1
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 JUNE 30, 2001.
[ ] 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS JULY 31, 2001
----- -------------
Common Stock, $0.01 par value 34,555,540
2
RENAISSANCE LEARNING, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
PART I - FINANCIAL INFORMATION
Page
Number
------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2001 (unaudited)
and December 31, 2000.......................................................... 1
Consolidated Statements of Income for the
Three Months and Six Months Ended
June 30, 2001 and 2000 (unaudited)............................................. 2
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2000 (unaudited)................................ 3
Notes to Unaudited Consolidated Financial Statements................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................ 11
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................................... 12
- Index -
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RENAISSANCE LEARNING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000
-------------------- --------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 33,917 $ 24,655
Investment securities 50,360 43,343
Accounts receivable, less allowance of $1,699
at June 30, 2001 and $985 at December 31, 2000 14,440 11,335
Inventories 1,520 1,523
Prepaid expenses 842 1,204
Deferred tax asset 3,265 2,922
Other current assets 948 845
---------- ---------
Total current assets 105,292 85,827
Property, plant and equipment, net 23,775 24,501
Deferred tax asset 1,801 2,127
Intangibles and goodwill, net 4,299 5,002
Capitalized software, net 818 581
Other non-current assets 533 183
---------- ---------
Total assets $ 136,518 $ 118,221
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,659 $ 2,166
Deferred revenue 5,795 5,484
Payroll and employee benefits 3,034 2,813
Income taxes payable 3,751 2,419
Other current liabilities 3,473 4,104
---------- ---------
Total current liabilities 18,712 16,986
Deferred revenue 1,136 1,380
---------- ---------
Total liabilities 19,848 18,366
Minority interest 181 185
Shareholders' equity 116,489 99,670
---------- ---------
Total liabilities and shareholders' equity $ 136,518 $ 118,221
========== =========
See accompanying notes to consolidated financial statements.
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RENAISSANCE LEARNING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
--------------- -------------- -------------- --------------
(In thousands, except per share amounts)
Net sales:
Products $ 28,522 $ 22,195 $ 52,884 $ 40,567
Services 4,144 4,227 9,963 9,925
--------------- -------------- -------------- --------------
Total net sales 32,666 26,422 62,847 50,492
--------------- -------------- -------------- --------------
Cost of sales:
Products 4,013 2,881 7,309 5,398
Services 1,680 2,167 5,355 5,216
--------------- -------------- -------------- --------------
Total cost of sales 5,693 5,048 12,664 10,614
--------------- -------------- -------------- --------------
Gross profit 26,973 21,374 50,183 39,878
Operating expenses:
Product development 4,497 3,838 8,889 7,008
Selling and marketing 7,435 6,129 15,426 12,762
General and administrative 3,703 3,030 7,118 5,863
--------------- -------------- -------------- --------------
Total operating expenses 15,635 12,997 31,433 25,633
--------------- -------------- -------------- --------------
Operating income 11,338 8,377 18,750 14,245
Other income:
Interest income 960 666 1,974 1,241
Other, net 195 117 170 263
--------------- -------------- -------------- --------------
Income before taxes 12,493 9,160 20,894 15,749
Income tax provision 4,810 3,623 8,044 6,214
--------------- -------------- -------------- --------------
Net income $ 7,683 $ 5,537 $ 12,850 $ 9,535
=============== ============== ============== ==============
Basic earnings per share $ 0.22 $ 0.16 $ 0.37 $ 0.28
Diluted earnings per share $ 0.22 $ 0.16 $ 0.37 $ 0.28
See accompanying notes to consolidated financial statements.
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RENAISSANCE LEARNING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2001 2000
-------------------- --------------------
(In thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income $ 12,850 $ 9,535
Noncash (income) expenses included in net income -
Depreciation and amortization 2,898 2,223
Deferred income taxes (16) (349)
Change in assets and liabilities -
Accounts receivable (3,105) 2,543
Inventory 3 490
Prepaid expenses 361 590
Accounts payable and other current liabilities 3,209 294
Deferred revenue 67 (899)
Other current assets (102) (1,113)
Other (110) (48)
-------------------- --------------------
Net cash provided by operating activities 16,055 13,266
-------------------- --------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,233) (2,233)
Purchase of short-term investments, net (7,017) (12,230)
Capitalized software development costs (474) -
Acquisitions (704) -
-------------------- --------------------
Net cash used in investing activities (9,428) (14,463)
-------------------- --------------------
Cash flows provided by financing activities:
Proceeds from issuance of stock 814 490
Return of capital to minority interest - (60)
Purchase of treasury stock - (325)
Proceeds from exercise of stock options 1,821 50
-------------------- --------------------
Net cash provided by financing activities 2,635 155
-------------------- --------------------
Net increase (decrease) in cash 9,262 (1,042)
Cash and cash equivalents, beginning of period 24,655 22,882
-------------------- --------------------
Cash and cash equivalents, end of period $ 33,917 $ 21,840
==================== ====================
See accompanying notes to consolidated financial statements.
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RENAISSANCE LEARNING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATION
The consolidated financial statements include the financial results of
Renaissance Learning, Inc. and our consolidated subsidiaries. All significant
intercompany transactions have been eliminated in the consolidated financial
statements.
Our name was legally changed from Advantage Learning Systems, Inc. to
Renaissance Learning, Inc. on April 18, 2001. On April 20, 2001, our stock
trading symbol on The Nasdaq Stock Market changed to RLRN to reflect the legal
name change.
2. BASIS OF PRESENTATION
The 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. Certain previously reported amounts have been
reclassified to conform with the 2001 presentation. These financial statements
should be read in conjunction with the financial information contained in our
Annual Report on Form 10-K which is on file with the U.S. Securities and
Exchange Commission.
Effective November 17, 2000, we acquired the business and assets of
Engineering Software Associates, Inc. ("ESA"), Minneapolis, Minnesota, a
provider of electronic assessment products and services to textbook publishers.
The transaction was accounted for using the purchase method of accounting, with
a total purchase price of $3.8 million including the assumption of less than
$100,000 of certain liabilities. The purchase price was subject to certain
post-closing adjustments. The purchase price was allocated based on the fair
values of the assets acquired and liabilities assumed and included an allocation
to intangibles and goodwill. The operating results of ESA are included in our
consolidated financial statements since the date of acquisition.
The results of operations for the three and six month periods ended
June 30, 2001 and 2000 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 January 3, 2000, our Board of Directors authorized the repurchase of
up to 1,000,000 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, 2001, we had repurchased 25,100
shares.
The weighted average shares outstanding during the three months and six
months ended June 30, 2001 and 2000 are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
---------------- ---------------- --------------- -----------------
Basic Weighted Average Shares 34,490,014 34,213,934 34,460,632 34,217,379
Impact of Stock Options 406,948 95,909 361,651 105,319
Diluted Weighted Average Shares 34,896,962 34,309,843 34,822,283 34,322,698
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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 math software and sold separately, and service
revenue from the sale of software support agreements.
The training segment provides professional development training
seminars and related products to train and support teachers in implementing our
model for educational improvement. 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 and from the annual National School Renaissance
Conference, and product revenue from the sale of training materials.
We evaluate the performance of our operating segments based on
operating income before nonrecurring items. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
--------------- -------------- --------------- ---------------
(In thousands)
Revenues: $ 29,372 $ 23,223 $ 54,825 $ 42,686
Software 3,294 3,199 8,022 7,806
Training --------------- -------------- --------------- ---------------
$ 32,666 $ 26,422 $ 62,847 $ 50,492
Total revenues =============== ============== =============== ===============
Operating income: $ 12,309 $ 8,859 $ 20,787 $ 14,898
Software (971) (482) (2,037) (653)
Training --------------- -------------- --------------- ---------------
$ 11,338 $ 8,377 $ 18,750 $ 14,245
Total operating income =============== ============== =============== ===============
The reported measures are consistent with those used in measuring
amounts in the consolidated financial statements. Such measurements are
generally along legal entity lines as aggregated.
It is our opinion, however, that because many flows of value between
the segments cannot be precisely quantified, this information provides an
incomplete measure of the training segment 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 $13,093,000 and $9,496,000 in the first
six months of 2001 and 2000, respectively. Our comprehensive income includes
foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities.
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6. GOODWILL AND OTHER INTANGIBLE ASSETS
On June 30, 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 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 will no longer be 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. In addition, under the new
rules, an acquired intangible asset should be separately recognized if the
benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred,
licensed, rented, or exchanged.
SFAS 142 requires that a new fair-value-based test be applied to
determine if intangible assets are impaired. We will perform an impairment
analysis of intangible assets by the end of 2001 and of goodwill by the end
of the first quarter of 2002 in accordance with the new standard.
For the years ended December 31, 2000, 1999 and 1998, goodwill expense
of $311,000, $205,000 and $176,000, respectively, is included in our
statement of income. During 2001 we recorded goodwill expense of $235,000
for the six months ended June 30 and expect to record goodwill expense of
$470,000 on an annual basis. We have estimated that goodwill amortization
of approximately $470,000 will not be recognized in 2002 as a result of
adopting this statement.
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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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
---------------- ----------------- ---------------- ---------------
Net Sales:
Products 87.3 % 84.0 % 84.1 % 80.3 %
Services 12.7 16.0 15.9 19.7
---------------- ----------------- ---------------- ---------------
Total net sales 100.0 % 100.0 % 100.0 % 100.0 %
================ ================= ================ ===============
Cost of sales:
Products 14.1 % 13.0 % 13.8 % 13.3 %
Services 40.5 51.3 53.7 52.6
Total cost of sales 17.4 19.1 20.2 21.0
Gross profit:
Products 85.9 87.0 86.2 86.7
Services 59.5 48.7 46.3 47.4
Total gross profit 82.6 80.9 79.8 79.0
Operating expenses:
Product development 13.8 14.5 14.1 13.9
Selling and marketing 22.8 23.2 24.6 25.3
General and administrative 11.3 11.5 11.3 11.6
---------------- ----------------- ---------------- ---------------
Total operating expenses 47.9 49.2 50.0 50.8
---------------- ----------------- ---------------- ---------------
Operating income 34.7 31.7 29.8 28.2
Other income:
Interest income 2.9 2.5 3.1 2.5
Other, net 0.6 0.5 0.3 0.5
---------------- ----------------- ---------------- ---------------
Total other income 3.5 3.0 3.4 3.0
---------------- ----------------- ---------------- ---------------
Income before taxes 38.2 34.7 33.2 31.2
Income tax provision 14.7 13.7 12.8 12.3
---------------- ----------------- ---------------- ---------------
Net income 23.5 % 21.0 % 20.4 % 18.9 %
================ ================= ================ ===============
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THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Net Sales. Our net sales increased by $6.2 million, or 23.6%, to $32.7
million in the second quarter of 2001 from $26.4 million in the second quarter
of 2000. Product sales increased by $6.3 million, or 28.5%, to $28.5 million in
the second quarter of 2001 from $22.2 million in the second quarter of 2000. The
increase in product sales is primarily attributable to (i) increased sales of
Accelerated Math products, including follow-on sales of subject libraries and
optical-mark card scanners, (ii) increased sales of Accelerated Reader quizzes,
with over 45,000 available book titles, to a larger base of Accelerated Reader
schools and (iii) increased sales of electronic assessment products to
educational publishers from the acquisition of Engineering Software Associates,
Inc. ("ESA") completed late last year.
Two new products were released late in the second quarter as scheduled:
STAR Early Literacy, a diagnostic test for phonics and other key early language
skills for students from pre-kindergarten to second grade, and AR Universal, the
new version of our Accelerated Reader reading management program which supports
new recorded-voice versions of quizzes on literature books for emergent readers
and new quizzes for assessing reading instruction assignments such as those
found in reading textbooks and other curricula. We continue to expect revenue
growth for 2001 to be at or near last year's growth rate with broadening
adoption of our new STAR Early Literacy software as well as continued strong
sales of our other reading and math software to both new and existing school
customers.
Service revenue, which consists of revenue from sales of training
sessions and software support agreements, decreased by $83,000, or 2.0%, to $4.1
million in the second quarter of 2001 from $4.2 million in the second quarter of
2000. This decrease is due primarily to a 15% decline in sales from our training
business as we continue to transition this business toward more district-wide
sales, as opposed to selling single training events. The decline in training
revenues was offset by a 21% increase in software support revenues, which
benefited from stronger support plan renewals. We expect to see service revenue
resume at least modest growth in the third quarter.
Cost of Sales. The cost of sales of products increased by $1.1 million,
or 39.3%, to $4.0 million in the second quarter of 2001 from $2.9 million in the
second quarter of 2000. As a percentage of product sales, the cost of sales of
products increased to 14.1% in the second quarter of 2001 from 13.0% in the
second quarter of 2000. The increase in cost of sales of products is due to
higher sales of scanners, for use with math software, as well as higher sales of
assessment products from the ESA acquisition, both of which carry somewhat lower
margins than our other software products.
The cost of sales of services decreased by $487,000, or 22.5%, to $1.7
million in the second quarter of 2001 from $2.2 million in the second quarter of
2000. As a percentage of sales of services, the cost of sales of services
decreased to 40.5% in the second quarter of 2001 from 51.3% in the second
quarter of 2000. The improvement was due to stronger sales in the software
support business and from a favorable training product mix. Compared to the
second quarter of 2000, the second quarter of 2001 training revenue contained a
higher proportion of onsite events, which are more profitable than hotel events.
Our overall gross profit margin increased to 82.6% in the second quarter of 2001
from 80.9% in the second quarter of 2000. The increase is primarily due to a
higher proportion of products to services in the 2001 revenue mix.
Product Development. Product development expenses increased by
$659,000, or 17.2%, to $4.5 million in the second quarter of 2001 from $3.8
million in the second quarter of 2000. These expenses increased primarily due to
continued aggressive investment in product development including STAR Early
Literacy and AR Universal, released late in the second quarter, and the
development of additional Accelerated Math libraries, eSchool office school
administration software, and a number of other new products at various stages of
development. As a percentage of net sales, product development costs decreased
to 13.8% in the second quarter of 2001 from 14.5% in the second quarter of 2000.
We expect product development costs to continue to increase throughout 2001 by
somewhat larger increments than the second quarter reflecting our continued
aggressive investment plans to drive future growth. Product development costs,
however, are not expected to increase significantly as a percentage of sales in
the near term.
Selling and Marketing. Selling and marketing expenses increased by $1.3
million, or 21.3%, to $7.4 million in the second quarter of 2001 from $6.1
million in the second quarter of 2000. These expenses increased due to a more
aggressive sales and marketing plan including (i) increased costs of promoting
the district-wide Renaissance schoolwide improvement process, (ii) the costs of
marketing the Generation21 enterprise-wide training and knowledge management
software, (iii) costs of marketing our new STAR Early Literacy and AR Universal
products and (iv) other initiatives. As a
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percentage of net sales, selling and marketing expenses declined to 22.8% in the
second quarter of 2001 from 23.2% in the second quarter of 2000. We expect that
selling and marketing expenses will continue at a higher level than the prior
year but will decline as a percent of sales in the third quarter compared to the
second quarter 2001.
General and Administrative. General and administrative expenses
increased by $673,000, or 22.2%, to $3.7 million in the second quarter of 2001
from $3.0 million in the second quarter of 2000. The higher expenses for the
second quarter of 2001 are largely due to increased costs associated with the
hiring of additional personnel, including wages and related benefits, and
increased personnel from the ESA acquisition in late 2000. As a percentage of
net sales, general and administrative costs decreased slightly to 11.3% in the
second quarter of 2001 from 11.5% in the second quarter of 2000, but remain
within our expected annual range of 11% to 12% of sales.
Operating Income. Operating income increased by $3.0 million, or 35.3%,
to $11.3 million in the second quarter of 2001 from $8.4 million in the second
quarter of 2000. As a percentage of net sales, operating income increased to
34.7% in the second quarter of 2001 from 31.7% in the second quarter of 2000. We
expect our 2001 operating margin to be at or slightly above the 2000 margin
levels.
Income Tax Expense. Income tax expense of $4.8 million was recorded in
the second quarter of 2001 at an effective income tax rate of 38.5% of pre-tax
income compared to $3.6 million, or 39.6% of pre-tax income in the second
quarter of 2000. We expect to maintain our effective tax rate at or below 39%
for 2001.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Net Sales. Our net sales increased by $12.4 million, or 24.5%, to $62.8
million in the six months ended June 30, 2001 from $50.5 million in the first
six months of 2000. Product sales increased by $12.3 million, or 30.4%, to $52.9
million in the first six months of 2001 from $40.6 million in the same period in
2000. The increase in product sales is primarily attributable to (i) increased
sales of Accelerated Math products, including follow-on sales of subject
libraries and optical-mark card scanners, (ii) increased sales of Accelerated
Reader quizzes, with over 45,000 available book titles, to a larger base of
Accelerated Reader schools and (iii) increased sales of electronic assessment
products to educational publishers from the ESA acquisition completed late last
year. We continue to expect revenue growth to be at or near last year's growth
rate with broadening adoption of our new STAR Early Literacy software as well as
continued strong sales of our other reading and math software to both new and
existing school customers.
Service revenue remained relatively constant at $10.0 million in the
first six months of 2001 compared to $9.9 million in the same period in 2000.
Training revenues declined in 2001 as we continue to transition this business
toward more district-wide sales, as opposed to selling single training events.
Our annual National School Renaissance Conference held in the first quarter drew
somewhat fewer attendees in 2001 than in 2000. The decline in training revenues
was offset by increased software support revenues, which benefited from stronger
support plan renewals.
Cost of Sales. The cost of sales of products increased by $1.9 million,
or 35.4%, to $7.3 million in the first six months of 2001 from $5.4 million in
the first six months of 2000. As a percentage of product sales, the cost of
sales of products increased to 13.8% in the first half of 2001 from 13.3% in the
first half of 2000. The increase in cost of sales is primarily due to higher
sales of scanners, for use with math software, as well as higher sales of
assessment products from the ESA acquisition, both of which carry somewhat lower
margins than our other software products.
The cost of sales of services increased by $138,000, or 2.7%, to $5.4
million in the first six months of 2001 from $5.2 million in the same period in
2000. As a percentage of sales of services, the cost of sales of services
increased to 53.7% in the first six months of 2001 from 52.6% in the first six
months of 2000. Increased costs associated with the location and timing of the
annual National School Renaissance Conference presented in the first quarter of
2001 were offset by stronger sales in the software support business. Our overall
gross profit margin increased to 79.8% in the first six months of 2001 from
79.0% in the first six months of 2000. The increase is primarily due to the
revenue mix of a higher proportion of products to services in 2001, as products
carry a higher gross profit margin than services.
Product Development. Product development expenses increased by $1.9
million, or 26.8%, to $8.9 million in the six months ended June 30, 2001 as
compared to $7.0 million in the corresponding 2000 period. These expenses
increased primarily due to continued aggressive investment in product
development including STAR Early Literacy and AR Universal, released late in the
second quarter, and the development of additional Accelerated Math libraries,
eSchool
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12
office school administration software, and a number of other new products at
various stages of development. As a percentage of net sales, product development
costs increased to 14.1% in the first half of 2001 from 13.9% in the first half
of 2000. We expect product development costs to continue to rise throughout
2001, reflecting our continued aggressive investment plans to drive future
growth. Product development costs, however, are not expected to increase
significantly as a percentage of sales in the near term.
Selling and Marketing. Selling and marketing expenses increased by $2.7
million, or 20.9%, to $15.4 million in the first half of 2001 from $12.8 million
in the first half of 2000. These expenses increased primarily due to (i)
increased costs of promoting the district-wide Renaissance schoolwide
improvement process, (ii) the costs of marketing the Generation21
enterprise-wide training and knowledge management software, (iii) costs of
marketing our new STAR Early Literacy and AR Universal products and (iv) other
initiatives. As a percentage of net sales, selling and marketing expenses
declined to 24.6% in the first half of 2001 from 25.3% in the first six months
of 2000. We anticipate that selling and marketing expenses will generally
continue at a higher level than the prior year but will decline as a percent of
sales in the third quarter compared to the second quarter 2001.
General and Administrative. General and administrative expenses
increased by $1.3 million, or 21.4%, to $7.1 million in the six months ended
June 30, 2001 from $5.9 million in the same period in 2000. The higher expenses
for 2001 are largely due to increased costs associated with the hiring of
additional personnel, including wages and related benefits, and increased
personnel from the ESA acquisition in late 2000. As a percentage of net sales,
general and administrative costs decreased slightly to 11.3% in the first six
months of 2001 compared to 11.6% in the same period in 2000, but remain within
our expected annual range of 11% to 12% of sales.
Operating Income. Operating income increased by $4.5 million, or 31.6%,
to $18.7 million in the first six months of 2001 from $14.2 million in the same
period in 2000. As a percentage of net sales, operating income increased to
29.8% in the first half of 2001 from 28.2% in the first half of 2000. We expect
our 2001 operating margin to be at or slightly above the 2000 margin levels.
Income Tax Expense. Income tax expense of $8.0 million was recorded in
the first six months of 2001 at an effective income tax rate of 38.5% of pre-tax
income compared to $6.2 million, or 39.5% of pre-tax income in the first half of
2000. We expect to maintain our effective tax rate at or below 39% for 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, our cash, cash equivalents and short-term
investments increased to $84.3 million from the December 31, 2000 total of $68.0
million. The increase of $16.3 million in the first half of 2001 is primarily
due to $16.1 million in cash provided by operating activities. We believe cash
flow from operations and our current cash position will be sufficient to meet
our working capital requirements and fund future growth acquisition
opportunities for the foreseeable future.
At June 30, 2001, we had a $10.0 million unsecured revolving line of
credit with a bank, which is available until March 31, 2002. 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
April 30, 2002. The line of credit bears interest based on the prime rate less
1.0%. As of June 30, 2001, the lines of credit had not been used.
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 those factors identified in Item 1,
Business, Forward-Looking Statements, contained in our Form 10-K for the year
ended December 31, 2000, which factors are incorporated herein by reference to
such Form 10-K.
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13
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. Since we expect to be able to hold these investments to maturity,
we do not expect to recognize any losses or gains related to an increase or
decrease in market interest rates.
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 unless there would be a sale or complete liquidation of an
underlying foreign investment. Aggregate foreign currency transaction gains and
losses are included in determining net earnings. 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 material.
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14
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 18, 2001, the Company held its Annual Meeting of Shareholders.
(b) Not applicable.
(c) Set forth below are descriptions of the matters voted upon at the
Annual Meeting of Shareholders and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker
non-votes, as to each such matter.
1. Eight directors were elected to serve until the 2002 Annual
Meeting of Shareholders and until their successors are elected and
qualified. The results of this proposal are as follows:
For Withheld
--- --------
(1) Judith A. Paul 30,302,205 714,733
(2) Terrance D. Paul 29,584,302 1,432,636
(3) Michael H. Baum 30,959,152 57,786
(4) John R. Hickey 30,959,505 57,433
(5) Timothy P. Welch 30,959,740 57,198
(6) John H. Grunewald 30,963,373 53,565
(7) Gordon H. Gunnlaugsson 30,963,606 53,332
(8) Harold E. Jordan 30,963,327 53,611
2. Approval was given to amend the Articles of Incorporation to
authorize the change of the name of the corporation to Renaissance
Learning, Inc. with 30,966,106 votes for this action, 35,573 votes
against, and 12,259 votes abstained.
3. Renaissance Learning, Inc.'s 1997 Stock Incentive Plan was
approved with 29,423,175 votes for this action, 246,169 votes
against, 26,299 votes abstained and 1,321,295 broker non-votes.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Not applicable.
(b) Forms 8-K. We filed no reports on Form 8-K during the quarter covered by
this report.
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15
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)
August 13, 2001 /s/ Michael H. Baum
--------------- ------------------------------
Date Michael H. Baum
Chief Executive Officer
(Principal Executive Officer)
August 13, 2001 /s/ Steven A. Schmidt
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Date Steven A. Schmidt
Secretary, Vice President, and Chief Financial Officer
(Principal Financial and Accounting Officer)