UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File No. 0-22187
RENAISSANCE LEARNING,
INC.
(Exact name of Registrant as
specified in its charter)
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Wisconsin
(State or other jurisdiction
of
incorporation or organization)
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39-1559474
(I.R.S. Employer
Identification No.)
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2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
(Address of principal
executive offices)
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54495-8036
(Zip Code)
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Registrants telephone number, including area code:
(715) 424-3636
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common Stock, $.01 par value
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The NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check One):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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(Do not check if a smaller
reporting company)
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Smaller reporting
company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $116,195,000
as of June 29, 2007. As of February 20, 2008, there
were 29,049,791 of the Registrants shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III is incorporated by reference from the Proxy
Statement for the Registrants Annual Meeting of
Shareholders to be held on April 16, 2008.
PART I
Overview
Renaissance Learning, Inc. is a leading provider of
computer-based assessment technology for pre-kindergarten
through senior high (pre-K-12) schools and
districts. Our tools provide daily formative assessment and
periodic progress-monitoring technology to enhance core
curriculum, support differentiated instruction and personalize
practice in reading, writing, and math. Renaissance Learning
products help educators make the practice component of their
existing curriculum more effective by providing tools to
personalize practice and easily manage the daily activities for
students of all levels.
Our products, which support and enhance all curriculum and
instructional approaches, are backed by research studies that
support the demonstrated effectiveness of our products. Our
products and services are primarily focused on three key
pre-K-12 curriculum areas: reading, writing and math.
Accelerated Reader*, STAR Reading
,
STAR Early Literacy
and
Read Now Power Up!
comprise our reading products.
Our math products include
Accelerated Math
,
STAR Math
and
Math Facts in a Flash. AlphaSmart
laptops and
related software are our primary writing and keyboarding
products. We also address language acquisition for English
language learners with our
English in a Flash
software.
Our
2Know!
response system is a versatile classroom tool
which encourages classroom participation and provides
instantaneous feedback to instructors in any educational
setting. Our products also include an optical-mark card scanner,
which is primarily used with
Accelerated Math,
to
automate scoring and recordkeeping tasks. Additionally, our
product offerings include supplemental resources for educators
and classroom use such as handbooks, workbooks, learning cards
and motivational items.
Our flagship product,
Accelerated Reader
, is software
that provides information for motivating and monitoring
increased literature-based reading practice. We believe that
Accelerated Reader
and our other products have achieved
their significant market positions as a result of demonstrated
effectiveness in assisting educators accelerate learning and
improve essential skills by facilitating increased student
practice, increasing the quality, quantity, and timeliness of
performance data available to educators, helping educators
motivate students and providing student access to low cost
computing solutions. Our products help educators manage student
practice of curriculum, provide targeted instruction, keep
students engaged and measure student progress in order to
accelerate student learning.
Our educational software products are available on two separate
platforms: our web-based
Renaissance Place
software
platform and our traditional desktop versions that run on local
area networks of individual schools. The
Renaissance Place
platform meets the needs of district-wide installations such
as: scalability, remote access, centralized database and server
for multiple campus use, sophisticated statistical analysis,
ease of administration and support, and integration with student
data from other district systems.
Renaissance Place
products are sold primarily on a subscription basis
typically for terms of one year. Our popular
Accelerated
Reader Enterprise
and
Accelerated Math Enterprise
packages are turn-key solutions consisting of the
Renaissance Place
platform with enhanced features,
unlimited access to all of our reading quizzes and math content,
remote software hosting, professional development and technical
consulting services. Enterprise versions of
Accelerated
Reader
and
Accelerated Math
are sold on a
subscription basis.
Our desktop products are relatively simple to set up and
maintain for an individual school, are designed to require only
modest technology resources and are competitively
priced at or below the discretionary spending level
of most school principals. Our traditional desktop products are
typically sold as school-wide perpetual
*
AR, AccelScan, Accelerated Math, Accelerated Reader,
Accelerated Vocabulary, AlphaSmart, Dana, English in a Flash,
MathFacts in a Flash, Neo, Neo 2, Read Now, Renaissance,
Renaissance Learning, Renaissance Place, STAR Early Literacy,
STAR Reading, STAR Math and 2Know! are trademarks of Renaissance
Learning, Inc. registered
®
,
common law or pending registration in the United States and
other countries. Other trademarks are the property of their
respective owners.
Power Up! and Steck-Vaughn are trademarks of Houghton Mifflin
Harcourt Supplemental Publishers, Inc.
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software licenses with optional annual support plans, student
expansions, and add-on reading quizzes and math content
libraries.
We offer a full line of professional service and support
solutions that integrate with, complement, and enhance the
effectiveness of, our products. Sold separately or bundled with
our products to provide a complete solution, our service
offerings include professional development and product training
seminars and conferences, report and data analysis, program
evaluation, guided implementation, distance training, software
support, software installation, database conversion and
integration services, and application hosting. Further, we
conduct research on best practices, perform field validation of
techniques, publish internally generated as well as third-party
research, and gather information to guide the development of new
and improved products.
Renaissance Learning, Inc. was founded in 1986 and is
incorporated under the laws of the State of Wisconsin. Our
common stock trades on The
NASDAQ Global Select
Market
®
under the symbol RLRN. Our principal executive
offices are located at 2911 Peach Street,
P.O. Box 8036, Wisconsin Rapids, Wisconsin
54495-8036
(telephone:
(715) 424-3636).
You may obtain, free of charge, copies of this Annual Report on
Form 10-K
as well as our Quarterly Reports on
Form 10-Q
and our Current Reports on
Form 8-K
(and amendments to those reports) filed with, or furnished to,
the Securities Exchange Commission (the SEC) as soon
as reasonably practicable after we have filed, or furnished,
such reports by accessing our website at
http://www.renlearn.com
,
clicking on About Us and scrolling down to the
SEC Filings link. You may read and copy any
materials filed by us with the SEC at the SECs Public
Reference Room located at 100 F Street, NE,
Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Information contained on our website is not part of this Annual
Report on
Form 10-K.
Software,
Laptop Computing Solutions and Other Educational
Products
Accelerated Reader
is software for motivating and
monitoring increased literature-based reading practice and for
providing educators with student progress information to support
instruction. A student selects a book at an appropriate reading
level from a list of books for which the school has an
Accelerated Reader
quiz, reads the book, and then takes a
multiple-choice quiz on a computer. For each book read,
Accelerated Reader
tracks the amount of reading practice
achieved by calculating points based on the length and
difficulty of the book and the students performance on the
quiz. The information generated from this process
titles read, percent of comprehension and amount of reading
completed creates a database of student reading
achievement from which reports are generated that help educators
monitor the amount and quality of reading practice for each
individual student and thereby effectively target their
instruction of comprehension, vocabulary and fluency. We
currently have computerized book quizzes for
Accelerated
Reader
on over 122,000 titles.
Accelerated Reader
supports recorded-voice versions of quizzes on literature
books for emergent readers, quizzes for assessing reading
instruction assignments from reading textbooks, and
Literacy
Skills
quizzes which allow educators to assess
students proficiency on specific skills found in state and
district language arts standards.
STAR Reading
is an easy to use, computer-adaptive
formative reading assessment system that determines a
students reading level, statistically correlated to
national norms, in ten minutes or less.
STAR Reading
adapts itself during testing by utilizing proprietary
branching logic that evaluates the pattern of the students
answers to determine the level of difficulty required for
subsequent questions. Tests can be administered several times a
year and the results provide educators with a database of
statistically accurate reading level information on their
students, grades 1-12, from which they can generate useful
diagnostic reports and adjust instructional strategies
accordingly.
STAR Early Literacy
computer adaptive assessment software
provides educators with a fast, accurate and easy solution to
assess the phonemic awareness, phonic and other readiness and
literacy skills of students in grades pre-K-3. The software
helps educators identify each students specific strengths
and diagnose specific weaknesses in skills covered by early
literacy curricula and standards.
STAR Early Literacy
allows for the assessment process to be quickly and easily
repeated several times throughout a school year at a lower cost
and on a timelier basis than conventional assessments.
Read Now Power Up!
is a comprehensive reading
intervention curriculum solution for grades 5-9 that combines
the instructional materials of
Steck-Vaughn
with the
technology of Renaissance Learning to help
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educators assist students identified as struggling readers.
Read Now Power Up!
employs a comprehensive instruction
model, multimedia instructional materials, a software
e-learning
package hosted on a dedicated interactive website and
professional development services to support educators with
implementation. These components work together to help educators
direct students to material appropriate to their reading
ability, provide the extensive practice crucial to improving
reading skills, and develop the range of skills necessary to
read successfully, from phonemic awareness through fluency and
comprehension.
Accelerated Math
software helps educators personalize
math instruction and manage the extensive curriculum practice
students need to develop math skills, master state standards and
to ensure math success for students of all abilities
average, gifted and remedial from grade one through
calculus, regardless of a districts chosen math
curriculum.
Accelerated Math
software generates
personalized assignments targeted to each individual
students level and scores them automatically using our
AccelScan
optical mark reader.
Accelerated Math
offers state standards-aligned libraries, textbook-aligned
libraries for popular math textbooks and extended response
libraries that integrate the application of multiple math
objectives.
AccelScan,
primarily used with
Accelerated Math
,
is our innovative, patented optical mark card reader. The reader
has intelligent mark recognition capability, which results in
more accurate recognition of student marks by distinguishing
many degrees of darkness from a variety of marking instruments
and ignoring lighter erasures.
AccelScan
automates
scoring of assignments and updating of student records,
providing educators with immediate information on student
progress without manual scoring.
STAR Math
is a computer-adaptive, formative math
assessment test and database that provides the same benefits as
STAR Reading. STAR Math
reports provide objective
information to help educators instantly place their students,
monitor progress, and match instruction to individual student
levels. Quick, accurate, and easy to administer,
STAR Math
provides math scores for grades 1-12 in approximately 15
minutes, provides comparisons to national norms, forecasts
results on major high-stakes tests, and can be administered
several times throughout the school year to track student
development of math proficiency.
MathFacts in a Flash
software helps educators motivate
students to master computational fluency. It gives students at
all skill levels valuable practice on their addition,
subtraction, multiplication, and division facts as well as on
mental math skills such as squares and fraction/decimal
conversion. Timed tests administered by the system accurately
measure students practice and mastery, while detailed
reports give educators timely, reliable feedback on the progress
of individual students or entire classrooms.
English in a Flash
software utilizes a research-based
approach to helping educators accelerate the language
acquisition for students who are English Language Learners
(ELLs) and English as a Second Language (ESL) students. This
approach is based on a systematic method of learning language
without reliance upon translation, grammatical instruction, or
multimedia distractions, which is significantly faster than
traditional methods of language acquisition.
AlphaSmart Laptops
are rugged, portable, easy-to-use, low
total-cost-of-ownership computing devices that can operate
independently or complement existing computers. Models offered
include the
Neo 2
,
Neo
and
Dana. AlphaSmart
laptops are particularly well suited to keyboarding skill
development and facilitating writing practice in a classroom
setting. In addition,
AlphaSmart
laptops run a variety of
curriculum-specific software focused on skills improvement and
real-time formative assessment in writing, language arts, math,
science, keyboarding, social studies, technology literacy and
special needs.
AlphaSmart
laptops also perform
word-processing, function as a calculator, are expandable and
feature advanced wireless capabilities, thereby increasing
student access to affordable portable computing. They can
operate up to 700 hours on a single set of batteries. The
Neo 2
contains the functionality of, and integrates with,
our
2Know!
response system. Concurrent with the March
2008 release of
Accelerated Reader, Renaissance Place
schools will have the ability to administer
Accelerated
Reader
quizzes using the
Neo 2
, which will
effectively leverage the functionality and benefits of these two
popular products in an educational setting.
2Know!
response system is an interactive system that
allows educators to easily encourage student classroom
participation and obtain instantaneous feedback that can be used
to quickly assess student comprehension and performance. The
system employs state-of-the-art radio frequency technology
allowing wireless communication
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between students handheld devices and
Renaissance
Learning
software. Educators can use the system and the
large amount of available assessment content for quizzes, tests,
surveys and exercises while encouraging increased classroom
participation and saving time through automatic real-time
scoring.
Educator Resource Products.
We also produce
videotapes, handbooks, lesson books, math learning cards,
workbooks and motivational items for use by educators in
conjunction with our software and training programs.
Professional
Services
We offer a full line of professional services to our customers.
Our services include support plans for our software solutions,
technical services, product training and multiple professional
development options.
Support Plans.
We offer extended service and support
plans that provide users of our products access to telephone
support. Support plans are packaged with software and also sold
separately and typically cover a period of 12 months.
Technical Services.
We provide our customers with a
variety of services to help with the implementation and support
of their
Renaissance
programs. These include system
setup, software installation, application hosting,
troubleshooting, technical training, data conversion, interface
programming and custom report writing.
Training and Professional Development Services.
Our
professional development sessions provide leadership development
opportunities, instruct educators in proven best practices to
enhance their curriculum and instruction, and inform educators
on how to most effectively use our products and the information
they generate. Our content has been organized into beginning,
advanced and special topics that can be delivered over time
allowing educators to integrate best practices into the
classroom and assimilate information as they need it. We offer
several delivery options to meet specific customer needs and
constraints including: (i) online self-study,
(ii) online webinars conducted by a
Renaissance
implementation specialist using the web and a telephone,
(iii) full-day
professional development seminars, (iv) consulting provided
on an
on-site
or
remote basis, (v) implementation coaching in which the
educator is paired with one of our specialists for
implementation support over an entire school year and
(vi) large training events like our regional symposiums and
national conference.
Our training and professional development services can be
accessed online through the
Renaissance Training Center
which is the gateway to all of our professional development
services. Customers can access online self-study content or
webinars as well as register for regional symposiums. The site
also tracks each persons courses, online certificates,
continuing education (CEU) credits and maintains a transcript of
completed professional development.
Product
Development
We believe that continued substantial investment in product
development is required to remain competitive and grow in the
educational marketplace. We invest continuously in the
development of new products and services, enhancement of
existing products and services, development of new content for
existing products, development of tools to increase the
efficiency of product development, and scientific research that:
generates concepts for new products and services, validates the
efficacy of our existing products and services and provides
useful feedback for improvement of new and existing products and
services. For the years ended December 31, 2007, 2006, and
2005, our development expenses were $18.5 million,
$17.3 million and $17.0 million, respectively
(excluding capitalized amounts of $0.2 million, $0.7 million and
$0.3 million, respectively).
Selling
and Marketing
We market our educational products and services to teachers,
school librarians, principals, entire schools, school district
personnel, and state departments of education as well as
internationally through our United Kingdom sales office and
distributors. Our sales and marketing strategy consists of
direct marketing to potential and existing customers and
relationship selling through a dual sales channel encompassing
both a telesales organization primarily designed for school
level sales and a field sales team focused on multiple schools
or district wide sales. We
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use a variety of lead-generating techniques, including trade
shows, advertisements in educational publications, direct mail,
websites and referrals.
We have resale arrangements with various book dealers and book
publishers that sell our software products to their customers.
These firms are particularly receptive to such alliances because
the use of our products in schools encourages increased
purchases of the books and other products that they sell. Some
of our hardware products are also distributed by various
third-party resellers. We offer only limited, short-term price
protection and stock balancing rights to our resellers.
Part of our distribution strategy is to develop cross-marketing
arrangements with third-party firms, which sell non-competing
products into the education market. We have formed strategic
alliances with book distributors, publishers, and other
organizations in the pre-K-12 market to develop additional new
product opportunities and to enhance the channels available to
sell and distribute our products. These alliances take several
forms. For example, we offer
Accelerated Reader
quizzes
and
Accelerated Math
software libraries aligned to
popular textbook series and other curriculum materials. Our
Read Now Power Up!
product is the result of a combined
development effort and cross-marketing arrangement with a major
textbook publisher. We also have other arrangements in which we
have aligned our products to work with
and/or
complement other educational materials.
We experience seasonal variations in customer orders primarily
due to the budget and school-year cycles of our customers. Total
quarterly orders received are generally highest in the third
quarter. Our service revenues tend to be higher in the second
and third quarters due to customer preferences as to when
services are delivered. Due to increased interest in our
subscription-based products and services, particularly
Accelerated Reader Enterprise
and
Accelerated Math
Enterprise
, the current trend is toward software order
levels being higher in the second and third quarters. Also, due
to
Accelerated Reader Enterprise
and
Accelerated Math
Enterprise
, which include access to all reading quizzes and
math libraries, we have recently experienced reduced orders for
reading quizzes and math libraries. This change in reading quiz
and math library ordering patterns has tended to reduce order
levels in the first and fourth quarters, thus further adding to
the seasonally high proportion of orders received in the second
and third quarter.
Production
A growing number of customers purchase our software on a hosted
basis and therefore access our products directly from our data
center servers through the internet. Our software products are
also distributed on CD-ROM. Bulk CD-ROMs are produced by
third-party contractors. We produce order-specific and smaller
batches of CD-ROMs at our distribution facility.
Accelerated
Reader
quizzes and
Accelerated Math
libraries can be
purchased and downloaded from our website and selected patches
and software updates are available for download on our website
as well.
Our
AlphaSmart
laptops, the
2Know!
response system
and our
AccelScan
scanners are produced to our
specifications by third-party contract manufacturers, some of
which are located outside of the United States. Other related
products, including videotapes, books, graphics, and
motivational items, are produced by third-party vendors.
Competition
The educational technology and professional development markets
in which we operate are very competitive and fragmented. We
compete with many other companies offering educational software
products, computing devices, interactive response systems,
professional development and technology consulting services to
schools. Education continues to emerge as a major global
industry and potential competitors, including large hardware
manufacturers, software developers, educational publishers, and
consulting firms, may enter or increase their focus on the
schools market, resulting in greater competition for us. In
addition, we compete against other more traditional methods of
education, training and testing, including pencil and paper
testing.
As we enter into new markets, existing competitors could
increase the barriers to entering these markets by driving
prices lower or making modifications to enhance their products.
Success in selling our established products
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and services may cause competitors to focus on us in their
marketing efforts thereby increasing direct competition. There
can be no assurance that we will continue to be able to market
our products and services successfully or compete effectively in
the educational marketplace.
Intellectual
Property
We regard certain of our technologies as proprietary and rely
primarily on a combination of patent, copyright, trademark, and
trade secret laws as well as employee non-disclosure agreements
to establish and protect our intellectual property rights. We
also employ serialization techniques to prevent unauthorized
installation of our software products and related content. There
can be no assurance that the steps taken by us to protect our
rights will adequately prevent and deter misappropriation. In
addition, while we do not believe that our products, trademarks
or other proprietary rights infringe upon the proprietary rights
of third parties, there can be no assurance that a third party
will not make a contrary assertion. The cost of responding to
such assertions can be material, regardless of whether an
assertion is validated. The software publishing industry has
traditionally experienced widespread unauthorized reproduction
of products in violation of intellectual property rights. Such
activity is difficult to detect and legal proceedings to enforce
intellectual property rights are often burdensome and involve a
high degree of uncertainty and costs. There can be no assurance
that our software products will not experience unauthorized
reproduction, which would have a material adverse effect on our
business, financial condition and results of operations.
Employees
As of February 1, 2008, we had 991 full-time and
part-time employees. We believe our relations with employees are
good. None of our employees is represented by a union or subject
to collective bargaining agreements.
Backlog
As of December 31, 2007 and 2006, we had backlogs that
aggregated approximately $39.6 million and
$26.2 million, respectively. These backlogs include
deferred revenue related to software subscriptions, software
support agreements, technology consulting and professional
development of $38.4 million and $24.6 million at
December 31, 2007 and 2006, respectively. Substantially all
of the 2007 backlog is expected to be realized during 2008.
Forward-Looking
Statements
In accordance with the Private Securities Litigation Reform Act
of 1995, we can obtain a safe-harbor for
forward-looking statements by identifying those statements and
by accompanying those statements with cautionary statements
which identify factors that could cause actual results to differ
materially from those in the forward-looking statements.
Accordingly, the following information contains or may contain
forward-looking statements: (1) information included or
incorporated by reference in this Annual Report on
Form 10-K,
including, without limitation, statements made under
Item 1-Business
and
Item 7-Managements
Discussion and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements with
respect to growth initiatives, growth prospects, projected
sales, revenues, earnings and costs, and product development
schedules and plans, and managements expectations
regarding orders and financial results for future periods
(2) information included or incorporated by reference in
our future filings with the SEC including, without limitation,
statements with respect to growth initiatives, growth prospects,
projected sales, revenues, earnings and costs, and product
development schedules and plans, and managements
expectations regarding orders and financial results for future
periods and (3) information contained in written material,
releases and oral statements issued by us, or on our behalf,
including, without limitation, statements with respect to growth
initiatives, growth prospects, projected sales, revenues,
earnings and costs, and product development schedules and plans,
and managements expectations regarding orders and
financial results for future periods. Our actual results may
differ materially from those contained in the forward-looking
statements identified above. Factors which may cause such a
difference to occur include, but are not limited to, the factors
listed in
Item 1A-Risk
Factors.
7
Reliance on Single Product Line.
Our
Accelerated
Reader
software and supplemental
Accelerated Reader
quizzes accounted for approximately 38%, 37% and 37% of our
net sales in 2007, 2006 and 2005, respectively. An overall
decline in sales of
Accelerated Reader
and supplemental
quizzes would have a material adverse effect on our business,
financial condition and results of operations.
Geographic Concentration of Sales.
A substantial
portion of our sales is concentrated in several states,
including California, Texas, Florida, North Carolina and
Georgia, which accounted for approximately 15%, 14%, 6%, 4% and
4%, respectively, of our net sales in 2007. If large numbers of
schools or a district or districts controlling a large number of
schools in such states were to discontinue purchasing our
products and services, our business, financial condition, and
results of operations would be materially adversely affected.
Dependence on Educational Institutions and Government
Funding.
Substantially all of our revenue is derived
from sales to educational institutions, individual educators,
and their other suppliers. There can be no assurance that
educational institutions
and/or
individual educators will continue to invest in technology-based
products and professional development for reading and other
curricula or continue to respond favorably to our marketing. Our
inability to increase the number of products sold or number of
schools served would adversely affect our business, financial
condition and results of operations. Because of our dependence
on educational institutions, the funding of which is largely
dependent on government support, a substantial decrease in
government budgets or funding for educational software or
technology would have a material adverse effect on our business,
financial condition and results of operations. Economic slow
downs that negatively affect school funding can adversely impact
the sale of our products and services to schools. In addition,
certain aspects of government sponsored education initiatives
may not endorse, or be complementary to, the principles and
methodologies underlying and associated with our products and
services, which could adversely affect our business, financial
condition and results of operations.
Dependence on Continued Product Development.
The
educational technology and services markets in which we compete
are characterized by evolving industry standards, frequent
product introductions and sudden technological change. Our
future success depends, to a significant extent, on a number of
factors, including our ability to enhance our existing products,
develop and successfully introduce new products in a timely
fashion, and respond quickly and cost effectively to
technological change, including: shifts in operating systems,
hardware platforms, programming languages, alternative delivery
systems, the internet and other uncertainties. There can be no
assurance that new products will be as well received as our
established products, particularly since they may require
technology
and/or
resources not generally available in all schools. We attempt to
maintain high standards for the demonstrated academic
effectiveness of our products. Our adherence to these standards
could delay or inhibit the introduction of new products.
Moreover, there can be no assurance that our products will not
be rendered obsolete or that we will have sufficient resources
to make the necessary investments or be able to develop and
market the products required to maintain our competitive
position.
Acquisitions.
In order to strengthen our business,
we continually evaluate strategic opportunities, including
acquisitions. Acquisitions involve a number of difficulties and
risks, including, among others: the failure to integrate
personnel, technology, research and development, marketing and
sales operations of the acquired company; the diversion of
management time and resources and the resulting disruption to
our ongoing business; the potential loss of the acquired
companys customers, as well as our own; and unanticipated
costs and liabilities. Any integration process will require
significant time and resources, and we may not be able to manage
the process successfully. If customers of the acquired company,
or our customers, are uncertain about our ability to operate on
a combined basis with the acquired company, they could delay or
cancel orders for products and services. Moreover, we may not
successfully evaluate or utilize the acquired technology or
accurately forecast the financial impact of an acquisition
transaction. If we fail to integrate an acquired company or
business successfully, our business, financial condition, and
results of operations could be adversely affected, including the
potential need to record a non-cash charge for the impairment of
goodwill and other intangibles.
Reliance on statistical studies to demonstrate effectiveness
of our products and services.
We rely on statistical
studies to demonstrate that our products and related services
improve student achievement. We believe that these studies
accurately reflect the performance of our products. These
studies, however, involve the following risks: (i) the
sample sizes used in our studies may yield results that are not
representative of the general population of
8
students who use our products; (ii) the methods used to
gather the information upon which these studies are based depend
on cooperation from students and other participants, and
inaccurate or incomplete responses could distort results;
(iii) schools studying the effectiveness of our products
may apply different methodologies and data collection
techniques, making results difficult to aggregate and compare;
(iv) we facilitate the collection and analysis of data for
some of these studies; and (v) we hire researchers to
aggregate and present the results of some of these studies and,
in some cases, to conduct the studies. There is growing demand
from the No Child Left Behind Act and other sources for research
and studies to demonstrate the effectiveness of educational
programs and products. Our selling and marketing efforts, as
well as our reputation, could be adversely impacted if the
public, including our existing and potential customers, is not
convinced that the product effectiveness is proven by the
studies.
Limited Protection of Intellectual Property and Proprietary
Rights.
We regard certain of our technologies as
proprietary and rely primarily on a combination of patent,
copyright, trademark and trade secret laws and employee
non-disclosure agreements to establish and protect our
intellectual property rights. We also employ serialization
techniques to prevent unauthorized installation of our software
products and related content. There can be no assurance that the
steps taken by us to protect our rights will be adequate to
prevent or deter misappropriation. In addition, while we do not
believe that our products, trademarks or other proprietary
rights infringe upon the proprietary rights of third parties,
there can be no assurance that a third party will not make a
contrary assertion. The cost of responding to such assertions
can be material, regardless of whether an assertion is
validated. The software publishing industry has traditionally
experienced widespread unauthorized reproduction of products in
violation of intellectual property rights. Such activity is
difficult to detect and legal proceedings to enforce
intellectual property rights are often burdensome and involve a
high degree of uncertainty and costs. There can be no assurance
that our software products will not experience unauthorized
reproduction, which would have a material adverse effect on our
business, financial condition and results of operations.
Selling and Marketing Strategy and Product
Acceptance.
Our selling and marketing strategy includes
the introduction of new products and services directed at new
markets as well as the development of new sales and distribution
channels. There can be no assurance that we will be successful
in offering new products and services, entering new markets and
developing new sales and distribution channels or that any such
products or services, if introduced, will achieve acceptance in
the marketplace.
Risks of International Expansion.
A component of our
growth strategy is the expansion of our operations in
international markets. Doing business in international markets
is subject to a number of risks, including, among others:
acceptance by foreign educational systems of our approach to
educational products; lack of existing customer base; unexpected
changes in regulatory requirements; potentially adverse tax
consequences; tariffs and other trade barriers; difficulties in
staffing and managing foreign operations; changing economic
conditions; exposure to different legal standards (particularly
with respect to intellectual property); burdens of complying
with a variety of foreign laws; and fluctuations in currency
exchange rates. If any of these risks were to materialize, our
business, financial condition, and results of operations could
be adversely affected.
Educational Philosophies.
Our products support all
teaching methods and curricula by focusing on continuous
feedback, increased student practice of essential skills, and
demonstrated product effectiveness through measurable results.
Certain educators, academics, politicians, and theorists,
however, advocate philosophies of instruction that can lead them
to oppose certain educational products or services. These
philosophies can include, but are not limited to, opposition to
standardized testing or over-reliance on the same; opposition to
computers or motivational techniques; exclusive focus on
particular types of direct instruction; and highly technical
definitions of acceptable research. Some of these philosophical
stances have the capacity to negatively influence the market for
our products and services, and such influence could have a
material adverse impact on demand for our products and services
and thus on our business, financial condition and results of
operations.
Highly Competitive Industry.
The educational
technology and professional development markets in which we
operate are very competitive and fragmented. We compete with
other companies offering educational software products,
computing devices, interactive response systems, professional
development, and technology consulting services to schools.
Education continues to emerge as a major global industry and
potential competitors, including large hardware manufacturers,
software developers, educational publishers, and consulting
firms, may enter or
9
increase their focus on the schools market, resulting in greater
competition for us. In addition, we compete against more
traditional methods of education, training and testing,
including pencil and paper testing.
As we enter into new markets, existing competitors could
increase the barriers to entering this market by driving prices
lower or making modifications to enhance their products. Success
in selling our established products and services may cause
competitors to focus on us in their marketing efforts thereby
increasing direct competition. There can be no assurance that we
will continue to be able to market our products successfully or
compete effectively in the educational marketplace.
Dependence on Key Personnel.
Our success depends to
a significant extent upon the continued active participation of
certain key members of management. We do not have employment
agreements with these individuals and have no current intention
of entering into any such employment agreements. The loss of the
services of key personnel could have a material adverse effect
on our business, financial condition and results of operations.
Ability to Attract and Retain Qualified
Personnel.
Our future success will depend, in part,
upon our continuing ability to retain the employees, including
senior management personnel, who have assisted in the
development and marketing of our products and to attract and
retain qualified additional employees trained in computer
technology, sales, marketing, finance, and other disciplines to
enhance our product offerings and broaden our operations. There
can be no assurance that we will continue to be able to attract
and retain such personnel. The failure to attract or retain the
necessary personnel would have a material adverse effect on our
business, financial condition and results of operations.
Fluctuations in Quarterly Performance.
We generally
deliver products as orders are received. The quantity of product
orders in any quarter can be affected by a variety of factors,
including:
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|
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delays in the development
and/or
shipment of new products;
|
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|
the closing of large contract sales, such as those to school
districts;
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the shipment of new products for which orders have been building
for a period of time; and
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seasonal variations due to, among other things, the budget and
school year cycles of our school customers and annual ordering
patterns related to subscription-based products and services,
particularly
Accelerated Reader Enterprise
and
Accelerated Math Enterprise
.
|
In addition, our quarterly results can also be affected by:
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|
|
charges related to acquisitions and divestitures, including
related expenses, the write-off of in-process research and
development, the amortization of intangible assets, asset
impairments and similar items;
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charges related to obsolete or impaired tangible assets,
intangible assets, goodwill, capitalized software development
costs and similar items;
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supply-chain issues such as manufacturing problems, delivery
delays, component shortages, strikes or quality issues;
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expenses related to product development and marketing
initiatives;
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seasonal variability of product support costs; and
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seasonal variations due to delays in quiz order patterns as
customers consider upgrading to
Accelerated Reader
Enterprise
, our turn-key solution, which includes all quiz
content.
|
Our overall gross margins also fluctuate based upon the mix of
software, hardware and service sales. We realize higher margins
on our software product sales than our hardware and service
sales. Some of our revenues tend to be seasonal due to annual
school budget cycles, customer preferences as to when products
and services are delivered and the timing of our larger
professional development events, resulting in seasonal
variations in margins.
Share Price Volatility.
Numerous factors, many of
which are beyond our control, may cause the market price of our
common stock to fluctuate significantly. These factors include
announcements of technological innovations
10
and/or
new
products by us and our competitors, earnings releases and
earnings warnings by us and our competitors, expectations
regarding government funding levels for education, market
conditions in the industry, announcements by us of significant
acquisitions
and/or
divestitures, and the general state of the securities markets.
The market price of our common stock may decline significantly
if we fail to meet our forecasts or the published earnings
estimates of analysts and others. In addition, quarterly
fluctuations of our results of operations as described above may
cause a significant variation in the market price of our common
stock.
War, Acts of War and Terrorism.
Delays and
reductions in purchases of our products and services may occur
as a result of war, acts of war and terrorism, and the related
impacts, including a reduction of funds available to our
customers to purchase our products and services and disruptions
in our ability to develop, produce and distribute products and
services to our customers. These events would have a material
adverse effect on our business, financial condition and results
of operations.
Concentration of Share Ownership; Control by Principal
Shareholders/Management.
As of February 20, 2008,
our principal shareholders, Judith Paul and Terrance Paul, our
chairman and chief executive officer, respectively, and
co-founders of the company, beneficially owned approximately 67%
of our outstanding common stock. As a result, these principal
shareholders have the ability to control and direct our business
and affairs.
Shares Eligible for Future Sale.
Sales of a
substantial number of shares of our common stock in the public
market could adversely affect the market price of the common
stock. As of February 20, 2008, approximately
19.5 million shares of our common stock were held by
affiliates and may be publicly sold only if
registered under the Securities Act of 1933 or sold in
accordance with an applicable exemption from registration, such
as Rule 144. In addition, we have filed registration
statements under the Securities Act of 1933 to register an
aggregate of 6,000,000 shares of common stock reserved for
issuance under our 1997 Stock Incentive Plan and an aggregate of
500,000 shares of common stock reserved for issuance under
our Employee Stock Purchase Plan (ESPP), which will, when issued
in accordance with such plans, be eligible for immediate sale in
the public market, subject to the Rule 144 resale
limitations for affiliates. We did not offer the ESPP to our
employees in 2005, 2006 or 2007 and have no intention of
offering it in 2008.
Cash Dividends.
We declared quarterly cash dividends
of: $0.05 per share in the first and second quarter of 2007 and
$0.07 in the third and fourth quarter of 2007. We also declared
a special dividend of $0.75 per share during 2007. Our dividend
policy may be affected by, among other things, our views on
potential future capital requirements, including those related
to research and development, creation and expansion of sales
distribution channels, acquisitions, legal risks and stock
repurchases. Our dividend policy may change from time to time,
and we cannot provide assurance that we will continue to declare
dividends at all or in any particular amounts. A change in our
dividend policy could have a negative effect on the market price
of our common stock.
Possible Antitakeover Effects of Certain Articles and By-Laws
Provisions and Provisions of Wisconsin Law.
Our Amended
and Restated Articles of Incorporation and Amended and Restated
By-Laws, along with Wisconsin statutory law, contain provisions
that could discourage potential acquisition proposals and might
delay or prevent a change in control of the company. Such
provisions could result in our being less attractive to a
potential acquirer and could result in the shareholders
receiving less for their common stock than otherwise might be
available in the event of a takeover attempt.
Divestitures.
From time to time, we may, for any
number of reasons, determine it is in our best interests and in
the interests of our shareholders to dispose of a business or
product line. Divestitures involve a number of difficulties and
risks, including, among others, the diversion of management time
and resources and the resulting disruption to our ongoing
business, and unanticipated costs and liabilities. If we are
unable to manage the divestiture process successfully or if we
are incorrect in our assumptions regarding the costs associated
with a disposition, our business, financial condition and
results of operations could be adversely affected.
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Item 1B.
|
Unresolved
Staff Comments
|
None.
11
Our corporate headquarters is located in Wisconsin Rapids,
Wisconsin, in a 125,000 square foot facility owned by us
which was constructed in 1996. We lease various other office and
warehouse space. We believe our facilities are adequate to
support our operations for the foreseeable future.
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Item 3.
|
Legal
Proceedings
|
We are subject to various claims and proceedings covering a wide
range of matters that arise in the ordinary course of our
business activities. We believe that any liability that may
ultimately arise from the resolution of these matters will not
have a material adverse effect on our financial position,
results of operations or shareholders equity.
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Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We did not submit any matters to a vote of our security holders
during the fourth quarter of the fiscal year ended
December 31, 2007.
12
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
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Name and Age of Officer
|
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Office
|
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Judith Ames Paul
Age 61
|
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Ms. Paul is the co-founder of the company and has been
chairman of the board of directors since February 2006. From
1986 until July 2001, and again from August 2002 until July
2003, Ms. Paul served as chairman of the board, and from
July 2001 until August 2002, and again from July 2003 until
February 2006, Ms. Paul served as co-chairman with
Mr. Paul. Ms. Paul has been a director since 1986.
Ms. Paul acts as our spokesperson and is a leading teacher
advocate. Ms. Paul holds a bachelors degree in
elementary education from the University of Illinois. Judith
Paul is Terrance Pauls wife.
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Terrance D. Paul
Age 61
|
|
Mr. Paul is the co-founder of the company and has been our
chief executive officer since February 2006. From February 2006
to April 2006, Mr. Paul also served as our president. From
August 2002 until July 2003, Mr. Paul served as our chief
executive officer. From July 1996 until July 2001, Mr. Paul
served as vice chairman of the board and from July 2001 until
August 2002, and again from July 2003 until February 2006,
Mr. Paul served as co-chairman with Ms. Paul.
Mr. Paul has been a director since 1986. Mr. Paul
holds a law degree from the University of Illinois and an MBA
from Bradley University. Terrance Paul is Judith Pauls
husband.
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Steven A. Schmidt
Age 53
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Mr. Schmidt has been our president and chief operating
officer since April 2006. From November 2005 until January 2006,
he served as our senior vice president, administration and
operations. From July 2003 to November 2005, Mr. Schmidt
served as our executive vice president. From August 1999 until
November 2004, he served as our chief financial officer and
secretary, and from August 1999 until July 2003, he also served
as a vice president. Mr. Schmidt holds a bachelors
degree in accountancy from the University of
Wisconsin-La Crosse, and is a certified public accountant.
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Mary T. Minch
Age 41
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Ms. Minch has been our chief financial officer and
secretary since November 2004 and has served as senior vice
president, finance since January 2007. From December 2003 to
January 2007, Ms. Minch served as our vice president,
finance. From February 2003 to December 2003, Ms. Minch
held the position of North American division controller for
Stora Enso North American Corp., a forest product company whose
parent company acquired Consolidated Papers, Inc. From October
2000 to February 2003, she served as controller-magazine papers
at Stora Enso North American Corp. Ms. Minch holds
bachelors degrees in managerial accounting and finance
from the University of Wisconsin-Stevens Point and a
masters degree from the University of Wisconsin-Oshkosh,
and is a certified public accountant.
|
The term of office of each executive officer is from one annual
meeting of the board of directors until the next annual meeting
of the board of directors or until a successor has been duly
elected and qualified or until his or her death or until he or
she resigns or has been removed from office.
There are no arrangements or understandings between any of our
executive officers and any other person (not an officer or
director of the company acting as such) pursuant to which any of
the executive officers were selected as an officer of the
company.
13
PART II
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Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock is traded under the symbol RLRN on
The NASDAQ Global Select Market. Information regarding the
market prices of our common stock may be found in Note 16
of our Notes to Consolidated Financial Statements.
Holders
As of February 20, 2008, there were 609 record holders of
our common stock.
Historical
Dividends
We declared quarterly cash dividends of $0.05 per share in each
of the four quarters of 2006. We declared quarterly cash
dividends of: $0.05 per share in the first and second quarter of
2007 and $0.07 in the third and fourth quarter of 2007. We also
declared a special dividend of $0.75 per share during 2007. We
intend to continue to pay quarterly cash dividends, subject to
capital availability and a determination that cash dividends
continue to be in the best interests of the company and our
shareholders.
14
Performance
Graph
The following graph compares the total shareholder return on our
common stock for the five year period from December 31,
2002 through December 31, 2007 with that of the NASDAQ
Composite Index and a peer group index constructed by us. The
companies included in our peer group index are Blackboard Inc.
(BBBB), Learning Tree International, Inc. (LTRE), The Princeton
Review, Inc. (REVU), School Specialty, Inc. (SCHS), Skillsoft
Public Company Limited (SKIL) and Plato Learning, Inc. (TUTR).
The total return calculations set forth below assume $100
invested on December 31, 2002 with reinvestment of
dividends into additional shares of the same class of securities
at the frequency with which dividends were paid on such
securities through December 31, 2007. The stock performance
graph shown in the graph below should not be considered
indicative of potential future stock price performance.
COMPARISON
OF A 5 YEAR CUMULATIVE TOTAL RETURN*
Among Renaissance Learning,
Inc., The NASDAQ Composite Index
And A Peer Group
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Cumulative Return
|
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12/02
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12/03
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12/04
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12/05
|
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12/06
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|
12/07
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Renaissance Learning, Inc.
|
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100.00
|
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|
127.35
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|
|
|
106.79
|
|
|
|
110.03
|
|
|
|
104.58
|
|
|
|
89.14
|
|
|
|
|
|
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NASDAQ Composite Index
|
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100.00
|
|
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149.89
|
|
|
|
165.01
|
|
|
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169.26
|
|
|
|
188.17
|
|
|
|
207.11
|
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Peer Group
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100.00
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186.17
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149.69
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166.92
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167.36
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220.78
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* $100 invested on 12/31/02 in
stock or index-including reinvestment of dividends.
Fiscal year ending December 31.
15
Recent
Sales of Unregistered Securities
There were no sales of unregistered securities during the year
ended December 31, 2007.
Changes
in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
On April 17, 2002, our Board of Directors authorized a
repurchase program which provides for the repurchase of up to
5,000,000 shares of our common stock. On February 9,
2005, our Board of Directors authorized the repurchase of an
additional 3,000,000 shares under the stock repurchase
program. On February 6, 2008 our Board of Directors
authorized the purchase of an additional 1.0 million shares
under the stock repurchase program.
No time limit was placed on the duration of the repurchase
program, nor is there any dollar limit on the program.
Repurchased shares will become treasury shares and may be used
for stock-based employee benefit plans and for other general
corporate purposes.
The following table shows information relating to the repurchase
of shares of our common stock during the three months ended
December 31, 2007:
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Total Number of
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Shares Purchased as
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Maximum Number of
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Part of Publicly
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Shares that May Yet Be
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Total Number of
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Average Price
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Announced Plans or
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Purchased Under the
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Period
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Shares Purchased
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Paid per Share
|
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Programs
|
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Plans or Programs
|
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October 1-31
|
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93
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$
|
13.10
|
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93
|
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246,767
|
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November 1-30
|
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0
|
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0
|
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0
|
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246,767
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December 1-31
|
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36
|
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15.48
|
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36
|
|
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246,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
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129
|
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$
|
13.76
|
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|
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129
|
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16
|
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Item 6.
|
Selected
Financial Data
|
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
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Year Ended December 31,
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2007
|
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2006
|
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2005
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2004
|
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2003
|
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Consolidated Income Statement Data
|
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Net sales:
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Products
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$
|
84,628
|
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$
|
90,750
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$
|
94,296
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|
|
$
|
91,482
|
|
|
$
|
106,080
|
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Services
|
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23,304
|
|
|
|
20,778
|
|
|
|
21,987
|
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|
20,242
|
|
|
|
21,552
|
|
|
|
|
|
|
|
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Total net sales
|
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107,932
|
|
|
|
111,528
|
|
|
|
116,283
|
|
|
|
111,724
|
|
|
|
127,632
|
|
|
|
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Cost of sales:
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Products
|
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15,673
|
|
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16,455
|
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|
12,917
|
|
|
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6,167
|
|
|
|
10,656
|
|
Services
|
|
|
11,830
|
|
|
|
10,011
|
|
|
|
8,669
|
|
|
|
9,532
|
|
|
|
9,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
27,503
|
|
|
|
26,466
|
|
|
|
21,586
|
|
|
|
15,699
|
|
|
|
20,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
80,429
|
|
|
|
85,062
|
|
|
|
94,697
|
|
|
|
96,025
|
|
|
|
107,348
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
18,506
|
|
|
|
17,291
|
|
|
|
17,046
|
|
|
|
14,536
|
|
|
|
14,881
|
|
Selling and marketing
|
|
|
36,042
|
|
|
|
33,639
|
|
|
|
30,778
|
|
|
|
30,551
|
|
|
|
27,997
|
|
General and administrative
|
|
|
14,951
|
|
|
|
16,330
|
|
|
|
12,989
|
|
|
|
12,005
|
|
|
|
12,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
69,499
|
|
|
|
67,260
|
|
|
|
60,813
|
|
|
|
57,092
|
|
|
|
55,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,930
|
|
|
|
17,802
|
|
|
|
33,884
|
|
|
|
38,933
|
|
|
|
52,124
|
|
Other, net
|
|
|
1,178
|
|
|
|
1,234
|
|
|
|
3,494
|
|
|
|
1,640
|
|
|
|
2,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income continuing operations before income taxes
|
|
|
12,108
|
|
|
|
19,036
|
|
|
|
37,378
|
|
|
|
40,573
|
|
|
|
54,391
|
|
Income taxes continuing operations
|
|
|
4,541
|
|
|
|
7,043
|
|
|
|
13,211
|
|
|
|
15,012
|
|
|
|
19,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income continuing operations
|
|
|
7,567
|
|
|
|
11,993
|
|
|
|
24,167
|
|
|
|
25,561
|
|
|
|
34,985
|
|
Income (loss) discontinued operations
|
|
|
|
|
|
|
|
|
|
|
584
|
|
|
|
(2,859
|
)
|
|
|
(2,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,567
|
|
|
$
|
11,993
|
|
|
$
|
24,751
|
|
|
$
|
22,702
|
|
|
$
|
32,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.26
|
|
|
|
0.41
|
|
|
|
0.78
|
|
|
|
0.82
|
|
|
|
1.12
|
|
Discontinued operations
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.02
|
|
|
|
(0.09
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.26
|
|
|
$
|
0.41
|
|
|
$
|
0.80
|
|
|
$
|
0.73
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.26
|
|
|
|
0.41
|
|
|
|
0.78
|
|
|
|
0.82
|
|
|
|
1.12
|
|
Discontinued operations
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.02
|
|
|
|
(0.09
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.26
|
|
|
$
|
0.41
|
|
|
$
|
0.80
|
|
|
$
|
0.73
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.99
|
*
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
2.31
|
**
|
|
$
|
|
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
(6,543
|
)
|
|
$
|
15,282
|
|
|
$
|
21,539
|
|
|
$
|
41,815
|
|
|
$
|
103,240
|
|
Total assets
|
|
|
113,300
|
|
|
|
117,711
|
|
|
|
128,382
|
|
|
|
114,724
|
|
|
|
159,601
|
|
Shareholders equity
|
|
|
57,987
|
|
|
|
79,571
|
|
|
|
95,866
|
|
|
|
84,417
|
|
|
|
133,330
|
|
|
|
|
*
|
|
Includes a special dividend in 2007 of $0.75 per share.
|
|
**
|
|
Includes a special dividend in 2004 of $2.15 per share.
|
Generation21 Learning Systems, LLC (Generation21)
was divested during 2005 and, therefore, its results for all
periods presented in the consolidated financial statements are
reflected as discontinued operations.
17
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Renaissance Learning, Inc. is a leading provider of
computer-based assessment technology for pre-K-12 schools. Our
tools provide daily formative assessment and periodic
progress-monitoring technology to enhance core curriculum,
support differentiated instruction and personalize practice in
reading, writing and math. Renaissance Learning products help
educators make the practice component of their existing
curriculum more effective by providing tools to personalize
practice and easily manage the daily activities for students of
all levels.
Our sales are derived primarily from the sale of software
products, computerized hardware products and related services.
Revenues are recorded net of an allowance for estimated returns.
Allowances for bad debts are also recorded at the time of the
sale.
Product revenue is derived primarily from the sale of
educational software and hardware. Revenue from sales of
hardware is generally recognized when the product is shipped to
the customer. Revenue recognition from sales of our software
depends on whether the software is: (i) off-the-shelf or
customized and (ii) whether it is licensed on a perpetual
basis or as a subscription. We recognize revenue from
off-the-shelf perpetually licensed software sales upon delivery
to customers. Subscription-based software sales are recognized
as revenue on a straight-line basis over the subscription
period. Sales of software that require substantial modification
or customization are recognized as revenue using the
percentage-of-completion method of accounting. Revenues and
deferred revenues from software that require substantial
modification or customization are not significant in any of the
years presented.
Service revenue is primarily derived from: (i) product
support services, (ii) professional development and product
training seminars and conferences, (iii) application
hosting, (iv) technical services, (v) consulting and
(vi) other remote services. Product support services
included with sales of perpetual software licenses has a
duration of 12 months or less and the associated revenue is
recognized at the time the software is shipped with the related
costs of providing the telephone support accrued for at the same
time. Revenue from professional development and product training
seminars and conferences is recognized when the seminar or
conference is held. Revenue from other product support services
and application hosting is initially recorded as deferred
revenue and then recognized as revenue on a straight-line basis
over the term of the agreement, typically 12 months.
Revenue from technical services, consulting and other remote
services is recognized as the services are performed or on a
straight-line basis over the contractual period. Deferred
revenue includes: (i) amounts invoiced for products not yet
delivered and services not yet performed, (ii) advance
invoicing on contracts and (iii) that portion of product
support agreements and subscription-based product sales that has
not yet been recognized as revenue.
It is our practice to announce new products prior to when the
products are ready for shipment to allow customers sufficient
lead time for budgeting and curriculum purposes. This practice
can result in fluctuations in backlog for orders of new
products. These orders are generally filled within a relatively
short period of time after the product is ready for shipment.
Registrations for seminars and conferences are generally
received from customers in advance of the events, resulting in a
backlog for these services. Additionally, under district-wide
implementations, customers commit to a comprehensive solution
consisting of products and services in advance of delivery of
the products and services. The delivery of backlogged products
and services in certain periods can cause those periods to have
higher revenue and higher revenue growth rates than other
periods.
Cost of sales consists of expenses associated with sales of our
software and hardware products and the delivery of services.
These costs include: (i) personnel-related costs,
(ii) costs of purchased materials such as our
AlphaSmart
laptops, optical-mark card scanners, interactive response
systems, educational products, training materials, manuals and
motivational items, (iii) shipping and freight costs,
(iv) amortization of capitalized development costs and
(v) other overhead costs. We realize higher gross margins
on our software sales than on our hardware and service sales.
We expense all development costs associated with a software
product until technological feasibility is established, after
which time such costs are capitalized until the product is
available for general release to customers. Capitalized product
development costs are amortized into cost of sales, beginning
when the product is
18
available for general release, using the straight-line method
over the estimated economic life of the product, which is
generally estimated to be 24 months.
Acquisition
and Divestiture
On June 27, 2005, we acquired AlphaSmart, Inc., a provider
of affordable, laptop computing solutions for K-12 schools. The
results of AlphaSmarts operations are included in our
consolidated financial statements since that date. In February
2005, we consummated the sale of our Generation21 subsidiary, a
non-core part of our business. The results of Generation21, for
all periods presented in our consolidated financial statements,
are reflected as discontinued operations. Amounts referred to in
this Item 7 relate to continuing operations, except as
otherwise indicated.
Results
of Operations
Our results of operations can be affected by many factors
including the general economic environment, state and federal
budgetary decisions and the length and complexity of the sales
cycle for school districts. National trends, federal and state
legislation, Department of Education administrative policies and
the way the foregoing align with our products and services can
impact our business.
An important component of our software product strategy is a
transition to a subscription-based software sales model. We
believe that a business model based on subscription-based
software offers long-term advantages over traditional perpetual
licensing, including: (i) improved product utilization
leading to higher levels of customer satisfaction,
(ii) product adoption by more schools, (iii) more
lifetime revenue per customer and (iv) a more predictable
and reliable revenue stream.
This transition can significantly impact reported financial
results and customer ordering patterns. An increasing proportion
of customer orders attributable to our subscription-based
product and service offerings relative to customer orders of
non-subscription-based offerings can result in a significant
portion of a periods sales being initially deferred and
recognized as revenue in future periods over the subscription
term, generally 12 months. This can result in reported
revenue that significantly lags customer orders in a given
period. Transitioning to subscription-based software can also
adversely impact revenue as our customers that already own our
products under perpetual license agreements may delay purchases
of expansions, reading quizzes and math libraries while they are
contemplating a transition to subscription-based versions of our
products. Also, after customers transition to our
subscription-based enterprise products, they no longer order
reading quizzes and math libraries since this content is
included in their subscription. We believe that these factors
influenced our results of operations in both 2007 and to a
lesser extent in 2006.
Our
Renaissance Place
products are often sold at the
school district level. District level sales are more complex,
have a longer sales cycle, and are typically for a larger dollar
amount than sales made to individual schools. Thus, revenues
from district sales can be more uneven and are more difficult to
accurately predict. Consequently, our revenues and results of
operations can be significantly impacted by the timing of large
district orders.
Since our
Renaissance Place
product and service offerings
are typically sold on a subscription basis with a term of
12 months, a greater portion of our revenue is initially
deferred and recognized into income over the subscription
period. This can cause our revenue to show a greater decline
than it would have if these products had been sold as perpetual
licenses, for which the revenue is recognized immediately upon
shipment. Deferred revenue increased $13.7 million and
$5.7 million, over the years ended December 31, 2007
and 2006, respectively. The increase in deferred revenue during
2007 was driven primarily by sales of subscription-based
enterprise software packages.
We took a one-time charge of $0.5 million in the first
quarter of 2007 that related to a reorganization of our product
development resources and resulted in a reduction in staff and
assets related to the laptop line. Our net income and results of
operations was impacted in 2006 by a $1.9 million charge
that was comprised of separation expenses, primarily for former
executives. Items that impacted 2005 were: (i) the
acquisition of AlphaSmart, (ii) the
19
divestiture of Generation21, (iii) the sale of our Madison,
Wisconsin office building and (iv) recognition of the tax
benefit related to the settlement of certain state and federal
tax positions in 2005.
The following table sets forth certain consolidated income
statement data as a percentage of net sales, except that
individual components of cost of sales and gross profit are
shown as a percentage of their corresponding component of net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
78.4
|
%
|
|
|
81.4
|
%
|
|
|
81.1
|
%
|
Services
|
|
|
21.6
|
|
|
|
18.6
|
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
18.5
|
%
|
|
|
18.1
|
%
|
|
|
13.7
|
%
|
Services
|
|
|
50.8
|
|
|
|
48.2
|
|
|
|
39.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
25.5
|
|
|
|
23.7
|
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
81.5
|
|
|
|
81.9
|
|
|
|
86.3
|
|
Services
|
|
|
49.2
|
|
|
|
51.8
|
|
|
|
60.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
74.5
|
|
|
|
76.3
|
|
|
|
81.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
17.1
|
|
|
|
15.5
|
|
|
|
14.7
|
|
Selling and marketing
|
|
|
33.4
|
|
|
|
30.2
|
|
|
|
26.5
|
|
General and administrative
|
|
|
13.9
|
|
|
|
14.6
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10.1
|
|
|
|
16.0
|
|
|
|
29.1
|
|
Other, net
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income continuing operations before income taxes
|
|
|
11.2
|
|
|
|
17.1
|
|
|
|
32.2
|
|
Income taxes continuing operations
|
|
|
4.2
|
|
|
|
6.3
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income continuing operations
|
|
|
7.0
|
|
|
|
10.8
|
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income discontinued operations
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
7.0
|
%
|
|
|
10.8
|
%
|
|
|
21.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31, 2007 and 2006
Net Sales.
Our net sales decreased by
$3.6 million or 3.2%, to $107.9 million in 2007 from
$111.5 million in 2006. A significant portion of this
decline was related to our customers purchasing more
subscription-based products and services, particularly
Accelerated Reader
. Revenues from subscription-based
products are initially deferred and then recognized ratably over
the subscription period, generally one year, while the majority
of revenues from non-subscription-based sales are recognized
immediately upon delivery. During 2007, deferred revenue
increased by $13.7 million as compared to an increase of
$5.7 million in 2006. Customer orders for our products and
services increased by approximately $5.2 million or 4.3% in
2007 as compared to 2006.
Product revenue decreased by $6.1 million, or 6.7%, to
$84.6 million in 2007 from $90.7 million in 2006.
Product revenues decreased primarily due to the significant
increase in deferred revenue and to a lesser extent due to lower
laptop sales.
20
Service revenue increased by $2.5 million, or 12.2%, to
$23.3 million in 2007 compared to $20.8 million in
2006. Service revenues increased primarily due to order
improvements for technical services such as application hosting
and installations, and in professional development services,
both remote and onsite, partially offset by the impact of not
holding a national conference in 2007.
Cost of Sales.
The cost of sales of products
decreased by $0.8 million, or 4.7%, to $15.7 million
in 2007 from $16.5 million in 2006. As a percentage of
product sales, the cost of sales of products was 18.5% in 2007,
relatively unchanged from 18.1% in 2006.
The cost of sales of services increased by $1.8 million, or
18.2%, to $11.8 million in 2007 from $10.0 million in
2006. As a percentage of sales of services, the cost of sales of
services increased to 50.8% in 2007 from 48.2% in 2006 primarily
due to personnel and infrastructure additions that were required
for some of our remote and technical services, and to price
reductions in some of our
on-site
professional development service offerings.
Our overall gross profit margin percentage decreased to 74.5% in
2007 from 76.3% in 2006. This resulted from the lower service
margins and the higher proportion of total revenue attributable
to services in 2007.
Product Development.
Product development expense,
which excludes amounts capitalized, increased to
$18.5 million in 2007 from $17.3 million in 2006. As a
percentage of net sales, product development expenses increased
to 17.1% in 2007 from 15.5% in 2006. We capitalized product
development expenses of $0.2 million in 2007 compared to
$0.7 million in 2006. Product development expenses were
higher in 2007 primarily due to: (i) a $0.5 million
restructuring cost related to a partial reorganization of
product development resources for the laptop line in 2007,
(ii) the higher level of software development cost
capitalized in 2006 than in 2007 and (iii) a
$0.3 million increase in research and development costs
related to our United Kingdom products.
Selling and Marketing.
Selling and marketing
expenses increased by $2.4 million, or 7.1%, to
$36.0 million in 2007 compared to $33.6 million in
2006. Selling and marketing expenses increased in 2007, partly
due to increased commissions as a result of higher customer
order levels and partly due to salaries as a result of our sales
force expansion; partially offset by lower spending on
advertising and direct marketing. As a percentage of net sales,
selling and marketing expenses were 33.4% in 2007 compared to
30.2% in 2006.
General and Administrative.
General and
administrative expenses decreased by $1.4 million, or 8.4%,
to $14.9 million in 2007 from $16.3 million in 2006.
General and administrative expenses were lower in 2007 primarily
due to the impact of a one-time executive severance charge taken
in 2006. As a percentage of net sales, general and
administrative costs decreased to 13.9% in 2007 from 14.6% in
2006.
Operating Income.
Operating income decreased by
$6.9 million, or 38.6%, to $10.9 million in 2007 from
$17.8 million in 2006. As a percentage of net sales,
operating income decreased to 10.1% in 2007 from 16.0% in 2006
due to the combined effect of the factors discussed above.
Other Income.
Other income was unchanged at
$1.2 million in 2007 and 2006.
Income Tax Expense Continuing
Operations.
Income tax expense of $4.5 million,
from continuing operations, was recorded in 2007 at an effective
income tax rate of 37.5% of pre-tax income, compared to
$7.0 million, or 37.0% of pre-tax income for 2006. The
higher tax rate in 2007 was primarily the result of the adoption
of the new accounting standard for uncertain tax positions,
Financial Interpretation No. 48 (FIN 48).
The method for estimating, accruing and recognizing expenses and
benefits of uncertain income tax positions under FIN 48 is
substantially different than under the previous accounting
standard.
Years
Ended December 31, 2006 and 2005
Net Sales.
Our net sales decreased by
$4.8 million or 4.1%, to $111.5 million in 2006 from
$116.3 million in 2005. Revenues, excluding
AlphaSmart
laptops in both periods, declined by $12.2 million or
12.0% for the full year. A significant portion of this decline
was related to our customers purchasing more subscription-based
products and services, particularly
Accelerated Reader
.
Revenues from subscription-based products are initially deferred
and then recognized ratably over the subscription period,
generally one year, while the majority of revenues from
non-subscription-based sales are recognized immediately upon
delivery. During 2006, deferred revenue increased by
21
$5.7 million as compared to an increase of
$1.8 million in 2005. We believe that revenue excluding the
impact of laptops is a useful metric for investors because it
provides a basis upon which to compare the performance of our
business, as it existed prior to the June 27, 2005
AlphaSmart acquisition, to earlier periods.
Product revenue, including AlphaSmart in both periods, decreased
by $3.5 million, or 3.8%, to $90.8 million in 2006
from $94.3 million in 2005. The decrease was driven by the
transition to more subscription-based sales discussed above and
generally lower order rates which impacted most product lines.
This decrease was partially offset by the inclusion of
AlphaSmarts results for the full year in 2006 as compared
to a partial year in 2005.
Service revenue decreased by $1.2 million, or 5.5%, to
$20.8 million in 2006 compared to $22.0 million in
2005. Service revenues were down due to decreased revenue from
professional development services, primarily onsite events,
which was partially offset by increases in remote services such
as consulting and application hosting. Revenue from onsite
events was impacted in 2006 by reduced pricing as well as our
increased emphasis on remote services.
Cost of Sales.
The cost of sales of products
increased by $3.5 million, or 27.4%, to $16.4 million
in 2006 from $12.9 million in 2005. As a percentage of
product sales, the cost of sales of products increased to 18.1%
in 2006 from 13.7% in 2005. The product cost of sales percentage
increased primarily due to a higher proportion of sales
attributable to hardware in 2006 as compared to 2005 as we
realize lower gross profit margins on hardware sales than on
software sales.
The cost of sales of services increased by $1.3 million, or
15.5%, to $10.0 million in 2006 from $8.7 million in
2005. As a percentage of sales of services, the cost of sales of
services increased to 48.2% in 2006 from 39.4% in 2005. The
higher cost of sales percentage is the result of personnel and
infrastructure investments made in 2006, and to reduced pricing
of our onsite events.
Our overall gross profit margin percentage decreased to 76.3% in
2006 from 81.4% in 2005. This resulted from the higher cost of
sales percentages in 2006, from both products and services, as
discussed above.
Product Development.
Product development expense,
which excludes amounts capitalized, increased to
$17.3 million in 2006 from $17.0 million in 2005. As a
percentage of net sales, product development expenses increased
to 15.5% in 2006 from 14.7% in 2005. We capitalized product
development expenses of $0.7 million in 2006 compared to
$0.3 million in 2005. Product development spending was
higher in 2006 due to the inclusion of AlphaSmart for the full
year as compared to only a partial year in 2005.
Selling and Marketing.
Selling and marketing
expenses increased by $2.9 million, or 9.3%, to
$33.6 million in 2006 compared to $30.8 million in
2005. Selling and marketing expenses increased primarily due to
our sales force expansion, partially offset by reduced marketing
expenses as we focus on a more targeted direct marketing
approach. As a percentage of net sales, selling and marketing
expenses were 30.2% in 2006 compared to 26.5% in 2005.
General and Administrative.
General and
administrative expenses increased by $3.3 million, or
25.7%, to $16.3 million in 2006 from $13.0 million in
2005. General and administrative expenses were higher in 2006
primarily due to: (i) a $1.9 million charge related to
separation expenses, primarily for former executives,
(ii) a $0.6 million increase in share-based
compensation and (iii) the inclusion of AlphaSmart for a
full year in 2006 as compared to a partial year in 2005. As a
percentage of net sales, general and administrative costs
increased to 14.6% in 2006 from 11.1% in 2005.
Operating Income.
Operating income decreased by
$16.1 million, or 47.5%, to $17.8 million in 2006 from
$33.9 million in 2005. As a percentage of net sales,
operating income decreased to 16.0% in 2006 from 29.1% in 2005
due to the combined effect of the factors discussed above.
Other Income.
Other income decreased
$2.3 million to $1.2 million in 2006 from
$3.5 million in 2005, primarily due to the sale of an
office building which generated a $1.8 million pre-tax gain
in 2005.
Income Tax Expense Continuing
Operations.
Income tax expense of $7.0 million,
from continuing operations, was recorded in 2006 at an effective
income tax rate of 37.0% of pre-tax income, compared to
$13.2 million, or 35.3% of pre-tax income for 2005. In
2005, we recognized a tax benefit of approximately
$0.8 million related to
22
the favorable resolution of certain state and federal tax
positions, which was the primary reason for the lower effective
tax rate in 2005.
Discontinued Operations.
In 2005 we realized a gain
of approximately $0.7 million on the sale of Generation21,
which includes a one-time tax benefit of $1.3 million. When
combined with the operating losses incurred in January and
February 2005 for that subsidiary, the net income from
discontinued operations totaled approximately $0.6 million
in 2005.
Liquidity
and Capital Resources
As of December 31, 2007, our cash, cash equivalents and
investment securities were $24.5 million, down
$5.6 million from the December 31, 2006 total of
$30.1 million. During 2007, we generated operating cash
flow of $26.0 million.
At December 31, 2007, we had a $15.0 million secured
revolving line of credit with a bank which is available until
May 31, 2009. The line of credit bears interest at either a
floating rate based on the prime rate less 1.0%, or a fixed rate
for a period of up to 90 days based on LIBOR plus 1.25%.
The rate is at our option and is determined at the time of
borrowing. We also have a $2.0 million unsecured revolving
line of credit with a bank available until April 30, 2009.
The line of credit bears interest based on the prime rate less
1.0%. As of December 31, 2007, the lines of credit had not
been used.
On April 17, 2002, our Board of Directors authorized the
repurchase of up to 5,000,000 shares of our common stock.
On February 9, 2005, our Board of Directors authorized the
repurchase of an additional 3,000,000 shares under the
stock repurchase program. No time limit was placed on the
duration of the repurchase program. Repurchased shares will
become treasury shares and will be used for stock-based employee
benefit plans and for other general corporate purposes. During
the period of January 1, 2007 through December 31,
2007, we repurchased approximately 117,000 shares at a cost
of $1.4 million. Since the original authorization of the
repurchase program in 2002, we have repurchased 7.8 million
shares at a cost of $134.8 million. Depending on our stock
valuation, cash availability and other factors, we may
repurchase additional shares as a beneficial use of our cash to
enhance shareholder value.
We declared quarterly cash dividends of $0.05 per share in each
of the four quarters of 2006. We declared quarterly cash
dividends of: $0.05 per share in the first and second quarter of
2007 and $0.07 in the third and fourth quarter of 2007. We also
declared a special dividend of $0.75 per share during 2007. We
intend to continue to pay quarterly cash dividends, subject to
capital availability and a determination that cash dividends
continue to be in the best interests of the company and our
shareholders.
We believe our strong cash position coupled with cash flow from
operations will be sufficient to meet both our short-term and
long-term working capital requirements.
Off-Balance
Sheet Arrangements and Aggregate Contractual
Obligations
We do not have any off-balance sheet transactions, arrangements,
or obligations (including contingent obligations), that would
have a material effect on our financial results.
Operating Leases.
We enter into operating leases,
primarily for facilities that we occupy in order to carry out
our business operations. We utilize operating leases for some of
our facilities to gain flexibility as compared to purchasing
facilities outright and limit our exposure to many of the risks
of owning commercial property, particularly with regard to
international operations. These agreements are generally for
terms of one to five years and cannot be terminated by either
the lessor or us for reasons other than breach of the lease
agreement. We do not anticipate early termination of any of
these agreements. For each of the years ended December 31,
2007, 2006 and 2005, we incurred expenses of approximately
$2.2 million, $2.0 million, and $0.9 million,
respectively, related to these operating leases.
23
Purchase Obligations.
We enter into commitments with
certain suppliers to purchase components for our hardware
products, such as
AlphaSmart
computing devices,
AccelScan
scanners and the
2Know!
response system.
The majority of these obligations will be satisfied within one
year.
Tax audit settlements and deposits.
We anticipate
making cash payments related to the settlement of tax audits or
deposits for unsettled audit issues in the range of $0.8 to
$1.6 million during 2008. The mid-point of this range is
included in the table below. Estimation of the amounts and
timing of payments in periods after 2008 are highly uncertain
and therefore are not included in the table.
As of December 31, 2007, our approximate contractual
obligations for operating leases, tax audit payments and
purchase obligations (by period due) were as follows:
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Payments Due by Period
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Less than 1
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1-3
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3-5
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More than
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Contractual Obligations
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Total
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year
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years
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years
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5 years
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(In Thousands)
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Operating lease obligations
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$
|
6,498
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|
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$
|
2,225
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|
|
$
|
2,610
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|
|
$
|
1,259
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|
|
$
|
404
|
|
Tax audit related payments
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|
1,200
|
|
|
|
1,200
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Purchase obligations
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3,668
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3,668
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Total
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$
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11,366
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$
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7,093
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$
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2,610
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$
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1,259
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$
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404
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Supplemental Executive Retirement Plan.
We have
established a Supplemental Executive Retirement Plan
(SERP) for the provision of retirement benefits to
members of our senior management. Under the terms of the plan,
participants elect to defer receipt of a portion of their
compensation and invest their deferrals in certain mutual funds
which are nearly identical to the investment selections offered
to participants in our 401(k) retirement plan. Upon a SERP
participants retirement (or certain other events), we have
an obligation to repay the current market value of the
participants account balance. As of December 31,
2007, we have fully funded the $1.9 million aggregate
contractual obligation for future payments to SERP participants.
Payouts of our obligations related to the SERP are dependant on
when participants leave service and how they elect to receive
their accrued benefit payments, which can range from a single
lump-sum payment to a
10-year
series of payments. Due to the inherent uncertainties in
predicting when the SERP obligations will be repaid, they are
not included in the above table. The SERP is more fully
described in Note 12 of our Notes to Consolidated Financial
Statements.
Other Obligations.
As of December 31, 2007, we
did not hold any long-term debt obligations, long-term purchase
obligations or material capital lease obligations.
Critical
Accounting Policies and Estimates
The foregoing discussion is based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
management to make judgments, estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. The following is a list of our critical accounting
policies defined as those policies that we believe are the most
important to the portrayal of our financial condition and
results of operations
and/or
require managements significant judgments and estimates.
This is not intended to be a comprehensive list of all of our
accounting policies. Our significant accounting policies are
more fully described in Note 5 of our Notes to Consolidated
Financial Statements.
Revenue Recognition.
We recognize revenue from our
software products in accordance with Statement of Position
No. 97-2
Software Revenue Recognition
issued by the Accounting
Standards Executive Committee of the American Institute of
Certified Public Accountants. Under this accounting standard,
revenue is recognized when the following have occurred:
persuasive evidence of an arrangement exists, product delivery
and acceptance has occurred or a service has been performed,
pricing is fixed and determinable, and collectibility is
probable. Revenue is recognized as follows: (i) at the time
of shipment to customers for perpetually licensed off-the-shelf
software products and related telephone support with a duration
of 12 months or less sold with the product, (ii) on
the
24
percentage-of-completion basis for software products which
require significant customization or modification, (iii) as
seminars are performed for training and professional development
services, (iv) straight-line over the term of the support
agreement for other software support agreements, (v) as the
service is performed or on a straight-line basis over the
contractual period for technical and consulting services and
(vi) straight-line over the subscription period for
subscription based products and services. Accordingly,
management is required to make judgments as to whether pricing
is fixed and determinable, whether collectibility is reasonably
assured and what the percentage of completion is as of the
financial reporting date.
Expenses are recognized and matched against revenues for the
reporting period presented in the financial statements. We
record accruals for sales returns and doubtful accounts at the
time of revenue recognition based upon historical experience as
well as other factors that in our judgment could reasonably be
expected to cause sales returns or doubtful accounts to differ
from historical experience. Changes in such allowances may be
required if future returns or bad debt activity differs from our
estimates.
Goodwill and Long-Lived Assets.
We assess the value
of our goodwill on at least an annual basis by comparing its
fair value with its carrying value. Fair value is determined
primarily based on valuation analysis performed by management
using a discounted cash flow methodology. The valuation analysis
requires significant judgments and estimates to be made
regarding future cash flows. Our estimates could be materially
impacted by factors such as competitive forces, customer
behavior, product acceptance, specific industry factors and
changes in interest rates.
In 2007 and 2006, our laptop revenues decreased primarily as a
result of difficulties in integrating the selling operations of
AlphaSmart into our overall organization. We believe that our
long-term strategies will be successful in returning the laptop
line to growth and higher levels of profitability.
We have goodwill of $44.2 million, a trademark of
$3.0 million and other intangibles of $2.6 million
related to the laptop business. We reviewed the value of these
assets for impairment at the end of 2007 and our review
indicated that there was no impairment at December 31,
2007. The valuation of any long-lived asset is inherently
subjective and dependent on projections of future operating
results. If we do not achieve the estimated future operating
results, or if other key variables and assumptions change, these
assets may be impaired in the future.
Software Support and Product Warranty
Obligations.
We record a liability for the estimated
cost of software support and hardware warranties at the time of
sale. Estimated costs are based upon our historical cost
experience of fulfilling these obligations as well as other
factors that in our judgment could reasonably be expected to
affect those costs, such as trends in the cost of providing
telephone support and product return rates. If the actual costs
of fulfilling these obligations differ from our estimates, it
could result in additional charges to cost of sales in future
periods.
Software Development Costs.
We capitalize certain
software development costs incurred after technological
feasibility is achieved. Capitalized software development costs
are amortized on a
product-by-product
basis using the straight-line method over the estimated economic
life of the products, which is generally estimated to be
24 months. Amortization begins when the products are
available for general release to customers. If the actual
economic life of our products is shorter than our estimates, it
could result in an impairment charge in future periods.
Taxes.
At the end of each interim reporting period,
we estimate the effective income tax rate anticipated to be
applicable for the full fiscal year. The estimated effective
income tax rate contemplates the expected jurisdiction where
income is earned (e.g., United States compared to
non-United
States), the estimated amount of certain tax credits, as well as
tax planning strategies. If the actual distribution of taxable
income by jurisdiction varies from our expectations, if the
actual amount of tax credits varies from our estimates, or if
the results of tax planning strategies are different from our
estimates, adjustments to the effective income tax rate may be
required in the period such determination is made.
We record a liability for uncertain tax positions based on our
estimate of the potential exposure. Due to the subjectivity and
complex nature of the underlying issues, there is significant
inherent uncertainty in these estimates. Actual payments or
assessments may differ from our estimates and require tax
provision adjustments in future periods.
25
Recent
Accounting Pronouncement
In December 2007, the FASB issued SFAS No. 141(R)
Business Combination
(SFAS 141R).
SFAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is
effective for us on January 1, 2009. SFAS 141R is not
expected to have a material effect on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). 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. This new consolidation method will
significantly change the accounting for transactions with
minority interest holders. SFAS 160 is effective for us on
January 1, 2009. SFAS 160 is not expected to have a
material effect on our consolidated financial statements.
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). This standard
permits entities to measure many financial instruments and
certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. The provisions of
SFAS 159 are effective for us on January 1, 2008 and
are not expected to have a material effect on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements,
(SFAS 157), to
establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements. The provisions of
SFAS 157 are effective for us on January 1, 2008 and
are not expected to have a material effect on our consolidated
financial statements.
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Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest Rate Risk.
Our exposure to market interest
rate risk consists of: (i) the increase or decrease in the
amount of interest income we can earn on our investment
portfolio and (ii) the decrease or increase in value of our
investment security portfolio if market interest rates increase
or decrease, respectively. We anticipate that we will have
sufficient liquidity to hold our investments to maturity;
therefore, we do not expect to recognize any material losses or
gains related to an increase or decrease in market interest
rates.
Market Risk.
Our exposure to market risk relates to
the quality of the holdings in our investment security
portfolio. The fair market value of our investments is subject
to increases or decreases in value resulting from the
performance of the securities issuer, from upgrades or
downgrades in the credit worthiness of the securities issuer,
upgrades or downgrades in the credit worthiness and the insurer
of the securities and from changes in general market conditions.
We seek to manage our exposure to market risk by investing in
accordance with our corporate investment policy as established
by our Board of Directors. The goals of the policy are:
(i) preservation of capital, (ii) provision of
adequate liquidity to meet projected cash requirements,
(iii) minimization of risk of principal loss through
diversified short and medium term investments and
(iv) maximization of yields in relationship to the
guidelines, risk, market conditions and tax considerations.
Our investment policy permits investments in obligations of the
U.S. Treasury department and its agencies, money market
funds, and high quality investment-grade corporate and municipal
interest-bearing obligations. The policy requires
diversification to prevent excess concentration of issuer risk
and requires the maintenance of minimum liquidity levels. The
policy precludes investment in equity securities except for the
specific purpose of funding the obligations related to our
Supplemental Executive Retirement Plan (see Note 12 of our
Notes to Consolidated Financial Statements). As of
December 31, 2007, our investment securities had a market
value of approximately $17.2 million and a carrying value
of $17.1 million. Due to the type and duration of our
investments, we do not expect to realize any material gains or
losses related to market risk.
26
Foreign Currency Exchange Rate Risk.
The financial
position and results of operations of our foreign subsidiaries
are measured using local currency. Revenues and expenses of such
subsidiaries have been translated into U.S. dollars using
average exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange on the
balance sheet date. Translation gains or losses are deferred as
a separate component of shareholders equity. Aggregate
foreign currency transaction gains and losses are included in
determining net income. As such, our operating results are
affected by fluctuations in the value of the U.S. dollar
compared to the British pound, Canadian dollar, Euro and Indian
rupee. At this time, foreign exchange rate risk is not
significant due to the relative size of our foreign operations
and revenues derived from sales in foreign currency.
27
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Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Renaissance Learning, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Renaissance Learning, Inc. and subsidiaries (the
Company) as of December 31, 2007 and 2006, and
the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a)(2). We also have audited the
Companys internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these
financial statements and financial statement schedule and an
opinion on the Companys internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
As described in Note 5 to the Consolidated Financial
Statements, on January 1, 2006, the Company adopted
Statement of Financial Accounting Standard No. 123R,
Accounting for Stock Based Compensation
. As described in
Note 8 to the Consolidated Financial Statements, on
January 1, 2007, the Company adopted FASB Interpretation
No. 48,
Accounting for Uncertainty in Income Taxes.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Renaissance Learning, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein. Also, in
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 27, 2008
28
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As of
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands,
|
|
|
|
Except Share and
|
|
|
|
Per Share Amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,337
|
|
|
$
|
5,953
|
|
Investment securities
|
|
|
8,136
|
|
|
|
22,525
|
|
Accounts receivable, less allowance of $1,072 and $1,133,
respectively
|
|
|
8,791
|
|
|
|
10,528
|
|
Inventories
|
|
|
6,273
|
|
|
|
4,108
|
|
Prepaid expenses
|
|
|
2,197
|
|
|
|
1,896
|
|
Income taxes receivable
|
|
|
1,450
|
|
|
|
1,291
|
|
Deferred tax asset
|
|
|
4,406
|
|
|
|
3,596
|
|
Other current assets
|
|
|
300
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
38,890
|
|
|
|
49,994
|
|
Investment securities
|
|
|
8,982
|
|
|
|
1,625
|
|
Property, plant and equipment, net
|
|
|
10,578
|
|
|
|
11,811
|
|
Deferred tax asset
|
|
|
1,587
|
|
|
|
|
|
Goodwill
|
|
|
47,065
|
|
|
|
46,973
|
|
Other intangibles, net
|
|
|
5,579
|
|
|
|
6,124
|
|
Capitalized software, net
|
|
|
452
|
|
|
|
727
|
|
Other non-current assets
|
|
|
167
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
113,300
|
|
|
$
|
117,711
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,011
|
|
|
$
|
2,782
|
|
Deferred revenue
|
|
|
35,675
|
|
|
|
23,751
|
|
Payroll and employee benefits
|
|
|
4,184
|
|
|
|
4,750
|
|
Other current liabilities
|
|
|
3,563
|
|
|
|
3,429
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
45,433
|
|
|
|
34,712
|
|
Deferred revenue
|
|
|
2,707
|
|
|
|
885
|
|
Deferred compensation and other employee benefits
|
|
|
1,933
|
|
|
|
1,665
|
|
Deferred tax liability
|
|
|
|
|
|
|
878
|
|
Income taxes payable
|
|
|
5,104
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,313
|
|
|
|
38,140
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at December 31, 2007 and 2006
|
|
|
347
|
|
|
|
347
|
|
Additional paid-in capital
|
|
|
52,683
|
|
|
|
54,125
|
|
Retained earnings
|
|
|
102,887
|
|
|
|
124,290
|
|
Treasury stock, at cost: 5,703,450 shares at
December 31, 2007; 5,733,130 shares at
December 31, 2006
|
|
|
(98,123
|
)
|
|
|
(99,265
|
)
|
Accumulated other comprehensive income
|
|
|
193
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
57,987
|
|
|
|
79,571
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
113,300
|
|
|
$
|
117,711
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the consolidated financial statements
are an integral part of these balance sheets.
29
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands, Except Per Share Amounts)
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
84,628
|
|
|
$
|
90,750
|
|
|
$
|
94,296
|
|
Services
|
|
|
23,304
|
|
|
|
20,778
|
|
|
|
21,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
107,932
|
|
|
|
111,528
|
|
|
|
116,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
15,673
|
|
|
|
16,455
|
|
|
|
12,917
|
|
Services
|
|
|
11,830
|
|
|
|
10,011
|
|
|
|
8,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
27,503
|
|
|
|
26,466
|
|
|
|
21,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
80,429
|
|
|
|
85,062
|
|
|
|
94,697
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
18,506
|
|
|
|
17,291
|
|
|
|
17,046
|
|
Selling and marketing
|
|
|
36,042
|
|
|
|
33,639
|
|
|
|
30,778
|
|
General and administrative
|
|
|
14,951
|
|
|
|
16,330
|
|
|
|
12,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
69,499
|
|
|
|
67,260
|
|
|
|
60,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,930
|
|
|
|
17,802
|
|
|
|
33,884
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,009
|
|
|
|
1,078
|
|
|
|
1,324
|
|
Other, net
|
|
|
169
|
|
|
|
156
|
|
|
|
2,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income continuing operations before income taxes
|
|
|
12,108
|
|
|
|
19,036
|
|
|
|
37,378
|
|
Income taxes continuing operations
|
|
|
4,541
|
|
|
|
7,043
|
|
|
|
13,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income continuing operations
|
|
|
7,567
|
|
|
|
11,993
|
|
|
|
24,167
|
|
Income discontinued operations
|
|
|
|
|
|
|
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
7,567
|
|
|
$
|
11,993
|
|
|
$
|
24,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.26
|
|
|
$
|
0.41
|
|
|
$
|
0.78
|
|
Discontinued operations
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.26
|
|
|
$
|
0.41
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.26
|
|
|
$
|
0.41
|
|
|
$
|
0.78
|
|
Discontinued operations
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.26
|
|
|
$
|
0.41
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
30
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Amount(1)
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In Thousands)
|
|
|
Balance, December 31, 2004
|
|
$
|
347
|
|
|
$
|
54,490
|
|
|
$
|
99,689
|
|
|
$
|
(70,213
|
)
|
|
$
|
104
|
|
|
$
|
84,417
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
24,751
|
|
|
|
|
|
|
|
|
|
|
|
24,751
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,694
|
|
Dividends ($.20 per share)
|
|
|
|
|
|
|
|
|
|
|
(6,207
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,207
|
)
|
Stock repurchased for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,374
|
)
|
|
|
|
|
|
|
(32,374
|
)
|
Treasury shares issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase of AlphaSmart
|
|
|
|
|
|
|
2,171
|
|
|
|
|
|
|
|
20,895
|
|
|
|
|
|
|
|
23,066
|
|
Exercise of stock options
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
2,455
|
|
|
|
|
|
|
|
2,105
|
|
Excess tax benefits from share based payment arrangements
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Restricted stock grants
|
|
|
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
Shared-based compensation
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
347
|
|
|
|
56,084
|
|
|
|
118,233
|
|
|
|
(78,845
|
)
|
|
|
47
|
|
|
|
95,866
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
11,993
|
|
|
|
|
|
|
|
|
|
|
|
11,993
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,020
|
|
Dividends ($.20 per share)
|
|
|
|
|
|
|
|
|
|
|
(5,936
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,936
|
)
|
Stock repurchased for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,474
|
)
|
|
|
|
|
|
|
(22,474
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
16
|
|
Payment for cancellation of stock options
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,001
|
)
|
Share-based compensation
|
|
|
|
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
687
|
|
Excess tax benefits from share based payment arrangements
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393
|
|
Restricted stock grants
|
|
|
|
|
|
|
(2,036
|
)
|
|
|
|
|
|
|
2,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
347
|
|
|
|
54,125
|
|
|
|
124,290
|
|
|
|
(99,265
|
)
|
|
|
74
|
|
|
|
79,571
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
7,567
|
|
|
|
|
|
|
|
|
|
|
|
7,567
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,686
|
|
Dividends ($.99 per share)
|
|
|
|
|
|
|
|
|
|
|
(28,699
|
)
|
|
|
|
|
|
|
|
|
|
|
(28,699
|
)
|
Stock repurchased for treasury
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(1,435
|
)
|
|
|
|
|
|
|
(1,434
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
15
|
|
Share-based compensation
|
|
|
|
|
|
|
1,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,109
|
|
Effect of adoption of new acct principle
|
|
|
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
(271
|
)
|
Excess tax benefits from share based payment arrangements
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Restricted stock grants
|
|
|
|
|
|
|
(2,547
|
)
|
|
|
|
|
|
|
2,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
347
|
|
|
$
|
52,683
|
|
|
$
|
102,887
|
|
|
$
|
(98,123
|
)
|
|
$
|
193
|
|
|
$
|
57,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Common Stock, $0.01 par value, 150,000,000 shares
authorized.
|
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
31
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Reconciliation of net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,567
|
|
|
$
|
11,993
|
|
|
$
|
24,751
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
7,567
|
|
|
|
11,993
|
|
|
|
24,167
|
|
Adjustments to arrive at cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,838
|
|
|
|
3,541
|
|
|
|
3,179
|
|
Amortization of investment discounts/premiums
|
|
|
34
|
|
|
|
163
|
|
|
|
396
|
|
Share-based compensation expense
|
|
|
1,109
|
|
|
|
687
|
|
|
|
53
|
|
Deferred income taxes
|
|
|
(1,305
|
)
|
|
|
2,719
|
|
|
|
1,437
|
|
Excess tax benefits from share based payment arrangements
|
|
|
(10
|
)
|
|
|
(393
|
)
|
|
|
(112
|
)
|
Gain on sale of property
|
|
|
30
|
|
|
|
(4
|
)
|
|
|
(1,798
|
)
|
Change in assets and liabilities, excluding the effects of
acquisitions and divestitures
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,737
|
|
|
|
938
|
|
|
|
1,903
|
|
Inventories
|
|
|
(2,165
|
)
|
|
|
(334
|
)
|
|
|
568
|
|
Prepaid expenses
|
|
|
(331
|
)
|
|
|
(291
|
)
|
|
|
(369
|
)
|
Income taxes
|
|
|
2,715
|
|
|
|
(975
|
)
|
|
|
(937
|
)
|
Accounts payable and other liabilities
|
|
|
(1,147
|
)
|
|
|
(1,405
|
)
|
|
|
(483
|
)
|
Deferred revenue
|
|
|
13,747
|
|
|
|
5,711
|
|
|
|
1,821
|
|
Other current assets
|
|
|
(203
|
)
|
|
|
293
|
|
|
|
1,460
|
|
Other
|
|
|
337
|
|
|
|
(375
|
)
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by continuing operating activities
|
|
|
25,953
|
|
|
|
22,268
|
|
|
|
31,413
|
|
Cash used by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,953
|
|
|
|
22,268
|
|
|
|
31,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(2,147
|
)
|
|
|
(2,819
|
)
|
|
|
(2,419
|
)
|
Purchase of investment securities
|
|
|
(26,441
|
)
|
|
|
(20,040
|
)
|
|
|
(36,866
|
)
|
Maturities/sales of investment securities
|
|
|
33,746
|
|
|
|
23,220
|
|
|
|
71,481
|
|
Capitalized software development costs
|
|
|
(203
|
)
|
|
|
(689
|
)
|
|
|
(279
|
)
|
Proceeds from mortgage note
|
|
|
|
|
|
|
5,909
|
|
|
|
|
|
Net proceeds from sale of property
|
|
|
570
|
|
|
|
23
|
|
|
|
3,166
|
|
Net proceeds from sale of subsidiary
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Acquisitions of business, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(33,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
5,525
|
|
|
|
5,604
|
|
|
|
1,188
|
|
Cash used by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
5,525
|
|
|
|
5,604
|
|
|
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital to minority interest
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
Proceeds from exercise of stock options
|
|
|
30
|
|
|
|
16
|
|
|
|
2,105
|
|
Payment for cancellation of stock options
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
|
|
Excess tax benefits from share based payment arrangements
|
|
|
10
|
|
|
|
393
|
|
|
|
112
|
|
Dividends paid
|
|
|
(28,699
|
)
|
|
|
(5,936
|
)
|
|
|
(6,207
|
)
|
Purchase of treasury stock
|
|
|
(1,435
|
)
|
|
|
(22,474
|
)
|
|
|
(32,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(30,094
|
)
|
|
|
(29,002
|
)
|
|
|
(36,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,384
|
|
|
|
(1,130
|
)
|
|
|
(3,977
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
5,953
|
|
|
|
7,083
|
|
|
|
11,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
7,337
|
|
|
$
|
5,953
|
|
|
$
|
7,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (net of refunds)
|
|
$
|
2,979
|
|
|
$
|
5,281
|
|
|
$
|
11,121
|
|
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
32
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the financial
results of Renaissance Learning, Inc. (Renaissance
Learning) and our subsidiaries (collectively, the
Company).
|
|
(2)
|
Basis of
presentation
|
Except as indicated, amounts reflected in the consolidated
financial statements or the notes thereto, relate to our
continuing operations. Generation21 Learning Systems, LLC
(Generation21) was divested during the first quarter
of 2005 and, therefore, its results for all periods presented in
the consolidated financial statements are reflected as
discontinued operations. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Renaissance Learning, Inc. is a leading provider of technology
for personalizing reading, math, and writing practice for
pre-kindergarten through senior high (pre-K-12)
schools and districts. Our products accelerate learning and
improve test scores by facilitating increased student practice
of essential skills, increasing the quality, quantity, and
timeliness of performance data available to educators, helping
educators motivate students and providing student access to low
cost computing solutions.
Our educational software covers a wide range of subject areas
including reading, early literacy, math, writing, vocabulary and
language acquisition. We provide customized assessment software
to educational publishers, which supports many of the popular
textbook series used in K-12 and post-secondary educational
institutions. Our flagship product is
Accelerated Reader
,
which provides educators with information for motivating and
monitoring increased literature-based reading practice and to
support instruction. Our other software and service brands
include:
STAR Reading, STAR Early Literacy, Read Now Power
Up!, Accelerated Math, STAR Math, MathFacts in a Flash and
English in a Flash.
Our hardware products include
AlphaSmart
laptop computing
devices that run curriculum-specific software focused on skills
improvement and real-time formative assessments. The units offer
schools the ability to provide students with significantly
improved access to portable computing at a fraction of the cost
of conventional personal computers. Our
2Know!
response
system allows educators to easily encourage student classroom
participation and obtain instantaneous feedback that can be used
to quickly assess student comprehension and performance.
Additionally, we sell our patented
AccelScan
optical-mark
card scanner which is used primarily with
Accelerated Math
to automate scoring and recordkeeping tasks.
We offer a full line of professional service and support
solutions that integrate with, complement, and enhance the
effectiveness of, our products. Sold separately or bundled with
our products to provide a complete solution, our service
offerings include professional development and product training
seminars and conferences, report and data analysis, program
evaluation, guided implementation, remote web-based training,
software support, software installation, database conversion and
integration services, and application hosting.
On June 27, 2005, we acquired all of the outstanding common
stock of AlphaSmart, Inc. (AlphaSmart), a provider
of laptop computing devices for K-12 schools. The results of
AlphaSmarts operations are included in our consolidated
financial statements since that date. AlphaSmart products are
easy-to-use laptop computing devices that run
curriculum-specific software focused on skills improvement and
real-time formative assessments. The units offer schools the
ability to provide students with significantly improved access
to portable computing at a fraction of the cost of conventional
personal computers.
33
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate purchase price was approximately $58 million,
which consisted of $34 million in cash, $23 million of
our common stock (1,157,355 shares) and $1 million of
transaction costs. The purchase price was allocated to the
assets acquired and liabilities assumed according to their
estimated fair values. The values assigned to tradename and
customer relationships are based on an independent appraisal.
The tradename has an indefinite life and is not amortized. The
customer relationships intangible has a
10-year
estimated useful life and is being amortized on an accelerated
method (Note 6).
The following table includes our pro forma results of operations
for the twelve months ended December 31, 2005. The pro
forma financial information summarizes the results of operations
for the period indicated as if the AlphaSmart acquisition had
occurred at the beginning of 2005. The pro forma information
contains the actual operating results of AlphaSmart with the
results prior to the acquisition date adjusted to include the
pro forma impact of: the amortization of intangible assets,
lower interest income as a result of the sale of
available-for-sale
securities to fund the acquisition and the elimination of merger
related costs. These pro forma amounts are not necessarily
indicative of the results that would have been obtained if the
acquisition occurred at the beginning of 2005.
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31, 2005
|
|
|
|
(In Thousands, Except
|
|
|
|
Per Share Amounts)
|
|
|
Net sales
|
|
$
|
131,576
|
|
Income from continuing operations
|
|
|
24,104
|
|
Earnings per share from continuing operations
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.75
|
|
Diluted earnings per share
|
|
|
0.75
|
|
|
|
(5)
|
Significant
accounting policies
|
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
We recognize revenue from our software products in accordance
with Statement of Position
No. 97-2
Software Revenue Recognition
(SOP 97-2)
issued by the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants. Revenues are
recorded net of an allowance for estimated returns. Allowances
for bad debts are also recorded at the time of the sale.
Product revenue is derived primarily from the sale of
educational software and hardware. Revenue from sales of
hardware is generally recognized when the product is shipped to
the customer. Revenue recognition from sales of our software
depends on whether the software is:
(i) off-the-shelf
or customized and (ii) whether it is licensed on a
perpetual basis or as a subscription. We recognize revenue from
off-the-shelf
perpetually licensed software sales upon shipment to customers.
Subscription-based software sales are recognized as revenue on a
straight-line basis over the subscription period. Sales of
software that require substantial modification or customization
are recognized as revenue using the
percentage-of-completion
method of accounting. Revenues and deferred revenues from
software that require substantial modification or customization
are not significant in any of the years presented.
34
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Service revenue is derived from (i) product support
services, (ii) professional development and product
training seminars and conferences, (iii) application
hosting, (iv) technical services, (v) consulting and
(vi) other remote services. Product support services
included with sales of perpetually licensed software have a
duration of 12 months or less and the associated revenue is
recognized at the time the software is shipped with the related
costs of providing the telephone support accrued for at the same
time. Revenue from professional development and product training
seminars and conferences is recognized when the seminar or
conference is held. Revenue from other product support services
and application hosting is initially recorded as deferred
revenue and then recognized as revenue on a straight-line basis
over the term of the agreement, typically 12 months.
Revenue from technical services, consulting and other remote
services is recognized as the services are performed or on a
straight-line basis over the contractual period.
Deferred revenue includes (i) amounts invoiced for products
not yet delivered and services not yet performed,
(ii) advance invoicing on contracts and (iii) that
portion of support agreements and subscription-based product
sales that has not yet been recognized as revenue.
|
|
(c)
|
Impairment
or Disposal of Long-Lived Assets.
|
We evaluate the recoverability of the carrying amount of
long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully
recoverable. We evaluate the recoverability of goodwill and
other intangible assets with indefinite useful lives annually,
or more frequently if events or circumstances indicate that an
asset may be impaired. Management uses its judgment when
applying impairment rules to determine when an impairment test
is necessary. Examples of factors which could trigger an
impairment review include: (i) a significant decrease in
the market value of an asset, (ii) a significant change in
the extent or manner in which an asset is used and
(iii) significant adverse changes in legal factors or the
business climate that impact the value of an asset.
Impairment losses are measured as the amount by which the
carrying value of an asset exceeds its estimated fair value.
Estimating fair value requires that we forecast future cash
flows related to the asset subject to review. These forecasts
require assumptions about demand for our products and services,
future market conditions and technological developments. Other
assumptions include determining the discount rate and future
growth rates. Changes to these assumptions could result in an
impairment charge in future periods.
|
|
(d)
|
Cash and
cash equivalents
|
Cash amounts on deposit at banks and highly liquid debt
instruments purchased with an original maturity date of three
months or less are included in cash and cash equivalents. Cash
and cash equivalents consisted solely of cash and time deposits
at December 31, 2007 and 2006.
|
|
(e)
|
Investment
securities
|
We classify our investment securities as
held-to-maturity,
available for sale or trading in
accordance with the provisions of Statement of Financial
Accounting Standards No. 115,
Accounting for Certain
Investments in Debt and Equity Securities
(SFAS 115).
Debt securities have an original maturity of more than three
months and a remaining maturity of less than 24 months. Our
investments in debt securities consist of auction rate
securities and municipal bonds. Municipal bonds are classified
as
held-to-maturity
and are carried at amortized cost. The fair value of our debt
securities listed below is based on quoted market prices.
Auction rate securities are classified as available for sale.
Auction rate securities are liquid investments with interest
rates that are reset through a Dutch auction process
that occurs every 7 to 49 days, depending on the terms of
the individual security. The underlying securities have
long-term maturities. Our auction rate securities are stated
35
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
at cost, which closely approximates fair market value and,
therefore, there were no unrealized gains or losses related to
these securities included in accumulated other comprehensive
income (loss).
The equity securities we own are held for the purpose of funding
our Supplemental Executive Retirement Plan (SERP),
as further described in Note 12. These equity securities
are classified as trading and are therefore carried at their
current fair value based on quoted market prices. Our
investments in equity securities consist entirely of various
mutual fund shares in amounts that conform to the aggregate
investment selections of the participants in the SERP.
Investment securities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
|
Debt securities due in less than 1 year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
2,500
|
|
|
$
|
2,500
|
|
|
$
|
20,025
|
|
|
$
|
20,025
|
|
Municipal bonds
|
|
|
5,636
|
|
|
|
5,654
|
|
|
|
2,500
|
|
|
|
2,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current investment securities
|
|
|
8,136
|
|
|
|
8,154
|
|
|
|
22,525
|
|
|
|
22,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities due in 1 to 2 years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
7,051
|
|
|
|
7,078
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund investments
|
|
|
1,931
|
|
|
|
1,931
|
|
|
|
1,625
|
|
|
|
1,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current investment securities
|
|
|
8,982
|
|
|
|
9,009
|
|
|
|
1,625
|
|
|
|
1,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
17,118
|
|
|
$
|
17,163
|
|
|
$
|
24,150
|
|
|
$
|
24,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f) Inventories
Inventories are carried at the lower of
first-in,
first-out (FIFO) cost or market. Inventories primarily consist
of purchased materials which include laptop computing devices,
optical-mark card scanners, interactive response systems,
educational products, training materials, manuals, and
motivational items.
Advertising costs are expensed as the advertising takes place.
Advertising expenses for 2007, 2006 and 2005 were approximately
$4.6 million, $6.5 million and $8.2 million,
respectively.
|
|
(h)
|
Property,
plant and equipment
|
Property, plant and equipment are recorded at cost and are
depreciated over their estimated useful lives using principally
the straight-line method for financial reporting purposes.
Maintenance and repair costs are charged to expense as incurred,
and renewals and improvements that significantly extend the
useful life of an asset are added to the plant and equipment
accounts. Depreciation expense was $2.8 million,
$2.5 million and $2.1 million for 2007, 2006 and 2005,
respectively.
The estimated useful lives for property, plant and equipment are
as follows: buildings-25 to 40 years; furniture, fixtures
and office equipment-5 to 8 years; computer and production
equipment-3 to 5 years; vehicles-5 years; and
leasehold improvements-the lease term.
36
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net property, plant and equipment consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Land and improvements
|
|
$
|
1,146
|
|
|
$
|
1,219
|
|
Buildings
|
|
|
9,587
|
|
|
|
9,967
|
|
Furniture, fixtures and office equipment
|
|
|
4,772
|
|
|
|
4,694
|
|
Computer and production equipment
|
|
|
12,870
|
|
|
|
11,474
|
|
Other
|
|
|
1,490
|
|
|
|
1,713
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
29,865
|
|
|
|
29,067
|
|
Less accumulated depreciation and amortization
|
|
|
19,287
|
|
|
|
17,256
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
10,578
|
|
|
$
|
11,811
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Software
development costs
|
We capitalize certain software development costs incurred after
technological feasibility is achieved. Capitalized costs are
reported at the lower of amortized cost or net realizable value.
Capitalized software development costs are amortized on a
product-by-product
basis using the straight-line method over the estimated economic
life of the products, which is generally estimated to be
24 months. Amortization begins when the products are
available for general release to customers. All other research
and development expenditures are charged to product development
expense in the period incurred. When capitalized software is
fully amortized, the balance is removed from the capitalized
software and accumulated amortization accounts. Amounts
capitalized were approximately $0.2 million,
$0.7 million and $0.3 million in 2007, 2006 and 2005,
respectively. Amortization expense of approximately
$0.5 million, $0.4 million and $0.5 million for
2007, 2006 and 2005, respectively, is included in cost of
sales-products in the consolidated statements of income. At
December 31, 2007 and 2006, accumulated amortization of
capitalized software development costs was $0.4 million and
$1.3 million, respectively.
|
|
(j)
|
Sales and
concentration of credit risks
|
We grant credit to our customers in the ordinary course of
business. The majority of our customers are schools or school
districts, although we do sell some of our products through
resellers. Concentrations of credit risk with respect to trade
receivables are limited due to the significant number of
customers and their geographic dispersion. In 2007, 2006, and
2005, no single customer represented more than 10% of net sales.
|
|
(k)
|
Share-based
compensation
|
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123(R)
Share-Based
Payments
(SFAS 123R), using the modified
prospective application transition method. The modified
prospective application transition method requires compensation
cost to be recognized beginning on the effective date
(a) based on the requirements of SFAS 123R for all
share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123R for all
awards granted to employees prior to the effective date of
SFAS 123R that remain unvested on the effective date. As
such, prior periods will not reflect restated amounts.
Prior to January 1, 2006, we elected to follow the
intrinsic value based method of accounting for stock options
consistent with Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees
(APB
25) and to provide the pro forma disclosures of net income
and earnings per share as if the fair value based method had
been applied. Under the intrinsic value method, compensation
cost for stock options is measured by the excess, if any, of the
quoted price of our stock at the measurement date over the
exercise price.
No stock-based employee compensation expense related to stock
options or our stock purchase plans was reflected in net income
prior to January 1, 2006. SFAS 123R requires us to
report the tax benefit from the tax
37
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deduction that is in excess of recognized compensation costs
(excess tax benefits) as a financing cash flow. Restricted
shares or restricted stock units are granted to certain
employees and our directors. For employees, restricted stock
awards generally vest over a period of four years and for
non-employee directors, upon termination of the
individuals tenure on our board. Restricted stock awards
to employees are expensed over the vesting period and those made
to our non-employee directors are expensed when granted.
During the year ended December 31, 2007, we recognized
approximately $1.1 million in share-based compensation
expense related primarily to restricted stock and to a lesser
extent, stock options as compared to $0.7 million in 2006.
Cash received from stock option exercises was approximately
$17,000 in 2007 and $16,000 in 2006. The total income tax
benefit recognized related to share-based compensation, which is
recorded in additional paid-in capital, was approximately
$10,000 and $393,000 for the years ended December 31, 2007
and 2006, respectively.
The Black-Scholes option-pricing model was used to compute the
fair value of each option granted for purposes of the pro forma
disclosures required by SFAS 123R. Had compensation cost in
2005 been determined for the stock option grants based on the
fair value method set forth under SFAS 123R, prior to its
adoption, net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:
|
|
|
|
|
|
|
2005
|
|
|
|
(In Thousands, Except
|
|
|
|
Per Share Amounts)
|
|
|
Net Income, as reported
|
|
$
|
24,751
|
|
Add: share based compensation included in reported net income,
net of tax
|
|
|
33
|
|
Deduct: total share-based compensation expense determined under
fair-value based method for all awards, net of tax
|
|
|
2,518
|
|
Pro forma net income
|
|
$
|
22,266
|
|
Basic earnings per share:
|
|
|
|
|
As reported
|
|
$
|
0.80
|
|
Pro forma
|
|
|
0.72
|
|
Diluted earnings per share:
|
|
|
|
|
As reported
|
|
$
|
0.80
|
|
Pro forma
|
|
|
0.72
|
|
The per share weighted average fair value of options granted
under the plan during the year is:
|
|
$
|
10.06
|
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
2.01
|
%
|
|
|
1.39
|
%
|
|
|
1.01
|
%
|
Expected volatility
|
|
|
48.21
|
%
|
|
|
55.00
|
%
|
|
|
57.08
|
%
|
Risk-free interest rate
|
|
|
4.37
|
%
|
|
|
4.66
|
%
|
|
|
4.00
|
%
|
Expected life (in years)
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
In April 2005, our Board of Directors approved the acceleration
of vesting of the unvested stock options under our 1997 Stock
Incentive Plan. This resulted in options to purchase
approximately 438,000 shares of our common stock becoming
immediately exercisable. All of the unvested stock options for
which vesting was accelerated were underwater, with
exercise prices greater than the closing price of our common
stock on the date of acceleration. Vesting of the options was
accelerated as part of our plan to transition the equity-based
portion of our executive compensation plan from stock options to
grants of restricted stock, which we believe will be a more
effective performance incentive and retention tool. Also,
accelerated vesting of the options produced a more favorable
impact
38
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on our future results of operations in light of SFAS 123R.
Early vesting of these options resulted in approximately
$1.0 million less future compensation expense that would
otherwise have been recognized over the remaining life of the
options beginning on January 1, 2006.
|
|
(l)
|
Earnings
per common share
|
Earnings per share is computed in accordance with Statement of
Financial Accounting Standards No. 128
Earnings per
Share (
SFAS 128). Basic earnings per common
share (Basic EPS) is computed by dividing income
available to common shareholders by the weighted average number
of common shares outstanding during the period. Shares issued
and shares reacquired during the period are weighted for the
portion of the period they were outstanding.
Diluted earnings per common share (Diluted EPS) is
computed similarly to Basic EPS except that the weighted average
number of shares outstanding is increased to include the number
of additional common shares that would have been outstanding if
the potentially dilutive common shares had been issued. Our
potentially dilutive common shares consist of unexercised stock
options and restricted shares.
The computation of Diluted EPS does not assume conversion,
exercise or contingent issuance of securities that may have an
antidilutive effect on earnings per share. Consequently, stock
options with an exercise price greater than the average market
price for the period are not included in the computation of
potentially dilutive common shares. For the years ended
December 31, 2007, 2006 and 2005, there were approximately
833,000, 829,000 and 895,000, respectively, antidilutive options
excluded from the computation of diluted earnings per share.
The weighted average shares outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Basic weighted average shares outstanding
|
|
|
28,792,337
|
|
|
|
29,551,309
|
|
|
|
30,966,501
|
|
Dilutive effect of outstanding stock options
|
|
|
2,982
|
|
|
|
7,626
|
|
|
|
63,151
|
|
Dilutive effect of restricted shares
|
|
|
31,301
|
|
|
|
10,325
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
28,826,620
|
|
|
|
29,569,260
|
|
|
|
31,029,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We account for income taxes according to the provisions of
Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes
(SFAS 109).
SFAS 109 requires an asset and liability based approach to
accounting for income taxes. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences on
future years of temporary differences between financial and tax
accounting of revenue and expense items (see Note 7).
Valuation allowances are provided when it is anticipated that a
deferred tax asset is not likely to be fully realized. Effective
January 1, 2007, we adopted Financial Interpretation
No. 48
Accounting for Uncertainty in Income Taxes
(FIN 48) and account for liabilities
related to uncertain tax positions in accordance with its
provisions (see Note 8).
|
|
(n)
|
Comprehensive
income (loss)
|
Our comprehensive income (loss) includes foreign currency
translation adjustments, which are included in accumulated other
comprehensive income in the consolidated statements of
shareholders equity. At December 31, 2007, 2006 and
2005, accumulated other comprehensive income consisted entirely
of foreign currency translation adjustments, which resulted from
translation of the balance sheets of our international
operations to U.S. dollars using the exchange rate in
effect on the balance sheet date.
39
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(o)
|
Shipping
and handling revenues and costs
|
We include shipping and handling fees billed to customers in net
sales. The related shipping and handling costs are included in
cost of sales.
|
|
(p)
|
Sales,
use and value added taxes
|
We do not include sales, use, value added or similar taxes
billed to customers in net sales.
|
|
(q)
|
Product
warranty and support obligations
|
We recognize expense for the estimated costs of hardware
warranties and software support at the time the related revenue
is recognized. For hardware warranty, we estimate the costs
based on historical and projected product failure rates,
historical and projected repair costs, and knowledge of specific
product failures (if any). The specific hardware warranty terms
and conditions vary depending upon the product sold, but
generally include technical support, parts, and labor over a
period generally ranging from 90 days to three years. For
software warranty, we estimate the costs to provide customers
with service during the term of the support period. We regularly
reevaluate our estimates to assess the adequacy of the recorded
warranty and support liabilities and adjust the amounts as
necessary.
The changes in our aggregate product warranty and support
liabilities were as follows:
|
|
|
|
|
|
|
(In Thousands)
|
|
|
Balance at December 31, 2005
|
|
$
|
1,297
|
|
Amount expensed for new warranty and support obligations and
changes in estimates for pre-existing obligations
|
|
|
4,375
|
|
Cost of warranty and support provided during the year
|
|
|
(4,477
|
)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,195
|
|
Amount expensed for new warranty and support obligations and
changes in estimates for pre-existing obligations
|
|
|
4,571
|
|
Cost of warranty and support provided during the year
|
|
|
(4,463
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,303
|
|
|
|
|
|
|
|
|
(6)
|
Goodwill
and other intangible assets
|
Under Statement of Financial Accounting Standards No. 142
Goodwill and Other Intangible Assets
(SFAS 142), we are required to assess goodwill
and other intangibles with indefinite lives at least annually
for impairment by applying a fair-value-based test. We completed
this testing in 2007 and 2006, and found no instances of
impairment.
The following table summarizes the change in goodwill during
2005, 2006 and 2007:
|
|
|
|
|
|
|
(In Thousands)
|
|
|
Balance at December 31, 2005
|
|
|
45,906
|
|
Acquisition final allocation adjustment
|
|
|
1,066
|
|
Currency translation
|
|
|
1
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
46,973
|
|
Currency translation
|
|
|
92
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
47,065
|
|
|
|
|
|
|
40
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2007, 2006, and 2005, we
recognized amortization expense of $0.5 million,
$0.7 million and $0.6 million, respectively, on other
intangibles with finite lives. The tradename has an indefinite
life and therefore is not amortized. The customer relationships
intangible has a
10-year
estimated useful life and is being amortized on an accelerated
method. Intangible amortization expense is estimated to be
$0.5 million, $0.4 million, $0.3 million,
$0.3 million and $0.3 million for 2008, 2009, 2010,
2011 and 2012, respectively.
Other intangibles consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Tradename
|
|
$
|
3,000
|
|
|
$
|
|
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
$
|
|
|
|
$
|
3,000
|
|
Customer relationships
|
|
|
4,150
|
|
|
|
1,571
|
|
|
|
2,579
|
|
|
|
4,150
|
|
|
|
1,026
|
|
|
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles
|
|
$
|
7,150
|
|
|
$
|
1,571
|
|
|
$
|
5,579
|
|
|
$
|
7,150
|
|
|
$
|
1,026
|
|
|
$
|
6,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes from continuing operations
consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
5,081
|
|
|
$
|
3,783
|
|
|
$
|
9,840
|
|
State and local
|
|
|
696
|
|
|
|
518
|
|
|
|
1,850
|
|
Foreign
|
|
|
69
|
|
|
|
23
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision
|
|
|
5,846
|
|
|
|
4,324
|
|
|
|
11,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(1,231
|
)
|
|
|
2,571
|
|
|
|
1,329
|
|
State and local
|
|
|
(74
|
)
|
|
|
148
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax provision
|
|
|
(1,305
|
)
|
|
|
2,719
|
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
4,541
|
|
|
$
|
7,043
|
|
|
$
|
13,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Income tax provision at statutory tax rate
|
|
$
|
4,239
|
|
|
|
35.0
|
%
|
|
$
|
6,663
|
|
|
|
35.0
|
%
|
|
$
|
13,083
|
|
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
|
|
379
|
|
|
|
3.1
|
%
|
|
|
433
|
|
|
|
2.3
|
%
|
|
|
1,273
|
|
|
|
3.4
|
%
|
Federal tax credits and exclusions
|
|
|
(469
|
)
|
|
|
(3.9
|
)%
|
|
|
(82
|
)
|
|
|
(0.4
|
)%
|
|
|
(327
|
)
|
|
|
(0.9
|
)%
|
Resolution of prior period tax matters
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(658
|
)
|
|
|
(1.8
|
)%
|
Provision for uncertain tax positions
|
|
|
507
|
|
|
|
4.2
|
%
|
|
|
171
|
|
|
|
0.9
|
%
|
|
|
(121
|
)
|
|
|
(0.3
|
)%
|
Other
|
|
|
(115
|
)
|
|
|
(0.9
|
)%
|
|
|
(142
|
)
|
|
|
(0.8
|
)%
|
|
|
(39
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
4,541
|
|
|
|
37.5
|
%
|
|
$
|
7,043
|
|
|
|
37.0
|
%
|
|
$
|
13,211
|
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
1,768
|
|
|
$
|
1,062
|
|
Expenses not currently deductible
|
|
|
2,638
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
|
4,406
|
|
|
|
3,596
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
104
|
|
|
|
32
|
|
Expenses not currently deductible
|
|
|
2,401
|
|
|
|
86
|
|
Depreciation and amortization
|
|
|
495
|
|
|
|
388
|
|
Intangibles
|
|
|
(1,413
|
)
|
|
|
(1,384
|
)
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax asset (liability)
|
|
|
1,587
|
|
|
|
(878
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
5,993
|
|
|
$
|
2,718
|
|
|
|
|
|
|
|
|
|
|
(8) Uncertain
Tax Positions
We file income tax returns with the U.S., various states and
certain foreign jurisdictions. Our most significant
jurisdictions are the U.S. and the state of Wisconsin. We
are no longer subject to examinations by the U.S. for years
before 2004. For Wisconsin and the remaining jurisdictions, with
few exceptions, we are no longer subject to examinations by tax
authorities for years before 2003. We are not currently under
examination by the Internal Revenue Service. We are currently
under examination by the State of Wisconsin for 2003 through
2006.
Effective January 1, 2007, we adopted FIN 48. This
interpretation provides specific guidance on how enterprises
recognize and measure tax benefits associated with uncertain tax
positions. As a result of the adoption of FIN 48, we
recognized a $0.3 million increase in the liability for
unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of retained
earnings. We classify interest and penalties related to
unrecognized tax benefits as income tax expense. During the year
ended December 31, 2007, we recognized approximately
$0.3 million of tax expense related to interest and
penalties.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
Interest & penalties
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
|
Balance at January 1, 2007
|
|
$
|
3,034
|
|
|
$
|
1,159
|
|
|
$
|
4,193
|
|
Additions for tax positions related to the current year
|
|
|
730
|
|
|
|
40
|
|
|
|
770
|
|
Additions for tax positions of prior years
|
|
|
61
|
|
|
|
265
|
|
|
|
326
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(55
|
)
|
|
|
(17
|
)
|
|
|
(72
|
)
|
Settlements
|
|
|
(81
|
)
|
|
|
(32
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,689
|
|
|
$
|
1,415
|
|
|
$
|
5,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the unrecognized tax benefits of $3.7 million
at December 31, 2007 is $2.5 million of tax benefits
that, if recognized, would reduce our annual effective tax rate.
We do not anticipate that our total amount of unrecognized tax
benefits will significantly change during 2008 or that we will
be required to make any payments related to tax positions that
will have a significant adverse impact on our financial
position, results of operations or shareholders equity.
42
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have a $15.0 million secured revolving line of credit
with a bank, which is available until May 31, 2009. The
line of credit bears interest at either a floating rate based on
the prime rate less 1.0%, or a fixed rate for a period of up to
90 days based on LIBOR plus 1.25%. The rate is at our
option and is determined at the time of borrowing. We also have
a $2.0 million unsecured revolving line of credit with a
bank available until April 30, 2009. The line of credit
bears interest based on the prime rate less 1.0%. As of
December 31, 2007 and 2006, the lines of credit had not
been used.
We are party to various operating leases for office and
warehouse facilities we occupy to carry out our business
operations. Certain of these leases provide for scheduled rent
increases based on price-level factors. We have not entered into
leases that call for contingent rent. In most cases, management
expects that, in the normal course of business, leases will be
renewed or replaced. Approximate rent expense for 2007, 2006 and
2005 was $2.2 million, $2.0 million and
$0.9 million, respectively.
Future approximate minimum rental payments (including estimated
operating costs) required under operating leases as of
December 31, 2007 are as follows:
|
|
|
|
|
|
|
(In Thousands)
|
|
|
2008
|
|
$
|
2,225
|
|
2009
|
|
|
1,508
|
|
2010
|
|
|
1,102
|
|
2011
|
|
|
716
|
|
2012
|
|
|
543
|
|
After 2012
|
|
|
404
|
|
|
|
|
|
|
|
|
$
|
6,498
|
|
|
|
|
|
|
(11) Litigation
We are subject to various claims and proceedings covering a wide
range of matters that arise in the ordinary course of business
activities. We believe that any liability that may ultimately
arise from the resolution of these matters will not have a
material adverse effect on our financial position, results of
operations or shareholders equity.
In order to provide retirement benefits for our employees, we
have established a defined contribution 401(k) Savings Plan
covering all employees in the United States who meet certain
service requirements and a Supplemental Executive Retirement
Plan (SERP) available to senior management.
Employees participating in the 401(k) plan may elect to
contribute up to 50% of their annual pretax compensation subject
to certain IRS limitations. SERP participants may elect to defer
up to 20% of their annual pretax compensation to the SERP.
Vesting and employer matching contributions are the same under
both plans. Vesting of employer contributions takes place
ratably over an employees first four years of service with
full vesting of past and future employer contributions once four
years of service is reached.
Employer matching contributions are currently $0.75 for each
$1.00 contributed by a participant and are limited to a maximum
of 4.5% of a participants pretax compensation. For those
employees participating in the
43
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SERP, the maximum employer contribution is determined on a
combined basis with the 401(k) plan. Discretionary employer
contributions may also be made to the plans. No discretionary
contributions were made to the plans in 2007, 2006 or 2005.
SERP participants elect to defer receipt of a portion of their
compensation and invest their deferrals in certain mutual funds,
which are nearly identical to the investment selections offered
to participants in our 401(k) plan. The liability for the SERP
is included in deferred compensation and other employee
benefits. The SERP is fully funded and the related investments
are classified as investment securities on our consolidated
balance sheets. Our liability for the SERP was $1.9 million
at December 31, 2007 and $1.6 million, at
December 31, 2006.
The following summarizes our expense under these retirement
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Employer matching contribution 401(k) Plan
|
|
$
|
1,459
|
|
|
$
|
1,318
|
|
|
$
|
1,027
|
|
Employer matching contribution SERP
|
|
|
18
|
|
|
|
15
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,477
|
|
|
$
|
1,333
|
|
|
$
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13) Stock
incentive plan
We have established the 1997 Stock Incentive Plan (the
Plan) for our officers, key employees, non-employee
directors and consultants. A combined maximum of 6,000,000
options, stock appreciation rights (SARs) and share
awards may be granted under the plan. No incentive stock options
(ISOs) or SARs have been granted under the Plan. At
December 31, 2007, there were approximately
2.2 million shares available for issuance under our 1997
Stock Incentive Plan.
(a) Stock option awards
Options granted
under the Plan may be in the form of nonqualified stock options
(NSOs) or ISOs which comply with Section 422 of
the Internal Revenue Code. The exercise price of the options is
the market value of our common stock at the date of grant.
Options become exercisable ratably over their respective vesting
period which ranges from immediate vesting up to a four year
vesting period. The options expire 10 years from the grant
date.
A summary of stock option activity under the plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
|
|
|
exercise
|
|
|
|
|
|
exercise
|
|
|
|
Shares
|
|
|
price
|
|
|
Shares
|
|
|
price
|
|
|
Shares
|
|
|
price
|
|
|
Outstanding at beginning of year
|
|
|
895,516
|
|
|
$
|
22.96
|
|
|
|
1,519,820
|
|
|
$
|
22.42
|
|
|
|
1,625,038
|
|
|
$
|
22.85
|
|
Granted
|
|
|
11,551
|
|
|
|
12.37
|
|
|
|
9,616
|
|
|
|
14.86
|
|
|
|
223,044
|
|
|
|
20.58
|
|
Exercised
|
|
|
(1,755
|
)
|
|
|
8.88
|
|
|
|
(241,149
|
)*
|
|
|
13.54
|
|
|
|
(135,880
|
)
|
|
|
15.49
|
|
Forfeitures
|
|
|
(25,015
|
)
|
|
|
23.06
|
|
|
|
(392,771
|
)
|
|
|
26.47
|
|
|
|
(192,382
|
)
|
|
|
28.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
880,297
|
|
|
|
22.85
|
|
|
|
895,516
|
|
|
|
22.96
|
|
|
|
1,519,820
|
|
|
|
22.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
880,297
|
|
|
$
|
22.85
|
|
|
|
893,297
|
|
|
$
|
22.98
|
|
|
|
1,515,381
|
|
|
$
|
22.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Includes 240,119 of shares related to payment of $1,000,501 to
cancel
in-the-money
options, primarily of the companys former chief executive
officer in 2006.
|
44
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and Outstanding Options
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
Range of
|
|
Options
|
|
|
Remaining
|
|
|
Average
|
|
Exercise price
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
$8.00 to $16.00
|
|
|
76,599
|
|
|
|
3.26
|
|
|
$
|
12.59
|
|
$16.01 to $22.00
|
|
|
420,093
|
|
|
|
4.07
|
|
|
|
17.82
|
|
$22.01 to $29.00
|
|
|
95,819
|
|
|
|
6.41
|
|
|
|
24.48
|
|
$29.01 to $34.00
|
|
|
186,427
|
|
|
|
3.42
|
|
|
|
60.63
|
|
$34.01 to $40.00
|
|
|
100,825
|
|
|
|
2.92
|
|
|
|
35.46
|
|
$40.01 to $52.00
|
|
|
534
|
|
|
|
3.55
|
|
|
|
51.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$8.00 to $51.58
|
|
|
880,297
|
|
|
|
3.99
|
|
|
$
|
22.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Restricted stock awards
Restricted
shares or restricted stock units are granted to certain
employees and our directors. For employees, restricted stock
awards generally vest over a period of four years and for
non-employee directors, upon termination of the
individuals tenure on our board. Restricted stock awards
to employees are expensed over the vesting period, and those
made to our non-employee directors are expensed when granted.
Unearned restricted stock compensation is recorded based on the
market price on the grant date and is expensed equally over the
vesting period. In 2007, 153,401 restricted shares were granted
at a weighted average market price at the grant date of $12.93
and compensation expense related to restricted shares was
approximately $1.0 million for the year. In 2006, 125,056
restricted shares were granted at a weighted average market
price at the grant date of $14.16 and compensation expense
related to restricted shares was approximately $0.6 million
for the year. In 2005, 23,409 restricted shares were granted at
a weighted average market price at the grant date of $22.70 and
compensation expense related to restricted shares was $53,000
for the year.
|
|
(14)
|
Shareholders
equity
|
On April 17, 2002, our Board of Directors authorized the
repurchase of up to 5,000,000 shares of our common stock.
On February 9, 2005, our Board of Directors authorized the
repurchase of an additional 3,000,000 shares of common
stock. No time limit was placed on the duration of the
repurchase program. Repurchased shares will become treasury
shares and will be used for share-based employee compensation
plans and for other general corporate purposes. Since initial
authorization was granted, we have repurchased 7.8 million
common shares of common stock at a cost of $134.8 million
under this repurchase program.
A summary of stock repurchase activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate annual
|
|
|
|
|
|
|
Weighted average
|
|
|
cost of
|
|
|
|
Number of shares
|
|
|
repurchased price
|
|
|
repurchased
|
|
|
|
repurchased
|
|
|
per share*
|
|
|
stock*
|
|
|
2007
|
|
|
117,480
|
|
|
$
|
12.22
|
|
|
$
|
1,435,099
|
|
2006
|
|
|
1,461,216
|
|
|
$
|
15.38
|
|
|
$
|
22,474,628
|
|
2005
|
|
|
1,837,231
|
|
|
$
|
18.00
|
|
|
$
|
32,373,719
|
|
|
|
|
*
|
|
Includes broker commission
|
On April 14, 1999, our shareholders approved an amendment
to the Companys Amended and Restated Articles of
Incorporation to increase the authorized common stock of the
Company from 50,000,000 shares to 150,000,000 shares
with a $.01 par value per share. The Companys Amended
and Restated Articles of Incorporation also includes
authorization to issue up to 5,000,000 shares of preferred
stock with a $.01 par value per share. No preferred stock
has been issued.
45
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statement of Financial Accounting Statement No. 131
Disclosures about Segments of an Enterprise and Related
Information
(SFAS 131) establishes annual
and interim reporting standards for an enterprises
business segments and related disclosures about its products,
services, geographic areas and major customers. The method of
determining what information to report is based on the way
management organizes the operating segments within the Company
for making operating decisions and assessing financial
performance. In addition, SFAS 131 applies both qualitative
and quantitative aggregation rules to operating segments in
order to determine the final reportable segments. Under
SFAS 131, we have one reportable segment. Foreign market
operations are not significant at this time.
|
|
(16)
|
Quarterly
results of operations (unaudited)
|
The following table sets forth unaudited consolidated income
statement data for each quarter of the last two fiscal years.
This unaudited quarterly financial information is prepared on
the same basis as the annual information presented in the
consolidated financial statements and, in our opinion, reflects
all adjustments (consisting of normal recurring entries)
necessary for a fair presentation of the information. The
operating results for any quarter are not necessarily indicative
of results for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In Thousands, Except Per Share Amounts)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
26,688
|
|
|
$
|
27,177
|
|
|
$
|
25,809
|
|
|
$
|
28,258
|
|
Gross profit
|
|
|
20,118
|
|
|
|
20,244
|
|
|
|
18,969
|
|
|
|
21,098
|
|
Operating income
|
|
|
1,805
|
|
|
|
3,161
|
|
|
|
1,898
|
|
|
|
4,066
|
|
Income before income taxes
|
|
|
2,107
|
|
|
|
3,485
|
|
|
|
2,188
|
|
|
|
4,328
|
|
Income taxes
|
|
|
790
|
|
|
|
1,307
|
|
|
|
821
|
|
|
|
1,623
|
|
Net income
|
|
|
1,317
|
|
|
|
2,178
|
|
|
|
1,367
|
|
|
|
2,705
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
0.05
|
|
|
|
0.08
|
|
|
|
0.05
|
|
|
|
0.09
|
|
Common stock price per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
17.94
|
|
|
|
13.29
|
|
|
|
13.81
|
|
|
|
15.75
|
|
Low
|
|
|
12.51
|
|
|
|
10.97
|
|
|
|
10.92
|
|
|
|
11.37
|
|
46
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In Thousands, Except Per Share Amounts)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
31,117
|
|
|
$
|
29,319
|
|
|
$
|
25,167
|
|
|
$
|
25,925
|
|
Gross profit
|
|
|
23,983
|
|
|
|
22,462
|
|
|
|
18,768
|
|
|
|
19,849
|
|
Operating income
|
|
|
5,240
|
|
|
|
7,076
|
|
|
|
2,987
|
|
|
|
2,499
|
|
Income before income taxes
|
|
|
5,522
|
|
|
|
7,419
|
|
|
|
3,303
|
|
|
|
2,792
|
|
Income taxes
|
|
|
2,043
|
|
|
|
2,745
|
|
|
|
1,222
|
|
|
|
1,033
|
|
Net income
|
|
|
3,479
|
|
|
|
4,674
|
|
|
|
2,081
|
|
|
|
1,759
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
0.12
|
|
|
|
0.16
|
|
|
|
0.07
|
|
|
|
0.06
|
|
Common stock price per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
19.96
|
|
|
|
17.21
|
|
|
|
15.19
|
|
|
|
18.76
|
|
Low
|
|
|
15.98
|
|
|
|
12.64
|
|
|
|
10.61
|
|
|
|
13.71
|
|
Earnings per share amounts for each quarter are required to
be calculated independently and therefore may not total to the
amount calculated for the year.
|
|
(17)
|
Recent
accounting pronouncements
|
In December 2007, the FASB issued SFAS No. 141(R)
Business Combinations
(SFAS 141R).
SFAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is
effective for us on January 1, 2009. SFAS 141R is not
expected to have a material effect on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). 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. This new consolidation method will
significantly change the accounting for transactions with
minority interest holders. SFAS 160 is effective for us on
January 1, 2009. SFAS 160 is not expected to have a
material effect on our consolidated financial statements.
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). This standard
permits entities to measure many financial instruments and
certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. The provisions of
SFAS 159 are effective for us on January 1, 2008 and
are not expected to have a material effect on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements
(SFAS 157), to
establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements. The provisions of
SFAS 157 are effective for us on January 1, 2008 and
are not expected to have a material effect on our consolidated
financial statements.
47
RENAISSANCE
LEARNING, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(18)
|
Discontinued
operations
|
In February 2005, we consummated the sale of our Generation21
subsidiary, a non-core part of our business, for $75,000. The
results of Generation21 for all periods presented in our
consolidated financial statements are reflected as discontinued
operations.
Results of discontinued operations consist of the following:
|
|
|
|
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Operating loss
|
|
$
|
(192
|
)
|
Income tax benefit
|
|
|
76
|
|
|
|
|
|
|
Loss from operations, net
|
|
|
(116
|
)
|
|
|
|
|
|
Loss on disposal
|
|
|
(642
|
)
|
Tax benefit on disposal
|
|
|
1,342
|
|
|
|
|
|
|
Gain on disposal, net
|
|
|
700
|
|
|
|
|
|
|
Gain from discontinued operations, net
|
|
$
|
584
|
|
|
|
|
|
|
On February 6, 2008 our Board of Directors declared a
quarterly cash dividend of $0.07 per share. The board also
authorized the purchase of an additional 1.0 million shares
under the stock repurchase program. With this authorization, we
may repurchase an additional 1.2 million shares as of that
date.
48
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this
evaluation, management, including our chief executive officer
and chief financial officer, concluded that our disclosure
controls and procedures were effective as of December 31,
2007.
There has been no change in our internal control over financial
reporting that has occurred during the quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined under
Rule 13a-15(f)
promulgated under the Exchange Act. Under the supervision and
with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an
evaluation of the effectiveness of our internal control over
financial reporting based on the framework in
Internal
Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation using the framework in
Internal Control Integrated Framework
, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2007 and during
the year then ended.
The effectiveness of our internal control over financial
reporting has been audited by Deloitte & Touche LLP,
our independent registered public accounting firm, as stated in
their report which is included herein.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
49
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
(a)
Executive Officers.
Reference is made to
Executive Officers of the Registrant in Part I
hereof.
(b)
Directors.
The information required by this
Item is set forth in our Proxy Statement for the Annual Meeting
of Shareholders to be held on April 16, 2008 under the
caption Proposal One: Election of Directors,
which information is incorporated by reference herein.
(c)
Section 16 Compliance.
The information
required by this Item is set forth in our Proxy Statement for
the Annual Meeting of Shareholders to be held on April 16,
2008 under the caption Section 16(a) Beneficial Ownership
Reporting Compliance, which information is incorporated by
reference herein.
(d)
Code of Ethics.
We have adopted a code of
ethics pursuant to Item 406 of
Regulation S-K.
A copy of our code of ethics is incorporated by reference herein
(see Exhibit 14.1 of Exhibit Index).
(e)
Audit Committee and Audit Committee Financial
Expert.
The information required by this Item is set
forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 16, 2008 under the caption
Proposal One: Election of Directors - Audit
Committee, which information is incorporated by reference
herein.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 16, 2008 under the captions Executive
Compensation, Non-Employee Director
Compensation, Compensation Committee Report
and Compensation Committee Interlocks and Insider
Participation, which information is incorporated by
reference herein.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 403 of
Regulation S-K
is set forth in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 16, 2008 under the caption
Security Ownership of Management and Certain Beneficial
Owners, which information is incorporated by reference
herein.
50
The information required by Item 201(d) of
Regulation S-K
is set forth below.
EQUITY
COMPENSATION PLAN INFORMATION
The following table sets forth certain information about shares
of our common stock outstanding and available for issuance under
our existing equity compensation plans, which consist of our
1997 stock incentive plan and our 1998 employee stock
purchase plan (this latter plan is currently inactive). The
table details securities authorized for issuance under our
equity compensation plans as of December 31, 2007. The
table below does not include awards, exercises or cancellations
under our equity compensation plans subsequent to
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Available for Future
|
|
|
|
Number of Securities
|
|
|
|
|
|
Issuance Under
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected
|
|
Plan category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
in First Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
880,297
|
|
|
$
|
22.85
|
|
|
|
2,426,597
|
(1)
|
Equity compensation plans not approved by security holders(2)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
880,297
|
|
|
$
|
22.85
|
|
|
|
2,426,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Of the 6,000,000 shares authorized for issuance under our
1997 stock incentive plan, 2,187,203 remain available for future
issuance as of December 31, 2007. Under our
1998 employee stock purchase plan (ESPP),
239,394 shares remain available for future issuance. We did
not offer the ESPP to employees in 2007 and do not intend to
offer the plan to employees in 2008.
|
|
(2)
|
|
Both of the companys equity compensation plans have been
approved by shareholders.
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 16, 2008 under the caption Certain
Relationships and Transactions, which information is
incorporated by reference herein.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 16, 2008 under the caption Audit Committee
Report, which information is incorporated by reference
herein.
51
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(a)(1)
|
Financial Statements.
|
|
Consolidated
Financial Statements
|
Report
of Independent Registered Public Accounting Firm
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
Consolidated
Statements of Income for the years ended December 31, 2007,
2006 and 2005
|
Consolidated
Statements of Shareholders Equity for the years ended
December 31, 2007, 2006 and 2005
|
Consolidated
Statements of Cash Flows for the years ended December 31,
2007, 2006 and 2005
|
Notes
to Consolidated Financial Statements
|
(a)(2)
Financial Statement Schedules.
See the Exhibit Index, which is incorporated by
reference herein.
See (b) below.
See the Exhibit Index, which is incorporated by
reference herein.
|
|
(c)
|
Financial
Statements Excluded from Annual Report to
Shareholders.
|
Not applicable.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RENAISSANCE LEARNING, INC.
Terrance D. Paul
Chief Executive Officer and a Director
Date: February 27, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated:
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/
Terrance
D. Paul
Terrance
D. Paul
|
|
Chief Executive Officer
(Principal Executive Officer) and a Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/
Mary
T. Minch
Mary
T. Minch
|
|
Senior Vice President-Finance,
Chief Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
|
|
February 27, 2008
|
|
|
Directors:
|
Judith A. Paul, Addison L. Piper, John H. Grunewald, Gordon H.
Gunnlaugsson, Harold E. Jordan and Judith A. Ryan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
Mary
T. Minch
Mary
T. Minch
Attorney-In-Fact*
|
|
|
|
February 27, 2008
|
|
|
|
*
|
|
Pursuant to authority granted by powers of attorney, copies of
which are filed herewith.
|
53
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of Registrant, as
amended.(1)
|
|
3
|
.2
|
|
Amended and Restated By-Laws of Registrant, as amended.(2)
|
|
4
|
.1
|
|
Form of Stock Certificate.(3)
|
|
10
|
.1
|
|
Amended and Restated Employee Stock Purchase Plan.(4)*
|
|
10
|
.2
|
|
1997 Stock Incentive Plan (Amended and Restated Effective
April 16, 2003).(5)*
|
|
10
|
.3
|
|
Incentive Bonus Plan.(6)*
|
|
10
|
.4
|
|
Form of Nonstatutory Stock Option Agreement between Registrant
and certain employees and consultants.(7)*
|
|
10
|
.5
|
|
Form of Nonstatutory Stock Option Agreement between Registrant
and certain non-employee directors.(7)*
|
|
10
|
.6
|
|
Form of Restricted Stock Agreement with certain executive
officers.(8)*
|
|
10
|
.7
|
|
Form of Restricted Stock Agreement with certain non-employee
directors.(8)*
|
|
10
|
.8
|
|
Form of Restricted Stock Unit Agreement with certain
non-employee directors.(9)*
|
|
10
|
.9
|
|
Form of Non-Employee Director Indemnification Agreement.(10)
|
|
10
|
.10
|
|
Credit Agreement dated as of October 1, 2007 by and between
Registrant and Wells Fargo Bank, National Association.(11)
|
|
14
|
.1
|
|
Code of Business Conduct and Ethics.(12)
|
|
21
|
.1
|
|
Subsidiaries of Registrant.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1
|
|
Directors Powers of Attorney.
|
|
31
|
.1
|
|
Section 302 Certification by Terrance D. Paul, Chief
Executive Officer.
|
|
31
|
.2
|
|
Section 302 Certification by Mary T. Minch, Chief Financial
Officer.
|
|
32
|
.1
|
|
Section 906 Certification by Terrance D. Paul, Chief
Executive Officer.
|
|
32
|
.2
|
|
Section 906 Certification by Mary T. Minch, Chief Financial
Officer.
|
|
99
|
.1
|
|
Schedule II Valuation and Qualifying Accounts.
|
|
|
|
(1)
|
|
Incorporated by reference to
Registrants
Form 10-Q
for the quarter ended March 31, 2001 (SEC File
No. 0-22187).
|
|
(2)
|
|
Incorporated by reference to
Registrants
Form 10-Q
for the quarter ended March 31, 2000 (SEC File
No. 0-22187).
|
|
(3)
|
|
Incorporated by reference to
Registrants Amendment No. 2 to
Form 8-A
filed on August 9, 2006 (SEC File
No. 0-22187).
|
|
(4)
|
|
Incorporated by reference to
Registrants
Form 10-K
for the fiscal year ended December 31, 2000 (SEC File
No. 0-22187).
|
|
(5)
|
|
Incorporated by reference to
Registrants
Form S-8
filed on April 18, 2003 (SEC File
No. 333-104622).
|
|
(6)
|
|
Incorporated by reference to
Registrants
Form 10-Q
for the quarter ended June 30, 2003 (SEC File
No. 0-22187).
|
|
(7)
|
|
Incorporated by reference to
Registrants
Form 8-K
filed on March 7, 2005 (SEC File
No. 0-22187).
|
|
(8)
|
|
Incorporated by reference to
Registrants
Form 8-K
filed on May 10, 2006 (SEC File
No. 0-22187).
|
|
(9)
|
|
Incorporated by reference to
Registrants
Form 10-Q
for the quarter ended September 30, 2006 (SEC File
No. 0-22187).
|
|
(10)
|
|
Incorporated by reference to
Registrants
Form 8-K
filed on January 29, 2007 (SEC File
No. 0-22187).
|
|
(11)
|
|
Incorporated by reference to
Registrants
Form 10-Q
for the quarter ended September 30, 2007 (SEC File
No. 0-22187).
|
|
(12)
|
|
Incorporated by reference to
Registrants
Form 10-K
for the fiscal year ended December 31, 2003 (SEC File
No. 0-22187).
|
|
*
|
|
Management contract or compensatory
plan or arrangement.
|
THE REGISTRANT WILL FURNISH A COPY OF ANY OF THE FOREGOING
EXHIBITS UPON THE REQUEST OF A SHAREHOLDER AFTER THE
PAYMENT OF A FEE BY SUCH SHAREHOLDER WHICH SHALL REPRESENT
REGISTRANTS REASONABLE EXPENSES INCURRED IN FURNISHING ANY
SUCH EXHIBIT. REQUESTS SHOULD BE SENT TO RENAISSANCE LEARNING,
INC., 2911 PEACH STREET, P.O. BOX 8036, WISCONSIN RAPIDS,
WISCONSIN
54495-8036,
ATTENTION: CORPORATE SECRETARY.
54
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