**UNITEDSTATES**

**SECURITIESAND 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 ENDEDFEBRUARY 28, 2002**

** **

**OR**

** **

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**FOR THE TRANSITION PERIODFROM          TO          **

 

**Commission file number 000-33335**

 

**LAWSONSOFTWARE, INC.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                    |   | **41-1251159**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (I.R.S. Employer Identification Number) |
|                                                            |   |                                    |
| **380 ST. PETER STREET   ST. PAUL, MINNESOTA 55102**            |
| (Address of principal executive offices)                        |
|                                                            |
| **(651) 767-7000**                                              |
| (Registrant’s telephone number, including area code)       |

___________________________________________

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes   ý No  o

 

The number of shares ofthe registrant’s common stock outstanding as of March 26, 2002 was 94,234,411.

 

 

 

**LAWSON SOFTWARE, INC.**

 

**Form 10-Q**

 

**Index**

 
| PART I.    | FINANCIAL INFORMATION                                                                                            |
|------------|------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                             |
| Item  1.   | Financial Statements                                                                                             |
|       |                                                                                                             |
|       | Condensed Consolidated  Balance Sheets at February 28, 2002 and May 31, 2001                                     |
|       |                                                                                                             |
|       | Condensed  Consolidated Statements of Operations for the three and nine months ended  February 28, 2002 and 2001 |
|       |                                                                                                             |
|       | Condensed  Consolidated Statements of Cash Flows for the nine months ended February 28,  2002 and 2001           |
|       |                                                                                                             |
|       | 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 Disclosure about Market Risk                                                       |
|       |                                                                                                             |
| PART II.   | OTHER INFORMATION                                                                                                |
|       |                                                                                                             |
| Item  1.   | Legal Proceedings                                                                                                |
|       |                                                                                                             |
| Item  2.   | Changes in  Securities and Use of Proceeds                                                                       |
|       |                                                                                                             |
| Item  3.   | Defaults Upon Senior  Securities                                                                                 |
|       |                                                                                                             |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                                             |
|       |                                                                                                             |
| Item 5.    | Other Information                                                                                                |
|       |                                                                                                             |
| Item  6.   | Exhibits and Reports  on Form 8-K                                                                                |
|       |                                                                                                             |
| SIGNATURES |                                                                                                             |

 

2

----

 

PART I.   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
|                                                                                          |   | **February  28,  2002** |    | **May 31,  2001** |       |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------|------------|
| ASSETS                                                                                        |   | **(unaudited)**         |    |              | ** ** |
| Current assets:                                                                               |   |                    |    |              |       |
| Cash and cash equivalents                                                                     |   | $                       | 203,982 |              | $          | 58,839 |   |
| Marketable securities                                                                         |   | 24,191                  |    | 18,769            |       |
| Trade accounts receivable, net                                                                |   | 107,532                 |    | 92,335            |       |
| Deferred income taxes                                                                         |   | 19,786                  |    | 19,786            |       |
| Prepaid expenses and other assets                                                             |   | 15,106                  |    | 9,070             |       |
| Total current assets                                                                          |   | 370,597                 |    | 198,799           |       |
|                                                                                          |   |                    |    |              |       |
| Property and equipment, net                                                                   |   | 28,829                  |    | 24,972            |       |
| Goodwill, net                                                                                 |   | 22,214                  |    | 4,259             |       |
| Other intangible assets, net                                                                  |   | 12,167                  |    | —            |       |
| Deferred income taxes                                                                         |   | 2,057                   |    | 6,637             |       |
| Other assets, noncurrent                                                                      |   | 2,181                   |    | 1,436             |       |
| Total assets                                                                                  |   | $                       | 438,045 |              | $          | 236,103 |   |
|                                                                                          |   |                    |    |              |       |
| LIABILITIES, MANDATORILY REDEEMABLE SECURITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)       |   |                    |    |              |       |
| Current liabilities:                                                                          |   |                    |    |              |       |
| Current portion of long-term debt                                                             |   | $                       | 757     |              | $          | 792 |   |
| Accounts payable                                                                              |   | 18,458                  |    | 14,440            |       |
| Accrued compensation and benefits                                                             |   | 21,852                  |    | 21,174            |       |
| Other accrued liabilities                                                                     |   | 21,561                  |    | 16,127            |       |
| Income taxes payable                                                                          |   | 1,276                   |    | 5,212             |       |
| Deferred revenue and customer deposits                                                        |   | 93,929                  |    | 101,632           |       |
| Total current liabilities                                                                     |   | 157,833                 |    | 159,377           |       |
|                                                                                          |   |                    |    |              |       |
| Long-term debt, less current portion                                                          |   | 461                     |    | 1,010             |       |
| Senior subordinated convertible notes                                                         |   | —                  |    | 8,031             |       |
| Mandatorily redeemable common stock warrants                                                  |   | —                  |    | 2,560             |       |
| Other long-term liabilities                                                                   |   | 2,472                   |    | 4,099             |       |
| Total liabilities                                                                             |   | 160,766                 |    | 175,077           |       |
|                                                                                          |   |                    |    |              |       |
| Commitments and contingencies (see Note 5)                                                    |   |                    |    |              |       |
| Series A convertible redeemable preferred stock                                               |   | —                  |    | 29,750            |       |
| Mandatorily redeemable common stock at redemption  value                                      |   | 596                     |    | 56,145            |       |
| Stockholders’ equity (deficit):                                                          |   |                    |    |              |       |
| Preferred stock                                                                               |   | —                  |    | —            |       |
| Common stock                                                                                  |   | 953                     |    | 664               |       |
| Additional paid-in capital                                                                    |   | 292,600                 |    | 26,783            |       |
| Treasury stock, at cost                                                                       |   | (16,652                 | )       | (15,344           | )          |
| Deferred stock-based compensation                                                             |   | (10,613                 | )       | (15,093           | )          |
| Retained earnings                                                                             |   | 12,205                  |    | 35,025            |       |
| Accumulated other comprehensive loss                                                          |   | (1,214                  | )       | (759              | )          |
| Adjustment for mandatorily redeemable common stock                                            |   | (596                    | )       | (56,145           | )          |
| Total stockholders’ equity (deficit)                                                     |   | 276,683                 |    | (24,869           | )          |
| Total liabilities, mandatorily redeemable securities  and stockholders’ equity (deficit) |   | $                       | 438,045 |              | $          | 236,103 |   |

 

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

 

3

----

 

**LAWSON SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(unaudited)**

 
|                                                                           |   | **Three  Months Ended** |    | **Nine  Months Ended** |   |
|--------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                                           |   | **Feb. 28,   2002**     |    | **Feb. 28,  2001**     |   | **Feb. 28,   2002** |   | **Feb. 28,   2001** |   |
| Revenues:                                                                      |   |                    |    |                   |   |   |   |   |   |
| License fees                                                                   |   | $                       | 49,135  |                   | $      | 45,780 |   | $ | 114,338 |   | $ | 101,871 |   |
| Services                                                                       |   | 66,363                  |    | 55,883                 |   | 197,196 |   | 166,303 |   |
| Total revenues                                                                 |   | 115,498                 |    | 101,663                |   | 311,534 |   | 268,174 |   |
| Cost of revenues:                                                              |   |                    |    |                   |   |   |   |   |   |
| Cost of license fees                                                           |   | 9,159                   |    | 9,094                  |   | 24,895 |   | 17,783 |   |
| Cost of services                                                               |   | 35,910                  |    | 28,721                 |   | 104,308 |   | 84,559 |   |
| Total cost of revenues                                                         |   | 45,069                  |    | 37,815                 |   | 129,203 |   | 102,342 |   |
|                                                                           |   |                    |    |                   |   |   |   |   |   |
| Gross profit                                                                   |   | 70,429                  |    | 63,848                 |   | 182,331 |   | 165,832 |   |
|                                                                           |   |                    |    |                   |   |   |   |   |   |
| Operating expenses:                                                            |   |                    |    |                   |   |   |   |   |   |
| Research and development                                                       |   | 17,124                  |    | 13,285                 |   | 50,263 |   | 37,621 |   |
| Sales and marketing                                                            |   | 31,763                  |    | 30,254                 |   | 92,162 |   | 82,590 |   |
| General and administrative                                                     |   | 9,757                   |    | 14,518                 |   | 23,955 |   | 28,564 |   |
| Other general expenses (see Note 2)                                            |   | —                  |    | 5,008                  |   | 655 |   | 5,008 |   |
| Amortization of acquired intangibles                                           |   | 208                     |    | —                 |   | 554 |   | — |   |
| Total operating expenses                                                       |   | 58,852                  |    | 63,065                 |   | 167,589 |   | 153,783 |   |
|                                                                           |   |                    |    |                   |   |   |   |   |   |
| Operating income                                                               |   | 11,577                  |    | 783                    |   | 14,742 |   | 12,049 |   |
|                                                                           |   |                    |    |                   |   |   |   |   |   |
| Other income (expense):                                                        |   |                    |    |                   |   |   |   |   |   |
| Interest income                                                                |   | 871                     |    | 471                    |   | 1,702 |   | 1,605 |   |
| Interest expense                                                               |   | (139                    | )       | (56                    | )      | (1,993 | ) | (510 | ) |
| Total other income (expense)                                                   |   | 732                     |    | 415                    |   | (291 | ) | 1,095 |   |
|                                                                           |   |                    |    |                   |   |   |   |   |   |
| Income before income taxes and extraordinary item                              |   | 12,309                  |    | 1,198                  |   | 14,451 |   | 13,144 |   |
| Provision for income taxes                                                     |   | 4,923                   |    | 503                    |   | 5,780 |   | 5,521 |   |
| Income before extraordinary item                                               |   | 7,386                   |    | 695                    |   | 8,671 |   | 7,623 |   |
| Extraordinary item, net of $928 tax benefit (see  Note 11)                     |   | (1,393                  | )       | —                 |   | (1,393 | ) | — |   |
| Net income                                                                     |   | 5,993                   |    | 695                    |   | 7,278 |   | 7,623 |   |
| Accretion on and conversion of preferred stock                                 |   | (30,002                 | )       | (4                     | )      | (30,098 | ) | (4 | ) |
| Net (loss) income applicable to common stockholders                            |   | $                       | (24,009 | )                      | $      | 691 |   | $ | (22,820 | ) | $ | 7,619 |   |
|                                                                           |   |                    |    |                   |   |   |   |   |   |
| Net (loss) income per share:                                                   |   |                    |    |                   |   |   |   |   |   |
| Net (loss) income applicable to common stockholders  before extraordinary item |   | $                       | (0.25   | )                      | $      | 0.01 |   | $ | (0.29 | ) | $ | 0.11 |   |
| Extraordinary item (basic and diluted)                                         |   | (0.02                   | )       | —                 |   | (0.02 | ) | — |   |
| Basic                                                                          |   | $                       | (0.27   | )                      | $      | 0.01 |   | $ | (0.31 | ) | $ | 0.11 |   |
| Diluted                                                                        |   | $                       | (0.27   | )                      | $      | 0.01 |   | $ | (0.31 | ) | $ | 0.09 |   |
| Shares used in computing net (loss) income per  share:                         |   |                    |    |                   |   |   |   |   |   |
| Basic                                                                          |   | 90,103                  |    | 71,471                 |   | 74,622 |   | 71,160 |   |
| Diluted                                                                        |   | 90,103                  |    | 83,611                 |   | 74,622 |   | 82,719 |   |

 

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

 

4

----

 

**LAWSON SOFTWARE, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                                |   | **Nine  Months Ended** |       |
|-------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                |   | **Feb. 28,   2002**    |       | **Feb. 28,   2001** |   |
| **Cash flows from operating  activities:**                                          |   |                   | ** ** |   | ** ** |
| Net income                                                                          |   | $                      | 7,278      |   | $ | 7,623 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:  |   |                   |       |   |   |
| Depreciation and amortization                                                       |   | 8,865                  |       | 8,148 |   |
| Deferred income taxes                                                               |   | —                 |       | (2,657 | ) |
| Provision for doubtful accounts                                                     |   | 5,175                  |       | 2,730 |   |
| Extraordinary charge on retirement of subordinated  debt                            |   | 2,321                  |       | — |   |
| Equity instruments issued to non-employees                                          |   | —                 |       | 1,165 |   |
| Tax benefit from stockholder transactions                                           |   | 2,530                  |       | 2,370 |   |
| Tax commitment from exercise of stock options                                       |   | (1,427                 | )          | (1,593 | ) |
| Accretion on put warrants                                                           |   | 996                    |       | 5 |   |
| Amortization of stock-based compensation                                            |   | 7,281                  |       | 1,380 |   |
| Amortization of discounts on notes payable                                          |   | 201                    |       | 6 |   |
| Amortization of discount and accretion of premium on  marketable securities         |   | (264                   | )          | (8 | ) |
| Changes in operating assets and liabilities, net of  effect from acquisition:       |   |                   |       |   |   |
| Trade accounts receivable                                                           |   | (19,223                | )          | (13,069 | ) |
| Prepaid expenses and other assets                                                   |   | (6,490                 | )          | (7,130 | ) |
| Accounts payable                                                                    |   | 3,763                  |       | (5,349 | ) |
| Accrued and other liabilities                                                       |   | 4,439                  |       | 7,461 |   |
| Income taxes payable                                                                |   | (3,936                 | )          | (553 | ) |
| Deferred revenue and customer deposits                                              |   | (10,493                | )          | 14,006 |   |
| Net cash provided by operating activities                                           |   | 1,016                  |       | 14,535 |   |
| **Cash flows from investing  activities:**                                          |   |                   | ** ** |   | ** ** |
| Cash paid in conjunction with acquisition, net of  cash acquired                    |   | (25,995                | )          | — |   |
| Purchases of marketable securities                                                  |   | (28,158                | )          | (3,913 | ) |
| Sales and maturities of marketable securities                                       |   | 23,000                 |       | — |   |
| Purchases of property and equipment                                                 |   | (11,339                | )          | (4,492 | ) |
| Net cash used in investing activities                                               |   | (42,492                | )          | (8,405 | ) |
| **Cash flows from financing  activities:**                                          |   |                   | ** ** |   | ** ** |
| Proceeds from initial public offering, net of  offering costs                       |   | 197,351                |       | — |   |
| Borrowings under long-term debt                                                     |   | —                 |       | 758 |   |
| Payments on long-term debt                                                          |   | (631                   | )          | (19,204 | ) |
| Proceeds from sale of senior subordinated  convertible notes, net of offering costs |   | —                 |       | 9,685 |   |
| Payments on senior subordinated convertible notes                                   |   | (10,240                | )          | — |   |
| Exercise of stock options                                                           |   | 1,381                  |       | 229 |   |
| Proceeds from sale of Series A preferred stock, net  of offering costs              |   | —                 |       | 24,290 |   |
| Repurchase of common stock                                                          |   | (1,242                 | )          | (10,007 | ) |
| Net cash provided by financing activities                                           |   | 186,619                |       | 5,751 |   |
| Increase in cash and cash equivalents                                               |   | 145,143                |       | 11,881 |   |
| Cash and cash equivalents at beginning of period                                    |   | 58,839                 |       | 45,862 |   |
| Cash and cash equivalents at end of period                                          |   | $                      | 203,982    |   | $ | 57,743 |   |

 

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

 

5

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**LAWSON SOFTWARE, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(inthousands, except per share data)**

 

**1.             BASISOF****PRESENTATION**

 

The unaudited condensed consolidated financialstatements included herein reflect all adjustments, in the opinion ofmanagement, necessary to fairly state Lawson Software, Inc.’s (the Company’s)consolidated financial position, results of operations and cash flows for theperiods presented.  These adjustmentsconsist of normal, recurring items.  Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amounts therein.  Due to the inherent uncertainty involved inmaking estimates, actual results in future periods may differ from thoseestimates.  The results of operationsfor the period ended February 28, 2002 are not necessarily indicative of theresults to be expected for any subsequent quarter or for the entire fiscal yearending May 31, 2002.  The condensedfinancial statements and notes are presented as permitted by the requirementsfor Form 10-Q and do not contain certain information included in the Company’sannual financial statements and notes. These condensed consolidated financial statements should be read inconjunction with the Company’s Prospectus filed with the Securities andExchange Commission on December 6, 2001.

 

**2.             OTHERGENERAL****EXPENSES**

 

The following table presents a summary of othergeneral expenses:

 
|                                                |   | **Three  Months Ended****February 28,** |   | **Nine  Months Ended****February 28,** |   |
|-----------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                                |   | **2002**                                |   | **2001**                               |   | **2002** |   | **2001** |   |
| Business process improvement initiatives            |   | —                                  |   | $                                      | 2,629  |   | $ | 655 |   | $ | 2,629 |   |
| Repurchase of stock options held by former employee |   | —                                  |   | 2,379                                  |   | — |   | 2,379 |   |
| Total other general expenses                        |   | —                                  |   | $                                      | 5,008  |   | $ | 655 |   | $ | 5,008 |   |

 

During the nine months ended February 28, 2002 and thethree and nine months ended February 28, 2001, the Company recognized $655 and$2,629, respectively, in expenses related to business process improvementinitiatives designed to prepare the Company for an initial publicoffering.  Such costs are expensed asincurred.  Also, during the three andnine months ended February 28, 2001, the Company recognized $2,379 in expensesrelated to the repurchase of options held by a former executive of theCompany.  This charge was included inother general expenses as it related to a payment to a former employee.

 

**3.             PERSHARE DATA**

 

Basic net (loss) income per share is computed usingthe net (loss) income applicable to common stockholders and theweighted-average number of shares of common stock outstanding.  Diluted earnings per share reflect thepotential dilution of securities that could share in the earnings of an entity.  Diluted net loss per common share does notdiffer from basic net loss per common share in the three and nine months endedFebruary 28, 2002 as potential shares of common stock from conversion of stockoptions and warrants were anti-dilutive. These anti-dilutive shares for the three and nine months ended February28, 2002 were 15,171 and 21,583, respectively. Net income available to common shareholders for the three and ninemonths ended February 28, 2002 includes a $29,996 charge related to theunamortized value of the beneficial conversion feature of our preferredstock.  This non-cash charge did notaffect net income.  See Note 11 in theNotes to the Condensed Consolidated Financial Statements for further discussionof this non-cash charge.

 

6

----

 

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

 
|                                                |   | **Three  Months Ended****February 28,** |    | **Nine  Months Ended****February 28,** |   |
|-----------------------------------------------------|--------|-----------------------------------------|---------|----------------------------------------|--------|
|                                                |   | **2002**                                |    | **2001**                               |   | **2002** |   | **2001** |   |
| Basic earnings per share computation:               |   |                                    |    |                                   |   |   |   |   |   |
| Net (loss) income applicable to common stockholders |   | $                                       | (24,009 | )                                      | $      | 691 |   | $ | (22,820 | ) | $ | 7,619 |   |
| Weighted average common shares - basic              |   | 90,103                                  |    | 71,471                                 |   | 74,622 |   | 71,160 |   |
| Basic net (loss) income per share                   |   | $                                       | (0.27   | )                                      | $      | 0.01 |   | $ | (0.31 | ) | $ | 0.11 |   |
|                                                |   |                                    |    |                                   |   |   |   |   |   |
| Diluted earnings per share computation:             |   |                                    |    |                                   |   |   |   |   |   |
| Net (loss) income applicable to common stockholders |   | $                                       | (24,009 | )                                      | $      | 691 |   | $ | (22,820 | ) | $ | 7,619 |   |
| Shares calculation:                                 |   |                                    |    |                                   |   |   |   |   |   |
| Weighted average common shares                      |   | 90,103                                  |    | 71,471                                 |   | 74,622 |   | 71,160 |   |
| Effect of dilutive preferred stock                  |   | —                                  |    | 673                                    |   | — |   | 224 |   |
| Effect of dilutive stock options and warrants       |   | —                                  |    | 11,467                                 |   | — |   | 11,335 |   |
| Weighted average common shares - diluted            |   | 90,103                                  |    | 83,611                                 |   | 74,622 |   | 82,719 |   |
| Diluted net (loss) income per share                 |   | $                                       | (0.27   | )                                      | $      | 0.01 |   | $ | (0.31 | ) | $ | 0.09 |   |

 

Diluted net income per share for the three and ninemonths ended February 28, 2001 assumes the conversion of all outstanding sharesof preferred stock into shares of common stock, as if the shares had convertedimmediately upon their issuance.

 

**4.             COMPREHENSIVE****INCOME**

 

The following table presents the calculation ofcomprehensive income:

 
|                                              |   | **Three  Months Ended****February 28,** |   | **Nine  Months Ended****February 28,** |   |
|---------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                              |   | **2002**                                |   | **2001**                               |   | **2002** |   | **2001** |   |
| Net income                                        |   | $                                       | 5,993  |                                   | $      | 695 |   | $ | 7,278 |   | $ | 7,623 |   |
| Unrealized gain on available for sale investments |   | 14                                      |   | —                                 |   | 14 |   | — |   |
| Translation adjustment                            |   | (5                                      | )      | (1                                     | )      | (469 | ) | (308 | ) |
| Comprehensive income                              |   | $                                       | 6,002  |                                   | $      | 694 |   | $ | 6,823 |   | $ | 7,315 |   |

 

**5.             COMMITMENTSAND CONTINGENCIES**

 

Former employees that were ESOP participants have theright to require the Company to repurchase any vested ESOP shares they receiveat the market price.  Consequently,shares held by the ESOP participants are considered mandatorily redeemablecommon stock and are recorded at the estimated fair market value at eachbalance sheet date.  Upon the closing ofthe Company’s initial public offering (see Note 11), the repurchase featureterminated for all but 193 shares of which 60 are outstanding at February 28,2002.

 

**6.             SEGMENTAND****GEOGRAPHIC****AREAS**

 

The Company views its operations and manages itsbusiness as one segment, the development and marketing of computer software andrelated services.  Factors used toidentify the Company’s single operating segment include the organizationalstructure of the Company and the financial information available for evaluationby the chief operating decision maker in making decisions about how to allocateresources and assess performance.  TheCompany markets its products and services through the Company’s offices in theUnited States and its wholly-owned branches and subsidiaries operating inCanada, the United Kingdom, Germany, France and the Netherlands.

 

7

----

 

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

 
|                     |   | **Three  Months Ended****February 28,** |    | **Nine  Months Ended****February 28,** |   |
|--------------------------|--------|-----------------------------------------|---------|----------------------------------------|--------|
|                     |   | **2002**                                |    | **2001**                               |   | **2002** |   | **2001** |   |
| Revenues:                |   |                                    |    |                                   |   |   |   |   |   |
| Domestic operations      |   | $                                       | 107,725 |                                   | $      | 94,231 |   | $ | 289,213 |   | $ | 248,872 |   |
| International operations |   | 7,773                                   |    | 7,432                                  |   | 22,321 |   | 19,302 |   |
| Consolidated             |   | $                                       | 115,498 |                                   | $      | 101,663 |   | $ | 311,534 |   | $ | 268,174 |   |

 
|                     |   | **Feb. 28,   2002** |       | **May 31,   2001** |   |
|--------------------------|--------|---------------------|------------|--------------------|--------|
| Long-lived assets:       |   |                | ** ** |               |   |
| Domestic operations      |   | $                   | 62,507     |               | $      | 28,568 |   |
| International operations |   | 703                 |       | 663                |   |
| Consolidated             |   | $                   | 63,210     |               | $      | 29,231 |   |

 

**7.             ACQUISITIONOF ACCOUNT4, INC.**

 

On July 11, 2001, the Company completed theacquisition of Account4, Inc. (Account4). Account4 is a provider of web-based professional services automationsoftware that enables services organizations to more efficiently manage theirbusinesses and workforce.  As a resultof the acquisition, the Company expanded its software solution for professionalservice organizations to include automated functions such as forecasting andplanning, scheduling and assignments, skills and resource management, time andexpense reporting, project management and invoicing.  The acquisition of Account4 was intended to enhance the Company’sstrategies of focusing on targeted vertical markets and providing additionalvalue-added products and services to its customers.  In this transaction, the Company acquired all the outstandingsecurities of Account4 in exchange for $27,500, including the repayment ofassumed debt.  The results of Account4’soperations have been included in the consolidated financial statements sinceJuly 11, 2001.

 

The transaction was accounted for under the purchasemethod of accounting and accordingly, the assets and liabilities acquired wererecorded at their estimated fair values at the effective date of theacquisition.  The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed at the date of the acquisition.

 
|                      |   | **At July  11, 2001** |   |
|---------------------------|--------|-----------------------|--------|
| Current assets            |   | $                     | 4,297  |   |
| Intangible assets         |   | 13,400                |   |
| Goodwill                  |   | 17,943                |   |
| Other long-term assets    |   | 214                   |   |
| Total assets acquired     |   | 35,854                |   |
| Current liabilities       |   | (2,657                | )      |
| Deferred tax liability    |   | (5,670                | )      |
| Long-term debt            |   | (27                   | )      |
| Total liabilities assumed |   | (8,354                | )      |
| Net assets acquired       |   | $                     | 27,500 |   |

 

The intangible assets of $13,400 have aweighted-average useful life of approximately 7 years.  The intangible assets that make up thatamount include acquired technology of $5,100 (5-year useful life) and customerlist of $8,300 (10-year useful life). No amounts were allocated to in-process research and development, asAccount4 did not have any new products in development at the time of theacquisition.  All of the goodwill wasassigned to the Company’s single reporting unit, which is its sole operatingsegment.  In accordance with the provisionsof Statement of Financial Accounting Standard (SFAS) No. 142, goodwillgenerated from the Account4 acquisition is not amortized.

 

8

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The following table presents the consolidated resultsof operations on an unaudited pro forma basis as if the acquisition of Account4had taken place at the beginning of the periods presented: 

 
|                                |   | **Three  Months Ended****February 28,** |    | **Nine  Months Ended****February 28,** |   |
|-------------------------------------|--------|-----------------------------------------|---------|----------------------------------------|--------|
|                                |   | **2002**                                |    | **2001**                               |   | **2002** |   | **2001** |   |
| Total revenues                      |   | $                                       | 115,498 |                                   | $      | 104,134 |   | $ | 312,275 |   | $ | 275,114 |   |
| Net income                          |   | $                                       | 5,993   |                                   | $      | 237 |   | $ | 5,373 |   | $ | 3,554 |   |
| (Loss) Earnings per share - basic   |   | $                                       | (0.27   | )                                      | $      | 0.00 |   | $ | (0.33 | ) | $ | 0.05 |   |
| (Loss) Earnings per share - diluted |   | $                                       | (0.27   | )                                      | $      | 0.00 |   | $ | (0.33 | ) | $ | 0.04 |   |

 

The unaudited pro forma results of operations are forcomparative purposes only and do not necessarily reflect the results that wouldhave occurred had the acquisition occurred at the beginning of the periodspresented or the results which may occur in the future.  The results of operations of Account4 forthe three and nine months ended February 28, 2001 included non-cash stockcompensation expenses of $69 and $3,612, respectively.

 

**8.             GOODWILLAND OTHER INTANGIBLE ASSETS - ADOPTION OF STATEMENTS 141 AND 142**

 

Effective June 1, 2001, the Company adopted SFASNo. 141, “Business Combinations” and No. 142, “Goodwill and OtherIntangible Assets.”  Under thesestandards, the Company ceased amortizing goodwill that had a net book value of$4,259 as of June 1, 2001, which is expected to reduce 2002 annualamortization expense by approximately $1,549. Adoption of the new standards resulted in not recognizing $387 and$1,161 in goodwill amortization expense for the three and nine months endedFebruary 28, 2002, respectively, that would have been recognized had the oldstandards been in effect.  The sameperiods last year included $295 and $795 in goodwill amortization expense forthe three and nine months ended February 28, 2001, respectively, under the oldstandards.  See additional SFASNo. 141 and 142 disclosures related to the Account4 acquisition in Note 7.

 

The following table presents the impact of the newstandards (only goodwill amortization and related tax effects) on operatingincome, net income and (loss) earnings per share, as if they had been in effectfor the three and nine months ended February 28, 2001:

 
|                              |   | **Three  Months Ended****February 28,** |       | **Nine  Months Ended****February 28,** |       |
|-----------------------------------|--------|-----------------------------------------|------------|----------------------------------------|------------|
|                              |   | **2002**                                |       | **2001**                               |       | **2001** |   | **2002** |   | **2001** |   | **2001** |   |
|                              |   | **As  Reported**                        | ** ** | **As  Adjusted**                       | ** ** | **As  Reported** | ** ** | **As  Reported** | ** ** | **As Adjusted** | ** ** | **As  Reported** | ** ** |
| Operating income                  |   | $                                       | 11,577     |                                   | $          | 1,078 |   | $ | 783 |   | $ | 14,742 |   | $ | 12,844 |   | $ | 12,049 |   |
| Net income                        |   | $                                       | 5,993      |                                   | $          | 866 |   | $ | 695 |   | $ | 7,278 |   | $ | 8,084 |   | $ | 7,623 |   |
| (Loss) Earnings per share-basic   |   | $                                       | (0.27      | )                                      | $          | 0.01 |   | $ | 0.01 |   | $ | (0.31 | ) | $ | 0.11 |   | $ | 0.11 |   |
| (Loss) Earnings per share-diluted |   | $                                       | (0.27      | )                                      | $          | 0.01 |   | $ | 0.01 |   | $ | (0.31 | ) | $ | 0.10 |   | $ | 0.09 |   |

 

Acquiredintangible assets subject to amortization were as follows:

 
|                |   | **February  28, 2002**      |       |
|---------------------|--------|-----------------------------|------------|
|                |   | **Gross  carrying Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
| Acquired technology |   | $                           | 5,100      |   | $ | 680 |   |
| Customer list       |   | 8,300                       |       | 553 |   |
|                |   | $                           | 13,400     |   | $ | 1,233 |   |

 

There were no intangible assets subject toamortization at May 31, 2001.  Forthe three and nine months ended February 28, 2002, amortization expense forintangible assets was $462 and $1,233, respectively.  The estimated annual amortization expense for intangible assetsis approximately $1,695 for the fiscal year ending May 31, 2002, $1,850for the fiscal years ending May 31, 2003 thru 2006 and $915 for the fiscal yearending May 31, 2007.

 

**9.             STOCKHOLDERS’EQUITY**

 

Effective August 8, 2001, the Company’s Board ofDirectors authorized a 1.387-for-1 stock split of the then issued andoutstanding shares of common stock.  Allreferences to common stock and per share data included in the financialstatements and related notes have been adjusted to give retroactive effect tothe stock split.

 

9

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**10.          NEW****ACCOUNTING PRONOUNCEMENTS**

 

In January 2002, the Emerging Issues Task Force (EITF)issued EITF No. 01-14, “Income Statement Characterization of ReimbursementsReceived for ‘Out-of-Pocket’ Expenses Incurred” (formerly *EITF Abstracts*, Topic No. D-103).  This EITF requires that reimbursementsreceived for out-of-pocket expenses incurred should be characterized as revenuein the income statement as opposed to a reduction of expenses incurred.  These out-of-pocket expenses may includeairfare, mileage, hotel stays and out-of-town meals that the customer willreimburse the service provider.  TheEITF is effective for financial reporting periods beginning after December 15,2001.  Adoption of the EITF would haveresulted in an increase in both revenues and cost of revenues in the amount of$2,802 and $2,755 for the three months ended February 28, 2002 and 2001,respectively, and $8,646 and $5,586 for the nine months ended February 28, 2002and 2001, respectively.  The adoptionwill not affect the Company’s financial position or results of operations.

 

In October 2001, the FASB (Financial AccountingStandards Board) approved SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  Thisstatement addresses financial accounting and reporting for the impairment oflong-lived assets and for long-lived assets to be disposed of and supersedesSFAS No. 121 and APB Opinion No. 30, “Reporting the Results of Operations –Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions.”  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001, and interim periods within those fiscalyears, with early application encouraged. The Company is currently evaluating this standard and does not expectany material effect on its financial position or results of operations.

 

**11.          INITIAL****PUBLIC****OFFERING**

 

The Company closed its initial public offering onDecember 12, 2001, at which time the Company issued 13,675 shares of commonstock from the primary offering, 10,316 shares of common stock upon conversionof all of the outstanding shares of series A preferred stock, 1,661 shares ofcommon stock as part of the over-allotment option exercise and 439 shares ofcommon stock issued upon the exercise of warrants and sold as part of theover-allotment option exercise.  Aftergiving effect to the issuance of these shares on December 12, 2001, the Companyhad 93,316 shares of common stock and 106,825 shares of fully diluted commonstock outstanding.  The Company receivedproceeds, net of commissions, of $200,750 in the initial public offeringincluding exercise of the over-allotment option in full, before giving effectto non-commission related offering expenses of approximately $3,400.  Proceeds from the initial public offeringare invested in interest-bearing, investment grade securities.  The Company used $10,240 proceeds from theoffering to repay senior subordinated convertible notes.  Due to the repayment of the notes prior tothe scheduled maturity date, the Company recorded an extraordinary charge inthe third quarter for the total amount of the unamortized debt issuance costsand the discount on the notes of $1,393, net of income tax benefit of$928.  Additionally, as a result of theconversion of the series A preferred stock to common stock, which acceleratedthe amortization of the beneficial conversion feature, the Company recognized a$29,996 non-cash charge to net income available to common stockholders for theunamortized value of the beneficial conversion feature of our preferred stockin the third quarter of fiscal 2002. The Company also recognized accretion on the preferred stock of $6 and$102 for the three and nine months ended February 28, 2002, respectively.  These charges adversely impacted basic andfully diluted earnings per share by $0.33. However, these charges had no impact on net income.

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**Forward-LookingStatements**

 

In addition to historicalinformation, this Quarterly Report contains forward-looking statements.  The forward-looking statements are made inreliance upon safe harbor provisions of the Private Securities LitigationReform Act of 1995.  The forward-lookingstatements are subject to certain risks and uncertainties that could cause actualresults to differ materially from those reflected in the forward-lookingstatements.  Factors that might causesuch a difference include, but are not limited to, those discussed in thesection entitled “Management’s Discussion and Analysis of Financial Conditionand Results of Operations”.  Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s opinions only as of the date hereof.  The Company undertakes no obligation torevise or publicly release the results of any revision to these forward-lookingstatements.  Readers should carefullyreview the risk factors described in this report on Form 10-Q and in otherdocuments the Company files from time to time with the Securities and ExchangeCommission, including the “Risk Factors” section of the Company’s prospectusdated December 6, 2001, filed with the Commission pursuant to Rule 424(b) ofthe Securities Act of 1933, as amended, in connection with the RegistrationStatement No. 333-63394 on Form S-1 filed with the Commission on June 20, 2001,together with any amendments thereto.

 

**CriticalAccounting Policies And Estimates**

 

Our discussion andanalysis of financial conditions and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financialstatements requires us to make 

 

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estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements, thereported amounts of revenues and expenses during the reporting period, andrelated disclosures of contingent assets and liabilities.  Note 2 in the Notes to the ConsolidatedFinancial Statements in our Prospectus filed December 6, 2002, describes oursignificant accounting polices used in the preparation of the consolidatedfinancial statements.  On an on-goingbasis, we evaluate our estimates, including, but not limited to, those relatedto bad debts, intangible assets and contingencies.  We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.  Actual results could differfrom these estimates under different assumptions or conditions.

 

We believe the criticalaccounting polices listed below affect significant judgments and estimates usedin the preparation of our consolidated financial statements.

 

*Revenue Recognition.* We recognize revenues in accordance with the provisions of the AmericanInstitute of Certified Public Accountants Statement of Position(SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4and SOP 98-9, as well as Technical Practice Aids issued from time to timeby the American Institute of Certified Public Accountants, and in accordancewith the Securities and Exchange Commission Staff Accounting BulletinNo. 101, “Revenue Recognition in Financial Statements.”  We license software under non-cancelablelicense agreements and provide related professional services, including support,training, consulting and implementation. Training, consulting and implementation services are not essential tothe functionality of our software products, are sold separately and also areavailable from a number of third-party service providers.  Accordingly, revenues from these servicesare generally recorded separately from the license fee.  Software arrangements including fixed-feeservice components are recognized using contract accounting.  Our specific revenue recognition policiesare as follows:

 

•              SoftwareLicense Fees – License fee revenues from end-users and resellers are generallyrecognized using the residual method when the software product has beenshipped, provided a non-cancelable license agreement has been signed, there areno uncertainties surrounding product acceptance, the fees are fixed ordeterminable and collection of the related receivable is consideredprobable.  We do not generally offerrights of return, acceptance clauses and price protection to ourcustomers.  Typically, our softwarelicense fees are due within a twelve-month period from the date ofshipment.  If the fee due from thecustomer is not fixed or determinable, including payment terms greater thantwelve months from shipment, revenue is recognized as payments become due andall other conditions for revenue recognition have been satisfied.  In software arrangements that include rightsto multiple software products, specified upgrades, maintenance or services, weallocate the total arrangement fee among each deliverable using the relativefair value of each of the deliverables determined using vendor-specificobjective evidence.  Vendor-specificobjective evidence of fair value is determined using the price charged whenthat element is sold separately.  Insoftware arrangements in which we do not have vendor-specific objectiveevidence of fair value of undelivered elements, revenue is deferred until fairvalue is determined or all elements have been delivered.  Up-front set-up fees in transactions withapplication service providers are deferred and recognized ratably over theestimated service period.

 

•              Services– Revenues from training and consulting services are recognized as services areprovided to customers.  Revenues frommaintenance contracts are deferred and recognized ratably over the term of themaintenance agreements.  Revenues forcustomer support and maintenance, which are bundled with the initial licensefee, are deferred based on the fair value of the bundled support services; fairvalue is based on the renewal rate for continued support arrangements.

* *

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

 

*Valuation of Long-Lived andIntangible Assets and Goodwill. *We review goodwill, identifiableintangibles and other long-lived assets for impairment annually or sooner ifevents or changes in circumstances indicate that the carrying amount may not berecoverable.  Events or changes incircumstances that indicate the carrying amount may not be recoverable include,but are not limited to, a significant decrease in the market value of thebusiness or asset acquired, a significant adverse change in the extent ormanner in which the business or asset acquired is used or a significant adversechange in the business climate.  If suchevents or changes in circumstances are present, the undiscounted cash flowmethod is used to determine whether the asset is impaired.  Cash flows would include the estimatedterminal value of the asset and exclude any interest charges.  To the extent that the carrying value of theasset exceeds the undiscounted cash flows. The discount rate utilized would be based on our best estimate of therelated risks and return at the time the impairment assessment is made.  All of our goodwill was assigned to a singlereporting unit, which is our sole operating segment.

 

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*Contingencies.* We are subject to the possibility of various loss contingencies in thenormal course of business.  We accruefor loss contingencies when a loss is estimable and probable.

 

**RecentEvents**

 

On December 12, 2001, weclosed our initial public offering.  SeeNote 11 to the condensed consolidated financial statements.

 

On July 11, 2001, wecompleted the acquisition of Account4, Inc. (Account4).  See Note 7 to the condensed consolidatedfinancial statements.

 

**Results of Operations**

 

The following table sets forth certain line items inour consolidated statement of operations as a percentage of total revenues forthe periods indicated:

 
|                                                |   | **Three  Months Ended Feb. 28,** |   | **Nine  Months Ended****Feb. 28,** |   |
|-----------------------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|
|                                                |   | **2002**                         |   | **2001**                           |   | **2002** |   | **2001** |   |
| Revenues:                                           |   |                             |   |                               |   |   |   |   |   |
| License fees                                        |   | 42.5                             | %      | 45.0                               | %      | 36.7 | % | 38.0 | % |
| Services                                            |   | 57.5                             |   | 55.0                               |   | 63.3 |   | 62.0 |   |
| Total revenues                                      |   | 100.0                            |   | 100.0                              |   | 100.0 |   | 100.0 |   |
|                                                |   |                             |   |                               |   |   |   |   |   |
| Cost of revenues:                                   |   |                             |   |                               |   |   |   |   |   |
| Cost of license fees                                |   | 7.9                              |   | 8.9                                |   | 8.0 |   | 6.6 |   |
| Cost of services                                    |   | 31.1                             |   | 28.3                               |   | 33.5 |   | 31.6 |   |
| Total cost of revenues                              |   | 39.0                             |   | 37.2                               |   | 41.5 |   | 38.2 |   |
|                                                |   |                             |   |                               |   |   |   |   |   |
| Gross margin                                        |   | 61.0                             |   | 62.8                               |   | 58.5 |   | 61.8 |   |
|                                                |   |                             |   |                               |   |   |   |   |   |
| Operating expenses:                                 |   |                             |   |                               |   |   |   |   |   |
| Research and development                            |   | 14.8                             |   | 13.1                               |   | 16.1 |   | 14.0 |   |
| Sales and marketing                                 |   | 27.5                             |   | 29.7                               |   | 29.6 |   | 30.8 |   |
| General and administrative                          |   | 8.5                              |   | 14.3                               |   | 7.7 |   | 10.6 |   |
| Other general expenses                              |   | —                           |   | 4.9                                |   | 0.2 |   | 1.9 |   |
| Amortization of acquired  intangibles               |   | 0.2                              |   | —                             |   | 0.2 |   | — |   |
| Total operating expenses                            |   | 51.0                             |   | 62.0                               |   | 53.8 |   | 57.3 |   |
|                                                |   |                             |   |                               |   |   |   |   |   |
| Operating income                                    |   | 10.0                             |   | 0.8                                |   | 4.7 |   | 4.5 |   |
| Other income (expense), net                         |   | 0.6                              |   | 0.4                                |   | (0.1 | ) | 0.4 |   |
| Income before income taxes and  extraordinary  item |   | 10.6                             |   | 1.2                                |   | 4.6 |   | 4.9 |   |
| Provision for income taxes                          |   | 4.2                              |   | 0.5                                |   | 1.8 |   | 2.1 |   |
| Income before extraordinary  item                   |   | 6.4                              |   | 0.7                                |   | 2.8 |   | 2.8 |   |
| Extraordinary item, net of tax  benefit             |   | (1.2                             | )      | —                             |   | (0.5 | ) | — |   |
| Net income                                          |   | 5.2                              | %      | 0.7                                | %      | 2.3 | % | 2.8 | % |

 

**Three Months Ended February 28, 2002Compared To Three Months Ended February 28, 2001**

 

***Revenues***

 

*Total Revenues. *Total revenues increased to $115.5million for the three months ended February 28, 2002 from $101.7 million forthe three months ended February 28, 2001, or 13.6%.  The increase was due to a $3.4 million increase in license feesand a $10.5 million increase in services revenues.

 

*License Fees*.  Revenuesfrom license fees increased to $49.1 million for the three months endedFebruary 28, 2002 from $45.8 million for the three months ended February 28,2001, or 7.3%.  The increase isprimarily due to demand for enterprise applications software from customers in ourtargeted vertical markets, most notably healthcare, professional services andpublic sector.  The increase alsoreflects an increase in the number of licensing agreements in the three monthsended February 28, 2002, as well as increased customer acceptance of ourprofessional services automation solution. Revenues from license fees as a percentage of total revenues for thethree 

 

12

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months ended February 28, 2002 and 2001 were 42.5% and45.0%, respectively.  The decrease as apercentage of revenues was primarily a result of the increase in revenues fromservices as a percentage of revenues.

 

*Services*.  Revenuesfrom services increased to $66.4 million for the three months ended February28, 2002 from $55.9 million for the three months ended February 28, 2001, or18.8%.  The increase was primarily dueto an increase in maintenance revenues, reflecting an expanded customer baseand greater demand for consulting services. Services revenues as a percentage of total revenues for the three monthsended February 28, 2002 and 2001 were 57.5% and 55.0%, respectively.

 

***Cost of Revenues***

 

*Cost of License Fees*.  Cost oflicense fees increased to $9.2 million for the three months ended February 28,2002 from $9.1 million for the three months ended February 28, 2001, or0.7%.  Cost of license fees includedamortization expense of acquired intangibles related to the purchase ofAccount4 of $0.3 million for the three months ended February 28, 2002.  Cost of license fees as a percentage oftotal revenues for the three months ended February 28, 2002 and 2001 were 7.9%and 8.9%, respectively. ** **Gross margin on revenue fromlicense fees was 81.4% and 80.1% for the three months ended February 28, 2002and 2001, respectively.  The decrease incost of license fees as a percentage of total revenues and the increase ingross margin on license fees was due to the decreased proportion of sales ofthird-party products in our revenue mix.

 

*Cost of Services*.  Cost ofservices increased to $35.9 million for the three months ended February 28,2002 from $28.7 million for the three months ended February 28, 2001, or25.0%.  The increase in expenses wasprimarily due to higher compensation expenses and other related costs fromadditional headcount and increased third party consulting expenses.  Cost of services included non-cash chargesfor stock-based compensation of $0.1 million for the three months endedFebruary 28, 2002.  Cost of services asa percentage of total revenues for the three months ended February 28, 2002 and2001 were 31.1% and 28.3%, respectively. Gross margin on services revenues was 45.9% and 48.6% for the threemonths ended February 28, 2002 and 2001, respectively.  The increase in cost of services as apercentage of total revenues and the decrease in gross margin on services wereprimarily due to increased headcount and increased use of third-partyconsultants.

 

***Operating Expenses***

 

*Research and Development*.  Research anddevelopment expenses increased to $17.1 million for the three months endedFebruary 28, 2002 from $13.3 million for the three months ended February 28,2001, or 28.9%.  Research anddevelopment expenses included non-cash charges for stock-based compensation of$0.5 million and $0.1 million for the three months ended February 28, 2002 and2001, respectively.  Research anddevelopment expenses as a percentage of total revenues for the three monthsended February 28, 2002 and 2001 were 14.8% and 13.1%, respectively.  The increase in expenses was primarily dueto higher compensation expenses and other related costs from additionalheadcount.

 

*Sales and Marketing*.  Sales andmarketing expenses increased to $31.8 million for the three months endedFebruary 28, 2002 from $30.3 million for the three months ended February 28,2001, or 5.0%.  Sales and marketingexpenses included non-cash charges for stock-based compensation of $0.7 millionand $0.2 million for the three months ended February 28, 2002 and 2001,respectively.  Sales and marketingexpenses as a percentage of total revenues for the three months ended February28, 2002 and 2001 were 27.5% and 29.7%, respectively.  The increase in expenses was primarily due to higher compensationexpenses and other related costs from additional headcount and increasedexpenses related to expanded branding efforts subsequent to our initial publicoffering.

 

*General and Administrative*.  General andadministrative expenses decreased to $9.8 million for the three months endedFebruary 28, 2002 from $14.5 million for the three months ended February 28,2001, or 32.8%.  General andadministrative expenses included non-cash charges for stock-based compensationof $1.0 million and $0.5 million for the three months ended February 28, 2002and 2001, respectively and compensation associated with a repurchase of stockoptions from current employees of $5.1 million for the three months endedFebruary 28, 2001.  Additionally,general and administrative expenses included a lease abandonment expense of$1.2 million for the three months ended February 28, 2001.  General and administrative expenses as apercentage of total revenues for the three months ended February 28, 2002 and2001 were 8.5% and 14.3%, respectively. After adjusting for the above items, the remaining change in general andadministrative expenses was mainly due to an increase in bad debt expense.

 

*OtherGeneral Expenses. *Other general expenses for the threemonths ended February 28, 2001 consisted of $2.6 million in consulting feesrelated to business process improvement initiatives designed to prepare ourorganization for our initial public offering and $2.4 million in expensesrelated to the repurchase of options held by a former executive of the Company.

 

*Amortizationof Acquired Intangibles. *Amortization of acquired intangibles forthe three months ended February 28, 2002 consisted of $0.2 million inamortization expense related to the purchase of Account4 in July 2001.

 

13

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***Other Income (Expense)***

 

Other income, net was$0.7 million for the three months ended February 28, 2002 compared with $0.4million for the three months ended February 28, 2001.  Other income, net as a percentage of total revenues for the threemonths ended February 28, 2002 and 2001 was 0.6% and 0.4%, respectively.  We earned interest income of $0.8 millionand $0.5 million for the three months ended February 28, 2002 and 2001,respectively.  This was offset byinterest expense of $0.1 million for the three months ended February 28, 2002and 2001.  This increase in interestincome was primarily due to the interest earned on proceeds from our initialpublic offering.

 

***Provision for Income Taxes***

 

We recognized an incometax provision of $4.9 million for the three months ended February 28, 2002compared to $0.5 million for the three months ended February 28, 2001.  Our income tax provision is comprisedprimarily of federal and state taxes. Our effective rate was 40.0% and 42.0% for the three months endedFebruary 28, 2002 and 2001, respectively. The decrease in the effective tax rate was primarily due to a decreasein permanent non-deductible expenses and an increase in tax-exempt interestincome.

 

***Extraordinary Item***

 

We used $10.2 million inproceeds from our initial public offering to repay senior subordinatedconvertible notes.  Due to the repaymentof the notes prior to the scheduled maturity date, we recorded an extraordinarycharge for the total amount of the unamortized debt issuance costs and thediscount on the notes of $1.4 million, net of the tax benefit of $0.9 millionfor the three months ended February 28, 2002.

 

***Accretion and Conversion of Preferred Shares***

 

As part of our initialpublic offering on December 12, 2001, we converted all of the outstandingshares of series A preferred stock and issued 10,316 shares of commonstock.  As a result of the conversion ofthe series A preferred stock, we recognized a $30.0 million non-cash charge tonet income available to common stockholders for the unamortized value of thebeneficial conversion feature of our preferred stock.  The charge had no impact on net earnings.  See Note 11 in the Notes to the CondensedConsolidated Financial Statements.

 

**Nine Months Ended February 28, 2002 Compared To Nine MonthsEnded February 28, 2001**

 

***Revenues***

 

*Total Revenues. *Total revenues increased to $311.5million for the nine months ended February 28, 2002 from $268.2 million for thenine months ended February 28, 2001, or 16.2%. The increase was due to a $12.5 million increase in license fees and a$30.9 million increase in services revenues.

 

*License Fees*.  Revenuesfrom license fees increased to $114.3 million for the nine months endedFebruary 28, 2002 from $101.9 million for the nine months ended February 28,2001, or 12.2%.  The increase wasprimarily due to demand for enterprise applications software from customers inour targeted vertical markets, a reduction in revenues deferred on newcontracts compared with the prior period and increased customer acceptance ofour professional services automation solution. Revenues from license fees as a percentage of total revenues for thenine months ended February 28, 2002 and 2001 were 36.7% and 38.0%,respectively.  The decrease as apercentage of revenues was primarily a result of the increase in revenues fromservices as a percentage of revenues.

 

*Services*.  Revenues fromservices increased to $197.2 million for the nine months ended February 28,2002 from $166.3 million for the nine months ended February 28, 2001, or18.6%.  The increase was primarily dueto an increase in maintenance revenues, reflecting an expanded customer baseand an increase in consulting revenues resulting from an increase in billableservice consultants and an increase in third party consulting revenues.  Services revenues as a percentage of totalrevenues for the nine months ended February 28, 2002 and 2001 were 63.3% and62.0%, respectively.

 

***Cost of Revenues***

 

*Cost of License Fees*.  Cost oflicense fees increased to $24.9 million for the nine months ended February 28,2002 from $17.8 million for the nine months ended February 28, 2001, or 40.0%.  Cost of license fees included amortizationexpense of acquired intangibles related to the purchase of Account4 of $0.7million for the nine months ended February 28, 2002.  Cost of license fees as a percentage of total revenues for thenine months ended February 28, 2002 and 2001 were 8.0% and 6.6%,respectively.  Gross margin on revenuefrom license fees was 78.2% and 82.5% for the nine months ended February 28,2002 and 2001, respectively.  Theincrease in cost of license fees as a percentage of total revenues and thedecrease in gross margin on license fees were primarily attributable to anincreased proportion of sales of third-party products in our revenue mix.

 

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*Cost of Services*.  Cost ofservices increased to $104.3 million for the nine months ended February 28,2002 from $84.6 million for the nine months ended February 28, 2001, or23.4%.  The increase in expenses wasprimarily due to higher compensation expenses and other related costs fromadditional headcount and increases in third-party costs due to greater use ofthird-party consultants.  Cost ofservices included non-cash charges for stock-based compensation of $0.4 millionfor the nine months ended February 28, 2002. The cost of services as a percentage of total revenues for the ninemonths ended February 28, 2002 and 2001 were 33.5% and 31.6%,respectively.  Gross margin on servicesrevenues was 47.1% and 49.2% for the nine months ended February 28, 2002 and2001, respectively.  The increase incost of services as a percentage of total revenues and the decrease in grossmargin on services were primarily due to increased utilization of third-partyconsultants and lower consultant utilization due to the September 11, 2001terrorist attacks which primarily effected the quarter ended November 30, 2001.

 

***Operating Expenses***

 

*Research and Development*.  Research anddevelopment expenses increased to $50.3 million for the nine months endedFebruary 28, 2002 from $37.6 million for the nine months ended February 28,2001, or 33.6%.  Research anddevelopment expenses included non-cash charges for stock-based compensation of$1.3 million and $0.1 million for the nine months ended February 28, 2002 and2001, respectively.  Research anddevelopment expenses as a percentage of total revenues for the nine monthsended February 28, 2002 and 2001 were 16.1% and 14.0%, respectively.  The increase in expenses was primarily dueto higher compensation expenses and other related costs from additionalheadcount.

 

*Sales and Marketing*.  Sales andmarketing expenses increased to $92.2 million for the nine months endedFebruary 28, 2002 from $82.6 million for the nine months ended February 28,2001, or 11.6%.  Sales and marketingexpenses included non-cash charges for stock-based compensation of $2.2 millionand $0.3 million for the nine months ended February 28, 2002 and 2001,respectively.  Sales and marketingexpenses as a percentage of total revenues for the nine months ended February28, 2002 and 2001 were 29.6% and 30.8%, respectively.  The increase in expenses was primarily due to higher compensationexpenses and other related costs from additional headcount and expenses relatedto expanded branding efforts subsequent to our initial public offering.

 

*General and Administrative*.  General andadministrative expenses decreased to $24.0 million for the nine months endedFebruary 28, 2002 from $28.6 million for the nine months ended February 28,2001, or 16.1%.  General andadministrative expenses included non-cash charges for stock-based compensationof $3.5 million and $1.0 million for the nine months ended February 28, 2002and 2001, respectively and compensation associated with a repurchase of stockoptions from current employees of $5.1 million for the nine months ended February28, 2001.  Additionally, general andadministrative expenses included a lease abandonment expense of $1.8 millionfor the nine months ended February 28, 2001. General and administrative expenses as a percentage of total revenuesfor the nine months ended February 28, 2002 and 2001 were 7.7% and 10.6%,respectively.

 

*OtherGeneral Expenses. *Other general expenses for the ninemonths ended February 28, 2002 consisted of $0.7 million in consulting feesrelated to business process improvement initiatives designed to prepare ourorganization for our initial public offering. Other general expenses for the nine months ended February 28, 2001consisted of  $2.6 million in consultingfees related to business process improvement initiatives designed to prepareour organization for our initial public offering and $2.4 in expenses relatedto the repurchase of options held by a former executive of the Company.

 

*Amortizationof Acquired Intangibles. *Amortization of acquired intangibles forthe nine months ended February 28, 2002 consisted of $0.6 million inamortization expense related to the purchase of Account4 in July 2001.

 

***Other Income (Expense)***

 

Other expense, net was$0.3 million for the nine months ended February 28, 2002 compared with $1.1million of other income, net for the nine months ended February 28, 2001.  Other expense, net and other income, net asa percentage of total revenues for the nine months ended February 28, 2002 and2001 were 0.1% and 0.4%, respectively. We earned interest income of $1.7 million and $1.6 million for the ninemonths ended February 28, 2002 and 2001, respectively.  This was offset by interest expense of $2.0and $0.5 million for the nine months ended February 28, 2002 and 2001, respectively.  The increase in interest expense was due tothe interest on the senior subordinated convertible notes and accretion on thewarrants issuable upon conversion of the senior subordinated convertible notesissued in connection with our recapitalization.

 

***Provision for Income Taxes***

 

We recognized an incometax provision of $5.8 million for the nine months ended February 28, 2002compared to $5.5 million for the nine months ended February 28, 2001.  Our income tax provision is comprisedprimarily of federal and state taxes. Our effective rate was 40.0% and 42.0% for the nine months endedFebruary 28, 2002 and 2001, respectively. The decrease in the effective tax rate was primarily due to a decreasein permanent non-deductible expenses and an increase in tax-exempt interestincome.

 

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***Extraordinary Item***

 

We used $10.2 million inproceeds from our initial public offering to repay senior subordinatedconvertible notes.  Due to the repaymentof the notes prior to the scheduled maturity date, we recorded an extraordinarycharge for the total amount of the unamortized debt issuance costs and thediscount on the notes of $1.4 million, net of the tax benefit of $0.9 millionfor the nine months ended February 28, 2002.

 

***Accretion and Conversion of Preferred Shares***

 

As part of our initialpublic offering on December 12, 2001, we converted all of the outstandingshares of series A preferred stock and issued 10,316 shares of commonstock.  As a result of the conversion ofthe series A preferred stock, we recognized a $30.0 million non-cash charge tonet income available to common stockholders for the unamortized value of thebeneficial conversion feature of our preferred stock.  The charge had no impact on net earnings.  See Note 11 in the Notes to the CondensedConsolidated Financial Statements.

 

**Liquidityand Capital Resources**

 

We finance our operationsprimarily with cash generated through operations.  As of February 28, 2002, we had $228.2 million in cash, cashequivalents and marketable securities and $212.8 million in working capital.

 

Net cash provided byoperating activities was $1.0 million and $14.5 million for the nine monthsended February 28, 2002 and 2001, respectively and $16.2 million for the threemonths ended February 28, 2002.  The decreasein cash provided by operating activities was primarily due to changes indeferred revenue and customer deposits, accounts payable and trade accountsreceivable.

 

Net cash used ininvesting activities was $42.5 million and $8.4 million for the nine monthsended February 28, 2002 and 2001, respectively.  Use of cash for the nine months ended February 28, 2002 included$26.0 million related to the acquisition of Account4, $11.3 million related tothe purchases of property and equipment, the majority of which consisted ofcomputer equipment, and net investment purchases and maturities of $5.2million.  We have generally fundedcapital expenditures through the use of cash generated through operations orbank loans. We expect that capital expenditures will continue to increase inthe future as we make additional investments in operations.

 

Net cash provided byfinancing activities was $186.6 million and $5.8 million for the nine monthsended February 28, 2002 and 2001, respectively.  On December 12, 2001, we closed our initial public offering.  We received proceeds, net of commissions, of$200.8 million in the initial public offering including exercise of theover-allotment option in full, before giving effect to non-commission relatedoffering expenses of approximately $3.4 million.  We used proceeds of $10.2 million from the offering to repaysenior subordinated convertible notes. We expect to use the remainder of the proceeds from the sale of sharesby us in the initial public offering for general corporate purposes, includingincreased marketing and research and development expenditures, capitalexpenditures and possible acquisitions. Pending use of those proceeds, we have invested the proceeds ininterest-bearing, investment grade securities.

 

On September 4, 2001, theCompany increased its revolving credit facility to $25.0 million and extendedits term to September 30, 2003.

 

We have no off-balancesheet financing.  We disclosed oursignificant lease obligations in our prospectus dated December 6, 2001.  There have been no significant changessubsequent to our December 6, 2001 prospectus.

 

We believe that cash flowfrom operations, together with the sale of common stock from our initial publicoffering and borrowings available under our existing credit facilities will besufficient to meet our cash requirements for the foreseeable future.

 

**New****AccountingPronouncements**

 

In January 2002, theEmerging Issues Task Force (EITF) issued EITF No. 01-14, “Income StatementCharacterization of Reimbursements Received for ‘Out-of-Pocket’ ExpensesIncurred” (formerly *EITF Abstracts*,Topic No. D-103).  This EITF requiresthat reimbursements received for out-of-pocket expenses incurred should becharacterized as revenue in the income statement as opposed to a reduction ofexpenses incurred.  These out-of-pocketexpenses may include airfare, mileage, hotel stays and out-of-town meals thatthe customer will reimburse the service provider.  The EITF is effective for financial reporting periods beginningafter December 15, 2001.  Adoption ofthe EITF would have resulted in an increase in both revenues and cost ofrevenues in the amount of $2,802 and $2,755 for the three months ended February28, 2002 and 2001, respectively, and $8,646 and $5,586 for the nine monthsended February 28, 2002 and 2001, respectively.  The adoption will not affect the Company’s financial position orresults of operations.

 

In October 2001, the FASB(Financial Accounting Standards Board) approved SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets.”  This statement addresses financial accounting and reporting forthe impairment of long-lived assets and for long-lived assets to be disposed ofand supersedes SFAS No. 121 and APB Opinion No. 30, “Reporting the Results ofOperations – Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions.”  SFAS No. 144 iseffective for fiscal years beginning after December 15, 2001, and interimperiods within those fiscal years, with early application encouraged.  The Company is currently evaluating thisstandard and does not expect any material effect on its financial position orresults of operations.

 

**FactorsThat May Affect Future Results And Market Price Of Stock**

 

An investment in ourcommon stock involves a high degree of risk. Investors evaluating our company and its business should carefullyconsider the factors described below and all other information contained inthis report on Form 10-Q.  Any of thefollowing factors could materially harm our business, operating results andfinancial condition.  Additional factorsand uncertainties not currently known to us or that we currently considerimmaterial could also harm our business, operating results and financialcondition.  This section should be readin conjunction with the unaudited Condensed Consolidated Financial Statementsand Notes thereto and Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in this report on Form 10-Q andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for the year ended May 31, 2001 contained in the Company’sprospectus dated December 6, 2001, filed with the Commission pursuant to 

 

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Rule 424(b) of the Securities Act of 1933, as amended,in connection with the Registration Statement No. 333-63394 on Form S-1 filedwith the Commission on June 20, 2001, together with any amendmentsthereto.  The Company may makeforward-looking statements from time to time, both written and oral.  The actual results may differ materiallyfrom those projected in any such forward-looking statements due to a number offactors, including those set forth below and elsewhere in this report on Form10-Q.

 

***A decline ininformation technology spending may result in a decrease in our revenues orlower our growth rate.***

 

A decline in the demandfor information technology among our current and prospective customers mayresult in decreased revenues or a lower growth rate for us because our salesdepend, in part, on our customers’ level of funding for new or additionalinformation technology systems and services. Moreover, demand for our solutions may be reduced by a decline inoverall demand for computer software and services.  A continued economic downturn may cause our customers to reduceor eliminate information technology spending and cause price erosion for oursolutions, which would substantially reduce the number of new software licenseswe sell and the average sales price for these licenses.  In addition, the September 11, 2001terrorist attacks in the United States and related military actions, as well asfuture events or effects occurring in response or in connection to those developments,may reduce the amount and delay the timing of capital expenditures bycorporations for information technology, such as our software products.  Accordingly, we cannot assure you that wewill be able to increase or maintain our revenues.

 

***There are a largenumber of shares that may be sold in the market which may************depress our stockprice.***

 

Sales of a substantialnumber of shares of our common stock in thepublic market by our employees, directors or othercorporate insiders, or the perception that such sales are likelyto occur, could depress the market priceof our common stock and couldimpair our ability to raise capital through the saleof additional equitysecurities.  Starting March 7,2002, which was the 91st day followingcompletion of our initial public offering,approximately 882,000 shares ofcommon stock, and if all outstanding and issuedoptions and warrants were fully exercised, approximately 7.0 million shares ofcommon stock subject to such outstanding options and warrants, became availablefor sale in the public market.  StartingJune 1, 2002, approximately 1.3 million additionalshares subject to outstanding options will becomeavailable for sale in the public market upon exercise of such options.  Beginning June 5, 2002, when the 180-daylockup agreements expire from our initial public offering, approximately 74.7million additional shares will be eligible for sale in the public market.  Inaddition, approximately 11.8 million shares subject tooutstanding options and warrants, if fully exercised, will be available forsale starting June 5, 2002.

 

***Because ourcustomers are concentrated in five targeted service industries, our operatingresults may be adversely affected by changes in one or more of theseindustries.***

 

As a result of our focuson five targeted services industries, our financial results depend, insignificant part, upon economic conditions in the healthcare, retail,professional services, financial services and public sector industries.  An economic downturn or adverse change inthe regulatory environment or business prospects for one or more of theseindustries may decrease our revenues or lower our growth rate.  In addition, we must continue to developindustry specific functionality for our solutions, which satisfy the changing,specialized requirements of prospective customers in our target industries.

 

***We may experience fluctuations in quarterlyrevenue and operating expenses that could adversely impact our stock price andour operating results.***

 

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

 

•        asignificant number of our prospective customers’ decisions regarding whether toenter into license agreements with us are made within the last few weeks ofeach quarter; 

 

•        wehave historically had a higher concentration of sales in the second half of ourfiscal year due to the nature of our sales personnel compensation programs; 

 

•        thesize of license transactions can vary significantly; 

 

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

 

•        customerevaluations and purchasing processes vary significantly from company tocompany, and a customer’s internal approval and expenditure authorizationprocess can be difficult and time consuming to complete, even 

 

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      after selection of a vendor; 

 

•        thenumber, timing and significance of software product enhancements and newsoftware product announcements by us and our competitors may affect purchasedecisions; 

 

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

 

•        numberand timing of employee exercises of non-qualified stock options could have anadverse impact on operating expenses in the quarter by increasing our payrolltaxes when the options are exercised; and 

 

•        onMarch 21, 2002, we entered into a new joint sales arrangement with SiebelSystems, Inc. and terminated our existing reseller agreement.  We will no longer record revenues orexpenses related to the resale of Siebel products.

 

Fluctuation in ourquarterly revenues and operating expenses may adversely affect our operatingresults.  In each fiscal quarter ourexpense levels, operating costs and hiring plans are based on projections offuture revenues and are relatively fixed. If our actual revenues fall below expectations we could experience areduction in operating results.

 

***Our lengthy andvariable sales cycle makes it difficult to predict our operating results.***

 

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

 

•        reduced demand for enterprise software solutions; 

 

•        introduction of products by our competitors; 

 

•        lower prices offered by our competitors; 

 

•        changes in budgets and purchasing priorities; and 

 

•        reduced need to upgrade existing systems.

 

Our prospective customersroutinely require education regarding the use and benefit of our products.  This may also lead to delays in receivingcustomers’ orders.

 

***As with otherenterprise software vendors, we may be required to delay revenue recognitioninto future periods which could adversely impact our operating results.***

 

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

 

•        license agreements include applications that are underdevelopment or other undelivered elements; 

 

•        we must deliver services, including significantmodifications, customization or complex interfaces, which could delay productdelivery or acceptance; 

 

•        thetransaction involves acceptance criteria or there are identifiedproduct-related issues; 

 

•        the transaction involves contingent payment terms orfees; 

 

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

 

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

 

•        we are required to accept extended paymentterms.

 

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 in order to recognizerevenue when we initially deliver software or perform services.  Negotiation of 

 

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mutually acceptable terms and conditions can extendthe sales cycle, and sometimes we do not obtain terms and conditions thatpermit revenue recognition at the time of delivery or even as work on theproject is completed.

 

***A number of ourcompetitors are well-established software companies that have advantages overus.***

 

We face competition froma number of software companies 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 include well-established companies such as OracleCorporation, PeopleSoft Inc. and SAP AG, all of which have larger installedcustomer bases.  Furthermore, Oracle iscapable of bundling its software with its database applications, which underliea significant portion of our installed applications.

 

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

 

   •     Internet software vendors; 

 

   •     single-industrysoftware vendors; 

 

   •     emergingenterprise resource optimization software vendors; 

 

   •     humanresource management software vendors; 

 

   •     financialmanagement software vendors; and 

 

   •     outsourcedservices providers.

 

As a result, the marketfor enterprise software applications has been and continues to be intenselycompetitive.  Some competitors havebecome more aggressive with their pricing, payment terms and/or issuance of contractualimplementation terms or guarantees.  Wemay be unable to continue to compete successfully with new and existingcompetitors without lowering prices or offering other favorable terms.  We expect competition to persist andintensify, which could negatively impact our operating results and marketshare.

 

***Changes in theterms on which we license technologies from third-party vendors, includingHyperion Solutions Corporation, could result in the loss of potential revenuesor increased costs or delays in the production and improvement of our products.***

 

We license complementarythird-party software products that we incorporate into, or resell with, our ownsoftware products.  For example, we havea strategic development, marketing and reseller relationship with Hyperion thatallows us to incorporate its technology into our financial suite ofproducts.  These licenses and othertechnology licenses are subject to periodic renewal and may include minimumsales requirements.  Specifically, thefailure to meet such minimum sales requirements under the Hyperion contractswould permit Hyperion to terminate our agreements.  A failure to renew, or early termination of, these licenses couldadversely impact our business.  If anyof the third-party software vendors change their product offerings or terminateour licenses, we may lose potential revenues and may need to incur additionaldevelopment costs.  In addition, if thecost of licensing any of these third-party software products significantlyincreases, or if there is a change in the relative mix of products we offer,our gross margins could significantly decrease.  We rely on existing relationships with software vendors who arealso competitors.  If these vendors changetheir business practices, we may be compelled to find alternative vendors withcomplementary software, which may not be available on attractive terms or atall, or may not be as widely accepted or as effective as the software providedby 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.

 

***A deterioration inour relationship with resellers, systems integrators and other third partiesthat 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 existingpartners.  If our relationships withthese resellers, system integrators and strategic and technology partnersdeteriorate or terminate, we may lose important sales and marketingopportunities.  Our resellerarrangements from time to time give rise to disputes regarding marketingstrategy, exclusive territories 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.  Thesesystems integrators may increase their promotion of competing enterprisesoftware applications, or may otherwise discontinue their relationships with orsupport of us.

 

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We also may enter intojoint arrangements with strategic partners to develop new software products orextensions, or to sell our software as part of integrated products.  Our business may be adversely affected ifthese strategic partners change their business priorities or experiencedifficulties in their operations, which in either case causes them to terminateor reduce their support for the joint arrangements.  Furthermore, the financial condition of our channel partnersimpacts our business.  If our partnersare unable to recruit and adequately train a sufficient number of consultingpersonnel to support the implementation of our software products, or theyotherwise do not adequately perform implementation services, we may losecustomers.  Our relationships withresellers, systems integrators and other third-party vendors are an importantpart of our business, and a deterioration of these relationships couldadversely impact our business and operating results.

 

***We may be unable toretain or attract clients if we do not develop new products and enhance ourcurrent products in response to technological changes.***

 

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

 

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

 

   •     developand market products and services that meet changing customer needs; and 

 

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

 

Our core technologiesface competition from new or revised technologies that may render our existingtechnology less competitive or obsolete, reducing the demand for oursolutions.  As a result, we mustcontinually redesign our products to incorporate these new technologies and toadapt our software products to operate on, and comply with, evolving industrystandards for hardware and software platforms. In addition, conflicting new technologies present us with difficultchoices of which new technologies to adopt. If we fail to anticipate or respond adequately to technological developments,or experience significant delays in product development or introduction, ourbusiness and operating results will be negatively impacted.

 

In addition, to theextent we determine that new technologies and equipment are required to remaincompetitive, the development, acquisition and implementation of suchtechnologies may require us to make significant capital investments.  We may not be able to obtain capital forthese purposes and investments in new technologies may not result incommercially viable technological products. The loss of revenue and increased costs to us from such changingtechnologies would adversely affect our business and operating results.

 

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

 

Our software programs areoften deployed in large and complex computer networks.  Because of the nature of these programs,they can only be fully tested for reliability when deployed in networks forlong periods of time.  Our softwareprograms may contain undetected defects when first introduced or as newversions are released, and our customers may discover defects in our productsor experience corruption of their data only after our software programs havebeen deployed.  As a consequence, fromtime to time we have received customer complaints following installation of ourproducts.  In addition, our products arecombined with products from other vendors. As a result, should problems occur, it may be difficult to identify thesource of the problem.  These conditionsincrease the risk that we could experience, among other things: 

 

   •     lossof customers; 

 

   •     damageto our brand reputation; 

 

   •     failureto attract new customers or achieve market acceptance; 

 

   •     diversionof development resources; and 

 

   •     legalactions by our customers.

 

In addition, we may notbe able to avoid or limit liability for disputes relating to productperformance or the provision of services. The occurrence of any one or more of the foregoing factors could causeus to experience losses, incur liabilities and adversely affect our operatingresults.

 

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***We may not be ableto develop our international operations successfully.***

 

Currently, we have alimited international presence on which to base expectations for internationalsales.  Additionally, we must adapt ourproducts to meet the requirements of local markets, primarily in Asia.  We may not be successful in developingbusiness outside of the United States despite continued investment in ourinternational operations.  Factors thatcould have an adverse effect on our ability to develop our internationaloperations include: 

 

•        lack ofexperience in a particular geographic market; 

 

•        significantpresence of our competitors in international markets; 

 

•        increasedcost and development time required to modify and translate our products forlocal markets; 

 

•        inabilityto recruit personnel in a specific country or region; 

 

•        failureto enter into relationships with local resellers, systems integrators or otherthird-party vendors; 

 

•        differingforeign technical standards; and 

 

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

 

If our internationaloperations expand, our business may become subject to unexpected,uncontrollable and rapidly changing events and circumstances in addition tothose experienced in the United States. The following factors, among others, could have an adverse impact on ourbusiness and operating results: 

 

•        operatingcosts in many countries are higher than in the United States; 

 

•        conductingbusiness in currencies other than United States dollars subjects us to currencycontrols and fluctuations in currency exchange rates; 

 

•        we may beunable to hedge some transactions because of uncertainty or the inability toreasonably estimate our foreign exchange exposure; 

 

•        we mayhedge some anticipated transactions and transaction exposures, but could stillexperience losses due to exchange rate fluctuations; 

 

•        laws,policies and other regulatory requirements affecting trade and investmentincluding loss or modification of exemptions for taxes and tariffs, and importand export license requirements; and 

 

•        exposureto different legal standards or risks.

 

***We may be unable toidentify or complete suitable acquisitions and investments, and anyacquisitions and investments we do complete may create business difficulties ordilute our stockholders.***

 

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

 

***Services providedby systems integrators carry lower gross margins than services provided by ouremployees and a change in the mix of services revenues could have an adverseimpact on our operating results.***

 

We subcontract certainconsulting services to systems integrators which generally causes such servicesto carry lower gross margins than services provided internally.  Therefore, an increase in the percentage ofservices provided by systems integrators versus services provided by ouremployees could have a detrimental impact on our overall gross margins andcould adversely affect operating results.

 

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***We may be unable tocompete effectively in the application service provider market.***

 

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

 

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

 

We are subject to therisk of adverse claims and litigation alleging infringement by us of theintellectual property rights of others. Many participants in the technology industry have an increasing numberof patents and patent applications and have frequently demonstrated a readinessto take legal action based on allegations of patent and other intellectualproperty infringement.  Further, as thenumber and functionality of our products increase, we believe that we maybecome increasingly subject to the risk of infringement claims.  If infringement claims are brought againstus, these assertions could distract management and we may have to expendpotentially significant funds and resources to defend or settle suchclaims.  If we were found to infringe onthe intellectual property rights of others, we could be forced to paysignificant license fees or damages for infringement.

 

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 against us was successful, we maybe required to incur significant expense and pay substantial damages as we areunable to insure against this risk. Even if we were to prevail, the accompanying publicity could adverselyimpact the demand for our software.  Provisionsattempting to limit our liability in our standard agreements may be invalidatedby unfavorable judicial decisions or by federal, state, local or foreign lawsor ordinances.

 

***If we are unable toattract and retain qualified personnel, specifically sales and marketingpersonnel and software engineers, we will be unable to develop new products andincrease our revenue.***

 

If we are unable toattract, train and retain highly-skilled technical, managerial, sales andmarketing personnel, we may be at a competitive disadvantage and unable toincrease our revenue.  Competition forpersonnel 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.  We may grant large numbers of options or other stock-based awardsto attract and retain personnel, which could be highly dilutive to ourstockholders.  The failure to attract,train, retain and effectively manage employees could negatively impact ourdevelopment and sales efforts and cause a degradation of our customerservice.  In particular, the loss ofsales personnel could lead to lost sales opportunities because it can takeseveral months to hire and train replacement sales personnel.  Uncertainty created by turnover of keyemployees could adversely affect our business, operating results and stockprice.

 

***We have limitedprotection of our intellectual property and, if we fail to adequately protectour intellectual property, we may not be able to compete.***

 

We consider certainaspects of our internal operations, software and documentation to beproprietary, and rely on a combination of contract, copyright, trademark andtrade secret laws and other measures to protect this information.  In addition, to date we have filed only onepatent application but we intend to file additional patent applications.  Outstanding applications may not result inissued patents and, even if issued, the patents may not provide any competitiveadvantage.  Existing copyright lawsafford only limited protection.  Ourcompetitors may independently develop technologies that are less expensive orbetter than our technology.  Inaddition, when we license our products to customers, we provide source code formost of our products.  We also permitcustomers to possibly obtain access to our other source code through a sourcecode escrow arrangement.  This access toour source code may increase the likelihood of misappropriation or other misuseof our intellectual property.  Inaddition, the laws of some countries in which our software products are or maybe licensed do not protect our software products and intellectual propertyrights to the same extent as the laws of the United States.  Defending our rights could be costly.

 

***Financial outlook***

 

From time to time inpress releases and otherwise, we may publish forecasts or other forward-lookingstatements regarding our future results, including estimated revenues or netearnings.  Any forecast of our futureperformance reflects various assumptions. These assumptions are subject to significant uncertainties, and as amatter of course, any number of them may prove to be incorrect.  Further, the achievement of any forecastdepends on numerous risks and other factors (including those described in thisdiscussion), many of which are beyond our control.  As a result, we cannot assure that our performance will beconsistent with any management forecasts or that the variation from suchforecasts will not be material and adverse. Current and potential shareholders are cautioned not to base theirentire analysis of our business and prospects upon isolated predictions, butinstead are encouraged 

 

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to utilize our entire publicly available mix ofhistorical and forward-looking information, as well as other availableinformation affecting us and our services, when evaluating our prospectiveresults of operations.

 

ITEM 3.  QUALITATIVE AND QUANTITATIVEDISCLOSURES ABOUT MARKET RISK

 

Currently, we haveminimal monetary assets, liabilities and operating expenses denominated inforeign currencies.  If ourinternational operations expand and we decide to enter into hedgingtransactions to minimize foreign currency rate risk, the adoption of SFAS No.133, as amended by SFAS Nos. 137 and 138, could have a material impact on ouroperating results.

 

We do not utilize anyderivative security instruments.  Ourinvestments are based on the Company’s investment policies, as such,investments with original maturities of three months or less are classified ascash and cash equivalents.  As ofFebruary 28, 2002, we consider the reported amounts of these investments to bereasonable approximations of their values. Therefore, changes in the marketinterest rates will not have a material impact on our financial position.  Through February 28, 2002, interest expensewas not sensitive to the general levels of United States interest rates becauseall of our notes payable bear fixed interest rates.

 

PART II.  OTHERINFORMATION

 

ITEM 1. LEGALPROCEEDINGS

 

We are a defendant in alawsuit, *Felice Cambridge v. LawsonSoftware, Inc. et. al.,* filed in the United States  District Court for the Northern District ofTexas.  The lawsuit primarily allegesviolations of the Americans with Disabilities Act of 1990 and related claimswith respect to one former employee.  Webelieve these claims are without merit and we will vigorously defend againstthese claims.

 

ITEM 2. CHANGES IN SECURITIES AND USE OFPROCEEDS

 

(c)           Between December 1, 2001 and February 28, 2002, we sold128,490 shares of common stock to various employees pursuant to the exercise ofoutstanding stock options for an aggregate consideration of $291,613 inreliance upon rule 701 of the Securities Act of 1933, as amended (“SecuritiesAct”).  Between December 1, 2001 andbefore completion of our initial public offering on December 6, 2001 we grantedoptions to purchase an aggregate of 150,000 shares of common stock to variousemployees in reliance upon rule 701 of the Securities Act.

 

(d)           Useof Proceeds

 

As of February 28, 2002,we held $187.2 million of net proceeds from our initial public offering ininterest-bearing, investment grade securities. We expect to use these proceeds from the sale of our shares for generalcorporate purposes, including increased marketing and research and developmentexpenditures, capital expenditures and possible acquisitions.

 

ITEM 3. DEFAULTSUPON SENIOR SECURITIES

 

                None

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

                None

 

ITEM 5. OTHER INFORMATION

 

                None

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)     Exhibits

 

                10.28       Amendment to 2001 Employee Stock PurchasePlan

 

(b)     Reports on Form 8-K

 

                None

 

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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  4, 2002. | LAWSON SOFTWARE, INC. |
|-----------------------------|-----------------------|
|                        |                  |
|                        | By:                   | /s/ Robert G. Barbieri |   |
|                        |                  | Robert G. Barbieri |   |
|                        |                  | Executive Vice President and Chief Financial Officer |
|                        |                  | (principal financial and accounting officer) |
|                        |                  |
|                             |                       |  |  |  |

 

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EXHIBIT INDEX

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION OF DOCUMENTS**                   |   |
|---------------------|--------|------------------------------------------------|--------|
|                |
| 10.28               |   | Amendment to 2001 Employee Stock Purchase Plan |

 

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