Back to GetFilings.com

Table of Contents

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 twelve months and (2) has been subject to such filing requirements for the past 90 days.    Yes         No    

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 the 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.    

The number of shares of the Registrant’s common stock, par value $.01, outstanding as of December 27, 2000 was 8,315,832 shares. The aggregate market value of common stock (based on the closing price on December 27, 2000) held by non-affiliates of the Registrant was approximately $117,482,000.

The information required in Part III of this Form 10-K is incorporated by reference to the definitive Proxy Statement for the Company’s Annual Meeting of Stockholders to be held on March 22, 2001 (the “2001 Proxy Statement”). The 2001 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of the Company’s fiscal year.

This document contains 59 pages.

1

2

Table of Contents

Item 1. BUSINESS

Overview:

PLATO Learning, Inc. (the “Company”) enhances the learning process by providing computer-based and e-learning instruction and related services and by offering basic to advanced level courseware in reading, writing, math, science, and life and job skills. The Company’s PLATO® Learning System and PLATO® Web Learning Network provide more than 2,000 hours of objective-based, problem solving courseware and include assessment, alignment, and management tools to facilitate the learning process. PLATO courseware is delivered via networks, CD-ROM, private intranets, and the Internet. In addition, single topic PLATO courseware is available through the Company’s e-commerce Web site and a growing number of distributors. PLATO courseware is marketed to middle and high schools, colleges, job training programs, correctional institutions, military education programs, corporations and consumers.

The Company operates its principal business in the single industry segment of education and training software (see Note 12 to Consolidated Financial Statements for segment and geographic information).

PLATO Learning, Inc.’s wholly-owned subsidiaries are PLATO, Inc. and CyberEd, Inc. (“CyberEd”). PLATO, Inc. has two wholly-owned subsidiaries, PLATO Learning (Canada), Inc., and PLATO Learning (UK) Ltd.

Company History:

The Company is a Delaware corporation and was incorporated in 1989. At that time the Company acquired the principal business of the Training and Education Group of Control Data Corporation. In December 1992, the Company became publicly held and its common stock has since traded on the NASDAQ National Market System under the symbol TUTR.

In September 1998, the Company sold its Aviation Training business (which marketed computer-based instructional systems to airlines worldwide for use by commercial airline pilots, maintenance crews, and cabin personnel) to focus exclusively on its education business.

On March 30, 2000, the Company’s stockholders approved a change in the Company’s name from TRO Learning, Inc. to PLATO Learning, Inc. The Company also changed the names of its three direct and indirect subsidiaries from The Roach Organization, Inc., TRO Learning (Canada), Inc., and TRO Learning (UK) Ltd. to PLATO, Inc., PLATO Learning (Canada), Inc. and PLATO Learning (UK) Ltd., respectively.

On July 21, 2000, the Company acquired CyberEd, a privately held Nevada corporation and provider of multimedia science courseware for high schools, for $4.4 million in cash, net of cash

3

Table of Contents

Item 1. BUSINESS, Continued

Company History, Continued

acquired. The acquisition was accounted for using the purchase method of accounting (see Note 2 to Consolidated Financial Statements).

Products and Services:

The Company’s products offer educators and trainers an effective complement, supplement or alternative to instructor-led education. PLATO is a computer-based instructional system designed to enhance the learning process and help adolescent and adult learners reach their fullest potential. PLATO provides interactive, individualized instruction in a broad range of subjects. PLATO courseware has proven effective in a variety of learning settings, including mainstream classrooms, alternative education programs, mandated state accountability test preparation, graduation standards prep labs, school-to-work programs, adult basic education, GED preparation, developmental studies, employment preparation, workplace training, and military basic skills programs. Whether used for distance learning, as a complement or supplement to a traditional program, or as an advanced course offering, PLATO courseware motivates and engages a wide range of learners.

PLATO Courseware and Software:

The comprehensive PLATO courseware library includes over 2,000 hours of mastery-based instruction in the subject areas of reading, writing and language arts, mathematics, science, social studies, life and job skills, technology, and applied skills for the workplace. The consistent instructional strategy and design, and modular structure of PLATO courseware provides maximum flexibility to design customized programs to meet both individual learner needs and specific program objectives. This modularity has enabled the creation of over 250 pre-aligned packages to meet various state, federal and international program requirements.

PLATO courseware can integrate into an educational program as follows:

	•		as a complement to classroom learning, addressing individual learner needs through enrichment and remediation;
	•		as a supplement to classroom learning, providing additional instruction and practice; and
	•		as a primary resource, allowing the instructor to focus attention on areas of the curriculum which are difficult for learners or which require ongoing dialog among learners and the instructor.

4

Table of Contents

Item 1. BUSINESS, Continued

Products and Services, Continued

PLATO Courseware and Software, Continued

The Company regularly updates its PLATO courseware library and develops new products to extend and enhance it. In the spring of 1999, the Company released its 2,000-hour PLATO courseware library as a native 32-bit application under the Windows® operating system. Windows-based PLATO problem-solving courses employ sophisticated interactive simulations, online coaching, and advanced multimedia and graphics to create an exciting learning environment that fosters critical-thinking skills. New products recently released include Essential Reading Skills, Vocabulary and Reading Comprehension, UK Reading Strategies, CyberEd High School Biology Series, CyberEd High School Chemistry Series and the PLATO Web Learning Network. New courses scheduled for release in the near future include Fundamental Reading Strategies, Intermediate Reading Strategies and the PLATO Simulated Test System.

In 1998, Math Problem Solving was included in the Children’s Software Review (CSR) “All Star Software” list with a rating of 4.5 out of 5 stars. CSR’s All Star Software List is an ongoing collection of highly recommended software titles that is updated on a bi-monthly basis. Also in 1998, Vocabulary Builder was selected as a top five finalist for the 1999 Codie Award for Best New Education Software Program sponsored by the Software Publishers Association. Earning the status of a Codie Award finalist is significant, particularly since Vocabulary Builder was selected from a pool of more than 900 nominations.

CyberEd received the ComputEd Learning Lab Education Software Review Award (EDDIE) for 2000. This marks the third year in a row that CyberEd has claimed the award. CyberEd® Interactive Chemistry was selected as the “best 2000 post-secondary science software” for its academic content, technical merit, subject approach and quality of management system.

5

Table of Contents

Item 1. BUSINESS, Continued

Products and Services, Continued

PLATO Courseware and Software, Continued

The following table summarizes PLATO courseware and software offerings:

6

Table of Contents

Item 1. BUSINESS, Continued

Products and Services, Continued

PLATO Courseware and Software, Continued

PLATO courseware is objective-based and can be aligned to help learners meet specific program, local, state and provincial learning objectives and tests. PLATO courseware can also be aligned to national and international standardized tests and curriculum standards including:

	•		ABLE (Adult Basic Literacy Exam)
	•		ACT (American College Test)
	•		CAT (California Achievement Test)
	•		CAAT (Canadian Adult Achievement Test)
	•		CASAS (Comprehensive Adult Student Assessment System)
	•		GED (General Education Development) Exam
	•		NCTM (National Council of Teachers of Mathematics) Standards
	•		SAT (Scholastic Aptitude Test)
	•		SCAN’S (Secretary’s Commission on Achieving Necessary Skills) Competencies
	•		Standard Achievement Tests
	•		TABE (Test of Adult Basic Education)
	•		ACT Work Keys™
	•		GNVQ (General National Vocational Qualification) (England)
	•		English and Maths National Curriculum (England)
	•		Key Skills, Communication and Application of Number (Curriculum 2000, England)
	•		English and Maths 5-14 Curriculum (Scotland)

7

Table of Contents

Item 1. BUSINESS, Continued

Products and Services, Continued

PLATO Learning System

The PLATO Learning System consists of PLATO courseware, assessments and mastery tests, alignments to external performance standards (such as state graduation standards) and instructional management software.

PLATO Pathways, a component of the PLATO Learning System, is an easy to use Windows-based software program that seamlessly integrates assessment, instruction and management – giving instructors a versatile educational tool. This instructional management system diagnoses strengths and weaknesses and adaptively prescribes individualized learner menus – ensuring targeted, personalized instruction keyed to program goals. It can incorporate offline, online, and Web-based resources to enrich the learning experience. It also tracks learner progress and offers an extensive array of reports which provide administrators, teachers, learners, and parents with highly meaningful information that documents accountability and performance.

The PLATO Learning System is configured to use computers running Microsoft Windows (95, 98, NT and Windows 2000) or Apple^® iMac or G3 with Windows emulation software. PLATO’s multiple delivery systems include:

	•		Desktop Launch – with the desktop launch, individual PLATO courses can be delivered directly on a computer workstation without a management system. Individual student sign-on, bookmarking, recordkeeping, and reporting are available.
	•		Local Area Networks (LAN) — with a LAN configuration, all courseware, management software, student records, and files are centralized and can be accessed by any learner, at any learning station, using a private PLATO identifier and password. The Company offers LAN configurations utilizing either Microsoft Windows NT/2000, Novell® NetWare or Linux servers.
	•		CD-ROM Stand Alone — CD-ROM delivery allows a single computer workstation to deliver PLATO courseware using PLATO Pathways.

PLATO^®Web Learning Network

The PLATO Web Learning Network offers, as an Internet Application Service, the same high quality instructional content and essential student management services that are found on the highly successful PLATO Learning System products. The PLATO Web Learning Network gives administrators the necessary leverage to seamlessly share PLATO courseware, assessment and

8

Table of Contents

Item 1. BUSINESS, Continued

Products and Services, Continued

PLATO^®Web Learning Network, Continued

instructional management resources across a number of classrooms, school buildings and programs, and students’ homes to gain maximum return on their software investments. Because the PLATO Web Learning Network is an application service provider (ASP) product, districts can free up technical and hardware replacement budgets by eliminating the need to fund LANs at every location. These savings mean our customers gain added purchasing flexibility to provide even more students with the opportunity to achieve academic success with PLATO courseware.

The PLATO Web Learning Network links directly with the new PLATO^® Simulated Test System to offer schools comprehensive skills diagnostics, assessment, instruction, and reporting services.

PLATO^®Simulated Test System

The PLATO Simulated Test System is a Web-based assessment tool that provides state-standards practice tests and skill assessments with immediate scoring and links to instruction that will help the learner improve in areas of weakness.

Government-mandated promotion and graduation exams are requiring educators across the country to find new ways to identify student skill gaps and prepare them for national, state and local standardized tests. With the PLATO Simulated Test System, scheduled for release in January 2001, PLATO Learning introduces a powerful new tool to help educators meet this challenge. The system can be used with or without PLATO educational software.

The PLATO Simulated Test System, sold on an annual subscription basis, provides educators, parents and students with critical information on student, class, school and district-wide test readiness. The system gives teachers full control regarding the timing and frequency of practice tests, so students can be periodically re-assessed to determine their readiness. Each practice test is designed to emulate the actual test experience. Students may take the practice tests from any computer equipped with a browser, including their home computer. The system scores the practice test and provides instant feedback. For students enrolled in schools using PLATO software on a LAN or via the Internet, the system automatically creates an individualized learning path to fill the gaps.

To help educators and parents keep effective records of student progress, the system creates graphical and text reports for every student. Students and parents can view their own reports online. Educators can view individual student reports and class performance data, while administrators may view data by class, school or district.

9

Table of Contents

Item 1. BUSINESS, Continued

Products and Services, Continued

Internet/Distance Learning

Remote learners with Internet or intranet access can review lessons, test for mastery, and progress through lesson sequences just as if they were onsite in the lab or classroom – using either the PLATO^®on the Internet or the PLATO Web Learning Network products. Records and courseware are kept on an Internet Server and are accessible by learners on demand, from any location, using private PLATO identifiers and a password. Learners can monitor their progress and print a learner progress report. Administrators can monitor progress using a variety of reports that provide data both in summary and detailed formats.

E-commerce

Teachers, parents, home users, home schoolers, and businesses can purchase single topic PLATO courseware through the Company’s e-commerce Web site at www.plato.com as well as from a number of partner sites with links to this site. Customers may select from over 110 individual titles, including reading, mathematics, science, applied physical science, and vocabulary building. Purchases may be either electronically downloaded on demand or provided on CD-ROM to be shipped the next day. To ensure a transaction security for its customers, the Company provides secure online credit card transaction processing through its partnership with Digital River, a leader in Web-based commerce for digital products.

Professional Services:

PLATO Professional Services was created to ensure that clients receive the necessary support services for the success of their PLATO programs and ongoing personal development.

	•		Training Services — Customized education and training solutions include implementation planning, professional development workshops, and ongoing training, evaluation and support – provided by the Company’s experienced Education Consultants.
	•		Technical Support — On-site installation and specialized technical consulting provided by PLATO Field Engineers and Technicians for clients who do not have the appropriate skills.
	•		Software Support — Available via a toll-free telephone number, Internet e-mail, the PLATO Support Web Page, and a PLATO Support CD, clients can access PLATO specialists and software analysts to answer questions or solve problems with their PLATO system. Clients also receive periodic updates and enhancements to their PLATO courseware and software.

10

Table of Contents

Item 1. BUSINESS, Continued

Sales and Marketing:

The Company’s sales and marketing efforts are designed to increase market penetration and reinforce the Company’s reputation for product quality, service and customer satisfaction. The Company targets potentially large and growth market segments to which existing and future products can be sold through a variety of distribution networks and channels.

The Company uses a combination of direct sales resources and a reseller network, deploying e-commerce, catalogue, portals, multi level marketing and a comprehensive Web site (www.plato.com) in North America and the United Kingdom. Worldwide, the Company has established distribution agreements with experienced education product/services business partners in Singapore, Malaysia, Puerto Rico, United Arab Emirates and South Africa.

Business Environment:

The Company has seen increased acceptance of effective, multimedia-based, computer-aided methods of training and education due to, among other reasons, their flexibility, cost-efficiency, and demonstrated effectiveness.

The Federal E-Rate Program, Federal Technology Fund, and State and District initiatives have funneled tremendous numbers of dollars into creating state-of-the-art school technology infrastructures for the 21st century. The resulting growth in the number of computers and sophisticated telecommunications systems now in place in all schools has created a technology-rich environment that offers an excellent sales opportunity for sophisticated software applications. Responding to this new environment, the Company has grown its product line in the current year to leverage this tremendous opportunity. The PLATO Web Learning Network offers the full PLATO curricula as a browser-based application making possible delivery of PLATO software both inside and outside of the school building and making possible a full array of new services for students. The PLATO Simulated Test System provides online simulations of state-mandated tests so students can assess their readiness for their state test as well as receive automatic prescriptions to PLATO courseware for areas where they have failed to show skills mastery.

11

Table of Contents

Item 1. BUSINESS, Continued

Competition:

In all of its markets, the Company competes primarily against more traditional methods of education and training, principally live classroom instruction. The Company competes primarily on the basis of the depth and recognized quality of its courseware and its ability to deliver a flexible, timely, cost-effective, and customized solution to a client’s education and training needs. Based on experience, the Company believes that product depth, quality and effectiveness are key factors which buyers use in evaluating competitive offerings.

Within the academic computer-based education market, the Company competes most directly with other learning system providers, including divisions within Pearson PLC, McGraw-Hill McMillian, Compass Learning, and Riverdeep. Generally, Compass competes in the elementary market, McGraw-Hill in the adult and college markets and Pearson’s CCC/NovaNet and Riverdeep each offer a K-12 line of products. PLATO courseware offers a comprehensive curriculum developed specifically for the adult and young adult learner and is especially appropriate for middle and high school learners. In the post-secondary education and training markets there are many regional and specialized competitors.

Product Development and Customer Support:

The Company’s product development group develops, enhances, and maintains the PLATO courseware, instructional management software, and delivery system platforms. This group employs a rigorous multi-phased product development methodology and process management system. Based on both classical instructional design concepts and models, as well as systems development management techniques, the Company’s product development methodology has been constructed to specifically address the creation of individualized, learner-controlled, interactive instruction using the full multimedia capabilities of today’s personal computing, communication and other related technologies. The Company’s rigorous instructional design and development methodology assures the instructional effectiveness and content integrity of the resulting product. This is supported and enhanced by a UK product development team that is able to respond effectively to international market requirements. These procedures ensure that the most appropriate and highest quality production values are achieved in the development of all courseware. Moreover, the Company’s innovative product architectures and advanced group-based rapid prototyping technologies shorten time-to-market and development costs.

Central to the courseware development process are six proprietary software tools: (1) PLATO Pathways - the PLATO instructional management system designed for system control, tracking and reporting of student performance, and administration; (2) Micro PLATO Authoring System (MPAS); and (3) PLATO Curriculum Design, Development and Delivery (PCD3) System – tools for

12

Table of Contents

Item 1. BUSINESS, Continued

Product Development and Customer Support, Continued

enhancement and maintenance of part of the PLATO courseware library; (4) Win PLATO – a proprietary software framework for authoring and delivering Windows courseware; (5) WebPLATO - a proprietary software framework for authoring and delivering Web-based courseware; and (6) PLATO Web Learning Network - a proprietary software framework for creating and delivering web pages for instructional management, student record keeping courseware delivery through a browser, access control and site monitoring.

The Company’s customer support group provides a full range of support services to ensure client satisfaction. Full-time professionals, with general technical expertise and extensive operational knowledge of the Company’s products, provide pre-sale technical consultation and support to the Company’s field sales organization and are responsible for the final technical review and approval of all proposed delivery platforms and installation configurations. These professionals consult and coordinate with the client, account manager, and installation team regarding site preparation and system installation. They also confirm full client acceptance and monitor client satisfaction and support requirements.

The Company integrates its products by purchasing component parts from a network of external suppliers under a just-in-time inventory system. The Company has supplier relationships with several hardware and software vendors. Although these relationships are important to the Company, management believes that, in the event that such products or services were to cease to be available, alternative sources could be found on terms acceptable to the Company. The Company does not use raw materials and maintains minimal inventory.

All manufacturers’ warranties are passed through to the Company’s clients. After the warranty periods are over, the Company offers maintenance contracts through third-party service organizations. The Company contracts with outside vendors, primarily BancTec Services Corp., to provide for hardware installation and maintenance services for its client sites. In addition, the Company distributes a limited amount of third-party courseware and purchases off-the-shelf software and hardware products from Novell, Microsoft, and other vendors.

Proprietary Rights:

The Company regards its courseware and software as proprietary and relies primarily on a combination of statutory and common law copyright, trademark, trade secret laws, license and distribution agreements, employee and third-party non-disclosure agreements, and other methods to protect its proprietary rights. The Company owns the federal registration of the PLATO trademark. In addition, in 1989 Control Data assigned to the Company federally registered copyrights in the

13

Table of Contents

Item 1. BUSINESS, Continued

Proprietary Rights, Continued

PLATO courseware. The Company has not recorded the assignment of these copyrights because it believes the additional statutory rights resulting from recordation are not necessary for the protection of the Company’s rights therein. The Company has federal copyrights on all PLATO courseware produced since 1989. The Company has not applied for trademark registration at the state level, but has instead relied on its federal registrations and state common law rights to protect its proprietary information. The Company has registered the PLATO trademark in the United States and overseas and regards this registration as material to its business. The Company licenses some software from third-party developers and incorporates it into the Company’s courseware offerings.

Pursuant to a settlement agreement entered into in October 1992, the Company has granted certain limited courseware and software licenses to Drake and Control Data Systems, Inc. (CDSI). The licenses permit Drake and CDSI to market certain earlier versions of PLATO courseware in certain specified situations. The Company believes that the limited licenses granted to Drake and CDSI will have no material adverse impact on its future business.

Backlog:

The Company’s backlog consists of orders for the delivery of PLATO products and services in future periods. The backlog was approximately $8.6 million and $5 million, at October 31, 2000 and 1999, respectively. At October 31, 2000, approximately $2.3 million of the backlog is expected to be delivered subsequent to fiscal year 2001.

Seasonality:

The Company’s quarterly operating results fluctuate as a result of a number of factors including the business and sales cycle, the amount and timing of new product introductions by the Company, product shipments, client funding issues, marketing expenditures, product development expenditures, and promotional programs. In addition, some of the Company’s clients experience cyclical variations in funding which can impact the Company’s revenue patterns. The Company’s quarterly revenues can also fluctuate based upon spending patterns, budget cycles, and the fiscal year ends of these clients. The Company historically has experienced its lowest revenues in the first quarter and increasingly higher levels of revenues in each of the next three quarters.

14

Table of Contents

Item 1. BUSINESS, Continued

Employees:

As of November 30, 2000, the Company employed 376 people on a full-time basis, including 199 in sales and marketing, 57 in product development and operations, 91 in support services, and 29 in finance and administration. Within sales and marketing, the Company has 68 account managers responsible for sales of PLATO products and services and for maintaining active relationships with both current and potential clients. Additionally, the Company has 53 part-time employees.

Item 2. PROPERTIES

The Company leases all of its facilities, including its corporate headquarters in Bloomington, Minnesota. The Company has sales offices throughout the United States and its subsidiaries maintain offices in Canada and the United Kingdom.

The Company’s leased facilities are adequate to meet its business requirements.

Item 3. LEGAL PROCEEDINGS

The Company is not a party to any litigation that is expected to have a material adverse effect on the Company or its business

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended October 31, 2000.

15

Table of Contents

The Executive Officers of the Company as of January 1, 2001 were as follows:

Executive officers are appointed by, and serve at the discretion of, the Board of Directors.

Mr. Murray’s business experience is set forth in the Company’s 2001 Proxy Statement under the Section “Election of Directors”. The information is incorporated herein by reference.

John M. Buske, age 50, joined the Company as Vice President, Finance and Chief Financial Officer in November 2000. From 1987 to November 2000, he was employed by St. Jude Medical, Inc. Since 1997, Mr. Buske held the position of Corporate Controller. Prior to 1997, he held the positions of Director of Finance and Assistant Treasurer. Prior to St. Jude Medical, Mr. Buske held various financial management positions with Apache Corporation, an oil and gas exploration company, and National Car Rental, a car rental and leasing company.

G. Thomas Ahern, age 42, was promoted to Executive Vice President, Sales and Marketing in December 2000. From November 1997 to November 1999, he was Senior Vice President, Sales and Marketing. From January to October 1997, he was Vice President, PLATO Education Sales, North America. From December 1992 to October 1997 he was Vice President, U.S. Sales, PLATO Education. Previously, he was Regional Vice President, Sales for the Company since its founding in 1989. Prior to joining the Company, Mr. Ahern was National Sales Manager for the Training and Education Group of Control Data Corporation.

16

Table of Contents

Wellesley R. Foshay, Ph.D., age 53, has served as Vice President, Instructional Design and Cognitive Learning since the Company’s founding in 1989. Prior to joining the Company, Dr. Foshay was Senior Director, Quality Assurance, Standards and Training for Applied Learning International, Inc., a training and education company.

David H. LePage, age 54, was promoted to Senior Vice President, Operations in December 2000. From 1997 to November 2000, he was Vice President, PLATO Support Services and Distribution. From the Company’s founding in 1989 until 1997, he was Vice President, Systems Development, Client Support and Operations. Prior to joining the Company, Mr. LePage was General Manager, Systems Development and Technical Support for the Training and Education Group of Control Data Corporation.

Mary Jo Murphy, age 44, joined the Company in August 1993 as Vice President, Corporate Controller and Chief Accounting Officer. She was named Assistant Secretary in March 2000. From 1986 to 1992, she was Corporate Controller for Krelitz Industries, Inc., a drug distribution company. Ms. Murphy, a Certified Public Accountant, was formerly an Audit Supervisor for Coopers & Lybrand.

Frank Preese, age 53, was promoted to Chief Technology Officer in December 2000. From November 1997 to November 2000, he was Vice President, Product Development. From 1996 through 1997 he was Assistant Vice President, Curriculum Development and during 1995 was Senior Director of Curriculum Development. Prior to joining the Company in 1994 as Director of Curriculum Development, Mr. Preese was Vice President of Computer Services for Golle & Holmes Corporation, a training consultancy to Fortune 500 companies.

Steven R. Schuster, age 41, has served as Vice President and Treasurer and Secretary since September 2000. From March 2000 until September 2000 he served as Vice President and Treasurer and Assistant Secretary. From October 1998 until March 2000 he served as Vice President and Treasurer. He joined the Company in December 1996 as Vice President and Assistant Treasurer. Mr. Schuster was formerly Vice President for Norwest Bank, a financial services company, and the Assistant Treasurer for St. Jude Medical, Inc.

John C. Super, age 53, assumed the role of Vice President, Strategic Planning in December 2000. From June 1999 to November 2000, he was Vice President, Strategic Initiatives. Mr. Super was Vice President, Marketing from February 1997 through June 1999. From 1992 through 1996 he was Vice President, Strategic Sales and during 1991 was Vice President Sales, Eastern Region. Prior to joining the Company in 1990 as Workplace Account Manager, Mr. Super served in sales and management capacities with Wicat Systems and Computer Curriculum Corporation.

17

Table of Contents

Recent Executive Officer Changes:

On November 21, 2000, the Company announced that, pursuant to its management succession plan established at the beginning of fiscal 2000, William R. Roach, founder of the Company had resigned as Chairman and Chief Executive Officer. General (retired), Dennis J. Reimer, a member of the Board of Directors, succeeded Mr. Roach as Chairman and John Murray, the Company’s President and Chief Operating Officer was appointed President and Chief Executive Officer. Mr. Roach will continue to be a member of the Board of Directors.

On November 27, 2000, the Company announced the appointment of John M. Buske as Vice President
Finance and Chief Financial Officer.

18

Table of Contents

Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
             MATTERS

Market Information:

The Company’s common stock is publicly traded on the NASDAQ National Market System under the symbol TUTR.

The following table presents the high and low closing prices for the Company’s common stock as reported by NASDAQ for each quarter during the fiscal years ended October 31, 2000 and 1999:

Holders:

There were approximately 2,500 stockholders of record as of December 27, 2000 (includes individual participants in security position listings).

Dividends:

The Company has not declared or paid dividends on its common stock. The Company’s ability to pay dividends is restricted by its revolving loan agreement (see Note 5 to Consolidated Financial Statements). While future dividend payments are at the discretion of the Board of Directors, the Company is growth-oriented and there is no present intention to pay a cash dividend on its common stock.

19

Table of Contents

Item 6.   SELECTED FINANCIAL DATA

20

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
             FINANCIAL CONDITION

(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS

Overview

The Company enhances the learning process by providing computer-based and e-learning instruction and related services, and by offering basic to advanced level courseware in reading, writing, math, science and life and job skills. The Company’s PLATO® Learning System and PLATO® Web Learning Network provide more than 2,000 hours of objective-based, problem solving courseware and include assessment, alignment and management tools to facilitate the learning process. PLATO courseware is delivered via networks, CD-ROM, private intranets and the Internet. In addition, single topic PLATO courseware is available through the Company’s e-commerce web site and a growing number of distributors. PLATO courseware is marketed to middle and high schools, colleges, job training programs, correctional institutions, military education programs, corporations and consumers.

On March 30, 2000, the Company’s stockholders approved a change in the Company’s name from TRO Learning, Inc. to PLATO Learning, Inc.

Acquisition

On July 21, 2000, the Company acquired CyberEd, Inc. (“CyberEd”), a privately held Nevada corporation and provider of multimedia science courseware for high schools, for approximately $4,400 in cash, net of cash acquired. The acquisition was accounted for using the purchase method of accounting (see Note 2 to Consolidated Financial Statements). The results of operations for CyberEd have been included in the Company’s financial statements from the date of acquisition. These results are not material to the results of operations for the fourth quarter or the year ended October 31, 2000.

Divestiture

In September 1998, the Company sold its Aviation Training business (which marketed computer-based instructional systems to airlines worldwide for use by commercial airline pilots, maintenance crews and cabin personnel) to focus exclusively on its education business. To provide a more meaningful analysis of the Company’s results of operations, 1998 amounts exclude the revenues and expenses associated with Aviation Training.

21

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
             FINANCIAL CONDITION, Continued

(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS, Continued

      The following table presents statement of earnings amounts (excluding Aviation Training in 1998) as a percentage of revenue:

Revenues

The following table highlights revenues by product line:

In 2000, courseware and professional services revenue, the driver of the Company’s operations, increased $10,988 or 27% as compared to 1999. The Company continued to experience increased acceptance of its products and services in its various markets. This revenue growth was achieved primarily through increased sales volume to both new and existing customers. Total revenues for 2000 were $56,123, an increase of $11,988 from 1999.

Courseware and professional services revenue for 1999 increased $4,771 or 13% as compared to 1998. The Company experienced increased acceptance of its products and services in its various markets. Revenue growth was achieved primarily through increased sales volume to both new and existing customers. Total revenues for 1999 were $44,135, an increase of $4,750 from 1998.

22

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
             FINANCIAL CONDITION, Continued

(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS, Continued

Revenues, Continued

The Company’s quarterly operating results fluctuate as a result of a number of factors including the business and sales cycle, the amount and timing of new product introductions by the Company, client spending patterns, budget cycles and fiscal year ends, and promotional programs. The Company historically has experienced its lowest revenues in the first quarter and increasingly higher levels of revenues in each of the next three quarters.

Gross Profit

Gross profit for 2000 increased $10,846 or 28% to $49,629 as compared to $38,783 for 1999. This increase was due mainly to the increase in courseware and professional services revenue. Gross margin was a comparable 88% for both 2000 and 1999.

Gross profit for 1999 increased $3,683 or 10% to $38,783 as compared to $35,100 for 1998. This increase was primarily due to the increase in courseware and professional services revenue. Gross margin was 88% for 1999 as compared to 89% for 1998. The decrease resulted from a slight product mix shift.

Selling, General, and Administrative Expense

Selling, general, and administrative expense for 2000 increased $7,699 or 29% to $34,163 as compared to $26,464 for 1999. The increase resulted from infrastructure expansion, higher commissions due to increased revenues and incentive bonuses, which were not available in 1999. As a percentage of revenue, total selling, general and administrative expense increased from 60% in 1999 to 61% in 2000.

Selling, general, and administrative expense for 1999 increased $2,631 or 11% to $26,464 as compared to $23,833 for 1998. The increase was due to an increase in the provision for doubtful accounts of $1,356 and an increase in sales and marketing expenses of $976 due to increased revenues. As a percentage of revenue, total selling, general and administrative expense decreased slightly from 61% in 1998 to 60% in 1999.

23

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
             FINANCIAL CONDITION, Continued

(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS, Continued

Product Development and Customer Support Expense

Product development and customer support expense for 2000 increased $868 or 16% to $6,339 as compared to $5,471 for 1999. The increase was due primarily to increased spending associated with enhanced reading products, simulated test products and the PLATO Web Learning Network. In addition, customer support expense increased as a result of the Company’s expanding customer base. As a percentage of revenue, total product development and customer support expense decreased from 12% in 1999 to 11% in 2000.

Product development and customer support expense for 1999 increased $197 or 4% to $5,471 as compared to $5,274 for 1998. The increase was due primarily to increased spending associated with enhanced reading products. As a percentage of revenue, total product development and customer support expense decreased from 13% in 1998 to 12% in 1999.

Operating Profit

Operating profit for 2000 was $9,127 as compared to $6,848 for 1999. This improvement in operating results was due principally to the increase in courseware and professional services revenue, partially offset by increased selling, general and administrative expenses in 2000. Operating profit, as a percentage of revenue, increased slightly from 15.5% in 1999 to 16.2% in 2000.

Operating profit for 1999 was $6,848 as compared to $5,993 for 1998. This improvement in operating results was due principally to the increase in courseware and professional services revenue, partially offset by the increased sales and marketing and bad debt expenses in 1999. Operating profit, as a percentage of revenue, increased slightly from 15.2% in 1998 to 15.5% in 1999.

Interest Expense

Interest expense decreased to $971 for 2000 from $1,651 for 1999 primarily as a result of the decreased level of bank debt that resulted from cash flow from operations.

Interest expense decreased to $1,651 for 1999 from $2,217 for 1998 primarily as a result of the decreased level of bank borrowings and lower interest rates.

24

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
             FINANCIAL CONDITION, Continued

(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS, Continued

Income Taxes

The Company’s effective tax rate for 2000 was 39%. Income taxes for 1999 reflect a nonrecurring tax benefit of $10,000 resulting from the reversal of the valuation allowance placed on the Company’s deferred tax asset, related to its net operating loss carryforwards in the United States. This reversal was based on updated expectations about future years’ taxable income to reflect continuing improvements in operating results influenced by the Company’s continued revenue growth and other indications that certain concerns that had previously limited management’s expectation about future taxable income no longer were applicable.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of October 31, 2000, the Company’s principal sources of liquidity included cash and cash equivalents of $6,415, net accounts receivable of $21,829 and its line of credit. The Company had total installment receivables of $13,233 at October 31, 2000, of which $13,040 are to be billed within one year and are included in net accounts receivable. Working capital was $17,503 at October 31, 2000, an increase of $10,464 from October 31, 1999 due primarily to increased cash, accounts receivable, and deferred income taxes, and decreased short-term borrowings partially offset by increased accruals and deferred revenue.

Net cash provided by the Company’s operating activities was $14,248 in 2000 compared to $3,319 in 1999. Cash flows from operations were used principally to fund the Company’s working capital requirements and to reduce debt.

The Company’s net cash used in investing activities was $8,416 in 2000 and $3,563 in 1999. The acquisition of CyberEd, net of cash acquired, used $4,387 (see Note 2 to Consolidated Financial Statements). Capitalized product development costs were $2,932 in 2000 and $2,731 in 1999. The Company’s capital expenditures totaled $1,097 in 2000 and $832 in 1999. At October 31, 2000, the Company had no material commitments for capital expenditures.

The Company’s net cash provided by financing activities was $750 in 2000. The Company completed a private placement of common stock, resulting in net proceeds of $4,771 (see Note 8 to Consolidated Financial Statements), offset by the $4,587 of net repayments of short-term

25

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
             FINANCIAL CONDITION, Continued

FINANCIAL CONDITION, Continued

Liquidity and Capital Resources, Continued

borrowings. Net cash used in financing activities was $160 in 1999, which represents repayments of debt offset by the proceeds received from the issuance of convertible redeemable preferred stock (see Note 7 to Consolidated Financial Statements). The Company has resources available under its revolving loan agreement to provide up to a maximum $15,000 line of credit through February 26, 2002 (see Note 5 to Consolidated Financial Statements). At October 31, 2000, there were no borrowings outstanding and the Company’s unused borrowing capacity was $13,828.

Income taxes for 1999 reflect a nonrecurring tax benefit of $10,000 resulting from the reversal of the valuation allowance placed on the Company’s deferred tax asset, related to its net operating loss carryforwards in the United States. This reversal was based on updated expectations about future years’ taxable income to reflect continuing improvements in operating results influenced by the Company’s continued revenue growth and other indications that certain concerns that had previously limited management’s expectation about future taxable income no longer were applicable. In prior years, the primary differences between pretax earnings for financial reporting purposes and taxable income for income tax purposes included revenue recognition, the capitalization of product development costs and various reserves. The Company has total net operating loss carryforwards of approximately $30,500 which begin to expire in 2004.

From time to time, the Company evaluates potential acquisitions of products or businesses that complement the Company’s core business. The Company may consider and acquire other complementary businesses, products, or technologies in the future.

The Company maintains adequate cash reserves and credit facilities to meet its anticipated working capital, capital expenditure and business investment requirements.

Factors Affecting Quarterly Operating Results

The Company’s quarterly operating results fluctuate as a result of a number of factors including the business and sales cycle, the amount and timing of new product introductions by the Company, client spending patterns, budget cycles and fiscal year ends, and promotional programs. The Company historically has experienced its lowest revenues in the first quarter and increasingly higher levels of revenues in each of the next three quarters.

26

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
             FINANCIAL CONDITION, Continued

FINANCIAL CONDITION, Continued

New Accounting Standards

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) which, as amended by SFAS 137 and 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. This statement establishes a new model for accounting for derivatives and hedging activities. Under SFAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. The adoption of SFAS 133 in fiscal year 2001 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements”. SAB 101 provides guidance for revenue recognition under various circumstances. The accounting and disclosures prescribed by SAB 101 will be effective in the fourth quarter of the Company’s fiscal year 2001, and retroactive to the beginning of that fiscal year. The Company is reviewing the requirements of SAB 101 and has not yet determined the impact on its consolidated financial statements.

Year 2000

The Company began addressing the Year 2000 (Y2K) issue in early 1998 and developed and implemented a comprehensive Y2K readiness plan for the Company’s products and operations. As of January 1, 2001 the Company has not, nor to its knowledge have any of the Company’s key business partners, experienced any material Y2K complications. However, there can be no absolute assurance that the Company and its business partners will not experience some complications resulting from the Y2K issue in the future. The Company’s Y2K costs have not been material to its financial condition or results of operations.

27

Table of Contents

Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk:

The Company’s borrowing capacity primarily consists of a revolving loan with interest rates that fluctuate based upon market indexes. At October 31, 2000, the Company did not have any outstanding borrowings under this revolving loan. As a result, risk relating to interest fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk:

The Company markets its products worldwide and has operations in Canada and the United Kingdom. As a result, financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Working funds necessary to facilitate the short-term operations of foreign subsidiaries are kept in local currencies in which they do business. Approximately 9% of total revenues were denominated in currencies other than the U.S. dollar for fiscal year ended October 31, 2000.

CAUTIONARY STATEMENTS

As provided for in the Private Securities Litigation Reform Act of 1995, the Company cautions investors that a number of factors could cause actual future results of operations to vary from those anticipated in previously made forward-looking statements and any other forward-looking statements made in this document and elsewhere by or on behalf of the Company. Net revenues could be materially affected by products introduced by competitors with advanced technology and better features and benefits or lower prices or government funding priorities. Operations could be affected by the Company’s ability to execute its diversification strategy or to integrate acquired companies.

28

Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page

29

Table of Contents

Report of Management

The management of PLATO Learning, Inc. is responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts which reflect management’s best estimates based on its informed judgment and consideration given to materiality. Management is also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements.

In the opinion of management, the Company’s accounting systems and procedures, and related internal controls, provide reasonable assurance that transactions are executed in accordance with management’s intention and authorization, that financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom. Management reviews and modifies the system of internal controls to improve its effectiveness. The effectiveness of the controls system is supported by the selection, retention and training of qualified personnel, an organizational structure that provides an appropriate division of responsibility and a budgeting system of control.

The adequacy of the Company’s internal accounting controls, the accounting principles employed in its financial reporting and the scope of independent audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of outside directors. The independent accountants meet with, and have confidential access to, the Audit Committee to discuss the results of their audit work.

John Murray
President and Chief Executive Officer

John M. Buske
Vice President Finance and
Chief Financial Officer

Report of Independent Accountants

To the Stockholders and
Board of Directors of
PLATO Learning, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of stockholders’ equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of PLATO Learning, Inc. and its subsidiaries at October 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
December 5, 2000

30

Table of Contents

See Notes to Consolidated Financial Statements

31

Table of Contents

See Notes to Consolidated Financial Statements

32

Table of Contents