Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended October 31, 2009
or
p 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: 0-20842
PLATO
LEARNING, INC.
(Exact
name of Registrant as specified in its charter)
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Delaware
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36-3660532
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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10801
Nesbitt Avenue South, Bloomington, MN 55437
(Address
of principal executive offices)
(952)
832-1000
(Registrant’s
telephone number, including area code)
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, $0.01 Par Value
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NASDAQ
Global 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 p No x
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 p No x
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No p
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes p No p
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 registrant’s 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. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
Accelerated Filer p
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Accelerated
Filer x
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Non-Accelerated
Filer p (Do
not check if smaller reporting company)
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Smaller
Reporting Company p
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.)
Yes p No x
The
aggregate market value of common stock held by non-affiliates of the registrant,
as of April 30, 2009 (the last business day of the Registrant’s most recently
completed second fiscal quarter) was approximately $60,000,000.
The
number of shares outstanding of the registrant’s common stock as of December 31,
2009 was 24,379,414.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s definitive Proxy Statement for the Company’s Annual Meeting of
Stockholders to be held on March 25, 2010 (the “2010 Proxy Statement”) are
incorporated by reference in Part III.
Form
10-K
Fiscal
Year Ended October 31, 2009
TABLE
OF CONTENTS
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Page
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Business
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1
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Risk
Factors
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8
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Unresolved
Staff Comments:
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13
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Properties
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13
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Legal
Proceedings
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14
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Submission
of Matters to a Vote of Security Holders
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14
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Selected
Financial Data
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17
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Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations
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18
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Quantitative
and Qualitative Disclosures About Market Risk
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33
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Financial
Statements and Supplementary Data
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34
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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64
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Controls
and Procedures
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64
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Other
Information
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65
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Directors
and Executive Officers of the Registrant
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66
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Executive
Compensation
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66
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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67
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Certain
Relationships and Related Transactions
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67
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Principal
Accountant Fees and Services
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67
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Exhibits,
Financial Statement Schedules
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68
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69
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70
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Forward-Looking
Statements
In addition to historical information,
this Form 10-K contains forward-looking statements. These forward-looking
statements are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (“the Act”). The words
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,”
“should” and similar expressions are intended to identify “forward-looking
statements” within the meaning of the Act. Forward-looking statements include,
among others, statements about our future performance, future releases of our
products, new courses we intend to make available to our customers, the
sufficiency of our sources of capital for future needs, and the expected impact
of recently issued accounting pronouncements. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in Part I Item 1A of this Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management’s opinions only as of the date hereof. We undertake no
obligation to revise or publicly release any revision to these forward-looking
statements based on circumstances or events, which occur in the future. Readers
should carefully review the risk factors described in Part I Item 1A of this
report on Form 10-K and in other documents we file from time to time with the
Securities and Exchange Commission.
Trademark
and Copyright References
PLATO®,
Straight Curve® and Academic Systems® are registered trademarks of PLATO
Learning, Inc. PLATO Learning, PLATO Learning Environment™ and
PLE™ are trademarks of PLATO Learning, Inc. Solely for convenience,
we refer to our trademarks in this Form 10-K without the ™ and ® symbols, but
such references are not intended to indicate, in any way, that we will not
assert, to the fullest extent under applicable law, our rights to these
trademarks.
Business
Description
PLATO
Learning, Inc. is a Delaware corporation that was incorporated in 1989 and is
headquartered in Bloomington, Minnesota. We are a leading provider of
on-line instruction, curriculum management, assessment, and related professional
development services to K–12 schools, community colleges and other educational
institutions across the country. Our products are used by customers principally
to provide alternative instruction to students performing below their grade
level in order to help those students return to the classroom, recover course
credits, pass high school exit exams or prepare for college and other
post-secondary studies. In addition to the value provided to
students, our solutions allow school districts to retain state and federal
funding tied to student enrollment, and help educators meet the demands of state
and federal student achievement initiatives for intervention, dropout prevention
and college readiness. We also offer online and onsite staff professional
development services to ensure optimal use of our products and to help schools
meet their accountability requirements and school improvement
plans.
Our
research-based courseware library includes thousands of hours of mastery-based
instruction covering discrete learning objectives in the subject areas of
reading, writing, language arts, mathematics, science, and social studies. Our
web-based assessment and alignment tools allow instruction to be personalized to
each student’s unique needs with curriculum that is aligned to local, state, and
national standards. Using our web-based products, educators are able to identify
each student’s instructional needs and prescribe an individual learning program
of PLATO Learning courseware, educational web sites, the school’s textbooks and
other core and supplemental instructional materials. A variety of reports are
available to help educators identify gaps in student understanding, monitor
student progress and ensure that standard learning objectives are being
addressed.
Beginning
in late fiscal year 2005, we implemented a strategy to deliver our products and
solutions on a subscription basis using a new internet-based learning management
platform we market as the PLATO Learning Environment, or PLE. As of October 31,
2009, approximately 1,360 school districts, community colleges and other
educational institutions across 50 states subscribed to our instructional
solutions delivered on PLE, and over 1.7 million students, teachers and
administrators at these institutions were registered to use PLE.
Our
principal business is the development and marketing of online curriculum
solutions and related services.
Market
Based on
recent market data from Simba Information (“Simba”), approximately $9.3 billion
is spent annually on print and electronic instructional materials in the U.S.
K-12 education market. Of that spending, approximately $1.75 billion is spent on
K-12 digital content.
Our
instructional products are delivered on a subscription basis over the internet,
via our learning management system, the PLATO Learning Environment, or PLE.
Today, 99% of the nation’s K-12 public schools have Internet access, and as a
result, schools are increasingly turning to web-based methods of instruction as
a supplement to their instructor-led programs due to their flexibility,
cost-efficiency, and effectiveness.
Our
instructional solutions are primarily used as alternative programs for students
that have not been successful in the traditional classroom environment, as well
as for online programs that offer first time credit for students at, below,
and/or above grade level. Additionally, many of our customers have
integrated our products into their core classroom
instruction. Earning a high-school diploma represents a key milestone
in an individual's schooling and social and economic advancement, but according
to the National Center for Education Statistics, more than 25% of incoming
freshman do not finish high school. Statistics like these raise the awareness of
the effectiveness of U.S. public schools and have led to legislative
requirements and public demand for increased accountability and improvements in
U.S. K-12 schools. These trends have led to increasing demand for solutions like
ours and others that address the need to improve school effectiveness and
graduation rates. As a result, we believe that technology-based instructional
materials have the ability to cost effectively create an individualized and
flexible instructional environment, and are generally preferred over print-based
materials by today’s students. We believe that these ongoing market
dynamics will cause technology-based instructional materials to continue to grow
faster than the total instructional materials market.
Strategy
Our
strategy is focused on the following strategic initiatives:
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·
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Deliver our
instructional solutions on a single, Internet-based delivery
platform. Emerging trends over the last several years are driving
acknowledgement of the benefits of delivering curriculum into the K–12
market over the Internet. These trends include improving Internet
technology, significant investments by school districts in technology
infrastructure, the high cost of ownership of multi-vendor, on-site
applications, growing use and acceptance of Internet-based resources in
the K–12 market, ubiquitous Internet accessibility outside the classroom,
and student and teacher demographics with respect to technology
expectations and adoption. Targeting these trends, we developed and
launched PLE in July 2006, an intuitive, web-based Learning Management
System that is available to students, teachers and administrators anywhere
an Internet connection and browser are available. In 2009 we
completed work to enhance the PLE platform to offer more flexibility,
reporting and usability. PLE 2.0 is set to release in the first
quarter of fiscal year 2010.
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·
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Leverage our strong
brand and extensive library of curriculum to grow market share in the
individualized instruction and online courses
markets.
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o
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Our
traditional strength has been the intervention market - solutions that
help students who are one or more grade levels behind and at risk of not
being promoted to the next grade or not graduating. Instruction delivered
using technology provides an ideal solution for this market as
instructional intervention generally occurs outside the traditional
classroom and requires self-paced learning which is personalized for each
student’s unique learning needs. The technology solutions currently sold
to this market are characterized by a large number of smaller competitors.
We believe that providing new and differentiated solutions on an
Internet-based and constantly evolving platform such as PLE, combined with
our strong brand in this market, uniquely positions us to be a dominant
provider of technology-based solutions in the fragmented intervention
market.
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o
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In
addition to designing our courseware to effectively help struggling
learners, we expect to continue to invest in courseware to meet the
growing demand from school districts for solutions that allow them to
offer a full online learning experience for students at and above grade
level.
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·
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Subscription-based,
on-demand, software-as-a-service (“SaaS”)
application. Historically, we operated a traditional
software business model in which software products were licensed to
customers on a perpetual basis for installation and use on their own
technology. This business model has many undesirable
characteristics including high product maintenance and support costs, high
volatility
and low visibility of financial results, and a dependence on large sales
at or near quarter-end to achieve financial targets, often resulting in
significant price discounting and a short-term business focus. We believe
the subscription-based business model provides significant advantages in
that it produces significant operating leverage, a predictable recurring
revenue stream through subscription renewals, and greater visibility and
stability to future operating results. In fiscal year 2009,
approximately 93% of our product orders were for subscription-based
products, up from approximately 85% in fiscal year
2008.
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Best in class
competencies in software product development. Our
software development organization is centered on an on- and off-shore
development model and structured software development processes that have
greatly lowered development costs and improved product quality and time to
market.
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Products
Our
products consist of a comprehensive portfolio of technology-based instructional
content, classroom assessment, and related professional development that we
market to K–12 schools, community colleges and other educational institutions.
Our products are used by these customers principally to provide individualized
instruction to students performing at or below their grade level. Our
programs are most frequently leveraged for students returning to the classroom,
course credits recovery, high school exit exam preparation and/or preparation
for college and other post-secondary studies.
Instructional
Content
Our
content library consists of rich, interactive, multimedia instructional content
that is highly engaging for both students and teachers. This research-based
courseware library includes more than 6,000 hours of mastery-based instruction
material covering the primary K-12 subject areas of mathematics, science,
reading/language arts, and social studies.
Our
content can be applied to multiple student learning profiles (e.g. general
education, special education, at-risk) and tailored for students across multiple
grade-levels. Content offerings are classified as intervention solutions when
applied to students performing below grade-level, as core or supplemental
instructional solutions for mainstream students performing at grade level, and
as advanced placement offerings for students performing above grade level. We
believe our content provides the following differentiating factors:
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Interactive,
engaging multimedia instruction that is highly differentiated from static
text-based or video content provided by many other
companies;
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Content
that is cross-referenced to academic standards set by states, the federal
government, and other standard-setting
bodies;
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Assessments
that are tied to these standards and generate personalized lesson plans
based on an individual student’s test
results;
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Content
that is arranged into a series of semester-long pre-configured online
courses for grades 7–12 that can be employed both inside and outside of
the classroom, and is fully customizable by schools to fit their unique
instructional needs;
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Correlated
to primary textbooks used in K–12
schools.
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Learning
Management System
The PLATO
Learning Environment (PLE), a web-based platform to deliver all of our
instructional solutions, provides a unified curriculum management and delivery
system that requires only an Internet connection and a browser. In addition to
anytime-anywhere delivery of our products, PLE provides the following
differentiating factors:
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Automated
alignments of instructional content to learning standards in all states
and the major national standards such as SAT, ACT, GED, and
NAEP;
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Access
to pre-set teacher materials used to supplement the online
curriculum;
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Built-in
links to many popular websites containing other K–12
curriculum;
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Functionality
allowing school districts to create customized courses tailored to their
specific instructional scope and sequence, including the ability for
teachers to upload documents they have created for access by
students;
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Search
functionality that allows users to find resources and content based on
standards applicable to their instructional
requirements;
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Preparation
of assessment tests and generation of recommendations for relevant
follow-up content based on results;
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Automated
grading and reporting for whole course or supplemental
programs.
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Classroom Formative
Assessment
Formative
assessment involves collecting feedback from learning activities to adapt
instruction to a learner’s needs. Our assessment database consists of
more than 180,000 test items linked to state, district, and national learning
objectives across all subject areas of reading, math, science and social
studies. In conjunction with powerful data management tools, our assessment
solutions can provide assessment results by student demographic category and
facilitate data-driven decision making for school curriculum development,
textbook choices and providing personalized learning. PLATO Test Packs with
Prescriptions prescribe individual learning paths to PLATO content based on
student performance, which can then be completed at the student’s own learning
pace. As a result, PLATO Test Packs give teachers the flexibility to allow PLE
to automatically prescribe assignments or to make manual adjustments before
assigning lessons.
Instructional
Solutions
We
combine our large library of interactive content and assessments with the unique
features of PLE to deliver a variety of instructional solutions to educational
institutions. In K-12 schools, these solutions primarily address
at-risk students who have fallen behind in the classroom, allowing these
students to recover credits, move to the next grade level, avoid dropping out of
school or prepare for their high school exit exam. In the post-secondary market,
our developmental algebra products, sold under the Academic Systems brand, are
primarily intended for students who have completed high school but are not yet
ready for college level math courses. We also provide instructional
solutions to adult education markets for GED preparation, workforce readiness
and life and career skills.
Services
and Product Support
Our
professional services offerings ensure that customers receive the consultation,
training and services needed to successfully implement our solutions and integrate
educational technology into their day-to-day teaching and learning environment.
Services are delivered in face-to-face sessions as well as synchronous and
asynchronous online delivery methods.
We
provide telephone and online product support to our customers. Subscription
customers are entitled to support as part of their subscription fees to our
online products. Customers who purchased perpetual license products
can choose to obtain telephone support by paying an annual software maintenance
fee.
Sales
and Marketing
Our sales
channel consists of direct sales representatives located throughout the U.S. and
inside sales representatives operating out of our corporate headquarters in
Bloomington, Minnesota. We also utilize distributors and resellers in certain
geographic markets.
In the
K–12 market we sell to school districts of all sizes, but generally target
larger school districts. In the post-secondary market, we target community
colleges, four-year universities, adult education centers, and correctional
institutions.
Competition
The
market for electronic instructional materials is served by hundreds of companies
that offer a range of instructional products and services. At one end of the
market are companies offering modular software applications or videos that
consist of a single element of instructional content or an individual course or
application. At the other end are companies like PLATO Learning that provide
full course offerings that span multiple grade levels and/or subject areas.
These companies are “comprehensive” in terms of being able to package a solution
that covers multiple grade levels, subjects, and associated reports and
assessments. Between the comprehensive and non-comprehensive categories there
are as many variations as there are companies.
In the
individualized instruction market we compete nationally with comprehensive
providers, such as Pearson Education, however we most frequently compete against
a number of smaller competitors, including Compass Learning, OdysseyWare,
Class.com, Apex Learning, American Education Corporation (A+), E2020, and
others. Many of these smaller companies focus on a geographic segment or
district size, rather than the national market. The needs, size, and location of
school districts often influence the opportunities for which companies choose to
compete.
When
competing with any company, we differentiate our solutions by emphasizing the
depth of our multimedia rich courseware aligned to standards, the benefits of a
single learning management system that delivers all content over the Internet
for all grades and core subject areas, the completeness of alignments to state
and national standards, and the unique diagnostic and prescriptive capabilities
of our products to improve performance on state exams and
standards. We also believe that our record of student improvement and
product development capabilities differentiate us from the competition. Based on
our experience, we believe that these are key factors that buyers use in
evaluating competitive offerings.
Product Development
Our
product development group develops, enhances, and maintains our courseware,
assessment, instructional management software, and delivery system platforms. We
utilize both domestic and offshore resources. In fiscal year 2009, approximately
40% of our total software development spending was incurred
offshore.
Proprietary
Rights
Our
courseware is proprietary and we attempt to protect it primarily under a
combination of the laws of copyrights, trademarks, and trade secrets. We also
utilize license agreements, employment agreements, employment termination
agreements, third-party non-disclosure agreements, and other methods to protect
our proprietary rights. We regard certain of our intellectual property rights as
essential to our business and enforce our intellectual property rights when we
become aware of any infringements or potential infringements and believe they
warrant such action.
Revenue Backlog
We define
revenue backlog as the total of deferred revenue reported on our balance sheet
plus unbilled amounts due under non-cancelable subscription agreements which is
not included in the balance sheet. Following is a reconciliation of
deferred revenue to revenue backlog, and the components of revenue backlog, as
of the end of fiscal years 2009 and 2008:
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As
of October 31,
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2009
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2008
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%
Change
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Reconciliation:
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Total
Deferred revenue
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$ | 53,698 | $ | 44,921 | 20 | % | ||||||
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Add:
Unbilled amounts due under
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||||||||||||
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non-cancelable
subscription agreements
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14,641 | 8,945 | 64 | % | ||||||||
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Revenue
Backlog
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$ | 68,339 | $ | 53,866 | 27 | % | ||||||
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Components
of Revenue Backlog:
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Subscriptions
and related services:
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Subscriptions
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$ | 56,410 | $ | 41,694 | 35 | % | ||||||
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Professional
services
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7,294 | 5,070 | 44 | % | ||||||||
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Subtotal
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63,704 | 46,764 | 36 | % | ||||||||
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Legacy
products and services:
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License
fees
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386 | 467 | (17 | %) | ||||||||
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Software
maintenance
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4,249 | 6,635 | (36 | %) | ||||||||
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Subtotal
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4,635 | 7,102 | (35 | %) | ||||||||
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Total
Revenue Backlog
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$ | 68,339 | $ | 53,866 | 27 | % | ||||||
At
October 31, 2009, we expect approximately $24.1 million of our deferred revenue
to be recognized subsequent to fiscal year 2010.
Seasonality
Our quarterly financial results
fluctuate as a result of a number of factors including public education budget
cycles and the mix of perpetual license fee and subscription product
sales. Historically we have experienced our lowest order levels, cash
balances and revenues in the first and second quarters of our fiscal year and
higher levels of orders, cash and revenues in our third and fourth quarters.
More recently, our increasing emphasis on sales of subscription products has
moderated the seasonality of our revenues. Because of these factors, the results
for interim periods are not necessarily indicative of the results to be expected
for the full fiscal year.
Employees
As of
October 31, 2009, we had approximately 300 employees. We also
contract with offshore resources in the development of new
products. We have never experienced a work stoppage as a result of a
labor dispute, and none of our employees are represented by a labor
organization.
Non-Audit
Services Performed by Independent Registered Public Accounting Firm
Pursuant
to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section
202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing to
investors the non-audit services approved by our Audit Committee to be performed
by, our independent registered public accounting firm. Non-audit
services are defined as services other than those provided in connection with an
audit or a review of our financial statements. During the period
covered by this Annual Report on Form 10-K, our Audit Committee pre-approved
non-audit services, consisting of fees paid for online research
materials.
Web
Site Access to Reports
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy
Statements on Schedule 14A, Current Reports on Form 8-K, and any amendments to
those reports, are made available free of charge on our web site (www.plato.com)
as soon as reasonably practical after such reports are filed with the Securities
and Exchange Commission (“SEC”). Statements of changes in beneficial
ownership of our securities on Form 4 by our executive officers and directors
are made available on our web site by the end of the business day following the
submission of such filings to the SEC. All reports mentioned above
are also available from the SEC’s web site (www.sec.gov).
We
operate in a market environment that involves significant risks, many of which
are beyond our control. The following risk factors may adversely
impact our results of operations, financial position, cash flow and the market
price of our common stock. Although we believe that we have
identified and discussed below the key risk factors affecting our business, they
are not the only ones facing us. There may be additional risks and
uncertainties that are not presently known or that are not currently believed to
be significant that also may affect our results of operations and financial
condition.
Risks Relating to Our
Industry
We
derive a substantial portion of our revenues from public school funding, which
is dependent on support from federal, state, and local
governments. Changes or reductions in funding for public school
systems could reduce our revenues and cash flows and negatively impact our
margins and impede the growth of our business.
The
availability of funding to purchase our products is subject to many factors that
affect government spending. These factors include downturns in
general economic conditions, like those which we are currently experiencing,
that can reduce government tax revenues and may affect education funding,
emergence of other priorities that can divert government funding from
educational objectives, periodic changes in government leadership that can
change spending priorities, and the government appropriations process, which is
often slow and unpredictable. In many instances, customers rely on
specific funding appropriations to purchase our
products. Curtailments, delays, or reductions in this funding can
delay or reduce revenues and cash flow we had otherwise forecasted to
receive.
The
growth of our business depends on continued investment by public school systems
in interactive educational technology and products. Changes to funding of public
school systems can slow this type of investment and adversely affect our
revenues and market opportunities.
If
national educational standards and assessments are adopted, or if existing
metrics for applying state standards are revised, new competitors could more
easily enter our markets or the demands in the markets we currently serve may
change.
With the
reauthorization of the Elementary and Secondary Education Act, known as No Child
Left Behind, or NCLB, in 2001, Congress conditioned the receipt of federal
funding for education on the establishment of educational standards, annual
assessments and the achievement of adequate yearly progress milestones. These
standards are established at the state level, and there are currently no
national educational standards that are required to be assessed pursuant to
NCLB. As part of NCLB, each state is required to establish clear performance
standards for each grade level in reading, math and science in grades 3 through
8, and for high school exit or end-of-course exams. Our products are
specifically built to align to the educational and assessment standards in all
50 states, which we believe differentiates them from the products offered by our
competitors. If a uniform set of national standards and assessments were to
replace individual state level standards, it would be easier for competitors to
develop similar products. If such an increase in competition occurred, our
ability to compete effectively could be negatively impacted and our revenue and
profitability could materially decline.
Competition
in our industry is intense and growing, which could adversely affect our
performance.
Our
industry is intensely competitive, rapidly evolving, and subject to
technological change. We compete primarily against organizations
offering educational and training software and services, including comprehensive
curriculum software publishers, companies providing single-title retail
products, and Internet content and service providers. Some of our
competitors have substantially greater financial, technical and marketing
resources than us. The demand for e-learning products and services
has grown significantly with the advent of on-line educational institutions,
improvements
in Internet access and reductions in the cost of technology. While
this growing demand presents opportunities for us, it also results in the
addition or consolidation of competitors. Increased competition in
our industry could result in price reductions, reduced operating margins, or
loss of market share, which could seriously harm our business, cash flows, and
operating results.
Risks
Relating to Our Company
The
success of our business model is dependent on growth in market acceptance of
online subscription products delivered over the Internet. If this acceptance
does not grow or is otherwise diminished, our revenues will continue to decline
and may affect our ability to maintain profitability.
Our
ability to generate revenue growth and to continue to be profitable is dependent
on significant growth of subscription fees to our Internet-based
products. Market acceptance of software solutions delivered over the
Internet can be negatively affected by factors such as customers’
confidentiality concerns with regard to student information that is stored
outside of their controlled computing environments, existing investments in
owned courseware, technology infrastructure and related personnel, customer
preferences with regard to perpetual licenses vs. annual subscription decisions,
and availability, reliability and security of access to the Internet within a
school district.
Adverse
changes in these factors could result in a decline in the acceptance of
web-based courseware solutions making it difficult for us to execute our current
business model. As a result, we may need to reevaluate that business
model, which may affect our ability to continue to achieve
profitability.
The
success of our product investment strategy and our ability to remain competitive
against companies with access to larger amounts of capital is dependent on our
ability to maintain our cost-effective off-shore development resources. If we
are unable to do so, we would experience significant product delays and
increases in product development costs which would adversely affect our
strategy, competitive position, revenues and profitability.
More than
40% of our total software development and maintenance spending in fiscal year
2009 was incurred on off-shore development resources. We believe the
use of these resources provides us greater flexibility, cost savings, and a
greater return on our development investments. These resources are also critical
to our ability to respond quickly to market changes and to compete against
companies with access to larger amounts of capital than we
have. However, this dependence introduces risks common to many
outsourcing relationships. These risks include the supplier’s ability
to maintain sufficient capacity, control costs, and hire, train, and retain
qualified resources, as well as risks associated with our limited direct control
and physical access to these resources including the ability to protect and
enforce our intellectual property rights. In our supplier agreements
we strive to include provisions intended to limit some of these risks; however,
that is not always possible and there can be no assurance that they will be
effective at doing so. If our supplier relationships are suddenly and
adversely affected, it would cause significant product delays, increased
development costs and could impact product usability, which would have a
material negative effect on our competitive position, revenues and
profitability.
Our
future success may be dependent on our ability to compete in the broader
instructional materials market against larger competitors with significantly
greater resources than we have.
The
instructional materials market has been dominated for many years by a small
number of large publishers that provide textbooks and other printed materials to
the school market. These companies have well-established distribution
channels and significantly greater marketing, curriculum and financial resources
than us. As electronic instructional materials continue to grow and
take market share from print materials, competition from these companies will
increase and we may not be able to compete effectively.
If
we are unable to adapt our products and services to technological changes, to
the emergence of new computing devices and to more sophisticated online
services, we may lose market share and service revenue, and our business could
suffer.
We need to anticipate, develop and introduce new products, services and applications on a timely and cost effective basis that keeps pace with technological developments and changing customer needs. We may encounter difficulties responding to these changes that could delay our introduction of products and services or require us to make larger than anticipated investments to maintain existing products. Software industries are characterized by rapid technological change and obsolescence, frequent product introductions, and evolving industry standards. For example, the number of individuals who access the internet through devices other than a personal computer, such as personal digital assistants, mobile telephones, televisions and set-top box devices, has increased dramatically, and this trend is likely to continue. Our subscription services were designed for internet use on desktop and laptop computers. The lower resolution, functionality and memory associated with alternative devices currently available may make the use of our products through such devices difficult. We have no experience to date in operating versions of our products and services developed or optimized for users of alternative devices. Accordingly, it is difficult to predict the problems we may encounter in developing versions of our products and services for use on these alternative devices, and we may need to devote significant resources to the creation, support and maintenance of such versions. If we fail to develop or sell products and services cost effectively that respond to these or other technological developments and changing customer needs, we may lose market share and revenue and our business could materially suffer.
Since
fiscal 2005 we have transitioned our business from products that are licensed on
a perpetual basis to those that are licensed on a subscription basis. The
different revenue recognition characteristics of these products affect the
comparability of our financial results. As a result, our business will be
difficult to compare from period to period. Our business is also seasonal. As a
result of these factors, we may continue to experience unexpected fluctuations
in our quarterly cash flows, revenues and results from operations, which may
adversely affect our stock price and the implementation of our
strategy.
We expect
sales of perpetual license products and related software maintenance to continue
to decline because we completed the transition of our business model to
subscription-based products. As a result, our operating results may be difficult
to compare
to historical periods, and may fluctuate from quarter-to-quarter due to factors
such as the size, timing, and product mix of license vs. subscription
orders. In addition, public school budget cycles result in
purchases that have historically been concentrated in the last two quarters of
our fiscal year. Accordingly, our annual operating performance can be materially
and adversely affected if factors such as school budget constraints,
availability of federal and state funding, sales productivity and new product
introductions do not align with these purchasing patterns. If such
annual results are not achieved we may have to delay or adjust components of our
strategy implementation which may affect our ability to maintain
profitability.
Our
transition from perpetual to subscription-based products has resulted in an
increasing trend whereby cash receipts from the sale of our products has shifted
from payment shortly after the time of sale, to payment over the subscription
period. This trend, together with the seasonality of our business previously
discussed, may adversely affect our short-term liquidity.
We
generally require that one-year subscriptions and sales of perpetual licenses be
paid in full within a short time after completion of the
sale. Multi-year subscription customers may be given an option to pay
for these subscriptions annually in advance, and these customers are
increasingly electing, or negotiating, to make multi-year payments. This
increasing delay in the receipt of payment for the sales of our products,
together with the seasonality of our business discussed above, has adversely
affected our cash flows and may increase our short-term liquidity
needs.
Misuse
or misappropriation of our proprietary rights or inadvertent infringement by us
on the rights of others could adversely affect our results of
operations.
We regard
certain of our intellectual property rights as essential to our
business. We rely on a combination of the laws of copyrights,
trademarks, and trade secrets, as well as license agreements, employment and
employment termination agreements, third-party non-disclosure agreements, and
other methods to protect our proprietary rights. We enforce our
intellectual property rights when we become aware of any infringements or
potential infringements and believe they warrant such action. If we
were unsuccessful in our ability to protect these rights, our operating results
could be adversely affected.
Although
we believe our products and services have been independently developed and that
none of our products or services infringes on the rights of others, third
parties may assert infringement claims against us in the future. We
may be required to modify our products, services or technologies or obtain a
license to permit our continued use of those rights. We may not be
able to do so in a timely manner or upon reasonable terms and
conditions. Failure to do so could harm our business and operating
results. In addition, we leverage certain third party generated
products through license and/or royalty agreements and we have the risk that
certain of these relationships will not continue or that the underlying products
will not be properly supported or updated by the third parties.
We have a
number of technological mechanisms to prevent or inhibit unauthorized copying of
our software products and generally require the execution of a written license
agreement, which restricts use and copying of our software products.
However,
if such copying or misuse were to occur to any substantial degree, our operating
results could be adversely affected.
If
our security measures are breached and unauthorized access is obtained to our
web-based products, they may be perceived as not being secure, customers may
curtail or stop using these products and we may incur significant legal and
financial exposure and liabilities.
The use
of our web-based subscription products involves the storage of certain personal
information with regard to the teachers and students using these products. If
our security measures are breached and unauthorized access to this information
occurs, our reputation will be damaged, our business may suffer and we could
incur significant liability. Because the techniques used to attempt unauthorized
access to systems such as ours change frequently and generally are not
recognized until attempted on a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. If an actual or
perceived breach of our security occurs, the market perception of the security
of our system could be harmed and we could lose sales and
customers.
Claims relating to content available
on or accessible from, our web sites may subject us to liabilities and
additional expense.
Our
web-based subscription products incorporate content not under our direct control
including content from, and links to, third-party web sites, and content
uploaded by our customers. As a result, we could be subject to claims
relating to this content. In addition to exposing us to potential
liability, claims of this type could require us to change our web sites in a
manner that could be less attractive to our customers and divert our financial
and development resources.
Interruptions
or delays in service from our third-party Web hosting facilities could impair
the delivery of our service and harm our business.
Our
subscription products are delivered using standard computer hardware located in
two, third-party Web hosting facilities, with the primary facility located on
the west coast of the United States. We do not control the operation of these
facilities, and they are vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunications failures and similar events.
Despite precautions taken at these facilities, the occurrence of a natural
disaster or other unanticipated problems at these facilities could result in
lengthy interruptions in our service. Even with disaster recovery arrangements
in place, our service could be interrupted. Interruptions in our service may
reduce our revenue, cause us to issue credits, cause customers to terminate
their subscriptions and adversely affect our renewal rates and our ability to
attract new customers. Our business will also be harmed if our customers and
potential customers believe our service is unreliable.
None.
We lease
all of our facilities, including our corporate headquarters in Bloomington,
Minnesota, which expires in June 2010. We currently anticipate that in 2010 we
will likely execute a new lease for a different facility in or near Bloomington,
although we may renew our current lease for less square footage. We also
continue to be a party to two leases for unoccupied office space in the United
Kingdom. Other than our plans to address the expiration of our
headquarters facility lease discussed above, our leased facilities are adequate
to meet our current and expected business requirements.
From time
to time, we may become involved in litigation arising out of operations in the
normal course of business. As of October 31, 2009, we were not party
to any pending legal proceedings the outcome of which could reasonably be
expected to have a material unfavorable or favorable effect on our operating
results, financial position or cash flows.
None.
Market
Information
Our
common stock has traded publicly on the NASDAQ Global Market under the symbol
“TUTR” since December 23, 1992. The quarterly ranges of high and low
prices per share of our common stock were as follows:
| 2009 | 2008 | |||||||||||||||
| Fiscal Quarter | High | Low | High | Low | ||||||||||||
| First | $ | 1.80 | $ | 0.81 | $ | 4.70 | $ | 2.90 | ||||||||
| Second | 3.17 | 1.13 | 3.88 | 2.44 | ||||||||||||
| Third | 4.34 | 2.50 | 3.04 | 1.84 | ||||||||||||
| Fourth | 4.98 | 3.87 | 3.22 | 1.30 | ||||||||||||
Holders
As of
December 31, 2009, there were approximately 480 record holders of our common
stock, excluding stockholders whose stock is held either in nominee name and/or
street name brokerage accounts. Based on information available to us,
there were approximately 1,727 holders of our common stock whose stock is held
either in nominee name and/or street name brokerage accounts.
Stock
Performance Graph
The
following stock performance graph does not constitute soliciting material, and
should not be deemed filed or incorporated by reference into any other Company
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent the Company specifically incorporates this stock
performance graph by reference therein.
In
accordance with Securities and Exchange Commission regulations, the following
performance graph compares the cumulative total stockholder return on our common
stock to the cumulative total return on the NASDAQ Composite Index and the
weighted average return of our peer group (described below) for the five years
ended October 31, 2009, assuming an initial investment of $100 and the
reinvestment of all dividends.
Our
current peer group consists of the following: LeapFrog Enterprises, Inc., Nobel
Learning Communities, Princeton Review, Inc., Renaissance Learning, Inc.,
Scholastic Corp., School Specialty, Inc. and Scientific Learning,
Inc.
| 10/31/2004 | 10/31/2005 | 10/31/2006 | 10/31/2007 | 10/31/2008 | 10/31/2009 | |||||||||||||||||||
| PLATO Learning, Inc. | $ | 100.00 | 81.49 | $ | 67.51 | $ | 50.32 | $ | 20.08 | $ | 51.96 | |||||||||||||
| Current Peer Group | 100.00 | 102.30 | 94.07 | 93.78 | 60.31 | 55.76 | ||||||||||||||||||
| NASDAQ | 100.00 | 107.36 | 119.83 | 144.77 | 87.14 | 103.55 | ||||||||||||||||||
Dividends
We did
not declare or pay cash dividends on our common stock in fiscal years 2009, 2008
or 2007. While future cash dividend payments are at the discretion of
our Board of Directors, our current intentions are to reinvest all earnings in
the development and growth of our business.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
information required by Item 201(d) of Regulation S-K is set forth under Item 12
of this Annual Report on Form 10-K.
Repurchases
We
repurchased 1,471 shares of our common stock for an aggregate cost of
approximately $4,000 during the second quarter of fiscal 2009. The
shares were repurchased in accordance with employee elections to withhold shares
to fund tax withholdings due upon vesting of restricted stock. Shares
repurchased but not reissued are presented as treasury stock in the Consolidated
Balance Sheet.
|
(In
thousands, except per share amounts)
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
For
the year ended October 31:
|
|||||||||||||||||||||||
|
Revenues(1)
|
$ | 65,183 | $ | 68,401 | $ | 69,632 | $ | 90,719 | $ | 121,804 | |||||||||||||
|
Gross
profit (2)
|
37,317 | 26,933 | 32,113 | 49,936 | 56,996 | ||||||||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||||||
|
Sales
and marketing
|
23,762 | 27,632 | 29,849 | 38,598 | 49,996 | ||||||||||||||||||
|
General
and administrative
|
8,984 | 10,366 | 12,095 | 16,619 | 18,420 | ||||||||||||||||||
|
Software
maintenance and development
|
2,637 | 4,060 | 4,334 | 5,496 | 5,646 | ||||||||||||||||||
|
Amortization
of intangibles
|
853 | 1,550 | 1,740 | 3,711 | 4,322 | ||||||||||||||||||
|
Goodwill
impairment (3)
|
- | 71,865 | - | - | - | ||||||||||||||||||
|
Restructuring,
impairment and other charges
|
- | 6,748 | (478 | ) | 9,093 | 6,025 | |||||||||||||||||
|
Operating
income (loss)
|
1,081 | (95,288 | ) | (15,427 | ) | (23,581 | ) | (27,413 | ) | ||||||||||||||
|
Other
(expense) income, net
|
(124 | ) | 254 | 1,159 | 1,701 | 586 | |||||||||||||||||
|
Income
tax (benefit) expense
|
- | (3,137 | ) | 608 | 600 | 860 | |||||||||||||||||
|
Net
income (loss)
|
957 | (91,897 | ) | (14,876 | ) | (22,480 | ) | (27,687 | ) | ||||||||||||||
|
Basic
income (loss) per share
|
$ | 0.04 | $ | (3.85 | ) | $ | (0.63 | ) | $ | (0.95 | ) | $ | (1.18 | ) | |||||||||
|
Diluted
income (loss) per share
|
$ | 0.04 | $ | (3.85 | ) | $ | (0.63 | ) | $ | (0.95 | ) | $ | (1.18 | ) | |||||||||
|
At
October 31:
|
|||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 28,164 | $ | 20,018 | $ | 24,297 | $ | 33,094 | $ | 46,901 | |||||||||||||
|
Marketable
securities
|
- | - | - | - | 213 | ||||||||||||||||||
|
Accounts
receivable, net
|
10,710 | 6,834 | 11,752 | 17,522 | 22,768 | ||||||||||||||||||
|
Total
assets
|
45,413 | 68,967 | 162,780 | 175,198 | 197,328 | ||||||||||||||||||
|
Long-term
debt, excluding current portion
|
- | - | - | 18 | 57 | ||||||||||||||||||
|
Deferred
revenue
|
53,698 | 44,921 | 44,600 | 40,814 | 40,431 | ||||||||||||||||||
|
Total
liabilities
|
61,030 | 58,911 | 62,045 | 60,748 | 62,501 | ||||||||||||||||||
|
Stockholders'
equity
|
$ | 12,422 | $ | 10,056 | $ | 100,735 | $ | 114,450 | $ | 134,827 | |||||||||||||
| (1 | ) |
In
2006, we began transitioning our business model from one that sells
one-time perpetual
|
|||||||||||||||||||||
|
licenses
to our software, for which revenue is generally recognized up-front upon
delivery, to one that
|
|||||||||||||||||||||||
|
sells
subscription-based products, for which revenue is recognized over the
subscription
|
|||||||||||||||||||||||
|
period. As
a result, this transition will affect the comparability of our revenues
and profitability from
|
|||||||||||||||||||||||
|
period
to period until it is complete.
|
|||||||||||||||||||||||
| (2 | ) |
Gross
profit was reduced by asset impairment charges related to:
|
|||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||
|
Capitalized
product development
|
$ | 5,085 | $ | 531 | $ | - | $ | 4,412 | |||||||||||||||
|
Purchased
technology intangible assets
|
- | - | 1,089 | 8,782 | |||||||||||||||||||
| $ | 5,085 | $ | 531 | $ | 1,089 | $ | 13,194 | ||||||||||||||||
|
There
were no asset impairment charges in fiscal year 2009. See Notes 7 and
8 to the Consolidated
|
|||||||||||||||||||||||
|
Financial
Statements.
|
|||||||||||||||||||||||
|
(3)
For additional detailed information see Note 14 to the Consolidated
Financial Statements.
|
|||||||||||||||||||||||
Fiscal
Year
Our
fiscal year is from November 1 to October 31. Unless otherwise stated,
references to the years 2009, 2008, and 2007 relate to the fiscal years ended
October 31, 2009, 2008, and 2007, respectively. References to future years also
relate to our fiscal year ending October 31.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of operations is
based upon 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 us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses. We continually evaluate our
critical accounting policies and estimates, and have identified the policies
relating to the following areas as those that are significant to our financial
statement presentation, and require difficult, subjective, or complex
judgments:
|
|
·
|
Revenue
recognition
|
|
|
·
|
Capitalized
software development costs
|
|
|
·
|
Valuation
of deferred income taxes
|
|
|
·
|
Impairment
analysis of goodwill and identified intangible
assets
|
Our
discussion of these policies is intended to supplement, but not replace, the
more detailed discussion of these and other accounting policies and disclosures
contained in the Notes to Consolidated Financial Statements.
Revenue Recognition. We
derive our revenues from three sources: (1) subscription revenues, which are
comprised of subscription fees from customers accessing our online, web-based
products; (2) license revenues from non-cancelable perpetual license agreements;
and (3) related professional and support services and other
revenue.
We
recognize revenue when all of the following conditions are met:
|
|
·
|
There
is persuasive evidence of an
arrangement;
|
|
|
·
|
Access
to our online subscription products has been provided to the customer or
the perpetual courseware has been
delivered;
|
|
|
·
|
The
amount of fees to be paid by the customer is fixed and determinable;
and
|
|
|
·
|
The
collectability of the fee is
probable.
|
Revenue
from the licensing of software under subscription arrangements is recognized on
a ratable basis over the subscription period starting the later of the first day
of the subscription period or when all revenue recognition criteria identified
above have been met. Amounts that have been invoiced are recorded in
accounts receivable and in deferred revenue or revenue, depending on whether the
revenue recognition criteria have been met. Amounts due under
non-cancelable subscription agreements are not
recognized in accounts receivable or deferred revenue until such amounts are
invoiced to the customer.
We also
provide professional services, which consist of training and implementation
services, as well as ongoing customer support and
maintenance. Training and implementation services are not essential
to the functionality of our software products. Revenues from these
services are recognized separately upon delivery where there is objective and
reliable evidence of fair value of each deliverable. Software support
revenue is deferred and recognized ratably over the support period.
For
revenue arrangements with multiple deliverables, we allocate the total amount
the customer will pay to the separate units of accounting based on their
relative fair values, as determined by the price of the undelivered items when
sold separately.
If
collectability of the fee is not probable, revenue is recognized as payments are
received from the customer provided all other revenue recognition criteria have
been met. If the fee due from the customer is not fixed or
determinable, revenue is recognized as the payments become due provided all
other revenue recognition criteria have been met.
Capitalized Software Development
Costs. Our investments in software development are significant, and the
rules that govern how these costs are accounted for in our financial statements
can have a significant impact on our operating results from period to
period.
At the
end of fiscal year 2008, we completed our transition to a software-as-a-service
business model in which substantially all of our products are now delivered on a
hosted, subscription service basis. Effective for fiscal year 2009,
we have applied authoritative guidance that accounts for the costs of computer
software developed for internal use. The guidance provides that
hosting arrangements in which customers do not have a contractual right to take
possession of the software are service arrangements, and such software, subject
to certain exceptions, is considered internal use software.
Our
software development costs relate to the research, development, enhancement, and
maintenance of our software products. Costs related to the initial
design and development of new products and the routine enhancement and
maintenance of existing products are expensed as incurred. When projects reach
the application development stage we begin capitalization of the related project
costs. Capitalization ends when a product is available for general release to
our customers, at which time amortization of the capitalized costs begins. The
amortization of these costs is included in cost of revenues.
Prior to
fiscal year 2009, we accounted for our software development costs as computer
software to be sold, leased or otherwise marketed. Capitalization
began when technological feasibility was achieved and an allocation of indirect
costs was included in the amounts capitalized. Capitalization ended when a
product was available for general release to our customers, at which time
amortization of the capitalized costs began.
We
evaluate our capitalized costs whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Prior to 2009, we evaluated
our capitalized costs on a quarterly basis to determine if the unamortized cost
related to any product, or group of products, exceeded its estimated net
realizable value. Estimating net realizable value requires us to use judgment in
projecting future revenues and cash flows to be generated by the product and
thereby quantifying the amount, if any, to be written off. Actual cash flows
realized could differ materially from those estimated. In addition, any future
changes to our software product offerings could result in write-offs of
previously capitalized costs and have a significant impact on our consolidated
results of operations. Our analysis as of October 31, 2008 resulted
in impairment charges on these assets of $4.6 million. There were no
impairment charges on capitalized software development costs
2009.
Valuation of Deferred Income
Taxes. Our accounting policy for the valuation of deferred income taxes
is considered critical for several reasons. Significant judgment is required in
the assessment of the need for a valuation allowance. In addition, income tax
accounting rules, in combination with purchase accounting rules applied in the
acquisition of Lightspan in 2004, resulted in a complex tax accounting situation
in which, until 2008, we had not recognized tax benefits on operating losses or
on the realization of deferred tax assets, but regardless of our operating
results, had been recognizing tax expense on future tax liabilities related to
tax deductible goodwill.
The
majority of our deferred tax assets represent net operating loss carryforwards
which are available to offset future taxable income. These loss carryforwards
include those acquired in the acquisition of Lightspan in 2004, as well as
carryforward losses that existed prior to, or were incurred after, the
acquisition. Our ability to realize the benefit of these loss carryforwards is
dependent upon our ability to generate future taxable income., Our history of
cumulative operating losses over the past several years has led to our current
assessment that it is more likely than not that our net deferred taxes will not
be realized. As a result, our deferred tax assets are fully reserved
and will remain fully reserved until the related tax benefits are realized
through the generation of taxable income in a particular year, or until we can
demonstrate a history of generating taxable income.
Until
2008, our calculation of net deferred tax assets excluded a deferred tax
liability related to tax deductible goodwill. The timing of the reversal of this
difference was considered indefinite because it would not reverse until the
underlying assets that created the goodwill were disposed of or
sold. In 2008, the goodwill was determined to by fully impaired, and
as a result, the deferred tax liability associated with tax deductible goodwill
was reversed.
Goodwill and Identified Intangible
Assets. Goodwill and identified intangible assets are recorded when the
purchase price paid for an acquisition exceeds the fair value of the tangible
assets acquired. Most of the companies we have acquired have not had
significant tangible assets. As a result, a significant portion of
the purchase price paid in acquisitions has been allocated to identified
intangible assets and/or goodwill.
Identified
intangible assets are amortized to expense over their expected useful lives and
goodwill was not amortized. Once established, these assets are
subject to periodic impairment assessments to determine if their current
carrying values are recoverable based on information available at the time these
assessments are made. Significant assumptions and estimates are
required in making these assessments.
Accordingly,
the assumptions and estimates we use in implementing this policy affect the
amount of identified intangible asset amortization and impairment charges, if
any, reflected in our operating results. Our impairment assessments at October
31, 2008 resulted in the elimination of goodwill and a related impairment charge
of $71.9 million, and impairment charges of $1.9 million on identified
intangible technology, trademark and customer assets acquired in previous
acquisitions. There were no impairment charges in 2009.
General
Factors Affecting our Financial Results
There are
a number of general factors that affect our results from period to period. These
factors are discussed below.
Revenue. In 2008, we
completed a transition of our business model from one that sells one-time
perpetual licenses to software, for which revenue is generally recognized
up-front upon delivery, to one that sells subscription-based products, for which
revenue is recognized over the subscription period. The transition began in late
fiscal 2005 when we introduced many of our new subscription-based products and
affects the comparability of our revenues over this period. In 2009,
a meaningful, but declining portion of our revenues continued to be derived from
sales of perpetual licenses of our software products and related maintenance.
These revenues are reported as license fees and software maintenance (included
in services revenue) in our consolidated statement of operations. As
subscription revenues grow as a percentage of total revenues, we expect our
period to period revenues to become more comparable and
predictable.
Cost of Revenues and Gross
Profit. Our cost of revenues and gross profit during a period is
dependent on a number of factors. License fee and software maintenance revenues
historically have had high gross profit due to the low direct cost of delivering
these products and services. As a result, the mix of license fee revenues to
total revenues in a given period significantly influences reported total gross
profit. In addition, a large portion of our costs of revenue are fixed in
nature. These costs include amortization of capitalized software development and
purchased technology, depreciation and other infrastructure costs to support our
hosted subscription services, customer support operations, and full-time
professional services personnel who deliver our training services. Accordingly,
increases in revenues allow us to leverage these costs resulting in higher gross
profit, while decreases in revenues have the opposite effect.
Operating Expenses. General
and administrative expenses are substantially fixed in nature. However, certain
components such as our provision for bad debts, professional fees, and other
expenses can vary based on business results, individual events, or initiatives
we may be pursuing at various times throughout the year.
Incentive
compensation is a significant variable component of our sales and marketing
expenses, approximating 8% to 9% of total revenues in any given period. Sales
and marketing expenses also include costs such as travel, tradeshows, and
conferences that can vary with revenue activity or individual events that occur
during the period.
Software maintenance and development expense in our consolidated statement of
operations does not reflect our total level of software product spending. Costs
to enhance or maintain existing products, or to develop products prior to the
application development stage, are charged to software maintenance and
development expense as incurred. Costs incurred to develop new products after
the preliminary project stage is completed, which represent the majority of our
total development spending, are capitalized and amortized to cost of revenues.
Accordingly, software maintenance and development expense in our consolidated
statement of operations can fluctuate from period to period, in terms of both
total dollars and as a percentage of revenue, based on the nature and timing of
activities occurring during the period.
Amortization
of intangibles represents the amortization of certain identified intangible
assets acquired through various acquisitions. While these expenses are generally
predictable from period to period because they are fixed over the course of
their individual useful lives, they can be affected by events and other factors
that result in impairment of these assets and a corresponding reduction in
future amortization.
Non-GAAP
Financial Measures
The
following discussion and analysis of our financial condition and results of
operations includes non-GAAP financial measures, identified in the
reconciliations below, that is not prepared in accordance with generally
accepted accounting principles and may be different from non-GAAP financial
measures used by other companies. Non-GAAP financial measures should
not be considered as a substitute for, or superior to, measures of financial
performance prepared in accordance with GAAP. Investors are encouraged to review
the following reconciliations of the non-GAAP financial measures used herein to
their most directly comparable GAAP financial measures as provided in our
consolidated financial statements.
Our
management has used these non-GAAP financial measures to gauge the success of
our transition to a software-as-a-service business model. This
transition affects comparability of our results between periods during the
transition, which began in late 2005 and was completed by the end of 2008,
because revenue accounting differences and the costs to support and deliver
products and services vary significantly between our current and prior business
models. Management therefore believes these non-GAAP measures provide
transparency to our results by excluding transitory effects of the change to our
business model and help gauge the success of our
transition. Management believes these non-GAAP measures are useful to
investors for the same reasons.
Reconciliation of 2008 and 2007 GAAP
Net Loss and Loss Per Share to Non-GAAP Net Loss and Loss Per Share Before
Impairments, Restructuring and Other Charges and Benefits (in thousands, except
per share amounts)
|
2008
|
2007
|
|||||||
|
Net
loss:
|
||||||||
|
Net
loss, as reported
|
$ | (91,897 | ) | $ | (14,876 | ) | ||
|
Goodwill
impairment
|
71,865 | - | ||||||
|
Income
tax benefit related to goodwill impairment charge
|
(3,137 | ) | - | |||||
|
Restructuring,
impairment and other charges
|
11,833 | 53 | ||||||
|
Net
loss before restructuring, impairments
|
||||||||
|
and
other charges and benefits
|
$ | (11,336 | ) | $ | (14,823 | ) | ||
|
Loss
per share (basic and diluted):
|
||||||||
|
Loss
per share, as reported
|
$ | (3.85 | ) | $ | (0.63 | ) | ||
|
Goodwill
impairment
|
3.01 | - | ||||||
|
Income
tax benefit related to goodwill impairment charge
|
(0.13 | ) | - | |||||
|
Restructuring,
impairment and other charges
|
0.49 | 0.01 | ||||||
|
Loss
per share before restructuring, impairments
|
||||||||
|
and
other charges and benefits
|
$ | (0.48 | ) | $ | (0.62 | ) | ||
|
Basic
and diluted weighted average common shares
|
||||||||
|
outstanding
(GAAP)
|
23,854 | 23,754 | ||||||
Reconciliation
of 2008 and 2007 GAAP Operating Expenses to Non-GAAP Operating Expenses before
Goodwill Impairments, Restructuring and Other Charges (in
thousands)
|
2008
|
2007
|
|||||||
|
Total
operating expenses, as reported
|
$ | 122,221 | $ | 47,540 | ||||
|
Goodwill
impairment
|
71,865 | - | ||||||
|
Restructuring,
impairment and other charges (benefit)
|
6,748 | (478 | ) | |||||
|
Operating
expenses before restructuring, impairments
|
||||||||
|
and
other charges (benefit)
|
$ | 43,608 | $ | 48,018 | ||||
Overview
of Financial Results
Fiscal
2009 was a milestone year for our company as we achieved profitability for the
first time since 2001 and significantly improved cash flows. We also
achieved our first year of growth in total orders since our transition to a
software-as-a-service (“SaaS”) business model that began in
2005. Although total revenues in 2009 continued to be adversely
affected by declining emphasis on sales of legacy perpetual products and related
software maintenance, strong growth in subscription revenues on our SaaS
products have now substantially offset these declines. Compared to 2008, total
2009 revenues declined $3.2 million, or 4.7%, to $65.2 million.
Our cost
management efforts throughout the transition have led to significant declines in
the costs of operating our business. Operating expenses, excluding impairments,
restructuring and other charges and benefits (a non-GAAP measure) declined 16.9%
to $36.2 million in 2009 from $43.6 million in 2008. Together with the
moderating revenue declines, these cost declines led to an improvement in our
non-GAAP net
income (loss) excluding impairments, restructuring and other charges and
benefits, to $1.0 million, or $0.04 per share, from ($11.3) million, or ($0.48)
per share, in 2008. On a GAAP basis, our net income was $1.0 million
in 2009 compared to a net loss of ($91.9) million for 2008, with the change
primarily attributable to the non-cash impairment charge to goodwill and
restructuring charges incurred in fiscal year 2008.
In 2010,
we will continue to make curriculum and platform investments specifically
designed to address the evolving needs of the online instruction
market. Early in the year we expect to launch PLE 2.0, our first
major new release of PLE since it was introduced four years ago. We also expect
to add up to ten new courses for mainstream and advanced placement students, and
additional platform features that enable virtual instruction between teachers
and students. While our investment and sales efforts are focused exclusively on
subscription-based products, the financial effects of the transition to
subscription products is not fully complete and may continue to impede the
progress of our year-over-year financial results in the near term. This and
other risks we face in our business are discussed in more detail in Item 1A of
Part I of this report.
Results
of Operations
Our
discussion and analysis of results of operations should be read in conjunction
with the section above captioned “General Factors Affecting our
Financial Results”.
Revenues
The
following tables summarize certain key information to aid in the understanding
of our discussion and analysis of revenues:
Order Information (in
thousands)
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Amount
|
Change
from 2008
|
Amount
|
Change
from 2007
|
Amount
|
||||||||||||||||
|
Subscriptions & related
services:
|
||||||||||||||||||||
|
Subscriptions
|
$ | 57,262 | 31.4 | % | $ | 43,585 | 19.8 | % | $ | 36,369 | ||||||||||
|
Professional
services
|
10,361 | 32.2 | % | 7,840 | (11.6 | %) | 8,873 | |||||||||||||
|
Other
|
2,906 | (4.7 | %) | 3,049 | (7.1 | %) | 3,282 | |||||||||||||
|
Subtotal
|
70,529 | 29.5 | % | 54,474 | 12.3 | % | 48,524 | |||||||||||||
|
Legacy products and
services:
|
||||||||||||||||||||
|
License
fees
|
4,045 | (48.7 | %) | 7,886 | (53.4 | %) | 16,931 | |||||||||||||
|
Software
maintenance
|
6,134 | (37.1 | %) | 9,748 | (20.2 | %) | 12,221 | |||||||||||||
|
Subtotal
|
10,179 | (42.3 | %) | 17,634 | (39.5 | %) | 29,152 | |||||||||||||
|
Total
orders
|
$ | 80,708 | 11.9 | % | $ | 72,108 | (7.2 | %) | $ | 77,676 | ||||||||||
Revenue
by Category (in thousands)
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Amount
|
Change
from 2008
|
Amount
|
Change
from 2007
|
Amount
|
||||||||||||||||
|
Subscriptions & related
services:
|
||||||||||||||||||||
|
Subscriptions
|
$ | 41,210 | 17.0 | % | $ | 35,221 | 45.7 | % | $ | 24,173 | ||||||||||
|
Professional
services
|
8,440 | (12.5 | %) | 9,642 | (12.6 | %) | 11,033 | |||||||||||||
|
Other
|
2,871 | (4.0 | %) | 2,990 | 4.7 | % | 2,856 | |||||||||||||
|
Subtotal
|
52,521 | 9.8 | % | 47,853 | 25.7 | % | 38,062 | |||||||||||||
|
Legacy products and
services:
|
||||||||||||||||||||
|
License
fees
|
4,101 | (51.5 | %) | 8,458 | (52.2 | %) | 17,712 | |||||||||||||
|
Software
maintenance
|
8,561 | (29.2 | %) | 12,090 | (12.8 | %) | 13,858 | |||||||||||||
|
Subtotal
|
12,662 | (38.4 | %) | 20,548 | (34.9 | %) | 31,570 | |||||||||||||
|
Total
revenues
|
$ | 65,183 | (4.7 | %) | $ | 68,401 | (1.8 | %) | $ | 69,632 | ||||||||||
2009
vs. 2008
Total
orders increased 11.9% from $72.1 million in 2008 to $80.7 million in 2009,
driven by continued strong demand for our subscription-based products.
Subscription orders grew 31.4% while legacy license and software maintenance
orders declined 42.3% reflecting our declining emphasis on sales of these
products and services.
Total
revenues decreased $3.2 million, or 4.7%, to $65.2 million in 2009. Subscription
revenues increased $6.0 million, or 17.0%, to $41.2 million on our growing base
of subscription customers. While subscription revenue growth was strong, it was
not
sufficient to fully offset the decline in legacy license fees and software
maintenance service revenues. Our strategic shift away from these
legacy products and services resulted in a $7.9 million, or 38.4% decline in
these revenues to $12.7 million.
2008
vs. 2007
Total
revenues decreased $1.2 million, or 1.8%, to $68.4 million in 2008. Subscription
revenues increased $11.0 million, or 45.7%, to $35.2 million as strong growth in
subscription product orders in 2007 and 2008 were recognized as revenue over the
portion of the subscription periods occurring in 2008. While subscription
revenue growth was strong, it was not sufficient to fully offset a decline in
license fees and software maintenance revenues. Our strategic shift
away from legacy perpetual software products resulted in a $9.3 million, or
52.2%, decline in license fee revenues, and a $1.8 million, or 12.8%, decline in
software maintenance revenue. Professional services revenues in 2008 declined
$1.4 million, or 12.6%, as 2007 professional services revenues benefited from a
focused effort to deliver the backlog of services unused by our
customers.
Total
orders declined from $77.7 million in 2007 to $72.1 million in 2008, reflecting
a slowing of orders in the second half of the fourth quarter of 2008 as news
worsened on the broader U.S. economy and school districts put spending decisions
on hold as they evaluated the effects on their budgets. The order decline also
reflects the continuing transition from selling products that are licensed on a
perpetual basis, which have higher one-time selling prices, to those that are
licensed on a subscription basis, which have lower selling prices but are
renewable at the end of each subscription period.
Cost
of Revenue
2009
vs. 2008
Total
cost of revenue in 2009 decreased $13.6 million, or 32.8%, to $27.9 million
compared to the same period in 2008. Cost of revenue in 2008 included
$5.1 million of impairment charges on capitalized software development costs and
purchased intangible assets. Subscription cost of revenue declined $2.5 million,
or 13.4%, in 2009 due to declines in software development amortization and
royalty costs. The decline in amortization is due to the
above-mentioned asset impairments, and reduced levels of capitalized software
development spending in 2009. The decline in royalty costs in 2009
relates to a royalty arrangement with a third party provider of curriculum
content that was renegotiated at a lower cost in late 2008.
License
fee cost of revenue declined $3.5 million in 2009 compared to 2008 due to a
reduction in related revenues, lower product amortization, and cost reduction
initiatives undertaken in 2008. The services cost of revenue decreased 20.5% to
$9.9 million in 2009 from $12.4 million for 2008 due to the lower professional
services costs on lower related revenues, and lower support costs due to our
declining base of customers using our legacy perpetual products.
2008
vs.
2007
Total
cost of revenue in 2008 increased $3.9 million, or 10.5%, due primarily to an
increase in impairment charges on capitalized software development costs and
purchased
intangible assets from $0.5 million in 2007, to $5.1 million in 2008, as
discussed above. Subscription cost of revenue increased $3.1 million or 20.2%,
in 2008 on increases in software development amortization and royalty costs. The
increase in amortization is due to investments in software development made as
we transitioned to a SaaS business model. The increased royalty costs
were associated with a third party provider of curriculum
content.
License
fee cost of revenue in 2008 declined $3.1 million compared to 2007 due to lower
product amortization, royalty costs and lower material costs on reduced revenues
and changes in the license product mix. The services cost of revenue decreased
4.8% to $12.4 million in 2008 from $13.1 million 2007 due to the lower
professional services costs on lower revenue levels, and lower support costs due
to our declining base of customers using our legacy perpetual
products.
Operating
Expenses
To aid in
the understanding of our discussion and analysis of operating expenses, the
following table summarizes the amount and percentage change in the amounts from
the previous year for certain operating expense line items:
|
Increase
(Decrease)
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2008
to 2009
|
2007
to 2008
|
||||||||||||||||
|
Sales
and marketing
|
$ | 23.8 | $ | 27.6 | $ | 29.9 | (14.0 | %) | (7.4 | %) | ||||||||||
|
General
and administrative
|
9.0 | 10.4 | 12.1 | (13.3 | %) | (14.3 | %) | |||||||||||||
|
Software
maintenance and development
|
2.6 | 4.1 | 4.3 | (35.0 | %) | (6.3 | %) | |||||||||||||
|
Amortization
of intangibles
|
0.8 | 1.5 | 1.7 | (45.0 | %) | (10.9 | %) | |||||||||||||
|
Operating
expenses excluding impairments, restructuring
|
36.2 | 43.6 | 48.0 | (16.9 | %) | (9.2 | %) | |||||||||||||
|
and
other charges
|
||||||||||||||||||||
|
Goodwill
impairment
|
- | 71.9 | - | (100.0 | %) |
NM
|
||||||||||||||
|
Restructuring,
impairment and other charges
|
- | 6.7 | (0.5 | ) | (100.0 | %) |
NM
|
|||||||||||||
|
Total
operating expenses
|
$ | 36.2 | $ | 122.2 | $ | 47.5 | (70.4 | %) | 157.1 | % | ||||||||||
2009
vs. 2008
Total operating expenses in 2009 decreased to $36.2 million from operating
expenses excluding impairments, restructuring and other charges of $43.6 million
in 2008. See further discussion below and Note 14 to consolidated financial
statements for a detailed description of these restructuring, impairment and
other charges that occurred in 2008.
Sales and
marketing expenses declined 14.0% to $23.8 million in 2009 as compared to $27.6
million in 2008. This decrease primarily reflects reduced investments
in marketing activities and better management of travel costs and inside sales
resources. None of the decline was due to a reduction in the number of direct
field sales representatives which remained approximately the same from 2008 to
2009.
General
and administrative expenses declined 13.3% to $9.0 million in 2009 as compared
to $10.4 million in 2008, due primarily to reductions in labor costs and
declines in the cost of compliance activities and facility related
expenses.
Software
maintenance and development expenses for 2009 were $2.6 million compared to $4.1
million for 2008. The reduction in software maintenance and development expenses
reflects the increasing stability of our PLE platform and efficiencies built
into delivering new releases of the platform. Total software
development spending, which represents the combination of spending on projects
that are capitalized and those that are expensed, was $7.5 million in 2009, or
11.5% of total revenues, compared to total spending in 2008 of $14.7 million, or
21.5% of total revenues. The decline reflects our intention to align product
investment levels with revenues.
Amortization
of intangibles represents the amortization of identified intangible assets,
other than technology, acquired in acquisitions. Amortization of $0.8
million in 2009 represented a decrease of 45.0% from 2008 as certain assets
acquired in earlier acquisitions became fully amortized or were impaired and
written off during 2008.
2008
vs. 2007
Total
operating expenses in 2008 increased to $122.2 million and included $78.6
million in impairments, restructuring and other charges. See further
discussion below and Note 14 to consolidated financial statements for a detailed
description of these charges. Operating expenses excluding
impairments, restructuring and other charges, declined 9.2% to $43.6 million in
2008 compared to $48.0 million in 2007.
Sales and
marketing expenses declined to $27.6 million in 2008 as compared to $29.9
million in 2007. This decrease primarily reflects improved management
of indirect sales and marketing costs and better leveraging of our inside sales
resources.
General
and administrative expenses declined 14.3% to $10.4 million in 2008 as compared
to $12.1 million in 2007, due primarily to reductions in labor and incentive
costs and declines in the cost of compliance activities and internal business
systems support.
Product
maintenance and development expenses for 2008 were $4.1 million compared to $4.3
million for 2007. The reduction in product maintenance and development expenses
reflects the increasing stability of our PLE platform and efficiencies built
into delivering new releases of the platform. Total product
development spending, which represents the combination of spending on projects
that are capitalized and those that are expensed, was $14.7 million in 2008, or
21.5% of total revenues, compared to total spending in 2007 of $20.0 million, or
28.8% of total revenues. The decline reflects completion of a three year product
roadmap for the first phase of our SaaS strategy initiated in late
2005.
Amortization
of intangibles represents the amortization of identified intangible assets,
other than technology, acquired in acquisitions. Amortization of $1.5
million in 2008 represented a decrease of 10.9% from 2007 as certain assets
acquired in earlier acquisitions became fully amortized during
2008.
Operating
expenses in 2008 include a non-cash impairment charge of $71.9 million on
goodwill acquired in multiple acquisitions between 2000 and 2003, several years
prior to launching our SaaS business model strategy. As described in our
critical accounting policies, authoritative guidance requires that goodwill be
reviewed for potential impairment annually, or when events or changes in
circumstances indicate the carrying value of the goodwill might exceed its
current fair value. One of the indicators of impairment is a sustained decline
in a company’s share price whereby market capitalization of the company is less
than its book value for an extended period of time. We began to
experience such a decline starting in March 2008. After trading in a
range near our book value throughout the summer, we experienced a further
decline in our stock price as the financial markets reacted to the credit crisis
facing major lending institutions, and worsening conditions in the overall
economy. As a result of these factors, we concluded in the fourth quarter of
2008 that our recorded goodwill was impaired.
The
determination of the amount of the impairment required that the fair values of
our assets and liabilities be determined as if we had been acquired in a
hypothetical business combination with a purchase price equal to the market
capitalization of our company as of October 31, 2008, adjusted for certain
factors that might reasonably affect the value of our company if purchased in an
actual acquisition. The estimates and assumptions used in determining
the hypothetical purchase price and fair value determinations are inherently
subject to uncertainty.
Under
accounting rules for business combinations, goodwill exists only if the purchase
price exceeds the fair value of the net assets of the acquired entity. Our
impairment analysis concluded that the purchase price as determined above was
less than the sum of the fair value of our identified tangible and intangible
assets, less the fair value of our liabilities. Accordingly, no value was
assigned to goodwill resulting in full impairment of goodwill and a related
non-cash charge to 2008 operating results of $71.9 million. The impairment of
goodwill did not have any impact on our day-to-day business operations,
liquidity or long-term SaaS strategy.
Impairment,
restructuring and other charges consist of $1.4 million in non-cash impairment
charges on previously acquired intangible assets, and $5.3 million in cash and
non-cash charges related to achieving continued cost efficiencies in our SaaS
business model, and the transition of our CEO in late 2008.
Interest
Income
Interest
income decreased from $0.5 million in 2008 to $0.2 million in
2009. This decrease reflected a decline in interest rates earned on
investments partially offset by a slight increase in average cash and cash
equivalents balances.
Interest
income decreased from $1.3 million in 2007 to $0.5 million in
2008. This decrease is due to lower average cash and cash equivalents
balances as well as a decline in interest rates earned on these
balances.
Income
Taxes
As
discussed earlier under the caption “Critical Accounting Policies and
Estimates,” our net deferred tax assets are fully reserved. We did not record a
current income
tax expense related to our current year operating income because we utilized a
portion of the net operating loss carryforward.
Prior to
2008, certain tax deductible goodwill could not be used to offset other net
deferred tax assets resulting in the recording of income tax expense related to
this liability of $0.6 million in 2007. In 2008, the full impairment
of the tax-deductible goodwill, as discussed above, resulted in the reversal of
the cumulative deferred tax liability and a corresponding income tax benefit of
$3.1 million.
Liquidity
and Capital Resources
At
October 31, 2009, our principal sources of liquidity included cash and cash
equivalents totaling $28.2 million, net billed accounts receivable of $10.7
million, and unbilled commitments under non-cancelable subscription contracts
totaling $14.6 million, of which $7.8 million is expected to be billed in
2010. We also have a three-year senior secured credit facility that
provides us with a revolving line of credit up to the lesser of $20 million or
the amount of our trailing twelve months subscription and software maintenance
revenues. Under this agreement, which expires in June 2010, we have
the option of selecting an interest rate for any drawdown under the facility
equal to the applicable Prime or LIBOR Rate plus a sliding margin that is based
on the amount of borrowings outstanding. Borrowings under the
agreement are secured by all of our assets. Financial covenants apply
only when the unused portion of the line of credit, plus cash and cash
equivalents on hand, is less than $12.5 million, and are limited to minimum
quarterly thresholds of earnings before interest, taxes, depreciation and
amortization (EBITDA). At October 31, 2009 and 2008, availability
under the line was $20 million and there were no borrowings
outstanding.
2009
vs. 2008
Cash
provided by operations increased to $13.6 million in 2009 from $6.5 million in
2008, due to the increase in total orders and reductions in overall spending as
discussed above. Cash used in investing activities declined to $5.6
million in 2009, from $11.0 million in 2008. This decline reflects a
reduction in our product investment requirements based on the completion of the
conversion of our extensive content to the PLE environment and our intention to
align our level of product investment to our level of revenue. These
changes resulted in an $8.1 million increase from 2008 to 2009 in our year end
balance of cash and cash equivalents.
2008
vs. 2007
Cash
provided by operations declined to $6.5 million in 2008 from $9.7 million, due
primarily to the decline from 2007 to 2008 in total orders discussed above,
partially offset by reductions in overall spending. Cash used in
investing activities declined to $11.0 million in 2008, from $17.9 million in
2007. This decline reflected a reduction in our product investment
requirements based on the substantial completion of the conversion of our
extensive content to the PLE environment. These changes resulted in a
$4.3 million decrease from 2007 to 2008 in our year end balance of cash and cash
equivalents.
Contractual
Obligations
Our
principal commitments consist of future minimum payments due under operating
leases, royalty and non-cancelable software license agreements. In
addition, any future borrowings under our revolving loan agreement as discussed
above would require future use of cash. At October 31, 2009, the
future minimum payments under these commitments were as follows:
|
Payments
Due by Period (in thousands)
|
||||||||||||||||||||
|
1
Year
|
1
to 3
|
3
to 5
|
More
than
|
|||||||||||||||||
|
Contractual
Obligations
|
Total
|
or
Less
|
Years
|
Years
|
5
Years
|
|||||||||||||||
|
Operating
leases
|
$ | 1,307 | $ | 960 | $ | 295 | $ | 52 | $ | - | ||||||||||
|
Royalty
agreements
|
2,236 | 2,236 | - | - | - | |||||||||||||||
|
Non-cancelable
software license agreements
|
333 | 273 | 53 | 7 | - | |||||||||||||||
|
Capital
leases obligations
|
6 | 6 | - | - | ||||||||||||||||
|
Total
|
$ | 3,882 | $ | 3,475 | $ | 348 | $ | 59 | $ | - | ||||||||||
Also, as
discussed in Item 2 of this Form 10-K, the lease of our office facility in
Bloomington, MN expires in June 2010. We currently anticipate that in 2010 we
will likely execute a new lease for a different facility in or near Bloomington,
although we may renew our current lease for less square footage. The table above
does not reflect these contemplated actions.
Purchase
orders are not included in the table above. Our purchase orders
represent authorizations to purchase rather than binding
agreements. The contractual commitment amounts in the table above are
associated with agreements that are enforceable and legally binding and that
specify all significant terms, including fixed or minimum services to be used,
fixed minimum or variable price provisions, and the approximate timing of the
transaction. Obligations under contracts that we can cancel without
significant penalty are not included in the table above.
We
believe our existing cash, cash equivalents, anticipated cash provided by
operating activities, and availability under our line of credit will be
sufficient to meet our working capital and capital expenditure needs over the
next 12 months. Our future capital requirements will depend on many
factors, including the timing and extent of software development expenditures,
order volume, and the timing and collection of receivables.
Disclosures
about Off-Balance Sheet Arrangements
We did
not have any off-balance sheet arrangements as of October 31, 2009 or October
31, 2008.
Interest
Rate Risk
On June
4, 2007, we entered into a three-year senior secured credit facility which
provides us with a revolving line of credit up to the lesser of $20 million or
the amount of our trailing twelve months subscription and software maintenance
revenue. Under the agreement, which expires in June 2010, we have the
option of selecting an interest rate for any drawdown under the facility equal
to the applicable Prime or Libor Rate plus a sliding margin that is based on the
amount of borrowings outstanding. There were no borrowings
outstanding at October 31, 2009 or 2008.
Foreign
Currency Exchange Rate Risk
Our
foreign operations are not a significant component of our business, and as a
result, risks relating to foreign currency fluctuation are considered
minimal.
Recent
Accounting Pronouncements
In June
2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental
GAAP. All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting
literature not included in the Codification has become
non-authoritative. The Codification did not change GAAP, but instead
introduced a new structure that combines all authoritative standards into a
comprehensive, topically organized online database. The Codification
is effective for interim or annual periods ending after September 15, 2009, and
impacts our financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of our
financial statements or disclosures as a result of implementing the Codification
during the fiscal year ended October 31, 2009.
In
October 2009, the FASB’s Emerging Issues Task Force (EITF) issued authoritative
guidance addressing revenue arrangements with multiple
deliverables. The guidance eliminates the criterion for objective and
reliable evidence of fair value for the undelivered products or
services. Instead, revenue arrangements with multiple deliverables
should be divided into separate units provided the deliverables meet certain
criteria. This guidance also eliminates the use of the residual
method of allocation and requires that the arrangement consideration be
allocated at the inception of the arrangement to all deliverables based on their
relative selling price. The guidance also provides a hierarchy for
estimating the selling price of each of the deliverables. The
guidance is effective prospectively for revenue arrangements entered into or
materially modified at the beginning of our fiscal year 2011; however, earlier
application is permitted. We are currently evaluating this guidance
and anticipate that we will adopt it in the first quarter of fiscal year 2010,
but do not expect it to have a material effect on our consolidated financial
statements.
In
October 2009, the FASB’s EITF issued authoritative guidance that updated
software revenue arrangements that also include tangible
products. The amendments exclude tangible products and software
essential to the tangible product’s functionality from the software revenue
guidance. The guidance is effective prospectively for revenue
arrangements entered into or materially modified at the beginning of our fiscal
year 2011; however, earlier application is permitted. We do not
expect the provisions to have a material effect on our consolidated financial
statements.
In August
2009, the FASB issued updated guidance to reduce potential ambiguity in
financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides
clarification that in circumstances, in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in the
guidance. The provisions became effective during our fourth quarter
2009 and did not have a material effect on our consolidated financial
statements.
In April
2008, the FASB issued authoritative guidance amending the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset as provided for under separate accounting guidance
topics. The provisions are effective for our fiscal year 2010 and are
currently not expected to have a material effect on our consolidated financial
statements.
In
December 2007, the FASB issued authoritative guidance that 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. The guidance also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. The provisions will be adopted by us in the first
quarter of fiscal 2010 and are currently not expected to have a material effect
on our consolidated financial statements.
In
December 2007, the FASB issued a new accounting pronouncement regarding
noncontrolling interests and the deconsolidation of a
subsidiary. This will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
(NCI) and classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions with minority
interest holders. The provisions will be adopted by us in the first
quarter of fiscal year 2010 and are currently not expected to have a material
effect on our consolidated financial statements.
In
February 2007, the FASB issued authoritative guidance to permit 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 were effective
beginning in our fiscal year 2009 and did not have a material effect on our
consolidated financial statements.
In
September 2006, the FASB issued authoritative guidance to establish a consistent
framework for measuring fair value and expand disclosures on fair value
measurements. The provisions were effective beginning in our fiscal
year 2009 and did not have a material effect on our consolidated financial
statements.
The
information appearing under the captions “Interest Rate Risk” and
“Foreign Currency Exchange
Risk” in Item 7 of this Annual Report on Form 10-K is incorporated herein
by reference.
(a)(1) Consolidated
Financial Statements:
|
Page
|
|
|
35
|
|
|
37
|
|
|
38
|
|
|
39
|
|
|
40
|
|
|
41
|
Board of
Directors and Stockholders
PLATO
Learning, Inc.
We have
audited the accompanying consolidated balance sheets of PLATO Learning, Inc. and
subsidiaries (the “Company”) as of October 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity
and comprehensive income (loss), and cash flows for each of the three years in
the period ended October 31, 2009. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements 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. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PLATO Learning, Inc. and
subsidiaries as of October 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2009, in conformity with accounting principles generally accepted in
the United States of America.
We also
have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), PLATO Learning, Inc. and
subsidiaries’ internal control over financial reporting as of October 31,
2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated January 14, 2010,
expressed an unqualified opinion.
/s/ Grant
Thornton LLP
Minneapolis,
Minnesota
January
14, 2010
Board of
Directors and Stockholders
PLATO
Learning, Inc.
We have
audited PLATO Learning, Inc. and subsidiaries (the “Company”) internal control
over financial reporting as of October 31, 2009, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s
management is responsible 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 Management’s
Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the effectiveness of on PLATO
Learning, Inc. and subsidiaries’ internal control over financial reporting based
on our audit.
We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit 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, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed 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 company’s 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 company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, PLATO Learning, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of
October 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of PLATO
Learning, Inc. and subsidiaries as of October 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows for each
of the three years in the period ended October 31, 2009, and our report dated
January 14, 2010 expressed an unqualified opinion on those consolidated
financial statements.
/s/ Grant
Thornton LLP
Minneapolis,
Minnesota
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||
|
YEAR
ENDED OCTOBER 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
REVENUES
|
||||||||||||
|
Subscriptions
|
$ | 41,210 | $ | 35,221 | $ | 24,173 | ||||||
|
License
fees
|
4,101 | 8,458 | 17,712 | |||||||||
|
Services
|
19,872 | 24,722 | 27,747 | |||||||||
|
Total
revenues
|
65,183 | 68,401 | 69,632 | |||||||||
|
COST
OF REVENUES
|
||||||||||||
|
Subscriptions
|
16,171 | 18,674 | 15,540 | |||||||||
|
License
fees
|
1,809 | 5,277 | 8,396 | |||||||||
|
Services
|
9,886 | 12,432 | 13,052 | |||||||||
|
Impairment
charges
|
- | 5,085 | 531 | |||||||||
|
Total
cost of revenues
|
27,866 | 41,468 | 37,519 | |||||||||
|
GROSS
PROFIT
|
37,317 | 26,933 | 32,113 | |||||||||
|
OPERATING
EXPENSES
|
||||||||||||
|
Sales
and marketing
|
23,762 | 27,632 | 29,849 | |||||||||
|
General
and administrative
|
8,984 | 10,366 | 12,095 | |||||||||
|
Software
maintenance and development
|
2,637 | 4,060 | 4,334 | |||||||||
|
Amortization
of intangibles
|
853 | 1,550 | 1,740 | |||||||||
|
Goodwill
impairment
|
- | 71,865 | - | |||||||||
|
Restructuring,
impairment and other charges (benefit)
|
- | 6,748 | (478 | ) | ||||||||
|
Total
operating expenses
|
36,236 | 122,221 | 47,540 | |||||||||
|
OPERATING
INCOME (LOSS)
|
1,081 | (95,288 | ) | (15,427 | ) | |||||||
|
Interest
income
|
187 | 549 | 1,254 | |||||||||
|
Interest
expense
|
(286 | ) | (300 | ) | (117 | ) | ||||||
|
Other,
net
|
(25 | ) | 5 | 22 | ||||||||
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
957 | (95,034 | ) | (14,268 | ) | |||||||
|
Income
tax expense (benefit)
|
- | (3,137 | ) | 608 | ||||||||
|
NET
INCOME (LOSS)
|
$ | 957 | $ | (91,897 | ) | $ | (14,876 | ) | ||||
|
INCOME
(LOSS) PER SHARE:
|
||||||||||||
|
Basic
|
$ | 0.04 | $ | (3.85 | ) | $ | (0.63 | ) | ||||
|
Diluted
|
$ | 0.04 | $ | (3.85 | ) | $ | (0.63 | ) | ||||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
||||||||||||
|
Basic
|
24,165 | 23,854 | 23,754 | |||||||||
|
Diluted
|
24,800 | 23,854 | 23,754 | |||||||||
|
See
Notes to Consolidated Financial Statements
|
||||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(In
thousands)
|
||||||||
|
OCTOBER
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 28,164 | $ | 20,018 | ||||
|
Accounts
receivable, net
|
10,710 | 6,834 | ||||||
|
Other
current assets
|
6,539 | 7,408 | ||||||
|
Total
current assets
|
45,413 | 34,260 | ||||||
|
Equipment
and leasehold improvements, net
|
2,472 | 3,589 | ||||||
|
Software
development costs, net
|
19,904 | 24,086 | ||||||
|
Identified
intangible assets, net
|
2,384 | 3,723 | ||||||
|
Other
long-term assets
|
3,279 | 3,309 | ||||||
|
Total
assets
|
$ | 73,452 | $ | 68,967 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,070 | $ | 3,085 | ||||
|
Accrued
compensation
|
3,805 | 3,996 | ||||||
|
Other
accrued liabilities
|
2,457 | 6,909 | ||||||
|
Deferred
revenue
|
38,020 | 36,005 | ||||||
|
Total
current liabilities
|
45,352 | 49,995 | ||||||
|
Long-term
deferred revenue
|
15,678 | 8,916 | ||||||
|
Total
liabilities
|
61,030 | 58,911 | ||||||
|
Commitments
and contingent liabilities (see Note 11)
|
- | - | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock, $.01 par value, 50,000 shares authorized;
|
||||||||
|
24,342 shares issued and 24,282 outstanding at October 31,
|
||||||||
|
2009; 24,046 shares issued and 23,988 shares outstanding
|
||||||||
|
at
October 31, 2008
|
243 | 240 | ||||||
|
Additional
paid in capital
|
172,560 | 171,143 | ||||||
|
Treasury
stock at cost, 59 shares at October 31, 2009
|
||||||||
|
58
shares at October 31, 2008
|
(319 | ) | (315 | ) | ||||
|
Accumulated
deficit
|
(158,833 | ) | (159,790 | ) | ||||
|
Accumulated
other comprehensive loss
|
(1,229 | ) | (1,222 | ) | ||||
|
Total
stockholders' equity
|
12,422 | 10,056 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 73,452 | $ | 68,967 | ||||
|
See
Notes to Consolidated Financial Statements
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
(In
thousands)
|
||||||||||||
|
YEAR
ENDED OCTOBER 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
income (loss)
|
$ | 957 | $ | (91,897 | ) | $ | (14,876 | ) | ||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Deferred
income taxes (benefit)
|
- | (3,137 | ) | 608 | ||||||||
|
Impairment
charges
|
- | 78,540 | 531 | |||||||||
|
Amortization
of capitalized product development costs
|
9,024 | 12,233 | 10,739 | |||||||||
|
Amortization
of identified intangible and other long-term assets
|
1,513 | 2,618 | 2,970 | |||||||||
|
Depreciation
and amortization of equipment and leasehold improvements
|
1,836 | 2,094 | 2,441 | |||||||||
|
Provision
for doubtful accounts
|
(190 | ) | - | (553 | ) | |||||||
|
Stock-based
compensation
|
1,222 | 1,012 | 1,174 | |||||||||
|
Loss
on disposal of equipment
|
26 | 103 | 3 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(3,686 | ) | 4,918 | 6,322 | ||||||||
|
Other
current and long-term assets
|
725 | 37 | (385 | ) | ||||||||
|
Accounts
payable
|
(2,015 | ) | (1,523 | ) | (78 | ) | ||||||
|
Other
current and long-term liabilities
|
(4,634 | ) | 1,216 | (3,020 | ) | |||||||
|
Deferred
revenue
|
8,777 | 321 | 3,786 | |||||||||
|
Total
adjustments
|
12,598 | 98,432 | 24,538 | |||||||||
|
Net
cash provided by operating activities
|
13,555 | 6,535 | 9,662 | |||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Capitalized
internal software development costs
|
(4,842 | ) | (10,670 | ) | (15,698 | ) | ||||||
|
Purchased
product development
|
- | - | (475 | ) | ||||||||
|
Purchases
of equipment and leasehold improvements
|
(745 | ) | (338 | ) | (1,750 | ) | ||||||
|
Net
cash used in investing activities
|
(5,587 | ) | (11,008 | ) | (17,923 | ) | ||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Net
proceeds from issuance of common stock
|
194 | 109 | 203 | |||||||||
|
Payment
of debt financing fees
|
- | - | (523 | ) | ||||||||
|
Repayments
of capital lease obligations
|
(9 | ) | (25 | ) | (47 | ) | ||||||
|
Net
cash (used in) provided by financing activities
|
185 | 84 | (367 | ) | ||||||||
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH & CASH EQUIVALENTS
|
(7 | ) | 110 | (169 | ) | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
8,146 | (4,279 | ) | (8,797 | ) | |||||||
|
Cash
and cash equivalents at beginning of period
|
20,018 | 24,297 | 33,094 | |||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 28,164 | $ | 20,018 | $ | 24,297 | ||||||
|
See
Notes to Consolidated Financial Statements
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
|
|||||||||||||||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||||||||||||
|
Common
Stock
|
Retained
|
Accumulated
|
|||||||||||||||||||||||||||
|
Additional
|
Earnings
|
Other
|
Total
|
||||||||||||||||||||||||||
|
Par
|
Paid
in
|
Treasury
|
(Accumulated
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||||||
|
Shares
|
Value
|
Capital
|
Stock
|
Deficit)
|
Loss
|
Equity
|
|||||||||||||||||||||||
|
BALANCES,
OCTOBER 31, 2006
|
23,741 | $ | 237 | $ | 168,597 | $ | (205 | ) | $ | (53,017 | ) | $ | (1,162 | ) | $ | 114,450 | |||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (14,876 | ) | - | (14,876 | ) | ||||||||||||||||||||
|
Foreign
currency translation
|
|||||||||||||||||||||||||||||
| adjustments | - | - | - | - | - | (170 | ) | (170 | ) | ||||||||||||||||||||
| Total comprehensive loss | (15,046 | ) | |||||||||||||||||||||||||||
|
Exercise
of stock options and
|
|||||||||||||||||||||||||||||
|
shares
issued under employee
|
|||||||||||||||||||||||||||||
|
stock
purchase plan
|
56 | 1 | 202 | - | - | - | 203 | ||||||||||||||||||||||
|
Stock-based
compensation
|
27 | - | 1,128 | - | - | - | 1,128 | ||||||||||||||||||||||
|
BALANCES,
OCTOBER 31, 2007
|
23,824 | 238 | 169,927 | (205 | ) | (67,893 | ) | (1,332 | ) | 100,735 | |||||||||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (91,897 | ) | - | (91,897 | ) | ||||||||||||||||||||
|
Foreign
currency translation
|
|||||||||||||||||||||||||||||
| adjustments | - | - | - | - | - | 110 | 110 | ||||||||||||||||||||||
| Total comprehensive loss | (91,787 | ) | |||||||||||||||||||||||||||
| Share issued under employee | |||||||||||||||||||||||||||||
| stock purchase plan | 85 | 1 | 217 | - | - | - | 218 | ||||||||||||||||||||||
|
Stock-based
compensation
|
117 | 1 | 999 | - | - | - | 1,000 | ||||||||||||||||||||||
|
Repurchased
shares
|
(38 | ) | (110 | ) | (110 | ) | |||||||||||||||||||||||
|
BALANCES,
OCTOBER 31, 2008
|
23,988 | 240 | 171,143 | (315 | ) | (159,790 | ) | (1,222 | ) | 10,056 | |||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 957 | - | 957 | ||||||||||||||||||||||
|
Foreign
currency translation
|
|||||||||||||||||||||||||||||
| adjustments | - | - | - | - | - | (7 | ) | (7 | ) | ||||||||||||||||||||
| Total comprehensive income | 950 | ||||||||||||||||||||||||||||
| Exercise of stock options and | |||||||||||||||||||||||||||||
| shares issued under employee | |||||||||||||||||||||||||||||
|
stock
purchase plan
|
|
119 | 1 | 196 | - | - | - | 197 | |||||||||||||||||||||
|
Stock-based
compensation
|
|||||||||||||||||||||||||||||
|
and
other
|
177 | 2 | 1,221 | - | - | - | 1,223 | ||||||||||||||||||||||
|
Repurchased
shares
|
(2 | ) | (4 | ) | (4 | ) | |||||||||||||||||||||||
|
BALANCES,
OCTOBER 31, 2009
|
24,282 | $ | 243 | $ | 172,560 | $ | (319 | ) | $ | (158,833 | ) | $ | (1,229 | ) | $ | 12,422 | |||||||||||||
|
See
Notes to Consolidated Financial Statements
|
|||||||||||||||||||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. General
Fiscal
Year
Our
fiscal year is from November 1 to October 31. Unless otherwise
stated, references to the years 2009, 2008, and 2007 relate to the fiscal years
ended October 31, 2009, 2008, and 2007, respectively. References to
future years also relate to our fiscal year ended October 31.
Consolidation
The
accompanying consolidated financial statements include the accounts of PLATO
Learning, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
period. Significant estimates include the deferred tax asset
valuation allowance and the valuation and recoverability of capitalized software
development costs, and identified intangible assets. Actual results
could differ from those estimates.
Note
2. Summary of Significant Accounting Policies
Cash
and Cash Equivalents
All
highly liquid investments purchased with an original maturity of three months or
less are considered to be cash equivalents. Any such investments are
carried at amortized cost, which approximates fair value.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of trade accounts receivable. We perform evaluations of our
customers’ credit worthiness and require no collateral from our customers.
Although many of our customers are dependent upon various government funding
sources and are subject to appropriation of funds, we do not believe there is a
significant concentration of risk associated with any specific governmental
program or funding source.
Goodwill
and Intangible Assets
Goodwill
and identified intangible assets are recorded when the purchase price paid for
an acquisition exceeds the fair value of the tangible assets
acquired. Most of the
companies we have acquired have not had significant tangible
assets. As a result, a significant portion of the purchase price paid
in acquisitions has been allocated to identified intangible assets and/or
goodwill.
Identified
intangible assets are amortized to expense over their expected useful lives and
goodwill was not amortized. Once established, these assets are
subject to periodic impairment assessments to determine if their current
carrying values are recoverable based on information available at the time these
assessments are made. Significant assumptions and estimates are
required in making these assessments. Accordingly, the assumptions
and estimates we use in implementing this policy affect the amount of identified
intangible asset amortization and impairment charges, if any, reflected in our
operating results. Our impairment assessments at October 31, 2008 resulted in
the elimination of goodwill and a related impairment charge of $71.9 million,
and impairment charges of $1.9 million on identified intangible technology,
trademark and customer assets acquired in previous
acquisitions. There were no impairment charges on identified
intangible assets in 2007 or 2009.
Long
Lived Assets
We review
identified intangible and other long lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If such events or changes in circumstances are
present, the undiscounted cash flows method is used to determine whether the
asset is impaired. Cash flows would include the estimated terminal
value of the asset and exclude any interest charges. To the extent the carrying
value of the asset exceeds the undiscounted cash flows over the estimated
remaining life of the asset, the impairment is measured using discounted cash
flows. Considerable judgment is required in the evaluation of whether
certain events or circumstances lead to an indication of impairment, and in the
assumptions used in determining discount rates and the amount and timing of
future cash flows. In 2008, we recorded asset impairment charges on
certain long-lived purchased technology and customer assets. No asset
impairment charges on long-lived assets were incurred in 2007 or
2009. See Note 8 for further discussion of these
charges.
Revenue
Recognition
We derive
our revenues from three sources: (1) subscription revenues, which are comprised
of subscription fees from customers accessing our online, web-based products;
(2) license revenues from non-cancelable perpetual license agreements; and (3)
related professional and support services and other revenue.
We
recognize revenue when all of the following conditions are met:
|
|
·
|
There
is persuasive evidence of an
arrangement;
|
|
|
·
|
Access
to our online subscription products has been provided to the customer or
the perpetual courseware has been
delivered;
|
|
|
·
|
The
amount of fees to be paid by the customer is fixed and determinable;
and
|
|
|
·
|
The
collectability of the fee is
probable.
|
Our
arrangements do not contain general rights of return.
Revenue
from the licensing of software under subscription arrangements is recognized on
a ratable basis over the subscription period starting the later of the first day
of the subscription period or when all revenue recognition criteria identified
above have been met. Amounts that have been invoiced are recorded in
accounts receivable and in deferred revenue or revenue, depending on whether the
revenue recognition criteria have been met. Amounts due under
non-cancelable subscription agreements are not recognized in accounts receivable
or deferred revenue until such amounts are invoiced to the
customer.
We also
provide professional services, including consulting, training, and
implementation services, as well as ongoing customer support and
maintenance. Consulting, training, and implementation services are
not essential to the functionality of our software products. Revenues
from these services are recognized separately upon delivery where there is
objective and reliable evidence of fair value of each
deliverable. Software support revenue is deferred and recognized
ratably over the support period.
For
revenue arrangements with multiple deliverables, we allocate the total amount
the customer will pay to the separate units of accounting based on their
relative fair values, as determined by the price of the undelivered items when
sold separately.
If
collectability of the fee is not probable, revenue is recognized as payments are
received from the customer provided all other revenue recognition criteria have
been met. If the fee due from the customer is not fixed or
determinable, revenue is recognized as the payments become due provided all
other revenue recognition criteria have been met.
Deferred
Revenue
We
generally invoice our customers at the time of order and record deferred revenue
for the portion of the order related to subscription products and services for
which the revenue recognition criteria have not been met. Accordingly, the
deferred revenue balance represents the value of billed subscription and
services agreements. As the revenue recognition criteria are met, revenue is
subsequently recognized.
Deferred
Commissions
Deferred
commissions represent the portion of sales incentive compensation paid to our
sales representatives associated with the portion of subscription and services
contracts billed but not yet recognized as revenue. Commissions are
earned at the time of invoicing, paid monthly, and the related expense is
deferred and amortized over the term of the related customer contracts on the
basis that the deferred commission amounts are recoverable through the future
revenue streams under the billed portion of customer contracts. We
believe this is the preferable method of accounting as the commission charges
are so closely related to the revenue from the billed portion of customer
contracts that they should be recorded as an asset and charged to expense over
the same period that the revenue is recognized.
Advertising
and Sales Promotion Costs
Advertising
and sales promotion costs, which are expensed as incurred, were $298,000,
$495,000 and $440,000 for 2009, 2008, and 2007, respectively.
Software
Development Costs
Our
software development costs relate to the research, development, enhancement, and
maintenance of our software. Software development costs include employee
salaries, benefits and third-party contractor fees. Research and development
costs, relating principally to the design and development of new products prior
to the application development stage and the routine enhancement, and
maintenance of existing products, are expensed as incurred.
At the
end of fiscal year 2008, we completed our transition to a software-as-a-service
business model in which substantially all of our products are now delivered on a
hosted, subscription service basis. Effective for fiscal year 2009,
we have applied authoritative guidance that accounts for the costs of computer
software developed for internal use. The guidance provides that
hosting arrangements in which customers do not have a contractual right to take
possession of the software are service arrangements, and such software, subject
to certain exceptions, is considered internal use software.
In
accordance with this guidance, we capitalize software development costs when the
projects under development reach the application development
stage. The application development stage is established
when we have completed all planning, designing, coding, and testing activities
necessary to establish that a product can be produced to meet its design
specifications. Capitalization ends when a product is available for
general release to our customers, at which time amortization of the capitalized
costs begins.
Prior to
fiscal year 2009, we accounted for our software development costs as computer
software to be sold, leased or otherwise marketed. Capitalization
began when technological feasibility was achieved and an allocation of indirect
costs was included in the amounts capitalized. Capitalization ended when a
product was available for general release to our customers, at which time
amortization of the capitalized costs began.
All
software development costs are amortized over the estimated useful life of the
product, which is four years for all platform, math and science products
released after July 2006, and three years for all other products. Software
development cost amortization is included in cost of subscription and license
fee revenues.
Purchased
product development represents non-refundable amounts paid under a revised
license agreement for software used in our subscription products. We
purchased $475,000 in 2007, which is being amortized on a straight-line basis
through August 2010. No purchases were made in 2008 or
2009.
Fully
amortized software development costs are written off when it is determined that
these assets are no longer substantially in use in existing
products. These write-offs have no effect on total assets or results
of operations.
Stock-Based
Compensation
Stock-based
compensation cost is measured at grant date, based on the fair value of the
award and is recognized as expense, amortized on a straight-line basis, over the
requisite service period of the individual grants, which generally equals the
vesting period. We elected to adopt the modified prospective
transition application method, as provided under authoritative accounting
guidance. Under this method, compensation expense is recognized for
the unvested portion of awards granted to employees on or before October 31,
2005, and for employee awards granted, modified, or settled after October 31,
2005. See Note 13 for additional stock-based compensation
disclosures.
The
authoritative guidance requires that the cash retained as a result of the tax
deductibility of the increase in the value of share-based arrangements be
presented as a component of cash flows from financing activities in the
consolidated statement of cash flows. Prior to the initial adoption
authoritative guidance, such amounts were presented as a component of cash flows
from operating activities. Due to our tax net operating loss
position, we did not realize cash savings as a result of the tax deduction for
stock-based compensation for the year ended October 31, 2009 or
2008.
Income
Taxes
We
account for income taxes using the asset and liability method, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in our financial statements or
tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial statement and tax
basis of assets and liabilities, using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance when it is more likely than not that some
component or all of the deferred tax assets will not be realized. Tax
rate changes are reflected in income during the period such changes are
enacted.
Income
(Loss) per Share
Basic and
diluted income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding during the period as
follows (in thousands, except per share amounts):
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income (loss)
|
$ | 957 | $ | (91,897 | ) | $ | (14,876 | ) | ||||
|
Basic
weighted average common
|
||||||||||||
|
shares
outstanding
|
24,165 | 23,854 | 23,754 | |||||||||
|
Diluted
weighted average common
|
||||||||||||
|
shares
outstanding
|
24,800 | 23,854 | 23,754 | |||||||||
|
Basic
income (loss) per share
|
$ | 0.04 | $ | (3.85 | ) | $ | (0.63 | ) | ||||
|
Diluted
income (loss) per share
|
$ | 0.04 | $ | (3.85 | ) | $ | (0.63 | ) | ||||
Approximately,
2,387,000 stock options with exercise prices greater than the average market
price of our common stock for the year ended October 31, 2009 were excluded from
the 2009 calculations of diluted income per share because they were
anti-dilutive.
Potential
common shares, which consist of stock options and restricted stock, are
anti-dilutive in a net loss situation and are therefore excluded in the
calculation of diluted loss per share. Accordingly, the calculation
of diluted loss per share for the periods presented for 2008 and 2007 excluded
the effect of approximately 2,630,000 and 2,682,000 potential common shares,
respectively, as they were anti-dilutive.
Comprehensive
Income (Loss)
The
components of our comprehensive income (loss) include our net income (loss),
unrealized gains and losses on available for sale marketable securities, and
foreign currency translation adjustments. The functional currency for
each of our foreign subsidiaries is the respective local
currency. All assets and liabilities of our foreign subsidiaries are
translated from local currencies to United States dollars at period end rates of
exchange, while revenues and expenses are translated at the average exchange
rates during the period. Translation adjustments arising from the
translation of net assets located outside of the United States (“U.S.”) into
U.S. dollars are recorded as a separate component of stockholders'
equity. The cumulative losses related to foreign currency translation
adjustments included in stockholders’ equity were $1,229,000, $1,222,000 and
$1,332,000 at October 31, 2009, 2008 and 2007, respectively. Any
gains or losses resulting from foreign currency transactions are included in the
consolidated statements of operations and were not significant during the
periods presented. Comprehensive income (loss) for all periods
presented is included in our consolidated statements of stockholders’ equity and
accumulated other comprehensive income (loss).
New
Accounting Pronouncements
In June
2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental
GAAP. All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting
literature not included in the Codification has become
non-authoritative. The Codification did not change GAAP, but instead
introduced a new structure that combines all authoritative standards into a
comprehensive, topically organized online database. The Codification
is effective for interim or annual periods ending after September 15, 2009, and
impacts our financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of our
financial statements or disclosures as a result of implementing the Codification
during the fiscal year ended October 31, 2009.
In
October 2009, the FASB’s Emerging Issues Task Force (EITF) issued authoritative
guidance addressing revenue arrangements with multiple
deliverables. The guidance eliminates the criterion for objective and
reliable evidence of fair value for the undelivered products or
services. Instead, revenue arrangements with multiple deliverables
should be divided into separate units provided the deliverables meet certain
criteria. This guidance also eliminates the use of the residual
method of allocation and requires that the arrangement consideration be
allocated at the inception of the arrangement to all deliverables based on their
relative selling price. The guidance also provides a hierarchy for
estimating the selling price of each of the deliverables. The guidance
is effective prospectively for revenue arrangements entered into or materially
modified at the beginning of our fiscal year 2011; however, earlier application
is permitted. We are currently evaluating this guidance and
anticipate that we will adopt it in the first quarter of fiscal year 2010, but
do not expect it to have a material effect on our consolidated financial
statements.
In
October 2009, the FASB’s EITF issued authoritative guidance that updated
software revenue arrangements that also include tangible
products. The amendments exclude tangible products and software
essential to the tangible product’s functionality from the software revenue
guidance. The guidance is effective prospectively for revenue
arrangements entered into or materially modified at the beginning of our fiscal
year 2011; however, earlier application is permitted. We do not
expect the provisions to have a material effect on our consolidated financial
statements.
In August
2009, the FASB issued updated guidance to reduce potential ambiguity in
financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides
clarification that in circumstances, in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
the guidance. The provisions became effective during our fourth
quarter 2009 and did not have a material effect on our consolidated financial
statements.
In April
2008, the FASB issued authoritative guidance amending the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset as provided for under separate accounting guidance
topics. The provisions are effective for our fiscal year 2010 and are
currently not expected to have a material effect on our consolidated financial
statements.
In
December 2007, the FASB issued authoritative guidance that 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. The guidance also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. The provisions will be adopted by us in the first
quarter of fiscal 2010 and are currently not expected to have a material effect
on our consolidated financial statements.
In
December 2007, the FASB issued a new accounting pronouncement regarding
noncontrolling interests and the deconsolidation of a
subsidiary. This will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
(NCI) and classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions with minority
interest holders. The provisions will be adopted by us in the first
quarter of fiscal year 2010 and are currently not expected to have a material
effect on our consolidated financial statements.
In
February 2007, the FASB issued authoritative guidance to permit 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 were effective beginning in our fiscal
year 2009 and did not have a material effect on our consolidated financial
statements.
In
September 2006, the FASB issued authoritative guidance to establish a consistent
framework for measuring fair value and expand disclosures on fair value
measurements. The provisions were effective beginning in our fiscal
year 2009 and did not have a material effect on our consolidated financial
statements.
Note
3. Supplemental Financial Statement Information
Supplemental
information regarding our cash flows is as follows (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
paid for interest
|
$ | 112 | $ | 126 | $ | 45 | ||||||
|
Cash
paid (refunded) for income taxes
|
- | - | (86 | ) | ||||||||
|
Capital
lease obligations incurred
|
- | - | 27 | |||||||||
Note
4. Accounts Receivable
Accounts
receivable are initially recorded at fair value upon the sale of products or
services to our customers. The components of accounts receivable at
October 31 were as follows (in thousands):
|
2009
|
2008
|
|||||||
|
Trade
accounts receivable
|
$ | 10,710 | $ | 7,130 | ||||
|
Allowance
for doubtful accounts
|
- | (296 | ) | |||||
| $ | 10,710 | $ | 6,834 | |||||
The
allowance for doubtful accounts activity was as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Balance,
November 1
|
$ | 296 | $ | 319 | $ | 928 | ||||||
|
Provision
for doubtful accounts, net of
|
||||||||||||
|
other
reserve adjustments
|
(190 | ) | - | (553 | ) | |||||||
|
Write-offs,
net of recoveries
|
(106 | ) | (23 | ) | (56 | ) | ||||||
| $ | - | $ | 296 | $ | 319 | |||||||
The
provision for doubtful accounts is included in general and administrative
expense on the consolidated statement of operations.
Note
5. Deferred Commissions
Total
deferred commissions at October 31, 2009 and 2008 were $4,568,000 and
$4,268,000. Of these amounts, $1,333,000 and $834,000 were recorded
as long-term deferred commissions and included in other assets at October 31,
2009 and 2008, respectively.
Note
6. Equipment and Leasehold Improvements
Equipment
and leasehold improvements are stated at cost, less accumulated depreciation and
amortization. The straight-line method of depreciation is used over
the estimated useful lives of the assets. This is generally three to
five years for equipment, and the shorter of the lease term or estimated useful
life for leasehold improvements. Upon retirement or disposition, the
cost and related accumulated depreciation and amortization are removed from the
accounts, and any gain or loss is included in our results of
operations. Maintenance and repairs are expensed as
incurred.
The
components of equipment and leasehold improvements at October 31 were as follows
(in thousands):
|
2009
|
2008
|
|||||||
|
Equipment
|
$ | 12,454 | $ | 13,450 | ||||
|
Leasehold
improvements
|
873 | 904 | ||||||
|
Total
|
$ | 13,327 | $ | 14,354 | ||||
|
Accumulated
depreciation and amortization
|
(10,855 | ) | (10,765 | ) | ||||
| $ | 2,472 | $ | 3,589 | |||||
Depreciation
and amortization expense was $1,836,000, $2,094,000 and $2,441,000 for 2009,
2008, and 2007, respectively.
Note
7. Software Development Costs
A
reconciliation of capitalized software development costs is as follows (in
thousands):
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Net
Carrying Value
|
||||||||||
|
Balance,
October 31, 2007
|
$ | 51,376 | $ | (21,110 | ) | $ | 30,266 | |||||
|
Capitalized
software development costs
|
10,670 | - | 10,670 | |||||||||
|
Amortization
|
- | (12,233 | ) | (12,233 | ) | |||||||
|
Impairments
|
(4,617 | ) | - | (4,617 | ) | |||||||
|
Write-off
of fully amortized costs
|
(7,573 | ) | 7,573 | - | ||||||||
|
Balance,
October 31, 2008
|
49,856 | (25,770 | ) | 24,086 | ||||||||
|
Capitalized
software development costs
|
4,842 | - | 4,842 | |||||||||
|
Amortization
|
- | (9,024 | ) | (9,024 | ) | |||||||
|
Write-off
of fully amortized costs
|
(7,569 | ) | 7,569 | - | ||||||||
|
Balance,
October 31, 2009
|
$ | 47,129 | $ | (27,225 | ) | $ | 19,904 | |||||
Amortization
expense related to capitalized software development costs was $9,024,000,
$12,233,000, and $10,739,000 for 2009, 2008, and 2007, respectively, and is
included as a component of cost of revenues related to subscriptions and license
fees in the consolidated statements of operations.
In 2008,
we recorded impairment charges of $4,617,000 related to capitalized software
development costs. These charges, which are reported in cost of
revenues, resulted from our evaluation of expected future revenues from certain
products relative to the estimated capitalized software development
costs. There were no impairment charges in 2009.
In 2009
and 2008, we wrote off approximately $7,569,000 and $7,573,000 of software
development costs and related accumulated amortization which were fully
amortized and were no longer considered substantially in use.
Note
8. Goodwill and Identified Intangible Assets
Goodwill
Goodwill
was recorded for the excess of the purchase price of acquisitions over the fair
value of identified tangible and intangible assets less the fair value of
liabilities assumed in these acquisitions. These acquisitions were
completed in fiscal years 2000 through 2003 and the assets from these
acquisitions are not a material part of our current SaaS strategy. Authoritative
guidance requires that goodwill be reviewed for potential impairment annually,
or when events or changes in circumstances indicate the carrying value of the
goodwill might exceed its current fair value. One of the indicators of
impairment is a sustained decline in a company’s share price whereby market
capitalization of the company is less than its book value for an extended period
of time. We began to experience such a decline starting in March
2008, following the release of our first quarter 2008 financial
results. After trading in a range near our book value throughout the
summer, we experienced a further decline in our stock price as the financial
markets reacted to the credit crisis facing major lending institutions, and
worsening conditions in the overall economy. Based on these and other factors,
we concluded in the fourth quarter of 2008 that our recorded goodwill was
impaired.
The
determination of the amount of the impairment required that the fair values of
our assets and liabilities be determined as if the Company had been acquired in
a hypothetical business combination with a purchase price equal to the market
capitalization of the Company as of October 31, 2008, adjusted for certain
factors that might reasonably affect the value of the Company if purchased in an
actual acquisition. The estimates and assumptions used in determining
the hypothetical purchase price and fair value determinations are inherently
subject to uncertainty.
Our
impairment analysis concluded that the purchase price as determined above was
less than the sum of the fair value of our identified tangible and intangible
assets, less the fair value of our liabilities. Under accounting rules for
business combinations, goodwill exists only if the purchase price exceeds the
fair value of the net assets of the acquired entity. Accordingly, no
value was assigned to goodwill resulting in full impairment of goodwill and a
related non-cash charge to 2008 operating results of $71,865,000. The
impairment of goodwill resulted in the reversal of the cumulative deferred tax
liability associated with tax-deductible goodwill and a corresponding income tax
benefit of $3,137,000. The impairment of goodwill is not expected to
have any impact on our day-to-day business operations, liquidity or long-term
SaaS strategy.
Identified
Intangible Assets
Identified
intangible assets subject to amortization, resulting from our previous
acquisitions, were as follows (in thousands):
|
2009
|
2008
|
|||||||||||||||||||||||
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Net
Carrying Value
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Net
Carrying Value
|
|||||||||||||||||||
|
Acquired
technology
|
$ | 7,300 | $ | (5,805 | ) | $ | 1,495 | $ | 7,300 | $ | (5,320 | ) | $ | 1,980 | ||||||||||
|
Trademarks
and
|
||||||||||||||||||||||||
|
tradenames
|
- | - | - | 1,380 | (1,380 | ) | - | |||||||||||||||||
|
Customer
relationships
|
||||||||||||||||||||||||
|
and
lists
|
19,800 | (18,911 | ) | 889 | 19,800 | (18,057 | ) | 1,743 | ||||||||||||||||
| $ | 27,100 | $ | (24,716 | ) | $ | 2,384 | $ | 28,480 | $ | (24,757 | ) | $ | 3,723 | |||||||||||
Amortization
expense and impairment charges related to the identified intangible assets
presented above were as follows (in thousands):
|
Fiscal
Years Ended
|
||||||||||||
|
October
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cost
of revenues:
|
||||||||||||
|
Amortization
expense
|
$ | 485 | $ | 821 | $ | 821 | ||||||
|
Impairment
charges
|
- | 467 | - | |||||||||
| 485 | 1,288 | 821 | ||||||||||
|
Operating
expenses
|
||||||||||||
|
Amortization
expense
|
854 | 1,550 | 1,740 | |||||||||
|
Impairment
charges
|
- | 1,422 | - | |||||||||
| 854 | 2,972 | 1,740 | ||||||||||
| $ | 1,339 | $ | 4,260 | $ | 2,561 | |||||||
The
estimated future amortization expense for the identified intangible assets
presented above is as follows (in thousands):
|
Cost
of
|
Operating
|
|||||||||||
|
Revenues
|
Expenses
|
Total
|
||||||||||
|
2010
|
$ | 485 | $ | 854 | $ | 1,339 | ||||||
|
2011
|
485 | 35 | 520 | |||||||||
|
2012
|
485 | - | 485 | |||||||||
|
2013
|
40 | - | 40 | |||||||||
|
Thereafter
|
- | - | - | |||||||||
| $ | 1,495 | $ | 889 | $ | 2,384 | |||||||
The
future amortization amounts presented above are estimates. Actual
future amortization expense may be different due to future acquisitions,
impairments, changes in amortization periods, or other factors.
In 2008,
we recorded impairment charges of $1,889,000 related to acquired technology and
customer assets. The technology impairment charges of $467,000, which
are reported in cost of revenues, resulted from our evaluation of expected
future revenues from certain products given changes in product strategies
formalized in the fourth quarter of 2008. These charges were primarily related
to retired products and a decrease in the anticipated future cash flows from
these products relative to the cash flows expected at the time these assets were
purchased. Impairment charges on customer relationships and lists
totaled $1,422,000 and are reported in operating expenses. These
charges were also triggered by reductions in anticipated future revenues
attributable to these assets.
There
were no impairment charges on identified intangible assets in 2007 or
2009.
Note
9. Revolving Loan
On June
4, 2007, we entered into a three-year senior secured credit facility which
provides us with a revolving line of credit up to the lesser of $20 million or
one times the Company’s
trailing twelve months subscription and maintenance revenue. Under
the agreement, which expires in June 2010, we have the option of selecting an
interest rate for any drawdown under the facility equal to the applicable Prime
or Libor Rate plus a sliding margin that is based on the amount of borrowings
outstanding. Borrowings under the agreement are secured by all of the
assets of the Company. Financial covenants are limited to maximum annual levels
of capitalized software development spending, and minimum quarterly thresholds
of earnings before interest, taxes, depreciation and amortization (EBITDA) which
are tested only when the unused portion of the line of credit plus our cash and
cash equivalents on hand is less than $12.5 million. We capitalized
legal and banking fees of $523,000 associated with this credit
facility. These costs are being amortized over the three-year term of
the agreement. At October 31, 2009 and 2008, availability under the
line was $20.0 million and there were no borrowings
outstanding.
Note
10. Deferred Revenue
The
components of deferred revenue were as follows (in thousands):
|
October
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Total
deferred revenue
|
$ | 53,698 | $ | 44,921 | ||||
|
Less:
Long-term portion
|
(15,678 | ) | (8,916 | ) | ||||
|
Current
deferred revenue
|
$ | 38,020 | $ | 36,005 | ||||
The
long-term portion of deferred revenues represents amounts we expect to recognize
as revenue in periods beyond one year from the balance sheet date.
Note
11. Commitments and Contingent Liabilities
Operating
Leases
We lease
our various office facilities. Certain of these operating leases contain renewal
options, escalation clauses and requirements that we pay taxes, insurance and
maintenance costs. Estimated amounts for these costs are
included in future minimum rental payments. Commitments for future
minimum rental payments under non-cancelable operating leases are as follows (in
thousands):
|
2010
|
$ | 960 | ||
|
2011
|
158 | |||
|
2012
|
137 | |||
|
2013
|
52 | |||
| $ | 1,307 |
The lease
for our current corporate headquarters in Bloomington, Minnesota, expires in
June 2010. We currently anticipate that in 2010 we will either renew this lease
for less square-footage, or execute a new lease for a different facility in or
near Bloomington. The table above does not reflect these contemplated
actions.
Rent
expense was $1,509,000, $2,503,000, and $1,716,000 for 2009, 2008, and 2007,
respectively. Amounts for 2008 include rent expenses accrued for
vacated facilities as discussed in Note 14. In 2008, we accrued
$904,000 for rent related to vacated facilities during our 2008
restructure. See Note 14 for additional information regarding our
2008 restructure.
Royalty
Agreements
Substantially
all of the royalty commitments are related to one agreement for third-party
products offered as part of our subscription solutions. The agreement
calls for fixed payments through November 2010. The agreement also
provides for the Company’s election to extend the agreement for an additional
year. Amounts paid under this agreement are capitalized and amortized to cost of
subscription revenue over our calculated dollar weighted average subscription
period of approximately 24 months. The weighted average subscription
period is subject to periodic review and adjustment as
appropriate. As of October 31, 2009 we are subject to future minimum
royalty payments of approximately $2,236,000 in 2010.
401(k)
Plan
We have a
discretionary 401(k) plan for all employees who are at least 21 years of age and
have completed 3 months of service with the Company. Our
discretionary contributions are funded each year and totaled $675,000 in 2009,
$805,000 in 2008, and $718,000 in 2007.
Employment
Agreements
As of
October 31, 2009, we had entered into various employment agreements with our
executive officers, which provide for aggregate severance payments of up to
approximately $1,546,000, subject to certain conditions and events.
Legal
Proceedings
From time
to time, we may become involved in litigation arising out of operations in the
normal course of business. We are not aware of any pending legal
proceedings the outcome of which could reasonably be expected to have a material
unfavorable or favorable effect on our operating results, financial position or
cash flows.
Note
12. Stockholders’ Equity
Common
Stock Issued
Shares of
common stock issued pursuant to the exercise of stock options and for purchases
under our employee stock purchase plan were 119,000, 85,000 and 56,000 shares
for 2009, 2008, and 2007, respectively.
Common
Stock Repurchased
We
repurchased 1,471 and 38,386 shares of our common stock for an aggregate cost of
approximately $4,000 and $109,000 during 2009 and 2008,
respectively. The shares
were repurchased in accordance with employee elections to withhold shares to
fund tax withholdings due upon vesting of restricted stock. Shares repurchased
but not reissued are presented as treasury stock in the consolidated balance
sheet.
No shares
of common stock were repurchased in 2007.
Stock
Incentive and Stock Option Plans
Prior to
November 1, 2005, we adopted various stock incentive plans (“Prior Stock Plans”)
that authorized the granting of stock options, stock appreciation rights, and
stock awards to directors, officers, and key employees, subject to certain
conditions, including continued employment. Stock options under these
plans were granted with an exercise price equal to the fair market value of our
common stock on the date of grant. Options granted to our outside
directors were exercisable immediately. All other options granted
become exercisable ratably over a service period of two to four years and
expire, if unexercised, after eight or ten years from the grant
date.
On
December 8, 2005, our Board of Directors approved the 2006 Stock Incentive Plan
(“2006 Plan”), which was ratified at the annual meeting of stockholders on March
2, 2006. The Plan permits the grant of stock options, stock
appreciation rights, restricted stock, performance shares, and other stock
awards. The total number of shares available for issuance under the
2006 Plan is equal to the sum of (a) the shares remaining under the Prior Stock
Plans, and (b) any shares issued under the Prior Stock Plans that are forfeited,
canceled, or expire without being exercised. Effective with the
adoption of the 2006 Plan, shares will no longer be issued under the Prior Stock
Plans. Stock options under the 2006 Plan are granted with an exercise
price equal to the fair market value of our common stock on the date of
grant. Options granted to our outside directors are exercisable
immediately. All other options granted become exercisable ratably
over a service period of three to four years and generally expire, if
unexercised, after eight years from the grant date.
Stock option transactions under these plans were as follows (share
amounts in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Options
outstanding at beginning of year
|
2,617 | 2,522 | 2,876 | |||||||||
|
Options
granted
|
914 | 507 | 199 | |||||||||
|
Options
exercised
|
(9 | ) | - | - | ||||||||
|
Options
forfeited or expired
|
(576 | ) | (412 | ) | (553 | ) | ||||||
|
Options
outstanding at end of year
|
2,946 | 2,617 | 2,522 | |||||||||
|
Options
exercisable at end of year
|
2,166 | 1,958 | 2,020 | |||||||||
|
Weighted
average exercise prices:
|
||||||||||||
|
Outstanding
at beginning of year
|
$ | 7.40 | $ | 8.49 | $ | 8.83 | ||||||
|
Granted
|
1.30 | 2.89 | 4.35 | |||||||||
|
Exercised
|
3.75 | - | - | |||||||||
|
Forfeited
|
7.95 | 7.57 | 8.77 | |||||||||
|
Outstanding
at end of year
|
5.42 | 7.40 | 8.49 | |||||||||
|
Exercisable
at end of year
|
6.71 | 8.40 | 8.88 | |||||||||
Stock
options outstanding and exercisable at October 31, 2009 were as follows (share
amounts in thousands):
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted-Average
Remaining Years Contractual Life
|
Weighted-Average
Exercise Price
|
Number
Exercisable
|
Weighted
Average Exercise Price
|
|||||||||||||||||
| $0.96 - $0.96 | 130 | 7.0 | $ | 0.96 | - | $ | - | |||||||||||||||
| $1.02 - $1.02 | 594 | 7.1 | 1.02 | 166 | 1.02 | |||||||||||||||||
| $1.57 - $2.96 | 592 | 6.5 | 2.66 | 498 | 2.60 | |||||||||||||||||
| $3.55 - $5.92 | 346 | 4.9 | 4.29 | 231 | 4.30 | |||||||||||||||||
| $6.57 - $18.50 | 1,284 | 2.9 | 9.49 | 1,271 | 9.51 | |||||||||||||||||
| 2,946 | 4.9 | $ | 5.42 | 2,166 | $ | 6.71 | ||||||||||||||||
In
addition to these plans, we also have an Employee Stock Purchase Plan under
which employees are entitled to purchase our common stock at a 15% discount to
the market price at the beginning or end of the quarterly purchase period as
defined in the plan, whichever is lower. We incurred $77,000, $81,000 and
$72,000 in 2009, 2008 and 2007, respectively, for the purchase discount that is
included in stock compensation expense.
Note
13. Stock-Based Compensation
Stock-based
compensation expense is recognized for employee awards granted, modified, or
settled subsequent to October 31, 2005, and the unvested portion of awards
granted to employees prior to November 1, 2005. We use the
straight-line method to recognize compensation expense over the requisite
service period of the award, which we have determined to be the vesting period,
and an annual pre-vesting forfeiture rate of 13% in 2009 and 2008 and 8% in
2007, which was determined based on historical pre-vesting
forfeiture data. The fair value of option awards in 2009, 2008 and
2007 was determined using the Black-Scholes option pricing model utilizing the
following assumptions:
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
life
|
4.6
years
|
4.6
years
|
4.3
years
|
|||||||||
|
Risk
free rate of return
|
1.5%-2.6 | % | 2.6%-2.9 | % | 4.4%-5.1 | % | ||||||
|
Volatility
|
49 | % | 49 | % | 49 | % | ||||||
|
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
We review
our current assumptions on a periodic basis and adjust them as necessary to
ensure proper option valuation. The expected life of an award was
determined based on our analysis of historical exercise behavior taking into
consideration various participant demographics and option characteristic
criteria. The risk-free rate of return is based on the yield on zero
coupon U.S. Treasury STRIPS with a remaining life that is consistent with the
expected life of the options being valued. Our estimate of volatility
was principally determined by examining our historical stock price
volatility.
Total
stock-based compensation expense recorded for the years ended October 31, 2009,
2008 and 2007 was $1,222,000, $1,012,000 and $1,174,000,
respectively.
The
intrinsic value of an option is the amount by which the fair value of the
underlying stock exceeds its exercise price. The total intrinsic
value of all options exercised during the fiscal year ended October 31, 2009 was
approximately $8,000. There were no options exercised in the year
ended October 31, 2008. The total intrinsic value of all exercisable
options outstanding at October 31, 2009 and 2008 was $1,532,000 and $0,
respectively. The weighted average fair value of options granted
during the year ended October 31, 2009 and 2008 was $0.55 per share and $1.08
per share, respectively.
As of
October 31, 2009 and 2008, the total unrecognized compensation cost related to
unvested stock-based compensation arrangements was approximately $0.7 million
and $1.2 million, respectively, and the related weighted average period over
which it is expected to be recognized remained at approximately two
years.
Note
14. Restructuring, Impairments and Other Charges
There
were no restructuring, impairments or other charges in
2009. Restructuring, impairments and other charges for 2008 and 2007
are summarized as follows (in thousands):
|
2008
|
2007
|
|||||||
|
Restructuring
charges:
|
||||||||
|
Severance
and related benefits for U.K.
|
||||||||
|
headcount
reduction
|
$ | 70 | $ | - | ||||
|
Severance
and related benefits for U.S.
|
||||||||
|
and
Canada headcount reduction
|
3,112 | 288 | ||||||
|
U.K.
facility closure liabilities
|
- | (766 | ) | |||||
|
U.S.
facility closure liabilities
|
1,045 | - | ||||||
| 4,227 | (478 | ) | ||||||
|
Impairment
charges:
|
||||||||
|
Identified
intangible assets
|
1,889 | - | ||||||
|
Fixed
assets
|
168 | - | ||||||
|
Capitalized
product development
|
4,617 | 531 | ||||||
|
Goodwill
|
71,865 | - | ||||||
| 78,539 | 531 | |||||||
|
Other
charges:
|
||||||||
|
Executive
officer changes
|
932 | - | ||||||
| $ | 83,698 | $ | 53 | |||||
|
Amounts
included in:
|
||||||||
|
Cost
of revenue
|
$ | 5,085 | $ | 531 | ||||
|
Operating
expenses
|
78,613 | (478 | ) | |||||
| $ | 83,698 | $ | 53 | |||||
Restructuring
Charges
Fiscal Year 2008:
In the second and fourth quarters of 2008, we incurred restructuring charges of
$1,635,000 and $1,547,000, respectively, related to additional workforce
reductions in the U.S. Included in the fourth quarter expense was
$36,000 related to stock compensation charges. During the third and fourth
quarter of 2008, we expensed approximately $800,000 and $245,000, respectively,
related to closing our facilities in Atlanta, San Diego and Puerto Rico and a
Bloomington warehouse which included approximately $93,000 related to asset
impairment charges.
Fiscal Year
2007: During the third quarter of 2007, we terminated a lease
for one of our United Kingdom facilities that was closed in connection with our
restructuring activities that began in 2005. As a result of this
transaction, we recorded a reduction in the restructure accrual related to this
facility of approximately $766,000 with a corresponding benefit to
earnings.
In
October 2007, we consolidated our service and sales organizations under the
leadership of one executive. Severance and related costs of $288,000 were
recorded related to these actions.
The
restructuring reserve activity was as follows (in thousands):
|
Severance
|
||||||||||||
|
and
related
|
Facility
|
|||||||||||
|
benefits
|
closings
|
Total
|
||||||||||
|
Reserve
balance at October 31, 2007
|
$ | 424 | $ | 616 | $ | 1,040 | ||||||
|
Provision
for restructuring
|
3,146 | 952 | 4,098 | |||||||||
|
Cash
payments
|
(1,806 | ) | (427 | ) | (2,233 | ) | ||||||
|
Other
|
- | (112 | ) | (112 | ) | |||||||
|
Reserve
balance at October 31, 2008
|
1,764 | 1,029 | 2,793 | |||||||||
|
Cash
payments
|
(1,560 | ) | (657 | ) | (2,217 | ) | ||||||
|
Other
|
- | (5 | ) | (5 | ) | |||||||
|
Reserve
balance at October 31, 2009
|
$ | 204 | $ | 367 | $ | 571 | ||||||
Impairment
Charges
The
impairment charges on product development, goodwill and acquired identified
intangible assets are more fully described in Note 7 and 8 to consolidated
financial statements, respectively.
Other
Charges
In
September 2008, we announced that Michael Morache would be stepping down as
President and Chief Executive Officer effective as of the close of business on
October 31, 2008. The Board of Directors approved an arrangement with Mr.
Morache whereby he would receive the severance benefits as described in his
employment agreement, subject to certain agreed-upon modifications, including
the extension of the amount of time Mr. Morache has to exercise vested stock
options. In the fourth quarter of 2008, we recorded total charges of
$932,000, including $216,000 of non-cash stock-based compensation, related to
Mr. Morache’s termination.
Note
15. Income Taxes
The
components of income (loss) before income taxes were as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
United
States
|
$ | 701 | $ | (95,456 | ) | $ | (15,396 | ) | ||||
|
Foreign
|
256 | 422 | 1,128 | |||||||||
| $ | 957 | $ | (95,034 | ) | $ | (14,268 | ) | |||||
The
components of income tax expense (benefit) were as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Federal
|
$ | - | $ | (3,137 | ) | $ | 608 | |||||
|
State
and local
|
- | - | - | |||||||||
| $ | - | $ | (3,137 | ) | $ | 608 | ||||||
|
Current
tax expense
|
$ | - | $ | - | $ | - | ||||||
|
Deferred
tax expense
|
- | (3,137 | ) | 608 | ||||||||
| $ | - | $ | (3,137 | ) | $ | 608 | ||||||
In 2007,
income tax expense of $608,000 was related to tax deductible
goodwill. In 2008, full impairment of the tax-deductible goodwill, as
discussed in Note 8 above, resulted in the reversal of the cumulative deferred
tax liability and a corresponding income tax benefit of $3,137,000.
Income
tax expense differs from the amount computed by applying the U.S. federal
statutory income tax rate to earnings (loss) before income taxes as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
U.S.
federal statutory rate at 34%
|
$ | 325 | $ | (32,311 | ) | $ | (4,851 | ) | ||||
|
Meals
and entertainment
|
101 | 109 | 67 | |||||||||
|
Stock
options
|
26 | 27 | 24 | |||||||||
|
Goodwill
|
- | 15,769 | 608 | |||||||||
|
Net
operating loss adjustments
|
5,247 | - | - | |||||||||
|
Other
non-deductible expenses
|
- | 138 | 91 | |||||||||
|
No
benefit from foreign (income) loss
|
(87 | ) | (144 | ) | (383 | ) | ||||||
|
(Decrease)
Increase in deferred tax valuation allowance
|
(5,612 | ) | 13,275 | 5,052 | ||||||||
| $ | - | $ | (3,137 | ) | $ | 608 | ||||||
The
components of the net deferred tax liability at October 31 were as follows (in
thousands):
|
2009
|
2008
|
|||||||
|
Current:
|
||||||||
|
Accrued
liabilities and reserves
|
$ | 4,395 | $ | 5,511 | ||||
|
Valuation
allowance
|
(4,395 | ) | (5,511 | ) | ||||
|
Net
current deferred tax asset
|
- | - | ||||||
|
Long-term:
|
||||||||
|
Net
operating loss carryforward
|
67,666 | 69,450 | ||||||
|
Tax
credit carryforwards
|
608 | 608 | ||||||
|
Product
development expense recognition
|
431 | 3,381 | ||||||
|
Equipment
basis difference
|
(420 | ) | (422 | ) | ||||
|
Identified
intangible asset basis difference
|
(140 | ) | (627 | ) | ||||
|
Goodwill
basis difference
|
4,650 | 5,218 | ||||||
|
Other
|
1,925 | 1,608 | ||||||
|
Valuation
allowance
|
(74,720 | ) | (79,216 | ) | ||||
|
Net
long-term deferred tax liability
|
- | - | ||||||
| $ | - | $ | - | |||||
At
October 31, 2009 and 2008, our deferred tax assets were fully
reserved. At October 31, 2009, approximately $64,790,000 of the
deferred tax asset relates to our net operating loss carryforwards in the U.S.
of approximately $161,974,000, which expire in varying amounts between 2010 and
2028. These loss carryforwards include those of Lightspan, a U.S.
company acquired in the first quarter of 2004, as limited by Section 382 of the
Internal Revenue Code. Also included in our deferred tax asset was
$2,876,000 related to net operating loss carryforwards of approximately
$9,464,000 in our foreign subsidiaries. We have provided a full
valuation allowance related to these foreign deferred income tax assets due to
the uncertainty in realization of future taxable income in these
jurisdictions.
Realization
of our U.S. deferred tax asset is dependent on generating sufficient taxable
income in the U.S. prior to expiration of these loss
carryforwards. Our history of cumulative operating losses over the
past several years has led to our current assessment that it is more likely than
not that our net deferred taxes will not be realized. As a result,
our deferred tax assets are fully reserved and will remain fully reserved until
the related tax benefits are realized through the generation of taxable income
in a particular year, or until we can demonstrate a history of generating
taxable income. Since as discussed above, we have fully impaired our
goodwill, subsequent realization of all deferred tax assets will be recorded as
a reduction of income tax expense in the year realized.
In 2008,
we recognized no tax benefit or liabilities for uncertainties related to prior
and current year income tax positions, which were determined to be
immaterial.
In 2008,
we increased our gross deferred tax assets by $11,476,000, related to the
increase in the value of our net operating losses resulting from the review of
tax limitations on the utilization of net operating losses per Section 382 of
the Internal Revenue Code.
Note
16. Segment and Geographic Information
We operate in one industry segment, which is the development and marketing of
educational software and related services. Net sales by geographic
area are presented by attributing revenues from external customers on the basis
of the country in which the product and services are
sold. Information about our geographic operations is as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
from unaffiliated customers:
|
||||||||||||
|
United
States
|
$ | 64,733 | $ | 67,527 | $ | 68,737 | ||||||
|
Foreign
|
450 | 874 | 895 | |||||||||
| $ | 65,183 | $ | 68,401 | $ | 69,632 | |||||||
|
Long-term
assets (at October 31):
|
||||||||||||
|
United
States
|
$ | 28,039 | $ | 34,707 | $ | 120,755 | ||||||
|
Foreign
|
- | - | 6 | |||||||||
| $ | 28,039 | $ | 34,707 | $ | 120,761 | |||||||
Note
17. Selected Quarterly Financial Data (Unaudited)
|
(In
thousands, except per share data)
|
||||||||||||||||||||
|
January
31
|
April
30
|
July
31
|
October
31
|
Total
|
||||||||||||||||
|
2009:
|
||||||||||||||||||||
|
Revenues
|
$ | 16,037 | $ | 15,507 | $ | 16,739 | $ | 16,900 | $ | 65,183 | ||||||||||
|
Gross
profit
|
9,282 | 8,572 | 9,615 | 9,848 | 37,317 | |||||||||||||||
|
Operating
expenses
|
9,091 | 8,397 | 9,368 | 9,380 | 36,236 | |||||||||||||||
|
Net
income
|
259 | 123 | 184 | 391 | 957 | |||||||||||||||
|
Basic
and diluted income per share(1)
|
$ | 0.01 | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.04 | ||||||||||
|
2008:
|
||||||||||||||||||||
|
Revenues
|
$ | 16,135 | $ | 16,245 | $ | 18,638 | $ | 17,383 | $ | 68,401 | ||||||||||
|
Gross
profit
|
7,468 | 7,018 | 9,333 | 3,114 | 26,933 | |||||||||||||||
|
Operating
expenses
|
11,419 | 13,346 | 11,231 | 86,225 | 122,221 | |||||||||||||||
|
Net
loss (2)
|
(3,911 | ) | (6,473 | ) | (2,061 | ) | (79,452 | ) | (91,897 | ) | ||||||||||
|
Basic
and diluted loss per share (1)
|
$ | (0.16 | ) | $ | (0.27 | ) | $ | (0.09 | ) | $ | (3.32 | ) | $ | (3.85 | ) | |||||
|
(1)
The sum of the quarterly income (loss) per share does not equal the annual
income (loss) per share due to rounding
|
||||||||||||||||||||
|
and
changes in average shares outstanding.
|
||||||||||||||||||||
|
(2)
In the fourth quarter of 2008, we incurred $5,085 of asset impairment
charges related to certain
|
||||||||||||||||||||
|
product
development assets and identified technology intangible assets. These
charges were recorded
|
||||||||||||||||||||
|
in
cost of revenues, which reduced gross profit. Restructuring,
impairment and other charges of
|
||||||||||||||||||||
|
$1,635,
$800 and $76,178 for second, third and fourth quarters, respectively, were
included in operating
|
||||||||||||||||||||
|
expenses. See
Notes 7, 8 and 14 to the Consolidated Financial Statements. The
fourth quarter of fiscal 2008
|
||||||||||||||||||||
|
also
includes a tax benefit of $3,137 related to the elimination of the
deferred tax liability on tax-deductible
|
||||||||||||||||||||
|
goodwill. See
Note 15 to the Consolidated Financial Statements.
|
||||||||||||||||||||
None.
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Annual Report on Form 10-K, we carried out an
evaluation under the supervision and with the participation of our Disclosure
Committee and our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Disclosure controls and procedures are designed to
ensure that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms and that such information is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of our disclosure controls and
procedures were effective as of October 31, 2009.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Our internal control over financial reporting is a process
designed 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.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
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 as of October 31,
2009 based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the results of this evaluation,
we concluded that our internal control over financial reporting was effective as
of October 31, 2009.
The
effectiveness of our internal control over financial reporting as of October 31,
2009 has been audited by Grant Thornton LLP, an independent registered public
accounting firm, as stated in their report which is included in Part II, Item 8
of this Annual Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d-15 that was conducted during the last fiscal quarter, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
None.
The
information required by Item 10 of this Annual Report on Form 10-K with respect
to identification of our directors and identification of an audit committee
financial expert is set forth under the captions “Election of Directors” and
“Committees and Meetings of
the Board of Directors” in our 2010 Proxy Statement and is incorporated
herein by reference.
Information
with respect to our Executive Officers as of January 1, 2010 is as
follows:
|
Name
|
Age
|
Position
|
||
|
Vincent
P. Riera
|
39
|
President
and Chief Executive Officer
|
||
|
Robert
J. Rueckl
|
48
|
Vice
President and Chief Financial
Officer
|
Executive
officers are appointed by, and serve at the discretion of, the Board of
Directors.
Vincent
P. Riera joined PLATO Learning in April 2007 as Senior Vice President, K-12
Sales, was appointed Senior Vice President, Sales and Service in September 2007
and became President and Chief Executive Officer on November 1,
2008. Prior to that, Mr. Riera served as Vice President at Gateway,
Inc. and held a wide range of sales and sales leadership positions at GE
Capital, Equant, Inc. and MCIWorldcom.
Robert J.
Rueckl joined PLATO Learning in June 2005 as Vice President, Controller and
Chief Accounting Officer, and in January 2007, became Vice President and Chief
Financial Officer. Prior to that, Mr. Rueckl held the positions of
Executive Vice President and Chief Financial Officer, and Vice President,
Controller at Zomax Incorporated, a publicly held supply chain services company.
From 1996 to 2002, Mr. Rueckl held several senior finance positions at ADC
Telecommunications. Prior to ADC, Mr. Rueckl spent five years at Cray Research
in several accounting and finance positions, and six years in the audit practice
of KPMG.
The
information required by Item 405 of Regulation S-K is set forth under the
caption “Section 16(a)
Beneficial Ownership Reporting Compliance” in our 2010 Proxy Statement
and is incorporated herein by reference.
Code
of Ethics
We have
adopted a code of business conduct and ethics for all of our employees and
directors, including our chief executive officer, chief financial officer, other
executive officers, and senior financial personnel, a copy of which is available
on our web site (www.plato.com). We intend to post on our web site
any material changes to or waiver from, our code of business conduct and ethics,
if any, within four business days of any such event.
The
information required by Item 11 of this Annual Report on Form 10-K is set forth
under the captions “Executive
Compensation,” “Compensation Committee Interlocks and Insider
Participation,” “Report
of the Compensation Committee” and “Director Compensation” in our
2010 Proxy Statement and is incorporated herein by reference.
Our
equity compensation plan information as of October 31, 2009 is as
follows:
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding
Options
|
Weighted-Average
Exercise Price of Outstanding Options
|
Number
of Securities Remaining Available for Future Issuance
|
|||
|
Equity
compensation plans
|
||||||
|
approved
by security holders
|
2,946,000
|
$5.42
|
1,238,000
|
|||
|
Equity
compensation plans not
|
||||||
|
approved
by security holders
|
-
|
-
|
-
|
|||
|
Total
|
2,946,000
|
$5.42
|
1,238,000
|
All other
information required by Item 12 of this Annual Report on Form 10-K is set forth
under the caption “Security
Ownership of Certain Beneficial Owners and Management” in our 2010 Proxy
Statement and is incorporated herein by reference.
The
information required by Item 13 of this Annual Report on Form 10-K is set forth
under the captions “Certain
Relationships and Related Transactions” and “Other Compensation
Arrangements” in our 2010 Proxy Statement and is incorporated
herein.
The
information required by Item 14 of this Annual Report on Form 10-K is set forth
under the caption “Fees Paid
to Principal Accountants” in our 2010 Proxy Statement and is incorporated
herein by reference.
|
(a) Documents
filed as part of this report:
|
||
|
1. Financial
Statements.
|
||
|
The
following Consolidated Financial Statements and Report
of
|
||
|
Independent
Registered Public Accounting Firms as set forth in Item 8
of
|
||
|
this
Annual Report on Form 10-K:
|
||
|
Consolidated
Statements of Operations for the fiscal years ended October 31, 2009, 2008
and 2007.
|
||
|
Consolidated
Balance Sheets as of October 31, 2009 and 2008.
|
||
|
Consolidated
Statements of Cash Flows for the fiscal years ended October 31, 2009, 2008
and 2007.
|
||
|
Consolidated
Statements of Stockholders’ Equity and Accumulated Other Comprehensive
Income (Loss) for the fiscal years ended October 31, 2009, 2008 and
2007.
|
||
|
Notes
to Consolidated Financial Statements.
|
||
|
2. Financial
Statement Schedules.
|
||
|
The
schedules are either not applicable or the required information is shown
in the consolidated financial statements or notes
thereto.
|
||
|
3. Exhibits.
|
||
|
See
“Exhibit Index” on page 71 of this Annual Report on Form 10-K for a
description of the documents that are filed as Exhibits to this report or
incorporated by reference herein.
|
||
|
(b) See
Item 15(a)(3) above.
|
||
|
(c) See
Item 15(a)(2) above.
|
||
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.
|
PLATO
LEARNING, INC.
|
By
/s/ Vincent P.
Riera
|
|
January
14, 2010
|
Vincent
P. Riera
|
|
President
and Chief Executive Officer
|
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 indicated on January 14, 2010.
|
Signature:
|
Title:
|
|
/s/ Vincent P. Riera
|
President
and Chief Executive Officer
|
|
Vincent
P. Riera
|
(principal
executive officer)
|
|
/s/ Robert J. Rueckl
|
Vice
President and Chief Financial Officer
|
|
Robert
J. Rueckl
|
(principal
financial officer)
|
|
________*________
|
|
|
David
W. Smith
|
Chairman
of the Board
|
|
________*________
|
|
|
Steven
R. Becker
|
Director
|
|
________*________
|
|
|
Matthew
A. Drapkin
|
Director
|
|
________*________
|
|
|
Susan
E. Knight
|
Director
|
|
________*________
|
|
|
John
G. Lewis
|
Director
|
|
________*________
|
|
|
M.
Lee Pelton
|
Director
|
|
________*________
|
|
|
Robert
S. Peterkin
|
Director
|
|
________*________
|
|
|
J.
Ted Sanders, Ed.D.
|
Director
|
|
*
|
/s/ Robert J. Rueckl
|
|
Robert
J. Rueckl
|
|
|
Attorney-in
Fact
|
|
For
the Fiscal Year Ended:
|
Commission
File No.
|
|
October
31, 2009
|
0-20842
|
|
Exhibit
Number
|
Description
|
|
3.01
|
Certificate
of Incorporation is incorporated by reference to the corresponding exhibit
of our Registration Statement on Form S-1 (File Number
33-54296).
|
|
3.02
|
Amended
and Restated Bylaws of PLATO Learning, Inc., Amended as of September 11,
2008, are incorporated by reference to the corresponding exhibit of our
Current Report on Form 8-K dated September 17, 2008 (File Number
0-20842).
|
|
3.03
|
Certificate
of Amendment of Amended Certificate of Incorporation is incorporated by
reference to the corresponding exhibit of our Annual Report on Form 10-K
for the year ended October 31, 2001 (File Number
0-20842).
|
|
3.04
|
Certificate
of Amendment of Certificate of Incorporation, filed November 6, 1992, is
incorporated by reference to Exhibit 3.05 of our Quarterly Report on Form
10-Q for the period ended April 30, 2002 (File Number
0-20842).
|
|
3.05
|
Certificate
of Amendment of Amended Certificate of Incorporation, filed March 20,
2002, is incorporated by reference to Exhibit 3.06 of our Quarterly Report
on Form 10-Q for the period ended April 30, 2002 (File Number
0-20842).
|
|
4.01
|
Form
of Stock Certificate is incorporated by reference to the corresponding
exhibit of our Registration Statement on Form S-1 (File Number
33-54296).
|
|
10.01
|
Lease
for Bloomington, Minnesota office is incorporated by reference to Exhibit
10.08 of our Annual Report on Form 10-K for the year ended October 31,
2000 (File Number 0-20842).
|
|
10.02
|
Form
of Indemnification Agreement is incorporated by reference to Exhibit 10.11
of our Current Report on Form 8-K dated June 21, 2006.
|
|
10.03
|
1997
Stock Incentive Plan is incorporated by reference to Appendix A of our
1997 Proxy Statement (File Number 0-20842). *
|
|
10.04
|
1997
Non-Employee Directors Stock Option Plan is incorporated by reference to
Appendix B of our 1997 Proxy Statement (File Number 0-20842).
*
|
|
10.05
|
2000
Stock Incentive Plan is incorporated by reference to Exhibit 4.03 of our
Registration Statement on Form S-8 (File Number 33-45228).
*
|
|
10.06
|
2000
Non-Employee Directors Stock Option Plan is incorporated by reference to
Exhibit 4.03 of our Registration Statement on Form S-8 (File Number
33-45230).*
|
|
10.07
|
PLATO
Learning, Inc. 2002 Stock Plan, as amended, is incorporated by reference
to Exhibit 10.39 of our Current Report on Form 8-K/A, Amendment No. 1,
dated March 3, 2005 (File Number 0-20842). *
|
|
10.08
|
Forms
of stock option agreement for 2002 Stock Plan, as amended, are
incorporated by reference to Exhibit 10.39 of our Current Report on Form
8-K dated December 7, 2005 (File Number 0-20842).
*
|
|
10.09
|
PLATO
Learning, Inc. 2006 Stock Incentive Plan, as amended, is incorporated by
reference to Exhibit 10.7 of our Current Report on Form 8-K, dated
September 11, 2008 (File Number 0-20842).*
|
|
10.10
|
Forms
of stock appreciation rights agreement for 2006 Stock Incentive Plan, are
incorporated by reference to Exhibit 10.14 of our Annual Report on Form
10-K, dated January 12, 2007 (File Number 0-20842).*
|
|
10.11
|
Directors
Compensation Plan, as amended, is incorporated by reference to Exhibit
10.33 of our Current Report on Form 8-K, dated March 31, 2008 (File Number
0-20842).*
|
|
10.12
|
Credit
Agreement, dated June 4, 2007, and amended on December 30, 2008, by and
among PLATO Learning, Inc. Wells Fargo Foothill, Inc. and the other
parties that are signatories thereto, is incorporated by reference to
Exhibit 10.1 of our Current Report on Form 8-K dated June 5, 2007 (File
Number 0-20842).
|
|
10.13
|
Form
of Employee Restricted Stock Agreement is incorporated by reference to
Exhibit 10.1 to our Quarterly Report on Form 10-Q dated September 10, 2007
(File Number 0-20842).*
|
|
10.14
|
PLATO
Learning, Inc. 2008 Executive Annual Cash Incentive Plan, incorporated by
reference to Exhibit 10.28 of our Current Report on Form 8-K dated January
24, 2008 (File Number 0-20842).*
|
|
10.15
|
PLATO
Learning, Inc. 2008 Executive Annual Equity Incentive Plan, incorporated
by reference to Exhibit 10.29 of our Current Report on Form 8-K, dated
March 31, 2008 (File Number 0-20842).*
|
|
10.16
|
Forms
of stock option agreement, are incorporated by reference to Exhibit 10.30
of our Current Report on Form 8-K, dated March 31, 2008 (File Number
0-20842).*
|
|
10.17
|
Forms
of performance shares agreement, are incorporated by reference to Exhibit
10.31 of our Current Report on Form 8-K, dated March 31, 2008 (File Number
0-20842).*
|
|
10.18
|
Form
of stock appreciation rights agreement, are incorporated by reference to
Exhibit 10.32 of our Current Report on Form 8-K, dated March 31, 2008
(File Number (0-20842).*
|
|
10.19
|
Forms
of employee restricted stock unit agreement, are incorporated by reference
to Exhibit 10.29 of our Current Report on Form 8-K, dated May 19, 2008
(File Number 0-20842).*
|
|
10.20
|
PLATO
Learning, Inc. 2009 Executive Annual Incentive Plan, incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K, dated
December 11, 2008 (File Number 0-20842).*
|
|
10.21
|
PLATO
Learning, Inc. 2010 Leadership Incentive Plan, incorporated by reference
to Exhibit 10.1 of our Current Report on Form 8-K, dated December 18, 2009
(File Number 0-20842). *
|
|
10.22
|
Form
of Stock Appreciation Rights Agreement for 2010 Leadership Incentive Plan,
incorporated by reference to Exhibit 10.2 of our Current Report on Form
8-K, dated December 18, 2009 (File Number 0-20842).*
|
|
10.23
|
Form
of Performance Share Award Agreement for 2010 Leadership Incentive Plan,
incorporated by reference to Exhibit 10.3 of our Current Report on Form
8-K, dated December 18, 2009 (File Number 0-20842).*
|
|
10.24
|
Employment
Agreement with James T. Lynn, is incorporated by reference to Exhibit
10.17 of our Annual Report on Form 10-K, dated January 14, 2008 (File
Number 0-20842).*
|
|
10.25
|
Employment
Agreement with Robert J. Rueckl, is incorporated by reference to Exhibit
10.19 of our Annual Report on Form 10-K, dated January 14, 2008 (File
Number 0-20842).*
|
|
10.26
|
Employment
Agreement with Vincent Riera is incorporated by reference to Exhibit 10.1
of our Current Report on Form 8-K, dated September 25, 2008 (File Number
0-20842).*
|
|
10.27
|
Agreement
between PLATO Learning, Inc and Steven R. Becker, BC Advisors, LLC, SRB
Management, and Matthew A. Drapkin, is incorporated by reference to
Exhibit 10.1 of our Current Report on Form 8-K, dated February 5, 2009
(File Number 0-20842)*
|
|
10.28
|
Separation
Letter from PLATO Learning to James T. Lynn.*
|
|
21.01
|
Subsidiaries
of the Registrant.**
|
|
23.01
|
Consent
of Independent Registered Public Accounting Firm.**
|
|
24.01
|
Power
of Attorney.**
|
|
31.01
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**
|
|
31.02
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.**
|
|
32.01
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.**
|
|
32.02
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.**
|
|
*
Denotes management contract or compensatory plan, contract or
arrangement
|
|
|
**
Filed herewith
|
|
72