Attached files

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EX-32.1 - EX-32.1 - Lawson Software, Inc.a10-5723_1ex32d1.htm
EX-10.1 - EX-10.1 - Lawson Software, Inc.a10-5723_1ex10d1.htm
EX-31.1 - EX-31.1 - Lawson Software, Inc.a10-5723_1ex31d1.htm
EX-10.2 - EX-10.2 - Lawson Software, Inc.a10-5723_1ex10d2.htm
EX-31.2 - EX-31.2 - Lawson Software, Inc.a10-5723_1ex31d2.htm
EX-32.2 - EX-32.2 - Lawson Software, Inc.a10-5723_1ex32d2.htm
EX-12.1 - EX-12.1 - Lawson Software, Inc.a10-5723_1ex12d1.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2010

 

 

 

OR

 

 

o

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

 

FOR THE TRANSITION PERIOD FROM            TO           

 

Commission file number: 000-51942

 

 

LAWSON SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

20-3469219

(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 mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

 

The number of shares of the registrant’s common stock outstanding on March 31, 2010 was 161,711,144.

 

 

 



Table of Contents

 

LAWSON SOFTWARE, INC.

Form 10-Q

Index

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets at February 28, 2010 and May 31, 2009

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended February 28, 2010 and 2009

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2010 and 2009

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4.

Controls and Procedures

45

 

 

 

PART II.

OTHER INFORMATION

46

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

47

Item 4.

(Removed and Reserved)

47

Item 5.

Other Information

47

Item 6.

Exhibits

47

 

SIGNATURES

48

 


 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

February 28,
2010

 

May 31,
2009 (1)

 

 

 

(unaudited)

 

(as adjusted)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

226,346

 

$

414,815

 

Restricted cash - current

 

1,043

 

9,208

 

Trade accounts receivable, net

 

135,280

 

152,666

 

Income taxes receivable

 

198

 

4,242

 

Deferred income taxes - current

 

23,776

 

18,909

 

Prepaid expenses and other current assets

 

38,806

 

52,255

 

Total current assets

 

425,449

 

652,095

 

 

 

 

 

 

 

Restricted cash - non-current

 

10,011

 

1,786

 

Property and equipment, net

 

56,355

 

55,641

 

Goodwill

 

556,359

 

470,274

 

Other intangible assets, net

 

169,098

 

91,701

 

Deferred income taxes - non-current

 

44,922

 

39,835

 

Other assets

 

13,947

 

13,149

 

Total assets

 

$

1,276,141

 

$

1,324,481

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Long-term debt - current

 

$

2,537

 

$

4,591

 

Accounts payable

 

2,165

 

14,018

 

Accrued compensation and benefits

 

69,146

 

73,976

 

Income taxes payable

 

2,915

 

4,512

 

Deferred income taxes - current

 

15,236

 

5,652

 

Deferred revenue - current

 

199,024

 

279,041

 

Other current liabilities

 

45,692

 

56,308

 

Total current liabilities

 

336,715

 

438,098

 

 

 

 

 

 

 

Long-term debt - non-current

 

222,333

 

217,333

 

Deferred income taxes - non-current

 

43,700

 

16,827

 

Deferred revenue - non-current

 

9,436

 

13,482

 

Other long-term liabilities

 

15,268

 

14,781

 

Total liabilities

 

627,452

 

700,521

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock; $0.01 par value; 42,562 shares authorized; no shares issued or outstanding

 

 

 

Common stock; $0.01 par value; 750,000 shares authorized; 202,424 and 201,808 shares issued, respectively; 161,439 and 161,476 shares outstanding, at February 28, 2010 and May 31, 2009, respectively

 

2,024

 

2,018

 

Additional paid-in capital

 

882,531

 

870,722

 

Treasury stock, at cost; 40,985 and 40,332 shares at February 28, 2010 and May 31, 2009, respectively

 

(327,684

)

(324,651

)

Retained earnings

 

51,117

 

40,718

 

Accumulated other comprehensive income

 

40,701

 

35,153

 

Total stockholders’ equity

 

648,689

 

623,960

 

Total liabilities and stockholders’ equity

 

$

1,276,141

 

$

1,324,481

 

 


(1) Adjusted to reflect adoption of the FASB guidance on accounting for convertible debt securities (Note 2)

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements

 

3



Table of Contents

 

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009 (1)

 

2010

 

2009 (1)

 

 

 

 

 

(as adjusted)

 

 

 

(as adjusted)

 

Revenues:

 

 

 

 

 

 

 

 

 

License fees

 

$

31,804

 

$

24,881

 

$

86,110

 

$

76,067

 

Maintenance services

 

89,080

 

85,806

 

259,662

 

264,998

 

Software revenues

 

120,884

 

110,687

 

345,772

 

341,065

 

Consulting

 

65,083

 

63,161

 

193,609

 

230,056

 

Total revenues

 

185,967

 

173,848

 

539,381

 

571,121

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Cost of license fees

 

6,595

 

4,872

 

16,929

 

16,852

 

Cost of maintenance services

 

17,352

 

14,810

 

49,833

 

49,057

 

Cost of software revenues

 

23,947

 

19,682

 

66,762

 

65,909

 

Cost of consulting

 

59,249

 

62,871

 

171,027

 

209,028

 

Total cost of revenues

 

83,196

 

82,553

 

237,789

 

274,937

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

102,771

 

91,295

 

301,592

 

296,184

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

22,760

 

18,209

 

65,651

 

62,669

 

Sales and marketing

 

42,919

 

34,203

 

118,796

 

123,680

 

General and administrative

 

21,224

 

18,542

 

60,071

 

59,996

 

Restructuring (Note 3)

 

1,154

 

3,534

 

5,905

 

11,020

 

Amortization of acquired intangibles

 

2,699

 

1,890

 

6,524

 

6,875

 

Total operating expenses

 

90,756

 

76,378

 

256,947

 

264,240

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

12,015

 

14,917

 

44,645

 

31,944

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest income

 

128

 

801

 

691

 

5,836

 

Interest expense

 

(4,514

)

(3,852

)

(13,558

)

(11,752

)

Other income (expense), net

 

165

 

318

 

5

 

591

 

Total other income (expense), net

 

(4,221

)

(2,733

)

(12,862

)

(5,325

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

7,794

 

12,184

 

31,783

 

26,619

 

Provision for income taxes

 

6,126

 

5,967

 

21,384

 

21,066

 

Net income

 

$

1,668

 

$

6,217

 

$

10,399

 

$

5,553

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

0.04

 

$

0.06

 

$

0.03

 

Diluted

 

$

0.01

 

$

0.04

 

$

0.06

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

161,412

 

162,675

 

161,308

 

164,508

 

Diluted

 

165,367

 

164,648

 

164,901

 

166,958

 

 


(1) Adjusted to reflect adoption of the FASB guidance on accounting for convertible debt securities (Note 2)

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements

 

4



Table of Contents

 

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

February 28,

 

 

 

2010

 

2009 (1)

 

 

 

 

 

(as adjusted)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,399

 

$

5,553

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

33,331

 

29,269

 

Amortization of debt issuance costs

 

780

 

766

 

Amortization of debt discount

 

6,365

 

5,961

 

Deferred income taxes

 

5,865

 

3,617

 

Provision for doubtful accounts

 

989

 

1,078

 

Warranty provision

 

3,544

 

4,704

 

Net loss on disposal of assets

 

7

 

 

Excess tax benefits from stock transactions

 

(494

)

(448

)

Stock-based compensation expense

 

13,258

 

6,761

 

Amortization of discounts on marketable securities

 

 

6

 

Changes in operating assets and liabilities (net of acquisition):

 

 

 

 

 

Trade accounts receivable

 

34,483

 

31,796

 

Prepaid expenses and other assets

 

16,943

 

(2,283

)

Accounts payable

 

(13,746

)

(10,893

)

Accrued expenses and other liabilities

 

(27,741

)

(7,898

)

Income taxes payable/receivable

 

3,549

 

(2,800

)

Deferred revenue

 

(95,963

)

(107,213

)

Net cash used in operating activities

 

(8,431

)

(42,024

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for acquisition, net of cash acquired

 

(160,000

)

 

Change in restricted cash

 

27

 

(8,677

)

Proceeds from maturities and sales of marketable securities and investments

 

4

 

50,664

 

Purchases of property and equipment

 

(13,949

)

(20,530

)

Net cash (used in) provided by investing activities

 

(173,918

)

21,457

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on long-term debt

 

(1,231

)

(1,223

)

Payments on capital lease obligations

 

(2,044

)

(887

)

Cash proceeds from exercise of stock options

 

2,021

 

1,957

 

Excess tax benefit from stock transactions

 

494

 

448

 

Cash proceeds from employee stock purchase plan

 

1,697

 

2,157

 

Repurchase of common stock

 

(7,423

)

(90,966

)

Net cash used in financing activities

 

(6,486

)

(88,514

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

366

 

(17,802

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(188,469

)

(126,883

)

Cash and cash equivalents at the beginning of the period

 

414,815

 

435,121

 

Cash and cash equivalents at the end of the period

 

$

226,346

 

$

308,238

 

 


(1) Adjusted to reflect adoption of the FASB guidance on accounting for convertible debt securities (Note 2)

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements

 

5


 


Table of Contents

 

LAWSON SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Nature of Business and Basis of Presentation

 

Lawson Software is a global provider of enterprise software, services and support; targeting customers in specific industries, including equipment service management & rental, fashion, food & beverage, healthcare, manufacturing & distribution, public sector (U.S.), and service industries as well as the horizontal market for our strategic human capital management product line. Lawson serves customers in three geographic regions: the Americas; Europe, Middle East, and Africa (EMEA); and Asia-Pacific, including Australia and New Zealand (APAC). We offer a broad range of software applications and industry-specific solutions that help our customers improve their business processes and reduce costs, resulting in better business or operational performance. Lawson solutions help automate and integrate business processes and promote collaboration among our customers and their partners, suppliers and employees. Through our consulting services, we help our customers implement, learn to use, upgrade and optimize their Lawson applications. Through our support services, we provide ongoing maintenance and assistance to our customers.

 

Basis of Presentation

 

Our Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) and include the accounts of Lawson Software, Inc., our branches and our wholly-owned and majority-owned subsidiaries operating in the Americas, EMEA, and APAC. All significant intercompany accounts and transactions have been eliminated. Our subsidiaries that are not majority-owned are accounted for under the equity method. The accompanying Condensed Consolidated Financial Statements reflect all adjustments, in the opinion of management, necessary to fairly state our consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items other than the out-of-period adjustments described below under Year-to-Date Fiscal 2010 Results of Operations and Year-to-Date Fiscal 2009 Results of Operations. The accompanying Condensed Consolidated Financial Statements for all fiscal year 2009 periods also include certain adjustments related to the adoption of a new accounting pronouncement that we were required to adopt retrospectively, as described in Note 2, Summary of Significant Accounting Policies - Adoption of New Accounting Pronouncements.

 

The unaudited Condensed Consolidated Financial Statements and Notes are presented as permitted by the requirements for Form 10-Q and do not contain all the information and disclosures included in our annual financial statements and notes as required by U.S. GAAP. The Condensed Consolidated Balance Sheet data as of May 31, 2009 and other amounts presented herein as of May 31, 2009 or for the year then ended were derived from our audited financial statements.  The accompanying interim Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the fiscal year ended May 31, 2009. The results of operations for our interim periods are not necessarily indicative of results to be achieved for our full fiscal year.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of revenues and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts and sales returns, fair value of investments, fair value of share-based compensation, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, restructuring obligations, contingencies and litigation, among others. We base our estimates and assumptions on our historical experience and on various other information available to us at the time that these estimates and assumptions are made. We believe that these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from our estimates.

 

Business Segments

 

During fiscal 2009 and prior years, we viewed our operations and managed our business as one reportable segment: the development and marketing of computer software and related services including consulting, maintenance and customer support. Beginning in the first quarter of fiscal 2010, we reorganized our operations to provide greater focus on and better serve our targeted vertical markets. With this strategic organizational change, including a workforce realignment, we determined that we have three reportable segments that align with our three industries groups: S3 Strategic Industries, M3 Strategic Industries and General Industries. See Note 15, Segment and Geographic Information, for applicable reportable segment disclosures.

 

6



Table of Contents

 

Fiscal Year

 

Our fiscal year is from June 1 through May 31. Unless otherwise stated, references to the years 2010 and 2009 relate to the fiscal years ended May 31, 2010 and 2009, respectively. References to future years also relate to our fiscal years ending May 31.

 

Year-to-Date Fiscal 2010 Results of Operations

 

Our results for the first nine months of fiscal 2010 include reductions to net income of approximately $0.8 million primarily as a result of $1.7 million of additional income tax provision recorded in the first quarter of fiscal 2010 that should have been recorded as a reduction of net income in the fourth quarter of 2009. An additional out-of-period adjustment was recorded in the first quarter of fiscal 2010 that increased pre-tax operating income by $0.9 million, related to the reversal of a services loss reserve that should have been reversed in the first quarter of fiscal 2008.  We have determined that the impact of these out-of-period adjustments recorded in the first quarter of fiscal 2010 were immaterial to our results of operations in all applicable prior interim and annual periods, to our first quarter and year-to-date results of operations for fiscal 2010.  We also expect the impact of the adjustments to be immaterial to our full fiscal 2010 results of operations.

 

Year-to-Date Fiscal 2009 Results of Operations

 

Our results for the nine months of fiscal 2009 included reductions to net income of approximately $2.1 million primarily as a result of $1.9 million of under accruals of sales incentive compensation recorded in the first quarter of fiscal 2009 that should have been recorded as a reduction of net income in the fourth quarter of fiscal 2008. These accruals primarily related to sales incentive compensation in EMEA. The fourth quarter fiscal 2008 under accrual was primarily due to the fact that the previous accrual methodology utilized in EMEA did not sufficiently provide for (1) overachievement of sales quotas and related higher commission rates that were achieved in EMEA in fiscal 2008 when license contracting targets were greatly exceeded by various sales personnel, and (2) sales incentives payable to sales management employees. We have taken actions, such as redesigning the sales incentive accrual process and enhancing monitoring controls, to mitigate the potential for replicating this matter.  We have determined that the impact of the sales incentive compensation under accruals, as well as additional out-of-period adjustments recorded in the second quarter of fiscal 2009 that increased pre-tax operating expenses by $0.4 million, primarily related to deferred third-party costs included in costs of license fees, were immaterial to our results of operations in all applicable prior interim and annual periods.

 

2. Summary of Significant Accounting Policies

 

Except to the extent updated or described below, a detailed description of our significant accounting policies can be found in Lawson’s Annual Report on Form 10-K for the fiscal year ended May 31, 2009.  The following notes should be read in conjunction with such policies and other disclosures in our Annual Report.

 

Adoption of New Accounting Pronouncements

 

On September 1, 2009, we adopted the Financial Accounting Standards Board (FASB) guidance on accounting standards codification and hierarchy of generally accepted accounting principles.  This guidance was issued in June 2009 and established the FASB Accounting Standards Codification (the ASC) as the source for authoritative U.S. GAAP. The ASC supersedes all existing non-SEC accounting and reporting standards under U.S. GAAP for nongovernmental entities.  It is not intended to nor does it change existing U.S. GAAP.  Any additions/revisions to U.S. GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU’s).  Our adoption of the ASC did not have any impact on our financial position, results of operations or cash flows.

 

On June 1, 2009, we adopted the FASB guidance related to accounting for convertible debt instruments with conversion and other options, which impacts the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. This guidance, issued in May 2008, impacts the accounting associated with our $240.0 million senior convertible notes. See Note 10, Long-Term Debt, for additional information regarding our senior convertible notes.  Under this guidance we are required to recognize additional (non-cash) interest expense based on the market rate for similar debt instruments that do not contain a comparable conversion feature. Furthermore, the guidance requires a retrospective adjustment for recognition of interest expense in prior periods.  Accordingly, we have made certain adjustments to the presentation of our 2009 Condensed Consolidated Financial Statements.  Upon adoption of this guidance on June 1, 2009, we began recording additional non-cash interest expense which will total approximately $8.2 million to $8.8 million annually or $2.1 million to $2.4 million per fiscal quarter in fiscal 2010 through fiscal 2012.

 

The adoption of the guidance on accounting for convertible debt instruments that may be settled in cash upon conversion required us to allocate the $240.0 million proceeds received from the issuance of our senior convertible notes between the applicable debt and equity components.  Accordingly, we have allocated $197.7 million of the proceeds to the debt component of our senior convertible notes and $25.2 million, net of deferred taxes of $15.8 million and debt issuance costs of $1.3 million, to the equity

 

7



Table of Contents

 

conversion feature.  The debt component allocation was based on the estimated fair value of similar debt instruments without a conversion feature as determined by using a discount rate of 6.77% which represents our estimated borrowing rate for such debt as of the date of our senior convertible notes’ issuance.  The difference between the cash proceeds associated with our senior convertible notes and the debt component was recorded as a debt discount with a corresponding offset to additional paid-in-capital, net of applicable deferred taxes and allocated debt issuance costs, representing the equity conversion feature.  The debt discount that we recorded is being amortized over five years, which is the expected term of our senior convertible notes (April 23, 2007 through April 15, 2012), using the effective interest method resulting in additional non-cash interest expense.  The debt issuance costs have been allocated to the respective debt component and the equity conversion feature resulting in a reclassification of $1.3 million of debt issuance costs to additional paid-in-capital.  The debt issuance costs allocated to the debt component are also being amortized to interest expense over the expected term of our senior convertible notes.  As of February 28, 2010, the remaining period over which the debt discount and debt issuance costs will be amortized is approximately 2.1 years.

 

The carrying amounts of our senior convertible notes included in our Condensed Consolidated Balance Sheets were as follows (in thousands):

 

 

 

February 28,

 

May 31,

 

 

 

2010

 

2009

 

 

 

 

 

(as adjusted)

 

Principal balance

 

$

240,000

 

$

240,000

 

Debt discount

 

(19,657

)

(26,022

)

Senior convertible notes, net

 

$

220,343

 

$

213,978

 

 

We have recorded the following interest expense related to our senior convertible notes in the periods presented (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(as adjusted)

 

 

 

(as adjusted)

 

Coupon rate of interest (2.5% - cash interest)

 

$

1,500

 

$

1,500

 

$

4,500

 

$

4,500

 

Debt discount amortization (non-cash interest)

 

2,122

 

1,987

 

6,365

 

5,961

 

Debt issuance cost amortization

 

260

 

260

 

780

 

780

 

Net interest expense

 

$

3,882

 

$

3,747

 

$

11,645

 

$

11,241

 

 

The following tables reflect the impact that adoption of the FASB guidance on accounting for convertible debt securities had on our Condensed Consolidated Financial Statements (in thousands, except per share amounts) for the periods presented.

 

Condensed Consolidated Balance Sheet as of May 31, 2009:

 

 

 

As Originally
Reported

 

Convertible
Debt
Adjustments

 

As Adjusted

 

Deferred income taxes - non-current (asset)

 

$

49,565

 

$

(9,730

)

$

39,835

 

Other assets

 

13,903

 

(754

)

13,149

 

Income taxes payable

 

4,513

 

(1

)

4,512

 

Long-term debt - non-current

 

243,355

 

(26,022

)

217,333

 

Additional paid in capital

 

845,522

 

25,200

 

870,722

 

Retained earnings

 

50,379

 

(9,661

)

40,718

 

 

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Table of Contents

 

Condensed Consolidated Statement of Operations for the three months ended February 28, 2009:

 

 

 

As Originally
Reported

 

Convertible
Debt
Adjustments

 

As Adjusted

 

Interest expense

 

$

1,931

 

$

1,921

 

$

3,852

 

Provision from income taxes

 

6,718

 

(751

)

5,967

 

Net Income

 

7,387

 

(1,170

)

6,217

 

Basic net income (loss) per share

 

$

0.05

 

$

(0.01

)

$

0.04

 

Diluted net income (loss) per share

 

$

0.04

 

$

 

$

0.04

 

 

Condensed Consolidated Statement of Operations for the nine months ended February 28, 2009:

 

 

 

As Originally
Reported

 

Convertible
Debt
Adjustments

 

As Adjusted

 

Interest expense

 

$

5,988

 

$

5,764

 

$

11,752

 

Provision from income taxes

 

23,311

 

(2,245

)

21,066

 

Net Income (loss)

 

9,072

 

(3,519

)

5,553

 

Basic net income (loss) per share

 

$

0.06

 

$

(0.03

)

$

0.03

 

Diluted net income (loss) per share

 

$

0.05

 

$

(0.02

)

$

0.03

 

 

Condensed Consolidated Statement of Cash Flows for the nine months ended February 28, 2009:

 

 

 

As Originally
Reported

 

Convertible
Debt
Adjustments

 

As Adjusted

 

Net income (loss)

 

$

9,072

 

$

(3,519

)

$

5,553

 

Amortization of debt issuance costs

 

963

 

(197

)

766

 

Amortization of debt discount

 

 

5,961

 

5,961

 

Deferred income taxes

 

5,913

 

(2,296

)

3,617

 

Income taxes payable/receivable

 

(2,851

)

51

 

(2,800

)

Net cash used in operating activities

 

(42,024

)

 

(42,024

)

 

Effective June 1, 2008, we adopted the FASB guidance related to fair value measurements. This guidance was issued in September 2006 and establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  In February 2008, the FASB issued additional guidance which removed certain leasing transactions from the scope of these provisions and partially deferred the effective date of this guidance for one year for certain nonfinancial assets and nonfinancial liabilities that are recognized at fair value on a nonrecurring basis (at least annually).  Our June 1, 2008 adoption date for this guidance was effective for financial assets and liabilities and nonfinancial assets and liabilities that are recognized at fair value on a recurring basis.  On June 1, 2009, we adopted the fair value guidance for our non-financial assets and liabilities that are recognized at fair value on a nonrecurring basis. Our adoption of this guidance did not have a significant impact on our financial position, results of operations or cash flows. See Note 9,

Fair Value Measurements.

 

Effective June 1, 2009, we adopted the FASB guidance related to business combinations, which significantly changed how business acquisitions are accounted for and impacts financial statements both on the acquisition date and in subsequent periods. This guidance was issued in December 2007 and establishes principles and requirements for the recognition and measurement of identifiable assets acquired, the liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. Some of the changes, such as the accounting for contingent consideration and exclusion of transaction costs from acquisition accounting, may introduce more volatility into earnings. Our accounting for business combinations changed on a prospective basis beginning with business combinations for which the acquisition date was after our adoption date of June 1, 2009, including our January 11, 2010 acquisition of Healthvision.  See Note 4, Business Combinations. In addition, any restructuring liabilities established in connection with integration of an acquired entity will have a negative impact on our future operating results as they will not be accounted for as part of the business combination purchase price but will be expensed when accrued. In relation to previous acquisitions, this guidance requires any release of existing income tax valuation allowances initially established through purchase accounting to be included in our earnings rather than as an adjustment to goodwill. This would have the effect of reducing our income tax provision in future periods when such valuation allowances are reversed.

 

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Table of Contents

 

Effective June 1, 2009, we adopted the provisions related to accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies.  The guidance requires that assets and liabilities of contractual and noncontractual contingencies be recognized at fair value if the fair value can be reasonably determined during the measurement period and provides guidance on how to make that determination.  This guidance applies prospectively to business combinations for which the acquisition date is after our adoption date of June 1, 2009.  Our adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

Effective June 1, 2009, we adopted the FASB guidance related to noncontrolling interests in consolidated financial statements.  This guidance, issued in December 2007, changed the accounting and reporting for minority interests, which are to be recharacterized as noncontrolling interests and classified as a separate component of equity rather than as a liability. As of May 31, 2009 and February 28, 2010, there were no noncontrolling interests relating to any of our subsidiaries. Accordingly, our adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

Effective June 1, 2009, we adopted the FASB guidance related to interim disclosures about fair value of financial instruments. This guidance, issued in April 2009, enhances consistency in financial reporting by requiring disclosures about the fair value of financial instruments in interim reporting periods as well as in annual financial statements.  Our adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows. See, Fair Value of Financial Instruments, below for applicable disclosures.

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued guidance which amends the consolidation guidance applicable to variable interest entities (VIE’s).  This guidance clarifies the determination of whether a company is required to consolidate a VIE, changes the approach to determining a VIE’s primary beneficiary (the reporting entity that must consolidate the VIE), requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE and requires additional disclosures about a company’s involvement in VIE’s. This guidance is effective for fiscal years beginning after November 15, 2009 (our fiscal 2011).  We are currently evaluating how this may affect our accounting for VIE’s but we do not expect it to have a material impact on our financial position, results of operations or cash flows.

 

Derivatives

 

We account for derivative instruments, consisting of foreign currency forward contracts, pursuant to the FASB guidance on accounting for derivatives instruments and hedging activities.  This guidance requires us to measure derivative instruments at fair value and record them in our balance sheet as either an asset or liability. We do not use derivative instruments for trading purposes. In fiscal 2010 and prior years, we have not designated these derivative contracts as hedge transactions and have not used hedge accounting. We manage foreign currency market risk using forward contracts to offset the risk associated with the effects of certain foreign currency exposures primarily related to non-functional currency intercompany loans and advances between our international subsidiaries as well as other balance sheet accounts, particularly accounts receivable, accounts payable and certain accrual accounts. Our foreign currency forward contracts are generally short term in nature, typically maturing within 90 days or less. We revalue all contracts to their current market value at the end of each reporting period and unrealized gains and losses are included in our results of operations for that period. These gains and losses largely offset gains and losses recorded from the revaluation of our non-functional currency balance sheet exposures. We expect this to mitigate some foreign currency transaction gains or losses in future periods. Our net realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature.

 

We record our foreign currency forward contracts on our Condensed Consolidated Balance Sheets as either prepaid expenses and other current assets or other current liabilities depending on whether the net fair value of such contracts is a net asset or net liability, respectively. All gains and losses from foreign currency forward contracts have been classified as general and administrative expense in our Condensed Consolidated Statements of Operations.  See Note 9, Fair Value Measurements, for more detail.   We have recorded the following net fair values of our foreign currency forward contracts and the related net realized and unrealized gains and losses as of and for the periods indicated (in thousands):

 

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Table of Contents

 

 

 

Net Asset

 

Net Liability

 

 

 

Prepaid expenses and other
current assets

 

Other current liabilities

 

Fair values of

 

February 28,

 

May 31,

 

February 28,

 

May 31,

 

derivatives not designated as hedging instruments:

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

82

 

$

 

$

 

$

547

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

Gain (loss) recognized for

 

February 28,

 

February 28,

 

derivatives not designated as hedging instruments:

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

5,125

 

$

7,723

 

$

(795

)

$

20,884

 

 

Fair Value of Financial Instruments

 

Our financial instruments consist primarily of cash equivalents, marketable securities, trade accounts receivable and accounts payable and foreign currency forward contracts for which the current carrying amounts approximate fair values, primarily due to their short periods to maturity. Our long-term debt is carried at its face value, net of applicable debt discount recorded upon adoption of the FASB guidance on accounting for convertible debt securities, as discussed above. The estimated fair value of our 2.5% senior convertible notes, including current maturities, was $235.5 million as of February 28, 2010, based on quoted market prices. The remainder of our long-term debt has fair values that are not materially different from their aggregate carrying values of $4.5 million.

 

Sales Returns and Allowances

 

We do not generally provide a contractual right of return. However, in the course of arriving at practical business solutions to various warranty and other claims, we have allowed sales returns and allowances. We record a provision against revenue for estimated sales returns and allowances on license and consulting revenues in the same period the related revenues are recorded or when current information indicates additional allowances are required (we refer to these provisions and allowances as a warranty reserve).  These estimates are based on historical experience determined by analysis of return activities, specifically identified customers and other known factors. If the historical data we utilize does not reflect expected future performance, a change in the allowances would be recorded in the period such determination is made, affecting future results of operations.

 

Following is a roll forward of our warranty reserve (in thousands):

 

Balance, May 31, 2009

 

$

7,905

 

Provision

 

3,544

 

Write-offs

 

(2,710

)

Curreny translation effect

 

(7

)

Balance, February 28, 2010

 

$

8,732

 

 

3. Restructuring

 

The following table sets forth the accrual activity for the nine months ended February 28, 2010 related to each of our restructuring plans and the remaining reserve balances (in thousands):

 

 

 

 

 

Restructuring Plan

 

 

 

 

 

 

 

Fiscal 2009

 

 

 

Fiscal 2006

 

 

 

 

 

Fiscal

 

 

 

 

 

Fiscal

 

 

 

Legacy

 

 

 

Total

 

2010

 

Q4

 

Q2

 

2007

 

Intentia

 

Lawson

 

Balance, May 31, 2009

 

$

15,781

 

$

 

$

8,651

 

$

3,346

 

$

782

 

$

1,475

 

$

1,527

 

Provision

 

4,568

 

4,568

 

 

 

 

 

 

Cash Payments

 

(10,949

)

(2,217

)

(5,766

)

(1,982

)

(448

)

(198

)

(338

)

Adjustments to provision

 

1,337

 

(227

)

326

 

(87

)

(134

)

1,459

 

 

Adjustments to provision-Goodwill

 

(352

)

 

 

 

 

(352

)

 

Currency translation effect

 

643

 

(183

)

674

 

79

 

22

 

51

 

 

Balance, February 28, 2010

 

$

11,028

 

$

1,941

 

$

3,885

 

$

1,356

 

$

222

 

$

2,435

 

$

1,189

 

 

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The accruals for severance and related benefits are included in accrued compensation and benefits and the accruals related to exited leased facilities are included in other current and long-term liabilities in our Condensed Consolidated Balance Sheets as of February 28, 2010 and May 31, 2009.

 

Fiscal 2010 Restructuring

 

On September 30, 2009, we approved a plan to further restructure our workforce.  Under this plan, we reduced our workforce by approximately 65 employees, or 2.0% of our global workforce.  The majority of the reductions occurred within our consulting practice in our EMEA region.  These actions were undertaken as a further refinement of our new vertical organization, including a resizing of our services business to leverage our partner channel, and in light of current demand for our consulting and implementation services in EMEA. The majority of the actions related to this plan were completed by the end of the second quarter of fiscal 2010.  The restructuring action resulted in pre-tax charges of $4.6 million for severance pay and related benefits which we recorded in the second quarter of fiscal 2010.  Substantially all of this amount will result in future cash expenditures.  During the second and third quarters of fiscal 2010 we made cash payments of approximately $2.2 million for severance pay and related benefits.  In addition, we recorded net adjustments to the accrual of approximately $0.2 million.  As of February 28, 2010, the accrual balance was approximately $1.9 million.  We expect that the majority of the severance and related benefits will be paid within the next 12 months.  Annualized cost and expense savings from these actions are estimated to be approximately $6.0 million.

 

Fiscal 2009 Restructuring

 

Fiscal 2009 Q2.  On November 18, 2008, we announced the implementation of cost reduction measures in light of the uncertainty in global economic conditions and in light of other operating margin improvement initiatives. These cost reduction initiatives included a restructuring plan resulting in the reduction of approximately 285 employees and exiting certain leased facilities.  In relation to these actions we recorded a pre-tax charge of approximately $7.9 million in the second quarter of fiscal 2009 and an additional $3.4 million in the third quarter of fiscal 2009. Actions related to severance were substantially completed by February 28, 2009, with related cash payments expected to continue through May 2010. Payments related to the exited facilities are expected to continue through November 2011.

 

Fiscal 2009 Q4.  On May 18, 2009, we initiated a plan to restructure our workforce in preparation of the vertical realignment of our organizational. The restructuring involved the reduction of our workforce by approximately 150 employees and the consolidation of space in certain of our leased facilities.  Actions related to this plan were completed by the end of our third quarter of fiscal 2010. The plan resulted in pre-tax charges of approximately $5.3 million for severance and related benefits and the consolidation of leased facilities resulted in pre-tax charges of approximately $3.8 million which we recorded in the fourth quarter of fiscal 2009.  We expect the majority of the severance and related benefits to continue through September 2010 while the leased facilities costs will be paid through December 2011.

 

In relation to the fiscal 2009 restructuring actions, we made cash payments of $5.1 million relating to severance and related benefits and $2.6 million related to the exited facilities during the first nine months of fiscal 2010.  In addition, we recorded net adjustments to the accruals of approximately $0.2 million including additional expenses accrued related to exited leased facilities net of a change to accrued severance and related benefits due to a reduction in the number of affected employees. As of February 28, 2010, we had an accrual of $5.2 million: $1.6 million for severance and related benefits and $3.7 million for the estimated fair value of our liability for the exited facilities.  As of May 31, 2009, the accrual totaled $12.0 million: $6.5 million for severance and related benefits and $5.5 million for the exited facilities.

 

Fiscal 2007 Restructuring

 

On February 28, 2007, we restructured our workforce by approximately 250 employees to rebalance our resources between various locations primarily in the U.S., Europe and our global support center in the Philippines. This reduction resulted in a pre-tax charge of $11.9 million which we recorded in the third quarter of fiscal 2007.  As of May 31, 2009 we had an accrual of $0.8 million for severance and related benefits. In the first nine months of fiscal 2010 we paid severance and related benefits of $0.4 million and we recorded $0.1 million in adjustments to reduce the accrual. The accrual balance at February 28, 2010 was approximately $0.2 million. Actions relating to severance were completed in the first quarter of fiscal 2009; however, we expect related cash payments to continue through May 2010.

 

Fiscal 2006 Restructuring

 

On April 26, 2006, in conjunction with the business combination with Intentia International AB (Intentia), we approved a plan designed to eliminate employee redundancies in both Intentia and Legacy Lawson.

 

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Table of Contents

 

Fiscal 2006 Legacy Lawson.  Actions related to legacy Lawson included the reduction of approximately 60 employees and the exit of or reduction in leased space. As of May 31, 2009, we had an accrual of $1.5 million for the exit or reduction of leased facilities. In the first nine months of fiscal 2010 we made cash payments of $0.3 million related to exited facilities. The remaining accrual balance at February 28, 2010 was $1.2 million for the exit or reduction of leased facilities. Actions relating to severance were completed in the first quarter of fiscal 2008. We expect cash payments related to exited facilities to continue through July 2011.

 

Fiscal 2006 Intentia. Actions related to Intentia included the reduction of approximately 125 employees and the exit of or reduction in leased space. As of May 31, 2009, we had an accrual of $1.5 million for the exit or reduction of leased facilities. We made cash payments of $0.2 million related to exited facilities in the first nine months of fiscal 2010.  During fiscal 2010, we made net adjustments to increase the accrual related to lease exit costs by approximately $1.1 million for changes in estimates relating to the original lease restructuring plan.  During the second quarter of fiscal 2010, we made adjustments to reduce lease exit costs of approximately $0.4 million for changes in estimates relating to the original lease restructuring plan.  These adjustments resulted in a reduction of acquired goodwill.  In addition, we recorded a $1.5 million increase in our lease accrual in the third quarter of fiscal 2010 as a result of an early exit by a subtenant.  The remaining accrual as of February 28, 2010 was $2.4 million related to the accrual for the exit or reduction of leased space. Actions relating to severance were completed in the third quarter of fiscal 2008. We expect cash payments related to exited facilities or reduced space to continue through June 2012.

 

As a result of our restructuring plans and the realignment of our workforce, we have experienced cost savings from the lower facility expenses and reduced headcount and expect these savings to continue.

 

4. Business Combination

 

On January 11, 2010, we completed our acquisition of Healthvision through the acquisition of all the outstanding stock of privately held Quovadx Holdings, Inc., Healthvision’s parent holding company.  Healthvision is a Dallas-based company providing integration and application technology and related services to hospitals and large healthcare organizations.  We believe the acquisition of Healthvision is a strategic fit for our S3 Strategic Industries segment.  The results of operations of Healthvision have been included in our Condensed Consolidated Statements of Operations from the date of acquisition.  Healthvision contributed revenues of $4.6 million and an operating loss of $2.7 million in the current fiscal quarter related to their operations from January 11 through February 28, 2010.

 

The cash purchase consideration totaled approximately $160.0 million in cash, net of approximately $10.4 million of acquired cash.  We funded the purchase price from our available cash.  The final purchase price is subject to certain post-closing adjustments.  We used the acquisition method to account for the acquisition in accordance with the FASB guidance on accounting for business combinations.  Under the acquisition method, the purchase price was allocated to, and we recognized the fair values of, Healthvision’s tangible and intangible assets acquired and liabilities assumed.  The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired has been recorded as goodwill. See Note 7, Goodwill and Intangible Assets.  The goodwill from this transaction arises from the benefits we expect to achieve from the additional revenue potential provided by our expanded product offerings and increased access to customers in our healthcare vertical within our S3 Strategic Industries segment.

 

Transaction and merger related integration costs of $0.5 million and $0.7 million, respectively, associated with Healthvision have been expensed as incurred and are reflected in our results of operations for the third quarter ended February 28, 2010 in general and administrative expenses.  These integration costs include approximately $0.3 million of severance and related benefits resulting from the elimination of certain positions that became redundant in the integration of Healthvision’s operations.  A majority of the affected employees will be working through the transition of their responsibilities and will be terminated during the next nine months.

 

We are responsible for determining the fair values of the acquired assets and liabilities. These fair values were based on our estimates as of the acquisition date of January 11, 2010 and were based on a number of factors, including valuations.  Identified intangible assets acquired included existing technology, existing customer relationships and trade names.  We used variations of the income approach method to value the intangible assets.  Under these methods, fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate.  The valuation of the existing technology and trade names were based on the relief-from-royalty method, and existing customer relationships were valued using the excess earnings method.   The royalty rates used in the relief from royalty method were based on both a return-on-asset method and market comparable rates.  Our estimates of fair value and resulting allocation of purchase price are preliminary as of February 28, 2010.  We are in the process of finalizing certain purchase consideration adjustments and the valuation of certain deferred tax liabilities and the final allocation of the adjusted purchase consideration may differ from the information presented in these unaudited Condensed Consolidated financial statements.  We do not anticipate that any changes would be materially different from the amounts presented below.

 

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Table of Contents

 

The following table summarizes our preliminary allocation of the Healthvision purchase consideration (in thousands):

 

Accounts receivable, net

 

$

19,519

 

Identified intangible assets:

 

 

 

Existing technology

 

45,500

 

Existing customer relationships

 

46,000

 

Trade names

 

4,000

 

Goodwill

 

78,799

 

Deferred revenue

 

(10,028

)

Deferred tax liabilities, net

 

(22,126

)

All other net tangible assets (liabilities), net of cash acquired

 

(1,664

)

Total fair value of purchase

 

$

160,000

 

 

In general, goodwill is deductible for tax purposes when, in conjunction with a stock acquisition, the acquired company has previously deductible tax basis goodwill.  Accordingly, $6.1 million of the goodwill we recorded in relation to our acquisition of Healthvision is amortizable for tax purposes.

 

The following unaudited pro forma financial information is based on historical financial information of Lawson and Healthvision giving effect to the acquisition as if it had occurred at the beginning of the fiscal year for each period presented and applying certain assumptions and pro forma adjustments.  These pro forma adjustments primarily relate to the amortization of acquired intangibles, recognition of deferred revenues, interest income, interest expense and the estimated impact on our income tax provision.  We believe that the assumptions used and the adjustments made are reasonable given the information available to us as of the date of this Form 10-Q.  This pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition occurred at such earlier times or of the results that may be achieved in the future.   In addition, these pro forma financial statements do not reflect the realization of any cost savings that we may achieve from operating efficiencies, synergies or other restructuring activities that may result from the acquisition.

 

The following table summarizes the pro forma financial information of the combined Lawson and Healthvision as if the acquisition closed at the beginning of the fiscal year for each period presented (in thousands except per share data):

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009

 

2010

 

2009

 

Total revenues

 

$

194,780

 

$

190,165

 

$

577,674

 

$

613,896

 

Net income

 

$

2,610

 

$

7,912

 

$

13,984

 

$

8,975

 

Net income per share - Basic

 

$

0.02

 

$

0.05

 

$

0.09

 

$

0.05

 

Net income per share - Diluted

 

$

0.02

 

$

0.05

 

$

0.08

 

$

0.05

 

 

5. Share-Based Compensation

 

We account for share-based compensation in accordance with the FASB guidance on share based payments.  This guidance requires us to estimate the fair value of our share-based payment awards on the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model which requires the input of significant assumptions including an estimate of the average period of time employees will retain vested stock options before exercising them, the estimated volatility of our common stock price over the expected term and the applicable risk-free interest rate. The value of the portion of awards that are ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations.

 

The fair value of restricted stock and restricted stock unit awards (together restricted stock awards) is estimated based on the grant date market value of our common stock.  For service-based restricted stock awards, compensation expense is recognized on a straight-line basis over the related service period.  For performance-based restricted stock awards vesting is based on obtaining certain performance targets (currently based on our non-GAAP operating margin percentage), compensation expense is recognized over the related service period based on management’s assessment of the probability of meeting such targets.  In general, we begin to recognize applicable compensation expense when we believe it is probable that the related performance targets will be met and no compensation expense is recorded, and any previously recognized expense reversed, when achievement of the performance target is not assessed as probable.  We assess the likelihood or probability of achieving the performance target for these awards at the end of each quarterly reporting period. These performance-based awards will be cancelled and forfeited if the applicable performance targets are not met.

 

Compensation expense related to our Employee Stock Purchase Plan (ESPP) is estimated as the 15% discount employees receive relative to the market value of our common stock at the end of the ESPP’s quarterly offering periods and is recognized in the applicable fiscal quarter.

 

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Table of Contents

 

The following table presents share-based compensation expense recognized in our Condensed Consolidated Statements of Operations, by category, for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

$

1,976

 

$

370

 

$

3,776

 

$

662

 

Research and development

 

448

 

162

 

629

 

460

 

Sales and marketing

 

2,947

 

453

 

5,798

 

1,453

 

General and administrative

 

887

 

1,041

 

3,055

 

4,186

 

Stock-based compensation expense, before income tax

 

6,258

 

2,026

 

13,258

 

6,761

 

Income tax benefit

 

(2,409

)

(780

)

(5,105

)

(2,603

)

Stock-based compensation expense, net of tax

 

$

3,849

 

$

1,246

 

$

8,153

 

$

4,158

 

 

As of February 28, 2010, we had the following unrecognized share-based compensation which we expect to recognize over the weighted average periods indicated (in thousands):

 

 

 

Outstanding
Stock
Options

 

Restricted
Stock
Awards

 

Unrecognized compensation expense

 

$

9,777

 

$

20,326

 

Recognition period

 

1.42 years

 

1.48 years

 

 

6. Trade Accounts Receivable

 

The components of our trade accounts receivable were as follows (in thousands):

 

 

 

February 28,

 

May 31,

 

 

 

2010

 

2009

 

Trade accounts receivable

 

$

119,840

 

$

141,436

 

Unbilled accounts receivable

 

19,836

 

14,752

 

Less: allowance for doubtful accounts

 

(4,396

)

(3,522

)

Trade accounts receivable, net

 

$

135,280

 

$

152,666

 

 

Unbilled accounts receivable represents revenue recognized on contracts for which billings have not yet been presented to our customers because the amounts were earned but not contractually billable as of the balance sheet date.

 

7. Goodwill and Intangible Assets

 

The change in the carrying amount of our goodwill by reportable segment for the nine months ended February 28, 2010 was as follows (in thousands):

 

 

 

S3 Strategic
Industries

 

M3 Strategic
Industries

 

General
Industries

 

Consolidated
Total

 

Balance, May 31, 2009 (1)

 

$

201,885

 

$

85,505

 

$

182,884

 

$

470,274

 

Goodwill acquired

 

78,799

 

 

 

78,799

 

Goodwill adjustments

 

(368

)

(156

)

(333

)

(857

)

Currency translation effect

 

2,986

 

1,643

 

3,514

 

8,143

 

Balance, February 28, 2010

 

$

283,302

 

$

86,992

 

$

186,065

 

$

556,359

 

 


(1)         Reflects the reporting segment structure effective beginning in the first quarter of fiscal 2010.  In fiscal 2009 and prior years we operated as one reportable segment. See Note 15, Segment and Geographic Information.

 

Goodwill acquired during the first nine months of fiscal 2010 totaled $78.8 million related to our acquisition of Healthvision (See Note 4, Business Combinations).  The Healthvision goodwill relates to our S3 Strategic Industries reportable segment.

 

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We recorded net adjustments of $0.9 million to reduce goodwill during the first nine months of fiscal 2010.  These adjustments included approximately $0.5  million related to net adjustments to our acquired income tax assets and liabilities related to our Intentia acquisition (see Note 11, Income Taxes) and $0.4 million related to our fiscal 2006 lease restructuring plan. See Note 3, Restructuring.

 

In accordance with the FASB guidance related to goodwill and other intangible assets, we are required to assess the carrying amount of our goodwill for potential impairment annually or more frequently if events or a change in circumstances indicate that impairment may have occurred.  We conduct our annual impairment test in the fourth quarter of each fiscal year.

 

Testing for goodwill impairment is a two step process. The first step screens for potential impairment and if there is an indication of possible impairment the second step must be completed to measure the amount of impairment loss, if any. The first step of the goodwill impairment test used to identify potential impairment compares the fair value of a reporting unit with the carrying value of its net assets. In fiscal 2009 and prior years, we had only one reporting unit and therefore we compared our Company’s fair value to the carrying value of our consolidated net assets to complete the first step of this test. If the fair value of the reporting unit had been less than the carrying value of the reporting unit, the second step of the goodwill impairment test would have been performed to measure the amount of impairment loss we would be required to record, if any. The second step, if required, would compare the implied fair value of Lawson’s goodwill with the current carrying amount of our goodwill. If the implied fair value of our goodwill is less than the carrying value, an impairment charge would be recorded as a charge to our operations.

 

The results of our most recent annual assessment performed at the end of fiscal 2009 did not indicate any impairment of our goodwill.  During the first quarter of fiscal 2010, with our strategic reorganization and workforce realignment, we determined that we now operate under three reportable segments: S3 Strategic Industries, M3 Strategic Industries and General Industries. See Note 15, Segment and Geographic Information, for additional information regarding our reportable segments.  For purposes of our goodwill impairment testing, we have determined that we have four reporting units: S3 Strategic Industries group, M3 Strategic Industries group, the services industries component of our General Industries group and the manufacturing & distribution component of our General Industries group. Upon this change from one reporting unit to four reporting units, effective June 1, 2009, we were required to allocate our goodwill to each reporting unit based upon their relative fair values and we were required to perform a step one goodwill impairment test.

 

For purposes of allocating our recorded goodwill to our new reporting units, we estimated their fair values using a combination of an income approach (discounted cash flow method) and a market approach (market comparable method).  Based on the results of the first step of our impairment test, the fair value exceeded the carrying value of the net assets for all of our reporting units.  The calculated fair values of our reporting units exceeded their carrying values by amounts between approximately $27.0 million and $247.0 million, or 52.0% to 158.0% of the reporting unit carrying values, as of June 1, 2009.  Accordingly, there was no impairment of our goodwill.  We have no accumulated impairment charges related to our goodwill.

 

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

 

 

 

February 28, 2010

 

May 31, 2009

 

 

 

 

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

Carrying

 

Accumulated

 

 

 

Estimated

 

 

 

Amounts

 

Amortization

 

Net

 

Amounts

 

Amortization

 

Net

 

useful lives

 

Maintenance contracts

 

$

22,940

 

$

18,974

 

$

3,966

 

$

22,940

 

$

17,511

 

$

5,429

 

Term

 

Technology

 

141,739

 

54,815

 

86,924

 

96,643

 

45,596

 

51,047

 

3-10 years

 

Client lists

 

10,230

 

8,664

 

1,566

 

10,323

 

7,907

 

2,416

 

4-10 years

 

Customer relationships

 

99,367

 

26,731

 

72,636

 

53,917

 

21,308

 

32,609

 

12 years

 

Trademarks/Trade names

 

9,306

 

5,414

 

3,892

 

5,263

 

5,263

 

 

2 years

 

Order backlog

 

5,853

 

5,853

 

 

5,728

 

5,728

 

 

1 year

 

Non-compete agreements

 

3,786

 

3,672

 

114

 

3,568

 

3,368

 

200

 

5 years

 

 

 

$

293,221

 

$

124,123

 

$

169,098

 

$

198,382

 

$

106,681

 

$

91,701

 

 

 

 

We amortize our intangible assets using underlying cash flow projections and accelerated and straight-line methods which approximate the proportion of future cash flows estimated to be generated in each period over the estimated useful life of the applicable asset. The balances reflected in the above table as of February 28, 2010 include the intangible assets acquired in our acquisition of Healthvision and applicable accumulated amortization (See Note 4, Business Combinations).  For the comparable three months ended February 28, 2010 and 2009, amortization expense for intangible assets was $7.1 million and $5.5 million, respectively.  Amortization expense for intangible assets was $17.0 million and $17.2 million for the comparable nine months ended February 28, 2010 and 2009, respectively.  Net intangible assets increased from May 31, 2009 to February 28, 2010 by approximately $0.9 million

 

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due to the effect of currency translation. Amortization expense is reported as a component of cost of revenues and as amortization of acquired intangibles in our Consolidated Statements of Operations.

 

We review our intangible assets for potential impairment whenever events or changes in circumstances indicate that their remaining carrying value may not be recoverable pursuant to the FASB guidance on accounting for the impairment or disposal of long-lived assets.  Due to the change in our reporting structure in the first quarter of fiscal 2010, we reassessed the recoverability of our intangible assets’ carrying values and determined that there was no impairment to be recognized as of June 1, 2009.

 

The estimated future annual amortization expense for identified intangible assets is as follows (in thousands):

 

2010 (remaining 3 months)

 

$

7,935

 

2011

 

29,912

 

2012

 

25,896

 

2013

 

22,427

 

2014

 

18,478

 

Thereafter

 

64,450

 

 

 

$

169,098

 

 

8. Deferred Revenue

 

The components of deferred revenue were as follows (in thousands):

 

 

 

February 28,

 

May 31,

 

 

 

2010

 

2009

 

License fees

 

$

41,362

 

$

55,667

 

Maintenance services

 

152,236

 

224,115

 

Consulting

 

14,862

 

12,741

 

Total deferred revenue

 

208,460

 

292,523

 

Less current portion

 

(199,024

)

(279,041

)

Deferred revenue - non-current

 

$

9,436

 

$

13,482

 

 

In general, changes in the balance of our deferred revenue are cyclical and primarily driven by the timing of our maintenance services renewal cycles. Our renewal dates occur in the third and fourth quarters of our fiscal year with revenues being recognized ratably over the applicable service periods. In addition to the cyclical nature of our deferred maintenance revenue, the decrease in the February 28, 2010 balance as compared to May 31, 2009 was primarily related to the recognition of certain deferred license fees revenues in the first half of fiscal 2010 primarily relating to contracts entered into in the fourth quarter of fiscal 2009 under our targeted sales campaign offered to our existing S3 customer base.  Deferred revenue balances related to our acquisition of Healthvision are included in the balances as of February 28, 2010 (See Note 4, Business Combinations).

 

9. Fair Value Measurements

 

As previously discussed, effective June 1, 2008, we adopted the FASB guidance for financial assets and liabilities and nonfinancial assets and liabilities that are recognized at fair value on a recurring basis.  We adopted this guidance for non-financial asset and liabilities that are recognized at fair value on a nonrecurring basis effective June 1, 2009.  This guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as an “exit price” which represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in valuing an asset or liability. The above mentioned guidance also requires the use of valuation techniques to measure fair values that maximize the use of observable inputs and minimize the use of unobservable inputs. As a basis for considering such assumptions and inputs, the guidance establishes a fair value hierarchy which identifies and prioritizes three levels of inputs to be used in measuring fair value.

 

The three levels of the fair value hierarchy are as follows:

 

Level 1

 

Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2

 

Inputs other than the quoted prices in active markets that are observable either directly or indirectly including: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

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Level 3

 

Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.

 

We measure certain financial assets and liabilities at fair value including our cash equivalents and foreign currency forward contracts. The following table summarizes the fair value of our financial assets and liabilities that were accounted for at fair value on a recurring basis as of February 28, 2010 (in thousands):

 

 

 

Fair Value Measurements Using Inputs
Considered as

 

Fair Value at

 

 

 

Level 1

 

Level 2

 

Level 3

 

February 28, 2010

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

$

65,178

 

$

 

$

65,178

 

Foreign currency forward contracts

 

 

1,164

 

 

1,164

 

Total

 

$

 

$

66,342

 

$

 

$

66,342

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

1,082

 

$

 

$

1,082

 

Total

 

$

 

$

1,082

 

$

 

$

1,082

 

 

Cash equivalents, primarily funds held in U.S. treasuries and money market instruments, are reported at their current carrying value which approximates fair value due to the short-term nature of these instruments and are included in cash and cash equivalents in our Condensed Consolidated Balance Sheets. Our investments in treasuries are valued using quoted market prices and are included in Level 1 inputs. Our money market instruments are valued primarily using observable inputs other than quoted market prices and are included in Level 2 inputs.

 

Foreign currency forward contracts are valued based on observable market spot and forward rates as of our reporting date and are included in Level 2 inputs in the above table. We use these derivative instruments to mitigate non-functional currency transaction exposure. All contracts are recorded at fair value and marked-to-market values at the end of each reporting period and realized and unrealized gains and losses are included in general and administrative expenses in our Condensed Consolidated Statements of Operations. The $0.1 million net asset related to the fair value of our foreign currency forward contracts was included in prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets.

 

In addition to the financial assets and liabilities included in the above table, certain of our nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable U.S. GAAP.  This includes items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment.  In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.  As of February 28, 2010 we had not recorded any impairment related to such assets and we had no other material nonfinancial assets or liabilities requiring adjustments or write-downs to their current fair value.

 

We did not elect to apply the FASB guidance related to the fair value option for financial assets and liabilities to any of our currently eligible financial assets or liabilities. As of February 28, 2010 our material financial assets and liabilities not carried at fair value include our trade accounts receivable and accounts payable which are reported at their current carrying values which we believe approximate their fair values.

 

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10. Long-Term Debt

 

Long-term debt consisted of the following (in thousands):

 

 

 

February 28,

 

May 31,

 

 

 

2010

 

2009

 

 

 

 

 

(as adjusted)

 

Senior convertible notes, interest at 2.5%

 

$

240,000

 

$

240,000

 

Debt discount

 

(19,657

)

(26,022

)

Car loans, interest at average rate of 4.7%

 

3,447

 

4,384

 

Capital lease obligations, interest at 7.9%

 

1,080

 

3,562

 

Total long-term debt

 

224,870

 

221,924

 

Less current maturities

 

(2,537

)

(4,591

)

Total long-term debt - non-current

 

$

222,333

 

$

217,333

 

 

In April 2007, we issued $240.0 million in aggregate principal amount of 2.5% senior convertible notes with net proceeds, after expenses, of approximately $233.5 million. The notes mature on April 15, 2012. The notes bear interest at a rate of 2.5% per annum, which is payable semi-annually in arrears, on April 15 and October 15 of each year, beginning October 15, 2007. The notes do not contain any restrictive financial covenants.  The notes are convertible, at the holders’ option, into cash and, if applicable, shares of our common stock based on an initial conversion rate of 83.2293 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $12.02 per share (which reflects a 35.0% conversion premium based on the closing sale price of $8.90 per share of Lawson common stock as reported by NASDAQ on April 17, 2007).  In connection with the issuance of the notes, we entered into a registration rights agreement with the initial purchasers of the notes. On August 16, 2007, we filed the shelf registration statement, which became effective on that date. On October 19, 2009, all securities that remained unsold under the registration statement were deregistered as our contractual obligation to maintain the shelf registration terminated.  See Note 7, Long-Term Debt and Credit Facilities, in Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for our fiscal year ended May 31, 2009 and Note 2, Summary of Significant Accounting Policies - Adoption of New Accounting Pronouncements, above for additional information regarding our accounting for these notes.

 

We had certain business relationships with Lehman Brothers OTC Derivatives Inc. (Lehman OTC), including a convertible note hedge transaction and a warrant transaction both entered into as part of the issuance of our senior convertible notes and an accelerated share repurchase transaction, see Note 16, Repurchase of Common Shares.  The bankruptcy filing of Lehman Brothers Holdings Inc. (Lehman Holdings) on September 15, 2008, as guarantor under the convertible note hedge transaction, and the bankruptcy filing by Lehman OTC on October 3, 2008, were events of default under the hedge transaction and warrant agreements. As a result of these defaults, we exercised our rights to terminate both the convertible note hedge transaction and the warrant transaction on October 10, 2008.  Accordingly, for financial reporting purposes, we recorded the estimated fair value of the related hedge transaction asset and the warrant liability during the second quarter of fiscal 2009, resulting in a decrease in our stockholders’ equity equal to the net amount of the recorded asset and liability. As of February 28, 2010, our claim against Lehman Holdings and Lehman OTC and Lehman Holdings’ and Lehman OTC’s claim against us had not been resolved.

 

On June 4, 2009, counsel for Lehman Holdings and Lehman OTC demanded payment from us of the termination-date fair value of the warrant, asserted that in the contracts we have waived the right to setoff against the amounts owed to us under the hedge transaction and claimed we violated the bankruptcy stay in asserting setoff rights. We have refused payment and contend that the U.S. Bankruptcy Code gives us legal rights of offset in this dispute.  We continue to closely monitor the Lehman Holdings bankruptcy situation, the liquidation of Lehman Brothers Inc. (LBI), as well as the Lehman OTC bankruptcy and our legal rights under our contractual relationships with Lehman OTC and LBI.

 

The terms of the senior convertible notes and the rights of note holders are not affected by the status of Lehman Holdings or Lehman OTC or by the termination of the convertible note hedge or warrant transactions.  We currently believe that the Lehman Holdings bankruptcy, and its potential impact on subsidiaries of Lehman Holdings, the liquidation of LBI, and the bankruptcy of Lehman OTC, will not have a material adverse effect on our financial position, results of operations or cash flows.

 

We have an uncommitted credit facility that consists of a guarantee line with Skandinaviska Enskilda Banken (SEB) in the amount of $4.2 million (30.0 million Swedish Krona). The facility is collateralized by a corporate letter of guarantee by Lawson Software, Inc. As of February 28, 2010, an insignificant amount was outstanding under the guarantee line and approximately $4.2 million was potentially available under the guarantee line.

 

11. Income Taxes

 

Our quarterly income tax expense is measured using an estimated annual effective tax rate for the period.  For the nine months ended February 28, 2010, our estimated annual global effective tax rate was 45.8% after considering those entities for which no tax benefit from operating losses is expected to occur during the year as a result of such entities requiring a full valuation allowance

 

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against current year losses.  We estimate our annual effective tax rate on a quarterly basis and make any necessary changes to adjust the rate for the applicable year-to-date period based upon the annual estimate. The estimated annual tax rate may fluctuate due to changes in forecasted annual operating income, changes in the jurisdictional mix of the forecasted annual operating income, positive or negative changes to the valuation allowance for net deferred tax assets, changes to actual or forecasted permanent book to tax differences, impacts from future tax settlements with state, federal or foreign tax authorities or impacts from enacted tax law changes.  We identify items which are unusual and non-recurring in nature and treat these as discrete events. The tax effect of discrete items are recorded entirely in the quarter in which the discrete event occurs.

 

Our income tax expense and overall effective tax rates were as follows for the periods indicated (in thousands, except percentages):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009

 

2010

 

2009

 

Income tax expense

 

$

6,126

 

$

5,967

 

$

21,384

 

$

21,066

 

Effective tax rate

 

78.6

%

49.0

%

67.3

%

79.1

%

 

The rate for the quarter ended February 28, 2010 was unfavorably impacted by 26.8 percentage points for unbenefitted foreign losses and changes in the jurisdictional mix of the forecasted annual operating income.  In addition, the rate for the current quarter was unfavorably impacted by 4.0 percentage points as a result of income tax return to income tax provision true-ups.

 

As of February 28, 2010, we have recorded a liability of approximately $8.6 million for unrecognized tax benefits related to uncertain tax positions, all of which would affect earnings and the effective tax rate, if recognized.  We recognize interest accrued related to unrecognized tax benefits and penalties, if incurred, as a component of our income tax expense.  During the three and nine months ended February 28, 2010 we recognized approximately $0.1 million and $0.3 million of interest and had $1.0 million accrued for the payment of interest as of February 28, 2010.  Interest recognized for the three and nine months ended February 28, 2009 was less than $0.1 million and $0.3 million, respectively.

 

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years ending before May 31, 2005.  Currently, we are under audit in various domestic and foreign jurisdictions.  While we believe we have adequately provided for all tax positions under examination, amounts asserted by taxing authorities could be greater or less than the accrued provision.  We do not anticipate that adjustments, if any, would result in a material change to our financial position or results of operations nor do we expect the amount of unrecognized tax benefits or cash payments related to these obligations to significantly change over the next 12 months.

 

During fiscal 2010, we adjusted certain income tax assets and liabilities related to our Intentia acquisition resulting in a reduction to goodwill of approximately $0.5 million. See Note 7, Goodwill and Intangible Assets.

 

12. Per Share Data

 

We compute net income per share in accordance with the FASB guidance on earnings per share. Under this guidance, basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding plus the weighted average of dilutive shares outstanding during the period. In addition, in periods of net loss, all potentially dilutive common shares are excluded from our computation of diluted weighted average shares outstanding, as their inclusion would have an anti-dilutive effect on net loss per share. We use the treasury stock method to calculate the weighted average dilutive shares related to “in-the-money” stock options and warrants, unvested restricted stock awards and shares issuable under our employee stock purchase plan. The dilutive effect of our senior convertible notes is calculated based on the average market price of our common stock during the applicable period and the senior convertible notes’ conversion price. The senior convertible notes are excluded from our computation of diluted earnings per share when the per share conversion price is greater than the average market price of our common stock during the applicable periods.

 

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The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(as adjusted)

 

 

 

(as adjusted)

 

Basic net income per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,668

 

$

6,217

 

$

10,399

 

$

5,553

 

Weighted average common shares - basic

 

161,412

 

162,675

 

161,308

 

164,508

 

Basic net income per share

 

$

0.01

 

$

0.04

 

$

0.06

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,668

 

$

6,217

 

$

10,399

 

$

5,553

 

Diluted weighted average shares calculation:

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

161,412

 

162,675

 

161,308

 

164,508

 

Net dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock options

 

1,970

 

1,364

 

1,943

 

1,932

 

Restricted stock awards

 

1,967

 

587

 

1,632

 

493

 

ESPP shares

 

18

 

22

 

18

 

25

 

Weighted average common shares - diluted

 

165,367

 

164,648

 

164,901

 

166,958

 

Diluted net income per share

 

$

0.01

 

$

0.04

 

$

0.06

 

$

0.03

 

 

Potentially dilutive shares of common stock related to share-based payments and warrants are excluded from the diluted net income per share computations when their exercise prices are greater than the average market price of our common stock during the applicable periods as their inclusion would be anti-dilutive.

 

The following table sets forth potentially dilutive weighted average shares which were excluded from our computation of diluted net income (loss) per share because their inclusion would have been anti-dilutive (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009

 

2010

 

2009

 

Stock options

 

7,051

 

11,637

 

6,964

 

6,533

 

Restricted stock units

 

21

 

59

 

11

 

39

 

Total potentially dilutive shares

 

7,072

 

11,696

 

6,975

 

6,572

 

 

13. Comprehensive Income (Loss)

 

The following table summarizes the components of other comprehensive income (loss) (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(as adjusted)

 

 

 

(as adjusted)

 

Net income

 

$

1,668

 

$

6,217

 

$

10,399

 

$

5,553

 

Unrealized (loss) gain on investments (1)

 

12

 

(22

)

4

 

(14

)

Pension unrealized gain

 

(141

)

 

140

 

 

Foreign currency translation adjustment

 

(30,081

)

(17,797

)

5,404

 

(120,152

)

Other comprehensive income (loss)

 

(30,210

)

(17,819

)

5,548

 

(120,166

)

Comprehensive income (loss)

 

$

(28,542

)

$

(11,602

)

$

15,947

 

$

(114,613

)

 


(1)           The unrealized gain (loss) on investments in the above table are net of taxes (tax benefits) of $(4) and $12 for the comparable three months and $(3) and $7 for the comparable nine months ended February 28, 2010 and 2009, respectively.

 

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Total accumulated other comprehensive income and its components for the periods presented were as follows (in thousands):

 

 

 

February 28,

 

May 31,

 

 

 

2010

 

2009

 

Foreign currency translation adjustment

 

$

37,628

 

$

32,224

 

Pension unrealized actuarial gain

 

3,074

 

2,934

 

Unrealized loss on investments

 

(1

)

(5

)

Accumulated other comprehensive income

 

$

40,701

 

$

35,153

 

 

On April 2, 2010, our Benefits Committee approved a plan to modify our defined benefit pension plan in Norway (the Plan) such that beginning on May 31, 2010, active participants in the Plan will no longer accumulate benefits for their services.  Assets equivalent to the accumulated benefits of all active participants in the Plan will be transferred to a newly-established defined contribution plan.  All retired participants will continue to receive benefits under the Plan.  We expect this modification of the Plan to result in a pre-tax gain of between $3.0 and $4.0 million in the fourth quarter of fiscal 2010.

 

14. Commitments and Contingencies

 

Legal

 

On January 21, 2010, JuxtaComm-Texas Software, LLC filed a lawsuit in the United States District Court for the Eastern District of Texas against Lawson Software, Inc., Lawson Software Americas, Inc. and 20 other defendants.  One of the defendants, Seco Tools, Inc. is a Lawson customer.  Under the terms of our customer license agreement, we have agreed to defend and indemnify Seco Tools in this lawsuit.  The complaint alleges that Lawson and the other defendants infringe United States Patent No. 6,195,662 entitled “System for Transforming and Exchanging Data Between Distributed Heterogeneous Computer Systems.”  JuxtaComm seeks damages in an undisclosed amount, enhancement of those damages, an attorneys’ fee award and an injunction against further infringement.  We plan to vigorously defend this case.  Because the complaint does not identify which of our products allegedly infringes this patent, and given the inherent unpredictability of litigation and jury trials, we cannot at this time estimate the possible outcome of this lawsuit. Because patent litigation is time consuming and costly to defend, we will continue to incur significant costs defending this case. In addition, in the event of an unfavorable outcome in this matter, it could have a material adverse effect on our future results of operations or cash flows.

 

On May 19, 2009, ePlus, Inc. filed a lawsuit in the United States District Court for the Eastern District of Virginia against Lawson Software, Inc., Perfect Commerce, Inc., SciQuest, Inc. and Verian Technologies, Inc.  The other three defendants subsequently entered into separate confidential settlements and the court dismissed their parts of the lawsuit. The May 2009 complaint alleges that Lawson’s supply chain products infringe three U.S. patents owned by ePlus.  In that complaint, ePlus seeks damages in an undisclosed amount, enhancement of those damages, an attorneys’ fee award and an injunction against further infringement.  As part of the subsequent discovery process, ePlus has made unquantified damages allegations for royalties on some or all of our aggregate license, maintenance and services revenues in the United States since October 2003 for our purchase order, inventory control and requisition products.  We are contesting the infringement claims and validity of the patents as well as the time frame and scope of products and services associated with ePlus’ damages allegations.  The court has required that ePlus submit its damages expert reports in May 2010.  When ePlus submits its damages expert report, we expect that report to include the dollar amount of damages claimed by ePlus and the royalty percentage and revenue base on which ePlus calculates the alleged damages royalty.  We are vigorously defending this case because we believe we have meritorious defenses, including non-infringement and patent invalidity.  This case is currently scheduled to go to trial in September 2010.  If we are not successful in obtaining summary judgment or other resolution before or at trial, at the conclusion of the trial the jury will decide whether or not ePlus has proved that Lawson has infringed, and whether or not Lawson has proved that the patents are invalid.  If the jury finds that Lawson failed to prove invalidity of the patents, and if the jury finds that ePlus has proved infringement, then the jury will determine the amount of damages payable by Lawson.  Given the inherent unpredictability of litigation and jury trials, we cannot at this time estimate the possible outcome of this lawsuit. Because patent litigation is time consuming and costly to defend, we will continue to incur significant costs defending this case. In addition, in the event of an unfavorable outcome in this matter, it could have a material adverse effect on our future results of operations or cash flows.

 

On May 20, 2008, a putative class action lawsuit was filed against us in the United States District Court for the Southern District of New York on behalf of current and former business, systems, and technical consultants. The suit, Cruz, et. al., v. Lawson Software, Inc. et. al., alleges that we failed to pay overtime wages pursuant to the Fair Labor Standards Act (FLSA) and state law, and alleges violations of state record-keeping requirements. The suit also alleges certain violations of ERISA and unjust enrichment. Relief sought includes back wages, corresponding 401(k) plan credits, liquidated damages, penalties, interest and attorneys’ fees. Given the preliminary nature of the alleged claims and the inherent unpredictability of litigation, we cannot at this time estimate the possible outcome of any such action. We successfully moved the case from the United States District Court for the Southern District of New York to the District of Minnesota. The Minnesota Federal District Court conditionally certified the case under the FLSA as a

 

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collective action and granted our motion to dismiss the two ERISA counts and the state wage and hour claims.  Plaintiffs moved for Rule 23 class certification but the Court denied their motion.  At the present time, the size of the class is limited to the 72 consultants who elected to participate in the lawsuit by filing opt-in forms.  As permitted by the present scheduling order, we plan to file a motion for summary judgment asking for dismissal of remaining class members based on their performance of exempt duties and/or making more than $100,000 per year.

 

We accumulated information regarding Intentia customer claims and disputes that arose before our acquisition of Intentia in April 2006.  The original charge to establish the reserve for these claims and disputes recorded in fiscal 2006, and the subsequent adjustment in fiscal 2007, were recorded to goodwill as part of the purchase accounting related to our acquisition of Intentia.  Adjustments to the reserve recorded in fiscal 2008 and 2009 were reflected in general and administrative expenses in our Consolidated Statements of Operations in the applicable periods as the reductions occurred outside the period in which adjustments to purchase accounting were allowed.  In the first and second quarters of fiscal 2009, certain of these claims and disputes settled at amounts lower than anticipated and our estimated reserve requirements were reduced by $1.8 million and $0.4 million, respectively. In the second quarter of fiscal 2010, we recorded an adjustment to the reserve in the amount of $0.7 million.  The applicable reserve is recorded at present value and is expected to be consumed through a combination of cash payments, accounts receivable write-offs and free services over the next 12 to 15 months.  As of February 28, 2010 and May 31, 2009, we had remaining accruals of approximately $1.2 million and $1.9 million, respectively, related to these Intentia disputes that arose before the acquisition. We expense our defense costs during the period incurred. If the aggregate settlement costs or judgments exceed the fair value estimate established as part of the purchase price adjustment, the excess costs would be expensed in the period when the additional charge is both probable and can be reasonably estimated.

 

On September 29, 2008, we received a settlement offer from our insurance carrier related to certain of these pre-merger litigation claims.  We accepted this offer of €1.2 million, approximately $1.6 million, and we recorded the settlement within our results of operations for the second quarter of fiscal 2009, when the funds were received.

 

We are subject to various other legal proceedings and the risk of litigation by employees, customers, suppliers, stockholders or others through private actions, class actions, administrative proceedings or other litigation. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows in a particular period.

 

Indemnification Guarantee Agreements and Employment Agreements

 

In the normal course of business, we license our software products to customers under end-user license agreements and to certain resellers or other business partners under business partner agreements.  We also enter into services agreements with customers for the implementation of our software. We may subcontract these services to our business partners.  These agreements generally include certain provisions for indemnifying our customer or business partner against losses, expenses and liabilities from damages that may be awarded against them if our software, or the third-party-owned software we resell, is found to infringe a patent, copyright, trademark or other proprietary right of a third-party.  We have also entered into various employment agreements with certain executives and other employees which provide for severance payments subject to certain conditions and events.  We believe our exposure under these various indemnification and employment agreements is minimal and accordingly, we have not accrued any liabilities related to these agreements as of February 28, 2010.

 

We have arrangements with certain of our customers whereby we guarantee the products and services purchased will operate materially and substantially as described in the documentation that we provided.  If necessary, we provide for the estimated cost of product and service warranties based on specific warranty claims and claim history.

 

See Note 13, Commitments and Contingencies, in Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for our fiscal year ended May 31, 2009 for additional detail regarding these various agreements.

 

15. Segment and Geographic Information

 

We are a global provider of enterprise software, services and support.  We target customers in specific industries as well as the horizontal market for our strategic human capital management product line. We serve customers in the Americas, EMEA and APAC geographic regions.  We determine our reportable operating segments in accordance with the provisions in the FASB guidance on segment reporting, which establishes standards for, and requires disclosure of, certain financial information related to our operating segments and geographic regions.  Factors used to identify our reportable operating segment(s) include the financial information regularly utilized for evaluation by our chief operating decision-maker (CODM) in making decisions about how to allocate resources

 

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and in assessing our performance.  We have determined that our CODM, as defined by this segment reporting guidance is our Chief Executive Officer (CEO).

 

Segment Information

 

During fiscal 2009 and prior years, we viewed our operations and managed our business as one reportable segment, the development and marketing of computer software and related services including consulting, maintenance and customer support. Beginning in the first quarter of fiscal 2010, we reorganized our operations to provide greater focus on and better serve our targeted vertical markets within each of our product lines.

 

In fiscal 2009 and prior years, the operations that supported our S3 products and M3 products were under one common leadership organization and the financial information utilized to evaluate our business operations for fiscal 2009 and prior years were combined for all vertical markets for our product sales, consulting services and maintenance and customer support. Following our fiscal 2010 strategic realignment, we are now operationally aligned by industry vertical and our management structure and financial reporting of our operations follow this vertical structure.  Based on our new organizational structure and related internal financial reporting structure, we have determined that we now have three reportable segments relating to our three industries groups: S3 Strategic Industries, M3 Strategic Industries and General Industries.  The S3 Strategic Industries and M3 Strategic Industries groups generally align with our Lawson S3 Enterprise Management System and Lawson M3 Enterprise Management System product lines, respectively.  Our S3 Strategic Industries and M3 Strategic Industries groups include key vertical industry markets for each of our S3 and M3 product lines, respectively, and related services and support, which we believe offer the greatest growth potential for Lawson.  The S3 Strategic Industries group targets customers in the healthcare and public sector industries. The M3 Strategic Industries group targets customers in the equipment service management & rental, food & beverage and fashion industries.  Our General Industries group includes our services industries customers (S3) and manufacturing & distribution industries customers (M3) which are in industries not included in our other two industries groups.

 

Within our organization, multiple sets of information are available reflecting various views of our operations including vertical, geographic and/or functional information.  However, the main financial information provided to and used by our CODM to assist in making operational decisions, allocating resources and assessing our performance reflects revenues, controllable costs and controllable margin by segment (which are our industries groups; S3 Strategic Industries, M3 Strategic Industries and General Industries).  Segment controllable costs include costs of applicable license fees and other direct costs: costs of resources dedicated to each industries group, direct general and administrative expenses and allocations related to our professional services organization.  The resulting segment controllable margin is the financial measure by which each segment and management’s performance is measured.  Segment controllable margin does not include an allocation of non-dedicated resources that support our entire organization or other corporate shared-services.  These unallocated expenses relate to our functional areas or competency centers: global sales operations, customer support, nearly all marketing, nearly all development and product management, and general and administrative functions: executive management, finance, human resources, legal, facilities and information technology services.  Certain other costs are also excluded from segment controllable margin and are included in competency center and other unallocated expenses including share-based compensation and pre-merger claims reserve adjustments.  In addition, restructuring charges and amortization of acquired intangibles are not allocated to our reportable segments. We do not have any intercompany revenue recorded between our reportable segments.  The accounting policies for all of our reportable segments are the same as those used in our consolidated financial statements as detailed in Note 2, Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended May 31, 2009 and updated herein.

 

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The following table presents financial information for our reportable segments for the periods indicated (in thousands):

 

 

 

S3 Strategic

 

M3 Strategic

 

General

 

 

 

Three Months Ended:

 

Industries

 

Industries

 

Industries

 

Total

 

February 28, 2010