10-Q 1 a08-1458_110q.htm 10-Q

 

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 November 30, 2007

 

 

 

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

 

                                         (I.R.S. Employer

incorporation or organization)

 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x                    Accelerated filer  o                Non-accelerated filer  o

 

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

 

The number of shares of the registrant’s common stock outstanding as of December 28, 2007 was 178,649,137.

 

 



 

LAWSON SOFTWARE, INC.

 

Form 10-Q
Table of Contents

 

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets at November 30, 2007 and May 31, 2007

3

 

Condensed Consolidated Statements of Operations
for the three and six months ended November 30, 2007 and 2006

4

 

Condensed Consolidated Statements of Cash Flows
for the six months ended November 30, 2007 and 2006

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

34

 

 

 

PART II.

OTHER INFORMATION

36

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Submission of Matters to a Vote of Security Holders

37

Item 5.

Other Information

37

Item 6.

Exhibits

37

 

SIGNATURES

38

 

2



 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

November 30,

 

May 31,

 

 

 

2007

 

2007

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

337,803

 

$

473,963

 

Restricted cash, current

 

6,806

 

555

 

Marketable securities

 

25,829

 

74,995

 

Trade accounts receivable, net

 

158,535

 

162,947

 

Income taxes receivable

 

8,073

 

5,183

 

Deferred income taxes - current

 

18,090

 

17,431

 

Prepaid expenses and other assets

 

37,698

 

28,196

 

Total current assets

 

592,834

 

763,270

 

 

 

 

 

 

 

Long-term marketable securities

 

1,809

 

4,878

 

Long-term investments

 

58,653

 

 

Restricted cash, non-current

 

697

 

6,889

 

Property and equipment, net

 

37,566

 

30,879

 

Goodwill

 

515,038

 

483,060

 

Other intangible assets, net

 

122,983

 

133,456

 

Deferred income taxes - non-current

 

34,382

 

36,889

 

Other assets

 

19,137

 

19,786

 

Total assets

 

$

1,383,099

 

$

1,479,107

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Long-term debt - current

 

$

3,553

 

$

3,322

 

Accounts payable

 

17,379

 

21,475

 

Accrued compensation and benefits

 

84,616

 

85,144

 

Income taxes payable

 

7,977

 

3,535

 

Deferred income taxes - current

 

4,855

 

4,605

 

Deferred revenue-current

 

167,397

 

247,587

 

Other accrued liabilities

 

64,311

 

72,986

 

Total current liabilities

 

350,088

 

438,654

 

 

 

 

 

 

 

Long-term debt - non-current

 

244,708

 

245,228

 

Uncertain tax position - non-current

 

4,464

 

 

Deferred income taxes - non-current

 

12,784

 

12,558

 

Long-term of deferred revenue

 

9,138

 

15,817

 

Other long-term liabilities

 

5,660

 

11,622

 

Total liabilities

 

626,842

 

723,879

 

 

 

 

 

 

 

Commitments and Contingencies, see Note 11

 

 

 

 

 

 

 

 

 

 

 

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; 200,660 and 199,389 shares issued, and 178,591 and 182,979 shares outstanding, at November 30, 2007 and May 31, 2007, respectively

 

2,003

 

1,994

 

Additional paid-in capital

 

834,746

 

822,740

 

Treasury stock, at cost; 22,069 and 16,410 shares at November 30, 2007 and May 31, 2007, respectively

 

(178,981

)

(123,207

)

Retained earnings

 

27,059

 

17,755

 

Accumulated other comprehensive income

 

71,430

 

35,946

 

Total stockholders’ equity

 

756,257

 

755,228

 

Total liabilities and stockholders’ equity

 

$

1,383,099

 

$

1,479,107

 

 

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

 

3



 

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 30,

 

November 30,

 

November 30,

 

November 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

License fees

 

$

32,990

 

$

22,041

 

$

58,450

 

$

38,809

 

Maintenance

 

84,705

 

70,969

 

163,219

 

140,553

 

Consulting

 

100,907

 

91,483

 

184,341

 

166,968

 

Total revenues

 

218,602

 

184,493

 

406,010

 

346,330

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Cost of license fees

 

6,616

 

5,850

 

13,369

 

10,892

 

Cost of maintenance

 

16,830

 

13,997

 

32,490

 

28,685

 

Cost of consulting

 

84,155

 

80,289

 

155,381

 

150,023

 

Total cost of revenues

 

107,601

 

100,136

 

201,240

 

189,600

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

111,001

 

84,357

 

204,770

 

156,730

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

21,732

 

22,530

 

39,018

 

42,855

 

Sales and marketing

 

48,214

 

39,898

 

90,505

 

76,790

 

General and administrative

 

25,839

 

22,215

 

51,562

 

48,205

 

Restructuring

 

80

 

(32

)

(65

)

3,360

 

Amortization of acquired intangibles

 

3,352

 

2,400

 

6,568

 

4,789

 

Total operating expenses

 

99,217

 

87,011

 

187,588

 

175,999

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

11,784

 

(2,654

)

17,182

 

(19,269

)

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest income

 

5,882

 

3,707

 

12,745

 

7,300

 

Interest expense

 

(2,142

)

(378

)

(4,746

)

(645

)

Other income (expense), net

 

(4,376

)

3

 

(4,054

)

43

 

Total other income (expense), net

 

(636

)

3,332

 

3,945

 

6,698

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

11,148

 

678

 

21,127

 

(12,571

)

Provision for income taxes

 

7,425

 

4,187

 

11,823

 

6,730

 

Net income (loss)

 

$

3,723

 

$

(3,509

)

$

9,304

 

$

(19,301

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

$

(0.02

)

$

0.05

 

$

(0.10

)

Diluted

 

$

0.02

 

$

(0.02

)

$

0.05

 

$

(0.10

)

 

 

 

 

 

 

 

 

 

 

Shares used in computing net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

178,453

 

187,376

 

179,974

 

186,610

 

Diluted

 

181,941

 

187,376

 

183,520

 

186,610

 

 

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

 

4



 

LAWSON SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

November 30,

 

November 30,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

9,304

 

$

(19,301

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

21,166

 

19,285

 

Amortization of debt issuance costs

 

644

 

 

Deferred income taxes

 

1,429

 

336

 

Provision for doubtful accounts

 

(845

)

1,708

 

Warranty provision

 

2,800

 

884

 

Impairment on long-term investments

 

4,229

 

 

Loss (gain) on disposal of assets

 

(311

)

2

 

Excess tax benefits from stock option exercises

 

(1,721

)

(1,033

)

Stock-based compensation expense

 

4,255

 

3,673

 

Amortization of discount and premiums on marketable securities

 

(90

)

(235

)

Changes in operating assets and liabilities, net of effect from acquisitions:

 

 

 

 

 

Trade accounts receivable

 

15,472

 

1,173

 

Prepaid expenses and other assets

 

(9,215

)

1,679

 

Accounts payable

 

(5,495

)

(8,398

)

Accrued and other liabilities

 

(21,979

)

(14,755

)

Income taxes payable/receivable

 

8,632

 

(1,672

)

Deferred revenue and customer deposits

 

(98,750

)

(14,333

)

Net cash used in operating activities

 

(70,475

)

(30,987

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid in conjunction with acquisitions, net of cash acquired

 

 

(1,995

)

Change in restricted cash

 

(59

)

(13,468

)

Purchases of marketable securities and investments

 

(205,098

)

(73,749

)

Proceeds from maturities and sales of marketable securities and investments

 

194,120

 

88,273

 

Purchases of property and equipment

 

(10,822

)

(5,473

)

Net cash used in investing activities

 

(21,859

)

(6,412

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on long-term debt

 

(881

)

(973

)

Cash proceeds from issuance of long-term debt

 

 

1,768

 

Payments on capital lease obligations

 

(676

)

(961

)

Cash proceeds from exercise of stock options

 

5,486

 

7,084

 

Excess tax benefits from stock option exercises

 

1,721

 

1,033

 

Cash proceeds from employee stock purchase plan

 

1,445

 

1,329

 

Repurchase of common stock from related parties

 

(36,800

)

 

Repurchase of common stock-other

 

(19,945

)

 

Net cash provided by (used in) financing activities

 

(49,650

)

9,280

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

5,824

 

1,166

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(136,160

)

(26,953

)

Cash and cash equivalents at the beginning of the period

 

473,963

 

210,154

 

Cash and cash equivalents at the end of the period

 

$

337,803

 

$

183,201

 

 

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

 

5



 

LAWSON SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.             NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

Lawson Software, Inc. (Lawson or the Company) provides business application software, consulting and maintenance to customers primarily in the services, trade industries and manufacturing/distribution sectors specializing in a variety of specific markets within these sectors including healthcare, public services, retail, financial services, food and beverage, manufacturing and wholesale distribution. The Company’s software includes a variety of applications to help automate and integrate critical business processes, aiding in collaboration among its customers and their partners, suppliers and employees. Through the Company’s consulting services it primarily helps its customers implement their Lawson applications and through maintenance activities it provides product updates, on-going support and technical assistance to customers using Lawson products.

 

Basis of Presentation

 

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its branches and majority-owned subsidiaries operating in the United States (U.S.), Latin America and Canada (Americas); Europe, Middle East and Africa (EMEA); and Asia-Pacific (APAC). The Company’s minority-owned subsidiaries are accounted for under the equity method. The unaudited Condensed Consolidated Financial Statements included herein reflect all adjustments, in the opinion of management, necessary to fairly state the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. The results of operations for the three and six month periods ended November 30, 2007 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending May 31, 2008. The unaudited Condensed Consolidated Financial Statements and Notes are presented as permitted by the requirements for Form 10-Q and do not contain certain information included in the Company’s annual financial statements and notes. The Condensed Consolidated Balance Sheet data as of May 31, 2007 was derived from audited financial statements. The accompanying interim Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the fiscal year ended May 31, 2007.

 

Fiscal Year

 

The Company’s fiscal year is from June 1 through May 31. Unless otherwise stated, references to the years 2008 and 2007 relate to the fiscal years ended May 31, 2008 and 2007, respectively. References to future years also relate to Lawson’s fiscal year ended May 31.

 

Recent Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations (SFAS 141(R)) and No. 160 Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB no. 51 (SFAS 160). SFAS 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods.  Some of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the potential impact on its financial statements of adopting SFAS 141(R) and SFAS 160.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (SFAS 159) which becomes effective for fiscal years beginning after November 15, 2007. Under SFAS 159, companies may elect to measure specified financial instruments and

 

6



 

warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. This election, called the “fair value option”, will enable some companies to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. The Company is currently evaluating the potential impact on its financial statements of adopting SFAS 159.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 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. SFAS 157 is effective for fiscal years beginning after November 15, 2007.  The Company is currently evaluating the expected impact on its financial statements of adopting SFAS 157. In December 2007, the FASB proposed FASB Staff Position (FSP) FAS 157-b to allow a one-year deferral of adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized at fair value on a nonrecurring basis.  The comment deadline for FSP FAS 157-b is January 16, 2008. In November 2007, the FASB issued proposed FSP SFAS 157-a—Application of FASB Statement No. 157 to FASB Statement No. 13 And Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions.  The comment deadline on this proposed FSP was January 4, 2008. The ultimate outcome of these recent developments is currently unknown.

 

Proposed Accounting Pronouncements

 

In August 2007, the FASB released proposed FSP APB 14-a Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (FSP APB 14-a) that would alter the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements.  FSP APB 14-a, if adopted as proposed, would significantly impact the accounting associated with the Company’s $240.0 million senior convertible notes. If adopted as proposed, this FSP would require the Company to recognize additional (non-cash) interest expense based on the market rate for similar debt instruments without the conversion feature. Furthermore, it would require recognizing interest expense in prior periods pursuant to retrospective accounting treatment. The proposed FSP was issued for a 45-day comment period that ended on October 15, 2007 but has not been issued in final form. The FASB is expected to begin its re-deliberations of the guidance in FSP APB 14-a in January 2008 and the ultimate effective date and outcome of such re-deliberations is unknown at this time.

 

Summary of Significant Accounting Policies

 

Except to the extent updated or described below, a detailed description of the Company’s significant accounting policies can be found in Lawson’s Annual Report on Form 10-K for the fiscal year ended May 31, 2007.

 

Income Taxes

 

 Consistent with prior periods, and upon our June 1, 2007 adoption of FASB Interpretation No. 48 Accounting for Uncertainties in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48),  the Company recognizes accrued interest related to unrecognized tax benefits in tax expense. Penalties, if incurred, are also recognized as a component of tax expense. In addition, the tax effect of discrete items is booked entirely in the quarter in which the discrete event occurs.

 

Sales Returns and Allowances and Warranty Reserves

 

Lawson does not generally provide a contractual right of return.  However, in the course of arriving at practical business solutions to various warranty and other claims, the Company has allowed sales returns and allowances. The Company records a provision against revenue for estimated sales returns and allowances on licenses and consulting in the same period the related revenues are recorded or when current information indicates additional amounts are required. These estimates are based on historical experience determined by analysis of return activities, specifically identified customers and other known factors. If the historical data utilized does not reflect expected future performance, a change in the allowance would be recorded in the period such determination is made.

 

Following is a roll forward of the Company’s warranty reserve (in thousands):

 

7



 

Balance, May 31, 2007

 

$

3,745

 

Provision

 

2,800

 

Write-offs

 

(516

)

Translation adjustment

 

(14

)

Balance, November 30, 2007

 

$

6,015

 

 

Marketable Securities and Long-Term Investments

 

As of November 30, 2007, the Company had a total of $27.6 million in marketable securities, and $58.7 million in long-term investments, which consisted of investments in auction rate securities. Auction rate securities are structured to provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism allows existing investors to either rollover their holdings, whereby they will continue to own their respective securities, or liquidate their holdings by selling such securities at par.   The Company does not directly hold mortgage-backed securities.  The recent uncertainties in the credit markets have affected all of the Company’s holdings in auction rate securities.

 

As of November 30, 2007, the Company identified approximately $63.7 million par value of investments in auction rate securities for which the auctions have been unsuccessful. These investments are currently rated AA or higher and are current on all obligations However, the liquidity and fair value of these investments have been impacted primarily by the uncertainty of the credit markets and exposure to the financial condition of bond insurance companies.

 

Typically the fair value of auction rate securities approximates par value due to the frequent resets through the auction rate process.  While the Company continues to earn interest on its current auction rate security investments at the maximum contractual rate, the estimated fair value of many of these investments no longer approximates par value. As of November 30, 2007, the fair value of the Company’s auction rate securities was written down from their par value of approximately $63.7 million to the estimated fair value of approximately $58.7 million, based in part on market information provided by the broker-dealer managing the Company’s investments.  Accordingly, the Company recorded an “other-than-temporary” impairment charge of approximately $4.2 million and a temporary impairment charge of $0.8 million to reduce the value of its auction rate securities to the new fair value. The “other-than-temporary” impairment charge is included in other income (expense), net in our Condensed Consolidated Statement of Operations. This charge represents future expected capital losses for which the Company does not currently have available capital gains to offset and accordingly, no tax benefits were recorded.  In addition, the Company reclassified the entire auction rate securities portfolio from marketable securities to long-term investments.

 

The Company reviews its impairments in accordance with Emerging Issues Task Force (EITF) 03-1 and FSP SFAS 115-1 and 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments to determine the classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of shareholders’ equity.  Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. The Company believes that a portion of the impairment of its auction rate securities investments is temporary and a portion is “other-than-temporary”. The differentiating factors between temporary and “other-than-temporary” impairment are primarily due to the greater uncertainties, longer expected holding period and the larger reduction to fair value related to the securities where the impairment is considered to be “other-than-temporary”.

 

2.             RESTRUCTURING

 

The following table sets forth the reserve activity for each of the Company’s restructuring plans and the remaining balances, which are included in the Consolidated Balance Sheets as of November 30, 2007 (in thousands):

 

8



 

 

 

 

 

Fiscal

 

Fiscal 2006 Restructure

 

 

 

 

 

2007

 

 

 

Legacy

 

 

 

Total

 

Restructure

 

Intentia

 

Lawson

 

Balance, May 31, 2007

 

$

24,294

 

$

10,474

 

$

11,257

 

$

2,563

 

Cash payments

 

(4,131

)

(2,441

)

(1,459

)

(231

)

Adjustments to provision - Restructuring

 

(65

)

430

 

(365

)

(130

)

Adjustments to provision - Goodwill

 

(3,700

)

 

(3,700

)

 

Currency translation effect

 

2,271

 

598

 

1,673

 

 

Balance, November 30, 2007

 

$

18,669

 

$

9,061

 

$

7,406

 

$

2,202

 

 

Fiscal 2007 Restructuring

 

On February 28, 2007, the Company’s management completed a roadmap for optimizing the Company’s productivity by enhancing global sourcing capabilities and resources. This roadmap calls for the rebalancing of the Company’s resources between various locations primarily in the United States, Europe and the Company’s global support center in the Philippines. Management envisions the reduction of approximately 350 employees primarily in the Company’s U.S. and European operations over the course of fiscal 2008. This reduction will include employees working in all areas of the Company, predominantly in consulting and research and development. In conjunction with this roadmap and in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits (SFAS 112), the Company recorded a charge of $11.9 million. As management takes actions in pursuing these goals, additional charges related to this roadmap which are not within the scope of SFAS 112 may be recorded in future periods, but the timing and extent of these charges are not currently determinable. As of May 31, 2007, the Company had a reserve of $10.5 million for severance and related benefits.  For the second quarter and first six months of fiscal 2008, $0.8 million and $2.4 million of severance and related benefits related to this reserve were paid, respectively and $0.2 million and $0.4 million of adjustments were made to the reserve, respectively.  The ending balance at November 30, 2007 was $9.1 million.  The Company expects cash payments to continue through November 2008 for severance and May 2010 for restructured facilities.

 

Fiscal 2006 Restructuring

 

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

 

Fiscal 2006 Legacy Lawson. The plan for legacy Lawson includes the reduction of approximately 60 employees in the U.S. and United Kingdom (U.K.) and the exit or reduction in space for leases in certain facilities. The reduction included employees who worked in operations, marketing, sales, research and development, maintenance and consulting. As of May 31, 2007, the Company had a reserve of $2.6 million for both severance and associated benefits and a reserve for the exit or reduction of leased facilities. For the second quarter and first six months of fiscal 2008, cash payments of $0.1 million and $0.2 million were made for the exit of leased facilities, respectively.  In addition, an adjustment of $0.1 million was made for the exit of leased facilities in the second quarter of fiscal 2008.  The ending balance at November 30, 2007 was $2.2 million for the exit or reduction of leased facilities. Actions relating to severance were completed in the first quarter of fiscal 2008. The Company expects cash payments for the exit of leased facilities to continue through July 2011.

 

Fiscal 2006 Intentia. The plan for Intentia includes the reduction of approximately 125 employees in the EMEA and APAC regions and the exit or reduction in space for leases in certain facilities. The reduction of employees includes employees who work in all functional areas of the Company. As of May 31, 2007, the Company had a reserve of $11.3 million for both severance and associated benefits and reserves for the exit or reduction of leased facilities.  Cash payments of $0.1 million and $0.5 million were made for severance and associated benefits in the second quarter and first six months of fiscal 2008, respectively.  Cash payments of $0.5 million and $1.0 million were made for the exit of leased facilities for the second quarter and first six months of fiscal 2008, respectively.  There were adjustments made for the lease exit costs of $0.4 million and $4.1 million in the second quarter and the first six months of fiscal 2008, respectively.  The second quarter adjustment of $3.7 million was a result of a change in the original lease restructuring plan.  EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, requires that a reduction to a restructuring liability established in connection with a business purchase combination should reduce the amount originally recorded to goodwill.  These payments and adjustments resulted in a combined ending balance as of November 30, 2007 for severance and associated benefits and the reserve for the exit or reduction of leased facilities of $7.4 million. The Company expects cash payments for severance and associated benefits to continue through January 2008 and cash payments for the exit of leased facilities to continue through June 2012.

 

9



 

The Company expects to see cost savings in future periods as a result of the restructuring plans with a reduction in cost of revenue and operating expenses resulting from lower facility lease expense and reduced headcount.

 

3.             SHARE-BASED COMPENSATION

 

The Company accounts for shared-based compensation awards in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (SFAS 123 (R)) which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model or other acceptable method.  The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period. The Company recognized share-based compensation expense of $2.2 million and $4.3 million, or $1.4 million and $2.6 million net of tax, in its Condensed Consolidated Statements of Operations for the three and six months ended November 30, 2007, respectively.  Share-based compensation expense of $1.6 million and $3.7 million, or $1.0 million and $2.4 million net of tax, was recognized in the three and six months ended November 30, 2006, respectively.

 

The following table presents the Condensed Consolidated Statements of Operations classification of stock-based compensation expense, including stock options, restricted stock awards and the Company’s Employee Stock Purchase Plan (ESPP), recognized for the three and six months ended November 30, 2007 and 2006 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 30,

 

November 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

$

247

 

$

212

 

$

512

 

$

448

 

Research and development

 

127

 

142

 

292

 

318

 

Sales and marketing

 

370

 

360

 

737

 

771

 

General and administrative

 

1,482

 

878

 

2,714

 

2,139

 

Stock-based compensation expense before income taxes

 

2,226

 

1,592

 

4,255

 

3,676

 

Income tax benefit

 

(861

)

(582

)

(1,646

)

(1,287

)

Total stock-based compensation expense after income taxes

 

$

1,365

 

$

1,010

 

$

2,609

 

$

2,389

 

 

Unrecognized compensation expense of $15.5 million related to outstanding stock options as of November 30, 2007, is expected to be recognized over a weighted average period of 3.1 years and will be adjusted for any future changes in estimated forfeitures.

 

Unrecognized compensation expense of $7.1 million related to restricted stock awards as of November 30, 2007, is expected to be recognized over a weighted average period of 2.1 years and will be adjusted for any future changes in estimated forfeitures.

 

4.             TRADE ACCOUNTS RECEIVABLE

 

The components of trade accounts receivable at November 30, 2007 and May 31, 2007 were as follows (in thousands):

 

 

 

November 30,

 

May 31,

 

 

 

2007

 

2007

 

Trade account receivables

 

$

139,278

 

$

147,771

 

Unbilled account receivables

 

28,030

 

25,083

 

Less: allowance for doubtful accounts

 

(8,773

)

(9,907

)

Net trade accounts receivable

 

$

158,535

 

$

162,947

 

 

Unbilled accounts receivable represents revenue earned but not contractually billable as of the balance sheet date.

 

10



 

5.             GOODWILL AND INTANGIBLE ASSETS

 

The change in the carrying amount of goodwill for the six months ended November 30, 2007, was as follows (in thousands):

 

Balance, May 31, 2007

 

$

483,060

 

Goodwill adjusted related to restructuring

 

(3,700

)

Additional consideration paid - Sigma

 

282

 

Currency translation effect

 

35,396

 

Balance, November 30, 2007

 

$

515,038

 

 

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

 

 

 

November 30, 2007

 

May 31, 2007

 

 

 

 

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

Carrying

 

Accumulated

 

 

 

Estimated

 

 

 

Amounts

 

Amortization

 

Net

 

Amounts

 

Amortization

 

Net

 

Useful Lives

 

Maintenance contracts

 

$

22,940

 

$

13,642

 

$

9,298

 

$

22,940

 

$

11,822

 

$

11,118

 

Term

 

Technology

 

92,986

 

28,955

 

64,031

 

91,555

 

22,541

 

69,014

 

3-10 years

 

Client lists

 

10,854

 

6,560

 

4,294

 

10,765

 

5,937

 

4,828

 

4-10 years

 

Customer relationships

 

53,177

 

10,368

 

42,809

 

49,492

 

5,371

 

44,121

 

12 years

 

Trademarks

 

5,681

 

4,329

 

1,352

 

5,281

 

2,514

 

2,767

 

2 years

 

Order backlog

 

6,333

 

6,333

 

 

5,861

 

5,861

 

 

1 year

 

Non-compete agreements

 

4,161

 

2,962

 

1,199

 

3,834

 

2,226

 

1,608

 

5 years

 

 

 

$

196,132

 

$

73,149

 

$

122,983

 

$

189,728

 

$

56,272

 

$

133,456

 

 

 

 

The Company amortizes its 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.  Intangible assets increased by $5.1 million resulting from the effect of currency translation.  Amortization expense for intangible assets was $7.5 million and $7.2 million for the three months ended November 30, 2007 and 2006, respectively. Amortization expense for intangible assets was $15.0 million and $14.6 million for the six months ended November 30, 2007 and 2006, respectively. Amortization expense is included in cost of license fees, cost of services and amortization of acquired intangibles in the accompanying Condensed Consolidated Statements of Operations.

 

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

 

2008 (remaining 6 months)

 

$

13,786

 

2009

 

22,162

 

2010

 

18,720

 

2011

 

15,936

 

2012

 

12,672

 

Thereafter

 

39,707

 

 

 

$

122,983

 

 

6.             DEFERRED REVENUE

 

The components of deferred revenue at November 30, 2007 and May 31, 2007 were as follows (in thousands):

 

11



 

 

 

November 30,

 

May 31,

 

 

 

2007

 

2007

 

License

 

$

36,055

 

$

35,497

 

Maintenance

 

126,879

 

215,480

 

Consulting

 

13,601

 

12,427

 

Total deferred revenue

 

176,535

 

263,404

 

Less current portion

 

(167,397

)

(247,587

)

Long-term portion of deferred revenue

 

$

9,138

 

$

15,817

 

 

Deferred maintenance revenue was significantly lower at November 30, 2007 compared to May 31, 2007 as a result of the Company’s adoption of a new process in the latter part of fiscal 2007 of renewing a large percentage of maintenance contracts on June 1 of each year rather than on various dates over the course of the year.

 

7.             LONG-TERM DEBT

 

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

 

 

 

November 30,

 

May 31,

 

 

 

2007

 

2007

 

Senior convertible notes, interest rate of 2.5%, due 2012

 

$

240,000

 

$

240,000

 

Car loans, interest at average rate of 4.7%, due in 2 to 3 years

 

6,283

 

6,010

 

Capital lease obligations, interest at 7.9%, due in 5 to 9 years

 

1,978

 

2,540

 

 

 

248,261

 

248,550

 

Less current maturities

 

(3,553

)

(3,322

)

Total long-term debt

 

$

244,708

 

$

245,228

 

 

Senior Convertible Notes

 

In April 2007, the Company issued $240.0 million of senior convertible notes with net proceeds, after expenses, of approximately $233.5 million. The notes mature on April 15, 2012 and bear interest at a rate of 2.50 percent per annum payable semi-annually in arrears on April 15 and October 15 of each year, beginning October 15, 2007. The notes do not contain restrictive financial covenants. See the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2007 and Proposed Accounting Pronouncements included in Note 1 above for additional information.

 

8.             INCOME TAXES

 

On June 1, 2007, the Company adopted the provisions of FIN 48.  As a result of implementation, there was no impact to retained earnings for unrecognized tax benefits that would be accounted for as a cumulative effect adjustment.  The balance of unrecognized tax benefits at adoption, exclusive of interest, was $10.3 million of which $4.6 million would affect earnings, if recognized.  The Company recognizes accrued interest related to unrecognized tax benefits in tax expense.  Penalties, if incurred, are also recognized as a component of tax expense.  As of June 1, 2007, the Company did not have any accrued interest expense related to uncertain tax benefits given the Company’s net operating loss carryforward position associated with prior years.  However, during the quarter ended November 30, 2007, the Company recorded approximately $0.1 million of interest related to unrecognized tax benefits.  In addition, the company utilized $0.2 million of the uncertain tax benefits, resulting in a balance of $4.5 million at November 30, 2007.

 

Lawson is subject to taxation in the U.S. and various states and foreign jurisdictions.  The material jurisdictions that are subject to examination by the taxing authorities primarily include the U.S., U.K., Denmark, France, Switzerland and Sweden and are generally for tax years 2003 and forward.  The Company is currently under examination by certain taxing authorities in a few foreign jurisdictions.  While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could be greater or less than its accrued position.  Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.  The Company is in the process of closing a foreign tax audit which is expected to result in a decrease in the amount of the portion of the unrecognized tax benefits which would not affect earnings if

 

12



 

recognized, as noted above, as of the date of adoption.  Other than related to the resolution of this tax audit, the Company does not expect the amount of unrecognized tax benefits or cash payments related to these obligations to significantly change over the next 12 months.

 

The quarterly tax expense is measured using an estimated annual tax rate for the period. At November 30, 2007, the Company’s estimated annual global effective tax rate was 44.8 percent after considering those entities for which no tax benefit is expected to occur during the year as a result of such entities requiring a full valuation allowance against current year losses.

 

The Company’s income tax expense for the three and six months ended November 30, 2007 was $7.4 million and $11.8 million, respectively.  This resulted in an overall effective tax rate of 66.6 percent and 56.0 percent for the quarter and six months ended November 30, 2007, respectively.  The rate for the quarter is negatively impacted by 12.3 percent for a discrete item related to a capital loss on an other than temporary impairment charge on auction rate securities for which no tax benefit is expected and positively impacted by 2.5 percent for discrete items related to a return to provision true-up and tax reserve release.  The quarterly rate for the three months ended November 30, 2007 was also higher than the expected annual rate due to the mix of quarterly income by jurisdiction.  The Company’s income tax expense for the three and six months ended November 30, 2006 was $4.2 million and $6.7 million, respectively.  The overall effective tax rate for the three and six months ended November 30, 2006 was not meaningful due to the Company recording a tax provision on the nominal pre-tax book income and net loss in the respective periods.  The increase in income tax expense for the three months ended November 30, 2007 as compared to November 30, 2006 primarily related to increased profitability.

 

 The Company reviews its annual tax rate on a quarterly basis and makes any necessary changes. 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.  The Company identifies items which are unusual and non-recurring in nature and treats these as discrete events. The tax effect of discrete items is booked entirely in the quarter in which the discrete event occurs.

 

9.             PER SHARE DATA

 

Basic earnings per share are computed using the net income or loss and the weighted average number of common shares outstanding. Diluted earnings per share reflect the weighted average number of common shares outstanding plus the weighted average of dilutive shares outstanding during the period. Dilutive shares consist of “in-the-money” shares to be issued upon the exercise of stock options, warrants, vesting of restricted stock awards, ESPP and conversion of the senior convertible notes. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

 

13



 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 30,

 

November 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Basic earnings per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

 3,723

 

$

 (3,509

)

$

 9,304

 

$

 (19,301

)

Weighted average common shares- basic

 

178,453

 

187,376

 

179,974

 

186,610

 

Basic net income (loss) per share

 

$

 0.02

 

$

 (0.02

)

$

 0.05

 

$

 (0.10

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

 3,723

 

$

 (3,509

)

$

 9,304

 

$

 (19,301

)

Shares calculation:

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

178,453

 

187,376

 

179,974

 

186,610

 

Net dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock options

 

3,202

 

 

3,282

 

 

Warrants

 

 

 

 

 

Restricted stock

 

272

 

 

251

 

 

ESPP

 

14

 

 

13

 

 

Senior convertible notes

 

 

 

 

 

Weighted average common shares - diluted

 

181,941

 

187,376

 

183,520

 

186,610

 

Diluted net income (loss) per share

 

$

 0.02

 

$

 (0.02

)

$

 0.05

 

$

 (0.10

)

 

Potential dilutive shares of common stock related to share-based payments and warrants that were excluded (all warrants were excluded) from the diluted net income per share computations were 32.9 million and 13.1 million as of November 30, 2007 and 2006, respectively, as their exercise prices were greater than the average market price of the Company’s common shares during the periods and were, therefore, anti-dilutive. Potential dilutive shares of common stock were excluded from periods with a net loss because they were anti-dilutive. The potential dilutive shares increased from fiscal 2007 to fiscal 2008 largely as a result of the 20.0 million warrants sold in April 2007 along with the issuance of the senior convertible notes.

 

The senior convertible notes are convertible under certain circumstances, at the holder’s option, into cash and, if applicable, shares of the Company’s 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. The conversion rate may be adjusted from time to time in certain instances. The notes are not currently dilutive to earnings per share as they are only dilutive when the Company’s common stock price exceeds the conversion price.

 

The Company uses the treasury stock method to calculate the weighted-average shares used in the diluted earnings per share computation. Under the treasury stock method, the assumed proceeds calculation includes the actual proceeds to be received from employees upon exercise, the average unrecognized compensation cost during the period and any tax benefits that will be credited upon exercise to additional paid-in capital.  The Company determined whether its pool of available excess tax benefits is sufficient to absorb any tax deduction shortfall. If so, the effect of the hypothetical deferred tax asset write-off reduces the assumed proceeds in the treasury stock calculation. If there was no pool of available excess tax benefits, or if the amount of the pool was insufficient to absorb an entire hypothetical tax deficiency, the amount of the deficiency that would be charged to income tax expense would not be a reduction of the assumed proceeds. Currently, the Company has determined that it has a sufficient pool available.

 

10.          COMPREHENSIVE INCOME (LOSS)

 

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

 

14



 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

November 30,

 

November 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income (loss)

 

$

3,723

 

$

(3,509

)

$

9,304

 

$

(19,301

)

Unrealized gain (loss) on available-for-sale investments, net of taxes of $21 and $(5) and $9 and $27 for the three and six months ended November 30, 2007 and 2006, respectively

 

(787

)

14

 

(762

)

44

 

Foreign currency translation adjustment

 

29,539

 

16,228

 

36,246

 

14,967

 

Other comprehensive income

 

28,752

 

16,242

 

35,484

 

15,011

 

Comprehensive income (loss)

 

$

32,475

 

$

12,733

 

$

44,788

 

$

(4,290

)

 

Total accumulated other comprehensive income and its components at November 30, 2007 and May 31, 2007 were as follows (in thousands):

 

 

 

November 30,

 

May 31,

 

 

 

2007

 

2007

 

Foreign currency translation adjustment

 

$

72,204

 

$

35,958

 

Unrealized loss on available-for-sale investments

 

(774

)

(12

)

Accumulated other comprehensive income

 

$

71,430

 

$

35,946

 

 

11.          COMMITMENTS AND CONTINGENCIES

 

Employment Agreements and Executive Change in Control Severance Pay Plans

 

The Company has entered into various employment agreements with certain executives and employees of the Company and has adopted executive change in control severance pay plans. These arrangements provide for severance payments subject to certain conditions and events.

 

Indemnification and Guarantee Agreements

 

The Company licenses its software products to customers under end-user license agreements and to certain resellers or other business partners under business partner agreements. These agreements generally include certain provisions for indemnifying the customer or business partner against losses, expenses and liabilities from damages that may be awarded against them if the Company’s software, or the third-party-owned software the Company resells, is found to infringe a patent, copyright, trademark or other proprietary right of another party. These agreements generally limit the Company’s indemnification obligations based on industry-standards and geographical parameters and give the Company the right to replace an infringing product. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company believes its internal development processes and other practices limit its exposure under these indemnification provisions. In addition, the invention and nondisclosure agreements signed by the Company’s employees assign to it various intellectual property rights. There are no pending litigations for which the Company is required to provide indemnification under these agreements. As a result, management believes the estimated fair value of these agreements is immaterial. Accordingly, there are no liabilities recorded for these agreements as of November 30, 2007.

 

The Company enters into services agreements with customers for the implementation of its software. The Company may also subcontract those services to its business partners. From time to time, the Company includes in those services agreements, certain provisions for indemnifying the customer against losses, expenses and liabilities from those services, including, for example, personal injury or tangible property damage. Lease agreements and other contracts with the Company’s vendors may also impose similar indemnification obligations on the Company for personal injury, tangible property damage or other claims. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general liability and umbrella insurance policies that enable it to recover a portion of certain amounts paid. There is no pending litigation for which the Company is required to provide indemnification under these agreements. As a result, management believes the estimated fair value of these agreements is immaterial. Accordingly, there are no liabilities recorded for these agreements as of November 30, 2007.

 

The Company has arrangements with certain vendors whereby it guarantees the expenses incurred by certain of their employees. The term is from execution of the arrangement until cancellation and payment of any outstanding amounts.

 

15



 

Unless otherwise limited in the contract, the Company would be required to pay any unsettled employee expenses upon notification from the vendor. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not significant. As a result, management believes the estimated fair value of these agreements is immaterial. Accordingly, there are no liabilities recorded for these agreements as of November 30, 2007.

 

The Company has arrangements with certain customers whereby the Company guarantees the products and services purchased by these customers will operate materially and substantially as described in the documentation that is provided.

 

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

 

Legal

 

The Company is subject to various legal proceedings and the risk of future litigation by employees, customers, suppliers, stockholders or others through private actions, class actions, administrative proceedings or other litigation. Management is of the opinion that the outcome of such legal actions will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.  The Company has also accumulated information regarding Intentia customer claims and disputes that arose before the acquisition. These reserves are recorded at present value and are expected to be consumed through a combination of cash payments, accounts receivable write-offs and free services over the next 24 months. Because the reserves are recorded at present value, an aggregate $0.2 million and $0.5 million of interest accretion was recorded in the three and six months ended November 30, 2007, respectively. As of November 30, 2007 and May 31, 2007, the Company had an accrual of $17.9 million and $18.3 million, respectively, related to the Intentia disputes that arose before the acquisition.

 

The Company expenses its defense costs during the period when incurred. If the aggregate settlement costs or judgments exceed the fair value estimate established as part of the purchase price adjustment, the overage would be expensed in the period when incurred. The Company is, and from time to time may become, involved in other litigation in the normal course of business concerning its products and services. While the outcome of these claims cannot be predicted with certainty, the Company does not believe that the outcome of these legal matters will have a material adverse effect on our 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 future results of operations or cash flows in a particular period.

 

IBM Agreement

 

In fiscal 2005, the Company and International Business Machines Corporation (IBM) entered into an OEM Software Agreement (that was modified in the second fiscal quarter of 2006 and again in the third fiscal quarter of 2007) and a Master Relationship Agreement (MRA). Under these agreements, the Company resells its business applications in conjunction with IBM’s open standards-based software and the companies jointly market these software solutions. The MRA governs the joint marketing activities and has a three-year term. During the term of the modified OEM Software Agreement, the Company pays royalties to IBM for the licensing of IBM programs to each applicable existing and new customer of the Company and pays IBM annual maintenance fees for each applicable Lawson customer. The modified OEM Software Agreement has an initial term of three years, commencing September 2005, and may be extended by the Company for two additional one-year terms. During the initial three-year term, the Company has agreed to pay certain minimum quarterly and annual royalties to IBM. Total commitments under the modified OEM Software Agreement approximate $9.5 million over the three-year term. The Company may elect to terminate the OEM Software Agreement for convenience upon 90 days advance notice to IBM. If the Company elects early termination at any time during the three-year term, the terms of the agreement require the Company to pay IBM any unpaid minimum royalties through the date of termination plus a prorated share of the guaranteed annual minimum payment due for the year in which the termination occurred.

 

The Company has made cash payments of $1.0 million and $4.5 million during the three and six months ended November 30, 2007, respectively and $10.2 million, according to terms of the modified OEM Software Agreement, throughout the life of the agreement through November 30, 2007. The payments were recorded as other assets—long-term, which under SFAS No. 86, Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed, will be

 

16



 

amortized to costs of license fees over the earlier of the time period in which units are sold or the useful life. In addition, the Company recorded $0.9 million and $1.8 million of expense in the three and six months ended November 30, 2007, respectively representing third-party license fees related to this arrangement.

 

Symphony Agreement with former Intentia

 

In May 2005, former Intentia entered a Master Offshoring Agreement (the Agreement) with Symphony Service Corp., referred to as Symphony Services, an affiliate of Symphony Technology Group, LLC, a shareholder of Lawson and Symphony Technology II-A,L.P., pursuant to which Symphony Services agreed to provide Intentia both product development and customer support resources for an initial five-year term. The Agreement was not affected by the consummation of the business combination with Lawson. It is believed that the Agreement will enable the Company to achieve significant quality improvements and better customer service without increasing total spending on product development and customer support and was part of a business transformation plan approved by Intentia in July 2004. Under terms of the Agreement, the Company is contractually obligated to pay for a stated minimum level of resources employed to provide services for the first three years of the Agreement, after which either party may terminate the Agreement by delivery of a six-month advanced written notification. If the Company elects to terminate the Agreement after the first three years, it would be required to pay a buyout fee equal to six months of resource costs under the Agreement. As of November 30, 2007, the remaining minimum obligation level was approximately $2.1 million through the original three-year term which ends in May 2008. Symphony has been paid $12.9 million since the Agreement’s inception through November 30, 2007. Romesh Wadwani is a member of the Board of Directors of Lawson and is a partner of Symphony Technology Group, LLC.

 

IBM Agreement with former Intentia

 

In May 2005, former Intentia entered into a Master Offshoring Agreement (the IBM AB Agreement) with IBM Svenska AB (IBM AB) in which IBM AB agreed to provide Intentia cost efficient, high quality software development services and governs the joint development activities. The IBM AB Agreement has an initial term of five years, and may be extended in one or more additional eighteen month period(s), provided that the parties mutually agree to such renewal in writing at least six months prior to the expiration of the then-current term. The IBM AB agreement was not affected by the consummation of the business combination with Lawson. For the duration of the term of the IBM AB Agreement, the Company is obligated for minimum staffing levels and resources defined by the IBM AB Agreement at an annual cost of approximately $1.2 million. After completion of two and a half years from the date of the agreement, the Company may terminate the IBM AB Agreement for convenience with a six-month advance written notice. However, if the IBM AB Agreement is terminated for convenience before the completion of five years, the Company remains obligated to pay IBM AB any unpaid amounts due for services performed up to the termination or the minimum staffing levels, whichever is greater. As of November 30, 2007 the Company’s total remaining minimum obligation under the IBM AB Agreement was $1.0 million. IBM AB has been paid $4.8 million since the IBM AB Agreement’s inception through November 30, 2007.

 

12.          SEGMENT AND GEOGRAPHIC AREAS

 

The Company views its operations and manages its business as one reportable segment; the development and marketing of computer software and related services including consulting and maintenance and customer support. Factors used to identify the Company’s single operating segment include the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. In an effort to achieve greater operational scale and leverage costs with the acquisition of Intentia, the Company has and will continue to integrate the operations that support the Intentia M3 products and the legacy Lawson S3 products under one leadership structure for all vertical markets. As a result, the financial information utilized to evaluate the business operations combines M3 and S3 initiatives for all vertical markets for product sales, consulting services and maintenance and customer support. The Company markets its products and services through the Company’s offices in the U.S. and its branches and wholly-owned subsidiaries operating in the Americas, EMEA and APAC.

 

The following table presents revenues summarized by geographic region (in thousands):

 

17



 

Three Months Ended

 

Geographical Region

 

November 30, 2007

 

Americas

 

APAC

 

EMEA

 

Total

 

License fees

 

$

19,150

 

$

1,560

 

$

12,280

 

$

32,990

 

Services:

 

 

 

 

 

 

 

 

 

Maintenance

 

55,159

 

2,514

 

27,032

 

84,705

 

Consulting

 

39,329

 

3,844

 

57,734

 

100,907

 

Total services

 

94,488

 

6,358

 

84,766

 

185,612

 

Total revenues

 

$

113,638

 

$

7,918

 

$

97,046

 

$

218,602

 

 

Three Months Ended

 

Geographical Region

 

November 30, 2006

 

Americas

 

APAC

 

EMEA

 

Total

 

License fees

 

$

12,758

 

$

725

 

$

8,558

 

$

22,041

 

Services:

 

 

 

 

 

 

 

 

 

Maintenance

 

49,853

 

1,597

 

19,519

 

70,969

 

Consulting

 

35,057

 

4,234

 

52,192

 

91,483

 

Total services

 

84,910

 

5,831

 

71,711

 

162,452

 

Total revenues

 

$

97,668

 

$

6,556

 

$

80,269

 

$

184,493

 

 

Six Months Ended

 

Geographical Region

 

November 30, 2007

 

Americas

 

APAC

 

EMEA

 

Total

 

License fees

 

$

32,190

 

$

3,155

 

$

23,105

 

$

58,450

 

Services:

 

 

 

 

 

 

 

 

 

Maintenance

 

106,686

 

4,321

 

52,212

 

163,219

 

Consulting

 

78,743

 

7,061

 

98,537

 

184,341

 

Total services

 

185,429

 

11,382

 

150,749

 

347,560

 

Total revenues

 

$

217,619

 

$

14,537

 

$

173,854

 

$

406,010

 

 

Six Months Ended

 

Geographical Region

 

November 30, 2006

 

Americas

 

APAC

 

EMEA

 

Total

 

License fees

 

$

24,593

 

$

960

 

$

13,256

 

$

38,809

 

Services:

 

 

 

 

 

 

 

 

 

Maintenance

 

98,845

 

3,175

 

38,533

 

140,553

 

Consulting

 

68,715

 

8,433

 

89,820

 

166,968

 

Total services

 

167,560

 

11,608

 

128,353

 

307,521

 

Total revenues

 

$

192,153

 

$

12,568

 

$

141,609

 

$

346,330

 

 

Total revenues attributable to the U.S. were $110.8 million and $95.4 million for the three months ended November 30, 2007 and 2006, respectively and revenues attributable to Sweden were $29.3 million and $23.9 million for the three months ended November 30, 2007 and 2006, respectively. For the six months ended November 30, 2007 and 2006, total revenues attributed to the U.S. were $211.5 million and $188.2 million, respectively and revenues attributed to Sweden were $51.4 million and $41.6 million for the six months ended November 30, 2007 and 2006, respectively. No other country reported revenues exceeding 10 percent of consolidated revenues.

 

The following table presents long-lived tangible assets, consisting of property and equipment net of accumulated depreciation, summarized by geographic region (in thousands):

 

 

 

Geographical Region

 

 

 

Americas

 

APAC

 

EMEA

 

Total

 

As of November 30, 2007

 

$

11,589

 

$

9,318

 

$

16,659

 

$

37,566

 

As of May 31, 2007

 

$

9,873

 

$

4,149

 

$

16,857

 

$

30,879

 

 

U.S. long-lived tangible assets were $11.5 million and $9.8 million as of November 30, 2007 and May 31, 2007,

 

18



 

respectively. Sweden long-lived tangible assets were $11.2 million and $11.5 million as of November 30, 2007 and May 31, 2007, respectively. Philippines long-lived tangible assets were $7.3 million and $2.9 million as of November 30, 2007 and May 31, 2007, respectively. Aside from the U.S., Sweden and Philippines, no other country reported long-lived tangible assets exceeding 10 percent of consolidated long-lived tangible assets.

 

13.          REPURCHASE OF COMMON SHARES AND RELATED PARTY TRANSACTIONS

 

In November 2006, the Company’s Board of Directors approved a share repurchase of up to $100.0 million of common stock which was subsequently increased to $200.0 million by the Board of Directors in April 2007. The share repurchase will continue to be funded using the Company’s existing cash balance and future cash flows and will occur through open market purchases, privately negotiated transactions and/or transactions structured through investment banking institutions as permitted by securities laws and other legal requirements. Market conditions will influence the timing of the buyback and the number of shares repurchased. From inception of the repurchase program to November 30, 2007, the Company used $111.6 million to repurchase 12.5 million shares at an average price of $8.93. In the six months ended November 30, 2007, $56.7 million was used to repurchase 6.1 million shares at an average price of $9.29.

 

Included in the purchases in the first six months of fiscal 2008 were 1.1 million shares purchased from Lawson Family Investment Company, Ltd. an entity affiliated with H. Richard Lawson, founder, co-chairman and a director of the Company. In addition 2.9 million shares were purchased from Symphony Technology Group, a principal stockholder of the Company. Dr. Romesh Wadhwani is co-chairman and a director of the Company and the founder and managing partner of Symphony Technology Group. These shares were purchased at $9.20 per share.

 

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

 

Forward-Looking Statements

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are made in reliance upon the safe harbor provisions of 27A of the SEC Act and 21E of the SEC Exchange Act of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among others, statements about our future performance, the continuation of historical trends, the sufficiency of our sources of capital for future needs, the effects of acquisitions and the expected impact of recently issued accounting pronouncements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the fiscal year ended May 31, 2007. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this Quarterly Report on Form 10-Q and in other documents the Company files from time to time with the SEC.

 

Business Overview

 

The Company provides business application software, consulting and maintenance to customers primarily in the services, trade industries and manufacturing/distribution sectors. In the manufacturing sector we serve both process manufacturing and discrete manufacturing. In the services sector we serve both asset-intensive and labor-intensive businesses. We operate as one business segment focused on broad sectors. We specialize in specific markets including healthcare, public services, retail, financial services, food and beverage, manufacturing and wholesale distribution. Our software includes enterprise financial management, human capital management, business intelligence, asset management, enterprise performance management, supply chain management, service management, manufacturing operations, business project management and industry-tailored applications. Our applications help automate and integrate critical business processes which enable our customers to collaborate with their partners, suppliers and employees. We support our customers’

 

19



 

use of software applications through consulting services, which primarily help our customers implement their Lawson applications, and through our maintenance program which provides on-going support and product updates for our customers’ continued use of our applications.

 

Management Overview

 

Revenues for the second quarter and first six months of fiscal 2008 grew in all geographies as compared to the same periods in fiscal 2007, reflecting the global nature of our business. The Americas continue to represent more than half our revenues at 52 percent in the quarter. The EMEA region accounted for 44 percent of total revenues in the quarter and the remaining four percent was in the Asia Pacific region.

 

Revenues in the second quarter and first six months of fiscal 2008 also increased in every product line. Significant license revenue growth was driven primarily by revenue increases from new software licenses in the current quarter as well as a benefit from the recognition of deferred revenue on software licenses executed in prior periods.  Demand for our consulting services continued to increase, while maintenance revenue also grew. Gross margins increased reflecting the benefit of higher license revenue and consulting margins.  Reduced operating expenses, as a percent of revenues, also contributed to improved profitability. Higher sales and marketing expenses, reflecting a continuing investment in customer relations, were partially offset by a decrease in research and development expenses.

 

The U.S. dollar weakened relative to other major international currencies in the second quarter and first six months of fiscal 2008, when compared with rates in the same periods in fiscal 2007, contributing approximately $10.9 million, or 6.6 percent, of the $34.1 million quarterly revenue growth and contributing approximately $15.3 million, or 5.0 percent, of the $59.7 million year-to-date revenue growth. The currency fluctuations also had the effect of increasing costs of revenues and expenses, as reported in U.S. dollars, by approximately $12.6 million in the second quarter and $18.6 million in the first six months ended November 30, 2007.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended May 31, 2007.

 

Results of Operations

 

The following table sets forth certain line items in our Condensed Consolidated Statements of Operations as a percentage of total revenues and the period-over-period increase (decrease) for the periods indicated:

 

20



 

 

 

Percentage of Total Revenue

 

Percentage of Total Revenue

 

Percentage of

 

 

 

Three Months Ended

 

Six Months Ended

 

Dollar Change

 

 

 

November 30,

 

November 30,

 

Fiscal 2008 vs. 2007

 

 

 

2007

 

2006

 

2007

 

2006

 

Quarter

 

Year-to-Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

License fees

 

15.1

%

11.9

%

14.4

%

11.2

%

49.7

%

50.6

%

Maintenance

 

38.7

 

38.5

 

40.2

 

40.6

 

19.4

 

16.1

 

Consulting

 

46.2

 

49.6

 

45.4

 

48.2

 

10.3

 

10.4

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

18.5

 

17.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of license fees

 

3.0

 

3.2

 

3.3

 

3.1

 

13.1

 

22.7

 

Cost of maintenance

 

7.7

 

7.6

 

8.0

 

8.3

 

20.2

 

13.3

 

Cost of consulting

 

38.5

 

43.5

 

38.3

 

43.3

 

4.8

 

3.6

 

Total cost of revenues

 

49.2

 

54.3

 

49.6

 

54.7

 

7.5

 

6.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

50.8

 

45.7

 

50.4

 

45.3

 

31.6

 

30.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

9.9

 

12.2

 

9.6

 

12.4

 

(3.5

)

(9.0

)

Sales and marketing

 

22.1

 

21.6

 

22.3

 

22.2

 

20.8

 

17.9

 

General and administrative

 

11.8

 

12.0

 

12.7

 

13.8

 

16.3

 

7.0

 

Restructuring

 

 

 

 

1.0

 

*NM

 

*NM

 

Amortization of acquired intangibles

 

1.6

 

1.3

 

1.6

 

1.4

 

39.7

 

37.1

 

Total operating expenses

 

45.4

 

47.1

 

46.2

 

50.8

 

14.0

 

6.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

5.4

 

(1.4

)

4.2

 

(5.5

)

*NM

 

*NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

(0.3

)

1.8

 

1.0

 

1.9

 

(119.1

)

(41.1

)

Income (loss) before income taxes

 

5.1

 

0.4

 

5.2

 

(3.6

)

*NM

 

*NM

 

Provision for income taxes

 

3.4

 

2.3

 

2.9

 

2.0

 

77.3

 

75.7

 

Net income (loss)

 

1.7

%

(1.9

)%

2.3

%

(5.6

)%

*NM

%

*NM

%

 


*Not Meaningful

 

Revenues

 

 

 

Three Months Ended

 

Quarterly Change

 

 

 

November 30,

 

Fiscal 2008 vs. 2007

 

(in thousands)

 

2007

 

2006

 

Dollars

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

License fees

 

$

32,990

 

$

22,041

 

$

10,949

 

49.7

%

Maintenance

 

84,705

 

70,969

 

13,736

 

19.4

 

Consulting

 

100,907

 

91,483

 

9,424

 

10.3

 

Total revenues

 

$

218,602

 

$

184,493

 

$

34,109

 

18.5

%

 

 

 

Six Months Ended

 

Year-to-Date Change

 

 

 

November 30,

 

Fiscal 2008 vs. 2007

 

 

 

2007

 

2006

 

Dollars

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

License fees

 

$

58,450

 

$

38,809

 

$

19,641

 

50.6

%

Maintenance

 

163,219

 

140,553

 

22,666

 

16.1

 

Consulting

 

184,341

 

166,968

 

17,373

 

10.4

 

Total revenues

 

$

406,010

 

$

346,330

 

$

59,680

 

17.2

%

 

21



 

Total Revenues

 

We generate revenues from licensing software, providing maintenance for previously licensed products and providing consulting services. We generally utilize written contracts as the means to establish terms and conditions by which our products, maintenance and consulting services are sold to our customers. Because our maintenance and consulting services are primarily attributable to our licensed products, growth in our maintenance and consulting services is directly tied to the success of our license contracting activity.

 

Second Quarter of Fiscal 2008 Compared to Second Quarter of Fiscal 2007

 

Total revenue increased by 18.5 percent to $218.6 million in the second quarter of fiscal 2008 as compared to $184.5 million in the second quarter of fiscal 2007. We experienced increases from all revenue streams, with maintenance representing the largest increase in dollars and license fees representing the largest increase in percentage.

 

First Six Months of Fiscal 2008 Compared to First Six Months of Fiscal 2007

 

Total revenues for the first six months of fiscal 2008 increased 17.2 percent to $406.0 million as compared to $346.3 million in the first six months of fiscal 2007. We experienced increases from all revenue streams, with maintenance representing the largest increase in dollars and license fees representing the largest increase in percentage.

 

License Fees

 

Our license fees primarily consist of fees resulting from products licensed to customers on a perpetual basis. Product license fees result from a customer’s licensing of a given software product for the first time or with a customer’s licensing of additional users for previously licensed products.

 

Second Quarter of Fiscal 2008 Compared to Second Quarter of Fiscal 2007

 

License fee revenues increased $10.9 million, or 49.7 percent, during the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007. The increase was primarily attributable to the contribution from new software license revenue, improved conversion rates and the net benefit from deferred revenue compared to the prior year, including $1.6 million related to a contract renegotiation.  Deferred license revenue recognized also increased in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007 due to a purchase accounting adjustment in connection with the Intentia acquisition. The purchase accounting adjustment reduced the Intentia deferred revenue balance and reduced the amount of deferred revenue recognized in the second quarter of fiscal 2007. The total number of licensing transactions increased in the second quarter of fiscal 2008 by 24 to 331.  The number of licensing transactions with new customers increased to 38 compared to 27 and average selling price increased by two percent in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.  Licensing transactions greater than $1.0 million decreased to two for the second quarter of fiscal 2008 compared to three transactions for the second quarter of fiscal 2007 which partially offset these increases.  License fee revenue as a percentage of total revenues for the second quarters of fiscal 2008 and 2007 was 15.1 percent and 11.9 percent, respectively.

 

First Six Months of Fiscal 2008 Compared to First Six Months of Fiscal 2007

 

License fee revenues increased $19.6 million, or 50.6 percent, for the first six months of fiscal 2008 compared to the first six months of fiscal 2007. The growth in license fee revenues was primarily driven by increased license contracting and deferred license revenue recognition, including $1.6 million related to a contract renegotiation.  Deferred license revenue recognized increased in the first six months of fiscal 2008 compared to the first six months of fiscal 2007 due to a purchase accounting adjustment in connection with the Intentia acquisition. The purchase accounting adjustment reduced the Intentia deferred revenue balance and reduced the amount of deferred revenue recognized in the first half of fiscal 2007.  Also contributing to our increased revenue recognition, was an increase in the average conversion rate in the first six months of fiscal 2008 compared to the first six months of fiscal 2007. The total number of licensing transactions increased by 90 to 625 in the first six months of fiscal 2008.  The number of licensing transactions with new customers increased to 65 for the first six months of fiscal 2008 compared to 61 for the first six months of fiscal 2007.  Licensing transactions greater than $1.0 million increased to eight for the first six months of fiscal 2008 compared to seven transactions for the first six months of fiscal 2007. License fee revenue as a percentage of total revenues for the first six months of fiscal 2008 and 2007 was 14.4 percent and 11.2 percent, respectively. We expect license fee revenue growth to continue in future quarters.

 

22



 

Maintenance

 

Our maintenance revenues represent the ratable recognition of fees to enroll and renew licensed products in our maintenance program. This program entitles our customers to product enhancements, technical support services, and on-going compatibility with third-party operating systems, databases and hardware. These fees are typically charged annually and are based on the license fees initially paid by the customer. Maintenance revenues can fluctuate based on the timing of contracts, renewal rates, price increases and the number of new license contracts.

 

Second Quarter of Fiscal 2008 Compared to Second Quarter of Fiscal 2007

 

Maintenance revenue in the second quarter of fiscal 2008 increased by $13.7 million, or 19.4 percent, compared to the second quarter of fiscal 2007. These increases were primarily driven by annual price increases, one-time fees of $1.5 million for early settlement of certain customer maintenance contracts and new maintenance agreements.   Maintenance fees in the second quarter of fiscal 2008, as a percentage of total revenue, increased to 38.7 percent from 38.5 percent in the second quarter fiscal of 2007.

 

First Six Months of Fiscal 2008 Compared to First Six Months of Fiscal 2007

 

Maintenance revenue increased $22.7 million, or 16.1 percent, for the first six months of fiscal 2008 compared to the first six months of fiscal 2007. This increase was primarily driven by annual price increases, one-time fees of $1.5 million for early settlement of certain customer maintenance contracts and new maintenance agreements.  Maintenance revenue as a percentage of total revenues for the first six months of fiscal 2008 and 2007 was 40.2 percent and 40.6 percent, respectively.

 

Consulting

 

Consulting revenues consist of services related to software installations, software implementations, customized development and training services to customers who have licensed our products.  Consulting revenues also include revenues associated with our hardware business.

 

Second Quarter of Fiscal 2008 Compared to Second Quarter of Fiscal 2007

 

Consulting revenue during the second quarter of fiscal 2008 increased $9.4 million, or 10.3 percent, compared to the second quarter of fiscal 2007. This increase was primarily attributable to $4.7 million related to improved terms on new and existing customer contracts and $4.0 million related to higher onshore and offshore utilization.  In addition, third-party revenues increased by $2.2 million.  Partially offsetting these increases was a decrease in hardware revenues of $1.8 million.  Consulting revenues during the second quarters of fiscal 2008 and 2007, as a percentage of total revenue, were 46.2 percent and 49.6 percent, respectively.

 

First Six Months of Fiscal 2008 Compared to First Six Months of Fiscal 2007

 

Consulting revenue increased $17.4 million, or 10.4 percent, for the first six months of fiscal 2008 compared to the first six months of fiscal 2007. This increase was primarily attributable to $4.7 million related to improved terms on new and existing customer contracts and $8.0 million related to higher onshore and offshore utilization.  In addition, third-party revenues increased by $5.6 million.  Partially offsetting these increases was a decrease in hardware revenues of $1.8 million.  Consulting revenues as a percentage of total revenues for the first six months of fiscal 2008 and 2007 were 45.4 percent and 48.2 percent, respectively.

 

23



 

Cost of Revenues

 

 

 

Three Months Ended

 

Quarterly Change

 

 

 

November 30,

 

Fiscal 2008 vs. 2007

 

(in thousands)

 

2007

 

2006

 

Dollars

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Cost of license fees

 

$

6,616

 

$

5,850

 

$

766

 

13.1

%

Cost of maintenance

 

16,830

 

13,997

 

2,833

 

20.2

 

Cost of consulting

 

84,155

 

80,289

 

3,866

 

4.8

 

Total cost of revenues

 

$

107,601

 

$

100,136

 

$

7,465

 

7.5

%

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

License fees

 

$

26,374

 

$

16,191

 

$

10,183

 

62.9

%

Maintenance

 

67,875

 

56,972

 

10,903

 

19.1

 

Consulting

 

16,752

 

11,194

 

5,558

 

49.7

 

Total

 

$

111,001

 

$

84,357

 

$

26,644

 

31.6

%

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

License fees

 

79.9

%

73.5

%

 

 

 

 

Maintenance

 

80.1

 

80.3

 

 

 

 

 

Consulting

 

16.6

 

12.2

 

 

 

 

 

Total

 

50.8

%

45.7

%

 

 

 

 

 

 

 

Six Months Ended

 

Year-to-Date Change

 

 

 

November 30,

 

Fiscal 2008 vs. 2007

 

 

 

2007

 

2006

 

Dollars

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Cost of license fees

 

$

13,369

 

$

10,892

 

$

2,477

 

22.7

%

Cost of maintenance

 

32,490

 

28,685

 

3,805

 

13.3

 

Cost of consulting

 

155,381

 

150,023

 

5,358

 

3.6

 

Total cost of revenues

 

$

201,240

 

$

189,600

 

$

11,640

 

6.1

%

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

License fees

 

$

45,081

 

$

27,917

 

$

17,164

 

61.5

%

Maintenance

 

130,729

 

111,868

 

18,861

 

16.9

 

Consulting

 

28,960

 

16,945

 

12,015

 

70.9

 

Total

 

$

204,770

 

$

156,730

 

$

48,040

 

30.7

%

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

License fees

 

77.1

%

71.9

%

 

 

 

 

Maintenance

 

80.1

 

79.6

 

 

 

 

 

Consulting

 

15.7

 

10.1

 

 

 

 

 

Total

 

50.4

%

45.3

%