Renaissance Learning (RLRN) 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2007.

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934FOR 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	(I.R.S. Employer
jurisdiction of incorporation)	Identification No.)

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

54495-8036
(Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filero      Accelerated filerþ      Non-accelerated filero

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

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, 2007
Common Stock, $0.01 par value	29,033,003

RENAISSANCE LEARNING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2007 and December 31, 2006		1
	Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2007 and 2006		2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		6
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		10
Item 4.	Controls and Procedures		11
PART II — OTHER INFORMATION
Item 1A.	Risk Factors		12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		12
Item 6.	Exhibits		13
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

-Index-

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,			December 31,
	2007			2006
	(In Thousands, Except Share and Per
	Share Amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	6,301		$	5,953
Investment securities		3,116			22,525
Accounts receivable, less allowance of $1,100 and $1,133, respectively		15,699			10,528
Inventories		5,667			4,108
Prepaid expenses		2,151			1,896
Income taxes receivable		2,272			1,291
Deferred tax asset		3,602			3,596
Other current assets		288			97
Total current assets		39,096			49,994
Investment securities		8,690			1,625
Property, plant and equipment, net		11,144			11,811
Deferred tax asset		288			—
Goodwill		47,058			46,973
Other intangibles, net		5,702			6,124
Capitalized software, net		540			727
Other non-current assets		38			457
Total assets	$	112,556		$	117,711
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,883		$	2,782
Deferred revenue		36,209			23,751
Payroll and employee benefits		3,962			4,750
Other current liabilities		3,769			3,429
Total current liabilities		46,823			34,712
Deferred revenue		2,333			885
Deferred compensation and other employee benefits		1,917			1,665
Deferred tax liability		—			878
Income taxes payable		4,193			—
Other noncurrent liabilities		175			—
Total liabilities		55,441			38,140
Shareholders’ equity:
Common stock, $.01 par value; shares authorized: 150,000,000; issued: 34,736,647 shares at September 30, 2007 and December 31, 2006		347			347
Additional paid-in capital		54,912			55,542
Retained earnings		102,211			124,290
Treasury stock, at cost: 5,703,551 shares at September 30, 2007; 5,733,130 shares at December 31, 2006		(98,125	)		(99,265	)
Unearned restricted stock compensation		(2,442	)		(1,417	)
Accumulated other comprehensive income		212			74
Total shareholders’ equity		57,115			79,571
Total liabilities and shareholders’ equity	$	112,556		$	117,711

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2007		2006		2007		2006
	(In Thousands, Except Per Share Amounts)
Net sales:
Products	$	18,674	$	19,533	$	62,581	$	69,783
Services		7,135		5,634		17,093		15,822
Total net sales		25,809		25,167		79,674		85,605
Cost of sales:
Products		3,539		3,708		11,732		13,019
Services		3,301		2,691		8,612		7,372
Total cost of sales		6,840		6,399		20,344		20,391
Gross profit		18,969		18,768		59,330		65,214
Operating expenses:
Product development		4,410		3,990		14,111		12,477
Selling and marketing		8,852		8,036		27,093		24,781
General and administrative		3,809		3,755		11,263		12,653
Total operating expenses		17,071		15,781		52,467		49,911
Operating income		1,898		2,987		6,863		15,303
Other income, net		290		316		916		942
Income before taxes		2,188		3,303		7,779		16,245
Income taxes		821		1,222		2,917		6,011
Net income	$	1,367	$	2,081	$	4,862	$	10,234
Earnings per share:
Basic	$	0.05	$	0.07	$	0.17	$	0.34
Diluted	$	0.05	$	0.07	$	0.17	$	0.34
Cash dividends declared per share	$	0.82	$	0.05	$	0.92	$	0.15

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Nine Months Ended
	September 30,
	2007			2006
	(In Thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income	$	4,862		$	10,234
Adjustments to arrive at cash provided by operating activities:
Depreciation and amortization		2,874			2,585
Amortization of investment discounts/premiums		59			153
Share-based compensation expense		902			490
Deferred income taxes		(1,172	)		1,860
Loss on sale of property		32			—
Excess tax benefits from share based payment arrangements		—			(393	)
Change in assets and liabilities, excluding the effects of acquisitions and divestitures:
Accounts receivable		(5,171	)		(2,245	)
Inventories		(1,559	)		223
Prepaid expenses		(185	)		(315	)
Income taxes		2,941			(1,070	)
Accounts payable and other liabilities		(251	)		(881	)
Deferred revenue		13,906			4,564
Other		159			74
Net cash provided by operating activities		17,397			15,279
Cash flows from investing activities:
Purchase of property, plant and equipment		(1,993	)		(2,096	)
Purchase of investment securities		(21,129	)		(3,800	)
Maturities/sales of investment securities		33,746			17,679
Capitalized software development costs		(167	)		(689	)
Net proceeds from sale of property		567			—
Net cash provided by investing activities		11,024			11,094
Cash flows from financing activities:
Proceeds from exercise of stock options		30			16
Payment for cancellation of stock options		—			(993	)
Excess tax benefits from share based payment arrangements		—			393
Dividends paid		(26,670	)		(4,479	)
Purchase of treasury stock		(1,433	)		(19,081	)
Net cash used by financing activities		(28,073	)		(24,144	)
Net increase in cash and cash equivalents		348			2,229
Cash and cash equivalents, beginning of period		5,953			7,083
Cash and cash equivalents, end of period	$	6,301		$	9,312

See accompanying notes to condensed consolidated financial statements.

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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.Consolidation

The condensed consolidated financial statements include the financial results of Renaissance Learning, Inc. and our subsidiaries.

2.Basis of Presentation

The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of the interim periods, and are presented on an unaudited basis. These financial statements should be read in conjunction with the financial information contained in our Annual Report on Form 10-K/A for the year ended December 31, 2006 (“2006 Annual Report”), which is on file with the U.S. Securities and Exchange Commission (the “SEC”).

The results of operations for the three and nine month periods ended September 30, 2007 and 2006 are not necessarily indicative of the results to be expected for the full year.

3.Earnings Per Common Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Shares issued and shares reacquired during the period are weighted for the portion of the period they were outstanding. Diluted earnings per common share has been computed based on the weighted average number of common shares outstanding, increased by the number of additional common shares that would have been outstanding if the potentially dilutive stock option shares and restricted shares had been issued.

The weighted average shares outstanding are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Basic weighted average shares outstanding		28,750,945		29,257,702		28,806,086		29,740,992
Dilutive effect of outstanding stock options		1,169		3,103		2,523		7,044
Dilutive effect of restricted shares		25,241		8,228		25,241		8,228
Diluted weighted average shares outstanding		28,777,355		29,269,033		28,833,850		29,756,264

For the three months ended September 30, 2007 and 2006, there were 849,989 and 872,192 outstanding stock options, respectively, excluded from the calculation of diluted earnings per share because their effect was antidilutive. For the nine months ended September 30, 2007 and 2006, there were 849,989 and 848,876 outstanding stock options, respectively, excluded from the calculation of diluted earnings per share because their effect was antidilutive. These options could be dilutive in the future.

4.Comprehensive Income

For the quarters ended September 30, 2007 and 2006, total comprehensive income was $1.4 million and $2.1 million, respectively. Total comprehensive income was $5.0 million and $10.2 million in the first nine months of 2007 and 2006, respectively. Our comprehensive income includes net income and foreign currency translation adjustments.

5. Goodwill and Other Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized and we are required to assess goodwill at least annually for impairment by applying a fair-value-based test. Other intangibles consist of customer relationships and tradename, which were acquired in connection with the purchase of AlphaSmart, Inc. (“AlphaSmart”). The tradename has an indefinite life and therefore is not amortized. The customer relationships intangible is amortized over its useful life of ten years, on the declining balance method.

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For the three months ended September 30, 2007 and 2006, we recognized amortization expense of $123,000 and $149,000, respectively. For the nine months ended September 30, 2007 and 2006, we recognized amortization expense of $422,000 and $513,000, respectively. Other intangibles consisted of the following (in thousands):

	September 30, 2007						December 31, 2006
	Gross		Accumulated				Gross		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
	(In Thousands)
Tradename	$	3,000	$	—	$	3,000	$	3,000	$	—	$	3,000
Customer relationships		4,150		1,448		2,702		4,150		1,026		3,124
	$	7,150	$	1,448	$	5,702	$	7,150	$	1,026	$	6,124

6.Share Based Compensation

Options to purchase 11,551 shares of our common stock were granted during the nine months ended September 30, 2007 and options to purchase 9,616 shares of our common stock were granted in the nine months ended September 30, 2006. The exercise prices for all options are equal to the fair market value of our common stock on the date the options were granted.

Restricted stock awards consisting of restricted shares or restricted share units are granted to certain employees and our directors. For employees, restricted stock awards generally vest over a period of four years and for non-employee directors, upon termination of the individual’s tenure on our board. Restricted stock awards to employees are expensed over the vesting period, and those made to our non-employee directors are expensed when granted. We granted 153,171 shares of restricted stock awards during the nine months ended September 30, 2007, and 120,199 shares in the nine months ended September 30, 2006. We value restricted stock awards at the closing market price of our common stock on the date of grant.

As of September 30, 2007, the total unearned compensation related to share-based compensation awards, net of estimated forfeitures, was $2.3 million, which will be amortized as expense over the weighted average remaining period of 3.2 years. Total share-based compensation was $0.9 million for the nine months ended September 30, 2007 and $0.6 million for the nine months ended September 30, 2006.

A summary of restricted stock award activity for the nine months ended September 30, 2007 is as follows:

				Weighted Average		Aggregate
	Shares			Value Per Share		Intrinsic Value
	(In Thousands, except per share amount)
Balance at January 1, 2007		132		$	15.31	$	2,337
Granted		153			12.93
Vested		(26	)		12.63
Forfeitures		(8	)		14.73
Balance at September 30, 2007		251		$	14.16	$	3,031

7.Dividends

On July 18, 2007, our Board of Directors declared a special cash dividend of $0.75 per share and declared a quarterly cash dividend of $.07 per share, both were paid September 4, 2007 to shareholders of record as of August 10, 2007.

On October 17, 2007, our Board of Directors declared a quarterly cash dividend of $0.07 per share, payable December 3, 2007 to shareholders of record as of November 9, 2007.

8.Income Taxes

Effective January 1, 2007, we adopted Financial Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation provides specific guidance on how enterprises recognize and measure tax benefits associated with uncertain tax positions. As a result of the adoption of FIN 48, we recognized a $0.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

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We file income tax returns with the United States of America (“U.S.”), various U.S. states, and foreign jurisdictions. Our most significant jurisdictions are the U.S. and the state of Wisconsin. We are no longer subject to examinations by the U.S. for years before 2004. For Wisconsin and the remaining jurisdictions, with few exceptions, we are no longer subject to examinations by tax authorities for years before 2001. We are not currently under examination by the Internal Revenue Service. We do have various state tax audits and appeals in process at any given time. We do not anticipate any adjustments that would result in a material change to our financial position or results of operations.

The total balance of our gross liability for unrecognized income tax benefits as of January 1, 2007 was $4.2 million. Included in this balance is $1.0 million related to enterprises acquired by us, for tax years prior to the acquisition. Because any adjustments to this portion of the liability would be charged to goodwill, such amounts would not affect our effective income tax rate, but could impact cash payments in future periods.

We classify accrued interest and penalties related to unrecognized tax benefits as income tax expense in our consolidated statements of income. Included in our liability for uncertain income tax positions is $1.2 million of accrued interest and penalties.

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

Results of Operations

Our results of operations can be affected by many factors including the general economic environment, state and federal budgetary decisions and the length and complexity of the sales cycle for school districts. National trends, federal and state legislation, Department of Education administrative policies and the way the foregoing align with our products and services can impact our business.

An important component of our software product strategy is a transition to a subscription-based software sales model. We believe that a business model based on subscription-based software offers long-term advantages over traditional perpetual licensing, including: (i) improved product utilization leading to higher levels of customer satisfaction, (ii) product adoption by more schools, (iii) more lifetime revenue per customer and (iv) a more predictable and reliable revenue stream.

This transition can significantly impact reported financial results and customer ordering patterns. An increasing proportion of customer orders attributable to our subscription-based product and service offerings relative to customer orders of non-subscription-based offerings can result in a significant portion of a period’s sales being initially deferred and recognized as revenue in future periods over the subscription term, generally 12 months. This can result in reported revenue that significantly lags customer orders in a given period. Transitioning to subscription-based software can also adversely impact revenue as our customers that already own our products under perpetual license agreements may delay purchases of expansions, reading quizzes and math libraries while they are contemplating a transition to subscription-based versions of our products. We believe that this delay in purchases by customers resulted in a decrease in software sales during the nine months ended September 30, 2007 of approximately $3.0 million. We believe that these factors influenced our results of operations for the three and nine month periods ended September 30, 2007. The transition to subscription-based products also affects customer ordering patterns. Compared to non-subscription-based offerings, customer orders of our subscription-based offerings tend to more closely follow school budgeting patterns resulting in a more seasonal order pattern weighted to the second and third calendar quarters. Also, after customers transition to our subscription-based enterprise products, they no longer order reading quizzes and math libraries since this content is included in their subscription. Historically, our customers have ordered more of this content in the first and fourth quarters. The combined effect is that a much greater proportion of a year’s orders are placed in the second and third quarters than has been the case in our past experience. We expect the delay in purchases by customers that already own our products under perpetual license agreements and the increased seasonality associated with our transition to Enterprise will adversely affect software orders during the fourth quarter of 2007 and the first quarter of 2008.

Operating expenses for the nine months ended September 30, 2007 and 2006 were impacted by restructuring costs. Restructuring costs for the nine months ended September 30, 2007 were $0.5 million or $0.01 per share (after tax). The 2007 restructuring costs, which were recorded in the first quarter, primarily related to a partial reorganization of our product development resources and resulted in a reduction in staff and assets related to the laptop line. Operating expenses for the nine months ended September 30, 2006 include a restructuring charge of $1.9 million, or $0.04 per share (after tax), that was recorded in the first quarter of 2006. The 2006 restructuring charge was primarily comprised of separation expenses for former executives.

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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 Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Net Sales:
Products		72.4	%		77.6	%		78.5	%		81.5	%
Services		27.6	%		22.4	%		21.5	%		18.5	%
Total net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales:
Products		19.0	%		19.0	%		18.7	%		18.7	%
Services		46.3	%		47.8	%		50.4	%		46.6	%
Total cost of sales		26.5	%		25.4	%		25.5	%		23.8	%
Gross profit:
Products		81.0	%		81.0	%		81.3	%		81.3	%
Services		53.7	%		52.2	%		49.6	%		53.4	%
Total gross profit		73.5	%		74.6	%		74.5	%		76.2	%
Operating expenses:
Product development		17.1	%		15.9	%		17.7	%		14.6	%
Selling and marketing		34.3	%		31.9	%		34.0	%		28.9	%
General and administrative		14.7	%		14.9	%		14.1	%		14.8	%
Total operating expenses		66.1	%		62.7	%		65.8	%		58.3	%
Operating income		7.4	%		11.9	%		8.7	%		17.9	%
Other, net		1.1	%		1.3	%		1.1	%		1.1	%
Income before taxes		8.5	%		13.2	%		9.8	%		19.0	%
Income taxes		3.2	%		4.9	%		3.7	%		7.0	%
Net Income		5.3	%		8.3	%		6.1	%		12.0	%

Three Months Ended September 30, 2007 and 2006

Net Sales. Our net sales increased by $0.6 million, or 2.5%, to $25.8 million in the third quarter of 2007 from $25.2 million in the third quarter of 2006.  Deferred revenue increased by $8.9 million in the third quarter this year, reaching a record level of $38.5 million, versus a $5.2 million increase in the prior year’s third quarter. Product revenues decreased by $0.8 million, or 4.4%, to $18.7 million in the third quarter of 2007 from $19.5 million in the third quarter of 2006.  Product revenue decreased primarily due to a transition to a subscription-based software sales model resulting in a significant increase in deferred revenue, and to a lesser extent due to lower laptop sales.

Service revenue increased by $1.5 million, or 26.6%, to $7.1 million in the third quarter of 2007 from $5.6 million in the third quarter of 2006. Service revenues increased in nearly all our service offerings with the largest improvements occurring in technical services such as hosting, technical consulting and installations, and in professional development services, both remote and onsite.

Cost of Sales. The cost of sales of products decreased by $0.2 million, or 4.6%, to $3.5 million in the third quarter of 2007 from $3.7 million in the third quarter of 2006. As a percentage of product sales, the cost of sales of products was unchanged at 19.0%.

The cost of sales of services increased by $0.6 million, or 22.7%, to $3.3 million in the third quarter of 2007 from $2.7 million in the third quarter of 2006. As a percentage of sales of services, the cost of sales of services decreased to 46.3% in the third quarter of 2007 from 47.8% in the third quarter of 2006. The improvement resulted from better utilization of our fixed costs and growth of our more profitable technical service offerings during the third quarter of 2007.

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Product Development. Product development expenses increased by $0.4 million, or 10.5%, to $4.4 million in the third quarter of 2007 from $4.0 million in the third quarter of 2006. Product development expenses were up due to a higher level of software development costs capitalized in the third quarter of 2006 than in the third quarter of 2007. As a percentage of net sales, product development costs increased to 17.1% in the third quarter of 2007 from 15.9% in the third quarter of 2006.

Selling and Marketing. Selling and marketing expenses of $8.8 million in the third quarter of 2007 were up by $0.8 million, or 10.2% from $8.0 million in the third quarter of 2006. As a percentage of net sales, selling and marketing expenses increased to 34.3% in the third quarter of 2007 from 31.9% in the third quarter of 2006. Selling and marketing expenses increased, partly due to increased commissions as a result of higher customer order levels and partly due to sales force expansion as we were not yet fully staffed in the third quarter last year.

General and Administrative. General and administrative expenses were unchanged at $3.8 million in the third quarter of 2007 and in the third quarter of 2006. As a percentage of net sales, general and administrative expenses decreased to 14.7% in the third quarter of 2007 from 14.9% in the third quarter of 2006.

Operating Income. Operating income was $1.9 million, or 7.4% of net sales in the third quarter of 2007 compared to $3.0 million, or 11.9% of net sales in the third quarter of 2006. Higher operating expenses were the primary reason for the decline.

Income Tax Expense.Income tax expense of $0.8 million was recorded in the third quarter of 2007 at an effective income tax rate of 37.5% of pre-tax income, compared to $1.2 million, or 37.0% of pre-tax income in the third quarter of 2006.

Nine Months Ended September 30, 2007 and 2006

Net Sales. Our net sales decreased by $5.9 million to $79.7 million in the first nine months of 2007 from $85.6 million in the first nine months of 2006. Deferred revenue increased by $13.9 million in the first nine months of 2007 versus an increase of $4.6 million in the first nine months of 2006. Product sales decreased by $7.2 million, or 10.3%, to $62.6 million in the first nine months of 2007 from $69.8 million in the same period in 2006. Product revenue decreased primarily due to the significant increase in deferred revenue and to a lesser extent due to lower laptop sales.

Service revenue increased by $1.3 million, or 8.0%, in the first nine months of 2007 to $17.1 million from $15.8 million in the first nine months of 2006. Service revenues increased primarily due to improvements in technical services such as hosting, technical consulting and installations, and in professional development services, both remote and onsite, partially offset by the impact of not holding a national conference in 2007.

Cost of Sales. The cost of sales of products decreased by $1.3 million, or 9.9%, to $11.7 million in the first nine months of 2007 from $13.0 million in the same period in 2006. As a percentage of product sales, the cost of sales of products was unchanged at 18.7%.

The cost of sales of services increased by $1.2 million, or 16.8%, to $8.6 million in the first nine months of 2007 from $7.4 million in the same period in 2006. As a percentage of sales of services, the cost of sales of services increased to 50.4% in the first nine months of 2007 from 46.6% in the first nine months of 2006 primarily due to personnel and infrastructure additions that were required for some of our remote and technical services and to price reductions in our on-site professional development service offerings.

Product Development. Product development expenses were $14.1 million or 17.7% of sales in the first nine months of 2007, compared to $12.5 million or 14.6% of sales for the first nine months of 2006. Product development expenses were higher in the 2007 period primarily due to: (i) increases in personnel expenses, (ii) a $0.5 million restructuring cost related to a partial reorganization of product development resources for the laptop line, (iii) a higher level of software development costs capitalized in 2006 than in 2007 and (iv) research and development costs related to our United Kingdom products.

Selling and Marketing. Selling and marketing expenses increased by $2.3 million, or 9.3%, to $27.1 million in the first nine months of 2007 from $24.8 million in the first nine months of 2006. As a percentage of net sales, selling and marketing expenses increased to 34.0% in the first nine months of 2007 from 28.9% in the first nine months of 2006. Selling and marketing expenses increased, partly due to increased commissions as a result of higher customer order levels and partly due to the sales force expansion as we were not yet fully staffed during the year earlier period.

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General and Administrative. General and administrative expenses were $11.3 million, or 14.1% of sales in the first nine months of 2007 compared to $12.7 million or 14.8% of sales in the first nine months of 2006. General and administrative expenses decreased from the same period in 2006 due to a $1.9 million restructuring charge comprised of separation expenses for former executives recorded in the first quarter of 2006, offset in part by higher share based compensation expense and other increased personnel expenses in 2007.

Operating Income. Operating income decreased by $8.4 million, or 55.2%, to $6.9 million in the first nine months of 2007 from $15.3 million in the same period in 2006. As a percentage of net sales, operating income decreased to 8.7% in the first nine months of 2007 from 17.9% in the first nine months of 2006. The decline was due to lower revenues and increased operating expenses as explained in more detail above.

Income Tax Expense. Income tax expense of $2.9 million was recorded for the first nine months of 2007 at an effective income tax rate of 37.5% of pre-tax income, compared to $6.0 million, or 37.0% of pre-tax income for the first nine months of 2006.

Liquidity and Capital Resources

As of September 30, 2007, our cash, cash equivalents and investment securities were $18.1 million, down $12.0 million from the December 31, 2006 total of $30.1 million. The decrease was primarily due to the use of $26.7 million for the payment of dividends, $2.0 million in capital additions and $1.4 million used to repurchase shares of stock, offset by cash flow from operations of $17.4 million.

We have a $15.0 million secured revolving line of credit with a bank which is available until May 31, 2009. The line of credit bears interest at either a floating rate based on the prime rate less 1.0%, or a fixed rate for a period of up to 90 days based on LIBOR plus 1.25%. The rate is at our option and is determined at the time of borrowing. We also have a $2.0 million unsecured revolving line of credit with a bank available until April 30, 2008. The line of credit bears interest based on the prime rate less 1.0%. As of September 30, 2007, the lines of credit had not been used.

Our Board of Directors has approved a stock repurchase program under which we may purchase up to an aggregate total of 8 million shares of our common stock. During the quarter and nine months ended September 30, 2007, we repurchased approximately 2,000 and 117,000 shares, respectively, at a cost of $27,000 and $1.4 million. As of September 30, 2007, the cumulative number of shares repurchased under this program was 7.8 million at an aggregate cost of $134.8 million. Depending on our stock valuation, cash availability and other factors, we may repurchase additional shares under this program.

On October 17, 2007, our Board of Directors declared a quarterly cash dividend of $0.07 per share, payable December 3, 2007 to shareholders of record as of November 9, 2007. We believe our strong levels of cash, cash equivalents and investment securities coupled with cash flow from operations will be sufficient to meet both our near-term and long-term working capital requirements for the foreseeable future.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

As of September 30, 2007, we did not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that would have a material effect on our financial results.

Operating Leases.We enter into operating leases, primarily for facilities that we occupy in order to carry out our business operations. We utilize operating leases for some of our facilities to gain flexibility and limit our exposure to many of the risks of owning commercial property, particularly with regard to international operations. These agreements have terms of one to seven years and cannot be terminated by either the lessor or us for reasons other than breach of the lease agreement. We do not anticipate early termination of any significant facility leases.

Purchase Obligations.We enter into commitments with certain suppliers to purchase components for our hardware products, such as AlphaSmart computing devices, AccelScan scanners and the 2Know! Classroom Response System. The majority of these obligations will be settled within one year.

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As of September 30, 2007, our approximate contractual obligations for operating leases and purchase obligations were:

Contractual Obligations	Payments due by Period
			Less than						More than
(In thousands)	Total		1 year		1-3 years		3-5 years		5 years
Operating lease obligations	$	6,915	$	628	$	4,654	$	1,237	$	396
Purchase obligations		3,987		3,852		135		—		—
Total	$	10,902	$	4,480	$	4,789	$	1,237	$	396

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. There have been no significant changes to our critical accounting policies that were disclosed in our 2006 Annual Report.

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” and the following “Quantitative and Qualitative Disclosures About Market Risk” may contain certain forward-looking statements regarding growth initiatives, growth prospects, projected sales, revenues, earnings and costs, product development schedules and plans, and management’s expectations regarding orders and financial results for 2007, 2008 and future periods. These forward-looking statements are based on current expectations and current assumptions which management believes are reasonable. However, these statements involve risks and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors which may cause such a difference to occur include: (i) the failure of Accelerated Reader Enterprise and Accelerated Math Enterprise and laptop orders to achieve expected growth targets, (ii) a decline in quiz and math library sales that exceeds our forecast, (iii) risks associated with our strategic growth plan, (iv) dependence on educational institutions and government funding and (v) other risks affecting our business as described in our filings with the Securities and Exchange Commission, including our 2006 Annual Report and later filed quarterly reports on Form 10-Q and current reports on Form 8-K, which factors are incorporated herein by reference. We expressly disclaim a duty to provide updates to forward-looking statements, whether as a result of new information, future events or other occurrences.

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, from upgrades or downgrades in the credit worthiness of the securities issuer and from changes in general market conditions.

We seek to manage exposure to market risk by investing in accordance with our corporate investment policy as established by our Board of Directors. The goals of the policy are: (i) preservation of capital, (ii) provision of adequate liquidity to meet projected cash requirements, (iii) minimization of risk of principal loss through diversified short and medium term investments and (iv) yields in relationship to the guidelines, risk, market conditions and tax considerations.

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Our investment policy permits investments in obligations of the U.S. Treasury department and its agencies, money market funds and high quality investment-grade corporate and municipal interest-bearing obligations. The policy requires diversification to prevent excess concentration of issuer risk and requires the maintenance of minimum liquidity levels. The policy precludes investment in equity securities except for the specific purpose of funding the obligations related to our Supplemental Executive Retirement Plan. As of September 30, 2007, our investment securities had a market value of approximately $11.8 million and a carrying value of $11.8 million. Due to the type and duration of our investments, we do not expect to realize any material gains or losses related to market risk.

Foreign Currency Exchange Rate Risk.The financial position and results of operations of our foreign subsidiaries are measured using local currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars using average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange 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 British pound, Canadian dollar, Euro and Indian Rupee. At this time, foreign exchange rate risk is not significant due to the relative size of our foreign operations and revenues derived from sales in foreign countries.

Item 4.Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2007, an evaluation was performed under the supervision and with the participation of management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC.

There has been no change in our internal control over financial reporting that has occurred during the quarter ended September 30, 2007, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

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Part II — OTHER INFORMATION

Item 1A.Risk Factors

There have been no material changes from risk factors previously disclosed in our 2006 Annual Report in response to Item 1A to Part I of Form 10-K.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On April 17, 2002, our Board of Directors authorized the repurchase of up to 5,000,000 shares of our common stock under our stock repurchase program. The repurchase of up to an additional 3,000,000 shares was authorized by our Board of Directors on February 9, 2005. No time limit was placed on the duration of the stock repurchase program, nor is there any dollar limit on the program. Repurchased shares become treasury shares and will be used for stock-based employee benefit plans, acquisitions and for other general corporate purposes.

The following table shows information relating to the repurchase of shares of our common stock during the three months ended September 30, 2007:

					Total Number of
					Shares Purchased as		Maximum Number of
	Total Number		Average Price		Part of Publicly		Shares that May Yet
	of Shares		Paid per		Announced Plans		Be Purchased Under
Period	Purchased		Share		or Programs		the Plans or Programs
July 1-31, 2007		2,068	$	12.93		2,068		271,960
August 1-31, 2007		0		0.00		0		271,960
September 1-30, 2007		0		0.00		0		271,960
Total		2,068	$	12.93		2,068

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Item 6.Exhibits

Exhibits.

Exhibit No.	Description
10.1	Credit Agreement dated as of October 1, 2007 by and between Wells Fargo Bank, National Association and Registrant
31.1	Section 302 certification by Terrance D. Paul
31.2	Section 302 certification by Mary T. Minch
32.1	Section 906 certification by Terrance D. Paul
32.2	Section 906 certification by Mary T. Minch

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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, 2007	/s/ Terrance D. Paul
Date	Terrance D. Paul
	Chief Executive Officer and a Director
	(Principal Executive Officer)
November 5, 2007	/s/ Mary T. Minch
Date	Mary T. Minch
	Senior Vice President-Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

Index to Exhibits

Exhibit No.	Description
10.1	Credit Agreement dated as of October 1, 2007 by and between Wells Fargo Bank, National Association and Registrant
31.1	Section 302 certification by Terrance D. Paul
31.2	Section 302 certification by Mary T. Minch
32.1	Section 906 certification by Terrance D. Paul
32.2	Section 906 certification by Mary T. Minch