** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 
| **ý**                                                                                                                                                                      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                      | ** ** | ** **                                                                                               |
| **FOR THE QUARTERLY PERIOD ENDED February 28,  2006**                                                                                                                      |
| ** **                                                                                                                                                                      | ** ** | ** **                                                                                               |
| **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** |
|--------------------------------------|

 

**LAWSON SOFTWARE, INC.**

(Exactname 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)       |

 

----

 

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 NOo

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES o NO ý

 

Thenumber of shares of the registrant’s common stock outstanding as of March 31,2006 was 104,452,213.

 

 

----

 

**LAWSONSOFTWARE, INC.**

 

**Form 10-QIndex**

 
| **PART I.** | **FINANCIAL INFORMATION**                                                                                             | ** ** |
|------------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.          | Financial Statements (unaudited)                                                                                      |       |
|             | Condensed  Consolidated Balance Sheets at February 28, 2006 and May 31, 2005                                |       |
|             | Condensed  Consolidated Statements of Operations for the three and nine months ended  February 28, 2006 and 2005 |       |
|             | Condensed Consolidated  Statements of Cash Flows for the nine months ended February 28, 2006 and  2005           |       |
|             | Notes to Condensed Consolidated Financial Statements                                                                  |       |
| Item 2.          | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                           |       |
| Item 3.          | Qualitative and Quantitative Disclosures  about Market Risk                                                           |       |
| Item 4.          | Controls and Procedures                                                                                               |       |
|             |                                                                                                                  |       |
| PART II.    | OTHER INFORMATION                                                                                                     |       |
| Item 1.          | Legal Proceedings                                                                                                     |       |
| Item 1A.         | Risk Factors                                                                                                          |       |
| Item 2.          | Unregistered Sales of Equity Securities and  Use of Proceeds                                                          |       |
| Item 3.          | Defaults Upon Senior Securities                                                                                       |       |
| Item 4.          | Submission of Matters to a Vote of Security  Holders                                                                  |       |
| Item 5.          | Other Information                                                                                                     |       |
| Item 6.          | Exhibits                                                                                                              |       |
|             | SIGNATURES                                                                                                            |       |

 

2

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PART I.  FINANCIAL INFORMATION

 

**ITEM 1. FINANCIAL STATEMENTS**

** **

**LAWSONSOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                               | ** ** | **February 28,  2006** | ** ** | **May 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                                   |       |                        |       |                   |       |
| Current  assets:                                                                                                                                                                                                         |       |                        |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                |       | $                           | 187,140    |                   | $          | 187,744 |   |
| Marketable securities                                                                                                                                                                                                    |       | 90,264                      |       | 43,099                 |       |
| Trade accounts receivable, net                                                                                                                                                                                           |       | 49,847                      |       | 42,907                 |       |
| Deferred income taxes                                                                                                                                                                                                    |       | 7,502                       |       | 9,314                  |       |
| Prepaid expenses and other assets                                                                                                                                                                                        |       | 13,464                      |       | 19,260                 |       |
| Total current assets                                                                                                                                                                                                     |       | 348,217                     |       | 302,324                |       |
|                                                                                                                                                                                                                     |       |                        |       |                   |       |
| Long-term  marketable securities                                                                                                                                                                                         |       | 496                         |       | 3,770                  |       |
| Property and  equipment, net                                                                                                                                                                                             |       | 12,371                      |       | 13,574                 |       |
| Goodwill                                                                                                                                                                                                                 |       | 43,304                      |       | 43,407                 |       |
| Other  intangible assets, net                                                                                                                                                                                            |       | 25,381                      |       | 31,939                 |       |
| Deferred  income taxes                                                                                                                                                                                                   |       | 24,299                      |       | 21,385                 |       |
| Other assets                                                                                                                                                                                                             |       | 9,418                       |       | 4,319                  |       |
| Total assets                                                                                                                                                                                                             |       | $                           | 463,486    |                   | $          | 420,718 |   |
|                                                                                                                                                                                                                     |       |                        |       |                   |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                                               |       |                        |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                    |       |                        |       |                   |       |
| Current portion of long-term debt                                                                                                                                                                                        |       | $                           | 300        |                   | $          | 1,836 |   |
| Accounts payable                                                                                                                                                                                                         |       | 11,068                      |       | 12,003                 |       |
| Accrued compensation and benefits                                                                                                                                                                                        |       | 16,807                      |       | 17,656                 |       |
| Other accrued liabilities                                                                                                                                                                                                |       | 17,417                      |       | 14,430                 |       |
| Income taxes payable                                                                                                                                                                                                     |       | 5,718                       |       | 1,418                  |       |
| Deferred revenue                                                                                                                                                                                                         |       | 73,713                      |       | 76,571                 |       |
| Total current liabilities                                                                                                                                                                                                |       | 125,023                     |       | 123,914                |       |
| Long-term  deferred revenue                                                                                                                                                                                              |       | 2,996                       |       | 1,284                  |       |
| Other  long-term liabilities                                                                                                                                                                                             |       | 3,118                       |       | 2,465                  |       |
| Total liabilities                                                                                                                                                                                                        |       | 131,137                     |       | 127,663                |       |
| Commitments  and contingencies (Note 9)                                                                                                                                                                                  |       |                        |       |                   |       |
| 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; 115,212 and 112,414 shares issued, respectively; 104,295  and 100,619 shares outstanding, at February 28, 2006  and May 31, 2005, respectively |       | 1,152                       |       | 1,124                  |       |
| Additional paid-in capital                                                                                                                                                                                               |       | 355,571                     |       | 338,666                |       |
| Treasury stock, at cost; 10,917 and 11,795  shares at February 28, 2006 and May 31, 2005, respectively.                                                                                                        |       | (70,311                     | )          | (72,348                | )          |
| Deferred stock-based compensation                                                                                                                                                                                        |       | (229                        | )          | (41                    | )          |
| Retained earnings                                                                                                                                                                                                        |       | 43,473                      |       | 22,733                 |       |
| Accumulated other comprehensive income                                                                                                                                                                                   |       | 2,693                       |       | 2,921                  |       |
| Total stockholders’ equity                                                                                                                                                                                          |       | 332,349                     |       | 293,055                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                          |       | $                           | 463,486    |                   | $          | 420,718 |   |
|                                                                                                                                                                                                                          |            |                             |            |                        |            |  |  |  |  |  |

 

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

 

3

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**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **February 28,  2006** | ** ** | **February 28,  2005** | ** ** | **February 28,  2006** | ** ** | **February 28,  2005** | ** ** |
| Revenues:                                              |       |                        |       |                        |       |   |   |   |   |
| License fees                                           |       | $                           | 15,099     |                        | $          | 13,924 |   | $ | 51,824 |   | $ | 40,370 |   |
| Services                                               |       | 72,596                      |       | 68,790                      |       | 212,822 |   | 208,028 |   |
| Total revenues                                         |       | 87,695                      |       | 82,714                      |       | 264,646 |   | 248,398 |   |
| Cost of  revenues:                                     |       |                        |       |                        |       |   |   |   |   |
| Cost of license fees                                   |       | 2,727                       |       | 2,232                       |       | 7,922 |   | 7,511 |   |
| Cost of services                                       |       | 32,576                      |       | 34,260                      |       | 99,213 |   | 107,764 |   |
| Total cost of revenues                                 |       | 35,303                      |       | 36,492                      |       | 107,135 |   | 115,275 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Gross profit                                           |       | 52,392                      |       | 46,222                      |       | 157,511 |   | 133,123 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Operating  expenses:                                   |       |                        |       |                        |       |   |   |   |   |
| Research and development                               |       | 14,325                      |       | 15,527                      |       | 42,875 |   | 46,828 |   |
| Sales and marketing                                    |       | 17,655                      |       | 17,681                      |       | 56,092 |   | 58,216 |   |
| General and administrative                             |       | 9,644                       |       | 10,325                      |       | 36,555 |   | 26,486 |   |
| Restructuring (Note 7)                                 |       | —                      |       | (153                        | )          | 5 |   | 5,237 |   |
| Amortization of acquired intangibles                   |       | 346                         |       | 391                         |       | 1,077 |   | 1,160 |   |
| Total operating expenses                               |       | 41,970                      |       | 43,771                      |       | 136,604 |   | 137,927 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Operating  income (loss)                               |       | 10,422                      |       | 2,451                       |       | 20,907 |   | (4,804 | ) |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Other  income:                                         |       |                        |       |                        |       |   |   |   |   |
| Interest income                                        |       | 2,814                       |       | 1,281                       |       | 7,486 |   | 2,845 |   |
| Interest expense                                       |       | (1                          | )          | (11                         | )          | (26 | ) | (39 | ) |
| Total other income                                     |       | 2,813                       |       | 1,270                       |       | 7,460 |   | 2,806 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Income  (loss) before income taxes                     |       | 13,235                      |       | 3,721                       |       | 28,367 |   | (1,998 | ) |
| Provision  (benefit) for income taxes                  |       | 3,228                       |       | 961                         |       | 7,627 |   | (1,321 | ) |
| Net income  (loss)                                     |       | $                           | 10,007     |                        | $          | 2,760 |   | $ | 20,740 |   | $ | (677 | ) |
|                                                   |       |                        |       |                        |       |   |   |   |   |
| Net income  (loss) per share:                          |       |                        |       |                        |       |   |   |   |   |
| Basic                                                  |       | $                           | 0.10       |                        | $          | 0.03 |   | $ | 0.20 |   | $ | (0.01 | ) |
| Diluted                                                |       | $                           | 0.09       |                        | $          | 0.03 |   | $ | 0.19 |   | $ | (0.01 | ) |
| Shares used  in computing net income (loss) per share: |       |                        |       |                        |       |   |   |   |   |
| Basic                                                  |       | 103,572                     |       | 99,342                      |       | 102,384 |   | 98,651 |   |
| Diluted                                                |       | 108,033                     |       | 104,899                     |       | 106,877 |   | 98,651 |   |

 

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

 

4

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**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                                | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **February 28,  2006** | ** ** | **February 28,  2005** | ** ** |
| **Cash  flows from operating activities:**                                                |       |                        |       |   |   |
| Net income (loss)                                                                         |       | $                           | 20,740     |   | $ | (677 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                        |       |   |   |
| Depreciation and amortization                                                             |       | 10,573                      |       | 12,258 |   |
| Deferred income taxes                                                                     |       | (1,102                      | )          | 3,828 |   |
| Provision for doubtful accounts, net of  recoveries                                       |       | (1,303                      | )          | 413 |   |
| Loss on the disposal of assets                                                            |       | —                      |       | 1 |   |
| Tax benefit from stockholder transactions  for option activity                            |       | 4,255                       |       | 2,955 |   |
| Amortization of stock-based compensation                                                  |       | 337                         |       | 171 |   |
| Stock-based compensation                                                                  |       | 6,368                       |       | — |   |
| Amortization of discount on notes payable                                                 |       | 17                          |       | 67 |   |
| Amortization of (premium) discount on  marketable securities                              |       | (311                        | )          | 119 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:            |       |                        |       |   |   |
| Trade accounts receivable                                                                 |       | (5,637                      | )          | 22,524 |   |
| Prepaid expenses and other assets                                                         |       | 3,628                       |       | (6,918 | ) |
| Accounts payable                                                                          |       | (935                        | )          | (1,030 | ) |
| Accrued and other liabilities                                                             |       | (1,186                      | )          | (6,710 | ) |
| Income taxes payable                                                                      |       | 4,327                       |       | (999 | ) |
| Deferred revenue and customer deposits                                                    |       | (1,146                      | )          | (8,915 | ) |
| Net cash provided by operating activities                                                 |       | 38,625                      |       | 17,087 |   |
|                                                                                      |       |                        |       |   |   |
| **Cash  flows from investing activities:**                                                |       |                        |       |   |   |
| Cash paid in conjunction with acquisition  (Note 5)                                       |       | (2,929                      | )          | — |   |
| Purchases of marketable securities                                                        |       | (116,425                    | )          | (447,864 | ) |
| Sales and maturities of marketable  securities                                            |       | 72,773                      |       | 435,608 |   |
| Purchases of property and equipment                                                       |       | (2,967                      | )          | (3,101 | ) |
| Net cash used in investing activities                                                     |       | (49,548                     | )          | (15,357 | ) |
|                                                                                      |       |                        |       |   |   |
| **Cash  flows from financing activities:**                                                |       |                        |       |   |   |
| Principal payments on long term debt                                                      |       | (1,684                      | )          | (1,323 | ) |
| Exercise of stock options                                                                 |       | 9,266                       |       | 6,378 |   |
| Issuance of treasury shares for employee  stock purchase plan                             |       | 2,737                       |       | 3,947 |   |
| Repurchase of common stock                                                                |       | —                      |       | (10,000 | ) |
| Net cash provided by (used in) financing  activities                                      |       | 10,319                      |       | (998 | ) |
| Increase  (decrease) in cash and cash equivalents                                         |       | (604                        | )          | 732 |   |
| Cash and  cash equivalents at beginning of period                                         |       | 187,744                     |       | 72,396 |   |
| Cash and  cash equivalents at end of period                                               |       | $                           | 187,140    |   | $ | 73,128 |   |

 

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

 

5

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**LAWSON SOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

** **

**1.****            ****BASIS OF PRESENTATION**

 

Theunaudited condensed consolidated financial statements included herein reflectall adjustments, in the opinion of management, necessary to fairly state LawsonSoftware, Inc.’s (the Company’s) consolidated financial position, resultsof operations and cash flows for the periods presented. These adjustmentsconsist of normal, recurring items. The preparation of financial statements inconformity with generally accepted accounting principles in the United States ofAmerica requires management to make estimates and assumptions that affect thereported amounts therein. Due to the inherent uncertainty involved in makingestimates, actual results in future periods may differ from those estimates.The results of operations for the three and nine month periods ended February 28,2006, are not necessarily indicative of the results to be expected for anysubsequent quarter or for the entire fiscal year ending May 31, 2006. Theunaudited condensed consolidated financial statements and notes are presentedas permitted by the requirements for Form 10-Q and do not contain certaininformation included in the Company’s annual financial statements and notes.The year-end condensed consolidated balance sheet data was derived from auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America.  The accompanying interim condensedconsolidated financial statements should be read in conjunction with theaudited financial statements and related notes included in the Company’s AnnualReport on Forms 10-K and Form 10-K/A filed with the Securities andExchange Commission for the fiscal year ended May 31, 2005.  As of February 28, 2006 the Companydisclosed income tax payable and long-term deferred revenue separately and as aresult the Company made revisions in classification of those amounts to priorperiods to conform to the current presentation. The revisions in classifications had no impact on the Company’s net incomeor stockholders’ equity as previously reported.

 

**2.****            ****STOCK-BASED COMPENSATION**

 

TheCompany accounts for stock-based employee compensation arrangements inaccordance with the provisions of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees,” and complies with the disclosureprovisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accountingfor Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock-BasedCompensation-Transition and Disclosure, an amendment of Financial AccountingStandards Board (FASB) Statement No. 123.”

 

TheCompany has adopted the disclosure-only provisions of SFAS No. 123. Forpurposes of the pro forma disclosures below, the estimated fair value of theoptions is amortized to expense over the options’ vesting period. Hadcompensation cost for the Company’s stock options been recognized based on thefair value at the grant date consistent with the provisions of SFAS No. 123,the Company’s net income (loss) and net income (loss) per share would have beenadjusted to the pro forma amounts indicated below (in thousands, except pershare amounts):

 
| ** **                                                                                                              | ** ** | **Three Months Ended  February 28,** | ** ** | **Nine Months Ended  February 28,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss):                                                                                                     |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                                                             |       | $                                         | 10,007     |                                     | $          | 2,760 |   | $ | 20,740 |   | $ | (677 | ) |
| Add: Stock-based employee compensation  expense included in reported net income (loss), net of taxes                    |       | 60                                        |       | 38                                       |       | 4,104 |   | 104 |   |
| Deduct: Total stock-based compensation  expense determined under fair value based method for all rewards, net of  taxes |       | (1,302                                    | )          | (1,862                                   | )          | (4,760 | ) | (5,441 | ) |
| Pro forma net income (loss)                                                                                             |       | $                                         | 8,765      |                                     | $          | 936 |   | $ | 20,084 |   | $ | (6,014 | ) |
|                                                                                                                    |       |                                      |       |                                     |       |   |   |   |   |
| Net  income (loss) per share:                                                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Basic:                                                                                                                  |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                                                             |       | $                                         | 0.10       |                                     | $          | 0.03 |   | $ | 0.20 |   | $ | (0.01 | ) |
| Pro forma                                                                                                               |       | $                                         | 0.08       |                                     | $          | 0.01 |   | $ | 0.20 |   | $ | (0.06 | ) |
| Diluted:                                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| As reported                                                                                                             |       | $                                         | 0.09       |                                     | $          | 0.03 |   | $ | 0.19 |   | $ | (0.01 | ) |
| Pro forma                                                                                                               |       | $                                         | 0.08       |                                     | $          | 0.01 |   | $ | 0.19 |   | $ | (0.06 | ) |

 

6

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During the nine months ended February 28, 2006, the Companyrecognized $4.1 million of after-tax stock-based employee compensation expensethat included a $3.8 million non-cash charge resulting from a negotiatedseparation agreement with its former president and chief executiveofficer.  The agreement was deemed to bea modification of previously granted options and therefore resulted in anintrinsic value charge for option expense under APB No. 25. In calculatingthe pro forma net income (loss) under SFAS No.123 for the three and nine monthsended February 28, 2006, $1.3 million and $****4.8million respectively, net of related tax effects, were deducted from net income(loss) representing the total stock-based employee compensation expense thatwas determined under the fair value based method for all awards. The optionsfor the former president and chief executive officer that were deemed modifiedwere 100% vested and therefore under the fair value based method only $0.4million, net of related tax effects, in option expense was included as expensein the pro forma calculation relating to the incremental value of the modifiedoptions as compared with the options before modification for the nine monthsended February 28, 2006.

 

Additionally, during the nine months ended February 28, 2006, all “out-of-the-money”options for all Section 16b officers and directors as of June 1, 2005were modified to permit a two year exercise window after termination.  While this required no charge in the Company’sincome statement under APB No. 25, there was an after-tax fair value chargeincluded in the pro forma charge above of $0.3 million for the nine monthsended February 28, 2006. The total of both modifications under SFAS No. 123was $0.7 million for the nine months ended February 28, 2006.

 

**3.****            ****PER SHARE DATA**

 

Basic earnings per share is computed using the net income (loss) andthe weighted average number of shares of common stock outstanding. Dilutedearnings per share reflect the weighted average number of shares of commonstock outstanding plus any potentially dilutive shares outstanding during theperiod. Potentially dilutive shares consist of shares to be issued upon theexercise of stock options and warrants and release of restricted stock (inthousands, except per share amounts).

 
| ** **                                    | ** ** | **Three Months Ended  February 28,** | ** ** | **Nine Months Ended  February 28,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic  earnings per share computation:        |       |                                      |       |                                     |       |   |   |   |   |
| Net income (loss)                             |       | $                                         | 10,007     |                                     | $          | 2,760 |   | $ | 20,740 |   | $ | (677 | ) |
| Weighted average common shares – basic   |       | 103,572                                   |       | 99,342                                   |       | 102,384 |   | 98,651 |   |
| Basic net  income (loss) per share            |       | $                                         | 0.10       |                                     | $          | 0.03 |   | $ | 0.20 |   | $ | (0.01 | ) |
|                                          |       |                                      |       |                                     |       |   |   |   |   |
| Diluted  earnings per share computation:      |       |                                      |       |                                     |       |   |   |   |   |
| Net income (loss)                             |       | $                                         | 10,007     |                                     | $          | 2,760 |   | $ | 20,740 |   | $ | (677 | ) |
| Shares  calculation:                          |       |                                      |       |                                     |       |   |   |   |   |
| Weighted average common shares – basic   |       | 103,572                                   |       | 99,342                                   |       | 102,384 |   | 98,651 |   |
| Effect of dilutive stock options              |       | 4,361                                     |       | 5,557                                    |       | 4,365 |   | — |   |
| Effect of restricted stock                    |       | 100                                       |       | —                                   |       | 100 |   | — |   |
| Effect of dilutive warrants                   |       | —                                    |       | —                                   |       | 28 |   | — |   |
| Weighted average common shares – diluted |       | 108,033                                   |       | 104,899                                  |       | 106,877 |   | 98,651 |   |
| Diluted net  income (loss) per share          |       | $                                         | 0.09       |                                     | $          | 0.03 |   | $ | 0.19 |   | $ | (0.01 | ) |

 

Potentially dilutiveshares of common stock excluded from the diluted net income (loss) per sharecomputations were 0.6 million and 13.6 millionas of February 28, 2006 and 2005, respectively. Certain potentiallydilutive shares of common stock were excluded from the diluted earnings pershare computation because their exercise prices were greater than the averagemarket price of the common shares during the period and were therefore notdilutive. In addition, potentially dilutive shares of common stock wereexcluded from periods with a net loss because they were anti-dilutive.

 

**4.****            ****RECENT ACCOUNTING PRONOUNCEMENTS**

 

InDecember 2004, the FASB issued SFAS 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. Thecost 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 options, restricted share plans, performance-basedawards, share appreciation rights and employee share purchase plans. SFAS No. 123(R)supersedes SFAS No. 123, *Accounting forStock-Based*

 

7

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*Compensation*(“SFAS No. 123”), and supersedes APB 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. Additionally, uponadoption, the Company plans to use the modified prospective method.  Public entities are 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. Basedon the Company’s significant amount of unvested share-based payment awards, theadoption of this statement is anticipated to have a material impact on theCompany’s Consolidated Statements of Operations, however the Company iscurrently evaluating the impact. Historically, had compensation costs for theCompany’s stock options been recognized based on fair value at the grant dateconsistent with the provisions of SFAS No. 123, the Company’s dilutedearnings per share would have been reduced by $0.06, $0.05, and $0.05,respectively, for the years ended May 31, 2005, May 31, 2004, and May 31,2003, as disclosed in the Company’s Annual Report on Form 10-K and Form 10-K/Afiled for the fiscal year ended May 31, 2005.

 

InMay 2005, the FASB issued SFAS No 154, “Accounting Changes and ErrorCorrections – A replacement of APB Opinion No. 20 and FASB Statement No. 3”(“SFAS 154”).  SFAS 154 changes the requirementfor the accounting for and reporting of a change in accounting principle. Thisstatement applies to all voluntary changes in accounting principles and changesrequired by an accounting pronouncement in the unusual instance that thepronouncement does not include specific transition provisions.  The provisions in SFAS 154 are effective foraccounting changes and correction of errors made in fiscal years beginningafter December 15, 2005, which is effective with the Company’s firstquarter of fiscal 2007.  

 

**5.****             PENDINGBUSINESS COMBINATION**

 

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 plan to 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 each case in exchangefor shares of the Company’s common stock. Under the Offer, the Company wouldissue approximately 81 million shares of its common stock, with anaggregate transaction value of approximately $449****million,based on the average closing price of the Company’s common stock beginning twodays before and ending two days after the June 2, 2005 announcementdate.  The transaction value has beenadjusted from approximately $464 million as previously reported due to arevision to the estimated transaction costs used in valuing the transaction.  The revision, however, does not have anyimpact on the exchange ratios of the Exchange Offer between the Company andIntentia. The Offer is expected to result in the Company’s stockholders owningapproximately 56.75 percent, and Intentia’s stockholders owningapproximately 43.25 percent, based on the Company’s capital stock and Series Aand Series B Intentia capital stock, calculated on a fully-diluted basisusing the treasury method.

 

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 theConsolidated Statements of Operations effective with the acquisition date.  The Company has incurred approximately$11.1 million of costs related to the acquisition.  During the three and nine months ended February 28,2006, $0.5 million and $2.9 million, respectively, has been capitalized asdirectly related to the transaction and eligible for inclusion as part of thepurchase price. During the three and nine months ended February 28, 2006,$0.7 million and $3.7 million, respectively, of costs related to theacquisition were charged to operations.

 

On March 17, 2006, the U.S. Securities and Exchange Commission(SEC) declared effective the Form S-4 Proxy Statement/Prospectusconcerning the Company’s proposed combination with Intentia.  The Swedish Prospectus for the combinationwith Intentia was registered with the Swedish Financial Supervisory Authorityon March 24, 2006.  The Company willhold a meeting of stockholders on April 17, 2006, to approve mattersrelating to the proposed combination of the two companies.  The transaction is expected to be completedby April 30, 2006, subject to stockholder approval and sufficient tenderof shares by Intentia stockholders.

 

8

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**6.****            ****COMPREHENSIVE INCOME**

 

Thefollowing table summarizes the components of comprehensive income (inthousands):

 
| ** **                                                                                                                                                                                                                                                                     | ** ** | **Three Months Ended  February 28,** | ** ** | **Nine Months Ended  February 28,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                     | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                                                                                                                                                                                                                                             |       | $                                         | 10,007     |                                     | $          | 2,760 |   | $ | 20,740 |   | $ | (677 | ) |
| Unrealized (loss) gain on  available-for-sale investments, net of taxes (benefit) of $(14) and  $(7) for the three months ended February 28, 2006 and 2005,  respectively, and $(27) and $9 for the nine months ended February 28,  2006 and 2005, respectively |       | (22                                       | )          | (11                                      | )          | (43 | ) | 14 |   |
| Foreign  currency translation adjustment                                                                                                                                                                                                                                       |       | 295                                       |       | (25                                      | )          | (185 | ) | 841 |   |
| Other comprehensive (loss) income                                                                                                                                                                                                                                              |       | 273                                       |       | (36                                      | )          | (228 | ) | 855 |   |
| Comprehensive  income                                                                                                                                                                                                                                                          |       | $                                         | 10,280     |                                     | $          | 2,724 |   | $ | 20,512 |   | $ | 178 |   |

 

**7.****            ****RESTRUCTURING**

 

During the three months ended February 28,2006, the Company did not record any restructuring adjustments compared to arestructuring reversal of $0.2 million for the three months ended February 28,2005. For the nine months ended February 28, 2006 and 2005, the Companyrecorded a charge of $0.01 million and $5.2 million, respectively.   

 

***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 withanticipated revenue levels. The plan included the reduction of 107 employees infiscal 2005 in the United States and the United Kingdom, which inaccordance with SFAS No. 112, *Employers Accounting forPost Employment Benefits - an amendment of FASB Statements No. 5 and 43(“*SFASNo. 112*”)*, resulted in a charge for severanceand related benefits of $2.9 million. The reduction included employees whoworked in operations, marketing, sales, research and development, customersupport and services. There were no cash payments made during the three andnine months ended February 28, 2006, respectively. All employee reductionsand related cash payments were substantially completed as of February 28,2005. The Company adjusted the remaining accrual to cover additionalcosts that are anticipated to be incurred. The remaining cash payments are expected to be completed during the firsthalf of fiscal 2007.

 

The following table setsforth the restructuring reserve activity related to the Phase I restructuringplan and the remaining balance as of February 28, 2006, which is includedin accrued compensation and benefits (in thousands):

 
| ** **                       | ** ** | **Severance  and related  benefits** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| Balance,  May 31, 2005 |       | $                                    | 29         |   |
| Adjustments to provision         |       | 13                                   |       |
| Balance,  February 28, 2006 |       | $                                    | 42         |   |

 

AtNovember 30, 2004, the Company also accrued for a restructuring plan (Phase II)that included initiatives to further reduce costs and realign projectedexpenses 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 offiscal 2005, the restructuring resulted in a $2.2 million charge forseverance and related benefits, net of a reversal of $0.3 millionsubsequent to the initial charge within fiscal 2005, in accordance with SFAS No. 112.The reduction included employees who worked in sales, research and developmentand services. Cash payments during fiscal 2005 for the Phase II plan were$2.0 million. There were no cash payments made during the three monthsended February 28, 2006.  There was$0.01 million in cash payments made during the nine months ended February 28,2006.  All employee reductions andrelated cash payments were substantially completed as of February 28, 2005.  The Company adjusted the remainingaccrual for costs that are no longer anticipated to be incurred. The remaining cash payments are expected tobe completed during the first half of fiscal 2007.

 

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The following table setsforth the restructuring reserve activity related to the Phase II restructuringplan and the remaining balances as of February 28, 2006, which areincluded in accrued compensation and benefits (in thousands):

 
| ** **                       | ** ** | **Severance  and related  benefits** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| Balance,  May 31, 2005 |       | $                                    | 114        |   |
| Cash payments                    |       | (14                                  | )          |
| Adjustments to provision         |       | (25                                  | )          |
| Balance,  February 28, 2006 |       | $                                    | 75         |   |

 

***Fiscal 2004 Restructuring***

 

In September 2003,the Company approved a restructuring plan to realign projected expenses withanticipated lower revenue levels and incurred $2.3 million in restructuringcharges for severance and related benefits. The fiscal 2004 plan resultedin the reduction of 93 employees in the second quarter of fiscal 2004,from various functions including research and development, general andadministrative and sales and marketing, primarily in the United States. During fiscal2005, the Company recorded a $0.03 million reversal of restructuring chargesfor certain employee costs it determined would not be incurred.  There was $0.1 million in final cash paymentsmade during the three months ended November 30, 2005. The Company adjustedthe remaining accrual to cover additional costs that were incurred in the finalcash payments under the plan. 

 

The following table setsforth the restructuring reserve activity reflecting the completion of thefiscal 2004 restructuring plan as of February 28, 2006 (inthousands):

 
| ** **                       | ** ** | **Severance  and related  benefits** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| Balance,  May 31, 2005 |       | $                                    | 62         |   |
| Cash payments                    |       | (104                                 | )          |
| Adjustments to provision         |       | 42                                   |       |
| Balance, February 28,  2006 |       | $                                    | —     |   |

 

***Fiscal 2003 Restructuring***

 

In September 2002,the Company approved a restructuring plan to realign projected expenses withanticipated lower revenue levels and incurred $5.8 million in restructuringcharges, which included $4.7 million of severance and related benefits and$1.1 million for the closure and consolidation of facilities. The planresulted in the reduction of 244 employees in the second quarter offiscal 2003, from various functions including administrative, professionaland managerial in the United States, Canada and Europe. During fiscal 2005, theCompany completed its obligation and recorded a reversal of restructuringcharges of $0.05 million for certain employee costs it determined would not beincurred. No further adjustments have been made in fiscal 2006.

 

***Fiscal 2002 Restructuring***

 

InMay 2002, the Company approved a restructuring plan in response to thegeneral economic downturn and incurred $3.3 million in restructuring charges,which included $3.0 million for severance related benefits and$0.3 million for the closure of a leased office facility. Duringfiscal 2003, the Company recorded $0.2 million in additional chargesassociated with finalization of lease termination agreements. The plan resultedin the reduction of 111 employees in various functions includingadministrative, professional, and managerial, primarily in the United States.There was a final cash payment made during the three months ended August 31,2005.  The Company adjusted the remainingaccrual completing its obligation under the plan.  No further adjustments have been made infiscal 2006. 

 

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Thefollowing table sets forth the restructuring reserve activity reflecting thecompletion of the fiscal 2002 restructuring plan as of February 28,2006 (in thousands):

 
| ** **                       | ** ** | **Facilities** | ** ** |
|----------------------------------|------------|----------------|------------|
| Balance,  May 31, 2005 |       | $              | 30         |   |
| Cash payments                    |       | (5             | )          |
| Adjustments to provision         |       | (25            | )          |
| Balance,  February 28, 2006 |       | $              | —     |   |

 

**8.****            ****GOODWILL AND INTANGIBLE ASSETS**

 

Thechanges in the carrying amount of goodwill for the nine months ended February 28,2006, are as follows (in thousands):

 
| Balance, May 31, 2005  |   | $    | 43,407 |   |
|----------------------------------|--------|------|--------|--------|
| Contingency consideration earned |   | 200  |   |
| Currency translation effect      |   | (303 | )      |
| Balance,  February 28, 2006 |   | $    | 43,304 |   |

 

Acquiredintangible assets subject to amortization were as follows (in thousands):

 
| ** **              | ** ** | **February 28, 2006**   | ** ** | **May 31, 2005**         | ** ** |
|-------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book Value** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Maintenance  contracts  |       | $                            | 22,940     |                          | $          | (7,285 | ) | $ | 15,655 |   | $ | 22,940 |   | $ | (4,316 | ) | $ | 18,624 |   |
| Acquired  technology    |       | 14,148                       |       | (10,786                       | )          | 3,362 |   | 14,234 |   | (8,417 | ) | 5,817 |   |
| Customer  lists         |       | 11,133                       |       | (4,813                        | )          | 6,320 |   | 11,217 |   | (3,879 | ) | 7,338 |   |
| Non-compete  agreements |       | 518                          |       | (474                          | )          | 44 |   | 628 |   | (468 | ) | 160 |   |
|                    |       | $                            | 48,739     |                          | $          | (23,358 | ) | $ | 25,381 |   | $ | 49,019 |   | $ | (17,080 | ) | $ | 31,939 |   |
|                         |            |                              |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangibleassets are amortized on a straight-line basis over the estimated periodsbenefited, generally three to five years for acquired technology, four to tenyears for customer lists, and the term of the agreement for non-competeagreements. Intangible assets for maintenance contracts are amortized under anaccelerated amortization method, over the estimated term of the agreementsbased on the estimated revenue for the applicable period in relation to thetotal estimated revenue. For the three months ended February 28, 2006 and2005, there was $2.2 million in amortization expense for intangibleassets.  For the nine months ended February 28,2006 and 2005, there was $6.5 million and $6.6 million, respectively, inamortization expense for intangible assets. Amortization expense is reported in cost of license fees, cost ofservices and amortization of acquired intangibles, in the accompanying CondensedConsolidated Statements of Operations based on classification of relatedrevenue.

 

Theestimated future amortization expense for identified intangible assets is asfollows (in thousands):

 
| 2006 (remaining 3 months) |   | $     | 2,075  |   |
|---------------------------|--------|-------|--------|--------|
| 2007                      |   | 6,955 |   |
| 2008                      |   | 4,664 |   |
| 2009                      |   | 3,637 |   |
| 2010                      |   | 3,005 |   |
| Thereafter                |   | 5,045 |   |
|                      |   | $     | 25,381 |   |
|                           |        |       |        |        |  |

 

**9.****            ****COMMITMENTS ANDCONTINGENCIES**

 

TheCompany has outstanding contingent consideration agreements related toacquisitions ranging in the aggregate from zero to $5.7 million, measured overvarious periods through fiscal 2007, based on the acquired company’s futureperformance. Contingent consideration earned is paid in cash and recorded asadditional goodwill. During the three months 

 

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ended February 28, 2006 noadditional consideration had been earned, recorded or expired under theseagreements.  During the nine months endedFebruary 28, 2006, $0.2 million in additional consideration had beenearned and recorded and $1.0 million expired under these agreements.

 

The Company is involved in variousclaims and legal actions in the normal course of business. Management is of theopinion that the outcome of such legal actions will not have a significantadverse effect on the Company’s financial position, results of operations orcash flows. Notwithstanding management’s belief, an unfavorable resolution ofsome or all of these matters could materially affect the Company’s futureresults of operations and cash flows.

 

In fiscal 2005, the Companyand International Business Machines Corporation (IBM) entered into an OEMSoftware Agreement that was modified in the second quarter of fiscal 2006, anda Master Relationship Agreement (MRA). Under these agreements, the Company isreselling its business applications in conjunction with IBM’s openstandards-based software, and the companies will jointly market these softwaresolutions.  The MRA governs the joint marketingactivities and has a three-year term. During the term of the modifiedOEM Software Agreement, the Company is paying royalties to IBM for thelicensing of IBM programs to each applicable existing and new customer of theCompany, and is paying IBM annual maintenance fees for each applicablecustomer.  The royalty and maintenancepayments to IBM are based on transactions with each applicable Lawson customer.The modified OEM Software Agreement has an initial term of three yearscommencing September 2005 and may be extended by the Company for twoadditional one-year terms.  During theinitial three-year term, the Company has agreed to pay certain minimumquarterly and annual royalties to IBM. Total commitments under the modified OEMSoftware Agreement approximate $9.5 million over the three-year term. TheCompany may elect to terminate the OEM Software Agreement for convenience upon90 days advance notice to IBM.  If theCompany elects early termination at any time during the initial three-yearterm, the Company would pay IBM any unpaid minimum royalties through the dateof termination plus a prorated share of the guaranteed annual minimum paymentdue for the year in which the termination occurred.  The Company has made cash payments of $2.6million according to terms of the modified OEM Software Agreement during thenine months ended February 28, 2006 recorded as other assets – long-term.  In addition, the Company recorded $0.5 millionas other accrued liabilities on the February 28, 2006 CondensedConsolidated Balance Sheet, representing the prorated portion of the $0.6million annual minimum owed in the initial year of the contract.   Inaccordance with SFAS No. 86 *Accounting for the Costsof Computer Software to Be Sold, Leased, or Otherwise Marketed* (“SFASNo. 86”), the fees paid and accrued to date will be amortized to costs of licensefees over the earlier of the time period in which units are sold or the usefullife.  

 

On May 9, 2005, theCompany and The Hackett Group, Inc., a wholly-owned subsidiary ofAnswerthink Inc. (“Hackett”), entered into an Advisory Alliance Agreement (the “Agreement”).The Agreement identifies joint programs in which Hackett will provide theCompany and its customers 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.The Company and Hackett have the option to extend the terms of the programsupon mutual written agreement, and Hackett has agreed to provide certainexclusivity rights to the Company in connection with certain of its programs.Under the Agreement, the Company paid $1.6 million in the nine months ended February 28,2006, and is contractually committed to pay an additional $0.5 million withinthe next twelve months that has been recorded as other accrued liabilities at February 28,2006.  Approximately $1.6 million of feesis being amortized on a straight line basis over the term of the Agreement andis reflected as sales and marketing expenses and approximately $0.5 million isbeing amortized over the same period the revenue is being recognized and isreflected as cost of license fees.  Inaddition, the Company will pay additional fees when sales volumes meetestablished criteria throughout the term of the contract.

 

**10.****         ****SEGMENT AND GEOGRAPHIC AREAS**

 

TheCompany views its operations and manages its business as one segment, thedevelopment and marketing of computer software and related services. Factorsused to identify the Company’s single operating segment include the financialinformation available for evaluation by the chief operating decision maker inmaking decisions about how to allocate resources and assess performance.  The Company markets its products and servicesthrough the Company’s offices in the United States and its wholly-ownedbranches and subsidiaries operating in Canada, the United Kingdom, France andthe Netherlands. Upon completion of the acquisition of Intentia, the Companywill reassess the determination of its segments.  The following table presents revenues andlong-lived assets summarized by geographic region (in thousands):

 

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| ** **               | ** ** | **Three Months Ended  February 28,** | ** ** | **Nine Months Ended  February 28,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                |       |                                      |       |                                     |       |   |   |   |   |
| Domestic operations      |       | $                                         | 84,069     |                                     | $          | 78,490 |   | $ | 252,760 |   | $ | 235,097 |   |
| International operations |       | 3,626                                     |       | 4,224                                    |       | 11,886 |   | 13,301 |   |
| Consolidated             |       | $                                         | 87,695     |                                     | $          | 82,714 |   | $ | 264,646 |   | $ | 248,398 |   |
|                          |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **               | ** ** | **February 28,  2006** | ** ** | **May 31,  2005** | ** ** |
|--------------------------|------------|-----------------------------|------------|------------------------|------------|
| Long-lived  assets:      |       |                        |       |                   |       |
| Domestic operations      |       | $                           | 67,574     |                   | $          | 73,925 |   |
| International operations |       | 13,482                      |       | 14,995                 |       |
| Consolidated             |       | $                           | 81,056     |                   | $          | 88,920 |   |

 

The following table presents revenues for license fees, customersupport and consulting services (in thousands):

 
| ** **               | ** ** | **Three Months Ended  February 28,** | ** ** | **Nine Months Ended  February 28,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2006**                                  | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Components  of revenues: |       |                                      |       |                                     |       |   |   |   |   |
| License fees             |       | $                                         | 15,099     |                                     | $          | 13,924 |   | $ | 51,824 |   | $ | 40,370 |   |
| Services:                |       |                                      |       |                                     |       |   |   |   |   |
| Consulting               |       | 27,173                                    |       | 25,513                                   |       | 79,232 |   | 81,169 |   |
| Customer support         |       | 45,423                                    |       | 43,277                                   |       | 133,590 |   | 126,859 |   |
| Total services           |       | 72,596                                    |       | 68,790                                   |       | 212,822 |   | 208,028 |   |
| Total revenues           |       | $                                         | 87,695     |                                     | $          | 82,714 |   | $ | 264,646 |   | $ | 248,398 |   |

 

**11.****          COMMONSTOCK REPURCHASES**

 

In June 2003, the Company’s Board of Directors authorized therepurchase of up to $50.0 million of the Company’s common shares. Shares wererepurchased from time to time as market conditions warranted either throughopen market transactions, block purchases, private transactions or other means.During fiscal 2005 the Company completed the authorized stock repurchase planby purchasing the remaining 1.4 million shares for $10.0 million in cash. Cashproceeds obtained from the maturities of marketable securities, the exercise ofemployee stock options and contributions to the employee stock purchase plan,largely funded the share repurchases. The repurchased shares, which remain intreasury, are being used for general corporate purposes.

 

**12.****          STOCK WARRANT**

 

On July 18, 2005, a stock warrant issued in fiscal 2001 witha five-year life, was exercised allowing its holder to purchase1.0 million shares of the Company’s common stock at an exercise price of$4.64 per share. The warrant was exercised on a net basis, resulting in theissuance of 0.1 million shares of common stock from treasury, whichresulted in a $0.3 million reduction to additional paid-in capital duringthe first quarter of fiscal 2006.  TheCompany has no outstanding stock warrants.

 

**13.****          STOCK COMPENSATION**

 

**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 andeliminate the Company’s call right to purchase shares issued after exercise and(2) allow those options to be exercised until the earlier of two yearsafter resignation as a director or ten years after the date of grant. Thischange resulted in recognizing $0.1 million in compensation expenseincluded in general and administrative expenses in the Condensed ConsolidatedStatements of Operations during the first quarter of fiscal 2006 because aportion of these options were

 

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“in-the-money” at the time theywere immediately vested.

 

Effective on June 1, 2005, the Company amended the stockoptions that have an exercise price per share greater than or equal to $5.95(the closing price on NASDAQ on June 1, 2005) and that are held byeach officer who was subject to the reporting requirements of Section 16of the Securities Exchange Act of 1934, to allow that officer to exercise theoptions that are unexercised and vested as of that officer’s employmenttermination date until the earlier of two years after termination of employmentor ten years after the date of grant. Stock options previously granted to any Section 16 reporting personwith an exercise price per share of less than $5.95 were not amended. Thisstock-based compensation change resulted in no impact to the CondensedConsolidated Statements of Operations in the first quarter of fiscal 2006.  

 

 **RestrictedStock Award**

 

On June 2, 2005, the Company granted a restricted stock award of100,000 shares of common stock to its newly appointed president and chiefexecutive officer. The shares, with a $0.5 million market value at date ofgrant, shall vest in two 50,000 share increments on June 1, 2006 and 2007,subject to acceleration upon certain events. The market value of the restricted stock was recorded as unearnedcompensation, a component of stockholders’ equity, and is being amortized overthe respective vesting periods. For the three and nine months ended February 28,2006 amortization of the unearned compensation related to restricted stock was$0.1 million and $0.3 million, respectively.

 

**Stock Compensation Charge**

 

During the first quarter of fiscal 2006, the Company recorded a $6.3million non-cash charge resulting from a negotiated separation agreement withits former president and chief executive officer, which among other termsprovided that he remain available to the Company in a part-time employmentstatus for a period of up to two years. That agreement was deemed to be a modification of previously grantedoptions, resulting in a non-cash charge for option expense.  The charge is included in general andadministrative expenses in the Condensed Consolidated Statements of Operationsfor the nine months ended February 28, 2006.

 

**14.****          INCOMETAXES**

 

Thequarterly tax expense is measured using an estimated annual tax rate for theperiod. For fiscal 2006, the Company’s estimated annual tax rate is 39.4%before the impact of discrete items. The Company’s effective tax rate, after theimpact of discrete items, was 24.4% and 25.8% for the three months ended February 28, 2006 and 2005,respectively.  The effective tax rate forthe three months ended February 28, 2006 includes a reversal of $1.4million of valuation allowance as a result of the determination that previouslyrecorded deferred tax assets are now more likely than not to be realized priorto their expiration dates and the reversal of $0.5 million of tax reservesrelated to the closing of the U.S. statute of limitations on certain tax years.

 

TheCompany’s effective tax rate, after the impact of discrete items, was 26.9% and66.1% for the nine months ended February 28, 2006 and 2005, respectively.The effective tax rate for the nine months ended February 28, 2006 includesa reversal of $1.4 million of valuation allowance as a result of thedetermination that previously recorded tax assets are now more likely than notto be realized prior to their expiration dates and the reversal of $2.1 millionof tax reserves related to favorable settlement of certain foreign tax auditmatters and the closing of the U.S. statute of limitations on certain tax years.   

 

The effective tax rate, after the impact ofdiscrete items, for the three and nine months ended February 28, 2005 includesa $0.4 million benefit recorded with the filing of the Company’s tax returns asa result of a favorable return to provision adjustment. This discrete benefithad the effect of decreasing the effective tax rate for the three months endedFebruary 28, 2005 by approximately 10%. For the nine months ended February 28,2005, due to a relatively small pre-tax loss of $0.2 million, this discreteitem increased the effective tax rate by approximately 20%.

 

TheCompany reviews its annual tax rate on a quarterly basis and makes anynecessary changes. The estimated annual tax rate may fluctuate due to changesin forecasted annual operating income; changes to the valuation allowance fornet deferred tax assets; changes to actual or forecasted permanent book to taxdifferences; impacts from future tax settlements with state, federal or foreigntax authorities; or impacts from enacted tax law changes. The Companyidentifies items which are unusual and non-recurring in nature, and treatsthese as discrete events. The tax effect of discrete items is booked entirelyin the quarter in which the discrete event occurs.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

Inaddition to historical information, this Form 10-Q 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 to identify “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include, among others, statements about our future performance,the continuation of historical trends, the sufficiency of our sources ofcapital for future needs, the effects of acquisitions and the expected impactof recently issued accounting pronouncements. These forward-looking statementsare subject to certain risks and uncertainties that could cause actual resultsto differ materially from those reflected in the forward-looking statements.Factors that might cause such a difference include, but are not limited to,those discussed in the section entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Factors That May AffectOur Future Results or the Market Price of Our Stock.” Readers are cautioned notto place undue reliance on these forward-looking statements, which reflectmanagement’s opinions only as of the date hereof. We undertake no obligation torevise or publicly release the results of any revision to these forward-lookingstatements based on circumstances or events, which occur in the future. Readersshould carefully review the risk factors described in this report on Form 10-Qand in other documents we file from time to time with the Securities andExchange Commission (SEC).

 

**Business Overview**

 

We provide business application software, services and support thathelp organizations manage, analyze and improve their businesses. The markets weserve 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, includingconsulting, training and implementation services, as well as ongoing customersupport and maintenance. Consulting, training and implementation services aregenerally not essential to the functionality of our software products, are soldseparately and also are available from a number of third-party serviceproviders. Accordingly, revenues from these services are generally recordedseparately from license fees. We have offices and affiliates serving North andSouth America, Europe, Asia, Africa, and Australia.

 

**Pending Business Combination**

 

On June 2, 2005, we entered into anagreement to combine with Stockholm, Sweden-based Intentia International AB (“Intentia”)in an all-stock transaction. The Company and Intentia plan to effect theirbusiness combination through a recommended public offer in Sweden (the “Offer”)for (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 the Company’s common stock. Under theoffer, the Company would issue approximately 81 million shares of its commonstock, with an aggregate transaction value of approximately $449 million, basedon the average closing price of the Company’s common stock beginning two daysbefore and ending two days after the June 2, 2005 announcement date. Thetransaction value has been adjusted from approximately $464 million aspreviously reported due to a revision to the estimated transaction costs usedin valuing the transaction.  Therevision, however, does not have any impact on the exchange ratios of theExchange Offer between the Company and Intentia.  The Offer is expected to result in theCompany’s stockholders owning approximately 56.75 percent, and Intentia’sstockholders owning approximately 43.25 percent based on the Company’s capitalstock and Series A and Series B Intentia capital stock, calculated ona fully-diluted basis using the treasury method.

 

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 the purchasemethod of accounting and accordingly, the assets and liabilities acquired willbe recorded at their estimated fair values at the effective date of theacquisition and the results of the operations will be included in theConsolidated Statements of Operations effective with the acquisition date.  The Company has incurred approximately$11.1 million of costs related to the acquisition. During the three andnine months ended February 28, 2006, $0.5 million and $2.9 millionrespectively, has been capitalized as directly related to the transaction andeligible for inclusion as part of the purchase price. During the three and ninemonths ended February 28, 2006, $0.7 million and $3.7 million,respectively, of costs related to the acquisition were charged to operations.

 

On March 17, 2006, the U.S. Securities and Exchange Commission(SEC) declared effective the Form S-4 Proxy Statement/Prospectusconcerning the Company’s proposed combination with Intentia.  The Swedish Prospectus for the combinationwith Intentia was registered with the Swedish Financial Supervisory Authorityon March 24, 2006.  The Company willhold a meeting of stockholders on April 17, 2006, to approve mattersrelating to the proposed combination of the two companies.  The transaction is expected to be completedby April 30, 2006, subject to stockholder approval and sufficient tenderof shares by Intentia stockholders.

 

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**Critical Accounting Policies and Estimates**

 

Ourdiscussion and analysis of financial condition and results of operations arebased upon our unaudited condensed 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 periods, and related disclosuresof contingent assets and liabilities. The Notes to the Condensed ConsolidatedFinancial Statements contained herein describe our significant accountingpolices used in the preparation of the consolidated financial statements. On anon-going basis, we evaluate our estimates, including, but not limited to, thoserelated to bad debt, intangible assets and contingencies. We base our estimateson historical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results could differ from theseestimates.

 

Webelieve the critical accounting polices listed below reflect our moresignificant judgments, estimates and assumptions used in the preparation of ourcondensed consolidated financial statements.

 

*Revenue Recognition.*    Revenue recognition rules for softwarebusinesses are very complex. We follow specific and detailed guidelines indetermining the proper amount of revenue to be recorded; however, certainjudgments affect the application of our revenue recognition policy. Revenueresults are difficult to predict, and any shortfall in revenue or delay inrecognizing revenue could cause our operating results to vary significantlyfrom quarter to quarter.

 

Thesignificant judgments for revenue recognition typically involve whethercollectibility can be considered probable and whether fees are fixed ordeterminable. In addition, our transactions often consist of multiple elementarrangements, which typically include license fees, customer support fees andprofessional service fees.  Thesemultiple element arrangements must be analyzed to determine the relative fairvalue of each element, the amount of revenue to be recognized upon shipment, ifany, and the period and conditions under which deferred revenue should berecognized.

 

Werecognize revenues in accordance with the provisions of the American Instituteof Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “SoftwareRevenue Recognition,” as amended, and SOP 98-9, “Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions,” as well asTechnical Practice Aids issued from time to time by the AICPA, and inaccordance with the Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, “Revenue Recognition”. We license software undernon-cancelable license agreements and provide related professional services,including consulting, training, and implementation services, as well as ongoingcustomer support and maintenance. Consulting, training and implementationservices are generally not essential to the functionality of our softwareproducts, are sold separately and also are available from a number ofthird-party service providers. Accordingly, revenues from these services aregenerally recorded separately from license fees and recognized as the servicesare performed. Software arrangements which include certain fixed-fee servicecomponents are recognized as the services are performed while correspondingcosts to provide these services are expensed as incurred. Software arrangementsincluding services that are essential to the functionality of our softwareproducts are recognized using contract accounting and thepercentage-of-completion methodology based on labor hours input. The amounts ofrevenue and related expenses reported in the consolidated financial statementsmay vary, due to the amount of judgment required to address significantassumptions, risks and uncertainties in applying the application of thepercentage-of-completion methodology.  Ourspecific revenue recognition policies are as follows:

 

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•      SoftwareLicense Fees— License fee revenues fromend-users are recognized 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 we receive an order form from a reseller for a specific end-user sale. Wedo not generally offer rights of return, acceptance clauses or price protectionto our customers. In situations where software license contracts include rightsof return or acceptance clauses, revenue is deferred until the clause expires.Typically, our software license fees are due within a twelve-month period fromthe date of shipment. If the fee due from the customer is not fixed ordeterminable, including payment terms greater than twelve months from shipment,revenue is recognized as payments become due and all other conditions forrevenue recognition have been satisfied. In software arrangements that includerights to multiple delivered elements such as software products or specifiedupgrades and undelivered elements such as support or services, we allocate thetotal arrangement fee according to the fair value of each element usingvendor-specific objective evidence. Vendor-specific objective evidence of fairvalue is determined using the price charged when that element is soldseparately. In software arrangements in which we have fair value of allundelivered elements but not of a delivered element, we use the residual methodto record revenue.  Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is allocated to the delivered elementand is recognized as revenue.   Insoftware arrangements in which we do not have vendor-specific objectiveevidence of fair value of all undelivered elements, revenue is deferred untilfair value is determined or all elements for which we do not havevendor-specific objective evidence of fair value, have been delivered.

 

•      Services—Revenues from training andconsulting services are recognized as services are provided to customers.Revenues from customer support contracts are deferred and recognized ratablyover the term of the support agreements. Revenues for customer support or fortraining and consulting services that are bundled with license fees aredeferred based on the vendor-specific objective evidence of fair value of thebundled services and recognized over the term of the agreement. Vendor-specificobjective evidence of fair value is based on the renewal rate for continued customersupport arrangements and the price charged when training and consultingservices are sold separately.

 

*Allowance for Doubtful Accounts.*  We maintain an allowance fordoubtful accounts at an amount we estimate to be sufficient to provide adequateprotection against losses resulting from extending credit to ourcustomers.  In judging the adequacy ofthe allowance for doubtful accounts, we consider multiple factors includinghistorical bad debt experience, the general economic environment, the need forspecific customer reserves and the aging of our receivables. This provision isincluded in operating expenses as a general and administrative expense. Aconsiderable amount of judgment is required in assessing these factors. If thefactors utilized in determining the allowance do not reflect futureperformance, then a change in the allowance for doubtful accounts would benecessary in the period such determination has been made affecting futureresults of operations.

 

*Sales Returns and Allowances*.** **Althoughwe do not provide a contractual right of return, in the course of arriving atpractical business solutions to various warranty and other claims, we haveallowed sales returns and allowances. We record a provision for estimated salesreturns and allowances on licenses in the same period the related revenues arerecorded or when current information indicates additional amounts are required.These estimates are based on historical experience determined by analysis of specificreturn activity and other known factors. If the historical data we utilize doesnot reflect future performance, then a change in the allowances would benecessary in the period such determination has been made affecting futureresults of operations.

 

*Valuation of Long-Lived andIntangible Assets and Goodwill.***  **In accordance with SFAS No. 144 “*Accounting for the Impairment or Disposal of Long-Lived Assets*,”******we reviewidentifiable intangible and other long-lived assets for impairment wheneverevents or changes in circumstances indicate the carrying amount may not berecoverable. Events or changes in circumstances that indicate the carryingamount may not be recoverable include, but are not limited to a significantdecrease in the market value of the business or asset acquired, a significantadverse change in the extent or manner in which the business or asset acquiredis used or a significant adverse change in the business climate. If such eventsor changes in circumstances are present, the undiscounted cash flows method isused to determine whether the long-lived asset is impaired. Cash flows wouldinclude the estimated terminal value of the asset and exclude any interestcharges. To the extent the carrying value of the asset exceeds the undiscountedcash flows over the estimated remaining life of the asset; the impairment ismeasured using the discounted cash flows method. The discount rate utilizedwould be based on management’s best estimate of the related risks and return atthe time the impairment assessment is made.

 

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In accordance with SFAS No. 142 “*Goodwill andOther Intangible Assets”* if events or changes in circumstancesindicate the carrying amount may not be recoverable, the first step of the goodwillimpairment test, used to identify potential impairment, compares the fair valueof a reporting unit with its carrying amount, including goodwill. We operate asone reporting unit and therefore compare our book value to market value. Marketvalue is determined utilizing our market capitalization plus a control premium.If our market value exceeds our book value, goodwill is considered notimpaired, thus the second step of the impairment test is not necessary. If ourbook value exceeds our market value, the second step of the goodwill impairmenttest is performed to measure the amount of impairment loss, if any. The secondstep of the goodwill impairment test, used to measure the amount of impairmentloss, compares the implied fair value of the goodwill with the book value ofthe goodwill. If the carrying value of the goodwill exceeds the implied fairvalue of the goodwill, an impairment loss would be recognized in an amountequal to the excess. Any loss recognized cannot exceed the carrying amount of goodwill.After a goodwill impairment loss is recognized, the adjusted carrying amount ofgoodwill is the new accounting basis. A subsequent reversal of a previouslyrecognized goodwill impairment loss is prohibited once the measurement of thatloss is completed.

 

*Income Taxes*.  Significant judgment is required in determining the income taxes in each of thejurisdictions in which we operate. This process involves estimating our actualcurrent tax exposure together with assessing temporary differences resultingfrom the different treatment of specific items for tax and financial reportingpurposes. These differences result in deferred tax assets and liabilities,which are included within our Condensed Consolidated Balance Sheets. Althoughwe believe our assessments are reasonable, no assurance can be given that thefinal tax outcome of these matters will not be different than that which isreflected in our historical income tax provisions, benefits and accruals. Suchdifferences could have a material effect on our income tax provision and netincome in the period in which such a determination is made.

 

Asof February 28, 2006 and May 31, 2005, the CondensedConsolidated Balance Sheets include net deferred tax assets in the amount of$31.8 million and $30.7 million, respectively.  We are required to evaluate the likelihoodthat our net deferred tax assets will be recovered from future taxable incomeand to the extent we believe that recovery is not likely, we must establish avaluation allowance. To the extent we establish or reverse some or all of thevaluation allowance, we must include that expense or expense reversal withinthe tax provision for the current period included in the Condensed ConsolidatedStatements of Operations.  As of February 28,2006, we have evaluated the previously reported valuation allowance anddetermined a portion of that allowance in the amount of $1.4 million should bereversed. This $1.4 million represents an expectation that the previouslyrecorded tax assets for federal tax credits, federal carryover items and statenet operating losses are now more likely than not to be realized prior to theirexpiration dates.  

 

Ourmethodology for determining the realization of our deferred tax assets involvesestimates of future taxable income from our core business, the estimated impactof future stock option deductions from the exercise of outstanding stockoptions, and the expiration dates and amounts of state, federal and foreign netoperating losses and other carryforwards in addition to various tax credits.These estimates are projected throughout the life of the related deferred taxassets based on assumptions that management believes to be reasonable andconsistent with current operating results. In assessing the future realization of our deferred tax assets as of February 28,2006, we considered both positive and negative evidence regarding our abilityto generate sufficient future taxable income to realize our deferred taxassets. The evidence considered included the cumulative tax operating loss forthe past three years; the cumulative pre-tax income for financial reportingpurposes for the past twelve cumulative quarters; a one year income look back;the estimated impact of future tax deductions from the exercise of stockoptions outstanding as of February 28, 2006; and the estimated futuretaxable income based on historical operating results.

 

Inthe event that we adjust our estimates of future taxable income or taxdeductions from the exercise of stock options, or our stock price changessignificantly without a corresponding change in taxable income, we may need toestablish an additional valuation allowance or reverse some or all of theexisting valuation allowance, which could materially impact our financialposition and results of operations.

 

*Contingencies.*  TheCompany is subject to the possibility of various loss contingencies in thenormal course of business. The Company accrues for loss contingencies when aloss is estimatable and probable.

 

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**Results of Operations**

 

Thefollowing table sets forth certain line items in our Condensed ConsolidatedStatements of Operations as a percentage of total revenues for the periodsindicated and the percentage of dollar change from the prior year:

 
| ** **                            | ** ** | **Three Months  Ended  February 28,** | ** ** | **Nine Months  Ended  February 28,** | ** ** | **Percent of  Dollar Change  2006 vs. 2005** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005**                                  | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **Quarter** | ** ** | **Year- to-  Date** | ** ** |
|                                  |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Revenues:                             |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| License fees                          |       | 17.2                                       | %          | 16.8                                      | %          | 19.6                                         | %          | 16.3 | % | 8.4 | % | 28.4 | % |
| Services                              |       | 82.8                                       |       | 83.2                                      |       | 80.4                                         |       | 83.7 |   | 5.5 |   | 2.3 |   |
| Total revenues                        |       | 100.0                                      |       | 100.0                                     |       | 100.0                                        |       | 100.0 |   | 6.0 |   | 6.5 |   |
|                                  |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Cost of revenues:                     |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Cost of license fees                  |       | 3.1                                        |       | 2.7                                       |       | 3.0                                          |       | 3.0 |   | 22.2 |   | 5.5 |   |
| Cost of services                      |       | 37.2                                       |       | 41.4                                      |       | 37.5                                         |       | 43.4 |   | (4.9 | ) | (7.9 | ) |
| Total cost of revenues                |       | 40.3                                       |       | 44.1                                      |       | 40.5                                         |       | 46.4 |   | (3.3 | ) | (7.1 | ) |
|                                  |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Gross margin                          |       | 59.7                                       |       | 55.9                                      |       | 59.5                                         |       | 53.6 |   | 13.3 |   | 18.3 |   |
|                                  |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Operating expenses:                   |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Research and development              |       | 16.3                                       |       | 18.7                                      |       | 16.2                                         |       | 18.8 |   | (7.7 | ) | (8.4 | ) |
| Sales and marketing                   |       | 20.1                                       |       | 21.4                                      |       | 21.2                                         |       | 23.4 |   | (0.1 | ) | (3.6 | ) |
| General and administrative            |       | 11.0                                       |       | 12.5                                      |       | 13.8                                         |       | 10.7 |   | (6.6 | ) | 38.0 |   |
| Restructuring                         |       | —                                     |       | (0.2                                      | )          | —                                       |       | 2.1 |   | — |   | — |   |
| Amortization of acquired  intangibles |       | 0.4                                        |       | 0.5                                       |       | 0.4                                          |       | 0.5 |   | (11.5 | ) | (7.2 | ) |
| Total operating expenses              |       | 47.8                                       |       | 52.9                                      |       | 51.6                                         |       | 55.5 |   | (4.1 | ) | (1.0 | ) |
|                                  |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Operating income (loss)               |       | 11.9                                       |       | 3.0                                       |       | 7.9                                          |       | (1.9 | ) | 325.2 |   | 535.2 |   |
|                                  |       |                                       |       |                                      |       |                                         |       |   |   |   |   |   |   |
| Other income                          |       | 3.2                                        |       | 1.5                                       |       | 2.8                                          |       | 1.1 |   | 121.5 |   | 165.9 |   |
| Income (loss) before income  taxes    |       | 15.1                                       |       | 4.5                                       |       | 10.7                                         |       | (0.8 | ) | 255.7 |   | 1,519.8 |   |
| Provision (benefit) for income  taxes |       | 3.7                                        |       | 1.2                                       |       | 2.9                                          |       | (0.5 | ) | 235.9 |   | 677.4 |   |
| Net income (loss)                     |       | 11.4                                       | %          | 3.3                                       | %          | 7.8                                          | %          | (0.3 | )% | 262.6 | % | 3,163.5 | % |

 

**Three Months Ended February 28, 2006 Compared With Three MonthsEnded February 28, 2005**

 

***Revenues***

 

*Total Revenues.*    Welicense software under non-cancelable license agreements and provide relatedprofessional services including consulting, training, and implementationservices, as well as ongoing customer support. Total revenues increased to$87.7 million for the three months ended February 28, 2006 from $82.7million for the three months ended February 28, 2005, representing a 6.0% increase.The $5.0 million increase in total revenues was attributed to a $1.2 millionincrease in license fees and a $3.8 million increase in services.

 

*License Fees.*    Revenuesfrom license fees increased to $15.1 million for the three months ended February 28,2006 from $13.9 million for the three months ended February 28, 2005,representing an 8.4% increase. The $1.2 million increase is primarily attributableto a 30.0% increase in licensing transactions. Revenues from license fees include transactions with new clients andexisting clients.  The percent ofcontracting revenue from new clients decreased to 32.7% from 35.6% in the prioryear period.  Revenues from license feesas a percentage of total revenues for the three months ended February 28,2006 and 2005 were 17.2% and 16.8%, respectively. 

 

*Services.*    Revenuesfrom services increased to $72.6 million for the three months ended February 28,2006 from $68.8 million for the three months ended February 28, 2005,representing a 5.5% increase.  The $3.8million increase in services includes a $2.1 million increase in customersupport revenue and a $1.7 million increase in consulting revenue. The 

 

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$2.1 million increase incustomer support revenue was primarily due to general price increases. The $1.7million increase in consulting revenue reflected the increased softwarelicensing activity throughout fiscal 2006. Service revenues as a percentage of total revenues for the three monthsended February 28, 2006 and 2005 were 82.8% and 83.2%, 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 include embeddedcomponents of third-party vendors, for which a fee is paid to the vendor uponsale of our products. In addition, we resell third-party products inconjunction with the license of our software solutions. The cost of licensefees is higher when we resell products of third-party vendors. As a result,gross profits may vary depending on the proportion of third-party product salesin our revenue mix.

 

Costof license fees increased to $2.7 million for the three months ended February 28,2006 from $2.2 million for the three months ended February 28, 2005,representing a 22.2% increase.  The $0.5million increase was primarily due to increased costs associated with sales relatedto the agreement initiated with IBM in fiscal 2005.  Sales under the agreement primarily began inthe third quarter of fiscal 2006.  Costof license fees as a percentage of total revenues for the three months ended February 28,2006 and 2005 were 3.1% and 2.7%, respectively. Gross margin on revenue fromlicense fees was 81.9% and 84.0% for the three months ended February 28,2006 and 2005, respectively, reflecting the higher costs associated with theIBM agreement in 2006.

 

*Cost of Services. *Costof services includes the salaries, employee benefits and related travel andoverhead costs for providing consulting, training, implementation and supportservices to customers as well as intangible asset amortization on supportcontracts purchased in April 2004.  

 

Costof services decreased to $32.6 million for the three months ended February 28,2006 from $34.3 million for the three months ended February 28, 2005,representing a 4.9% decrease and reflecting initiatives to reduce service costs.  The $1.7 million decrease in cost of serviceswas primarily due to a $1.8 million decrease in employee costs resulting fromworkforce reductions as a result of prior year restructuring initiatives andattrition that occurred since the prior year period, a $0.3 million decrease inrent, a $0.2 million decrease in third party costs and a $0.2 million decreasein depreciation expense.  The decrease waspartially offset by an increase in travel of $0.6 million.  Cost of services as a percentage of totalrevenues for the three months ended February 28, 2006 and 2005 was 37.2%and 41.4%, respectively.  Gross margin onservices revenues was 55.1% and 50.2% for the three months ended February 28,2006 and 2005, respectively.  The improvementin gross margin is due to improvements in both customer support and consultingmargins reflecting both revenue increases and reduction in expenses.  We have experienced favorable impacts onservice margin as a result of a higher mix of services being delivered by ourglobal sourcing partner leading to lower costs.

 

***Operating Expenses***

 

*Research and Development.*    Researchand development expenses consist primarily of salaries, employee benefits,related overhead costs and consulting fees relating to product development,enhancements, upgrades, testing, quality assurance and documentation.  Research and development expenses decreasedto $14.3 million for the three months ended February 28, 2006 from$15.5 million for the three months ended February 28, 2005,representing a 7.7% decrease. The $1.2 million decrease in research anddevelopment was primarily due to a $1.3 million decrease related to a plannedreduction in contract personnel and a $0.2 million decrease in employeebenefits.  The decreases were partiallyoffset by a $0.4 million increase in outsourcing through our global sourcing partnerrelationship resulting in overall productivity improvements.  Research and development expenses as apercentage of total revenues for the three months ended February 28, 2006and 2005 were 16.3% and 18.7%, respectively.

 

*Sales and Marketing.*   Salesand marketing expenses consist primarily of salaries and incentivecompensation, employee benefits and travel and overhead costs related to oursales and marketing personnel, as well as trade show activities and advertisingcosts.  Sales and marketing expenses wereconsistent at $17.7 million for the three months ended February 28, 2006 and2005. A $0.6 million increase in sales incentives was offset by a $0.4 milliondecrease in employee and related costs due to workforce reductions primarilyrelated to restructuring initiatives and a $0.2 million decrease in managementconsulting fees.   Sales and marketingexpenses as a percentage of total revenues for the three months ended February 28,2006 and 2005 were 20.1% and 21.4%, respectively.

 

*General and Administrative.*    General andadministrative expenses consist primarily of salaries, employee benefits andrelated overhead costs for administrative employees, as well as legal andaccounting expenses, consulting fees, bad debt expense and corporate insurancepolicies, including property and casualty, general liability and otherinsurance.  General and administrativeexpenses decreased to $9.6 million for the three months ended February 28,2006 from $10.3 million for the three months ended February 28, 2005,representing a 6.6% decrease. The $0.7 million decrease in general andadministrative 

 

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expenses was primarily due to a$2.1 million decrease in legal fees primarily related to SEC legal costsincurred in the prior year, partially offset by an increase of $1.4 million inemployee costs including increases in salaries, placement fees and benefits aswell as expenses relating to the pending acquisition of Intentia.  General and administrative expenses as apercentage of total revenues for the three months ended February 28, 2006and 2005 were 11.0 % and 12.5%, respectively.

 

*Restructuring.*   During the three months ended February 28, 2006 we recorded no adjustmentto restructuring compared with a $0.2 million restructuring credit for thethree months ended February 28, 2005. See Note 7 of Notes to CondensedConsolidated Financial Statements for a summary of activity for year-to-datefiscal 2006. 

 

*Amortization of Acquired Intangibles. * Amortizationof acquired intangibles of $0.3 million for the three months ended February 28,2006 was consistent with $0.4 million for the three months ended February 28,2005.

 

***Other Income, Net***

 

Otherincome, net, which is primarily comprised of interest income earned from cash,and marketable securities increased to $2.8 million for the three months ended February 28,2006 from $1.3 million for the three months ended February 28, 2005.  The $1.5 million increase in interest incomewas due primarily to a $50.8 million increase in average invested balances andan increase in average yields, which were 4.3% and 2.3% for the three monthsended February 28, 2006 and 2005, respectively.

 

***Provision for Income Taxes***

*** ***

Werecorded a $3.2 million income tax provision for the three months ended February 28,2006 compared with $1.0 million for the three months ended February 28, 2005. Our income taxprovision is based on pretax income and consists primarily of federal and stateincome taxes.  The quarterly tax expenseis measured using an estimated annual tax rate for the period.  At February 28, 2006, the Company’sestimated annual tax rate was 39.4% before the impact of discrete items. Oureffective tax rate, after the impact of discrete items, was 24.4% and 25.8% forthe three months ended February 28, 2006 and 2005, respectively.  The effective tax rate for the three monthsended February 28, 2006 includes a reversal of $1.4 million of valuationallowance as a result of the determination that previously recorded deferred taxassets are now more likely than not to be realized prior to their expirationdates and the reversal of $0.5 million of tax reserves related to the closingof the U.S. statute of limitations on certain tax years.  The effective tax rate, after theimpact of discrete items, for the three months ended February 28, 2005 includesa $0.4 million benefit recorded with the filing of the Company’s tax returns asa result of a favorable return to provision adjustment. This discrete benefithas the effect of decreasing the effective tax rate for the three months endedFebruary 28, 2005 by approximately 10%.  We review our reportedeffective tax rate on a quarterly basis and make any necessary changes.

 

**Nine Months Ended February 28, 2006 Compared With Nine months Ended February 28,2005**

 

***Revenues***

 

*Total Revenues.*    Totalrevenues increased to $264.6 million for the nine months ended February 28,2006 from $248.4 million for the nine months ended February 28, 2005,representing a 6.5% increase. The $16.2 million increase in total revenues wasattributed to an $11.4 million increase in license fees and a $4.8 millionincrease in service revenues.

 

*License Fees.*    Revenues from licensefees increased to $51.8 million for the nine months ended February 28,2006 from $40.4 million for the nine months ended February 28, 2005,representing a 28.4% increase. The $11.4 million increase from the prior yearperiod is attributable to an increase in transactions greater than $1.0 millionresulting in an increase in average licensing transaction size.  Transactions greater than $1.0 million forthe nine months ended February 28, 2006 and 2005 were 10 and 6,respectively.  Revenues from license feesinclude transactions with new clients and existing clients.  The number of licensing transactions with newclients increased to 48 in the current year period from 37 in the prior yearperiod.  The increase in new client salesis due in part because Lawson is being selected more frequently to bid onpotential transactions due partially to industry consolidation.  In addition, many of our targeted publiccompany clients have completed their initial year of Sarbanes-Oxley compliance,which has freed up their time and resources to facilitate some of the increasein sales activity.  Revenues fromlicense fees as a percentage of total revenues for the nine months ended February 28,2006 and 2005 were 19.6% and 16.3%, respectively.

 

*Services.*    Revenuesfrom services increased to $212.8 million for the nine months ended February 28,2006 from $208.0 million for the nine months ended February 28, 2005,representing a 2.3% increase.  The $4.8million increase in services includes a $6.7 million increase in customersupport revenue that was partially offset by a $1.9 million decrease in 

 

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consulting revenue. The $6.7million increase in customer support revenue was primarily due to general priceincreases.  The $1.9 million decrease inconsulting revenue was primarily due to a decline in fiscal 2005 licensecontracting activities, which resulted in fewer consulting opportunities duringthe first three quarters of fiscal 2006. Service revenues as a percentage of total revenues for the nine monthsended February 28, 2006 and 2005 were 80.4% and 83.7%, respectively.

 

***Cost of Revenues***

 

*Cost of License Fees.*   Cost of license fees increased to $7.9 million for the nine months ended February 28,2006 from $7.5 million for the nine months ended February 28, 2005,representing a 5.5% increase. The $0.4 million increase resulted primarily fromincreased costs associated with sales related to the agreement initiated withIBM in fiscal 2005.  Sales under theagreement primarily began in the third quarter of fiscal 2006.  Cost of license fees as a percentage of totalrevenues for the nine months ended February 28, 2006 and 2005 were 3.0%.Gross margin on revenue from license fees was 84.7% and 81.4% for the ninemonths ended February 28, 2006 and 2005, respectively.

 

*Cost of Services.   *Costof services decreased to $99.2 million for the nine months ended February 28,2006 from $107.8 million for the nine months ended February 28, 2005,representing a 7.9% decrease. The $8.6 million decrease in cost of services wasprimarily due to a $6.8 million decrease in employee costs resulting fromworkforce reductions primarily related to restructuring initiatives andattrition that occurred since the prior year period, a $0.8 million reductionin depreciation expense and a $0.3 million reduction in rent expenses.  Cost of services, as a percentage of totalrevenues, for the nine months ended February 28, 2006 and 2005 was 37.5 %and 43.4%, respectively.  Gross margin onservices revenues was 53.4% and 48.2% for the nine months ended February 28,2006 and 2005, respectively. Additionally, the Company is starting to see the benefit of lower costsas a result of higher mix of offshore resources.

 

***Operating Expenses***

 

*Research and Development.*   Researchand development expenses decreased to $42.9 million for the nine monthsended February 28, 2006 from $46.8 million for the nine months ended February 28,2005, representing an 8.4% decrease. The $3.9 million decrease in research anddevelopment was primarily due to a $1.4 million decrease in employee costsresulting from workforce reductions primarily related to prior year restructuringinitiatives, a $3.4 million decrease related to a planned reduction in contractpersonnel and a $0.4 million decrease in depreciation expense. The decreaseswere partially offset by a $1.7 million increase in outsourcing through our globalsourcing partner relationship resulting in overall productivityimprovements.  Research and developmentexpenses as a percentage of total revenues for the nine months ended February 28,2006 and 2005 were 16.2% and 18.8%, respectively.

 

*Sales and Marketing.*   Sales and marketing expenses decreased to $56.1 million for the nine monthsended February 28, 2006 from $58.2 million for the nine months ended February 28,2005, representing a 3.6% decrease. The $2.1 million decrease in sales andmarketing expenses was due to a $2.2 million reduction in advertising costs, a$1.4 million reduction in consulting fees from fiscal 2005 projects and a $0.8million reduction for travel expenses due to reduced headcount and costreduction initiatives.  Partiallyoffsetting these decreases was an increase of $2.5 million in employee andrelated costs due to sales incentives partially offset by workforce reductionsprimarily related to restructuring activities in fiscal 2005.  Sales and marketing expenses as a percentageof total revenues for the nine months ended February 28, 2006 and 2005were 21.2% and 23.4%, respectively.

 

*General and Administrative.*   General and administrativeexpenses increased to $36.6 million for the nine months ended February 28,2006 from $26.5 million for the nine months ended February 28, 2005,representing a 38.0% increase. The $10.1 million increase in general andadministrative expenses was primarily due to $11.7 million of increasedemployee costs including bonuses and severance which included a $6.3 millionnon-cash charge for option expense relating to the former president and CEO’snegotiated separation agreement. Additionally, contractor spending increased by $1.5 million and costs of$2.2 million were recorded for the pending merger with Intentia.  The increases in costs were partially offsetby a $1.7 million decrease in bad debt expense primarily driven by improvedaging of receivables due to strong collection efforts and lower specificreserves and a decrease in accounting and legal fees of $3.7 million primarilyrelated to SEC legal costs incurred in the prior year.  General and administrative expenses as apercentage of total revenues for the nine months ended February 28, 2006and 2005 were 13.8% and 10.7%, respectively.

 

*Restructuring.*   During the nine months ended February 28, 2006, we recorded a $0.01million restructuring charge compared with a $5.2 million restructuring charge,for the nine months ended February 28, 2005.  See Note 7 of Notes to Condensed ConsolidatedFinancial Statements for a summary of activity for year-to-date fiscal 2006.

 

*Amortization of Acquired Intangibles. * Amortizationof acquired intangibles for the nine months ended February 28, 2006 of$1.1 million was consistent with the $1.2 million for the nine monthsended February 28, 2005.

 

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***Other Income, Net***

 

Otherincome, net, which is primarily comprised of interest income earned from cashand marketable securities increased to $7.5 million for the nine months ended February 28,2006 from $2.8 million for the nine months ended February 28, 2005. The$4.7 million increase in interest income was due primarily to a $64.8 millionincrease in average invested balances and an increase in average yields, whichwere 3.8% and 1.8% for the nine months ended February 28, 2006 and 2005,respectively, and $0.4 million in interest income received on a tax refund.

 

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

*** ***

Werecorded a $7.6 million income tax provision for the nine months ended February 28,2006 compared with a  $1.3 million income tax benefit for thenine months ended February 28, 2005. Our income tax provision (benefit) isbased on pretax income (loss) and consists primarily of federal and stateincome taxes.  The quarterly tax expenseis measured using an estimated annual tax rate for the period.  At February 28, 2006, the Company’sestimated annual tax rate was 39.4% before the impact of discrete items. Oureffective tax rate, after the impact of discrete items, was 26.9% and 66.1% forthe nine months ended February 28, 2006 and 2005, respectively.  The effective tax rate for the nine monthsended February 28, 2006 includes a reversal of $1.4 million of valuationallowance as a result of the determination that previously recorded tax assetsare now more likely than not to be realized prior to their expiration dates andthe reversal of $2.1 million of tax reserves related to favorable settlement ofcertain tax audit matters and the closing of the U.S. statute of limitations oncertain tax years.  The effectivetax rate, after the impact of discrete items, for the nine months endedFebruary 28, 2005 includes a $0.4 million benefit recorded with the filing ofthe Company’s tax returns as a result of a favorable return to provisionadjustment. For the nine months ended February 28, 2005, due to a relativelysmall pre-tax loss of $0.2 million, this discrete item increased the effectivetax rate by approximately 20%.  We review our reported effective tax rate ona quarterly basis and make any necessary changes.

 

**Liquidity and Capital Resources**

** **
| ** **                                           | ** ** | **As of and for the Nine months Ended  February 28,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(in millions,  except %)**                    | ** ** | **2006**                                                   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Working  capital                                     |       | $                                                          | 223.2      |   | $ | 181.9 |   | 22.7 | % |
| Cash and  cash equivalents and marketable securities |       | $                                                          | 277.9      |   | $ | 221.9 |   | 25.3 | % |
| Cash  provided by operating activities               |       | $                                                          | 38.6       |   | $ | 17.1 |   | 126.0 | % |
| Cash used in  investing activities                   |       | $                                                          | (49.5      | ) | $ | (15.4 | ) | 222.6 | % |
| Cash  provided by (used in) financing activities     |       | $                                                          | 10.3       |   | $ | (1.0 | ) | 1,134.0 | % |

 

As of February 28, 2006 we had $277.9 million in cash, cashequivalents and marketable securities and $223.2 million in working capital.Our most significant source of operating cash flows is derived from licensefees and services to our customers. Days sales outstanding, which is calculatedon net current receivables at period end divided by revenue for the quartertimes 90 days in the quarter, was 51 and 45 as of February 28, 2006 and May 31,2005, respectively. The increase is reflective of a $6.9 million increase inaccounts receivable associated with the combined effects of increased revenuesand an increase in receivables associated with work in progress.  Our primary uses of cash from operatingactivities are for employee 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 acquisition related costs.  Weare estimating these acquisition related costs to be in the range of $120million to $140 million, which includes approximately $10 million to $15****million of costs to close the transaction, approximately$25 million to $35 million of integration costs once the transaction iscompleted, approximately $40 million for the pay-off of loans and 

 

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approximately $47 million ifall the Intentia shares are not tendered and we are required to purchase themfor cash.  We believe we have sufficientcash to fund this business transaction. For additional information refer to Note 5, “Pending BusinessCombination” in the Notes to the Condensed Consolidated Financial Statements.

 

During the quarter ended February 28, 2006, we began a program toinvoice annual support renewals so that most customers will have a June 1renewal date each year for software support. In the past, annual support renewal dates with customers were spreadthroughout the year, based on either the beginning of a quarter or theanniversary date of the initial license agreement with a customer.  Under this new program, we will invoicecustomers for annual support during the 90 day period before each June 1,and expect payment by that June 1. As a result, beginning in the first quarter of fiscal 2008, weanticipate our cash balance from annual support payments will increase whenthese invoices are paid, and then will decrease after each June 1 over theremainder of the year as we apply that cash towards the fulfillment of oursupport obligations.  Revenue is notaffected by this new program as revenue is recognized as the services areprovided.

 

***Cash flows fromoperating activities:***

 

Netcash provided by operating activities was $38.6 million for the ninemonths ended February 28, 2006 compared with $17.1 million for thenine months ended February 28, 2005. Cash flows from operating activitieswere largely generated from our net income of $20.7 million and increased by$18.8 million in non-cash charges before working capital changes. Non-cashcharges primarily consist of $10.6 million of depreciation and amortization, a$6.4 million stock compensation charge related to a negotiated separationagreement with the Company’s former president and chief executive officer and a$4.3 million tax benefit from stockholder transactions of option activity. The$0.9 million in net working capital changes decreased the overall cash providedto $38.6 million.

 

Theactivity in working capital changes for fiscal 2006 primarily relates to a $5.9million decrease in cash received resulting from accounts receivable, a $1.1million decrease in deferred revenue and customer deposits and $2.1 million of increasein cash payments related to accounts payable and accrued and other liabilities.These were partially offset by an increase in income taxes payable in theamount of $4.3 million related to the increased earnings and an increase inprepaid expenses of $3.6 million.

 

***Cash flows frominvesting activities:***

 

Net cash used in investing activities was $49.5 million for the ninemonths ended February 28, 2006 compared with $15.4  millionfor the nine months ended February 28, 2005. The decrease in cash frominvesting activities for the nine months ended February 28, 2006 primarilyrelated to $43.7 million of cashused in net purchases of marketable securities as well as $2.9 million of cashpaid for capitilized transaction costs in conjunction with the acquisition ofIntentia.  Refer to Note 5 “PendingBusiness Combination” in the Notes to the Condensed Consolidated FinancialStatements for additional information 

 

***Cash flows fromfinancing activities***:

 

Net cash provided by financing activities was $10.3 million for thenine months ended February 28, 2006 compared with net cash used infinancing activities of $1.0 million for the nine months ended February 28,2005.  The financing activities for thenine months ended February 28, 2006 primarily related to $9.3 million in cash received from theexercise of stock options and $2.7 million in cash received from employeecontributions to our employee stock purchase plan.

 

#### ***Repurchase of Common Shares***

#### *** ***

In June 2003 our Board of Directors authorized us to repurchase upto $50.0 million of our common shares. Shares were repurchased from time totime as market conditions warranted either through open market transactions,block purchases, private transactions or other means.  During the nine months ended February 28,2005, we completed the authorized stock repurchase plan by purchasing theremaining 1.4 million shares for $10.0 million in cash.  Cash proceeds obtained from maturities ofmarketable securities, the exercise of employee stock options and contributionsto the employee stock purchase plan largely funded the share repurchases.  The repurchased shares, which remain intreasury, are being used for general corporate purposes.  

 

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**Disclosuresabout Contractual Obligations and Commercial Commitments**

 

The followingsummarizes our contractual obligations at February 28, 2006, and the effectthese contractual obligations are expected to have on our liquidity and cashflows in future periods (in thousands):

 

 
| ** **                                 | ** ** | **Total** | ** ** | **1 Year or  Less** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|--------------------------------------------|------------|-----------|------------|-------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| **Balance Sheet Contractual Obligations:** |       |      |       |                          |       |               |       |               |       |                             |       |
| Debt                                       |       | $         | 300        |                          | $          | 300                |       | $                  | —     |                             | $          | — |   | $ | — |   |
| Strategic partner commitments (2) (3) |       | 1,000     |       | 1,000                         |       | —             |       | —             |       | —                           |       |
| Total                                      |       | $         | 1,300      |                          | $          | 1,300              |       | $                  | —     |                             | $          | — |   | $ | — |   |
| **Other Contractual Obligations:**         |       |      |       |                          |       |               |       |               |       |                             |       |
| Operating leases                           |       | $         | 67,999     |                          | $          | 8,266              |       | $                  | 16,514     |                             | $          | 15,895 |   | $ | 27,324 |   |
| Purchase obligations (1)                   |       | 10,439    |       | 8,082                         |       | 2,320              |       | 37                 |       | —                           |       |
| Total                                      |       | $         | 78,438     |                          | $          | 16,348             |       | $                  | 18,834     |                             | $          | 15,932 |   | $ | 27,324 |   |
|                                       |       |      |       |                          |       |               |       |               |       |                             |       |
| **Total Contractual Obligations**          |       | $         | 79,738     |                          | $          | 17,648             |       | $                  | 18,834     |                             | $          | 15,932 |   | $ | 27,324 |   |

 

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(1)                                  Ourpurchase obligations represent those commitments greater than $50,000 andconsist primarily of commitments for marketing activities.

 

(2)                                  Under the Agreement with Hackett that commenced May 9, 2005, we paid $1.6million during the nine months ended February 28, 2006, and are contractuallycommitted to pay an additional $0.5 million within the next twelve months.  We will pay additional fees when salesvolumes meet established criteria throughout the term of the contract. TheAgreement identifies joint programs in which Hackett will provide the Companyand its customers and prospects with, among other things, access to Hackettbenchmark tools, best-practices research and business advisory services. See Note 9 “Commitments andContingencies” to the Condensed Consolidated Financial Statements foradditional information.

 

 (3)                              In fiscal 2005, the Company and International Business MachinesCorporation (IBM) entered into an OEM Software Agreement that was modified inthe second quarter of fiscal 2006, and a Master Relationship Agreement (MRA).Under these agreements, we are reselling our business applications in conjunctionwith IBM’s open standards-based software, and the companies will jointly marketthese software solutions.  The MRAgoverns the joint marketing activities and has a three-year term. Duringthe term of the modified OEM Software Agreement, we are paying royalties to IBMfor the licensing of IBM programs to each applicable existing and new customerof the Company, and are paying IBM annual maintenance fees for each applicablecustomer.  The royalty and maintenancepayments to IBM are based on transactions with each applicable Lawson customer.The modified OEM Software Agreement has an initial term of three yearscommencing September 2005 and may be extended by us for two additional one-yearterms.  During the initial three-yearterm, we have agreed to pay certain minimum quarterly and annual royalties toIBM. Total commitments under the modified OEM Software Agreement approximate$9.5 million over the three-year term. We may elect to terminate the OEMSoftware Agreement for convenience upon 90 days advance notice to IBM.  If we elect early termination at any timeduring the initial three-year term, we would pay IBM any unpaid minimumroyalties through the date of termination plus a prorated share of theguaranteed annual minimum payment due for the year in which the terminationoccurred.  We have made cash payments of$2.6 million according to terms of the modified OEM Software Agreement duringthe nine months ended February 28, 2006 recorded as other assets – long-term.  In addition, we recorded $0.5 million as otheraccrued liabilities on the February 28, 2006 Condensed Consolidated BalanceSheet, representing the prorated portion of the $0.6 million annual minimumowed in the initial year of the contract.  See Note 9 “Commitments and Contingencies” tothe Condensed Consolidated Financial Statements for additional information.

 

**Off-Balance-SheetArrangements**

 

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

 

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resourcesare not subject to off-balance-sheet risks from unconsolidated entities. As ofFebruary 28, 2006, we did not have any off-balance-sheet arrangements, asdefined in Item 303(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 February 28, 2006, we leased facilities and certain equipment undernon-cancelable operating leases expiring between 2006 and 2017. Rentexpense under operating leases for the three months ended February 28, 2006 and2005 was $3.2 million and $3.5 million, respectively. Rent expense underoperating leases for the nine months ended February 28, 2006 and 2005 was $10.1million and $10.4 million, respectively. Future minimum lease payments underour operating leases as of February 28, 2006 are included above in “Disclosuresabout Contractual Obligations and Commercial Commitments”.

 

**RecentAccounting Pronouncements**

 

In December 2004 theFinancial 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 transactions to be recognized in the financial statements. Thecost 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 options, restricted share plans,performance-based awards, share appreciation rights and employee share purchaseplans. 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”)*.     *SFASNo. 123, as originally issued in 1995, established a fair-value-basedmethod of accounting for share-based payment transactions with employees.However, SFAS No. 123 permitted entities the option of continuing to applythe guidance in Opinion 25, as long as the footnotes to financial statementsdisclosed what net income would have been had the fair-value-based method beenused. We elected the option of disclosure only under SFAS No. 123. In ourdisclosures, we have historically used the Black-Scholes option pricing modelto determine the fair value of its share based compensation arrangements. Uponthe adoption of SFAS No. 123(R), we will determine whether it willcontinue to utilize the Black-Scholes model or adopt some other acceptablemodel. Public entities are required to apply SFAS No. 123(R) as of thefirst annual reporting period that begins after June 15, 2005, whichis effective with our first quarter of fiscal 2007. Based on thesignificant amount of our unvested share-based payment awards, the adoption ofthis statement is anticipated to have a material impact on our ConsolidatedStatements of Operations, however we are currently evaluating the impact.Historically, had compensation costs for the Company’s stock options beenrecognized based on fair value at the grant date consistent with the provisionsof SFAS No. 123, the Company’s diluted earnings per share would have beenreduced by $0.06, $0.05 and $0.05, respectively, for the years ended May 31,2005,  May 31, 2004, and May 31, 2003, asdisclosed in the Company’s Annual Report on Form 10-K and Form 10-K/A filed forthe fiscal year ended May 31, 2005.

 

InMay 2005, the FASB issued SFAS No 154, “Accounting Changes and ErrorCorrections — A replacement of APB Opinion No 20 and FASB Statement No. 3”(“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 afterDecember 15, 2005, which is effective with our first quarter offiscal 2007. We intend to adopt the disclosure requirements upon theeffective date of the pronouncement. Since this pronouncement only relates to disclosure requirements, theadoption will have no impact on our consolidated financial statements.

 

**ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Therewere no material changes in market risk for the Company in the period coveredby this report. See the Company’s Annual Report on Forms 10-K and 10-K/A forthe fiscal year ended May 31, 2005 for a discussion of market risk for theCompany.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

(a) Evaluation of Disclosure Controls andProcedures – Under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,we evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934 (the 

 

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“Exchange Act”)). Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that, as ofthe end of the period covered by this report, our disclosure controls andprocedures were effective.

 

(b) Changes in Internal Control Over FiancialReporting – There were no changes in our internal control over financialreporting identified in connection with our evaluation during the quarter endedFebruary 28, 2006, which have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

We are, and from time totime may become, involved in litigation in the normal course of businessconcerning our products and services. While the outcome of these claims cannotbe predicted with certainty, we do not believe that the outcome of any one ofthese legal matters will have a material adverse affect on our consolidatedfinancial position, results of operations or cash flows. However, depending onthe amount and the timing, an unfavorable resolution of some or all of thesematters could materially affect our future results of operations or cash flowsin a particular period.

 

**ITEM 1A.RISK FACTORS**

 

**Factors That May Affect Our FutureResults or the Market Price of Our Stock**

 

We operate ina rapidly changing environment that involves numerous uncertainties and risks.Investors evaluating our company and its business should carefully consider thefactors described below and all other information contained in this report onForm 10-Q. This section should be read in conjunction with theCondensed Consolidated Financial Statements and Notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in this report on Form 10-Q. Any of the following factors couldmaterially harm our business, operating results and financial condition. Additionalfactors and uncertainties not currently known to us or that we currentlyconsider immaterial could also harm our business, operating results andfinancial condition. We may make forward-looking statements from time to time,both written and oral. We undertake no obligation to revise or publicly releasethe results of any revisions to these forward-looking statements based oncircumstances or events which occur in the future. The actual results maydiffer materially from those projected in any such forward-looking statementsdue to a number of factors, including those set forth below and elsewhere inthis report on Form 10-Q.

 

**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 referred to as an “ExchangeOffer”. If the Exchange Offer is accepted and the transaction is completed, Lawsonwill issue approximately 81 million shares of Lawson common stock pursuant tothe terms of the Exchange Offer. Each Series A share of Intentia stockwill be entitled to receive 0.5061 newly issued shares of Lawson common stock;each Series B share of Intentia stock will be entitled to receive 0.4519newly issued shares of Lawson common stock; and each Warrant for the purchaseof Intentia stock will be entitled to receive 0.2157 newly issued shares ofLawson common stock. These exchange ratios will not change based on thefluctuations in the market price of our common stock. The closing of theExchange Offer and business combination with Intentia is subject to severalconditions, including approval by our stockholders and sufficient tender ofshares by Intentia security holders. Under the terms of the amended TransactionAgreement, if all of the conditions to the Exchange Offer are not completed byApril 30, 2006, either Lawson or Intentia could elect to terminate theTransaction Agreement.  Our efforts toclose the business combination and integrate our two businesses will createseveral additional risks and uncertainties.

 

***We may not be able toachieve the anticipated financial and strategic benefits of our proposedcombination 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 bothbusinesses 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 businesses.

 

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***Our investment in goodwill andintangibles from our acquisitions could become impaired.***

 

As of February 28, 2006 we had goodwill of $43.3million and acquired intangibles of $25.4 million on our Condensed ConsolidatedBalance Sheet.  Upon completion of thepending merger with Intentia, we anticipate a significant increase in goodwilland acquired intangibles.  To the extentthat we do not generate sufficient cash flows to recover the net amount of thegoodwill and intangibles recorded, the goodwill and intangibles could besubsequently written-off.  In such anevent, our results of operations in any given period would be negativelyimpacted, and the market price of our stock could decline.

 

***The integration ofLawson’s and Intentia’s businesses will require significant focus on staffing,training and compliance procedures for our internal control over financialreporting under Section 404 of the Sarbanes-Oxley Act of 2002.***

*** ***

***As a Swedish company, Intentia has nothad to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of2002 concerning the effectiveness of internal controls over financialreporting.  Consequently, Intentia doesnot currently have the staff, experience, training or procedures to comply withthese requirements.  The integration ofLawson and Intentia will require significant focus on staffing and training toaddress these requirements.  If we areunable to implement our compliance procedures and have a properly trained staffin place on a timely basis, we could encounter a significant deficiency ormaterial weakness in our internal controls. If in the future we are unable to assert that our internal control overfinancial reporting is effective as of the end of the then current fiscal yearor applicable quarter (or, if our independent registered public accounting firmis unable to attest that our management’s report is fairly stated or they areunable to express an opinion on the effectiveness of our internal controls), wecould lose investor confidence in the accuracy and completeness of ourfinancial reports, which would have a negative market reaction.***

*** ***

***We will encounter materialadverse consequences if we are unable to process and report, on a timely basis,the combined company’s financial results under U.S. GAAP and SEC requirements.***

 

Because themerger with Intentia will significantly increase the complexity of our globaloperations, we will need to develop and implement worldwide procedures designedfor accurate and timely financial reporting under U.S. GAAP and SECrequirements.  In addition, we will needto train the staff of the combined company to comply with these requirements ona global basis.  If we are unable toclose our books and prepare financial reports on a timely basis, we would berequired to seek a reporting extension under applicable SEC rules.  A reporting extension could adversely impactthe trading of our stock, erode investor confidence and result in othermaterial adverse consequences.

 

***We may not be able tosuccessfully integrate our business with the business of Intentia.***

*** ***

This transaction involves the integration of twobusinesses that are based in different countries and that currently operateindependently. 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 businesses’ 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 U.S. regulatoryrequirements.***

 

As a company governed bySwedish laws and the rules of the Stockholm Stock Exchange, Intentia’soperations have not been designed to comply with financial reporting,disclosure controls and internal control requirements imposed by US GAAP andthe Sarbanes-Oxley Act of 2002 and other U.S. securities laws and regulations.The implementation of the necessary control systems will be costly and timeconsuming. If Lawson fails to promptly implement these controls and systems atIntentia’s operations, Lawson could fail to comply with U.S. regulatoryrequirements, which could adversely offset our business, financial conditionand results of operations.

 

***The market price of ourcommon stock may decline as a result of the Exchange Offer.***

*** ***

In connection with the Exchange Offer, we could issueas many as 81 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 

 

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our common stock. The shares of our common stock issued in the ExchangeOffer, subject to the contractual limitations on those persons who executed thelock-up agreements, will be freely-tradable upon consummation of the ExchangeOffer. The acquisition of our shares by Intentia securityholders who may notwish to hold shares in a U.S. company, as well as the increase in theoutstanding number of shares of our common stock, may lead to sales of suchshares or the perception that such sales may occur, either of which mayadversely affect the market for, and the market price of, our common stock. Inaddition, the market price of our common stock may decline following theclosing 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 $8.05.On April 6, 2006, the closing price of our common stock was $7.76.

 

***Our stockholders willsuffer immediate and substantial dilution to their equity and voting interestsas a result of the Exchange Offer.***

*** ***

In connection with the Exchange Offer, we may issue asmany as 81 million sharesof our common stock to the holders of Intentia shares or Intentia warrants ifall Intentia securityholders elect to tender their Shares or Warrants inexchange for shares of our common stock. This means that the Intentiasecurityholders could own up to approximately 43.25% of the total number ofshares of our outstanding common stock following the Exchange Offer.Accordingly, the Exchange Offer will have the effect of substantially reducingthe percentage of equity and voting interest held by each of our currentstockholders.

 

***The Intentiasecurityholders may be able to influence our company significantly followingthe Exchange Offer.***

*** ***

After the Exchange Offer, former Intentiasecurityholders could own approximately 43.25% of the total number of shares ofour common stock based on the treasury method. Intentia’s largest shareholder,Symphony Technology Group, will own approximately 14% of Lawson’s 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 or of the Intentia securityholders generally.

 

***Unanticipated costs relatingto the Exchange Offer and resulting combination of Intentia and Lawson couldreduce 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 $25 million for the first 12months following closing of the transaction. Our objective is to minimizeincremental costs of operating as a combined company by offsetting incrementalcosts by cost savings of the combined company. It is possible that unexpectedtransaction costs, such as taxes, fees or professional expenses, or unexpectedfuture operating expenses, such as increased personnel costs or unexpectedseverance costs, as well as other types of unanticipated developments, couldadversely impact our business and profitability.

 

***The uncertaintiesassociated with our combination with Intentia may cause our customers andIntentia’s customers to delay or defer decisions which may result in the lossof customers and revenues.***

*** ***

Our customers and Intentia’s customers may, inresponse to the pending Exchange Offer and resulting combination of Lawson andIntentia, and prior to its effectiveness, delay or defer decisions concerningbusiness with either or both of the businesses. Any delay or deferral in thosedecisions 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.

 

***The uncertainties associatedwith our combination with Intentia may cause Intentia or us to lose keypersonnel.***

*** ***

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. Our competitors might alsoattempt to hire our key 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 on goodwilland certain intangibles to evaluate whether the intangible assets and goodwillthat we acquire from Intentia continue to have fair values that meet or exceedthe amounts recorded on our balance sheet. If the fair values of such assetsdecline below their carrying value on our balance sheet, we may be required torecognize an impairment charge related to such decline. We cannot predictwhether or when there will be an impairment charge, or the amount of suchcharge, if any. However, if the charge is significant, it could cause themarket price of our common stock to decline.

 

If, as of the closing date, there are unknownliabilities in connection with Intentia’s business, and those liabilities arenot reflected on the closing date balance sheet, we would be required to recorda charge during each period when those liabilities became known, probable andestimable.  Those charges, if material,could have an unanticipated and significant adverse effect on our financialresults and stock price.

 

In addition, we will incurtransaction and integration costs in our combination with Intentia.  As a result, we will incur accounting chargesfrom the combination that may delay and reduce our profitability in theaccounting period in which the combination is consummated.

 

***We expect to expend asignificant amount of cash in the Exchange Offer, which will partially reduceour cash balance.***

*** ***

Inorder to initiate compulsory acquisition proceedings under Swedish law, we mustacquire more than 90% of the outstanding shares in Intentia. If we meet thislegal requirement and furthermore acquire more than 90% of each of theoutstanding shares and voting power in Intentia on a fully diluted basis usingthe treasury method (including all shares issuable pursuant to outstanding warrantsbut excluding shares issuable pursuant to outstanding convertible securities),we intend to purchase the remaining Shares for cash, pursuant to compulsoryacquisition proceedings under Swedish law. The actual price per share purchasedpursuant to Swedish compulsory acquisition proceedings, initiated after a shareexchange offer, is typically based on the average closing price for the bidder’sstock during the acceptance period. In addition, interest will accrue on thepurchase price from the day the compulsory acquisition proceedings areinitiated. Assuming 90.01% of each of the outstanding shares and voting powerin Intentia are tendered in the Exchange Offer and the price that is requiredto be paid pursuant to the Swedish compulsory acquisition proceedings for theremaining approximately 10% of the shares equals SEK 22.17 per Series A shareand SEK 19.80 per Series B share, we could be obligated to pay approximatelyUSD 47 million (approximately SEK 348 million assuming a currency exchange rateof SEK 7.4108 to $1.00 as of May 31, 2005) plus interest for the Sharespurchased in the compulsory acquisition. This cash expenditure would normallyoccur between one and three years after the closing of the Exchange Offer.However, Lawson may be required to make a payment for part of the acquisitionsum at an earlier stage. Following the entering into force of an award onadvance acquisition of the minority shareholders’ shares, the arbitrationtribunal may—at the request of a party to the proceedings or the legalrepresentative for the minority shareholders—issue a separate award in respectof the acquisition sum accepted by Lawson. Thus, Lawson may be obligated tosettle such part of the acquisition sum prior to the final arbitration award.Therefore, the total amount payable by Lawson under the compulsory acquisitionproceedings could be greater than or less than USD 47 million.

 

We estimate that the total cash expenses related to acquisition costs tobe incurred by Lawson and Intentia for the Exchange Offer will be approximately$30 million, including investment banking fees, accounting and legal fees,printing, mailing and other out-of-pocket transaction costs. Additionally weestimate that the cash expenses related to integration costs will beapproximately $28.5 million.  We willhave approximately $198.0 million in available cash and cash equivalents, basedon the amount of cash and cash equivalents that we and Intentia had as ofFebruary 28, 2006. It is anticipated that we may use an additional amount of approximately$40 million in connection with the Combination, relating to a junior facilityloan made by Tennenbaum to Intentia valued at $27.4 million, which includesaccrued interest of  $0.6 million, as ofFebruary 28, 2006. The Tennenbaum loan matures in September 2009. However,pursuant to an agreement with Tennenbaum entered into in November 2005, Lawsonintends to prepay the Tennenbaum loan following the closing of the ExchangeOffer. Assuming current LIBOR interest rates until the prepayment date, theamount required to prepay the Tennenbaum loan in September

 

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2006,calculated in accordance with the November 2005 agreement with Tennenbaum, isestimated to be $2.7 million.  Alsoincluded in this amount are the remaining Notes valued at $10.2 million, whichincludes accrued interest of $0.3 million, as of February 28, 2006.  Total estimated costs for the acquisition aresummarized as follows (in thousands):

 
| ** **             | ** ** | **Lawson** | ** ** | **Intentia** | ** ** | **Total** | ** ** |
|------------------------|------------|------------|------------|--------------|------------|-----------|------------|
| Acquisition costs      |       | $          | 13.5       |         | $          | 16.5      |       | $ | 30.0 |   |
| Purchase of shares     |       | 47.0       |       |         |       | 47.0      |       |
| Payoff of loan         |       | 40.3       |       |         |       | 40.3      |       |
| Integration costs |       | 28.5       |       |         |       | 28.5      |       |
| Total                  |       | 129.3      |       | $            | 16.5       |      | $          | 145.8 |   |
|                        |            |            |            |              |            |           |            |  |  |  |

*** ***

***Full integration of ouroperations with Intentia’s operations may not be achieved if we cannotcompulsorily 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 outstanding convertiblesecurities). In addition, the compulsory acquisition proceedings may be timeconsuming.  To effect the compulsoryacquisition under Swedish law, we are required to have a beneficial interest ingreater than 90% of all of the voting power of the Intentia securities. It ispossible that, at the end of the Exchange Offer period, we will elect to waivethe above condition and consummate the Exchange Offer if we hold at least 70%of the outstanding securities and voting power of Intentia, even though we donot hold more than 90% of the outstanding Intentia securities. As a result, wewould not be able to effect a compulsory acquisition of the remainingoutstanding securities and voting power of Intentia. This could prevent ordelay us from realizing some or all of the anticipated financial and strategicbenefits of our combination with Intentia.

 

***As a result of theconsummation of the Exchange Offer, we will conduct more of our businessinternationally, which will expose us to additional and increased risks.***

*** ***

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 will increase upon consummation of the ExchangeOffer.  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;

 

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•                                          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 theExchange Offer, we will acquire the worldwide operations and approximately 2,200employees of Intentia.  Consequently, wewill face challenges inherent in efficiently managing an increased number ofemployees over large geographic distances, including the need to implementappropriate systems, policies, benefits and compliance programs.  In addition, we will be exposed to risksassociated with the translation of Intentia’s SEK-denominated financial resultsand balance sheet into U.S. dollars. Our reporting currency will remain as theU.S. dollar; however, a portion of our consolidated financial obligations willarise in other currencies, including Euros, British Pounds and SEK. Inaddition, the carrying value of some of our assets and liabilities will beaffected by fluctuations in the value of the U.S. dollar as compared with theEuro, British Pound and SEK.  Anyinability to successfully manage the geographically more diverse andsubstantially 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.***

*** ***

***The new management teammight not be able to define or successfully implement a business plan for thecombined businesses.***

*** ***

In June 2005, we appointed Harry Debes as our newpresident, chief executive officer, and director. Upon the completion of theExchange Offer, we will appoint a new co-chairman, Romesh Wadhwani, who is currentlythe chairman of the board of Intentia, and a new chief operating officer,Bertrand Sciard, the current president and chief executive officer of Intentia.While Mr. Wadhwani, Mr. Debes and Mr. Sciard have extensiveexperience in the software industry and managing software businesses and whileMr. Debes and Mr. Sciard have also managed large teams of people atother U.S. software businesses, neither Mr. Debes nor Mr. Sciard haspreviously been chief executive or chief operating officer of a public companyin the U.S. If this new management team is unable to adapt successfully to thedemands of managing a U.S. public company or to define or execute our businessplan, our results of operations may be adversely affected.

 

**Risks Relating to Lawson’s Business**

 

Our business and companywill continue to be subject to other risks and uncertainties, regardless ofwhether we complete the proposed business combination with Intentia.

 

***Economic, political and market conditions can adversely affect ourrevenue growth and operating results.***

 

Our revenue andprofitability depend on the overall demand for computer software, support andservices, particularly in the industries in which we sell our products andservices. Demand for enterprise software and demand for our solutions areaffected by general economic conditions, competition, product acceptance andtechnology lifecycles. Regional and global changes in the economy, governmentalbudget deficits and political instability in certain geographic areas haveresulted in businesses, government agencies and educational institutionsreducing their spending for technology projects generally and delaying orreconsidering potential purchases of our products and related services. Theuncertainty posed by the long-term effects of the war in the Middle East,terrorist activities, potential flu pandemics and related uncertainties andrisks and other geopolitical issues may impact the purchasing decisions ofcurrent or potential customers. Because of these factors, we believe the levelof demand for our products and services, and projections of future revenue andoperating results, will continue to be difficult to predict. Duringfiscal 2005 and the prior three fiscal years, we took measures to realignour projected expenses with anticipated revenue, and incurred restructuringcharges for severance and related benefits, facility closure or consolidationcharges. There is no assurance that these cost reduction measures will besufficient to offset any future revenue declines. Future declines in demand forour products and/or services could adversely affect our revenues and operatingresults.

 

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***A number of our competitors are well-established software businessesthat have advantages over us.***

 

We face competition from anumber of software businesses that have advantages over us due to their largercustomer bases, greater name recognition, long operating and productdevelopment history, greater international presence and substantially greaterfinancial, technical and marketing resources. These competitors includewell-established businesses such as Oracle Corporation, and SAP AG, both ofwhich have larger installed customer bases. If customers or prospects want toreduce 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 newcustomers, we believe that both of those larger businesses often attempt to usetheir size and staying power as a competitive advantage against us. Oracle’spurchase of PeopleSoft, Inc., Retek Inc., Siebel Systems, and otherconsolidations in the software industry have fueled uncertainty among customerprospects.

 

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

 

•                  Internet (on demand) software vendors;

 

•                  single-industry software vendors;

 

•                  emerging enterprise resource optimizationsoftware vendors;

 

•                  human resource management software vendors;

 

•                  financial management software vendors;

 

•                  merchandising software vendors;

 

•                  services automation software vendors; and

 

•                  outsourced services providers.

 

As a result, the market forenterprise software applications has been and continues to be intenselycompetitive. Some competitors are increasingly aggressive with their pricing,payment terms and/or issuance of contractual warranties, implementation termsor guarantees. We may be unable to continue to compete successfully with newand existing competitors without lowering prices or offering other favorableterms to customers. We expect competition to persist and intensify, which couldnegatively impact our operating results and market share.

 

***Wemay be unable to retain or attract customers if we do not develop new productsand enhance our current products in response to technological changes andcompeting products.***

 

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

 

•                  maintain and enhance our technologicalcapabilities to correspond to these emerging environments and standards;

 

•                  develop and market products and services thatmeet changing customer needs; or

 

•                  anticipate or respond to technologicalchanges on a cost-effective and timely basis.

 

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A substantialportion of our research and development resources is devoted to productupgrades that address regulatory and support requirements. Only the remainderof our limited research and development resources is available for newproducts. New products require significant development investment. Thatinvestment is further constrained because of the added costs of developing newproducts that work with multiple operating systems or databases. We faceuncertainty when we develop or acquire new products because there is noassurance that a sufficient market will develop for those products.  If we do not attract sufficient customerinterest in those products, we will not realize a return on our investment andour operating results will be adversely affected.

 

Our coreproducts face competition from new or revised technologies that may render ourexisting technology less competitive or obsolete, reducing the demand for ourproducts. As a result, we must continually redesign our products to incorporatethese new technologies and to adapt our software products to operate on, andcomply with evolving industry standards for hardware and software platforms.Maintaining and upgrading our products to operate on multiple hardware anddatabase platforms reduces our resources for developing new products. Because ofthe increased costs of developing and supporting software products acrossmultiple platforms, 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 benegatively impacted.

 

We have begunproducing certain products using a new business application platform we aredeveloping known as “Landmark.” The goals of Landmark are to simplify softwaredevelopment and improve product quality. Because we have not yet released anynew products developed using Landmark, it is too early to confirm whether wewill successfully achieve these goals.

 

In addition, tothe extent we determine that new technologies and equipment are required toremain competitive, 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.

 

***Wemay need to change our pricing models to compete successfully.***

 

The intenselycompetitive markets in which we compete can put pressure on us to reduce ourprices. If our competitors offer deep discounts on certain products or services,or eliminate license fees, in an effort to recapture or gain market share or tosell other products or services, we may need to lower prices or offer otherfavorable terms in order to compete successfully. Any such changes would belikely to reduce margins and could adversely affect operating results.

 

***If we are unable toattract and retain qualified personnel, specifically software engineers andsales personnel, we will be unable to develop new products and increase ourrevenue.***

 

We areexperiencing 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 customer service.In particular, the loss of sales personnel or groups of sales personnel couldlead to lost sales opportunities because it can take several months to hire andtrain replacement sales personnel. Uncertainty created by turnover of keyemployees could adversely affect our business, operating results and stockprice.

 

***Our earnings may be impacted bythe recent accounting pronouncement requiring expensing of equity instrumentsissued to employees.***

 

Wecurrently account for the issuance of stock options under APB OpinionNo. 25, *Accounting for Stock Issued toEmployees*. The FASB has issued SFAS No. 123(R), *Share-Based Payment* that changes theaccounting treatment for grants of options, sale of shares under our employeestock purchase plan and other equity instruments issued to employees. Theprovisions of SFAS No. 123(R) require us to value equity instrumentsissued to employees and liability-classified awards at grant date fair value orbased upon certain valuation methods that approximate grant date fair value,and to record those values as compensation expense in our statement ofoperations. Upon the adoption of SFAS No. 123(R), the Company willdetermine whether it will continue to utilize the Black-Scholes model or adoptsome other acceptable model. We will be required to expense all outstandingnon-vested stock options as of June 1, 2006 and stock options and otherapplicable equity

 

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instrumentsissued to employees on or after June 1, 2006. Public entities are requiredto apply SFAS No. 123(R) as of the first annual reporting period thatbegins after June 15, 2005, which is effective with the Company’sfirst quarter of fiscal 2007. Due to the significant number of outstandingunvested stock options anticipated as of June 1, 2006, we expect to incurmaterial compensation expense after June 1, 2006 as those options vest orin the event we decide to accelerate vesting. We may decide to change our stockbased compensation plan strategy for future grants. This could affect ourability to retain existing employees and attract qualified candidates, and alsocould increase cash compensation.

 

***Becauseour customers are concentrated in targeted service industries, our operatingresults may be adversely affected by adverse changes in one or more of theseindustries.***

 

As a result ofour focus on targeted service industries, our financial results depend, insignificant part, upon economic and market conditions in the healthcare,retail, government and education and financial services industries. Because thehealthcare marketplace for our products is maturing, we need to expand ourproduct offerings to achieve long-term revenue growth. Many state and localgovernments are facing budget shortfalls and are reducing capital spending,including spending on software and services. In addition, we must continue todevelop industry specific functionality for our solutions, which satisfies thechanging, specialized requirements of prospective customers in our targetindustries. This need is becoming more prevalent as the marketplace for ourtraditional products is maturing.

 

***Wemay experience fluctuations in quarterly revenue that could adversely impactour stock price and our operating results.***

 

Our actualrevenues in a quarter could fall below expectations, which could lead to adecline in our stock price. Our revenues and operating results are difficult topredict and may fluctuate substantially from quarter-to-quarter. Revenues fromlicense fees in any quarter depend substantially upon our licensing activityand our ability to recognize revenues in that quarter in accordance with ourrevenue recognition policies. Our quarterly license and services revenue mayfluctuate and may be difficult to forecast for a variety of reasons, includingthe following:

 

•                  a significant number of our existing andprospective customers’ decisions regarding whether to enter into licenseagreements with us are made within the last few weeks or days of each quarter;

 

•                  the size of license transactions can varysignificantly;

 

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

 

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

 

•                  the uncertainty caused by potential businesscombinations in the software industry may cause customers and prospectivecustomers to cancel, postpone or reduce capital spending projects on software;

 

•                  customer evaluations and purchasing processesvary significantly from company to company, and a customer’s internal approvaland expenditure authorization process can be difficult and time consuming tocomplete, even after selection of a vendor;

 

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

 

•                  existing customers may decline to renewsupport for our products, and market pressures may limit our ability toincrease support fees or require customers to upgrade from older versions ofour products;

 

•                  prospective customers may decline or deferthe purchase of new products or releases if we do not have sufficient customerreferences for those products; or

 

•                  we may have to defer revenues under ourrevenue recognition policies.

 

Fluctuation inour quarterly revenues may adversely affect our operating results. In eachfiscal quarter our expense levels, operating costs and hiring plans are basedon projections of future revenues and are relatively fixed. If our actual

 

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revenues fallbelow expectations we could experience a reduction in operating results.

 

***Ourlengthy and variable sales cycle makes it difficult to predict our operatingresults.***

 

It is difficultfor us to forecast the timing and recognition of revenues from sales of ourproducts because our existing and prospective customers often take significanttime evaluating our products before licensing them. The period between initialcustomer contact and a purchase by a customer may vary from nine months to morethan one year. During the evaluation period, prospective customers may decidenot to purchase or may scale down proposed orders of our products for variousreasons, including:

 

•                  reduced demand for enterprisesoftware solutions;

 

•                  introduction of products by ourcompetitors;

 

•                  lower prices offered by ourcompetitors;

 

•                  changes in budgets and purchasingpriorities; and

 

•                  reduced need to upgrade existingsystems.

 

Our existing andprospective customers routinely require education regarding the use andbenefits of our products.  This may alsolead to delays in receiving customers’ orders.

 

***Our future revenue is dependent in part on our installedcustomer base continuing to renew support agreements, license additionalproducts, and purchase additional professional services.***

 

Our installedclient base has traditionally generated additional support, license orprofessional service revenues. In future periods, customers may not necessarilymake these purchases. Support is generally renewable annually at a customer’soption, and there are no mandatory payment obligations or obligations tolicense additional software. If our customers decide not to renew their supportagreements or license additional products or contract for additional servicesor if they reduce the scope of the support agreements, our revenues coulddecrease and our operating results could be adversely affected. If we do notlicense our products to enough customers each quarter to offset the number ofexisting customers who elect not to renew support, our total customer countwill decline and, over time, our support revenue will likely decrease.

 

***A reduction in our licensingactivity may result in reduced services revenues in future periods.***

 

Our ability to maintain orincrease service revenue primarily depends on our ability to increase thenumber of our licensing agreements. Variances or slowdowns in licensingactivity may adversely impact our consulting, training and support servicerevenues in future periods.

 

***The interplay between Lawson’srevenue and cost structure may negatively affect its earnings on a short termbasis.***

 

A significant part of Lawson’stotal cost base is attributed to fixed costs related to personnel.  While Lawson’s license sales generate asubstantial gross margin, reductions in license sales in the short term mayhave a substantial effect on earnings due to the fact that cost adjustments inthe organization will not occur as quickly as the accompanying changes inrevenue.

 

***While we believe we currently have adequate internal control overfinancial reporting, we are required to evaluate on a continued basis ourinternal control over financial reporting under Section 404 of theSarbanes-Oxley Act of 2002 and any adverse results from such evaluation couldhave a negative market reaction.***

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002 (Section 404), beginning with our AnnualReport on Form 10-K for the fiscal year ended May 31, 2005, wewere required to furnish a report by our management on our internal controlover financial reporting. That report contained, among other matters, anassessment of the effectiveness of our internal control over financialreporting as of the end of the fiscal year, including a statement that ourinternal control over financial reporting was effective. This assessmentincluded disclosure that the Company did not have any material weaknesses inour internal control over financial reporting identified by management.  That report also contained a statement thatour independent registered public accounting firm had issued an attestationreport on management’s assessment of such internal controls. If in the futurewe are unable to assert that our internal control over financial reporting iseffective as of the

 

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endof the then current fiscal year or applicable quarter (or, if our independentregistered public accounting firm is unable to attest that our management’sreport is fairly stated or they are unable to express an opinion on theeffectiveness of our internal controls), we could lose investor confidence inthe accuracy and completeness of our financial reports, which would have anegative market reaction.

 

***Wemay be required to delay revenue recognition into future periods, which couldadversely impact our operating results.***

 

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

 

•                  the license agreements include applicationsthat are under development or have other undelivered elements;

 

•                  we must deliver services, includingsignificant modifications, customization or complex interfaces, which coulddelay product delivery or acceptance;

 

•                  the transaction includes acceptance criteria;

 

•                  the transaction includes contingent paymentterms or fees;

 

•                  a third-party vendor, whose technology isincorporated into our software products, delays delivery of the final softwareproduct to the customer;

 

•                  we are required to accept certain fixed-feeservices contracts; or

 

•                  we are required to accept extended paymentterms of more than one year or for which we do not have adequate support ofhistorical collectibility.

 

Because of the factorslisted above and other specific requirements under accounting principlesgenerally accepted in the United States for software revenue recognition, wemust have very precise terms in our license agreements to recognize revenuewhen we initially deliver software or perform services. Negotiation of mutuallyacceptable terms and conditions can extend the sales cycle, and sometimes we donot obtain terms and conditions that permit revenue recognition at the time ofdelivery or even as work on the project is completed.  Furthermore, because many contracts withinour verticals, including government and education and healthcare, often includethe terms summarized above, the contracts result in 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.The accounting profession and regulatory agencies continue to address anddiscuss accounting standards and interpretations covering revenue recognitionfor the software industry with the objective of providing additional guidanceon their application. These discussions and the issuance of newinterpretations, once finalized, could lead to unanticipated reductions in ourrecognized revenue. They could also drive significant adjustments to ourbusiness practices which could result in increased administrative costs,lengthened sales cycles and other changes which could adversely affect ourreported revenues and results of operations.

 

***Futureadjustments in our net deferred tax assets may materially impact our financialresults.***

 

On February 28, 2006 theCondensed Consolidated Balance Sheet includes net deferred tax assets in theamount of $31.8 million. Each quarter, we must assess the likelihood that ournet deferred tax assets will be recovered from future taxable income and to theextent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish or reverse all or a portion of thevaluation allowance, we must include an expense or expense reversal within thetax provision in the statement of operations. As of February 28, 2006, we have evaluated and determined that the priorreported valuation allowance in the amount of $1.4 million should be reversed.This amount represents an expectation that the previously reserved amounts forfederal tax credits, federal carryover items and state net operating losseswill now be realized prior to their expiration dates.

 

In the event that we adjustour estimates of future taxable income or tax deductions from the exercise ofstock options; or our stock price increases significantly without acorresponding increase in taxable income, we may need to establish anadditional valuation allowance, which could materially adversely impact ourfinancial position and results of operations. With the expected closing of themerger with Intentia we will need to reassess the combined U.S. historical

 

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results for Lawson andIntentia as well as the combined U.S. deferred tax assets.  Intentia’s U.S. operations are not materialand therefore its deferred tax assets are significantly less than Lawson’s.  However, Intentia’s historical losses in theU.S. and its deferred tax assets may impact the assessment and may increase thepossibility of future valuation allowances.

 

***We may experience fluctuations in quarterly results that couldadversely 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 the following:

 

•                  changes in forecasted annual operatingincome;

 

•                  changes to the valuation allowance on netdeferred tax assets;

 

•                  changes to actual or forecasted permanentdifferences between book and tax reporting;

 

•                  impacts from future tax settlements withstate, federal or foreign tax authorities; or

 

•                  impacts from tax law changes.

 

***Ourstock price 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:

 

•                  actual or anticipated fluctuations inrevenues or operating results, including revenue or results of operations inany quarter failing to meet the expectations, published or otherwise, of theinvestment community;

 

•                  announcements of technological innovations byus or our competitors;

 

•                  developments with respect to our intellectualproperty rights, including patents, or those of our competitors;

 

•                  fluctuations in demand for and sales of ourproducts, which will depend on, among other things, the acceptance of ourproducts in the marketplace and the general level of spending in the softwareindustry;

 

•                  rumors or dissemination of false and/ormisleading information;

 

•                  changes in management;

 

•                  proposed and completed acquisitions or othersignificant transactions by us or our competitors;

 

•                  introduction and success of new products orsignificant customer wins or losses by us or our competitors;

 

•                  the mix of products and services sold by us;

 

•                  the timing of significant orders by ourcustomers;

 

•                  conditions and trends in the softwareindustry, or consolidation within the technology industry that may impact ourcustomers, partners, suppliers or competitors;

 

•                  adoption of new accounting standardsaffecting the software industry;

 

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•                  acts of war or terrorism; and

 

•                  general market conditions.

 

***Wehave adopted anti-takeover defenses that could make it difficult for anothercompany to acquire control of Lawson or limit the price investors might bewilling to pay for our stock.***

 

Provisions in our amendedand restated certificate of incorporation and bylaws, our stockholder rightsplan and under Delaware law could make it more difficult for other businessesto acquire us, even if doing so would benefit our stockholders.  Our amended and restated certificate ofincorporation and bylaws contain the following provisions, among others, whichmay inhibit an acquisition of our company by a third-party:

 

•                            advance notification procedures for mattersto be brought before stockholder meetings;

 

•                            a limitation on who may call stockholdermeetings;

 

•                            a prohibition on stockholder action bywritten consent; and

 

•                            the ability of our board of directors toissue shares of preferred stock without a stockholder vote.

 

The issuanceof stock under our stockholder rights plan could delay, deter or prevent atakeover attempt that stockholders might consider in their best interests. Weare also subject to provisions of Delaware law that prohibit us from engagingin any business combination with any “interested stockholder,” meaninggenerally that a stockholder who beneficially owns more than 15% of our stockcannot acquire us for a period of three years from the date this person becamean interested stockholder unless various conditions are met, such as approvalof the transaction by our board of directors. Any of these restrictions couldhave the effect of delaying or preventing a change in control.

 

***Changes in the terms on whichwe license technologies from third-party vendors could result in the loss ofpotential revenues or increased costs or delays in the production andimprovement 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 resellerand alliance relationships with IBM, Business Software Incorporated, BusinessObjects, Hyperion Solutions Corporation, The Hackett Group, Inc. and otherbusinesses that allow us to resell their offerings with our products andservices. These relationships and other technology licenses are subject toperiodic renewal and may include minimum sales requirements. A failure to renewor early termination of these relationships or other technology licenses couldadversely impact our business. If any of the third-party software vendorschange their product offerings or terminate our licenses, we may lose potentialrevenues and may need to incur additional development costs and seekalternative third-party relationships. In addition, if the cost of licensingany of these third-party software products significantly increases, or if thereis a change in the relative mix of products we offer, our gross profits couldsignificantly decrease. We rely on existing relationships with software vendorswho are also competitors. If these vendors change their business practices, wemay be compelled to find alternative vendors with complementary software, whichmay not be available on attractive terms or at all, or may not be as widelyaccepted or as effective as the software provided by our existing vendors. Ourrelationships with these and other third-party vendors are an important part ofour business and a deterioration of these relationships could adversely impactour business and operating results.

 

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

 

Our ability to achieverevenue growth will depend in large part on adding new partners to expand oursales channels, as well as leveraging our relationships with existing partners.If our relationships with these resellers, system integrators and strategic andtechnology partners deteriorate or terminate, we may lose important sales andmarketing opportunities. Our reseller arrangements may from time to time giverise to disputes regarding marketing strategy, sales of competing products,exclusive territories, payment of fees and customer relationships, which couldnegatively affect our business or result in costly litigation.

 

Our current and potentialcustomers often rely on third-party systems integrators to implement and managenew and existing applications. These systems integrators may increase theirpromotion of competing enterprise software applications,

 

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ormay otherwise discontinue their relationships with us.

 

We also may enter into jointarrangements with strategic partners to develop new software products orextensions, sell our software as part of integrated products or serve as anapplication service provider for our products. Our business may be adverselyaffected if these strategic partners change their business priorities orexperience difficulties in their operations, which in either case causes themto terminate or reduce their support for the joint arrangements. Furthermore,the financial condition of our channel partners impacts our business. If ourpartners are unable to recruit and adequately train a sufficient number ofconsulting personnel to support the implementation of our software products, orthey otherwise do not adequately perform implementation services, we may losecustomers. Our relationships with resellers, systems integrators and otherthird-party vendors are an important part of our business, and a deteriorationof these relationships could adversely impact our business and operatingresults.

 

***Ourprograms are deployed in large and complex systems and may contain defects thatare not detected until after our programs have been installed, which coulddamage our reputation and cause us to lose customers or incur liabilities.***

 

Our software programs areoften deployed in large and complex computer networks. Because of the nature ofthese programs, they can only be fully tested for reliability when deployed innetworks for long periods of time. Our software programs may contain undetecteddefects when first introduced or as new versions are released, and ourcustomers may discover defects in our products, experience corruption of theirdata or encounter performance or scaling problems only after our softwareprograms have been deployed. As a consequence, from time to time we havereceived customer complaints following installation of our products. We arecurrently a defendant in several lawsuits where customers have raised thesetypes of issues with our products and services. In addition, our products arecombined with products from other vendors. As a result, should problems occur,it may be difficult to identify the source of the problem. Software and datasecurity are becoming increasingly important because of regulatory restrictionson data privacy and the significant legal exposures and business disruptionsstemming from computer viruses and other unauthorized entry or use of computersystems. These conditions increase the risk that we could experience, amongother things:

 

•                  loss of customers;

 

•                  damage to our brand reputation;

 

•                  failure to attract new customers or achievemarket acceptance;

 

•                  diversion of development and servicesresources; and

 

•                  legal actions by our customers or governmentregulators.

 

In addition, we may not beable to avoid or limit liability for disputes relating to product performance,software security or the provision of services. The occurrence of any one ormore of the foregoing factors could cause us to experience losses, incurliabilities and adversely affect our operating results.

 

***Ifour customers lose confidence in the security of data on the Internet, ourrevenues could be adversely affected.***

 

Maintaining the security ofcomputers and computer networks is an issue of critical importance for ourcustomers. Attempts by experienced computer programmers, or hackers, topenetrate 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 customers to seek toreduce or delay future purchases or to purchase competitors’ products which arenot Internet-based applications. Customers may also increase their spending toprotect their computer networks from attack, which could delay adoption of newtechnologies. Any of these actions by customers could adversely affect ourrevenues.

 

***We may be required to undertake a costly redesign of our products ifthird- party software development tools become an industry standard or causeobsolescence of our toolsets.***

 

Several businesses havefocused on providing software development tools and each of them is attemptingto establish its own tools as the accepted industry standard. If a softwareproduct were to emerge as a clearly established and widely accepted industrystandard or if rising expectations of toolsets of applications cause ourtoolsets to become obsolete, we may not be able to adapt our tools appropriatelyor rapidly enough to satisfy market demand. In addition, we could be

 

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forcedto abandon or modify our tools or to redesign our software products toaccommodate 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.

 

***Wemay be unable to identify or complete suitable acquisitions and investments;and any acquisitions and investments we do complete may create businessdifficulties or dilute our stockholders.***

 

As part of our businessstrategy, we intend to pursue strategic acquisitions. We may be unable toidentify suitable acquisitions or investment candidates. Even if we identifysuitable candidates, we cannot provide assurance that we will be able to makeacquisitions or investments on commercially acceptable terms. If we acquire acompany, we may incur losses in the operations of that company and we may havedifficulty integrating its products, personnel and operations into ourbusiness. In addition, its key personnel may decide not to work for us. We mayalso have difficulty integrating acquired businesses, products, services andtechnologies into our operations. These difficulties could disrupt our ongoingbusiness, distract our management and workforce, increase our expenses andadversely affect our operating results. We may also incorrectly judge the valueor 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.

 

***Wecurrently do not compete in the software “on demand” or application serviceprovider markets.***

 

Some businesses choose toaccess enterprise software applications through hosted “on demand” services orapplication service providers who distribute enterprise software through ahosted subscription service. We do not currently have our own “on demand”hosting program for our products and have had limited success with channelpartners who serve as application service providers for customers. If thesealternative distribution models gain popularity, we may not be able to competeeffectively in this environment.

 

***Inthe event our products infringe on the intellectual property rights of thirdparties, our business may suffer if we are sued for infringement or cannotobtain licenses to these rights on commercially acceptable terms.***

 

We are subject to the riskof adverse claims and litigation alleging infringement by us of theintellectual property rights of others. Many participants in the technologyindustry have an increasing number of patents and patent applications and havefrequently demonstrated a readiness to take legal action based on allegationsof patent and other intellectual property infringement. Further, as the numberand functionality of our products increase, we believe that we may becomeincreasingly subject to the risk of infringement claims. If infringement claimsare brought against us, these assertions could distract management and we mayhave to expend potentially significant funds and resources to defend or settlesuch claims. If we are found to infringe on the intellectual property rights ofothers, we could be forced to pay significant license fees or damages forinfringement.

 

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 currently take stepsto train our developers and monitor the content of products in development, butthere is no assurance that these steps will always be effective.

 

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

 

***If the open sourcecommunity expands into enterprise application software, our license feerevenues may decline.***

 

The open source community iscomprised of many different formal and informal groups of software developersand individuals who have created a wide variety of software and have made thatsoftware available for use, distribution and modification, often free ofcharge. Open source software, such as the Linux operating system, has beengaining in popularity

 

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amongbusiness users. If developers contribute enterprise application software to theopen source community, and that software has competitive features and scale tosupport business users in our markets, we will need to change our productpricing and distribution strategy to compete.

 

***Itmay become increasingly expensive to obtain and maintain liability insurance.***

 

We contract for insurance tocover several, but not all, potential risks and liabilities. In the currentmarket, insurance coverage is becoming more restrictive, and, when insurancecoverage is offered, the deductible for which we are responsible is larger. Inlight of these circumstances, it may become more difficult to maintaininsurance coverage at historical levels, or if such coverage is available, thecost to obtain or maintain it may increase substantially. This may result inour being forced to bear the burden of an increased portion of risks for whichwe have traditionally been covered by insurance, which could negatively impactour results of operations.

 

***Wehave limited protection of our intellectual property and, if we fail toadequately protect our intellectual property, we may not be able to compete.***

 

We consider certain aspectsof our internal operations, software and documentation to be proprietary, andrely on a combination of contract, copyright, trademark and trade secret lawsto protect this information. In addition, to date, we hold one patent and havefiled several patent applications. Outstanding applications may not result inissued patents and, even if issued, the patents may not provide any competitiveadvantage. Existing copyright laws afford only limited protection. Ourcompetitors may independently develop technologies that are less expensive orbetter than our technology. In addition, when we license our products tocustomers, we provide source code for many of our products. We may also permitcustomers to obtain access to our other source code through a source code escrowarrangement. This access to our source code may increase the likelihood ofmisappropriation or other misuse of our intellectual property. In addition, thelaws of some countries in which our software products are or may be licensed donot protect our software products and intellectual property rights to the sameextent as the laws of the United States. Defending our rights could be costly.

 

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

 

Business disruptions couldaffect our future operating results. Our operating results and financialcondition could be adversely affected in the event of a security breach, majorfire, war, terrorist attack or other catastrophic event. Impaired access orsignificant damage to our data center at our headquarters in St. Paul,Minnesota due to such an event could cause a disruption of our information,research and development, and customer support systems and loss of financialdata and certain customer data, which could adversely impact results of operationsand business financial conditions.

 

***We have limited experience with offshore outsourcing.***

 

To help improve margins andgain operational efficiencies, many software businesses have outsourcedportions of their software development and software services to businesseslocated in India or other parts of the world. In February 2004, we enteredinto an offshore agreement with a third-party based in India to provide certainsoftware support services for our products. We have expanded our efforts to usethis third-party to assist us in providing lower cost implementation servicesfor customers. In December 2005, we organized a subsidiary in the Philippines,to assist with product development and support at a cost lower than in theUnited States.  Since December 2005, wehave invested in the Philippines subsidiary but do not expect to achieve anycosts savings until the employees in the Philippines are hired and trained.  We have limited experience with these types ofoutsourcing and may be unable to achieve the anticipated economic efficienciesexpected****of this arrangement.

 

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

 

A substantial number ofshares of our common stock are held by our founders, their family members, apre-initial public offering investor, current or former employees, officers ordirectors. Sale of a portion of these shares in the public market, or theperception that such sales are likely to occur, could depress the market priceof our common stock and could impair our ability to raise capital through thesale of additional equity securities.

 

***Financial outlook.***

 

From time totime in press releases and otherwise, we may publish forecasts or otherforward-looking statements regarding our future results, including estimatedrevenues or net earnings. Any forecast of our future performance reflectsvarious assumptions. These assumptions are subject to significantuncertainties, and as a matter of course, any number of them may prove to be incorrect.Further, the achievement of any forecast depends on numerous risks and otherfactors

 

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(including those described in this discussion), many of which arebeyond our control. As a result, we cannot provide assurance that ourperformance will be consistent with any management forecasts or that thevariation from such forecasts will not be material and adverse. Current andpotential stockholders are cautioned not to base their entire analysis of our businessand prospects upon isolated predictions, but instead are encouraged to utilizeour 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.

 

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

(a)Not applicable

 

(b)Use of Proceeds

 

As of February28, 2006, we held $108.3 million of net proceeds from our initial publicoffering in interest-bearing, investment grade securities. During the threemonths ended February 28, 2006, we used approximately $0.5 million for capitalexpenditures, $1.9 million were capitalized for the pending businessacquisition with Intentia and $0.7 million for repayment of debt.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None

 

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

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None

 

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**ITEM 6. EXHIBITS**

 
| (a)    |   | Exhibits |
|--------|--------|----------|
|   |   |     |
|   |   | 31.1     | Certification of President and Chief Executive  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act- Harry Debes. |
|   |   |     |   |
|   |   | 31.2     | Certification of Executive  Vice President and Chief Fiancial and Performance Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act- Robert G. Barbieri. |
|   |   |     |   |
|   |   | 32.1     | Certification of  President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act- Harry Debes. |
|   |   |     |   |
|   |   | 32.2     | Certification of Executive  Vice President and Chief Fiancial and Performance Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act- Robert G. Barbieri. |

 

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** **

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| Date: April 7, 2006 |                       |
|---------------------|----------------------------|
|                |                       |
|                | 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) |

 

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**EXHIBIT INDEX**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION OF DOCUMENTS**                                                     |
|---------------------|------------|--------------------------------------------------------------------------------------------|
|                |       |                                                                                       |
| 31.1                |       | Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act- Harry Debes.        |
|                |       |                                                                                       |
| 31.2                |       | Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act- Robert G. Barbieri. |
|                |       |                                                                                       |
| 32.1                |       | Certification Pursuant to  Section 906 of the Sarbanes-Oxley Act- Harry Debes.        |
|                |       |                                                                                       |
| 32.2                |       | Certification Pursuant to  Section 906 of the Sarbanes-Oxley Act- Robert G. Barbieri. |

 

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