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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJuly 31, 2001
Commission File Number0-20842
PLATO LEARNING, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 36-3660532 (I.R.S. Employer Identification Number) | |
10801 Nesbitt Avenue South, Bloomington, MN (Address of principal executive offices) | 55437 (Zip Code) | |
Registrant’s telephone number, including area code: | (952) 832-1000 |
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 | ![]() | No | ![]() |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, $.01 par value Class | 12,201,936 shares Outstanding as of August 31, 2001 |
(This document contains 21 pages)
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PLATO Learning, Inc. and Subsidiaries
INDEX
Page | ||||||||
Number | ||||||||
PART I. | FINANCIAL INFORMATION | |||||||
Item 1. | Condensed Consolidated Financial Statements (Unaudited): | |||||||
Condensed Consolidated Statements of Earnings for the | ||||||||
Three and Nine Months Ended July 31, 2001 and 2000 | 3 | |||||||
Condensed Consolidated Balance Sheets as of | ||||||||
July 31, 2001 and October 31, 2000 | 4 | |||||||
Condensed Consolidated Statements of Cash Flows for the | ||||||||
Nine Months Ended July 31, 2001 and 2000 | 5 | |||||||
Notes to Condensed Consolidated Financial Statements | 6 | |||||||
Item 2. | Management's Discussion and Analysis of | |||||||
Results of Operations and Financial Condition | 13 | |||||||
PART II. | OTHER INFORMATION | |||||||
Item 1. | Legal Proceedings | 20 | ||||||
Item 2. | Changes in Securities | 20 | ||||||
Item 3. | Defaults Upon Senior Securities | 20 | ||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 20 | ||||||
Item 5. | Other Information | 20 | ||||||
Item 6. | Exhibits and Reports on Form 8-K | 20 | ||||||
SIGNATURES | 21 |
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PART I. FINANCIAL INFORMATION
PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands, except per share data)
Three Months Ended | Nine Months Ended | ||||||||||||||||||
July 31, | July 31, | ||||||||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||||||||
Revenues | $ | 22,803 | $ | 16,138 | $ | 47,921 | $ | 35,903 | |||||||||||
Cost of revenues | 1,667 | 1,707 | 4,615 | 4,673 | |||||||||||||||
Gross profit | 21,136 | 14,431 | 43,306 | 31,230 | |||||||||||||||
Operating expenses: | |||||||||||||||||||
Selling, general and administrative | 11,950 | 8,965 | 30,844 | 23,925 | |||||||||||||||
Product development and customer support | 2,238 | 1,521 | 6,070 | 4,612 | |||||||||||||||
Goodwill and intangible amortization | 818 | — | 1,412 | — | |||||||||||||||
Special charges | — | — | 1,260 | — | |||||||||||||||
Total operating expenses | 15,006 | 10,486 | 39,586 | 28,537 | |||||||||||||||
Operating profit | 6,130 | 3,945 | 3,720 | 2,693 | |||||||||||||||
Interest expense | 273 | 227 | 428 | 712 | |||||||||||||||
Interest income | (313 | ) | (5 | ) | (344 | ) | (9 | ) | |||||||||||
Other expense, net | 10 | 94 | 107 | 195 | |||||||||||||||
Earnings before income taxes | 6,160 | 3,629 | 3,529 | 1,795 | |||||||||||||||
Income tax expense | 2,587 | 1,306 | 1,482 | 610 | |||||||||||||||
Net earnings | 3,573 | 2,323 | 2,047 | 1,185 | |||||||||||||||
Preferred stock accretion | — | — | — | 129 | |||||||||||||||
Net earnings available to common stockholders | $ | 3,573 | $ | 2,323 | $ | 2,047 | $ | 1,056 | |||||||||||
Earnings per share: | |||||||||||||||||||
Basic | $ | 0.32 | $ | 0.31 | $ | 0.22 | $ | 0.15 | |||||||||||
Diluted | $ | 0.30 | $ | 0.28 | $ | 0.20 | $ | 0.14 | |||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||
Basic | 11,069 | 7,576 | 9,292 | 7,273 | |||||||||||||||
Diluted | 11,965 | 8,470 | 10,064 | 7,577 | |||||||||||||||
See Notes to Condensed Consolidated Financial Statements
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PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
July 31, | October 31, | |||||||||||
2001 | 2000 | |||||||||||
(Unaudited) | (See Note) | |||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 57,741 | $ | 6,415 | ||||||||
Accounts receivable, less allowances of $1,707 | ||||||||||||
and $2,308, respectively | 27,752 | 21,829 | ||||||||||
Inventories | 422 | 615 | ||||||||||
Prepaid expenses and other current assets | 875 | 627 | ||||||||||
Deferred income taxes | 2,315 | 2,315 | ||||||||||
Total current assets | 89,105 | 31,801 | ||||||||||
Equipment and leasehold improvements, less accumulated | ||||||||||||
depreciation of $3,530 and $2,882, respectively | 2,395 | 1,495 | ||||||||||
Product development costs, less accumulated amortization | ||||||||||||
of $11,185 and $9,072, respectively | 9,362 | 7,921 | ||||||||||
Deferred income taxes, net | 3,336 | 4,229 | ||||||||||
Goodwill, less accumulated amortization of $1,167 and $79, respectively | 17,205 | 3,014 | ||||||||||
Other assets | 4,553 | 2,130 | ||||||||||
Total assets | $ | 125,956 | $ | 50,590 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Current portion of long-term debt | $ | 174 | $ | 600 | ||||||||
Accounts payable | 1,382 | 1,502 | ||||||||||
Accrued employee salaries and benefits | 2,988 | 4,087 | ||||||||||
Accrued liabilities | 4,629 | 2,129 | ||||||||||
Deferred revenue | 8,125 | 5,980 | ||||||||||
Total current liabilities | 17,298 | 14,298 | ||||||||||
Long-term debt | 497 | — | ||||||||||
Deferred revenue | 828 | 287 | ||||||||||
Other liabilities | 103 | 160 | ||||||||||
Total liabilities | 18,726 | 14,745 | ||||||||||
Stockholders’ equity: | ||||||||||||
Common stock, $.01 par value, 25,000 shares | ||||||||||||
authorized; 12,464 shares issued and 12,190 shares | ||||||||||||
outstanding at July 31, 2001; 8,348 shares issued | ||||||||||||
and 8,225 shares outstanding at October 31, 2000 | 122 | 82 | ||||||||||
Paid-in capital | 108,545 | 35,526 | ||||||||||
Treasury stock at cost, 274 and 123 shares, respectively | (4,829 | ) | (1,209 | ) | ||||||||
Retained earnings | 4,328 | 2,281 | ||||||||||
Accumulated other comprehensive loss | (936 | ) | (835 | ) | ||||||||
Total stockholders’ equity | 107,230 | 35,845 | ||||||||||
Total liabilities and stockholders’ equity | $ | 125,956 | $ | 50,590 | ||||||||
Note: The balance sheet at October 31, 2000 has been derived from the audited financial
statements at that date. See Notes to Condensed Consolidated Financial Statements.
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PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended | ||||||||||||
July 31, | ||||||||||||
2001 | 2000 | |||||||||||
Cash flows from operating activities: | ||||||||||||
Net earnings | $ | 2,047 | $ | 1,185 | ||||||||
Adjustments to reconcile net earnings to net cash provided by | ||||||||||||
operating activities: | ||||||||||||
Deferred income taxes | 1,482 | 610 | ||||||||||
Depreciation and amortization | 4,394 | 2,053 | ||||||||||
Provision for doubtful accounts | 1,035 | 1,400 | ||||||||||
Stock-based compensation | 556 | 93 | ||||||||||
Loss on disposal of fixed assets | 29 | 85 | ||||||||||
Changes in assets and liabilities, net of acquisitions: | ||||||||||||
Accounts receivable | (6,878 | ) | (2,882 | ) | ||||||||
Inventories | 193 | (14 | ) | |||||||||
Prepaid expenses and other current and noncurrent assets | (1,165 | ) | 635 | |||||||||
Accounts payable | (276 | ) | (157 | ) | ||||||||
Accrued liabilities, accrued employee salaries and benefits | ||||||||||||
and other liabilities | (1,433 | ) | (82 | ) | ||||||||
Deferred revenue | 2,655 | 1,002 | ||||||||||
Total adjustments | 592 | 2,743 | ||||||||||
Net cash provided by operating activities | 2,639 | 3,928 | ||||||||||
Cash flows from investing activities: | ||||||||||||
Acquisitions, net of cash acquired of $279 and $686, respectively | (4,327 | ) | (4,114 | ) | ||||||||
Capital expenditures | (811 | ) | (825 | ) | ||||||||
Capitalization of product development costs | (3,541 | ) | (1,881 | ) | ||||||||
Net cash used in investing activities | (8,679 | ) | (6,820 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Repayments of capital lease obligations | (138 | ) | — | |||||||||
Net repayments of short-term borrowings | — | (1,668 | ) | |||||||||
Net proceeds from issuance of common stock | 57,603 | 5,106 | ||||||||||
Net cash provided by financing activities | 57,465 | 3,438 | ||||||||||
Effect of foreign currency on cash | (99 | ) | (134 | ) | ||||||||
Net increase in cash and cash equivalents | 51,326 | 412 | ||||||||||
Cash and cash equivalents at beginning of period | 6,415 | 63 | ||||||||||
Cash and cash equivalents at end of period | $ | 57,741 | $ | 475 | ||||||||
Cash paid for interest | $ | 240 | $ | 774 | ||||||||
Cash paid for income taxes | $ | 418 | $ | 99 | ||||||||
Non-cash investing and financing activities: | ||||||||||||
Common stock issued for acquisition | $ | 12,000 | — | |||||||||
Liabilities assumed in acquisition | $ | 557 | $ | 270 | ||||||||
Capital lease obligations incurred | $ | 733 | — | |||||||||
Debt converted to common stock | $ | 600 | $ | 325 | ||||||||
Stock option exercises using common stock | $ | 3,620 | — | |||||||||
See Notes to Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. | NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Business
PLATO Learning, Inc. and its subsidiaries (the “Company”) provide computer-based and e-learning instruction and related services, offering basic to advanced level courseware in reading, writing, math, science, and life and job skills. The Company’s PLATO® Learning System and PLATO® Web Learning Network provide more than 3,500 hours of objective-based, problem-solving courseware and include assessment, alignment, and management tools to facilitate the learning process. PLATO courseware is delivered via networks, CD-ROM, private intranets, and the Internet. In addition, single topic PLATO courseware is available through the Company’s e-commerce Web site and distributors. PLATO courseware is marketed to K-12 schools, colleges, job training programs, correctional institutions, military education programs, corporations and individuals.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000.
Revenue Recognition
Revenue is recognized in accordance with the provisions of Statement of Position No. 97-2, “Software Revenue Recognition”, as amended and modified. Revenue from the sale of courseware licenses, computer hardware and related services is recognized upon meeting the following criteria: (i) execution of a written customer order, (ii) delivery of the courseware, hardware and related services, (iii) the license fee is fixed or determinable and (iv) collectibility of the proceeds is probable. For software arrangements that include more than one element, the Company allocates the total arrangement fee among each deliverable based on the vendor-specific objective evidence of the relative fair value of each deliverable. Upon delivery, future service costs, if any, are accrued. Future service costs represent the Company’s problem resolution and support “hotline” service for a one-year period. Service revenue includes software support, which is deferred and recognized ratably over the support period, and revenue from
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. | NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued |
Revenue Recognition, Continued
installation and training services, which is recognized as services are performed. Installation and training services are customarily billed at a fixed daily rate. Deferred revenue represents the portion of billings made or payments received in advance of services being performed or products being delivered.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements”. SAB 101 provides guidance for revenue recognition under various circumstances. The accounting and disclosures prescribed by SAB 101 will be effective in the fourth quarter of fiscal year 2001, and retroactive to the beginning of that fiscal year. The Company does not expect the requirements of SAB 101 to have a significant impact on its consolidated financial statements.
Product Development, Enhancement and Maintenance Costs
Costs incurred in the development, enhancement and routine maintenance of the Company’s current generation courseware products are expensed as incurred. Costs incurred in establishing the technological feasibility of new courseware products are expensed as incurred. Once technological feasibility has been established, costs incurred in the development of new generation courseware products are capitalized.
Capitalized costs are amortized to product development and customer support expense using the straight-line method over the estimated useful life of the new courseware products, which is generally three years. Amortization begins when the product is available for general release to customers. Unamortized costs determined to be in excess of the net realizable value of the product, if any, are expensed at the date of such determination.
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net earnings (loss) available to common stockholders, adjusted to add back any convertible preferred stock accretion and convertible debt interest (if those securities are dilutive), by the weighted average number of common and, where dilutive, potential common shares outstanding during the period. Potential common shares include options, warrants and convertible securities.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
2. | ACQUISITION |
In April 2001, the Company acquired Wasatch Interactive Learning Corporation (“Wasatch”), a publicly held Washington corporation and provider of multimedia courseware for K-8 education. Following the approval of Wasatch stockholders, the Company acquired all of the outstanding securities of Wasatch in exchange for approximately 656,000 shares of the Company’s common stock with an aggregate fair value of $12,000, and Wasatch became a wholly owned subsidiary. In addition, the Company assumed all existing warrants to purchase Wasatch common stock and converted them into warrants to purchase the Company’s common stock.
In a separate transaction immediately prior to the closing date, the Company purchased Wasatch’s outstanding 7% convertible debenture from the holder for approximately $4,056 with funds borrowed under the Company’s revolving loan agreement. The 7% convertible debenture was terminated upon the closing of the acquisition.
The Wasatch acquisition was accounted for using the purchase method of accounting and, accordingly, the net liabilities acquired were recorded at their estimated fair values on the acquisition date. The purchase price consisted of $12,000 of common stock issued, $4,056 for the purchase of the Wasatch 7% convertible debenture, $611 of direct acquisition costs, $557 of liabilities assumed and $31 of value assigned to the assumed warrants. The allocation of the purchase price included approximately $595 to the estimated fair value of tangible assets acquired, $858 to deferred tax liabilities, $2,200 to identified intangible assets and $15,318 to goodwill. The valuation of identified intangible assets, consisting of customer base, software and assembled workforce, was performed by an independent appraisal firm in conjunction with management. Intangible assets are being amortized over three to five years and goodwill is being amortized over seven years.
The unaudited pro forma consolidated results of operations of the Company, as if the Wasatch acquisition had occurred at the beginning of the periods presented, were as follows:
Nine Months Ended | ||||||||
July 31, | ||||||||
2001 | 2000 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues | $ | 48,454 | $ | 37,480 | ||||
Net loss | $ | (885 | ) | $ | (2,190 | ) | ||
Diluted loss per share | $ | (0.09 | ) | $ | (0.29 | ) | ||
The unaudited pro forma consolidated results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the periods presented or the results which may occur in the future.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
3. | ACCOUNTS RECEIVABLE |
Accounts receivable include installment receivables of $12,953 and $13,040 at July 31, 2001 and October 31, 2000, respectively. Installment receivables to be billed beyond one year from the balance sheet date were $772 and $193 at July 31, 2001 and October 31, 2000, respectively, and are included in other assets on the consolidated balance sheets.
4. | DEBT |
Revolving Loan
At July 31, 2001, there were no borrowings outstanding under the Company’s revolving loan agreement. The unused borrowing capacity was $15,000.
10% Subordinated Convertible Debentures
In November 2000, the remaining $600 of debentures were converted into approximately 66,000 shares of the Company’s common stock.
Capital Lease Obligations
At July 31, 2001, the Company’s long-term debt consisted of various capital lease obligations for equipment. Amounts due in the next twelve months under these leases are classified as a current liability in the consolidated balance sheets.
5. | STOCKHOLDERS’ EQUITY |
In November 2000, the remaining $600 of 10% subordinated convertible debentures were converted by the holders into approximately 66,000 shares of the Company’s common stock.
In January 2001, the Company issued approximately 8,000 shares of common stock pursuant to the adjustment warrants issued in connection with the private placement of common stock in July 2000.
In April 2001, the Company issued approximately 656,000 shares of common stock for the acquisition of Wasatch (see Note 2). In addition, the Company assumed all existing warrants to purchase Wasatch common stock and converted them into warrants to purchase approximately 232,000 shares of the Company’s common stock, at exercise prices ranging from $74.87 to $394.79 per share. These warrants expire from 2002 to 2004.
In June 2001, the Company completed a public stock offering, selling 2,760,000 shares of common stock at a price of $21 per share. Net proceeds were approximately $55,000 after payment of underwriting discounts, commissions and offering costs.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
5. | STOCKHOLDERS’ EQUITY, Continued |
The Company issued approximately 601,000 shares of common stock for the exercise of outstanding stock options, and approximately 26,000 shares of common stock for the exercise of outstanding stock warrants during the nine months ended July 31, 2001.
Stock-based compensation for the nine months ended July 31, 2001 included non-cash charges of $489 for the accelerated vesting of stock options related to the Company’s succession plans and $67 for restricted stock compensation.
6. | SPECIAL CHARGES |
The consolidated statement of earnings for the nine months ended July 31, 2001 included special charges of $1,260. These charges represent costs associated with the November 2000 retirement of William R. Roach, the Company’s founder and former chief executive officer, and include non-cash amounts of $463 for the accelerated vesting of stock options.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
7. | EARNINGS PER SHARE |
Earnings per share is calculated as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||||
July 31, | July 31, | ||||||||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||||||||
Basic: | |||||||||||||||||||
Net earnings available to common stockholders | $ | 3,573 | $ | 2,323 | $ | 2,047 | $ | 1,056 | |||||||||||
Weighted average common shares outstanding | 11,069 | 7,576 | 9,292 | 7,273 | |||||||||||||||
Basic earnings per share | $ | 0.32 | $ | 0.31 | $ | 0.22 | $ | 0.15 | |||||||||||
Diluted: | |||||||||||||||||||
Net earnings available to common stockholders | $ | 3,573 | $ | 2,323 | $ | 2,047 | $ | 1,056 | |||||||||||
Preferred stock accretion | — | — | — | — | |||||||||||||||
Convertible debentures interest | — | 47 | — | — | |||||||||||||||
Net earnings for diluted earnings per share | $ | 3,573 | $ | 2,370 | $ | 2,047 | $ | 1,056 | |||||||||||
Weighted average common shares outstanding | 11,069 | 7,576 | 9,292 | 7,273 | |||||||||||||||
Potential common shares: | |||||||||||||||||||
Stock options and warrants | 896 | 609 | 772 | 304 | |||||||||||||||
Convertible preferred stock | — | — | — | — | |||||||||||||||
Convertible debentures | — | 285 | — | — | |||||||||||||||
Weighted average common and potential | |||||||||||||||||||
common shares outstanding for diluted | |||||||||||||||||||
earnings per share | 11,965 | 8,470 | 10,064 | 7,577 | |||||||||||||||
Diluted earnings per share | $ | 0.30 | $ | 0.28 | $ | 0.20 | $ | 0.14 | |||||||||||
For the nine months ended July 31, 2000, approximately 521,000 potential common shares from the convertible preferred stock and convertible debentures were antidilutive and excluded from the calculation of diluted earnings per share.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
8. | COMPREHENSIVE INCOME |
Total comprehensive income was as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||
July 31, | July 31, | ||||||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||||||
Net earnings | $ | 3,573 | $ | 2,323 | $ | 2,047 | $ | 1,185 | |||||||||
Foreign currency translation adjustments | (12 | ) | (46 | ) | (101 | ) | (149 | ) | |||||||||
Total comprehensive income | $ | 3,561 | $ | 2,277 | $ | 1,946 | $ | 1,036 | |||||||||
Accumulated other comprehensive loss is included as a separate component of stockholders’ equity on the consolidated balance sheets.
9. | RECENT ACCOUNTING PRONOUNCEMENTS |
In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets”. The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and intangible assets with indefinite useful lives not be amortized. Instead, these assets will be reviewed for impairment annually with any related losses recognized when incurred. SFAS No. 141 is generally effective for business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 with early application permitted in certain circumstances. At July 31, 2001, the net book value of the Company’s goodwill was $17,205, and goodwill amortization expense for the nine months ended July 31, 2001 was $1,088. The Company is considering adopting SFAS No. 142, effective November 1, 2001, but has not yet determined the impact that this statement will have on its consolidated financial position or results of operations.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
RESULTS OF OPERATIONS
Overview
The Company enhances the learning process by providing computer-based and e-learning instruction and related services, and by offering basic to advanced level courseware in reading, writing, math, science and life and job skills. The Company’s PLATO® Learning System and PLATO® Web Learning Network provide more than 3,500 hours of objective-based, problem-solving courseware and include assessment, alignment and management tools to facilitate the learning process. PLATO courseware is delivered via networks, CD-ROM, private intranets and the Internet. In addition, single topic PLATO courseware is available through the Company’s e-commerce web site and a growing number of distributors. PLATO courseware is marketed to K-12 schools, colleges, job training programs, correctional institutions, military education programs, corporations and individuals.
Acquisitions
In April 2001, the Company acquired Wasatch Interactive Learning Corporation (“Wasatch”), a publicly held Washington corporation and provider of multimedia courseware for K-8 education. Following the approval of Wasatch stockholders, the Company acquired all of the outstanding securities of Wasatch in exchange for approximately 656,000 shares of the Company’s common stock with an aggregate fair value of $12,000, and Wasatch became a wholly owned subsidiary. In addition, the Company assumed all existing warrants to purchase Wasatch common stock and converted them into warrants to purchase the Company’s common stock.
In a separate transaction immediately prior to the closing date, the Company purchased Wasatch’s outstanding 7% convertible debenture from the holder for approximately $4,056 with funds borrowed under the Company’s revolving loan agreement. The 7% convertible debenture was terminated upon the closing of the acquisition.
The Wasatch acquisition was accounted for using the purchase method of accounting and, accordingly, the net liabilities acquired were recorded at their estimated fair values on the acquisition date. The purchase price consisted of $12,000 of common stock issued, $4,056 for the purchase of the Wasatch 7% convertible debenture, $611 of direct acquisition costs, $557 of liabilities assumed and $31 of value assigned to the assumed warrants. The allocation of the purchase price included approximately $595 to the estimated fair value of tangible assets acquired, $858 to deferred tax liabilities, $2,200 to identified intangible assets and $15,318 to goodwill. The valuation of identified intangible assets, consisting of customer base, software and assembled work force, was performed by an independent appraisal firm in conjunction with management. Intangible assets are being amortized over three to five years and goodwill is being amortized over seven years.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
RESULTS OF OPERATIONS, Continued
Acquisitions,Continued
In July 2000, the Company acquired CyberEd, Inc. (“CyberEd”), a privately held Nevada corporation and provider of multimedia science courseware for high schools, for approximately $4,400 in cash, net of cash acquired. This acquisition was also accounted for using the purchase method of accounting.
The results of operations for Wasatch and CyberEd are not material to the consolidated results of operations for the three and nine months ended July 31, 2001.
Operating Results as a Percentage of Revenue
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenues | 7.3 | 10.6 | 9.6 | 13.0 | ||||||||||||
Gross profit | 92.7 | 89.4 | 90.4 | 87.0 | ||||||||||||
Selling, general and administrative expense | 52.4 | 55.6 | 64.4 | 66.6 | ||||||||||||
Product development and customer support expense | 9.8 | 9.4 | 12.7 | 12.9 | ||||||||||||
Goodwill and intangible amortization | 3.6 | — | 2.9 | — | ||||||||||||
Special charges | — | — | 2.6 | — | ||||||||||||
Total operating expenses | 65.8 | 65.0 | 82.6 | 79.5 | ||||||||||||
Operating profit | 26.9 | 24.4 | 7.8 | 7.5 | ||||||||||||
Interest expense | 1.2 | 1.4 | 0.9 | 2.0 | ||||||||||||
Interest income | (1.3 | ) | — | (0.7 | ) | — | ||||||||||
Other expense, net | — | 0.6 | 0.2 | 0.5 | ||||||||||||
Earnings before income taxes | 27.0 | 22.4 | 7.4 | 5.0 | ||||||||||||
Income tax expense | 11.3 | 8.1 | 3.1 | 1.7 | ||||||||||||
Net earnings | 15.7 | % | 14.3 | % | 4.3 | % | 3.3 | % | ||||||||
Revenues
The following table highlights revenues by product line:
Three Months Ended | Nine Months Ended | ||||||||||||||||
July 31, | July 31, | ||||||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||||||
Courseware and professional services | $ | 21,799 | $ | 14,898 | $ | 45,089 | $ | 32,495 | |||||||||
Hardware, third-party courseware and other | 1,004 | 1,240 | 2,832 | 3,408 | |||||||||||||
Total revenues | $ | 22,803 | $ | 16,138 | $ | 47,921 | $ | 35,903 | |||||||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
RESULTS OF OPERATIONS, Continued
Revenues,Continued
Courseware and professional services revenue, the Company’s core business, increased $6,901 or 46% to $21,799 for the three months ended July 31, 2001, as compared to $14,898 for the same period in 2000. For the nine months ended July 31, 2001, courseware and professional services revenue increased $12,594 or 39% to $45,089 as compared to $32,495 for the same period in 2000. The Company continued to experience increased acceptance of its products and services in its various markets. Revenue growth was achieved primarily through increased sales volume to both new and existing customers. Total revenues were $22,803 for the three months ended July 31, 2001, an increase of $6,665 or 41%, as compared to $16,138 for the same period in 2000. Total revenues were $47,921 for the nine months ended July 31, 2001, an increase of $12,018 or 33%, as compared to $35,903 for the same period in 2000.
Gross Profit
Gross profit increased $6,705 or 46% to $21,136 for the three months ended July 31, 2001 as compared to $14,431 for the same period in 2000. Gross profit increased $12,076 or 39% to $43,306 for the nine months ended July 31, 2001 as compared to $31,230 for the same period in 2000. The increases were principally due to the increased courseware and professional services revenue in 2001. Gross profit margin was 93% for the three months ended July 31, 2001 as compared to 89% for the same period in 2000. Gross profit margin was 90% for the nine months ended July 31, 2001 as compared to 87% for the same period in 2000. The increases were primarily due to the increased mix of higher margin courseware and professional services revenue in 2001.
Selling, General and Administrative Expense
Selling, general and administrative expense increased $2,985 or 33% to $11,950 for the three months ended July 31, 2001, as compared to $8,965 for the same period in 2000. The increase was due primarily to infrastructure expansion of the sales and marketing organization and commissions associated with revenue growth. As a percentage of revenue, total selling, general and administrative expense decreased to 52% for the three months ended July 31, 2001 from 56% for the same period in 2000.
Selling, general and administrative expense increased $6,919 or 29% to $30,844 for the nine months ended July 31, 2001, as compared to $23,925 for the same period in 2000. The increase was due primarily to infrastructure expansion of the sales and marketing organization and commissions associated with revenue growth. As a percentage of revenue, total selling, general and administrative expense decreased to 64% for the nine months ended July 31, 2001 from 67% for the same period in 2000.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
RESULTS OF OPERATIONS, Continued
Product Development and Customer Support Expense
Product development and customer support expense increased $717 or 47% to $2,238 for the three months ended July 31, 2001, as compared to $1,521 for the same period in 2000. Product development expense increased primarily due to increased spending associated with enhanced reading and math products, simulated test products, the PLATO management system and the PLATO Web Learning Network and increased amortization of previously capitalized costs, that was partially offset by increased capitalization of current period expenditures. Customer support expense increased primarily as a result of the Company’s expanding customer base. As a percentage of revenue, total product development and customer support expense increased to 10% for the three months ended July 31, 2001 from 9% for the same period in 2000.
Product development and customer support expense increased $1,458 or 32% to $6,070 for the nine months ended July 31, 2001, as compared to $4,612 for the same period in 2000. Product development expense increased primarily due to increased spending associated with enhanced reading and math products, simulated test products, the PLATO management system and the PLATO Web Learning Network and increased amortization of previously capitalized costs, that was partially offset by increased capitalization of current period expenditures. Customer support expense increased primarily as a result of the Company’s expanding customer base. As a percentage of revenue, total product development and customer support expense was 13% for the nine months ended July 31, 2001 and 2000.
Goodwill and Intangible Amortization
Goodwill and intangible amortization was $818 for the three months and $1,412 for the nine months ended July 31, 2001 related to the Wasatch acquisition in the second quarter of 2001 (see Note 2 to Condensed Consolidated Financial Statements) and the CyberEd acquisition late in the third quarter of 2000.
Special Charges
Special charges for the nine months ended July 31, 2001 represent costs associated with the November 2000 retirement of William R. Roach, the Company’s founder and former chief executive officer and include non-cash amounts of $463 for the accelerated vesting of stock options (see Note 6 to Condensed Consolidated Financial Statements).
Operating Profit
Operating profit was $6,130 for the three months ended July 31, 2001, as compared to $3,945 for the same period in 2000. Operating profit was $3,720 for the nine months ended July 31, 2001, as compared to $2,693 for the same period in 2000. This improvement in operating results was
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
RESULTS OF OPERATIONS, Continued
Operating Profit,Continued
due principally to the increased courseware and professional services revenue in 2001, partially offset by the increased operating expenses, goodwill and intangible amortization and, for the nine months only, the special charges in 2001, as explained above.
Interest Expense
Interest expense was $273 for the three months ended July 31, 2001 comparable to $227 for the same period in 2000. Interest expense decreased $284 to $428 for the nine months ended July 31, 2001 from $712 for the same period in 2000. This was the result of the decreased level of bank borrowings compared to 2000 and the conversion of the 10% subordinated convertible debentures during 2000.
Interest Income
Interest income was $313 for the three months and $344 for the nine months ended July 31, 2001. The increase from 2000 was due to interest income on the invested proceeds from the public stock offering completed in June 2001 (see Note 5 to Condensed Consolidated Financial Statements).
Income Taxes
Income tax expense of $2,587 and $1,482 was recorded for the three and nine months ended July 31, 2001, respectively, using the Company’s estimated fiscal year 2001 effective income tax rate of 42%. The increase in the effective tax rate from fiscal year 2000 is due primarily to non-deductible goodwill and intangible amortization in 2001.
FINANCIAL CONDITION
Liquidity and Capital Resources
At July 31, 2001, the Company’s principal sources of liquidity included cash and cash equivalents of $57,741, net accounts receivable of $27,752, and its line of credit. The Company had total installment receivables of $13,725 at July 31, 2001, of which $12,953 are expected to be billed within one year and are included in net accounts receivable. Working capital was $71,807 at July 31, 2001, an increase of $54,304 from October 31, 2000, due primarily to increased cash and cash equivalents and accounts receivable partially offset by increased accruals and deferred revenue.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
FINANCIAL CONDITION, Continued
Liquidity and Capital Resources,Continued
Net cash provided by the Company’s operating activities was $2,639 for the nine months ended July 31, 2001 as compared to $3,928 for the same period in 2000. Cash flows from operations were used principally to fund the Company’s working capital requirements.
Net cash used in the Company’s investing activities was $8,679 for the nine months ended July 31, 2001 as compared to $6,820 for the same period in 2000. Net cash used in 2001 included $4,327 for the Wasatch acquisition (see Note 2 to Condensed Consolidated Financial Statements), $811 for capital expenditures and $3,541 for capitalized product development costs.
Net cash provided by the Company’s financing activities was $57,465 for the nine months ended July 31, 2001, primarily from the public stock offering and the exercise of stock options and warrants (see Note 5 to Condensed Consolidated Financial Statements), as compared to $3,438 for the same period in 2000. The Company has resources available under its revolving loan agreement to provide borrowings of up to $15,000, as determined by the available borrowing base. At July 31, 2001, there were no borrowings outstanding and the unused borrowing capacity was $15,000.
In June 2001, the Company completed a public stock offering, selling 2,760,000 shares of its common stock at a price of $21.00 per share. Net proceeds were approximately $55,000, after payment of underwriting discounts, commissions and offering costs.
The Company maintains adequate cash reserves and credit facilities to meet its anticipated working capital, capital expenditure, and business investment requirements.
Factors Affecting Quarterly Operating Results
The Company’s quarterly operating results fluctuate as a result of a number of factors including the business and sales cycle, the amount and timing of new product introductions by the Company, client spending patterns, budget cycles and fiscal year ends and promotional programs. The Company historically has experienced its lowest revenues in the first quarter and increasingly higher levels of revenues in each of the next three quarters. Because of these factors, the results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company’s borrowing capacity primarily consists of a revolving loan with interest rates that fluctuate based upon market indexes. At July 31, 2001, the Company had no outstanding borrowings under this revolving loan. As a result, risk relating to interest fluctuation is considered minimal.
Foreign Currency Exchange Rate Risk
The Company markets its products worldwide and has operations in Canada and the United Kingdom. As a result, financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Working funds necessary to facilitate the short-term operations of foreign subsidiaries are kept in local currencies in which they do business. Approximately 8% of total revenues were denominated in currencies other than the U.S. dollar for the nine months ended July 31, 2001.
CAUTIONARY STATEMENTS
As provided for in the Private Securities Litigation Reform Act of 1995, the Company cautions investors that a number of factors could cause actual future results of operations to vary from those anticipated in previously made forward-looking statements and any other forward-looking statements made in this document and elsewhere by or on behalf of the Company. Net revenues could be materially affected by products introduced by competitors with advanced technology and better features and benefits or lower prices or government funding priorities. Operations could be affected by the Company’s ability to execute its diversification strategy or to integrate acquired companies.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings | |
The Company is not a party to any litigation that is expected to have a material adverse effect on the Company or its business. | ||
Item 2. | Changes in Securities | |
On June 5, 2001, the Company completed a public stock offering, selling 2,760,000 shares of common stock at a price of $21 per share (see Note 5 to Condensed Consolidated Financial Statements). | ||
Item 3. | Defaults Upon Senior Securities | |
Not Applicable. | ||
Item 4. | Submission of Matters to a Vote of Security Holders | |
Not Applicable. | ||
Item 5. | Other Information | |
Not Applicable. | ||
Item 6. | Exhibits and Reports on Form 8-K | |
(a) Exhibits — none | ||
(b) Reports on Form 8-K: | ||
No Reports on Form 8-K were filed for the quarter ended July 31, 2001. |
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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 on September 14, 2001.
PLATO LEARNING, INC. | ||
By | /s/ John Murray President and Chief Executive Officer (principal executive officer) | |
/s/ John M. Buske Vice President Finance and Chief Financial Officer (principal financial officer) | ||
/s/ Mary Jo Murphy Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer) |
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