Equivalents***

*** ***

All highly liquid investments with an original maturity of three monthsor less are considered to be cash equivalents. The Company’s cash equivalentsconsist primarily of money market instruments and highly liquid securities of corporationsand municipalities. These investments are denominated in U.S. dollars. Thecarrying amount of cash equivalents approximates fair value due to the shortmaturity of these instruments.

 

***Accounts Receivableand Allowance for Doubtful Accounts***

*** ***

Accounts receivable are initially recorded at fair value upon the saleof software licenses or services to clients. The Company maintains an allowancefor doubtful accounts at an amount estimated to be sufficient to provideadequate protection against losses resulting from extending credit to theCompany’s clients. In judging the adequacy of the allowance for doubtfulaccounts, the Company considers multiple factors including historical bad debtexperience, the general economic environment, the need for specific clientreserves and the aging of the Company’s receivables. A considerable amount ofjudgment is required in assessing these factors. If the factors utilized indetermining the allowance do not reflect future performance, then a change inthe allowance for doubtful accounts would be necessary in the period suchdetermination has been made impacting future results of operations. Thisprovision is included in operating expenses as a general and administrativeexpense in the Consolidated Statements of Operations.

 

***MarketableSecurities***

*** ***

The Company accounts formarketable securities in accordance with provisions of “Statement of FinancialAccounting Standards SFAS No. 115”, “*Accounting for CertainInvestments in Debt and Equity Securities*”. SFAS No. 115 addressesthe accounting and reporting for investments in fixed maturity securities andfor equity securities with readily determinable fair values. Managementdetermines the appropriate classification of debt securities at the time ofpurchase and reevaluates such designation as of each balance sheet date.Currently, all marketable securities held by the Company are classified asavailable-for-sale. Available-for-sale securities are carried atfair value as determined by quoted market prices, with unrealized gains andlosses, net of tax, reported as a separate component of stockholders’ equity.If an unrealized loss for any investment is considered to beother-than-temporary, the loss will be recognized in the ConsolidatedStatements of Operations in the period the determination is made. The costbasis of securities sold is determined using the specific identificationmethod. Interest and dividends on securities classified as available-for-saleare included in interest income. As of May 31, 2005, $43.1 millionof total investments mature within one year and $3.8 million mature beyondone year and within two years. Gross gains and gross losses resulting from thesale of securities classified as available-for-sale included in theConsolidated Statements of Operations for the years ended May 31, 2005, 2004, and 2003and were not significant.

 

F-8

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

As of May 31, 2005 and 2004,the Company’s debt and marketable securities were as follows:

 
| ** **                          | ** ** | **May 31, 2005** | ** **                 | **May 31, 2004** | ** **                           |
|-------------------------------------|------------|----------------------------|----------------------------|----------------------------|--------------------------------------|
| ** **                          | **Cost**   | ** **                 | **Aggregate  Fair  Value** | ** **                 | **Net  Unrealized  Gains  (Losses)** | ** ** | **Cost** | ** ** | **Aggregate  Fair  Value** | ** ** | **Net  Unrealized  Gains  (Losses)** | ** ** |
| State and local municipalities debt |       | $                          | 3,535                      |                       | $                                    | 3,511 |   | $ | (24 | ) | $ | 133,633 |   | $ | 133,586 |   | $ | (47 | ) |
| US Agency                           |       | 6,492                      |                       | 6,505                      |                                 | 13 |   | — |   | — |   | — |   |
| Corporate debt                      |       | 36,855                     |                       | 36,853                     |                                 | (2 | ) | 3,000 |   | 3,000 |   | — |   |
| Total                               |       | $                          | 46,882                     |                       | $                                    | 46,869 |   | $ | (13 | ) | $ | 136,633 |   | $ | 136,586 |   | $ | (47 | ) |
| Current                             |       | $                          | 43,123                     |                       | $                                    | 43,099 |   | $ | (24 | ) | $ | 128,086 |   | $ | 128,065 |   | $ | (21 | ) |
| Non-current                         |       | $                          | 3,759                      |                       | $                                    | 3,770 |   | $ | 11 |   | $ | 8,547 |   | $ | 8,521 |   | $ | (26 | ) |

 

**Revision in the Classification of CertainSecurities**

 

During fiscal 2005,the Company concluded that it was appropriate to classify its dutch auction rate securities as marketable securities.Dutch auction rate securities are investments that are typically backed bypreferred stock or long-term, variable-rate debt instruments whose interestrates are reset at predetermined short-term intervals through a dutch auction process. Previously, such investments hadprimarily been classified as cash and cash equivalents. Accordingly, theCompany has revised the classification to report these securities as marketablesecurities in the Consolidated Balance Sheet for the fiscal year ended May 31, 2004.The Company has also made corresponding adjustments to the Consolidated Statementof Cash Flows for fiscal 2004 and 2003, to reflect the grosspurchases and sales of these securities as investing activities rather than asa component of cash and cash equivalents. This change in classification doesnot affect previously reported cash flows from operations or from financingactivities in the Company’s previously reported Consolidated Statements of CashFlows, or the Company’s previously reported Consolidated Statements ofOperations for any period.

 

At May 31, 2005and May 31, 2004, the Company held $34.3 million and $110.3 million,respectively of dutch auction rate securitiesclassified within marketable securities as available-for-sale. As of May 31, 2005and May 31, 2004, $0 and $3.0 million of dutchauction rate securities held were classified as long-term marketable securitiesas the reset dates were longer than 365 days. The Company’s investments inthese securities are recorded at cost, which approximates fair market value dueto their variable interest rates, which typically reset every 7 to 49 days,and, despite the long-term nature of their stated contractual maturities, theCompany believes it has the ability to quickly liquidate these securities. As aresult, the Company had no cumulative gross unrealized holding gains (losses)or gross realized gains (losses) from these investments. All income generatedfrom these investments was recorded as interest income.

 

***Property andEquipment***

*** ***

Property and equipment includes equipment and office furniture, whichis stated at cost less accumulated depreciation. Depreciation is computed usingthe straight-line approach over the estimated useful lives of the assets, whichgenerally range from one to seven years. Property and equipment also includes leasehold improvements which is stated at cost lessaccumulated amortization. Amortization is computed over the shorter of theeconomic life or the term of the underlying facility lease, which generallyranges from three to sixteen years. Depreciation and amortization expense was$7.3 million, $9.0 million, and $11.6 million for the yearsended May 31, 2005, 2004, and 2003, respectively.

 

***LeaseObligations***

*** ***

The Company recognizeslease obligations with scheduled rent increases over the term of the lease on astraight-line basis in accordance with Financial Accounting Standards BoardTechnical Bulletin 85-3 “Accounting for Operating Leases with Scheduled RentIncreases.” Accordingly, the total amount of base rentals over the term of theCompany’s leases is

 

F-9

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

chargedto expense on a straight-line method, with the amount of rental expense inexcess of lease payments recorded as a deferred rent liability. As of May 31, 2005and 2004, the Company has deferred rent liabilities of $2.0 millionand $1.9 million, respectively, all of which are classified in other long-termliabilities. 

 

***Revenue Recognition***

*** ***

The Company recognizes revenues in accordance with the provisions ofthe American Institute of Certified Public Accountants (“AICPA”) Statement ofPosition (“SOP”) 97-2, “*Software RevenueRecognition*”, as amended and SOP 98-9, “*Modificationof SOP 97-2, Software Revenue Recognition, With Respect to CertainTransactions*”, as well as Technical Practice Aids issued from timeto time by the AICPA, and in accordance with the Securities and ExchangeCommission Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”.The Company licenses software under non-cancelable license agreements andprovides related professional services, including consulting, training, andimplementation services, as well as ongoing client support and maintenance.Consulting, training, and implementation services are generally not essentialto the functionality of the Company’s software products, are sold separatelyand also are available from a number of third-party service providers.Accordingly, revenues from these services are generally recorded separatelyfrom the license fees. Software arrangements which include fixed-fee service components, are recognized as the services are performed andthe costs to provide the related services are expensed as incurred. Softwarearrangements which include services that are essential to the functionality ofthe Company’s software products are recognized using contract accounting usingthe percentage-of-completion methodology based on labor hours input. Thespecific revenue recognition policies of the Company are as follows:

 

*Software LicenseFees*—License fee revenues from end-users arerecognized when the software product has been shipped, provided anon-cancelable license agreement has been signed, there are no uncertaintiessurrounding product acceptance, the fees are fixed or determinable andcollection of the related receivable is considered probable. Provided the abovecriteria are met, license fee revenues from resellers are recognized when thereis a sell-through by a reseller to an end-user. A sell-through is determinedwhen the Company receives an order form from a reseller for a specific end-usersale. The Company does not generally offer rights of return, acceptance clausesor price protection to its clients. In situations where the Company doesprovide rights of return or acceptance clauses, revenue is deferred until theclause expires. Typically, the Company’s software license fees are due within atwelve-month period from the date of shipment. If the fee due from the clientis not fixed or determinable, including payment terms greater than twelvemonths from shipment, revenue is recognized as payments become due and allother conditions for revenue recognition have been satisfied. In softwarearrangements that include rights to multiple software products, specifiedupgrades, maintenance or services, the Company allocates the total arrangementfee among each deliverable using the fair value of each of the deliverablesdetermined using vendor-specific objective evidence. Vendor-specific objectiveevidence of fair value is determined using the price charged when that elementis sold separately. In software arrangements in which the Company has fairvalue of all undelivered elements but not of a delivered element, the residualmethod is used to record revenue. Under the residual method, the fair value ofthe undelivered elements is deferred and the remaining portion of thearrangement fee is allocated to the delivered element(s) and is recognized asrevenue. In software arrangements in which the Company does not have vendor-specificobjective evidence of fair value of all undelivered elements, revenue is deferreduntil fair value is determined or all elements for which the Company does nothave vendor-specific objective evidence of fair value, have been delivered.

 

*Services*—Revenuesfrom training and consulting services are recognized as services are providedto clients. Revenues from maintenance contracts are recognized ratably over theterm of the maintenance agreements. Revenues for client support and maintenancethat are bundled with the initial license fee are deferred based on the fairvalue of the bundled support services and recognized ratably over the term ofthe agreement. Fair value is based on the renewal rate for continued supportarrangements.

 

F-10

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

***Sales Returns andAllowances***

*** ***

Although the Company does not provide a contractual right of return, inthe course of arriving at practical business solutions to various warranty andother claims, the Company has allowed sales returns and allowances. The Companyrecords a provision for estimated sales returns and allowances on licenses inthe same period the related revenues are recorded or when current informationindicates additional amounts are required. These estimates are based onhistorical experience determined by analysis of specific return activity andother known factors.

 

***Research andDevelopment***

*** ***

Expenditures for software research and development are expensed asincurred. Such costs are required to be expensed until the point thattechnological feasibility of the software is established. To date, the timeperiod between the establishment of technological feasibility and completion ofsoftware development has been short, and no significant development costs havebeen incurred during that period. Accordingly, the Company has not capitalizedany software development costs to date. The Company’s software research anddevelopment costs primarily relate to software development during the periodprior to technological feasibility and are charged to operations as incurred.

 

***Advertising Expense***

*** ***

The Company expenses advertising costs as incurred. Advertisingexpenses of $11.3 million, $9.9 million, and $8.8 million werecharged to sales and marketing expenses during the years ended May 31, 2005, 2004,and 2003, respectively.

 

***Income Taxes***

*** ***

The Company provides for income taxes using the liability method underSFAS No. 109, “*Accounting for IncomeTaxes*,” which requires recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements. Under this statement, deferred tax assetsand liabilities are determined based on the difference between the financialstatement and tax basis of assets and liabilities, using enacted tax rates ineffect for the year in which the differences are expected to reverse. Deferredtax assets are reduced by a valuation allowance when it is more likely than notthat some component or all of the deferred tax assets will not be realized. Taxrate changes are reflected in income during the period such changes areenacted.

 

***Concentrations ofCredit Risks***

*** ***

Financial instruments that potentially subject the Company toconcentrations of credit risk consist primarily of cash and cash equivalentsand trade accounts receivable. Cash equivalents consist primarily of moneymarket instruments and highly liquid debt securities of corporations andmunicipalities, with a maturity of three months or less and are readilyconvertible into cash.

 

The Company grants credit to clients in the ordinary course ofbusiness. Concentrations of credit risk with respect to trade accountsreceivable are limited due to the large number of clients comprising the Company’sclient base and their dispersion across different industries and geographicareas. No single client accounted for ten percent or more of revenues forfiscal 2005, 2004 or 2003 or of trade accounts receivable at May 31, 2005or 2004.

 

***ContingentLiabilities***

*** ***

The Company from time totime may have unresolved regulatory, legal and tax matters, as discussedfurther in Note 15. The Company provides for contingent liabilitiesin accordance with SFAS No. 5 “*Accounting forContingencies*” (“SFAS No. 5”). In accordance with SFAS No. 5,a loss contingency is charged to income when (i) it is probable that anasset has been impaired or a liability has been incurred at the date of thefinancial statements and (ii) the amount of the loss can be reasonablyestimated. Disclosure in the notes to the financial statements is required forloss contingencies that do not meet

 

F-11

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

boththose conditions if there is a reasonable possibility that a loss may have beenincurred. Gain contingencies are not recorded until realized. The Companyexpenses all legal costs incurred to resolve regulatory, legal and tax mattersas incurred.

 

Periodically, theCompany reviews the status of each significant matter to assess the potentialfinancial exposure. If a potential loss is considered probable and the amountcan be reasonably estimated as defined by SFAS No. 5, the Company reflectsthe estimated loss in its results of operations. Significant judgment isrequired to determine the probability that a liability has been incurred andwhether such liability can be reasonably estimated. Because of uncertaintiesrelated to these matters, accruals are based on the best information availableat the time. Further, estimates of this nature are highly subjective, and thefinal outcome of these matters could vary significantly from the amounts thathave been included in the accompanying consolidated financial statements. Asadditional information becomes available, the Company reassesses the potentialliability related to its pending claims and litigation and may revise itsestimates accordingly. Such revisions in the estimates of the potentialliabilities could have a material impact on the Company’s results of operationsand financial position.

 

***Long-Lived Assets***

*** ***

In accordance with SFAS No. 144 “*Accountingfor the Impairment or Disposal of Long-Lived Assets*”, the Companyreviews long-lived assets for impairment whenever events or changes incircumstances indicate the carrying amount may not be recoverable. Events orchanges in circumstances that indicate the carrying amount may not berecoverable include, but are not limited to, a significant decrease in themarket value of the business or asset acquired, a significant adverse change inthe extent or manner in which the business or asset acquired is used or asignificant adverse change in the business climate. If such events or changesin circumstances are present, the undiscounted cash flows method is used todetermine whether the asset is impaired. Cash flows would include the estimatedterminal value of the asset and exclude any interest charges. To the extent thecarrying value of the asset exceeds the undiscounted cash flows over theestimated remaining life of the asset, the impairmentis measured using the discounted cash flows. The discount rate utilized wouldbe based on management’s best estimate of the related risks and return at thetime the impairment assessment is made.

 

***Goodwill and OtherIntangible Assets***

*** ***

The changes in the carrying amount of goodwill for the year ended May 31, 2005and 2004 are as follows:

 
| ** **                              | ** ** | **May 31,** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Balance as of the beginning of the year |       | $                | 43,042     |   | $ | 31,410 |   |
| Goodwill acquired during the year       |       | —           |       | 9,699 |   |
| Contingent consideration earned         |       | 496              |       | 1,075 |   |
| Currency translation effect (loss) gain |       | (131             | )          | 858 |   |
| Balance as of the end of the year       |       | $                | 43,407     |   | $ | 43,042 |   |

 

Acquired intangible assets subject to amortization are as follows:

 
| ** **             | ** ** | **May 31, 2005**   | ** ** | **May 31, 2004**    | ** ** |
|------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Maintenance contracts  |       | $                            | 22,940     |                          | $          | 4,316 |   | $ | 18,624 |   | $ | 22,940 |   | $ | 324 |   | $ | 22,616 |   |
| Acquired technology    |       | 14,234                       |       | 8,417                         |       | 5,817 |   | 14,272 |   | 5,183 |   | 9,089 |   |
| Client lists           |       | 11,217                       |       | 3,879                         |       | 7,338 |   | 11,254 |   | 2,594 |   | 8,660 |   |
| Non-compete agreements |       | 628                          |       | 468                           |       | 160 |   | 632 |   | 230 |   | 402 |   |
|                   |       | $                            | 49,019     |                          | $          | 17,080 |   | $ | 31,939 |   | $ | 49,098 |   | $ | 8,331 |   | $ | 40,767 |   |

 

F-12

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

Intangible assets are amortized on a straight-line basis over theestimated periods benefited, generally three to five years for acquiredtechnology, four to ten years for client lists, and the term of the agreementfor non-compete agreements. Intangible assets for maintenance contracts are amortizedunder an accelerated amortization schedule, over the estimated term of theagreements based on the estimated revenue for the applicable period in relationto the total estimated revenue. Amortization expense for the three years ended May 31, 2005, 2004and 2003 was $8.8 million, $4.3 million and $2.4 million,respectively. Amortization expense is reported in cost of license fees, cost ofservices and amortization of acquired intangibles, in the accompanyingConsolidated Statements of Operations.

 

The estimated future annual amortization expense for identifiedintangible assets is as follows:

 
| 2006       |   | $     | 8,633  |   |
|------------|--------|-------|--------|--------|
| 2007       |   | 6,955 |   |
| 2008       |   | 4,664 |   |
| 2009       |   | 3,637 |   |
| 2010       |   | 3,005 |   |
| Thereafter |   | 5,045 |   |
|       |   | $     | 31,939 |   |

 

The Company accounts for goodwill and other intangible assets inaccordance with the provisions of SFAS No. 142, “*Goodwill andOther Intangible Assets*”. Under SFAS No. 142, goodwill andintangible assets with indefinite lives are not amortized to expense and mustbe reviewed for impairment annually or more frequently if events or changes incircumstances indicate that the asset might be impaired. The first step of thegoodwill impairment test, used to identify potential impairment, compares thefair value of a reporting unit with its carrying amount, including goodwill.The Company operates as one reporting unit and therefore compares the bookvalue to the market value. Market value is determined utilizing our marketcapitalization plus a control premium. If the market value exceeds the bookvalue, goodwill is considered not impaired, thus the second step of theimpairment test is not necessary. If the Company’s book value exceeds themarket value, the second step of the goodwill impairment test shall beperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test, used to measure the amount of impairment loss,compares the implied fair value of the goodwill with the book value of thegoodwill. If the carrying value of the goodwill exceeds the implied fair valueof the goodwill, an impairment loss would be recognized in an amount equal tothe excess. Any loss recognized cannot exceed the carrying amount of goodwill.After a goodwill impairment loss is recognized, the adjusted carrying amount ofgoodwill is its new accounting basis. Subsequent reversal of a previouslyrecognized goodwill impairment loss is prohibited once the measurement of thatloss is completed. The Company completed the annual goodwill impairmentassessment as of May 31, 2005 and 2004, upon which no impairment wasrecorded. As of May 31, 2005 and 2004, approximately $15.5 millionand $15.2 million of the Company’s goodwill relates to the Numbercraft,Armature, Closedloop and ijob, Inc. acquisitions and is expected to be taxdeductible.

 

***Stock-BasedCompensation***

*** ***

The Company accounts for stock-based employee compensation arrangementsin accordance with the provisions of Accounting Principles Board Opinion No. 25,“*Accounting for Stock Issued to Employees*”,and complies with the disclosure provisions of SFAS No. 123, “*Accounting for Stock-Based Compensation*” and SFAS No. 148“*Accounting for Stock-Based Compensation-Transitionand Disclosure-an amendment of Financial Accounting Standards Board (“FASB”)Statement No. 123*”.

 

The Company has adopted the disclosure-only provisions of SFAS No. 123.For purposes of the pro forma disclosures below, the estimated fair value ofthe options is amortized to expense over the options’ vesting period. Had 

 

F-13

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

compensation cost for the Company’s stock options been recognized basedon the fair value at the grant date consistent with the provisions of SFAS No. 123,the Company’s net income (loss) would have been adjusted to the pro formaamounts as indicated below: 

 
| ** **                                                                                                              | ** ** | **Year Ended  May 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                              | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss):                                                                                                      |       |                         |       |   |   |   |   |
| As reported                                                                                                             |       | $                            | 5,262      |   | $ | 7,991 |   | $ | (3,825 | ) |
| Add: Stock-based employee compensation  expense included in reported net income (loss), net of taxes                    |       | 159                          |       | 840 |   | 2,173 |   |
| Deduct: Total stock-based compensation  expense determined under fair value based method for all rewards, net of  taxes |       | (6,768                       | )          | (7,015 | ) | (6,744 | ) |
| Pro forma  net (loss) income                                                                                            |       | $                            | (1,347     | ) | $ | 1,816 |   | $ | (8,396 | ) |
|                                                                                                                    |       |                         |       |   |   |   |   |
| Net income (loss) per share:                                                                                       |       |                         |       |   |   |   |   |
| Basic:                                                                                                                  |       |                         |       |   |   |   |   |
| As reported                                                                                                             |       | $                            | 0.05       |   | $ | 0.08 |   | $ | (0.04 | ) |
| Pro forma                                                                                                               |       | $                            | (0.01      | ) | $ | 0.02 |   | $ | (0.09 | ) |
| Diluted:                                                                                                                |       |                         |       |   |   |   |   |
| As reported                                                                                                             |       | $                            | 0.05       |   | $ | 0.07 |   | $ | (0.04 | ) |
| Pro forma                                                                                                               |       | $                            | (0.01      | ) | $ | 0.02 |   | $ | (0.09 | ) |

 

***Foreign CurrencyTranslation***

*** ***

All assets and liabilities of the Company’s foreign branches andsubsidiaries are translated from local currencies to United States dollars atperiod end rates of exchange, while revenues and expenses are translated at theaverage exchange rate during the period. The functional currency for each ofthe Company’s foreign branches and subsidiaries is the respective localcurrency. Translation adjustments arising from the translation of net assetslocated outside of the United States into United States dollars are recorded asa separate component of stockholders’ equity. The amounts included in the Consolidated Statements of Operationsrelated to foreign currency transactions for the years ended May 31, 2005, 2004,and 2003 were a net gain of $0.1 million, a net loss of $0.8  million, and a net loss of $0.2 million,respectively. 

 

***Comprehensive Income(Loss)***

* *

Comprehensive income (loss) as defined by SFAS No. 130, “*Reporting Comprehensive Income*”, includes net income (loss)and items defined as other comprehensive income (loss). SFAS No. 130requires that items defined as other comprehensive income (loss), such asforeign currency translation adjustments and unrealized gains and losses oncertain marketable securities, be separately classified in the financialstatements. Such items are reported in the Consolidated Statements ofStockholders’ Equity as comprehensive income (loss). 

 

F-14

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

The following table summarizes the componentsof accumulated other comprehensive income (loss), net of income taxes: 

 
| ** **                                                                                                 | ** ** | **Year Ended May 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                                                                                          |       | $                           | 5,262      |   | $ | 7,991 |   | $ | (3,825 | ) |
| Unrealized gain (loss) on  available-for-sale investments, net of taxes (benefit) of $13, $(126) and  $108 |       | 20                          |       | (190 | ) | 146 |   |
| Foreign currency translation adjustment                                                                    |       | (29                         | )          | 1,955 |   | 2,231 |   |
| Other comprehensive (loss) income                                                                          |       | (9                          | )          | 1,765 |   | 2,377 |   |
| Comprehensive income (loss)                                                                                |       | $                           | 5,253      |   | $ | 9,756 |   | $ | (1,448 | ) |

 

***Per Share Data***

*** ***

Net income (loss) per share is computed under the provisions of SFAS No. 128,“*Earnings Per Share*”.Basic earnings per share is computed using net income(loss) and the weighted average number of common shares outstanding. Dilutedearnings per share reflect the weighted average number of common sharesoutstanding plus any potentially dilutive shares outstanding during the period.Potentially dilutive shares consist of shares issuable upon the exercise ofstock options and warrants.

 

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

 
| ** **                                    | ** ** | **Year Ended May 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic earnings per share computation:         |       |                        |       |   |   |   |   |
| Net income (loss)                             |       | $                           | 5,262      |   | $ | 7,991 |   | $ | (3,825 | ) |
| Weighted average common shares—basic     |       | 99,068                      |       | 98,462 |   | 98,165 |   |
| Basic net income (loss) per share             |       | $                           | 0.05       |   | $ | 0.08 |   | $ | (0.04 | ) |
|                                          |       |                        |       |   |   |   |   |
| Diluted earnings per share computation:       |       |                        |       |   |   |   |   |
| Net income (loss)                             |       | $                           | 5,262      |   | $ | 7,991 |   | $ | (3,825 | ) |
|                                          |       |                        |       |   |   |   |   |
| Shares computation:                           |       |                        |       |   |   |   |   |
| Weighted average common shares                |       | 99,068                      |       | 98,462 |   | 98,165 |   |
| Effect of dilutive stock options and warrants |       | 5,555                       |       | 8,538 |   | — |   |
| Weighted average common shares—diluted   |       | 104,623                     |       | 107,000 |   | 98,165 |   |
| Diluted net income (loss) per share           |       | $                           | 0.05       |   | $ | 0.07 |   | $ | (0.04 | ) |

 

Potential dilutive shares of common stock excluded from the diluted netincome (loss) per share computations were 5.6 million, 0.6 millionand 23.1 million for the years ended May 31, 2005, 2004 and 2003,respectively. Certain potential dilutive shares of common stock were excludedfrom the diluted earnings per share computation because their exercise priceswere greater than the average market price of the common shares during theperiod and were therefore not dilutive. Potential dilutive shares of commonstock were excluded from periods with net loss because they were anti-dilutive.

 

***New AccountingPronouncements***

*** ***

InDecember 2004 the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard No. 123 (revised 2004), *Share-Based Payment (“SFAS No. 123(R)”)*.SFAS No. 123(R) requires compensation cost relating to unvestedshare-based payment transactions that are outstanding as of the effective dateand newly issued transactions to be recognized in the financial statements.That cost will be measured based on the fair value of the equity or liabilityinstruments issued. SFAS No. 123(R) covers a wide range of share-basedcompensation arrangements including share

 

F-15

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

options,restricted share plans, performance-based awards, share appreciation rights andemployee share purchase plans. SFAS No. 123(R) supersedes SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS No. 123”), and supersedesAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“Opinion 25”)*.*SFAS No. 123, as originally issued in 1995,established a fair-value-based method of accounting for share-based paymenttransactions with employees. However, SFAS No. 123 permitted entities theoption of continuing to apply the guidance in Opinion 25, as long as thefootnotes to financial statements disclosed what net income would have been hadthe fair-value-based method been used. The Company elected the option ofdisclosure only under SFAS No. 123. In its disclosures, the Company hashistorically used the Black-Scholes option pricing model to determine the fairvalue of its share based compensation arrangements. Upon the adoption of SFAS No. 123(R),the Company will determine whether it will continue to utilize theBlack-Scholes model or adopt some other acceptable model. Public entities willbe required to apply SFAS No. 123(R) as of the first annual reportingperiod that begins after June 15, 2005, which is effective with theCompany’s first quarter of fiscal 2007. Based on the Company’s significantamount of unvested share-based payment awards, the adoption of this statementis anticipated to have a material impact on the Company’s ConsolidatedStatements of Operations, however the Company iscurrently evaluating the impact.  Referto “Stock-Based Compensation” within this footnote for the proforma impacts.

 

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets - An Amendment of APB Opinion No. 29” (“SFAS 153”). Theamendments made by SFAS 153 are based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. Further, the amendments eliminate the narrow exception for nonmonetaryexchanges of similar productive assets and replace it with a broader exceptionfor exchanges of nonmonetary assets that do not have “commercial substance.”The provisions in SFAS 153 are effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005, which iseffective with the Company’s second quarter of fiscal 2006. Adoption ofthis standard is not expected to have a material impact on the Company’sconsolidated financial statements.

 

InMay 2005, the FASB issued SFAS No 154, “Accounting Changes and ErrorCorrections – A replacement of APB Opinion No 20 and FASB Statement No. 30”(“SFAS 154”).  SFAS 154 changes therequirement for the accounting for and reporting of a change in accountingprinciple.  This statement applies to allvoluntary changes in accounting principles and changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. The provisions in SFAS 154 are effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15, 2005,which is effective with the Company’s first quarter of fiscal 2007.  The Company intends to adopt the disclosurerequirements upon the effective date of the pronouncement.  Since this disclosure pronouncement onlyrelates to requirements, the adoption will have no impact on the Company’sconsolidated financial statements.

 

**3.****             Restructuring**

** **

***Fiscal 2005 Restructuring***

*** ***

OnSeptember 28, 2004, the Company approved a plan designed to enhancethe Company’s operating effectiveness and profitability. Under therestructuring plan (Phase I), the Company streamlined structure, consolidatedleadership and reduced long-term costs to realign projected expenses with anticipatedrevenue levels. The plan included the reduction of 107 employees in fiscal 2005in the United States and the United Kingdom, which in accordance with SFAS No. 112,*Employers Accounting for Post Employment Benefits -an amendment of FASB Statements No. 5 and 43(“*SFAS No. 112*”)*, resulted in a charge for severance and related benefitsof $2.9 million, net of a reversal of $0.03 million subsequent to theinitial charge in the year ended May 31, 2005. The reduction includedemployees who worked in operations, marketing, sales, research and development,maintenance and services. Cash payments during fiscal 2005 for the Phase Iplan were $2.9 million. All employee reductions and related cash paymentswere substantially completed as of May 31, 2005. The remaining cashpayments are expected to be completed during fiscal 2006.

 

F-16

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

The following table setsforth the restructuring reserve activity related to the Phase I restructuringplan and the remaining balances as of May 31, 2005, which areincluded in accrued compensation and benefits:

 
| ** **                          | ** ** | **Severance  and related  benefits** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| Phase I provision for restructuring |       | $                                    | 2,998      |   |
| Cash payments                       |       | (2,938                               | )          |
| Adjustments to provision            |       | (31                                  | )          |
| Balance, May 31, 2005     |       | $                                    | 29         |   |

 

AtNovember 30, 2004, the Company also accrued for a restructuring plan(Phase II) that included initiatives to further reduce costs and realignprojected expenses with anticipated revenue levels. It included a reduction of 68employees in the United States and the United Kingdom, and because the Companywas able to determine probability at the end of the second quarter of fiscal 2005,the restructuring resulted in a charge of approximately $2.2 million, netof a reversal of $0.3 million subsequent to the initial charge forseverance and related benefits, in accordance with SFAS No. 112. Thereduction included employees who worked in sales, research and development andservices. Cash payments during fiscal 2005 for the Phase II plan were $2.0 million.All employee reductions and related cash payments were substantially completedas of May 31, 2005. The remaining cash payments are expected to becompleted during fiscal 2006.

 

The following table setsforth the restructuring reserve activity related to the Phase II restructuringplan and the remaining balances as of May 31, 2005, which areincluded in accrued compensation and benefits:

 
| ** **                           | ** ** | **Severance  and related  benefits** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| Phase II provision for restructuring |       | $                                    | 2,467      |   |
| Cash payments                        |       | (2,038                               | )          |
| Adjustments to provision             |       | (315                                 | )          |
| Balance, May 31, 2005      |       | $                                    | 114        |   |

 

***Fiscal 2004 Restructuring***

*** ***

In September 2003,the Company approved a restructuring plan to realign projected expenses withanticipated lower revenue levels and incurred restructuring charges of $2.3 millionfor severence and related benefits. The fiscal 2004 plan resulted in the reductionof 93 employees in the second quarter of fiscal 2004, from variousfunctions including research and development, general and adminstrative andsales and marketing, primarily in the United States. The Company expects thecash payments to be completed in fiscal 2006.

 

The following table setsforth the restructuring reserve activity related to the fiscal 2004restructuring plan and the remaining balances as May 31, 2005, whichare included in accrued compensation and benefits:

 
| ** **                      | ** ** | **Severance  and related  benefits** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| Balance, May 31, 2004 |       | $                                    | 57         |   |
| Adjustments to provision        |       | 5                                    |       |
| Balance, May 31, 2005 |       | $                                    | 62         |   |

 

***Fiscal 2003 Restructuring***

*** ***

In September 2002,the Company approved a restructuring plan to realign projected expenses withanticipated lower

 

F-17

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

revenue levels andincurred restructuring charges of $5.8 million, which included $4.7 millionof severence and related benefits and $1.1 million for the closure andconsolidation of facilities. The plan resulted in the reduction of 244employees in the second quarter of fiscal 2003, from various functionsincluding administrative, professional and managerial in the United States,Canada and Europe. During fiscal 2005, the Company completed itsobligations under the restructuring plan.

 

The followingtable sets forth the restructuring reserve activity related to the fiscal 2003restructuring plan as May 31, 2005:

 
| ** **                      | ** ** | **Severance  and related  benefits** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| Balance, May 31, 2004 |       | $                                    | 128        |   |
| Cash payments                   |       | (29                                  | )          |
| Adjustments to provision        |       | (99                                  | )          |
| Balance, May 31, 2005 |       | $                                    | —     |   |

 

***Fiscal 2002 Restructuring***

*** ***

InMay 2002, the Company approved a restructuring plan in response to thegeneral economic downturn and incurred restructuring charges of $3.3 million,which included $3.0 million for severance related benefits and $0.3 millionfor the closure of a leased office facility. During fiscal 2003, theCompany recorded an additional provision of $0.2 million associated withfinalization of lease termination agreements. The plan resulted in the reductionof 111 employees in various functions including administrative, professional,and managerial, primarily in the United States. The Company completed cashpayments for severance related benefits in fiscal 2003 and facilityclosure related costs are expected to be paid in full during fiscal 2006.

 

Thefollowing table sets forth the restructuring reserve activity related to thefiscal 2002 restructuring plan and the remaining balances as May 31, 2005,which are included in other accrued liabilities:

 
| ** **                      | ** ** | **Facilities** | ** ** |
|---------------------------------|------------|----------------|------------|
| Balance, May 31, 2004 |       | $              | 179        |   |
| Cash payments                   |       | (152           | )          |
| Adjustments to provision        |       | 3              |       |
| Balance, May 31, 2005 |       | $              | 30         |   |

 

**4.****             Acquisitions**

** **

OnJune 2, 2005, the Company announced that it had entered into anagreement to combine with Stockholm, Sweden-based Intentia International AB (“Intentia”)in an all stock transaction. Refer to Note 18, Subsequent Events foradditional information.

 

The following acquisitions were accounted for under the purchase methodof accounting and accordingly, the assets and liabilities acquired wererecorded at their estimated fair values at the effective date of theacquisition and the results of operations have been included in the ConsolidatedStatements of Operations since the acquisition date. In accordance with SFAS No. 142,“*Goodwill and Other Intangible Assets*”goodwill recorded as a result of the acquisition is subject to an annualimpairment test and will not be amortized. These acquisitions are intended toenhance the Company’s focus on targeted vertical markets and to provideadditional value-added products and services to its clients. 

 

On October 15, 2003, the Company acquired all of theoutstanding capital stock of Apexion Technologies, Inc. (“Apexion”) for$8.0 million in cash, net of cash acquired. The excess purchase price overthe fair value of the net tangible assets acquired of $8.6 million wasallocated to the following assets: $2.9 million to acquired technology,$0.2 million to a client list, $0.1 millionto a non-compete clause and $5.4 million to goodwill. The amount ofgoodwill recognized is not tax deductible. The acquired technology, client listand non-compete clause are being amortized on a straight-line basis over their

 

F-18

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

estimated usefullives of four, seven and two years, respectively. Terms of the initial agreementprovide for additional cash payments ranging from zero to $2.0 millioncontingent upon the future performance of Apexion measured annually through November 30, 2005.Any contingent consideration earned is recorded as additional goodwill. As of May 31, 2005no additional consideration had been earned or recorded under this agreement,and the remaining potential contingent consideration was $1.0 million. Apexionprovided materials and equipment logistics solutions for the healthcare industry.

 

On September 30, 2003, the Company acquired all of theoutstanding capital stock of Closedloop Solutions, Inc. (“Closedloop”) for$4.2 million in cash, net of cash acquired. The excess purchase price overthe fair value of the net tangible assets acquired of $5.0 million wasallocated to the following assets: $2.5 million to acquired technology,$0.5 million to a client list, $0.1 millionto a non-compete clause and $1.9 million to goodwill. The amount ofgoodwill recognized is tax deductible. The acquired technology, client list andnon-compete clause are being amortized on a straight-line basis over theirestimated useful lives of four, seven and two years, respectively. Closedloopprovided collaborative budgeting, planning and forecasting solutions usingreal-time, transactional functionality.

 

The following table summarizes the estimated fair values of the assetsacquired and liabilities assumed at the date of the acquisition:

 
| ** **                | ** ** | **September 30,  2003** | ** ** |
|---------------------------|------------|------------------------------|------------|
| Current assets            |       | $                            | 927        |   |
| Intangible assets         |       | 3,100                        |       |
| Goodwill                  |       | 1,922                        |       |
| Total assets acquired     |       | 5,949                        |       |
| Total liabilities assumed |       | (1,709                       | )          |
| Net assets acquired       |       | 4,240                        |       |
| Less cash acquired        |       | (85                          | )          |
| Net cash paid             |       | $                            | 4,155      |   |

 

On July 24, 2003, the Company acquired all of the outstandingcapital stock of Numbercraft Limited (“Numbercraft”) for $3.7 million incash, net of cash acquired and $0.3 million in notes payable. The excesspurchase price over the fair value of the net tangible assets acquired of $4.1 millionwas allocated to the following assets: $0.9 million to acquiredtechnology, $0.6 million to a client list, $0.3 millionto a non-compete clause and $2.3 million to goodwill. The amount ofgoodwill recognized is tax deductible. The acquired technology, client list andnon-compete clause are being amortized on a straight-line basis over theirestimated useful lives of three, four and three years, respectively. Terms ofthe initial agreement provide for additional cash payments ranging from zero to$9.0 million contingent upon the future performance of Numbercraftmeasured periodically through 2007. Any contingent consideration earned isrecorded as additional goodwill. During the fiscal years ended May 31, 2005and May 31, 2004, $0.5 million and $1.1 million ofadditional consideration was earned and recorded as additional goodwill,respectively. This amount and certain elements of the initial purchase pricehave been included in notes payable to the former principals of Numbercraft. Asof May 31, 2005, the remaining potential contingent consideration wasapproximately $5.9 million. Numbercraft provided solutions for retailersand consumer packaged goods companies that enable a quantitative understandingof consumer dynamics, product and offer performance, and client trends.

** **

On June 28, 2002, Lawson Software Limited, a wholly ownedsubsidiary of Lawson Software, Inc. acquired certain assets of ArmatureLimited and Armature Group Limited (collectively, Armature) for approximately$8.1 million. These assets consist of all software applications, relatedtrademarks, technologies, intangibles and certain fixed assets used in Armature’sbusiness. The excess purchase price over the fair value of the net tangibleassets acquired of $7.8 million was allocated to the following assets:$1.6 million to acquired technology, $1.8 million to a client listand $4.4 million to goodwill. The amount of goodwill recognized is taxdeductible. The acquired technology and client list are being amortized on astraight-line basis over their estimated useful lives of five and ten years,respectively. Armature provided merchandising/category management and supplychain management solutions for retailers, consumer goods manufacturers andwholesalers. In connection with the acquisition of Armature, the Companyaccrued severance costs of $0.3 million for

 

F-19

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

one terminatedemployee. Such severance costs were fully paid as of May 31, 2003.

 

The following tablepresents the consolidated results of operations on an unaudited pro forma basisas if the acquisitions of Closedloop and Armature had taken place at thebeginning of the periods presented. Fiscal 2005 includes a full year’seffect of the acquisitions: 

 

| ** **                                 | ** ** | **Year ended May 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **2004**                    | ** ** | **2003** | ** ** |
|                                       |       |                        |       |   |   |
| Total revenues                             |       | $                           | 364,243    |   | $ | 347,027 |   |
| Net income (loss)                          |       | $                           | 7,230      |   | $ | (8,020 | ) |
| Net income (loss) per share – basic   |       | $                           | 0.07       |   | $ | (0.08 | ) |
| Net income (loss) per share – diluted |       | $                           | 0.07       |   | $ | (0.08 | ) |

 

**5.****             Purchaseof Client Maintenance Contracts**

** **

On April 30, 2004, the Company acquired assets consisting ofclient maintenance contracts and client lists from Siemens Medical SolutionsHealth Services Corporation (“Siemens”) for $19.8 million in cash and $4.3 millionin other consideration. Of the total purchase price, $22.9 million wasallocated to the maintenance contracts and is being amortized over theremaining life of the contracts based on estimated periodic contractual revenuerecognized. The purchase price allocated to the client list of $1.0 millionis being amortized on a straight-line basis over 7 years. The remainingpurchase price of $0.2 million in transitional support costs was chargedto cost of services as the services were performed in 2004.

 

The asset purchase agreement was part of an overall restructuring of anexisting partner agreement between the Company and Siemens. Under the assetpurchase agreement, the Company has assumed responsibility for supportingclients using its software applications previously supported by Siemens. Theasset purchase agreement did not qualify as a business combination under thecriteria established in SFAS No. 141 “*Business Combinations*”.

 

**6.****             FinancialStatement Components**

** **

Supplemental disclosures of non-cash investing and financingtransactions:

 

| ** **                                             | ** ** | **May 31,** | ** ** |
|--------------------------------------------------------|------------|------------------|------------|
| ** **                                             | ** ** | **2005**         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Stock option exercises using common stock              |       | $                | 1,147      |   | $ | 70 |   | $ | 1,724 |   |
| Notes payable issued in conjunction with  acquisitions |       | 863              |       | 2,399 |   | — |   |
| Treasury stock exchanged for warrants                  |       | —           |       | 1,428 |   | — |   |
| Assets acquired under capital leases                   |       | —           |       | — |   | 390 |   |
| Assets acquired through settlement of  receivables     |       | —           |       | 2,657 |   | — |   |
|                                                        |            |                  |            |  |  |  |  |  |  |  |

 

F-20

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

Cash paid for acquisitions during the years ended May 31, 2004and 2003:

 

| ** **                     | ** ** | **May 31,** | ** ** |
|--------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Details of acquisitions:       |       |             |       |   |   |
| Fair value of assets           |       | $                | 20,697     |   | $ | 8,140 |   |
| Less liabilities assumed       |       | (4,593           | )          | (317 | ) |
| Cash paid                      |       | 16,104           |       | 7,823 |   |
| Less cash acquired             |       | (225             | )          | — |   |
| Net cash paid for acquisitions |       | $                | 15,879     |   | $ | 7,823 |   |

 

**Fiscal 2005 Acquisition Related Costs**

 

OnJune 2, 2005, the Company announced that it had entered into anagreement to combine with Stockholm, Sweden-based Intentia International AB (“Intentia”)in an all stock transaction. See Note 18 Subsequent Events for additionalinformation. During fiscal 2005, the Company incurred approximately $4.5 millionrelated to the potential combination. Approximately $3.7 million of thesecosts have been deferred as Other Assets on the Company’s Consolidated BalanceSheet as costs associated with the purchase price of Intentia. The Company hasincluded the $3.7 million of directly related costs within cash flows frominvesting activities as cash paid in conjunction with acquisitions in theaccompanying Consolidated Statements of Cash Flows for fiscal 2005.

*** ***

***Accounts Receivable, net***

 

| ** **                            | ** ** | **May 31,** | ** ** |
|---------------------------------------|------------|------------------|------------|
| ** **                            | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Trade accounts receivable             |       | $                | 46,090     |   | $ | 70,869 |   |
| Less: allowance for doubtful accounts |       | (3,183           | )          | (5,633 | ) |
| Accounts receivable, net              |       | $                | 42,907     |   | $ | 65,236 |   |

 
| **Rollforward of the allowance for doubtful  accounts:** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|

 
| Balance, May 31, 2002 |   | $      | 8,243  |   |
|---------------------------------|--------|--------|--------|--------|
| Provision                       |   | 423    |   |
| Write-offs                      |   | (2,839 | )      |
| Recoveries                      |   | 197    |   |
| Translation adjustment          |   | 416    |   |
| Balance, May 31, 2003 |   | 6,440  |   |
| Provision                       |   | 3,317  |   |
| Write-offs                      |   | (5,166 | )      |
| Recoveries                      |   | 741    |   |
| Translation adjustment          |   | 301    |   |
| Balance, May 31, 2004 |   | 5,633  |   |
| Provision                       |   | 1,141  |   |
| Write-offs                      |   | (4,083 | )      |
| Recoveries                      |   | 475    |   |
| Translation adjustment          |   | 17     |   |
| Balance, May 31, 2005 |   | $      | 3,183  |   |

 

F-21

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

***Property and Equipment, Net***

 
| ** **                                      | ** ** | **May 31,** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **2005**         | ** ** | **2004**   | ** ** | **Useful Lives** | ** ** |
| Equipment                                       |       | $                | 45,675     |       | $          | 43,660 |   | 1-5 years |   |
| Office furniture                                |       | 11,252           |       | 11,182     |       | 5-7 years |   |
| Leasehold improvements                          |       | 9,503            |       | 9,492      |       | 3-16 years |   |
|                                            |       | 66,430           |       | 64,334     |       |   |   |
| Less accumulated depreciation and  amortization |       | (52,856          | )          | (47,099    | )          |   |   |
|                                            |       | $                | 13,574     |       | $          | 17,235 |   |   |   |

 

***Deferred Revenue and Client Deposits***

 
| ** **                                                 | ** ** | **May 31,** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Services                                                   |       | $                | 69,709     |   | $ | 75,615 |   |
| License                                                    |       | 8,146            |       | 9,175 |   |
| Total deferred revenue and client deposits                 |       | 77,855           |       | 84,790 |   |
| Less current portion                                       |       | (76,571          | )          | (83,095 | ) |
| Long-term portion of deferred revenue and  client deposits |       | $                | 1,284      |   | $ | 1,695 |   |

** **

**7.****             Long-TermDebt**

** **

Long-term debt consists of:

 
| ** **                                                                                                                                                                    | ** ** | **May 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Note payable associated with  Numbercraft acquisition, interest at variable rate due in installments  payable in December 2005 and July 2006                   |       | $                | 1,836      |   | $ | 2,399 |   |
| Capital leases—payments annually through  November 2004. As of May 31, 2004, future minimum lease  payments were $243 excluding $7, representing interest |       | —           |       | 243 |   |
|                                                                                                                                                                          |       | 1,836            |       | 2,642 |   |
| Less current maturities                                                                                                                                                       |       | (1,836           | )          | (1,652 | ) |
| Total Long-term debt                                                                                                                                                          |       | $                | —     |   | $ | 990 |   |

 

**8.****             CommonStock**

 

In June 2003, the Company’s Board of Directors authorized the repurchaseof up to $50.0 million of its common shares. Shares were repurchased from timeto time as market conditions warranted either through open market transactions,block purchases, private transactions or other means. No time limit was set forthe completion of the program.  During fiscal 2004,a total of 4.9 million shares were repurchased for $40.0 million incash and $0.1 million in non-cash transactions. During fiscal 2005,the Company completed the authorized stock purchase plan by purchasing 1.4 millionshares for $10.0 million in cash. 

 

Cash proceeds obtained from the maturities of marketable securities,the exercise of employee stock options and contributions to the employee stockpurchase plan, largely funded the share repurchases. The repurchased commonshares are

 

F-22

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

recorded astreasury stock and result in a reduction of stockholders’ equity. The shares willbe used for general corporate purposes.

 

**9.****             Shareholder RightsPlan**

** **

On July 26, 2004, the Company’sBoard of Directors adopted a Shareholder Rights Plan in which preferred stockpurchase rights were distributed as a non-taxable dividend at the rate of oneRight for each share of Common Stock held as of the close of business on July 28, 2004.Each Right will entitle stockholders to buy one-one hundredth of a newly issuedshare of Series B Junior Participating Stock of the Company at an exerciseprice of $29.00. The Rights will be exercisable only if a person or group,other than an exempted person, acquires beneficial ownership of, or makes atender for, 15 percent or more of the Company’s outstanding Common Stock.

 

If any person, other than an exempted person becomes the beneficialowner of 15 percent or more of the Company’s outstanding Common Stock,each Right not owned by such person or certain related parties will entitle itsholder to purchase at the Right’s then current exercise price shares of theCompany’s Common Stock having a market value equal to twice the then currentexercise price. In addition, if after a person becomes the beneficial owner of15 percent or more of the Company’s outstanding Common Stock, the Companyis involved in a merger or other business combination transaction with anotherperson after which its Common Stock does not remain outstanding, or sells 50 percentor more of its assets or earning power to another person, each Right will entitleits holder to purchase at the Right’s then current exercise price shares ofcommon stock of such other person having a market value equal to twice the thencurrent exercise price.

 

The Company’s Board of Directors will be entitled to redeem the Rightsat $0.01 per Right at any time prior to a person or group acquiring 15 percentor more of the Company’s Common Stock. Otherwise, the Rights will expire on July 28, 2014.

 

On June 2, 2005, the Company announced a proposed businesscombination with Intentia International AB. See Note 18, Subsequent Eventsfor additional information on the proposed business combination. The Companyamended the Shareholder Rights Plan on June 2, 2005 so that theannounced transactions with Intentia and its affiliates will be exempt and willnot cause any distribution of Rights under the plan.

 

**10.****          StockOption Plans**

** **

The Company’s 1996 Stock Incentive Plan reserves a total of 27.7 millionshares of common stock for issuance of stock options to employees. In addition,the Company has also historically granted to employees individual stockoptions, which were not under a stock option plan. The total number of stockoptions outstanding outside the stock option plan were 0.5 million, 0.9 millionand 1.4 million at May 31, 2005, 2004 and 2003,respectively. Option grants may be of incentive or non-qualified stock optionsfor the purchase of shares of the Company’s common stock at exercise pricesdetermined by the Company’s Board of Directors. Generally, options granted toemployees vest over a four-year to six-year period and expire ten years afterthe date of grant. Prior to the initial public offering, the Companyhistorically determined the exercise price of stock options granted byreference to the most recent independent valuation performed in conjunctionwith the Company’s ESOP. After the initial public offering, the Companydetermines the exercise price using the closing market value.

 

The 2001 Stock Incentive Plan provides for the granting of stockoptions, including incentive stock options and non-qualified stock options,restricted stock, performance awards and other stock-based awards. There were 35.0 millionshares of the Company’s common stock reserved for issuance under the plan.

 

F-23

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

The following summarizes employee stock option activity under andoutside of the plan:

 
| ** **                          | ** ** | ** **    | ** ** | ** **   | ** ** | **Weighted–** | ** ** |
|-------------------------------------|------------|---------------|------------|--------------|------------|--------------------|------------|
| ** **                          | ** ** | ** **    | ** ** | **Range of** | ** ** | **Average**        | ** ** |
| ** **                          | ** ** | **Number**    | ** ** | **Exercise** | ** ** | **Exercise**       | ** ** |
| ** **                          | ** ** | **of Shares** | ** ** | **Price**    | ** ** | **Price**          | ** ** |
| Outstanding, May 31, 2002 |       | 22,450        |       | $0.54-$16.26 |       | $                  | 2.22       |   |
| Canceled                            |       | (1,355        | )          | $1.87-$14.00 |       | $                  | 3.34       |   |
| Granted at fair market value        |       | 3,789         |       | $3.99-$6.24  |       | $                  | 5.26       |   |
| Exercised                           |       | (4,181        | )          | $0.59-$5.20  |       | $                  | 1.66       |   |
| Outstanding, May 31, 2003 |       | 20,703        |       | $0.54-$16.26 |       | $                  | 2.83       |   |
| Canceled                            |       | (786          | )          | $2.25-$14.00 |       | $                  | 5.74       |   |
| Granted at fair market value        |       | 4,078         |       | $5.09-$9.77  |       | $                  | 7.08       |   |
| Exercised                           |       | (4,586        | )          | $0.54-$8.10  |       | $                  | 2.07       |   |
| Outstanding, May 31, 2004 |       | 19,409        |       | $0.54-$16.26 |       | $                  | 3.77       |   |
| Canceled                            |       | (1,782        | )          | $2.25-$16.26 |       | $                  | 6.54       |   |
| Granted at fair market value        |       | 2,574         |       | $5.72-$9.77  |       | $                  | 6.17       |   |
| Exercised                           |       | (3,229        | )          | $0.54-$6.49  |       | $                  | 2.37       |   |
| Outstanding, May 31, 2005 |       | 16,972        |       | $0.54-$16.26 |       | $                  | 4.11       |   |

 

Stock options exercisable at May 31, 2005, 2004, and 2003were 12.1 million, 12.4 million, and 13.6 million, respectively.

 

The following table summarizes fixed-price stock options outstanding atMay 31, 2005:

 
| ** **                   | ** ** | **Options Outstanding**            | ** ** | **Options Exercisable**                                    | ** ** |
|------------------------------|------------|------------------------------------|------------|------------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  of Shares  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual  Life (Yrs)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  of Shares  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $0.54 -$0.59                 |       | 564                                |       | 1.00                                                       |       | $ | 0.55 |   | 564 |   | $ | 0.55 |   |
| $1.23 - $1.87                |       | 142                                |       | 2.41                                                       |       | $ | 1.40 |   | 142 |   | $ | 1.40 |   |
| $2.25 - $2.32                |       | 6,733                              |       | 4.94                                                       |       | $ | 2.26 |   | 6,420 |   | $ | 2.26 |   |
| $2.97                        |       | 1,810                              |       | 5.92                                                       |       | $ | 2.97 |   | 1,810 |   | $ | 2.97 |   |
| $3.99 - $6.87                |       | 5,643                              |       | 8.28                                                       |       | $ | 5.79 |   | 2,358 |   | $ | 5.55 |   |
| $7.08 - $9.77                |       | 2,038                              |       | 8.46                                                       |       | $ | 7.56 |   | 757 |   | $ | 7.52 |   |
| $14.00                       |       | 42                                 |       | 6.26                                                       |       | $ | 14.00 |   | 38 |   | $ | 14.00 |   |
| $0.54 - $14.00               |       | 16,972                             |       | 6.43                                                       |       | $ | 4.71 |   | 12,089 |   | $ | 3.28 |   |

 

There was no deferred compensation relating to stock options grantedbelow fair market value in the years ended May 31, 2005, 2004, and 2003.Compensation expense recognized relating to stock options granted below fairmarket value in prior years was $0.3 million, $1.4 million, and $3.6 millionduring the years ended May 31, 2005, 2004, and 2003,respectively.

 

See Summary of Significant Accounting Policies in the Notes toConsolidated Financial Statements for the impact of stock based compensation onpro forma net income (loss) and net income (loss) per share.

 

F-24

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions and results:

 
| ** **                                         | ** ** | **2005** | ** ** | **2004**     | ** ** | **2003**     | ** ** |
|----------------------------------------------------|------------|----------|------------|--------------|------------|--------------|------------|
| Dividend yield                                     |       | —   |       | —       |       | —       |       |
| Risk free interest rate                            |       | 3.6      | %          | 3.6          | %          | 3.7          | %          |
| Expected life                                      |       | 5 years  |       | 5 years |       | 5 years |       |
| Expected volatility                                |       | 56.0     | %          | 65.0         | %          | 75.0         | %          |
| Estimated fair value of options granted per  share |       | $        | 3.17       |         | $          | 4.08         |       | $ | 3.34 |   |
|                                                    |            |          |            |              |            |              |            |  |  |  |

** **

**11.****          StockWarrants Issued to Non-Employees**

** **

At May 31, 2005, the Company had one outstanding fully vestedstock warrant. The warrant, issued in fiscal 2000 with a five-year life,expired July 18, 2005 and allowed the holder to purchase 1.0 millionshares of the Company’s common stock at an exercise price of $4.64 per share. OnJuly 18, 2005, the warrant issued was exercised on a net basis,resulting in the issuance of 0.1 million shares of common stock fromtreasury, which resulted in a $0.3 million reduction to additional paid-incapital in the first quarter of fiscal 2006.

 

In January 2004, a stock warrant issued in 2000, with afour-year life was exercised by its holder. The warrant allowed the holder topurchase 1.2 million shares of the Company’s common stock at an exerciseprice of $4.64. The warrant was exercised on a net basis, resulting in theissuance of 0.6 million shares of common stock from treasury, whichresulted in a $1.4 million reduction to additional paid-in capital.

 

**12.****          ProfitSharing and 401(k) Retirement Plan**

** **

The Company has a defined contribution profit sharing plan, whichconforms to IRS provisions for 401(k) plans. Employees are eligible toparticipate in the plan upon employment and are eligible for the Company matchafter completing one year of service. Participants may contribute up to 15% oftheir gross earnings to the plan. The Company matches 50% of the first 4% ofemployee contributions and may make additional contributions as determined bythe Board of Directors. The Company recorded 401(k) matching contributionexpense of approximately $2.2 million, $2.4 million, and $2.3 millionfor the years ended May 31, 2005, 2004, and 2003,respectively.

 

**13.****          EmployeeStock Purchase Plan**

** **

In February 2001, the stockholders of the Company approved the 2001Employee Stock Purchase Plan, which was effective as of the Company’s initialpublic offering. The purchase plan is intended to qualify as an employee stockpurchase plan within the meaning of Section 423 of the Internal RevenueCode of 1986, as amended. The plan allows eligible employees to purchase commonstock at a price equal to 85% of the lower of the fair market value of thecommon stock at the beginning or end of the offering period, which commences oneach January 1st and July 1st. The plan will terminate when all ofthe shares reserved under the plan have been purchased or five years from theeffective date unless the Board of Directors resolves to extend the purchaseplan for one or more additional periods of five years each. There are 20.8 millionshares of the Company’s common stock reserved for issuance under the plan, ofwhich 18.1 million shares were available for issuance as of May 31, 2005.Shares issued under this plan were 0.7 million,0.6 million, and 1.4 million shares in the years ended May 31, 2005, 2004,and 2003, respectively.

 

F-25

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

**14.****          IncomeTaxes**

** **

The provision (benefit) for income taxes consists of the followingcomponents:

 
| ** ** | ** ** | **Year Ended May 31,** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:   |       |                        |       |   |   |   |   |
| Federal    |       | $                           | 5,376      |   | $ | 9,552 |   | $ | (3,968 | ) |
| State      |       | 466                         |       | 2,284 |   | (219 | ) |
| Foreign    |       | 57                          |       | — |   | — |   |
|       |       | 5,899                       |       | 11,836 |   | (4,187 | ) |
| Deferred:  |       |                        |       |   |   |   |   |
| Federal    |       | (3,050                      | )          | (4,604 | ) | 1,434 |   |
| State      |       | 6                           |       | 91 |   | 307 |   |
|       |       | (3,044                      | )          | (4,513 | ) | 1,741 |   |
|       |       | $                           | 2,855      |   | $ | 7,323 |   | $ | (2,446 | ) |

 

A reconciliation of the expected federal income tax provision (benefit)at the statutory rate with the provision for income taxes is as follows:

 
| ** **                                                      | ** ** | **Year Ended May 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Taxes computed at statutory rate                                |       | 35.0                        | %          | 35.0 | % | (35.0 | )% |
| Valuation allowance                                             |       | 4.6                         |       | 7.8 |   | — |   |
| Foreign taxes                                                   |       | 0.4                         |       | 0.2 |   | 0.5 |   |
| Non-deductible expenses                                         |       | 6.8                         |       | 5.1 |   | 15.4 |   |
| State taxes, net of federal benefit                             |       | 3.8                         |       | 3.9 |   | (6.2 | ) |
| Tax exempt income, including  extraterritorial income exclusion |       | (9.7                        | )          | (4.9 | ) | (13.8 | ) |
| Tax credits                                                     |       | (5.7                        | )          | (1.5 | ) | (2.9 | ) |
| Other, net                                                      |       | —                      |       | 2.2 |   | 3.0 |   |
|                                                            |       | 35.2                        | %          | 47.8 | % | (39.0 | )% |

 

F-26

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

Temporary differences comprising net deferred tax assets are asfollows:

 
| ** **                       | ** ** | **May 31,** | ** ** |
|----------------------------------|------------|------------------|------------|
| ** **                       | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Current:                         |       |             |       |   |   |
| Allowance for doubtful accounts  |       | $                | 1,241      |   | $ | 2,197 |   |
| Accrued compensation             |       | 3,326            |       | 7,981 |   |
| Accrued liabilities and other    |       | 2,075            |       | 1,917 |   |
| Deferred revenue                 |       | 2,672            |       | 3,216 |   |
| Total current                    |       | $                | 9,314      |   | $ | 15,311 |   |
|                             |       |             |       |   |   |
| Noncurrent:                      |       |             |       |   |   |
| Depreciation and amortization    |       | $                | (1,821     | ) | $ | (3,735 | ) |
| Stock-based compensation         |       | 5,481            |       | 5,980 |   |
| Accrued liabilities and other    |       | 558              |       | 396 |   |
| Deferred revenue                 |       | 501              |       | 661 |   |
| Deferred rent                    |       | 707              |       | 678 |   |
| Net operating loss carryforwards |       | 35,410           |       | 29,051 |   |
| Tax credit carryforwards         |       | 2,121            |       | 1,538 |   |
| Subtotal                         |       | 42,957           |       | 34,569 |   |
| Valuation allowance              |       | (21,572          | )          | (22,225 | ) |
| Total noncurrent                 |       | $                | 21,385     |   | $ | 12,344 |   |

 

As of May 31, 2005, the Company had federal tax loss carryforwardsof approximately $39.6 million representing a $13.8 million deferredtax asset. The federal tax loss carryforwards will expire in 2019 through 2025,if not utilized. There was no valuation allowance related to this deferred taxasset as of May 31, 2005.

 

As of May 31, 2005, the Company had state tax losscarryforwards of approximately $47.7 million representing a $1.9 milliondeferred tax asset. The state tax loss carryforwards will expire in 2005through 2025, if not utilized. The Company had provided a partial valuationallowance of $1.1 million as of May 31, 2005, primarily relatedto certain acquired deferred income tax assets, due to the uncertainty inrealization prior to expiration.

 

As of May 31, 2005, the Company had foreign tax loss carryforwardsof approximately $65.4 million representing a $19.7 million deferredtax asset. The Company has provided a full valuation allowance related to thesedeferred tax assets due to the uncertainty in realization. The majority of theforeign tax loss carryforwards are available indefinitely.

 

As of May 31, 2005, the Company had other federal and state taxcredit and carryforwards of approximately $3.7 million representing a $2.7 milliondeferred tax asset. The federal and state credits and carryforwards will expirein 2005 through 2025, if not utilized. The Company has provided a partialvaluation allowance of $0.8 million as of May 31, 2005 due tothe uncertainty in realization prior to expiration.

 

As of May 31, 2005 and May 31, 2004, theConsolidated Balance Sheets include net deferred tax assets in the amount of$30.7 million and $27.7 million, respectively. The Company’smethodology for determining the realizability of its deferred tax assetsinvolves estimates of future taxable income from its core business, theestimated impact of future stock option deductions from outstanding stockoptions, and the expiration dates and amounts of net operating losscarryforwards and other tax credits. These estimates are projected through thelife of the related deferred tax assets based on assumptions which managementbelieves to be reasonable and consistent with current operating results.

 

Although the Company had cumulative pre-tax income for financialreporting purposes for the three years ended May 31, 2005, theCompany did not pay any significant income taxes over that period because taxdeductions from the exercise of stock options granted prior to the Company’sinitial public offering generated tax operating losses for the years ended May 31, 2005, 2004and 2003. In assessing the realizability of its deferred tax assets as of May 31, 2005,the Company

 

F-27

----

**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

consideredevidence regarding its ability to generate sufficient future taxable income torealize its deferred tax assets. The primary evidence considered included thecumulative tax operating loss for the past three years; the cumulative pre-taxincome for financial reporting purposes for the past three years; the estimatedimpact of future tax deductions from the exercise of stock options outstandingas of May 31, 2005; and the estimated future taxable income based onhistorical operating results.

 

After giving consideration to these factors, the Company concluded thatit was more likely than not that tax loss carryforwards and other tax creditsthat expire within the next ten years will not be utilized primarily due to theestimated future tax deductions from the exercise of stock options outstandingas of May 31, 2005. As a result, for the year ended May 31, 2005,the Company established a valuation allowance through the provision for incometaxes of $0.4 million for certain deferred tax assets associated primarilywith federal contribution carryforwards and state net operating losscarryforwards.  For the year ended May 31, 2004,the Company completed its assessment, and recorded a  valuation allowance through theprovision for income taxes of $1.2 million for federal contributioncarryforwards, tax credit carryforwards, and state net operating losscarryforwards.

 

The Company has established a full valuation allowance against itsforeign tax operating losses, because it was determined that they are notlikely to be realized. As of May 31, 2005, the Company had recordedan accumulated valuation allowance of $20.0 million against these losses. 

 

The following summarizes the rollforward ofthe deferred tax asset valuation allowance:

 
| Balance, May 31, 2002     |   | $      | 8,097  |   |
|-------------------------------------|--------|--------|--------|--------|
| Provisions for valuation allowance: |   |   |   |
| Foreign                             |   | 3,430  |   |
| Balance, May 31, 2003     |   | 11,527 |   |
| Provisions for valuation allowance: |   |   |   |
| Domestic                            |   | 1,195  |   |
| Foreign                             |   | 9,503  |   |
| Balance, May 31, 2004     |   | 22,225 |   |
| Provisions for valuation allowance: |   |   |   |
| Domestic                            |   | 364    |   |
| Foreign                             |   | (1,017 | )      |
| Balance, May 31, 2005     |   | $      | 21,572 |   |

 

The Company also concluded that it was more likely than not that the netdeferred tax assets of $30.7 million as of May 31, 2005 as wellas the estimated future tax deductions from the exercise of stock optionsoutstanding as of May 31, 2005 would be utilized prior to expiring ingreater than ten years. Based on this conclusion, the Company would requireapproximately $110.2 million in cumulative future taxable income to begenerated at various times over the next twenty years to realize the relatednet deferred tax assets of $30.7 million as of May 31, 2005 aswell as the estimated future tax deductions from the exercise of stock optionsoutstanding as of May 31, 2005. Additionally, the Company determinedthat it is likely the net deferred tax assets will continue to increase for thenext several years prior to utilization of the tax loss carryforwards and increasein excess of $20.6 million if the stock options outstanding as of May 31, 2005are exercised.

 

In the event that the Company adjusts its estimates of future taxableincome or tax deductions from the exercise of stock options; or the Company’sstock price increases significantly without a corresponding increase in taxableincome, the Company may need to establish an additional valuation allowance,which could materially impact its financial position and results of operations.

 

TheCompany is subject to income tax audits by the IRS, and other tax authorities.These audits usually cover multiple years. Due to varying statutes oflimitation for the commencement of an audit, it may be a number of years beforea particular tax year is free from challenge. As an audit progresses, theCompany assesses the likelihood of adverse outcomes resulting from theseexaminations to determine the adequacy of the provision for income taxes. TheCompany believes it has

 

F-28

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**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

adequatelyprovided for any known adverse income tax audit adjustments.

 

AtMay 31, 2005, the Company had an outstanding receivable of $8.5 millionfrom the IRS related to an operating loss carryback from May 31, 2003.In the first quarter of fiscal 2006, the Company received the $8.5 millionrefund plus interest of $0.4 million. 

 

**15.****          Commitmentsand Contingencies**

** **

***EmploymentAgreements***

*** ***

The Company has entered into various employment agreements with certainexecutives of the Company, which provide for severance payments subject tocertain conditions and events.

 

***Operating Leases***

*** ***

The Company rents office space and certain office equipment underoperating leases. In addition to minimum lease payments, the office leasesrequire payment of a proportionate share of real estate taxes and buildingoperating expenses. Certain lease agreements include escalation clauses. Thetotal amount of base rentals over the term of the Company’s leases is chargedto expense on a straight line method, with the amount of the rental expense inexcess of lease payments recorded as a deferred rent liability. Rent expenseunder operating leases was approximately $14.2 million, $14.4 million,and $16.1 million for the years ended May 31, 2005, 2004,and 2003, respectively.

 

                Future minimum lease payments are summarizedas follows:

 

| 2006                         |   | $      | 8,348  |   |
|------------------------------|--------|--------|--------|--------|
| 2007                         |   | 7,831  |   |
| 2008                         |   | 7,993  |   |
| 2009                         |   | 7,963  |   |
| 2010                         |   | 7,784  |   |
| Thereafter                   |   | 33,215 |   |
| Total minimum lease payments |   | $      | 73,134 |   |

 

***Indemnification andGuarantee Agreements***

*** ***

The Company licenses its software products to customers under end userlicense agreements and to certain resellers or other business partners underbusiness partner agreements. These agreements generally include certainprovisions for indemnifying the customer or business partner against losses,expenses and liabilities from damages that may be awarded against them if oursoftware, or the third-party-owned software the Company resells, is found toinfringe a patent, copyright, trademark or other proprietary right of a third-party.These agreements generally limit the Company’s indemnification obligationsbased on industry-standards and geographical parameters, and give the Companythe right to replace an infringing product. The maximum potential amount offuture payments the Company could be required to make under theseindemnification agreements is unlimited; however, the Company believes itsinternal development processes and other practices limit its exposure under theseindemnification provisions. In addition, the invention and nondisclosureagreements signed by the Company’s employees, assign to it various intellectualproperty rights. The Company has never incurred costs payable to a customer orbusiness partner to defend lawsuits or settle claims related to theseindemnification agreements. As a result, management believes the estimated fairvalue of these agreements is minimal. Accordingly, there are no liabilitiesrecorded for these agreements as of May 31, 2005.

 

The Company enters into services agreements with customers for theimplementation of its software. The Company also may subcontract those servicesto its business partners. From time to time, the Company includes in thoseservices agreements, certain provisions for indemnifying the customer againstlosses, expenses and liabilities from those services, 

 

F-29

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**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

including, for example, personal injury ortangible property damage. Lease agreements and other contracts with the Company’svendors may also impose similar indemnification obligations on the Company forpersonal injury, tangible property damage or other claims. The maximumpotential amount of future payments the Company could be required to make underthese indemnification agreements is unlimited; however, the Company has generalliability and umbrella insurance policies that enable it to recover a portionof certain amounts paid. The Company has never incurred costs payable to acustomer to defend lawsuits or settle claims related to these indemnificationagreements. As a result, management believes the estimated fair value of these agreementsis minimal. Accordingly, there are no liabilities recorded for these agreementsas of May 31, 2005.

 

The Company has arrangements with certain vendors whereby it guaranteesthe expenses incurred by certain of its employees. The term is from executionof the arrangement until cancellation and payment of any outstanding amounts.Unless otherwise limited in the contract, the Company would be required to payany unsettled employee expenses upon notification from the vendor. The maximumpotential amount of future payments the Company could be required to make underthese indemnification agreements is not significant. As a result, managementbelieves the estimated fair value of these agreements is minimal. Accordingly,there are no liabilities recorded for these agreements as of May 31, 2005.

 

When a customer purchases support for the Company’s software products,the Company generally warrants that those products then eligible for supportwill operate materially and substantially as described in the documentationthat is provided with that software. The Company also generally warrants thatits services will be provided by trained personnel and in a professional mannerusing commercially reasonable efforts. If necessary, the Company provides forthe estimated cost of product and service warranties based on specific warrantyclaims and claim history.

 

***Legal***

*** ***

The Company is involved in various claims and legal actions in thenormal course of business. Management is of the opinion that the outcome ofsuch legal actions will not have a significant adverse effect on the Company’sfinancial position, results of operations or cash flows. Notwithstandingmanagement’s belief, an unfavorable resolution of some or all of these matterscould materially affect our future results of operations or cash flows.

 

***ContingentConsideration Agreements***

*** ***

At May 31, 2005, the Company has outstandingcontingent consideration agreements related to acquisitions ranging from zeroto $6.9 million, measured over various periods through fiscal 2007, basedon the acquired company’s future performance. As of May 31, 2005, theremaining potential contingent consideration amounts related to the Apexion andNumbercraft acquisitions were $1.0 million and $5.9 million,respectively.  Contingent considerationearned is paid in cash and recorded as additional goodwill. The Company hassummarized activity related to contingent consideration agreements, sinceinception in the agreement table below:

 

| **Acquisition** | ** ** | **Through**         | ** ** | **Initial  Potential  Contingent  Consideration** | ** ** | **Earned** | ** ** | **Expired** | ** ** | **Remaining  Potential  Contingent  Consideration** | ** ** |
|-----------------|------------|---------------------|------------|---------------------------------------------------|------------|------------|------------|-------------|------------|-----------------------------------------------------|------------|
| Apexion         |       | November, 2005 |       | $                                                 | 2,000      |       | $          | —      |       | $                                                   | 1,000      |   | $ | 1,000 |   |
| Numbercraft     |       | May, 2007      |       | 9,050                                             |       | 1,562      |       | 1,638       |       | 5,850                                               |       |
| Keyola          |       | May, 2005      |       | 3,000                                             |       | —     |       | 3,000       |       | —                                              |       |
| Total           |       |                |       | $                                                 | 14,050     |       | $          | 1,562       |       | $                                                   | 5,638      |   | $ | 6,850 |   |

 

***Other Commitments***

*** ***

In February 2004, the Company entered into an offshore agreementwith a third-party to provide software maintenance services. If the Companyterminates the agreement prior to its initial twenty-four month term, atermination fee will be incurred equal to the sum of the previous six monthsservice charges, estimated to be approximately $1.6 million.

 

F-30

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**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

Management is of the opinion that the agreement will not be terminatedwithin the twenty-four month period.

 

***IBM Agreement***

*** ***

OnMay 9, 2005, the Company and International Business MachinesCorporation (“IBM”) entered into a Master Relationship Agreement (“MRA”) andOEM Software Agreement, both of which took effect on June 1, 2005.Under these agreements, the Company will standardize its business applicationsportfolio on IBM’s open standards-based software and hardware, and thecompanies will jointly market these software solutions. Total commitments underthese agreements are in excess of $6 million over a 3-year term.  The MRA governs the joint marketingactivities and has a three-year term. 

 

Underthe OEM Software Agreement, the Company plans to bundle and distributeWebSphere® and other IBM software products with all of theCompany’s business application products that are designed to operate with theseIBM programs. The Company may sublicense these IBM programs to its currentclients in consideration of a sublicense fee payable to IBM.   Inconsideration of software support provided by IBM for these IBM programs, theCompany has agreed to pay IBM a portion of support fees paid by its clients. Ifthe Company merges with or acquires the capital stock or assets of anotherentity, the Company may include that entity’s products under the OEM SoftwareAgreement under terms to be negotiated between the Company and IBM. The OEMSoftware Agreement has an initial term of three years and may be extended bythe Company for two additional one-year terms. The Company may elect toterminate the OEM Software Agreement for convenience upon 90 days advancenotice to IBM.  

 

***Hackett Group Agreement***

*** ***

On May 9, 2005,the Company and Answerthink, Inc. (“Answerthink”), The Hackett Group, Inc.,a wholly-owned subsidiary of Answerthink (“Hackett”), entered into an AdvisoryAlliance Agreement (the “Agreement”). The Agreement identifies joint programsin which Hackett will provide the Company and its clients and prospectswith, among other things, access to Hackett benchmark tools, bestpractices research and business advisory services in exchange for the paymentof specified program fees. The term of the Agreement commenced on May 9, 2005and continues until May 31, 2008 unless terminated earlier inaccordance with the provisions of the Agreement. The Company and Hackett havethe option to extend the terms of the programs upon mutual written agreement,and Hackett has agreed to provide certain exclusivity rights to the Company inconnection with certain of its programs. 

 

Under the Agreement,the Company has contractually committed to pay Hackett $1.6 million. As ofMay 31, 2005, $1.1  million hasbeen recorded as other accrued liabilities and $0.5  million as otherlong term liabilities in the Consolidated Balance Sheet. The Company will payHackett additional fees when sales volumes meet established criteria throughoutthe term of the contract and will pay an additional $0.5 million in fiscal 2007if the Company elects to participate in specified program initiatives.  

 

**16.****          Segmentand Geographic Areas**

** **

The Company views its operations and manages its business as onereportable segment, the development and marketing of computer software andrelated services. Factors used to identify the Company’s single operatingsegment include the financial information available for evaluation by the chiefoperating decision maker in making decisions about how to allocate resourcesand assess performance. The Company markets its products and services throughthe Company’s offices in the United States and its wholly-owned branches andsubsidiaries operating in Canada, the United Kingdom, France and theNetherlands.

 

F-31

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**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

The following table presents revenues and long-lived assets summarizedby geographic region:

 
| ** **               | ** ** | **Year Ended May 31,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                |       |                        |       |   |   |   |   |
| Domestic operations      |       | $                           | 317,937    |   | $ | 340,318 |   | $ | 322,986 |   |
| International operations |       | 17,247                      |       | 23,265 |   | 21,332 |   |
| Consolidated             |       | $                           | 335,184    |   | $ | 363,583 |   | $ | 344,318 |   |
|                     |       |                        |       |   |   |   |   |
| ** **               | ** ** | **May 31,**            | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2005**                    | ** ** | **2004** | ** ** | ** ** | ** ** |
| Long-lived assets:       |       |                        |       |   |   |   |   |
| Domestic operations      |       | $                           | 73,925     |   | $ | 84,482 |   |   |   |
| International operations |       | 14,995                      |       | 16,562 |   |   |   |
| Consolidated             |       | $                           | 88,920     |   | $ | 101,044 |   |   |   |

 

The following table presents revenues for license fees, maintenance andconsulting services:

 
| ** **              | ** ** | **Year Ended May 31,** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Components of revenues: |       |                        |       |   |   |   |   |
| License fees            |       | $                           | 57,743     |   | $ | 92,338 |   | $ | 77,614 |   |
| Services:               |       |                        |       |   |   |   |   |
| Consulting              |       | 106,718                     |       | 116,307 |   | 124,059 |   |
| Maintenance             |       | 170,723                     |       | 154,938 |   | 142,645 |   |
| Total services          |       | 277,441                     |       | 271,245 |   | 266,704 |   |
| Total revenues          |       | $                           | 335,184    |   | $ | 363,583 |   | $ | 344,318 |   |

 

**17.****          RelatedParties**

** **

The Company has utilized the marketing and consulting services of oneof the Company’s former directors and of that director’s firm in prior fiscalyears. No fees were paid to the director nor the director’s firm during theyears ended May 31, 2005 and 2004. Total fees paid to thedirector and the director’s firm were $0.1 millionfor the year ended May 31, 2003. The Company also purchased softwarefrom a company of which this individual is also a director. The softwarepurchase and services totaled $0.2 million for the year ended May 31, 2003.This individual resigned as director of the Company on May 19, 2003and has provided limited consulting services to the Company since that time.

 

**18.****          Subsequent Events**

** **

**Acquisition of Intentia International AB**

** **

OnJune 2, 2005, the Company entered into an agreement to combine withStockholm, Sweden-based Intentia International AB (“Intentia”) in an all-stocktransaction. The Company and Intentia will effect their business combinationthrough a recommended public offer in Sweden (the “Offer”) for (i) alloutstanding Intentia Series A and Series B shares and (ii) alloutstanding warrants to purchase Series B shares, in exchange for sharesof the Company common stock. Under the Offer, the Company would issueapproximately 82 million shares of its common stock, with an aggregatetransaction value of approximately USD 480 million, based on the closing priceof the Company’s common stock on May 31, 2005. The Offer is expectedto result in the Company’s stockholders owning approximately 56.75 percent,and Intentia’s stockholders owning approximately 43.25 percent, based on theCompany’s capital stock and Series A and Series B Intentia capitalstock, calculated on a fully-diluted basis using the treasury method. Thetransaction is expected to be completed in the second or third quarter offiscal 2006. Completion of the transaction isdependent upon, among other things, shareholder, regulatory and publicauthority approvals.

 

F-32

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**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

The transaction is expected to qualify as a tax-free exchange for bothparties within the meaning of Section 351 of the United States InternalRevenue Code. The Company intends to account for the transaction under thepurchase method of accounting and accordingly, the assets and liabilitiesacquired will be recorded at their estimated fair values at the effective dateof the acquisition and the results of the operations will be included in the ConsolidatedStatements of Operations effective with the acquisition date. The Company hasincurred approximately $4.5 million of costs related to the acquisition,of which $3.7 million has been capitalized as directly related to thetransaction and eligible for inclusion as part of the purchase price.  

 

**Changes in Leadership**

** **

On June 14, 2005, John J. Coughlan, the Company’s President,Chief Executive Officer and Director resigned from this current position.  Effective June 14, 2005, HarryDebes was appointed the new President, Chief Executive Officer and Director ofthe Company. On June 28, 2005, Richard Kreysar resigned as a memberof the board of directors and audit committee, for personal reasons.

 

**Amendments to Stock Option Agreements**

 

Effective on June 1, 2005, the Company amended the stockoptions held by each of its non-employee directors to: (1) fully vest and eliminatethe Company’s call right to purchase shares issued after exercise and (2) allowthose options to be exercised until the earlier of two years after resignationas a director or ten years after the date of grant. This change resulted inrecognizing $0.1  million in compensation expensein first quarter of fiscal 2006 due to the fact that these options were “in-the-money”at the time they were immediately vested. 

 

Effective on June 1, 2005, the Company amended the stockoptions compensation that have an exercise price per share greater than orequal to $5.95 (the closing price on Nasdaq on June 1, 2005) and thatare held by each officer who is currently subject to the reporting requirementsof Section 16 of the Securities Exchange Act of 1934, to allow thatofficer to exercise the options that are unexercised and vested as of thatofficer’s employment termination date until the earlier of two years aftertermination of employment or ten years after the date of grant.  Stock options previously granted to any Section 16reporting person with an exercise price per share less than $5.95 were notamended. This change resulted in no impact to the Consolidated Statements ofOperations in the first quarter of fiscal 2006.

 

F-33

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**LAWSON SOFTWARE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(in thousands, except share and pershare data)**

 

**19.****          Supplemental QuarterlyFinancial Information (Unaudited):**

** **

Summarized quarterly supplemental consolidated financial informationfor fiscal 2005 and 2004 are as follows:

 
| ** **                        | ** ** | **Quarter Ended**  | ** ** |
|-----------------------------------|------------|--------------------|------------|
| ** **                        | ** ** | **August 31** | ** ** | **November 30** | ** ** | **February 28** | ** ** | **May 31** | ** ** |
| **Fiscal 2005**              |       |               |       |   |   |   |   |   |   |
| Total revenues                    |       | $                  | 82,685     |   | $ | 82,999 |   | $ | 82,714 |   | $ | 86,786 |   |
| Gross profit                      |       | 43,854             |       | 43,047 |   | 46,222 |   | 51,477 |   |
| Restructuring                     |       | (75                | )          | 5,465 |   | (153 | ) | (209 | ) |
| (Loss) income before income taxes |       | (666               | )          | (5,053 | ) | 3,721 |   | 10,115 |   |
| Net (loss) income                 |       | (417               | )          | (3,020 | ) | 2,760 |   | 5,939 |   |
| Net (loss) income per share:      |       |               |       |   |   |   |   |   |   |
| Basic                             |       | $                  | 0.00       |   | $ | (0.03 | ) | $ | 0.03 |   | $ | 0.06 |   |
| Diluted                           |       | 0.00               |       | (0.03 | ) | 0.03 |   |   | 0.06 |   |
|                              |       |               |       |   |   |   |   |   |   |
| **Fiscal 2004**              |       |               |       |   |   |   |   |   |   |
| Total revenues                    |       | $                  | 88,002     |   | $ | 84,265 |   | $ | 91,606 |   | $ | 99,710 |   |
| Gross profit                      |       | 51,810             |       | 46,546 |   | 53,437 |   | 59,543 |   |
| Restructuring                     |       | (40                | )          | 2,250 |   | — |   | — |   |
| Income (loss) before income taxes |       | 5,311              |       | (2,105 | ) | 4,225 |   | 7,883 |   |
| Net income (loss)                 |       | 3,240              |       | (1,284 | ) | 2,577 |   | 3,458 |   |
| Net income (loss) per share:      |       |               |       |   |   |   |   |   |   |
| Basic                             |       | $                  | 0.03       |   | $ | (0.01 | ) | $ | 0.03 |   | $ | 0.04 |   |
| Diluted                           |       | 0.03               |       | (0.01 | ) | 0.02 |   | 0.03 |   |

 

No cash dividends have been declared or paid in any period presented.

 

F-34

----