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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM .................... TO ....................
COMMISSION FILE NUMBER: 0-22187
RENAISSANCE LEARNING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1559474
(STATE OR OTHER (IRS EMPLOYER
JURISDICTION OF INCORPORATION) IDENTIFICATION NO.)
PO BOX 8036
2911 PEACH STREET
WISCONSIN RAPIDS, WISCONSIN
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
54495-8036
(ZIP CODE)
(715) 424-3636
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OCTOBER 31, 2002
----- ----------------
Common Stock, $0.01 par value 32,621,966
RENAISSANCE LEARNING, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS ------
Condensed Consolidated Balance Sheets at September 30, 2002
and December 31, 2001.......................................................... 1
Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 2002 and 2001.................................................... 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001....................................... 3
Notes to Unaudited Condensed Consolidated Financial Statements.......................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................ 13
ITEM 4. CONTROLS AND PROCEDURES ............................................................... 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................................... 14
- Index -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,688 $ 35,904
Investment securities 58,852 49,288
Accounts receivable, less allowance of
$1,490 in 2002 and $1,723 in 2001 15,080 12,397
Inventories 1,788 1,648
Prepaid expenses 761 1,063
Deferred tax asset 3,702 3,606
Other current assets 1,527 1,312
------------------ ------------------
Total current assets 102,398 105,218
Investment securities 25,629 24,364
Property, plant and equipment, net 21,765 23,007
Deferred tax asset 2,131 2,238
Goodwill 2,313 2,313
Other intangibles, net 1,009 1,412
Capitalized software, net 752 506
Other non-current assets 270 903
------------------ ------------------
Total assets $ 156,267 $ 159,961
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,816 $ 2,769
Deferred revenue 8,810 7,184
Payroll and employee benefits 4,492 3,845
Income taxes payable 2,223 4,196
Other current liabilities 4,980 4,143
------------------ ------------------
Total current liabilities 25,321 22,137
Deferred revenue 1,017 1,097
------------------ ------------------
Total liabilities 26,338 23,234
Minority interest 156 196
Shareholders' equity
Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,200 -Sept. 30, 2002 34,617,861 -Dec. 31, 2001 347 346
Additional paid-in capital 54,416 51,702
Retained earnings 108,890 84,618
Accumulated other comprehensive income (loss) (95) 190
Treasury stock, at cost (1,892,482 shares - Sept. 30, 2002
25,100 shares - Dec. 31, 2001) (33,785) (325)
------------------ ------------------
Total shareholders' equity 129,773 136,531
------------------ ------------------
Total liabilities and shareholders' equity $ 156,267 $ 159,961
================== ==================
See accompanying notes to condensed consolidated financial statements.
- 1 -
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
--------------- -------------- -------------- --------------
Net sales:
Products $ 26,201 $ 29,695 $ 84,132 $ 82,579
Services 6,227 6,856 16,206 16,819
-------- -------- -------- --------
Total net sales 32,428 36,551 100,338 99,398
-------- -------- -------- --------
Cost of sales:
Products 3,108 4,178 8,936 11,488
Services 2,411 2,488 7,446 7,842
-------- -------- -------- --------
Total cost of sales 5,519 6,666 16,382 19,330
-------- -------- -------- --------
Gross profit 26,909 29,885 83,956 80,068
Operating expenses:
Product development 4,234 4,388 12,861 13,278
Selling and marketing 7,740 7,213 23,713 22,639
General and administrative 3,286 3,447 10,721 10,565
-------- -------- -------- --------
Total operating expenses 15,260 15,048 47,295 46,482
-------- -------- -------- --------
Operating income 11,649 14,837 36,661 33,586
Other income:
Interest income 807 1,004 2,549 2,978
Other, net 87 8 391 179
-------- -------- -------- --------
Income before taxes 12,543 15,849 39,601 36,743
Income tax provision 4,829 6,118 15,329 14,162
-------- -------- -------- --------
Net income $ 7,714 $ 9,731 $ 24,272 $ 22,581
======== ======== ======== ========
Basic earnings per common share $ 0.23 $ 0.28 $ 0.71 $ 0.65
Diluted earnings per common share $ 0.23 $ 0.28 $ 0.70 $ 0.65
See accompanying notes to condensed consolidated financial statements.
- 2 -
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
----------------- -----------------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 24,272 $ 22,581
Noncash (income) expenses included in net income -
Depreciation and amortization 3,505 4,266
Deferred income taxes 12 (19)
Change in assets and liabilities -
Accounts receivable (2,683) (4,804)
Inventories (140) 381
Prepaid expenses 301 103
Accounts payable and other current liabilities 1,516 6,687
Deferred revenue 1,545 731
Other current assets (215) (384)
Other 343 (110)
-------- --------
Net cash provided by operating activities 28,456 29,432
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,481) (1,948)
Purchase of investment securities, net (10,829) (21,776)
Capitalized software development costs (659) (474)
Acquisitions - (704)
-------- --------
Net cash used in investing activities (12,969) (24,902)
-------- --------
Cash flows provided by financing activities:
Proceeds from issuance of stock 1,066 815
Proceeds from exercise of stock options 1,271 2,879
Purchase of treasury stock (33,040) -
-------- --------
Net cash provided by (used in) financing activities (30,703) 3,694
-------- --------
Net increase (decrease) in cash (15,216) 8,224
Cash and cash equivalents, beginning of period 35,904 24,655
-------- --------
Cash and cash equivalents, end of period $ 20,688 $ 32,879
======== ========
See accompanying notes to condensed consolidated financial statements.
- 3 -
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATION
The condensed consolidated financial statements include the financial
results of Renaissance Learning, Inc. ("Renaissance Learning") and our
subsidiaries. Our significant subsidiaries include Renaissance Corporate
Services, Inc. and Generation21 Learning Systems, LLC ("Generation21"). School
Renaissance Institute, Inc., formerly a wholly-owned subsidiary of Renaissance
Learning, was merged into Renaissance Learning on December 31, 2001, and is
currently doing business under the name Renaissance Learning Madison. All
significant intercompany transactions have been eliminated in the condensed
consolidated financial statements.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
In the opinion of management of Renaissance Learning, the condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair presentation of the
results of the interim periods, and are presented on an unaudited basis. These
financial statements should be read in conjunction with the financial
information contained in our Annual Report on Form 10-K for the year ended
December 31, 2001, which is on file with the U.S. Securities and Exchange
Commission.
The results of operations for the three and nine month periods ended
September 30, 2002 and 2001 are not necessarily indicative of the results to be
expected for the full year.
3. EARNINGS PER COMMON SHARE
Basic earnings per common share has been computed based on the weighted
average number of common shares outstanding. Diluted earnings per common share
has been computed based on the weighted average number of common shares
outstanding, increased by the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
On April 17, 2002, our Board of Directors authorized a new repurchase
program which provides for the repurchase of up to 5,000,000 shares of our
common stock. No time limit was placed on the duration of the repurchase
program. Repurchased shares will become treasury shares and will be used for
stock-based employee benefit plans and for other general corporate purposes.
As of June 30, 2002, we had repurchased 25,100 shares under a previous
repurchase program. During the period of July 1, 2002 through September 30,
2002, we repurchased 1,867,382 shares at a cost of $33,460,000 under the current
repurchase program.
The weighted average shares outstanding during the three months and
nine months ended September 30, 2002 and 2001 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
---------------- ---------------- --------------- -----------------
Basic Weighted Average Shares 33,713,607 34,555,210 34,342,561 34,492,460
Impact of Stock Options 108,609 417,904 214,039 369,422
Diluted Weighted Average Shares 33,822,216 34,973,114 34,556,600 34,861,882
- 4 -
4. SEGMENT REPORTING
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. We have two
reportable segments: software and training.
The software segment produces learning information system software for
the K-12 school market in the United States, Canada, the United Kingdom and
Australia. The software assists educators in assessing and monitoring student
development by increasing the quantity, quality and timeliness of student
performance data in the areas of reading, math and writing. The software segment
also includes training and knowledge management enterprise software, which is
currently sold primarily to corporate customers, and electronic assessment
products and services sold to educational publishers. Revenue from the software
segment includes product revenue principally from the sale of software, product
revenue from scanners sold with software and sold separately, and service
revenue from the sale of software support agreements.
The training segment provides professional development seminars and
school improvement programs including training, consulting and educator resource
materials. The training programs instruct educators on how to accelerate
learning in the classroom through use of the information that our learning
information systems provide. Revenue from the training segment includes service
revenue from a variety of seminars presented in hotels and schools across the
country, consulting, the annual National Renaissance Conference, and product
revenue from the sale of training materials.
We evaluate the performance of our operating segments based on
operating income. Intersegment sales and transfers and revenue derived outside
of the United States are not significant. Summarized financial information
concerning our reportable segments is shown in the following table:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
(In thousands)
Revenues:
Software $ 27,500 $ 30,571 $ 87,059 $ 85,396
Training 4,928 5,980 13,279 14,002
--------------- -------------- --------------- ---------------
Total revenues $ 32,428 $ 36,551 $ 100,338 $ 99,398
=============== ============== =============== ===============
Operating income (loss):
Software $ 11,624 $ 13,433 $ 38,277 $ 34,219
Training 25 1,404 (1,616) (633)
--------------- -------------- --------------- ---------------
Total operating income $ 11,649 $ 14,837 $ 36,661 $ 33,586
=============== ============== =============== ===============
The reported measures are consistent with those used in measuring
amounts in the condensed consolidated financial statements. It is our opinion,
however, that because many synergistic benefits between the segments cannot be
precisely quantified, this information provides an incomplete measure of the
training segment operating profit or loss, and should not be viewed in
isolation. We evaluate the performance of the training segment based on many
factors not captured by the financial accounting system and often evaluate our
financial performance on a total entity basis.
5. COMPREHENSIVE INCOME
Total comprehensive income was $23,987,000 and $22,898,000 in the first
nine months of 2002 and 2001, respectively. For the quarters ended September 30,
2002 and 2001, comprehensive income was $7,681,000 and $9,805,000 respectively.
On January 1, 2002, we reclassified our investment securities to
held-to-maturity from available-for-sale and have amortized the unrealized gains
and losses as allowed by SFAS No. 115. This reclassification of our investments
had no impact on our reported net income for any of the periods presented. Our
comprehensive income for 2002 includes foreign currency translation adjustments
and the amortization of unrealized investment gains and losses during the
periods presented. Our comprehensive income for 2001 includes foreign currency
translation adjustments and unrealized gains and losses on available-for-sale
securities.
- 5 -
6. GOODWILL AND OTHER INTANGIBLE ASSETS
On June 30, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and
Other Intangible Assets". Under this new standard, goodwill acquired after June
30, 2001 is not amortized over its useful life and starting January 1, 2002,
amortization expense is no longer recorded for goodwill acquired on or before
June 30, 2001. SFAS 142 requires that goodwill be assessed at least annually for
impairment by applying a fair-value-based test.
We adopted the provisions of SFAS No. 142 effective January 1, 2002.
Assembled workforce does not meet the criteria of SFAS No. 142 for recognition
apart from goodwill, therefore, as of January 1, 2002, we reclassified the
$441,000 unamortized balance of assembled workforce to goodwill. SFAS 142
requires that a new fair-market-value test be applied to determine if goodwill
and other intangible assets with indefinite lives are impaired based on their
values as of January 1, 2002. We completed this testing in the first quarter of
2002 and found no instances of impairment of our recorded goodwill. All of our
goodwill and other intangible assets are assigned to our software segment.
In accordance with SFAS No. 142, the effect of this accounting change
is reflected prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the three months and the nine months ended
September 30, 2001 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------- ------------- -------------- --------------
(In thousands) (In thousands)
Net income:
Reported net income $ 7,714 $ 9,731 $ 24,272 $ 22,581
Goodwill amortization, net of tax - 86 - 259
-------------- ------------- -------------- --------------
Adjusted net income $ 7,714 $ 9,817 $ 24,272 $ 22,840
============== ============= ============== ==============
Adjusted Earnings per share:
Basic 0.23 0.28 0.71 0.66
Diluted 0.23 0.28 0.70 0.66
For the three months ended September 30, 2002, we recognized
amortization expense of $134,000 on other intangibles with finite lives. No
goodwill or other intangibles were acquired or impaired during the third quarter
of 2002. During the first quarter of 2002, we retired a $210,000 trade name
intangible which was fully amortized. Other intangibles with finite lives are
scheduled to be fully amortized by 2006 with corresponding amortization
estimated to be $134,000, $396,000, $286,000, and $193,000, for the remainder of
2002 and the years ended 2003, 2004, and 2005, respectively. Other intangibles
consisted of the following (in thousands):
September 30, 2002 December 31, 2001
--------------------------------------- -----------------------------------------
Gross Other Gross Other
Carrying Accumulated Intangibles Carrying Accumulated Intangibles
Amount Amortization Net Amount Amortization Net
------------ ----------- ----------- ------------ ------------ -------------
Algorithms and software code $ 2,124 $ 1,803 $ 321 $ 2,124 $ 1,565 $ 559
Trade name - - - 210 210 -
Non-compete agreement 1,100 412 688 1,100 247 853
------------ ----------- ----------- ------------ ------------ -------------
Other intangibles $ 3,224 $ 2,215 $ 1,009 $ 3,434 $ 2,022 $ 1,412
============ =========== =========== ============ ============ =============
- 6 -
7. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires entities to recognize the fair value of
a liability for legal obligations associated with the retirement of tangible
long-lived assets in the period incurred, if a reasonable estimate of the fair
value can be made.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of.
Under SFAS No. 144, the presentation of discontinued operations is broadened to
include a component of an entity rather than being limited to a segment of a
business. Also, accrual of future operating losses of discontinued businesses
will no longer be permitted. We were required to adopt SFAS No. 144 on January
1, 2002. The adoption had no impact on our financial position, results of
operations or shareholders' equity.
In July 2002, the FASB issued SFAS No. 146, " Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting associated with exit or disposal activities. Under SFAS
No. 146, costs associated with an exit or disposal activity shall be recognized
and measured at their fair value in the period in which the liability is
incurred rather than at the date of a commitment to an exit or disposal plan.
We are required to adopt SFAS No. 143 on January 1, 2003 and SFAS No.
146 for all exit and disposal activities initiated after December 31, 2002. We
are currently evaluating the provisions of these recent pronouncements, but we
believe there will be no material effect on our financial position, results of
operations or shareholders' equity resulting from their adoption.
- 7 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth certain consolidated income statement
data as a percentage of net sales, except that individual components of costs of
sales and gross profit are shown as a percentage of their corresponding
component of net sales:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Net Sales:
Products 80.8% 81.2% 83.8% 83.1%
Services 19.2 18.8 16.2 16.9
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of sales:
Products 11.9% 14.1% 10.6% 13.9%
Services 38.7 36.3 45.9 46.6
Total cost of sales 17.0 18.2 16.3 19.4
Gross profit:
Products 88.1 85.9 89.4 86.1
Services 61.3 63.7 54.1 53.4
Total gross profit 83.0 81.8 83.7 80.6
Operating expenses:
Product development 13.1 12.0 12.8 13.4
Selling and marketing 23.9 19.8 23.6 22.8
General and administrative 10.1 9.4 10.7 10.6
----- ----- ----- -----
Total operating expenses 47.1 41.2 47.1 46.8
----- ----- ----- -----
Operating income 35.9 40.6 36.6 33.8
Other income:
Interest income 2.5 2.7 2.5 3.0
Other, net 0.3 0.0 0.4 0.2
----- ----- ----- -----
Total other income 2.8 2.7 2.9 3.2
----- ----- ----- -----
Income before taxes 38.7 43.3 39.5 37.0
Income tax provision 14.9 16.7 15.3 14.3
----- ----- ----- -----
Net income 23.8% 26.6% 24.2% 22.7%
===== ===== ===== =====
- 8 -
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Sales. Our net sales decreased by $4.1 million, or 11.3%, to $32.4
million in the third quarter of 2002 from $36.6 million in the third quarter of
2001. Product sales decreased by $3.5 million, or 11.8%, to $26.2 million in the
third quarter of 2002 from $29.7 million in the third quarter of 2001. Sales
declined for every core learning information system product, including
Accelerated Reader(R) and Accelerated Math(R), and each of our STAR assessment
products. Third quarter of 2001 reflected higher sales of STAR Early Literacy(R)
because it was the first full quarter for shipment of this product. Our sales of
electronic assessment products to textbook publishers also declined in the third
quarter of 2002 compared to 2001. New product sales, consisting of Accelerated
Writer(TM), MathFacts in a Flash(TM), Fluent Reader(TM), Accelerated
Vocabulary(TM), AccelTest(TM), and StandardsMaster(TM), partially offset these
declines during the quarter.
Service revenue, which consists primarily of revenue from sales of
training, consulting, and software support agreements, decreased by $629,000, or
9.2%, to $6.2 million in the third quarter of 2002 from $6.9 million in the
third quarter of 2001. This decrease is attributable to our training business,
where seminar revenue declined by 19% over the third quarter 2001 level.
Software support service revenues increased by over 14% in the third quarter
2002 compared to 2001 due to an increased number of support plans in place over
the previous year.
We expect that fourth quarter 2002 and first quarter 2003 revenue will
be down from the respective quarters of the prior years. The economic downturn
has continued to put pressure on state education budgets and funding for K-12
schools. Many of our customers are dealing with budget cuts or uncertainty over
budget levels. Accordingly, school spending remains down from last year and we
do not expect a quick turnaround. Also, federal funds appear to be slow in
reaching schools.
Cost of Sales. The cost of sales of products decreased by $1.1 million,
or 25.6%, to $3.1 million in the third quarter of 2002 from $4.2 million in the
third quarter of 2001. As a percentage of product sales, the cost of sales of
products decreased to 11.9% in the third quarter of 2002 from 14.1% in the third
quarter of 2001. The decrease in the product cost of sales percentage is
primarily due to higher margins from the newly re-engineered version of the
AccelScan(R) scanner, which we started shipping in the fourth quarter of 2001.
The cost of sales of services decreased by $77,000, or 3.1%, to $2.4
million in the third quarter of 2002 from $2.5 million in the third quarter of
2001. As a percentage of sales of services, the cost of sales of services
increased to 38.7% in the third quarter of 2002 from 36.3% in the third quarter
of 2001. Lower attendance at our scheduled training events was the primary
reason for this percentage increase in the cost of sales of services.
Our overall gross profit margin increased to 83.0% in the third quarter
of 2002 from 81.8% in the third quarter of 2001. The increase is primarily due
to the improved margin on our AccelScan(R) scanner.
Product Development. Product development expenses decreased by
$154,000, or 3.5%, to $4.2 million in the third quarter of 2002 from $4.4
million in the third quarter of 2001. As a percentage of net sales, product
development costs increased to 13.1% in the third quarter of 2002 from 12.0% in
the third quarter of 2001. We expect spending for product development to remain
relatively flat in the near term as we continue to invest in product development
efforts including: new software and training products, enhanced versions of
existing products and new content for our software products, such as reading
quizzes for Accelerated Reader(R) and libraries for Accelerated Math(R).
Selling and Marketing. Selling and marketing expenses increased by
$527,000, or 7.3%, to $7.7 million in the third quarter of 2002 from $7.2
million in the third quarter of 2001. These expenses increased primarily due to
a more aggressive sales and marketing plan including: (i) increased costs of
selling at the district level, (ii) costs of advertising of our recently
released products, (iii) increased wages and related benefit costs associated
with additional personnel to support our expanded product line and to identify
and pursue state and federal educational funding opportunities. As a percentage
of net sales, selling and marketing expenses increased to 23.9% in the third
quarter of 2002 from 19.8% in the third quarter of 2001. We intend to continue
to be aggressive with a variety of sales and marketing initiatives to stimulate
leads and orders.
-9-
General and Administrative. General and administrative expenses
decreased by $161,000, or 4.7%, to $3.3 million in the third quarter of 2002
from $3.4 million in the third quarter of 2001. As a percentage of net sales,
general and administrative costs increased to 10.1% in the third quarter of 2002
from 9.4% in the third quarter of 2001. The decline in sales was the primary
factor in increasing general and administrative costs as a percentage of sales.
Operating Income. Operating income decreased by $3.2 million to $11.6
million in the third quarter of 2002 from $14.8 million in the third quarter of
2001. As a percentage of net sales, operating income decreased to 35.9% in the
third quarter of 2002 from 40.6% in the third quarter of 2001.
Income Tax Expense. Income tax expense of $4.8 million was recorded in
the third quarter of 2002 at an effective income tax rate of 38.5% of pre-tax
income compared to $6.1 million, or 38.6% of pre-tax income in the third quarter
of 2001. We expect to maintain our effective tax rate at or below 39% through
2002.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net Sales. Our net sales increased by $940,000, or 0.9%, to $100.3
million in the nine months ended September 30, 2002 from $99.4 million in the
first nine months of 2001. Product sales increased by $1.6 million, or 1.9%, to
$84.1 million in the first nine months of 2002 from $82.6 million in the same
period of 2001. The increase in product sales is primarily attributable to (i)
increased sales of Accelerated Reader(R) quizzes, with over 59,000 available
book titles, to a larger base of Accelerated Reader(R) schools, (ii) sales of
our new products including Accelerated Writer(TM), MathFacts in a Flash(TM),
Fluent Reader(TM), Accelerated Vocabulary(TM), AccelTest(TM), and
StandardsMaster(TM), (iii) increased sales of STAR Early Literacy(R) software,
and (iv) increased sales of our Accelerated Math(R) products, including
follow-on sales of subject libraries and AccelScan(R) scanners.
Service revenue decreased by $613,000, or 3.6%, to $16.2 million in the
first nine months of 2002 from $16.8 million in the same period in 2001. This
decrease is attributable to our training business, where seminar revenue
declined by 13% from the 2001 level. Software support service revenues increased
by over 17% in the first nine months of 2002 compared to 2001 mainly due to an
increased number of support plans in place.
Revenues for the fourth quarter 2002 and the first quarter 2003 are
expected to be down versus the comparative prior year period. We expect that by
midyear 2003, we can achieve positive growth rates, leading to modest full year
2003 growth in sales over 2002 levels, due to the impact of our recently
introduced products and an increase in district level sales.
Cost of Sales. The cost of sales of products decreased by $2.6 million,
or 22.2%, to $8.9 million in the first nine months of 2002 from $11.5 million in
the first nine months of 2001. As a percentage of product sales, the cost of
sales of products decreased to 10.6% in the first nine months of 2002 from 13.9%
in the first nine months of 2001. This decrease is primarily due to the improved
margin on our newly re-engineered AccelScan(R) scanners.
The cost of sales of services decreased by $396,000, or 5.0%, to $7.4
million in the first nine months of 2002 from $7.8 million in the same period in
2001. As a percentage of service sales, the cost of sales of services decreased
to 45.9% in the first nine months of 2002 from 46.6% in the first nine months of
2001. This decrease is primarily due to increased software support revenues
while the related costs remained relatively constant. Our overall gross profit
margin improved to 83.7% in the first nine months of 2002 from 80.6% in the
first nine months of 2001. The increase is primarily due to the improved margin
on our AccelScan(R) scanner.
Product Development. Product development expenses decreased by
$417,000, or 3.1%, to $12.9 million in the nine months ended September 30, 2002
as compared to $13.3 million in the corresponding 2001 period. As a percentage
of net sales, product development costs decreased to 12.8% in the first nine
months of 2002 from 13.4% in the first nine months of 2001. We expect product
development costs to remain relatively flat in the near term.
-10-
Selling and Marketing. Selling and marketing expenses increased by $1.1
million, or 4.7%, to $23.7 million in the first nine months of 2002 from $22.6
million in the first nine months of 2001. These expenses increased primarily due
to (i) increased costs of selling at the district level, and (ii) increased
wages and related benefit costs associated with additional personnel to support
our expanded product line and to identify and pursue state and federal
educational funding opportunities. As a percentage of net sales, selling and
marketing expenses increased to 23.6% in the first nine months of 2002 from
22.8% in the first nine months of 2001.
General and Administrative. General and administrative expenses
increased by $156,000, or 1.5%, to $10.7 million in the nine months ended
September 30, 2002 from $10.6 million in the same period in 2001. The higher
expenses for 2002 are primarily due to increased wages and related benefit
costs. As a percentage of net sales, general and administrative costs increased
to 10.7% in the first nine months of 2002 from 10.6% in the first nine months of
2001.
Operating Income. Operating income increased by $3.1 million, or 9.2%,
to $36.7 million in the first nine months of 2002 from $33.6 million in the same
period in 2001. As a percentage of net sales, operating income increased to
36.6% in the first nine months of 2002 from 33.8% in the first nine months of
2001.
Income Tax Expense. Income tax expense of $15.3 million was recorded in
the first nine months of 2002 at an effective income tax rate of 38.7% of
pre-tax income compared to $14.2 million, or 38.5% of pre-tax income in the
first nine months of 2001. We expect to maintain our effective tax rate at or
below 39% through 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, our cash, cash equivalents and investment
securities were $105.2 million, down from the December 31, 2001 total of $109.6
million. The change is primarily due to $28.5 million in cash provided by
operating activities offset by our stock repurchases of $33.0 million. We
believe our strong cash position coupled with cash flow from operations will be
sufficient to meet both our short-term and long-term working capital
requirements.
At September 30, 2002, we had a $15.0 million unsecured revolving line
of credit with a bank, which is available until March 31, 2004. The line of
credit bears interest at either a floating rate based on the prime rate less
1.0%, or a fixed rate for a period of up to 90 days based on LIBOR plus 1.25%.
The rate is at our option and is determined at the time of borrowing. We also
have a $2.0 million unsecured revolving line of credit with a bank, which is
available until January 31, 2003. The line of credit bears interest based on the
prime rate less 1.0%. As of September 30, 2002, the lines of credit had not been
used.
On April 17, 2002, our Board of Directors authorized the repurchase of
up to 5,000,000 shares of our common stock. No time limit was placed on the
duration of the repurchase program. Repurchased shares will become treasury
shares and will be used for stock-based employee benefit plans and for other
general corporate purposes. During the period of July 1, 2002 through September
30, 2002 we repurchased 1,867,382 shares at a cost of $33,460,000. Subsequently,
during the period of October 1, 2002 through October 31, 2002, we repurchased
221,752 shares at a cost of $3,449,000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
We have not made any changes in estimates or assumptions since December 31, 2001
that had a significant effect on the reported amounts. We believe the following
are the critical accounting policies that could have the most significant effect
on our reported results and that require the most subjective estimates by
management.
-11-
Revenue Recognition. We recognize revenue in accordance with Statement
of Position No. 97-2 "Software Revenue Recognition" issued by the Accounting
Standards Executive Committee of the AICPA. Under this accounting standard,
revenue is recognized when the following have occurred: persuasive evidence of
an arrangement exists, product delivery and acceptance has occurred or a service
has been rendered, pricing is fixed and determinable, and collectibility is
probable. Revenue is recognized as follows: (i) at the time of shipment to
customers for off-the-shelf software products and related telephone support with
a duration of 12 months or less sold with the product, (ii) on the percentage of
completion basis for custom software products, (iii) as seminars are performed
for training, (iv) straight-line over the term of the support agreement for
separately sold software support agreements, and (v) as the service is performed
or on a straight-line basis over the contractual period for consulting services.
Accordingly, management is required to make judgements as to whether pricing is
fixed and determinable, whether collectibility is reasonably assured and what
the percentage of completion is as of the financial reporting date for custom
software products.
Expenses are recognized and matched against revenues for the reporting
period presented in the financial statements. We record accruals for sales
returns and doubtful accounts at the time of revenue recognition based upon
historical experience. Changes in such allowances may be required if future
returns or bad debt activity differs from historical experience.
Impairment of Long-Lived Assets. We evaluate the recoverability of the
carrying amount of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. We
evaluate the recoverability of goodwill and other intangible assets with
indefinite useful lives annually or more frequently if events or circumstances
indicate that an asset might be impaired. Management uses judgement when
applying impairment rules to determine when an impairment test is necessary.
Examples of factors which could trigger an impairment review include a
significant decrease in the market value of an asset, a significant change in
the extent or manner in which an asset is used, and significant adverse changes
in legal factors or the business climate that impact the value of an asset.
Impairment losses are measured as the amount by which the carrying
value of an asset exceeds its estimated fair value. We are required to make
estimates of future cash flows related to the asset subject to review. These
forecasts require assumptions about demand for our products and services, future
market conditions and technological developments. Other assumptions include
determining the discount rate and future growth rates. Changes to these
assumptions could result in an impairment charge in future periods.
Software Support Agreements. We record a liability for the estimated
cost of software support obligations at the time of sale to customers based upon
historical cost experience of providing telephone support. Adjustments to the
software support liability may be required if actual costs differ from our
estimates.
Software Development Costs. We capitalize certain software development
costs incurred after technological feasibility is achieved. Capitalized software
development costs are amortized on a product-by-product basis using the
straight-line method over the estimated economic life of the products, which is
generally estimated to be 24 months. Amortization begins when the products are
available for general release to customers. If the actual economic life of our
products is shorter than our estimates, it could result in an impairment charge
in future periods.
Taxes. At the end of each interim reporting period, we estimate the
effective income tax rate expected to be applicable for the full fiscal year.
The estimated effective income tax rate contemplates the expected jurisdiction
where income is earned (e.g., United States compared to non-United States) as
well as tax planning strategies. If the actual distribution of taxable income by
jurisdiction varies from our expectations or if the results of tax planning
strategies are different from our estimates, adjustments to the effective income
tax rate may be required in the period such determination is made.
We record a liability for potential tax assessments based on our
estimate of the potential exposure. Due to the subjectivity and complex nature
of the underlying issues, actual payments or assessments may differ from
estimates and require tax provision adjustments.
-12-
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of
1995, we can obtain a "safe-harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ materially from those in the forward-looking statements. Accordingly, the
foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains certain forward-looking statements relating to
growth plans, projected sales, revenues, earnings and costs, and product
development schedules and plans. Our actual results may differ materially from
those contained in the forward-looking statements herein. Factors which may
cause such a difference to occur include (i) a delay or reduction in school
purchases of our products due to state budgetary constraints resulting in a
reduction in the funds available to schools and (ii) those factors identified in
Item 1, Business, Forward-Looking Statements, contained in our Form 10-K for the
year ended December 31, 2001, which factors are incorporated herein by reference
to such Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our exposure to market interest rate risk consists
of: (i) the increase or decrease in the amount of interest income we can earn on
our investment portfolio, and (ii) the decrease or increase in value of our
investment security portfolio if market interest rates increase or decrease,
respectively. We anticipate that we will have sufficient liquidity to hold our
investments to maturity, therefore, we do not expect to recognize any material
losses or gains related to an increase or decrease in market interest rates.
Market Risk. Our exposure to market risk relates to the quality of the
holdings in our investment security portfolio. The fair market value of our
investments is subject to increases or decreases in value resulting from the
performance of the securities issuer and from upgrades or downgrades in the
credit worthiness of the securities issuer. We seek to manage our exposure to
market risk by investing according to our board-approved investment policy which
has the following goals: (i) preservation of capital, (ii) provision of adequate
liquidity to meet projected cash requirements, (iii) minimization of risk of
principal loss through diversified short and medium term investments, and (iv)
maximization of yields in relationship to the guidelines, risk, market
conditions and tax considerations.
Our investment policy specifically defines that our investments (i)
have a maximum maturity of 36 months or less, (ii) meet a minimum portfolio
liquidity requirement that 10% of the portfolio shall be available on 30 days
notice and not more than 30% of the portfolio will have a maturity in excess of
24 months, (iii) meet minimum credit quality requirements specified in the plan
based on the type of investment, (iv) meet the concentration limit of not more
than 10% in any one issuer other than the US Treasury or its agencies, or money
market funds, and (v) meet certain maximum maturity or tender option limits
based on its minimum credit rating. As of September 30, 2002 our investment
securities had a market value of approximately $84,962,000 and a carrying value
of $84,481,000.
Our investment policy parameters preclude investment in equity
securities and require that the Board of Directors review the policy annually
and on an interim basis as required.
Foreign Currency Exchange Rate Risk. The financial position and results
of operations of our foreign subsidiaries are measured using local currency.
Revenues and expenses of such subsidiaries have been translated into U.S.
dollars at average exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange at the balance sheet
date. Translation gains or losses are deferred as a separate component of
shareholders' equity. Aggregate foreign currency transaction gains and losses
are included in determining net income. As such, our operating results are
affected by fluctuations in the value of the U.S. dollar compared to the
Australian dollar, British pound, Canadian dollar, and Indian Rupee. At this
time, foreign operations are not significant.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the design and operation
of our disclosure controls and procedures within 90 days before the filing date
of this quarterly report. Based on that evaluation, management, including the
CEO and CFO, concluded that our disclosure controls and procedures are adequate
and effective. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the evaluation, including any corrective actions with regard to significant
deficiencies or material weaknesses.
-13-
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
99.1 Section 906 certification by Terrance D. Paul
99.2 Section 906 certification by Steven A. Schmidt
(b) Forms 8-K. The following Form 8-K filings were made during the three months
ended September 30, 2002:
1. Form 8-K dated August 7, 2002 (filed on August 8, 2002)
Announcement of certain executive management changes.
2. Form 8-K dated September 25, 2002 (filed on September 25,
2002). Press release of third quarter preliminary results.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENAISSANCE LEARNING, INC.
(Registrant)
November 5, 2002 /s/ Terrance D. Paul
--------------------- ------------------------------
Date Terrance D. Paul
Chief Executive Officer
(Principal Executive Officer)
November 5, 2002 /s/ Steven A. Schmidt
--------------------- ------------------------------
Date Steven A. Schmidt
Secretary, Vice President, and Chief
Financial Officer
(Principal Financial and Accounting Officer)
SECTION 302 CERTIFICATION OF PERIODIC REPORT
I, Terrance D. Paul, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Renaissance Learning,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002
-------------------------
/s/ Terrance D. Paul
-----------------------------------
Terrance D. Paul
Chief Executive Officer
SECTION 302 CERTIFICATION OF PERIODIC REPORT
I, Steven A. Schmidt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Renaissance Learning,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002
----------------------
/s/Steven A. Schmidt
-----------------------------------------------------
Steven A. Schmidt
Chief Financial Officer, Secretary and Vice President
Index to Exhibits
Exhibit No. Description
- ----------- -----------
99.1 Section 906 certification by Terrance D. Paul
99.2 Section 906 certification by Steven A. Schmidt