RENAISSANCE LEARNING INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005.


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

Commission file number: 0-22187

RENAISSANCE LEARNING, INC.

(Exact name of Registrant as Specified in its Charter)


Wisconsin		39-1559474
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
(Address of principal executive offices)

54495-8036
(Zip Code)

(715) 424-3636
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Outstanding at
Class		April 30, 2005
Common Stock, $0.01 par value		30,598,782

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	March 31,			December 31,
	2005			2004
	(In Thousands, Except Share and
	Per Share Amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	39,340		$	27,460
Investment securities		19,630			25,103
Accounts receivable, less allowances of $1,248 and $1,283, respectively		8,361			8,441
Inventories		2,206			2,364
Prepaid expenses		1,138			1,194
Deferred tax asset		3,666			3,800
Assets of discontinued operations		—			1,149
Other current assets		400			453

Total current assets		74,741			69,964
Investment securities		16,670			21,003
Property, plant and equipment, net		18,454			18,552
Deferred tax asset		1,659			1,620
Goodwill		2,752			2,757
Other intangibles, net		138			192
Capitalized software, net		513			636

Total assets	$	114,927		$	114,724

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,341		$	2,377
Deferred revenue		15,096			16,484
Payroll and employee benefits		2,137			2,832
Income taxes payable		2,340			925
Liabilities of discontinued operations		—			1,650
Other current liabilities		4,039			3,881

Total current liabilities		26,953			28,149
Deferred revenue		558			620
Deferred compensation		1,305			1,354

Total liabilities		28,816			30,123
Minority interest		191			184
Shareholders’ equity:
Common stock, $.01 par; shares authorized: 150,000,000; issued: 34,736,647 shares at Dec. 31, 2004 and March 31, 2005		347			347
Additional paid-in capital		54,373			54,490
Retained earnings		104,612			99,689
Treasury stock, at cost 4,067,965 shares March 31, 2005; 3,865,280 shares Dec. 31, 2004		(73,504	)		(70,213	)
Accumulated other comprehensive income		92			104

Total shareholders’ equity		85,920			84,417

Total liabilities and shareholders’ equity	$	114,927		$	114,724

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)


	For the Three Months Ended
	March 31,
	2005		2004
	(In thousands, Except Per Share Amounts)
Net sales:
Products	$	21,126	$	24,804
Services		6,431		6,151

Total net sales		27,557		30,955

Cost of sales:
Products		1,189		1,703
Services		2,760		3,535

Total cost of sales		3,949		5,238

Gross profit		23,608		25,717
Operating expenses:
Product development		3,618		3,596
Selling and marketing		8,045		8,624
General and administrative		3,069		3,137

Total operating expenses		14,732		15,357

Operating income		8,876		10,360
Other income, net		456		389

Income — continuing operations before income taxes		9,332		10,749
Income taxes — continuing operations		3,453		4,005

Income — continuing operations		5,879		6,744

Income (loss) on discontinued operations, net of tax benefit of $1,417 in 2005 and $515 in 2004		584		(802	)

Net income	$	6,463	$	5,942


Earnings per share:
Basic:
Continuing operations	$	0.19	$	0.22
Discontinued operations		0.02	$	(0.03	)

Net income	$	0.21	$	0.19

Diluted:
Continuing operations	$	0.19	$	0.22
Discontinued operations		0.02	$	(0.03	)

Net income	$	0.21	$	0.19

Cash dividends declared per share	$	0.05	$	2.19

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	For the Three Months Ended
	March 31,
	2005			2004
	(In Thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income	$	6,463		$	5,942
Adjustments to arrive at cash provided by operating activities
Depreciation and amortization		745			934
Amortization of investment discounts/premiums		132			246
Deferred income taxes		95			(331	)
(Gain) loss on disposal of discontinued operations		(702	)		—
Income tax benefit from the exercise of stock options		10			—
Change in assets and liabilities -
Accounts receivable		81			896
Inventories		158			(332	)
Prepaid expenses		56			149
Accounts payable and other current liabilities		1,799			881
Deferred revenue		(1,450	)		(93	)
Other current assets		51			58
Other		108			30

Net cash provided by operating activities		7,546			8,380


Cash flows from investing activities:
Purchase of property, plant and equipment		(452	)		(350	)
Purchase of investment securities		(95	)		(4,031	)
Maturities/sales of investment securities		9,768			12,460
Capitalized software development costs		(4	)		(119	)
Net proceeds from disposal of discontinued operations		75			—

Net cash provided by investing activities		9,292			7,960

Cash flows from financing activities:
Return of capital to minority interest		—			(54	)
Proceeds from exercise of stock options		504			2,416
Dividends paid		(1,541	)		(67,877	)
Purchase of treasury stock		(3,921	)		—

Net cash used by financing activities		(4,958	)		(65,515	)

Net increase (decrease) in cash		11,880			(49,175	)
Cash and cash equivalents, beginning of period		27,460			62,524

Cash and cash equivalents, end of period	$	39,340		$	13,349

See accompanying notes to condensed consolidated financial statements.

- 3 -

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Consolidation

The condensed consolidated financial statements include the financial results of Renaissance Learning, Inc. and our subsidiaries. Our only significant subsidiary, as of March 31, 2005 is Renaissance Corporate Services Inc. Generation21 Learning Systems, LLC was divested during the first quarter of 2005 and, therefore, its results for all periods presented in the financial statements are reflected as discontinued operations.

2. Basis of Presentation

The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of the interim periods, and are presented on an unaudited basis. These financial statements should be read in conjunction with the financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2004, which is on file with the U.S. Securities and Exchange Commission (“2004 Annual Report”).

The results of operations for the three-month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.

3. Earnings Per Common Share

Basic earnings per common share is computed by dividing net income 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 has been computed based on the weighted average number of common shares outstanding, increased by the number of additional common shares that would have been outstanding if the potentially dilutive stock option shares had been issued.

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 up to an additional 3,000,000 shares under our stock repurchase program. No time limit was placed on the duration of the stock repurchase program, nor is there any dollar limit on the 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 quarter ending March 31, 2005, we repurchased 237,400 shares at a cost of $3.9 million. As of March 31, 2005 the cumulative number of shares repurchased under this program was 4.5 million with an aggregate cost of $82.3 million.

The weighted average shares outstanding are as follows:


	Three Months Ended March 31
	2005		2004
Basic weighted average shares outstanding		30,816,536		30,963,565
Dilutive effect of outstanding stock options		41,757		270,829

Diluted weighted average shares outstanding		30,858,293		31,234,394

For the three months ended March 31, 2005 and 2004, respectively, there were 1,281,374 and 667,500 shares attributable to outstanding stock options excluded from the calculation of diluted earnings per share because their effect was antidilutive. These options could be dilutive in the future.

4. Comprehensive Income

Total comprehensive income was $6.5 million and $6.0 million in the first quarter of 2005 and 2004, respectively. Our comprehensive income includes net income and foreign currency translation adjustments.

- 4 -

5. Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but is tested at least annually for impairment. Our other intangibles consist solely of a non-compete agreement which we amortize over its estimated useful life of five years. The non-compete agreement will be fully amortized at the end of 2005. For the three months ended March 31, 2005 and 2004, we recognized amortization expense on other intangibles of $55,000 and $74,000, respectively. No goodwill or other intangibles were acquired or impaired during the first quarter of 2005 or 2004. The non-compete agreement has an original cost of $1,100,000. Associated accumulated amortization was $908,000 at December 31, 2004 and was $962,000 at March 31, 2005.

6. Stock Option Plan

We have established the 1997 Stock Incentive Plan for our officers, key employees and non-employee directors. The intrinsic value method as prescribed in APB 25, “Accounting for Stock Issued to Employees”, is used to account for stock based compensation arrangements. Had compensation cost been determined for our plan based on the fair value at the grant dates for awards consistent with the alternative method set forth under SFAS 123, “Accounting for Stock-Based Compensation,” our net income and earnings per share would have been adjusted to the pro forma amounts indicated below:


	For the Three Months Ended
	March 31,
	2005		2004
	(In thousands, except per share amounts)
Net Income, as reported	$	6,463	$	5,942
Deduct: total stock-based compensation expense determined under fair-value based method for all awards, net of tax		248		595

Pro forma net income	$	6,215	$	5,347


Net Income per share:
Basic as reported	$	0.21	$	0.19

Basic pro forma	$	0.20	$	0.17

Diluted as reported	$	0.21	$	0.19

Diluted pro forma	$	0.20	$	0.17

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 will produce more favorable impact on our future results of operations in light of SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R, which we will be required to adopt effective January 1, 2006, requires that compensation cost attributed to stock options and other forms of share-based payment be recognized in the financial statements. We estimate that early vesting of these options will result in approximately $1.1 million less future compensation expense that would otherwise have been recognized over the remaining life of the options beginning on January 1, 2006.

- 5 -

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Our results of operations can be affected by many factors including the general economic environment and its impact on state and federal budgetary decisions, the length and complexity of the sales cycle for school districts, and the impacts on revenue of transitioning some of our offerings to new subscription-based products and services which results in a significant portion of the revenue being initially deferred and recognized as revenue over the subscription period. Our first quarter revenues are also impacted by seasonality because schools and districts typically make their purchasing plans and renew their subscriptions for the new academic school year in the second and third quarters. Each of these factors negatively impacted our results of operations for the three month period ended March 31, 2005.

Generation21 Learning Systems, LLC was divested during the first quarter of 2005 and, therefore, its results for all periods presented in the financial statements are reflected as discontinued operations.

The following table sets forth certain consolidated income statement data in dollars and as a percentage of net sales, except that individual components of costs of sales and gross profit are shown as a percentage of their corresponding component of net sales:


	Three Months Ended March 31,
	2005				2004					Change
					(Dollars In Thousands)
Net Sales:
Products	$	21,126	76.7	%	$	24,804		80.1	%	$	(3,678	)	-14.8	%
Services		6,431	23.3	%		6,151		19.9	%		280		4.6	%

Total net sales		27,557	100.0	%		30,955		100.0	%		(3,398	)	-11.0	%


Cost of sales:
Products		1,189	5.6	%		1,703		6.9	%		(514	)	-30.2	%
Services		2,760	42.9	%		3,535		57.5	%		(775	)	-21.9	%

Total cost of sales		3,949	14.3	%		5,238		16.9	%		(1,289	)	-24.6	%


Gross profit:
Products		19,937	94.4	%		23,101		93.1	%		(3,164	)	-13.7	%
Services		3,671	57.1	%		2,616		42.5	%		1,055		40.3	%

Total gross profit		23,608	85.7	%		25,717		83.1	%		(2,109	)	-8.2	%


Operating expenses:
Product development		3,618	13.1	%		3,596		11.6	%		22		0.6	%
Selling and marketing		8,045	29.2	%		8,624		27.9	%		(579	)	-6.7	%
General and administrative		3,069	11.1	%		3,137		10.1	%		(68	)	-2.2	%

Total operating expenses		14,732	53.5	%		15,357		49.6	%		(625	)	-4.1	%


Operating income		8,876	32.2	%		10,360		33.5	%		(1,484	)	-14.3	%

Other income:
Interest income		352	1.3	%		311		1.0	%		41		13.2	%
Other, net		104	0.4	%		78		0.3	%		26		33.3	%

Total other income		456	1.7	%		389		1.3	%		67		17.2	%


Income — continuing operations before income taxes		9,332	33.9	%		10,749		34.7	%		(1,417	)	-13.2	%

Income taxes — continuing operations		3,453	12.5	%		4,005		12.9	%		(552	)	-13.8	%


Income — continuing operations		5,879	21.3	%		6,744		21.8	%		(865	)	-12.8	%

Income (loss) on discontinued operations net of tax benefit of $1,417 in 2005 and $515 in 2004		584	2.1	%		(802	)	-2.6	%		1,386		-172.8	%


Net income	$	6,463	23.5	%	$	5,942		19.2	%	$	521		8.8	%

- 7 -

Three Months Ended March 31, 2005 and 2004

Net Sales. Our net sales decreased by $3.4 million, or 11.0%, to $27.6 million in the first quarter of 2005 from $31.0 million in the first quarter of 2004. Product sales declined by $3.7 million, or 14.8%, to $21.1 million in the first quarter of 2005 from $24.8 million in the first quarter of 2004. Revenues were down for all core products with the largest decline in Accelerated Math*. We now only sell this product as part of our comprehensive Math Renaissance solution which increased the initial price of the product and likely affected sales over the short-term, however, we believe this approach will lead to long-term growth of the product.

Service revenue for the first quarter of 2005 was $6.4 million, an increase of $280,000 from the first quarter 2004 revenues of $6.2 million. A 17% increase in attendance at our National Conference, to about 3,500 from about 3,000 in the previous year, resulted in an increase in service revenue of $190,000 for the first quarter of 2005 compared to 2004. We also experienced growth in revenue from software support and from some of our newer service offerings such as academic coaching and technical consulting which were partially offset by declines in revenue from our on-site training events.

Overall revenue levels continued to be impacted by constraints in school spending related to the state budget difficulties of the past several years. We also believe that the seasonality of our customers’ buying patterns is becoming more p


	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004		1
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004		2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004		3
Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		7
Item 3. Quantitative and Qualitative Disclosures About Market Risk		10
Item 4. Controls and Procedures		10
PART II – OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		11
Item 6. Exhibits		11
Certification of CEO
Certification of CFO
Certification of CEO
Certification of CFO


	Three Months
	Ended March 31,
	2005			2004
Dividend yield		1.23	%		0.64	%
Expected volatility		60.0	%		65.0	%
Risk-free interest rate		4.10	%		3.24	%
Expected life (in years)		5.9			6.0

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