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, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM ___________________ TO ____________________
COMMISSION FILE NUMBER: 0-22187
RENAISSANCE LEARNING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1559474
(STATE OR OTHER (IRS EMPLOYER
JURISDICTION OF INCORPORATION) IDENTIFICATION NO.)
PO BOX 8036
2911 PEACH STREET
WISCONSIN RAPIDS, WISCONSIN
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
54495-8036
(ZIP CODE)
(715) 424-3636
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate 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, 2002
----- -------------
Common Stock, $0.01 par value 34,140,486
RENAISSANCE LEARNING, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
PART I - FINANCIAL INFORMATION
Page
Number
------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2002
and December 31, 2001.......................................................... 1
Consolidated Statements of Income for the
Three Months and Six Months Ended
June 30, 2002 and 2001......................................................... 2
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001............................................ 3
Notes to Unaudited Consolidated Financial Statements................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................ 13
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 14
- Index -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2002 2001
---------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents $ 38,152 $ 35,904
Investment securities 49,628 49,288
Accounts receivable, less allowance of
$1,499 in 2002 and $1,723 in 2001 14,060 12,397
Inventories 1,450 1,648
Prepaid expenses 699 1,063
Deferred tax asset 3,666 3,606
Other current assets 1,484 1,312
--------- ---------
Total current assets 109,139 105,218
Investment securities 39,992 24,364
Property, plant and equipment, net 22,231 23,007
Deferred tax asset 2,212 2,238
Goodwill 2,313 2,313
Other intangibles, net 1,143 1,412
Capitalized software, net 594 506
Other non-current assets 475 903
--------- ---------
Total assets $ 178,099 $ 159,961
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 3,349 $ 2,769
Deferred revenue 7,699 7,184
Payroll and employee benefits 3,296 3,845
Income taxes payable 2,640 4,196
Other current liabilities 4,707 4,143
--------- ---------
Total current liabilities 21,691 22,137
Deferred revenue 941 1,097
--------- ---------
Total liabilities 22,632 23,234
Minority interest 197 196
Shareholders' equity
Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,717,965 -June 30, 2002 34,617,861 -June 30, 2001 347 346
Additional paid-in capital 54,134 51,702
Retained earnings 101,176 84,618
Accumulated other comprehensive income (loss) (62) 190
Treasury stock, at cost (25,100 shares) (325) (325)
--------- ---------
Total shareholders' equity 155,270 136,531
--------- ---------
Total liabilities and shareholders' equity $ 178,099 $ 159,961
========= =========
See accompanying notes to consolidated financial statements.
- 1 -
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands, except per share amounts)
Net sales:
Products $29,045 $28,522 $57,931 $52,884
Services 4,175 4,144 9,979 9,963
------- ------- ------- -------
Total net sales 33,220 32,666 67,910 62,847
------- ------- ------- -------
Cost of sales:
Products 2,964 4,013 5,827 7,309
Services 1,803 1,680 5,036 5,355
------- ------- ------- -------
Total cost of sales 4,767 5,693 10,863 12,664
------- ------- ------- -------
Gross profit 28,453 26,973 57,047 50,183
Operating expenses:
Product development 4,181 4,497 8,626 8,889
Selling and marketing 7,481 7,435 15,973 15,426
General and administrative 3,472 3,703 7,435 7,118
------- ------- ------- -------
Total operating expenses 15,134 15,635 32,034 31,433
------- ------- ------- -------
Operating income 13,319 11,338 25,013 18,750
Other income:
Interest income 880 960 1,742 1,974
Other, net 209 195 304 170
------- ------- ------- -------
Income before taxes 14,408 12,493 27,059 20,894
Income tax provision 5,605 4,810 10,501 8,044
------- ------- ------- -------
Net income $ 8,803 $ 7,683 $16,558 $12,850
======= ======= ======= =======
Basic earnings per common share $ 0.25 $ 0.22 $ 0.48 $ 0.37
Diluted earnings per common share $ 0.25 $ 0.22 $ 0.47 $ 0.37
See accompanying notes to consolidated financial statements.
- 2 -
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2002 2001
---------------- -----------------
(In thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income $ 16,558 $ 12,850
Noncash (income) expenses included in net income -
Depreciation and amortization 2,384 2,898
Deferred income taxes (34) (16)
Change in assets and liabilities -
Accounts receivable (1,663) (3,105)
Inventories 198 3
Prepaid expenses 364 361
Accounts payable and other current liabilities (584) 3,209
Deferred revenue 360 67
Other current assets (172) (102)
Other 201 (110)
-------- --------
Net cash provided by operating activities 17,612 16,055
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,089) (1,233)
Purchase of investment securities, net (15,968) (7,017)
Capitalized software development costs (363) (474)
Acquisitions -- (704)
-------- --------
Net cash used in investing activities (17,420) (9,428)
-------- --------
Cash flows provided by financing activities:
Proceeds from issuance of stock 1,066 814
Proceeds from exercise of stock options 990 1,821
-------- --------
Net cash provided by financing activities 2,056 2,635
-------- --------
Net increase in cash 2,248 9,262
Cash and cash equivalents, beginning of period 35,904 24,655
-------- --------
Cash and cash equivalents, end of period $ 38,152 $ 33,917
======== ========
See accompanying notes to consolidated financial statements.
- 3 -
RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATION
The consolidated financial statements include the financial results of
Renaissance Learning, Inc. ("Renaissance Learning") and our subsidiaries. Our
significant subsidiaries include Renaissance Corporate Services, Inc. and
Generation21 Learning Systems, LLC ("Generation21"). School Renaissance
Institute, Inc., formerly a wholly-owned subsidiary of Renaissance Learning, was
merged into Renaissance Learning on December 31, 2001, and is currently doing
business under the name Renaissance Learning Madison. All significant
intercompany transactions have been eliminated in the consolidated financial
statements.
2. BASIS OF PRESENTATION
In the opinion of management of Renaissance Learning, the consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, necessary for a fair presentation of the
results of the interim periods, and are presented on an unaudited basis. These
financial statements should be read in conjunction with the financial
information contained in our Annual Report on Form 10-K for the year ended
December 31, 2001, which is on file with the U.S. Securities and Exchange
Commission.
The results of operations for the three and six month periods ended
June 30, 2002 and 2001 are not necessarily indicative of the results to be
expected for the full year.
3. EARNINGS PER COMMON SHARE
Basic earnings per common share has been computed based on the weighted
average number of common shares outstanding. Diluted earnings per common share
has been computed based on the weighted average number of common shares
outstanding, increased by the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
On April 17, 2002, our Board of Directors authorized a new repurchase
program which provides for the repurchase of up to 5,000,000 shares of our
common stock. No time limit was placed on the duration of the repurchase
program. Repurchased shares will become treasury shares and will be used for
stock-based employee benefit plans and for other general corporate purposes.
As of June 30, 2002, we had repurchased 25,100 shares under a previous
repurchase program. During the period of July 1, 2002 through July 31, 2002, we
repurchased 570,191 shares at a cost of $11,327,000 under the current repurchase
program.
The weighted average shares outstanding during the three months and six
months ended June 30, 2002 and 2001 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---------------- ---------------- --------------- -----------------
Basic Weighted Average Shares 34,680,079 34,490,014 34,662,259 34,460,632
Impact of Stock Options 272,022 406,948 273,120 361,651
Diluted Weighted Average Shares 34,952,101 34,896,962 34,935,379 34,822,283
- 4 -
4. SEGMENT REPORTING
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. We have two
reportable segments: software and training.
The software segment produces learning information system software for
the K-12 school market in the United States, Canada, the United Kingdom and
Australia. The software assists educators in assessing and monitoring student
development by increasing the quantity, quality and timeliness of student
performance data in the areas of reading, math and writing. The software segment
also includes training and knowledge management enterprise software, which is
currently sold primarily to corporate customers, and electronic assessment
products and services sold to educational publishers. Revenue from the software
segment includes product revenue principally from the sale of software, product
revenue from scanners sold with software and sold separately, and service
revenue from the sale of software support agreements.
The training segment provides professional development training
seminars and district-wide school improvement programs including training,
consulting and educator resource materials. The training programs instruct
educators on how to accelerate learning in the classroom through use of the
information that our learning information systems provide. Revenue from the
training segment includes service revenue from a variety of seminars presented
in hotels and schools across the country and from the annual National
Renaissance Conference, and product revenue from the sale of training materials.
We evaluate the performance of our operating segments based on
operating income. Intersegment sales and transfers and revenue derived outside
of the United States are not significant. Summarized financial information
concerning our reportable segments is shown in the following table:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------ ------------- -------------
(In thousands)
Revenues:
Software $ 29,851 $ 29,372 $ 59,559 $ 54,825
Training 3,369 3,294 8,351 8,022
-------- -------- -------- --------
Total revenues $ 33,220 $ 32,666 $ 67,910 $ 62,847
======== ======== ======== ========
Operating income:
Software $ 14,125 $ 12,309 $ 26,654 $ 20,787
Training (806) (971) (1,641) (2,037)
-------- -------- -------- --------
Total operating income $ 13,319 $ 11,338 $ 25,013 $ 18,750
======== ======== ======== ========
The reported measures are consistent with those used in measuring
amounts in the consolidated financial statements. It is our opinion, however,
that because many synergistic benefits between the segments cannot be precisely
quantified, this information provides an incomplete measure of the training
segment 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 $16,306,000 and $13,093,000 in the first
six months of 2002 and 2001, respectively. For the quarters ended June 30, 2002
and 2001, comprehensive income was $8,703,000 and $7,844,000 respectively. Our
comprehensive income includes foreign currency translation adjustments and the
remaining balance of unrealized gains and losses on our held-to-maturity
securities that were previously classified as available-for-sale securities.
- 5 -
6. GOODWILL AND OTHER INTANGIBLE ASSETS
On June 30, 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 142 " Goodwill and Other Intangible Assets". Under this new
standard, goodwill acquired after June 30, 2001 is not amortized over its useful
life and starting January 1, 2002, amortization expense is no longer recorded
for goodwill acquired on or before June 30, 2001. SFAS 142 requires that
goodwill be assessed at least annually for impairment by applying a
fair-value-based test.
We adopted the provisions of SFAS No. 142 effective January 1, 2002.
Assembled workforce does not meet the criteria of SFAS No. 142 for recognition
apart from goodwill, therefore, as of January 1, 2002, we reclassified the
$441,000 unamortized balance of assembled workforce to goodwill. SFAS 142
requires that a new fair-market-value test be applied to determine if goodwill
and other intangible assets with indefinite lives are impaired based on their
values as of January 1, 2002. We completed this testing in the first quarter of
2002 and found no instances of impairment of our recorded goodwill. All of our
goodwill and other intangible assets are assigned to our software segment.
In accordance with SFAS No. 142, the effect of this accounting change
is reflected prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the three months and the six months ended June
30, 2001 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- ------- ---------- -------
(In thousands) (In thousands)
Net income:
Reported net income $ 8,803 $ 7,683 $ 16,558 $12,850
Goodwill amortization, net of tax -- 86 -- 173
--------- ------- ---------- -------
Adjusted net income $ 8,803 $ 7,769 $ 16,558 $13,023
========= ======= ========== =======
Adjusted Earnings per share:
Basic 0.25 0.23 0.48 0.38
Diluted 0.25 0.22 0.47 0.37
For the three months ended June 30, 2002, we recognized amortization
expense of $134,000 on other intangibles. No goodwill or other intangibles were
acquired or impaired during the second quarter of 2002. During the first quarter
of 2002, we retired a $210,000 trade name intangible which was fully amortized.
Other intangibles are scheduled to be fully amortized by 2006 with corresponding
amortization estimated to be $268,000, $396,000, $286,000, and $193,000, for the
remainder of 2002 and the years ended 2003, 2004, and 2005, respectively. Other
intangibles consisted of the following (in thousands):
June 30, 2002 December 31, 2001
------------------------------------ -------------------------------------
Gross Other Gross Other
Carrying Accumulated Intangibles Carrying Accumulated Intangibles
Amount Amortization Net Amount Amortization Net
--------- ------------ ---------- ---------- ------------ -----------
Algorithms and software code $2,124 $1,724 $ 400 $2,124 $1,565 $ 559
Trade name -- -- -- 210 210 --
Non-compete agreement 1,100 357 743 1,100 247 853
------ ------ ------ ------ ------ ------
Other intangibles $3,224 $2,081 $1,143 $3,434 $2,022 $1,412
====== ====== ====== ====== ====== ======
- 6 -
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations", which
requires entities to recognize the fair value of a liability for legal
obligations associated with the retirement of tangible long-lived assets in the
period incurred, if a reasonable estimate of the fair value can be made.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of.
Under SFAS No. 144, the presentation of discontinued operations is broadened to
include a component of an entity rather than being limited to a segment of a
business. Also, accrual of future operating losses of discontinued businesses
will no longer be permitted.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting associated with exit or disposal activities. Under SFAS
No. 146, costs associated with an exit or disposal activity shall be recognized
and measured at their fair value in the period in which the liability is
incurred rather than at the date of a commitment to an exit or disposal plan.
We are required to adopt SFAS No. 143 and SFAS No. 144 on January 1,
2003 and SFAS No. 146 for all exit and disposal activities initiated after
December 31, 2002. We are currently evaluating the provisions of these recent
pronouncements, but we believe there will be no material effect on our financial
position, results of operations or shareholders' equity resulting from their
adoption.
- 7 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth certain consolidated income statement
data as a percentage of net sales, except that individual components of costs of
sales and gross profit are shown as a percentage of their corresponding
component of net sales:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
---------- ----------- --------- ----------
Net Sales:
Products 87.4% 87.3% 85.3% 84.1%
Services 12.6 12.7 14.7 15.9
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of sales:
Products 10.2% 14.1% 10.1% 13.8%
Services 43.2 40.5 50.5 53.7
Total cost of sales 14.3 17.4 16.0 20.2
Gross profit:
Products 89.8 85.9 89.9 86.2
Services 56.8 59.5 49.5 46.3
Total gross profit 85.7 82.6 84.0 79.8
Operating expenses:
Product development 12.6 13.8 12.7 14.1
Selling and marketing 22.5 22.8 23.5 24.6
General and administrative 10.5 11.3 10.9 11.3
----- ----- ----- -----
Total operating expenses 45.6 47.9 47.1 50.0
----- ----- ----- -----
Operating income 40.1 34.7 36.9 29.8
Other income:
Interest income 2.6 2.9 2.6 3.1
Other, net 0.7 0.6 0.4 0.3
----- ----- ----- -----
Total other income 3.3 3.5 3.0 3.4
----- ----- ----- -----
Income before taxes 43.4 38.2 39.9 33.2
Income tax provision 16.9 14.7 15.5 12.8
----- ----- ----- -----
Net income 26.5% 23.5% 24.4% 20.4%
===== ===== ===== =====
- 8 -
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Net Sales. Our net sales increased by $555,000, or 1.7%, to $33.2
million in the second quarter of 2002 from $32.7 million in the second quarter
of 2001. Product sales increased by $523,000, or 1.8%, to $29.0 million in the
second quarter of 2002 from $28.5 million in the second quarter of 2001. The
increase in product sales is primarily attributable to (i) sales of STAR Early
Literacy* software, which did not begin to ship until late in the second quarter
of 2001, (ii) increased sales of Accelerated Reader* quizzes, with over 56,000
available book titles, to a larger base of Accelerated Reader schools, (iii)
sales of our new products, Accelerated Writer* and Accelerated Vocabulary*
software, released during the quarter, and (iv) increased sales of math
products, including follow-on sales of Accelerated Math* libraries, optical-mark
card scanners and Accelerated Math learning cards.
Service revenue, which consists of revenue from sales of training
sessions and software support agreements, increased by $31,000, or 0.8%, to $4.2
million in the second quarter of 2002 from $4.1 million in the second quarter of
2001. Software support revenues recognized during the quarter increased 21.7%
over the same quarter in 2001, while sales from our training business declined
by 14.0%. We expect that training revenues will continue to decline in 2002
versus a year ago, because of pressures on school funding.
Overall, we expect revenue growth for 2002 to be in the range of 5% to
10%. Current school funding is weak and we do not expect it to improve any time
soon. Three new products were released in the second quarter as scheduled:
Accelerated Writer writing improvement system, Accelerated Vocabulary vocabulary
development software, and StandardsMaster* instant assessment and Web-based
reporting software. Three additional new products are expected to be ready for
shipment in the third quarter: Fluent Reader* repeated reading software for
improving reading fluency, MathFacts in a Flash* software to help educators
improve students' computation fluency, and AccelTest* test creation, scoring,
and gradebook software.
Cost of Sales. The cost of sales of products decreased by $1.0 million,
or 26.1%, to $3.0 million in the second quarter of 2002 from $4.0 million in the
second quarter of 2001. As a percentage of product sales, the cost of sales of
products decreased to 10.2% in the second quarter of 2002 from 14.1% in the
second quarter of 2001. The decrease in cost of sales of products is due to the
improved margins on scanners, as well as a sales mix of higher margin products.
The cost of sales of services increased by $123,000, or 7.3%, to $1.8 million in
the second quarter of 2002 from $1.7 million in the second quarter of 2001. As a
percentage of sales of services, the cost of sales of services increased to
43.2% in the second quarter of 2002 from 40.5% in the second quarter of 2001 due
to lower margins realized on training services. Our overall gross profit margin
increased to 85.7% in the second quarter of 2002 from 82.6% in the second
quarter of 2001. The increase is primarily due to higher profitability on
scanners.
Product Development. Product development expenses decreased by
$316,000, or 7.0%, to $4.2 million in the second quarter of 2002 from $4.5
million in the second quarter of 2001. This decrease is a result of our
aggressive investment in product development in 2001. As a percentage of net
sales, product development costs decreased to 12.6% in the second quarter of
2002 from 13.8% in the second quarter of 2001. We expect that product
development cost growth will moderate in 2002 compared to the previous year and
that product development costs will decline as a percentage of sales for 2002
compared to 2001.
Selling and Marketing. Selling and marketing expenses increased by
$46,000, or 0.6%, to $7.5 million in the second quarter of 2002 from $7.4
million in the second quarter of 2001. As a percentage of net sales, selling and
marketing expenses declined to 22.5% in the second quarter of 2002 from 22.8% in
the second quarter of 2001. We plan to continue to be aggressive with a variety
of sales and marketing initiatives in order to stimulate leads and orders for
our new products and our expanded product line.
- ----------------
*Accelerated Reader(R), AccelScan(R), STAR Reading(R), Accelerated Math(R),
Generation21(R), STAR Math(R), Reading Renaissance(R), Math Renaissance(R) and
School Renaissance(R) are registered trademarks of the company. Perfect
Copy(TM), Perfect Copy High School(TM), Surpass(TM), Renaissance(TM),
Renaissance Learning(TM), STAR Early Literacy(TM), Fluent Reader(TM),
StandardsMaster(TM), Accelerated Writer(TM), Accelerated Vocabulary(TM),
AccelTest(TM), eSchoolOffice(TM), Writing Renaissance(TM), Total Knowledge
Management(TM), MathFacts in a Flash(TM), and TKM(TM) are common law trademarks
of the company.
- 9 -
General and Administrative. General and administrative expenses
decreased by $231,000, or 6.2%, to $3.5 million in the second quarter of 2002
from $3.7 million in the second quarter of 2001. As a percentage of net sales,
general and administrative costs decreased to 10.5% in the second quarter of
2002 from 11.3% in the second quarter of 2001. For the full year 2002, we expect
to leverage our administrative infrastructure and reduce general and
administrative costs as a percentage of sales compared to 2001 levels.
Operating Income. Operating income increased by $2.0 million, or 17.5%,
to $13.3 million in the second quarter of 2002 from $11.3 million in the second
quarter of 2001. As a percentage of net sales, operating income increased to
40.1% in the second quarter of 2002 from 34.7% in the second quarter of 2001.
Income Tax Expense. Income tax expense of $5.6 million was recorded in
the second quarter of 2002 at an effective income tax rate of 38.9% of income
before taxes compared to $4.8 million, or 38.5% of income before taxes in the
second quarter of 2001. We expect to maintain our effective tax rate at or below
39% for 2002.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Net Sales. Our net sales increased by $5.1 million, or 8.1%, to $67.9
million in the six months ended June 30, 2002 from $62.8 million in the first
six months of 2001. Product sales increased by $5.0 million, or 9.5%, to $57.9
million in the first six months of 2002 from $52.9 million in the same period in
2001. The increase in product sales is primarily attributable to (i) increased
sales of STAR Early Literacy software, which did not begin to ship until late in
the second quarter of 2001, (ii) increased sales of Accelerated Reader quizzes,
with over 56,000 available book titles, to a larger base of Accelerated Reader
schools and (iii) increased sales of Accelerated Math products, including
follow-on sales of subject libraries, optical-mark card scanners and Accelerated
Math learning cards.
Service revenue remained constant at $10.0 million in the first six
months of 2002 and 2001. Training revenues, including revenues from our National
School Renaissance Conference, declined by 8.8% in the first half of 2002, while
software support revenues increased by 18.8%. Revenues from our annual National
School Renaissance Conference held in the first quarter were relatively
unchanged in 2002 compared to 2001.
Cost of Sales. The cost of sales of products decreased by $1.5 million,
or 20.3%, to $5.8 million in the first six months of 2002 from $7.3 million in
the first six months of 2001. As a percentage of product sales, the cost of
sales of products decreased to 10.1% in the first half of 2002 from 13.8% in the
first half of 2001. This decrease is primarily due to the improved margin on our
AccelScan optical-mark card scanner and a sales mix weighted more heavily to
higher margin products. The cost of sales of services decreased by $319,000, or
6.0%, to $5.0 million in the first six months of 2002 from $5.4 million in the
same period in 2001. As a percentage of sales of services, the cost of sales of
services decreased to 50.5% in the first six months of 2002 from 53.7% in the
first six months of 2001. This decrease is primarily due to increased software
support revenues while the related costs remained relatively constant. Our
overall gross profit margin increased to 84.0% in the first six months of 2002
from 79.8% in the first six months of 2001.
Product Development. Product development expenses decreased by
$263,000, or 3.0%, to $8.6 million in the six months ended June 30, 2002 as
compared to $8.9 million in the corresponding 2001 period. This decrease is a
result of our aggressive investment in product development in 2001. As a
percentage of net sales, product development costs decreased to 12.7% in the
first half of 2002 from 14.1% in the first half of 2001.
Selling and Marketing. Selling and marketing expenses increased by
$547,000, or 3.5%, to $16.0 million in the first half of 2002 from $15.4 million
in the first half of 2001. These expenses increased primarily due to (i) costs
of selling and marketing our expanded product line, (ii) increased wages and
benefit costs, and (iii) increased professional fees. As a percentage of net
sales, selling and marketing expenses declined to 23.5% in the first half of
2002 from 24.6% in the first six months of 2001.
General and Administrative. General and administrative expenses
increased by $317,000, or 4.5%, to $7.4 million in the six months ended June 30,
2002 from $7.1 million in the same period in 2001. The higher expenses for 2002
are primarily due to increased wages and related benefit costs and increased
professional fees. As a percentage of net sales, general and administrative
costs decreased to 10.9% in the first six months of 2002 compared to 11.3% in
the same period in 2001.
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Operating Income. Operating income increased by $6.3 million, or 33.4%,
to $25.0 million in the first six months of 2002 from $18.7 million in the same
period in 2001. As a percentage of net sales, operating income increased to
36.9% in the first half of 2002 from 29.8% in the first half of 2001.
Income Tax Expense. Income tax expense of $10.5 million was recorded in
the first six months of 2002 at an effective income tax rate of 38.8% of income
before taxes compared to $8.0 million, or 38.5% of income before taxes, in the
first half of 2001. We expect to maintain our effective tax rate at or below 39%
for 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, our cash, cash equivalents and investment
securities increased to $127.8 million from the December 31, 2001 total of
$109.6 million. The increase of $18.2 million in the first half of 2002 is
primarily due to $17.6 million in cash provided by operating activities. We
believe our strong cash position coupled with cash flow from operations will be
sufficient to meet both our short-term and long-term working capital
requirements.
At June 30, 2002, we had a $15.0 million unsecured revolving line of
credit with a bank, which is available until March 31, 2004. The line of credit
bears interest at either a floating rate based on the prime rate less 1.0%, or a
fixed rate for a period of up to 90 days based on LIBOR plus 1.25%. The rate is
at our option and is determined at the time of borrowing. We also have a $2.0
million unsecured revolving line of credit with a bank, which is available until
January 31, 2003. The line of credit bears interest based on the prime rate less
1.0%. As of June 30, 2002, the lines of credit had not been used.
On April 17, 2002, our Board of Directors authorized the repurchase of
up to 5,000,000 shares of our common stock. No time limit was placed on the
duration of the repurchase program. Repurchased shares will become treasury
shares and will be used for stock-based employee benefit plans and for other
general corporate purposes. During the period of July 1, 2002 through July 31,
2002 we repurchased 570,191 shares at a cost of $11,327,000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
We have not made any changes in estimates or assumptions since December 31, 2001
that had a significant effect on the reported amounts. We believe the following
are the critical accounting policies that could have the most significant effect
on our reported results and that require the most subjective estimates by
management.
Revenue Recognition. We recognize revenue in accordance with Statement
of Position No. 97-2 "Software Revenue Recognition" issued by the Accounting
Standards Executive Committee of the AICPA. Under this accounting standard,
revenue is recognized when the following have occurred: persuasive evidence of
an arrangement exists, product delivery and acceptance has occurred or a service
has been rendered, pricing is fixed and determinable, and collectibility is
probable. Revenue is recognized as follows: (i) at the time of shipment to
customers for off-the-shelf software products and related telephone support with
a duration of 12 months or less sold with the product, (ii) on the percentage of
completion basis for custom software products, (iii) as seminars are performed
for training, (iv) straight-line over the term of the support agreement for
separately sold software support agreements, and (v) as the service is performed
or on a straight-line basis over the contractual period for consulting services.
Accordingly, management is required to make judgements as to whether pricing is
fixed and determinable, whether collectibility is reasonably assured and what
the percentage of completion is as of the financial reporting date for custom
software products.
Expenses are recognized and matched against revenues for the reporting
period presented in the financial statements. We record accruals for sales
returns and doubtful accounts at the time of revenue recognition based upon
historical experience. Changes in such allowances may be required if future
returns or bad debt activity differs from historical experience.
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Impairment of Long-Lived Assets. We evaluate the recoverability of the
carrying amount of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. We
evaluate the recoverability of goodwill and other intangible assets with
indefinite useful lives annually or more frequently if events or circumstances
indicate that an asset might be impaired. Management uses judgement when
applying impairment rules to determine when an impairment test is necessary.
Examples of factors which could trigger an impairment review include a
significant decrease in the market value of an asset, a significant change in
the extent or manner in which an asset is used, and significant adverse changes
in legal factors or the business climate that impact the value of an asset.
Impairment losses are measured as the amount by which the carrying
value of an asset exceeds its estimated fair value. We are required to make
estimates of future cash flows related to the asset subject to review. These
forecasts require assumptions about demand for our products and services, future
market conditions and technological developments. Other assumptions include
determining the discount rate and future growth rates. Changes to these
assumptions could result in an impairment charge in future periods.
Software Support Agreements. We record a liability for the estimated
cost of software support obligations at the time of sale to customers based upon
historical cost experience of providing telephone support. Adjustments to the
software support liability may be required if actual costs differ from our
estimates.
Software Development Costs. We capitalize certain software development
costs incurred after technological feasibility is achieved. Capitalized software
development costs are amortized on a product-by-product basis using the
straight-line method over the estimated economic life of the products, which is
generally estimated to be 24 months. Amortization begins when the products are
available for general release to customers. If the actual economic life of our
products is shorter than our estimates, it could result in an impairment charge
in future periods.
Taxes. At the end of each interim reporting period, we estimate the
effective income tax rate expected to be applicable for the full fiscal year.
The estimated effective income tax rate contemplates the expected jurisdiction
where income is earned (e.g., United States compared to non-United States) as
well as tax planning strategies. If the actual distribution of taxable income by
jurisdiction varies from our expectations or if the results of tax planning
strategies are different from our estimates, adjustments to the effective income
tax rate may be required in the period such determination is made.
We record a liability for potential tax assessments based on our
estimate of the potential exposure. Due to the subjectivity and complex nature
of the underlying issues, actual payments or assessments may differ from
estimates and require tax provision adjustments.
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of
1995, we can obtain a "safe-harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ materially from those in the forward-looking statements. Accordingly, the
foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains certain forward-looking statements relating to
growth plans, projected sales, revenues, earnings and costs, and product
development schedules and plans. Our actual results may differ materially from
those contained in the forward-looking statements herein. Factors which may
cause such a difference to occur include (i) a delay or reduction in school
purchases of our products due to state budgetary constraints resulting in a
reduction in the funds available to schools and (ii) those factors identified in
Item 1, Business, Forward-Looking Statements, contained in our Form 10-K for the
year ended December 31, 2001, which factors are incorporated herein by reference
to such Form 10-K.
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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. We anticipate that we will have sufficient liquidity to hold our
investments to maturity, therefore, we do not expect to recognize any material
losses or gains related to an increase or decrease in market interest rates.
Market Risk. Our exposure to market risk relates to the quality of the
holdings in our investment security portfolio. The fair market value of our
investments is subject to increases or decreases in value resulting from the
performance of the securities issuer and from upgrades or downgrades in the
credit worthiness of the securities issuer. We seek to manage our exposure to
market risk by investing according to our board-approved investment policy which
has the following goals: (i) preservation of capital, (ii) provision of adequate
liquidity to meet projected cash requirements, (iii) minimization of risk of
principal loss through diversified short and medium term investments, and (iv)
maximization of yields in relationship to the guidelines, risk, market
conditions and tax considerations.
Our investment policy specifically defines that our investments (i)
have a maximum maturity of 36 months or less, (ii) meet a minimum portfolio
liquidity requirement that 10% of the portfolio shall be available on 30 days
notice and not more than 30% of the portfolio will have a maturity in excess of
24 months, (iii) meet minimum credit quality requirements specified in the plan
based on the type of investment, (iv) meet the concentration limit of not more
than 10% in any one issuer other than the US Treasury or its agencies, or money
market funds, and (v) meet certain maximum maturity or tender option limits
based on it's minimum credit rating.
Our investment policy parameters preclude investment in equity
securities and require that the Board of Directors review the policy annually
and on an interim basis as required.
Foreign Currency Exchange Rate Risk. The financial position and results
of operations of our foreign subsidiaries are measured using local currency.
Revenues and expenses of such subsidiaries have been translated into U.S.
dollars at average exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange at the balance sheet
date. Translation gains or losses are deferred as a separate component of
shareholders' equity. Aggregate foreign currency transaction gains and losses
are included in determining net income. As such, our operating results are
affected by fluctuations in the value of the U.S. dollar compared to the
Australian dollar, British pound, Canadian dollar, and Indian Rupee. At this
time, foreign operations are not significant.
- 13 -
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 17, 2002, 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.
Nine directors were elected to serve until the 2003 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 33,262,740 544,307
(2) Terrance D. Paul 33,262,740 544,307
(3) Michael H. Baum 33,262,740 544,307
(4) John R. Hickey 33,262,670 544,377
(5) Timothy P. Welch 33,142,530 664,517
(6) John H. Grunewald 33,663,700 143,347
(7) Gordon H. Gunnlaugsson 33,663,700 143,347
(8) Harold E. Jordan 33,663,700 143,347
(9) Addison L. Piper 33,663,700 143,347
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
99.1 Section 906 certification by Michael H. Baum
99.2 Section 906 certification by Steven A. Schmidt
(b) Forms 8-K. The following Form 8-K filings were made during the three months
ended June 30, 2002:
1. Form 8-K dated April 17, 2002 (filed on April 19, 2002);
2. Form 8-K dated May 22,2002 (filed on May 28, 2002);
3. Amend. No. 1 to Form 8-K dated May 22, 2002 (filed on June 19,
2002); and
4. Form 8-K dated June 27, 2002 (filed on June 28, 2002).
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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)
August 13, 2002 /s/ Michael H. Baum
--------------- ------------------------------
Date Michael H. Baum
Chief Executive Officer
(Principal Executive Officer)
August 13, 2002 /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 Section 906 certification by Michael H. Baum
99.2 Section 906 certification by Steven A. Schmidt