UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 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 OCTOBER 31, 2001
----- ----------------
Common Stock, $0.01 par value 34,582,455
RENAISSANCE LEARNING, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
PART I - FINANCIAL INFORMATION
Page
Number
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2001 (unaudited)
and December 31, 2000.......................................................... 1
Consolidated Statements of Income for the Three
Months and Nine Months Ended
September 30, 2001 and 2000 (unaudited)........................................ 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 5. OTHER INFORMATION ..................................................................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................................... 12
-Index-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RENAISSANCE LEARNING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------- ---------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 32,879 $ 24,655
Investment securities 65,119 43,343
Accounts receivable, less allowance of $1,637 at
September 30, 2001 and $985 at December 31, 2000 16,139 11,335
Inventories 1,142 1,523
Prepaid expenses 1,101 1,204
Deferred tax asset 3,318 2,922
Other current assets 1,229 845
-------------------- ---------------------
Total current assets 120,927 85,827
Property, plant and equipment, net 23,506 24,501
Deferred tax asset 1,751 2,127
Intangibles and goodwill, net 3,997 5,002
Capitalized software, net 691 581
Other non-current assets 659 183
-------------------- ---------------------
Total assets $ 151,531 $ 118,221
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,640 $ 2,166
Deferred revenue 6,449 5,484
Payroll and employee benefits 4,013 2,813
Income taxes payable 4,235 2,419
Other current liabilities 3,845 4,104
-------------------- ---------------------
Total current liabilities 22,182 16,986
Deferred revenue 1,146 1,380
-------------------- ---------------------
Total liabilities 23,328 18,366
Minority interest 189 185
Shareholders' equity 128,014 99,670
-------------------- ---------------------
Total liabilities and shareholders' equity $ 151,531 $ 118,221
==================== =====================
See accompanying notes to consolidated financial statements.
- 1 -
RENAISSANCE LEARNING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
-------------- -------------- --------------- --------------
(In thousands, except per share amounts)
Net sales:
Products $ 29,695 $ 23,236 $ 82,579 $ 63,803
Services 6,856 5,821 16,819 15,746
-------------- -------------- --------------- --------------
Total net sales 36,551 29,057 99,398 79,549
-------------- -------------- --------------- --------------
Cost of sales:
Products 4,178 3,061 11,488 8,458
Services 2,488 2,719 7,842 7,936
-------------- -------------- --------------- --------------
Total cost of sales 6,666 5,780 19,330 16,394
-------------- -------------- --------------- --------------
Gross profit 29,885 23,277 80,068 63,155
Operating expenses:
Product development 4,388 4,127 13,278 11,135
Selling and marketing 7,213 5,367 22,639 18,129
General and administrative 3,447 2,962 10,565 8,825
-------------- -------------- --------------- --------------
Total operating expenses 15,048 12,456 46,482 38,089
-------------- -------------- --------------- --------------
Operating income 14,837 10,821 33,586 25,066
Other income:
Interest income 1,004 837 2,978 2,078
Other, net 8 13 179 276
-------------- -------------- --------------- --------------
Income before taxes 15,849 11,671 36,743 27,420
Income tax provision 6,118 4,492 14,162 10,707
-------------- -------------- --------------- --------------
Net income $ 9,731 $ 7,179 $ 22,581 $ 16,713
============== ============== =============== ==============
Basic earnings per share $ 0.28 $ 0.21 $ 0.65 $ 0.49
Diluted earnings per share $ 0.28 $ 0.21 $ 0.65 $ 0.49
See accompanying notes to consolidated financial statements.
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RENAISSANCE LEARNING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
--------------------- ---------------------
(In thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income $ 22,581 $ 16,713
Noncash (income) expenses included in net income -
Depreciation and amortization 4,266 3,371
Deferred income taxes (19) (289)
Change in assets and liabilities -
Accounts receivable (4,804) (1,174)
Inventory 381 628
Prepaid expenses 103 87
Accounts payable and other current liabilities 6,687 4,527
Deferred revenue 731 (267)
Other current assets (384) (754)
Other (110) (26)
--------------------- ---------------------
Net cash provided by operating activities 29,432 22,816
--------------------- ---------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,948) (3,031)
Purchase of short-term investments, net (21,776) (19,185)
Capitalized software development costs (474) (110)
Acquisitions (704) -
--------------------- ---------------------
Net cash used in investing activities (24,902) (22,326)
--------------------- ---------------------
Cash flows provided by financing activities:
Proceeds from issuance of stock 815 490
Return of capital to minority interest - (60)
Purchase of treasury stock - (325)
Proceeds from exercise of stock options 2,879 333
--------------------- ---------------------
Net cash provided by financing activities 3,694 438
--------------------- ---------------------
Net increase in cash 8,224 928
Cash and cash equivalents, beginning of period 24,655 22,882
--------------------- ---------------------
Cash and cash equivalents, end of period $ 32,879 $ 23,810
===================== =====================
See accompanying notes to consolidated financial statements.
- 3 -
RENAISSANCE LEARNING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATION
The consolidated financial statements include the financial results of
Renaissance Learning, Inc. and its 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 post-closing
adjustments related to the finalization of certain estimated working capital
accounts. 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 nine month periods ended
September 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 September 30, 2001, we had repurchased 25,100
shares.
The weighted average shares outstanding during the three months and
nine months ended September 30, 2001 and 2000 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
---------------- ---------------- --------------- -----------------
Basic Weighted Average Shares 34,555,210 34,220,030 34,492,460 34,218,268
Impact of Stock Options 417,904 282,360 369,422 168,681
Diluted Weighted Average Shares 34,973,114 34,502,390 34,861,882 34,386,949
- 4 -
4. SEGMENT REPORTING
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. We have two
reportable segments: software and training.
The software segment produces learning information systems 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 education 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------- -------------- --------------- ---------------
(In thousands)
Revenues:
Software $ 30,571 $ 24,358 $ 85,396 $ 67,044
Training 5,980 4,699 14,002 12,505
--------------- -------------- --------------- ---------------
Total revenues $ 36,551 $ 29,057 $ 99,398 $ 79,549
=============== ============== =============== ===============
Operating income:
Software $ 13,433 $ 10,049 $ 34,219 $ 24,947
Training 1,404 772 (633) 119
--------------- -------------- --------------- ---------------
Total operating income $ 14,837 $ 10,821 $ 33,586 $ 25,066
=============== ============== =============== ===============
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 $ 22,898,000 and $16,689,000 in the
first nine months of 2001 and 2000, respectively. For the quarters ended
September 30, 2001 and 2000, comprehensive income was $9,805,000 and $7,193,000
respectively. Our comprehensive income includes foreign currency translation
adjustments and unrealized gains and losses on available-for-sale securities.
- 5-
6. GOODWILL AND OTHER INTANGIBLE ASSETS
On June 30, 2001, the 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 intangible asset
acquired after June 30, 2001 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.
We will adopt the provisions of SFAS 142 effective January 1, 2002.
SFAS 142 requires that a new fair-value-based test be applied to determine if
goodwill and other intangible assets with indefinite lives are impaired based on
their values as of January 1, 2002. The transitional provisions of SFAS 142
provide that the impairment testing for intangible assets other than goodwill
shall be completed by March 31, 2002 and that the impairment test for goodwill
shall be completed by June 30, 2002.
For the years ended December 31, 2000, 1999 and 1998, goodwill
amortization expense of $311,000, $205,000 and $176,000, respectively, is
included in our statement of income. During 2001 we recorded goodwill
amortization expense of $350,000 for the nine months ended September 30 and
expect to record goodwill amortization expense of $470,000 for the year ended
December 31, 2001. We have estimated that goodwill amortization expense of
approximately $470,000 will not be recognized in 2002 as a result of adopting
this statement.
- 6 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth certain consolidated income statement
data as a percentage of net sales, except that individual components of costs of
sales and gross profit are shown as a percentage of their corresponding
component of net sales:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
-------------- --------------- ------------- -------------
Net Sales:
Products 81.2 % 80.0 % 83.1 % 80.2 %
Services 18.8 20.0 16.9 19.8
-------------- --------------- ------------- -------------
Total net sales 100.0 % 100.0 % 100.0 % 100.0 %
============== =============== ============= =============
Cost of sales:
Products 14.1 % 13.2 % 13.9 % 13.3 %
Services 36.3 46.7 46.6 50.4
Total cost of sales 18.2 19.9 19.4 20.6
Gross profit:
Products 85.9 86.8 86.1 86.7
Services 63.7 53.3 53.4 49.6
Total gross profit 81.8 80.1 80.6 79.4
Operating expenses:
Product development 12.0 14.2 13.4 14.0
Selling and marketing 19.8 18.5 22.8 22.8
General and administrative 9.4 10.2 10.6 11.1
-------------- --------------- ------------- -------------
Total operating expenses 41.2 42.9 46.8 47.9
-------------- --------------- ------------- -------------
Operating income 40.6 37.2 33.8 31.5
Other income:
Interest income 2.7 2.9 3.0 2.6
Other, net 0.0 0.1 0.2 0.4
-------------- --------------- ------------- -------------
Total other income 2.7 3.0 3.2 3.0
-------------- --------------- ------------- -------------
Income before taxes 43.3 40.2 37.0 34.5
Income tax provision 16.7 15.5 14.3 13.5
-------------- --------------- ------------- -------------
Net income 26.6 % 24.7 % 22.7 % 21.0 %
============== =============== ============= =============
- 7 -
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net Sales. Our net sales increased by $7.5 million, or 25.8%, to $36.6
million in the third quarter of 2001 from $29.1 million in the third quarter of
2000. Product sales increased by $6.5 million, or 27.8%, to $29.7 million in the
third quarter of 2001 from $23.2 million in the third quarter of 2000. The
increase in product sales is primarily attributable to (i) sales of STAR Early
Literacy, which was released late in the second quarter, (ii) increased sales of
Accelerated Math products, including follow-on sales of subject libraries and
optical-mark card scanners, (iii) increased sales of electronic assessment
products to educational publishers from the acquisition of Engineering Software
Associates, Inc. ("ESA") completed late last year, and (iv) increased sales of
Accelerated Reader quizzes, with over 50,000 available book titles, to a larger
base of Accelerated Reader schools.
Service revenue, which consists of revenue from sales of training
sessions and software support agreements, increased by $1.0 million, or 17.8%,
to $6.9 million in the third quarter of 2001 from $5.8 million in the third
quarter of 2000. This increase is primarily attributable to our training
business, where seminar revenue increased by 16% over the third quarter 2000
level led by growth in district seminar sales. Support plan revenues increased
by 23% over third quarter 2000 due to improving renewal rates of our expert
service plans and from service support sold as part of new kits.
We expect that fourth quarter 2001 revenue will be down from the third
quarter 2001 level, as is the typical seasonal pattern, and will likely
experience a slower year over year growth rate in the fourth quarter than in the
first three quarters of 2001.
Cost of Sales. The cost of sales of products increased by $1.1 million,
or 36.5%, to $4.2 million in the third quarter of 2001 from $3.1 million in the
third quarter of 2000. As a percentage of product sales, the cost of sales of
products increased to 14.1% in the third quarter of 2001 from 13.2% in the third
quarter of 2000. The increase in the product cost of sales percentage is
primarily due to higher sales of assessment products from the ESA acquisition,
which carry a somewhat lower margin than our other software products.
The cost of sales of services decreased by $232,000, or 8.5%, to $2.5
million in the third quarter of 2001 from $2.7 million in the third quarter of
2000. As a percentage of sales of services, the cost of sales of services
decreased to 36.3% in the third quarter of 2001 from 46.7% in the third quarter
of 2000. The improvement was due to stronger sales in the software support
business and improved cost efficiencies in the training business.
Our overall gross profit margin increased to 81.8% in the third quarter
of 2001 from 80.1% in the third quarter of 2000. The increase is primarily due
to the improvement in service margins.
Product Development. Product development expenses increased by
$261,000, or 6.3%, to $4.4 million in the third quarter of 2001 from $4.1
million in the third quarter of 2000. As a percentage of net sales, product
development costs decreased to 12.0% in the third quarter of 2001 from 14.2% in
the third quarter of 2000. We will continue to invest aggressively in product
development efforts including: new software and training products, enhanced
versions of existing products and new content for our software products, such as
reading quizzes for Accelerated Reader and libraries for Accelerated Math. As a
result, we expect spending for product development to continue to grow over
time. As a percentage of sales, however, we expect that product development
costs will average less than the peak periods of 2000 and early 2001.
Selling and Marketing. Selling and marketing expenses increased by $1.8
million, or 34.4%, to $7.2 million in the third quarter of 2001 from $5.4
million in the third quarter of 2000. These expenses increased primarily due to
a more aggressive sales and marketing plan including: (i) costs of selling and
marketing the district-wide Renaissance schoolwide improvement process, (ii)
costs of marketing our new STAR Early Literacy product, (iii) costs of marketing
Accelerated Math products, and (iv) other initiatives. As a percentage of net
sales, selling and marketing expenses increased to 19.8% in the third quarter of
2001 from 18.5% in the third quarter of 2000. We anticipate that the dollars
spent for selling and marketing expenses in the fourth quarter will be
approximately the same as the third quarter, before rising again in the first
quarter of 2002, as is the normal seasonal pattern.
General and Administrative. General and administrative expenses
increased by $486,000, or 16.4%, to $3.4 million in the third quarter of 2001
from $3.0 million in the third quarter of 2000. The higher expenses for the
third quarter of 2001 are largely due to increased costs associated with the
hiring of additional personnel, including wages and
- 8 -
related benefits, and the additional personnel from the ESA acquisition in late
2000. As a percentage of net sales, general and administrative costs declined to
9.4% in the third quarter of 2001 from 10.2% in the third quarter of 2000. As a
percentage of sales, we expect that general and administrative costs for 2001
will be approximately 11% of sales on an annual basis.
Operating Income. Operating income increased by $4.0 million to $14.8
million in the third quarter of 2001 from $10.8 million in the third quarter of
2000. As a percentage of net sales, operating income increased to 40.6% in the
third quarter of 2001 from 37.2% in the third quarter of 2000. Seasonally, third
quarter is our strongest quarter. Our operating margin for the fourth quarter is
expected to be below the third quarter level due to the normal seasonal pattern
but some modest margin expansion over fourth quarter 2000 is expected.
Income Tax Expense. Income tax expense of $6.1 million was recorded in
the third quarter of 2001 at an effective income tax rate of 38.6% of pre-tax
income compared to $4.5 million, or 38.5% of pre-tax income in the third quarter
of 2000. We expect to maintain our effective tax rate at or below 39% through
2002.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net Sales. Our net sales increased by $19.8 million, or 25.0%, to $99.4
million in the nine months ended September 30, 2001 from $79.5 million in the
first nine months of 2000. Product sales increased by $18.8 million, or 29.4%,
to $82.6 million in the first nine months of 2001 from $63.8 million in the same
period of 2000. The increase in product sales is primarily attributable to (i)
increased sales of the Company's Accelerated Math products, including follow-on
sales of subject libraries and optical-mark card scanners, (ii) increased sales
of Accelerated Reader quizzes, with over 50,000 available book titles, to a
larger base of Accelerated Reader schools, (iii) strong sales of our new STAR
Early Literacy released late in the second quarter, and (iv) increased sales of
electronic assessment products to educational publishers from the ESA
acquisition completed late last year.
Service revenue increased by $1.0 million, or 6.8%, to $16.8 million in
the first nine months of 2001 from $15.7 million in the same period in 2000. The
improvement is attributable to increases in software support revenues, which
benefited from stronger support plan renewals and support included with new kit
sales, as well as increased training revenue.
Cost of Sales. The cost of sales of products increased by $3.0 million,
or 35.8%, to $11.5 million in the first nine months of 2001 from $8.5 million in
the first nine months of 2000. As a percentage of product sales, the cost of
sales of products increased to 13.9% in the first nine months of 2001 from 13.3%
in the first nine months of 2000. The increase in the product cost of sales
percentage is primarily due to higher sales of assessment products from the ESA
acquisition, which carry a somewhat lower margin than our other software
products.
The cost of sales of services decreased by $94,000, or 1.2%, to $7.8
million in the first nine months of 2001 from $7.9 million in the same period in
2000. As a percentage of sales of services, the cost of sales of services
decreased to 46.6% in the first nine months of 2001 from 50.4% in the first nine
months of 2000. This improvement was due to cost efficiencies in the training
business, stronger sales in the software support business and an increased
proportion of training revenues attributable to onsite events which are more
profitable than our hotel events.
Our overall gross profit margin rose to 80.6% in the first nine months
of 2001 from 79.4% in the first nine months of 2000. The increase is primarily
due to the improvement in service margins.
Product Development. Product development expenses increased by $2.1
million, or 19.2%, to $13.3 million in the nine months ended September 30, 2001
as compared to $11.1 million in the corresponding 2000 period. As a percentage
of net sales, product development costs decreased to 13.4% in the first nine
months of 2001 from 14.0% in the first nine months of 2000. We will continue to
invest aggressively in product development efforts including: new software and
training products, enhanced versions of existing products and new content for
our software products, such as reading quizzes for Accelerated Reader and
libraries for Accelerated Math. As a result, we expect spending for product
development to continue to grow over time. As a percentage of sales, however, we
expect that product development costs will average less than the peak periods of
2000 and early 2001.
- 9 -
Selling and Marketing. Selling and marketing expenses increased by $4.5
million, or 24.9%, to $22.6 million in the first nine months of 2001 from $18.1
million in the first nine months 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 our new STAR Early Literacy
products, (iii) the costs of selling and marketing the Generation21
enterprise-wide training and knowledge management software, and (iv) costs of
marketing our Accelerated Math products. As a percentage of net sales, selling
and marketing expenses remained constant at 22.8% in the first nine months of
2001 as in the first nine months of 2000. We anticipate that the dollars spent
for selling and marketing expenses in the fourth quarter will be approximately
the same as the third quarter, before rising again in the first quarter of 2002,
as is the normal seasonal pattern.
General and Administrative. General and administrative expenses
increased by $1.7 million, or 19.7%, to $10.6 million in the nine months ended
September 30, 2001 from $8.8 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 the
additional personnel from the ESA acquisition in late 2000. As a percentage of
net sales, general and administrative costs declined to 10.6% in the first nine
months of 2001 from 11.1% in the first nine months of 2000. As a percentage of
sales, we expect that general and administrative costs for 2001 will be
approximately 11% on an annual basis for 2001.
Operating Income. Operating income increased by $8.5 million, or 34.0%,
to $33.6 million in the first nine months of 2001 from $25.1 million in the same
period in 2000. As a percentage of net sales, operating income increased to
33.8% in the first nine months of 2001 from 31.5% in the first nine months of
2000.
Income Tax Expense. Income tax expense of $14.2 million was recorded in
the first nine months of 2001 at an effective income tax rate of 38.5% of
pre-tax income compared to $10.7 million, or 39.0% of pre-tax income in the
first nine months of 2000. We expect to maintain our effective tax rate at or
below 39% through 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, our cash, cash equivalents and short-term
investments increased to $98.0 million from the December 31, 2000 total of $68.0
million. The increase of $30.0 million in the first nine months of 2001 is
primarily due to $29.4 million in cash provided by operating activities. We
believe our 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 September 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 September 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, financial and
operating ratios, and product development schedules and plans. Our actual
results may differ materially from those contained in the forward-looking
statements herein. Factors which may cause such a difference to occur include
(i) a delay or reduction in school purchases of our products as a result of the
terrorist attacks and the related economic impact of those attacks, including a
reduction in the funds available to schools to purchase our products and (ii)
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.
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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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Part II - OTHER INFORMATION
Item 5. Other information
On July 20, 2001, we announced that Addison L. (Tad) Piper, chairman of
the board of Minneapolis, Minnesota -based investment banking firm U.S.
Bancorp Piper Jaffray, was appointed to our board of directors as of
that date.
Our press release dated July 20, 2001 is attached as an exhibit to this
report and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
99.1 Press Release dated July 20, 2001.
(b) Forms 8-K. We filed no reports on Form 8-K during the quarter covered by
this report.
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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 12, 2001 /s/ Michael H. Baum
----------------------- ------------------------------
Date Michael H. Baum
Chief Executive Officer
(Principal Executive Officer)
November 12, 2001 /s/ Steven A. Schmidt
----------------------- ------------------------------
Date Steven A. Schmidt
Secretary, Vice President, and Chief Financial Officer
(Principal Financial and Accounting Officer)
Index to Exhibits
Exhibit No. Description
- ----------- ------------
99.1 Press release dated July 20, 2001.