EXHIBIT 13.01
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
OVERVIEW
PLATO Learning, Inc. and its subsidiaries (the "Company") enhance the learning
process by providing computer-based and e-learning instruction and related
services, offering basic to advanced level courseware in reading, writing, math,
science, social studies and life and job skills. The Company's PLATO(R) Learning
System and PLATO(R) Web Learning Network provide more than 3,500 hours of
objective-based, problem solving courseware and include assessment, alignment
and management tools to create standards-based curricula and facilitate the
learning process. PLATO courseware is delivered via networks, CD-ROM, private
intranets and the Internet. In addition, single topic PLATO courseware is
available through the Company's e-commerce web site and distributors. PLATO
courseware is marketed to K-12 schools, colleges, job training programs,
correctional institutions, military education programs, corporations and
individuals.
The Company's fiscal year is from November 1 to October 31. Unless otherwise
stated, references to the years 2001, 2000 and 1999 relate to the fiscal years
ended October 31, 2001, 2000, and 1999, respectively.
Effective October 26, 2001, the Company's Board of Directors authorized a
4-for-3 stock split, effected in the form of a stock dividend, of the then
issued and outstanding shares of the Company's common stock. All references to
common stock amounts, shares and per share data included in the consolidated
financial statements and related notes have been adjusted to give retroactive
effect to the stock split.
On March 30, 2000, the Company's stockholders approved a change in the Company's
name from TRO Learning, Inc. to PLATO Learning, Inc.
ACQUISITIONS
TEACHMASTER TECHNOLOGIES, INC.
In September 2001, the Company acquired TeachMaster Technologies, Inc.
("TeachMaster"), a privately-held South Dakota corporation, for $1,550 in cash,
approximately 24,000 shares of the Company's common stock with an aggregate fair
value of $500, approximately $726 to retire certain of TeachMaster's debts, and
additional consideration not to exceed $750. The additional consideration will
be paid only upon TeachMaster achieving certain financial targets in fiscal
years 2002 and 2003. TeachMaster, a research-based educational software
development and consulting services company, specializes in the implementation
of cross-platform standards-based educational solutions for K-12 school
districts.
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REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The TeachMaster acquisition was accounted for using the purchase method of
accounting (see Note 2 to Consolidated Financial Statements). The operating
results of TeachMaster were included in the Company's financial statements from
the date of acquisition; however, they were not material to the Company's
consolidated statement of earnings for the year ended October 31, 2001.
WASATCH INTERACTIVE LEARNING CORPORATION
In April 2001, the Company acquired Wasatch Interactive Learning Corporation
("Wasatch"), a publicly-held Washington corporation and provider of multimedia
courseware for K-8 education. Following the approval of Wasatch stockholders,
the Company acquired all of the outstanding securities of Wasatch in exchange
for approximately 875,000 shares of the Company's common stock with an aggregate
fair value of $11,996, and Wasatch became a wholly owned subsidiary. In
addition, the Company assumed all existing warrants to purchase Wasatch common
stock and converted them into warrants to purchase the Company's common stock.
In a separate transaction immediately prior to the closing date, the Company
purchased Wasatch's outstanding 7% convertible debenture from the holder for
approximately $4,056 with funds borrowed under the Company's revolving loan
agreement. The 7% convertible debenture was redeemed for cash upon the closing
of the acquisition.
The Wasatch acquisition was accounted for using the purchase method of
accounting (see Note 2 to Consolidated Financial Statements). The operating
results of Wasatch were included in the Company's financial statements from the
date of acquisition; however, they were not material to the Company's
consolidated statement of earnings for the year ended October 31, 2001.
CYBERED, INC.
In July 2000, the Company acquired CyberEd, Inc. ("CyberEd"), a privately-held
Nevada corporation and provider of multimedia science courseware for high
schools, for approximately $4,400 in cash, net of cash acquired. The acquisition
was accounted for using the purchase method of accounting (see Note 2 to
Consolidated Financial Statements). The operating results of CyberEd were
included in the Company's financial statements from the date of acquisition;
however, they were not material to the Company's consolidated statements of
earnings for the years ended October 31, 2001 and 2000.
14
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS, CONTINUED
The following table presents statement of
earnings amounts as a percentage of revenue: 2001 2000 1999
Revenues 100.0% 100.0% 100.0%
Cost of revenues 9.9 11.6 12.1
-------- -------- --------
Gross profit 90.1 88.4 87.9
-------- -------- --------
Operating expenses:
Selling, general and administrative 63.1 60.6 60.0
Product development and customer support 12.4 11.3 12.4
Goodwill and intangible amortization 3.0 0.3 --
Special charge 1.8 -- --
-------- -------- --------
Total operating expenses 80.3 72.2 72.4
-------- -------- --------
Operating profit 9.8 16.2 15.5
Interest expense 0.8 1.7 3.7
Interest income (1.2) -- --
Other expense, net 0.2 0.4 0.4
-------- -------- --------
Earnings before income taxes 10.0 14.1 11.4
Income tax expense (benefit) 5.0 5.5 (22.7)
-------- -------- --------
Net earnings 5.0% 8.6% 34.1%
======== ======== ========
REVENUES
The following table highlights revenues
by product line:
2001 2000 1999
Courseware and professional services $ 66,166 $ 51,453 $ 40,465
Hardware, third-party courseware and other 3,941 4,670 3,670
-------- -------- --------
Total revenues $ 70,107 $ 56,123 $ 44,135
======== ======== ========
In 2001, courseware and professional services revenue, the driver of the
Company's operations, increased $14,713 or 29% as compared to 2000. The Company
continued to experience increased acceptance of its products and services in its
various markets. The Company expanded into the elementary market in 2001 through
the acquisition of Wasatch. The revenue growth was achieved primarily through
increased sales volume to both new and existing customers. Total revenues for
2001 were $70,107, an increase of $13,984 or 25% from 2000. During the fourth
quarter of 2001, the Company experienced a downturn in revenues due to federal
funding delays and market uncertainty as a result of the events of September 11,
2001.
Courseware and professional services revenue for 2000 increased $10,988 or 27%
from 1999. The Company experienced increased acceptance of its products and
services in its various markets. Revenue growth was achieved primarily through
increased sales volume to both new and existing customers. Total revenues for
2000 were $56,123, an increase of $11,988 from 1999.
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, client spending patterns, budget cycles
and fiscal year ends, and promotional programs. The Company historically has
experienced its lowest revenues in the first quarter and increasingly higher
levels of revenues in each of the next three quarters.
15
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GROSS PROFIT
Gross profit for 2001 increased $13,558 or 27% to $63,187 as compared to $49,629
for 2000. This increase was due mainly to the increase in courseware and
professional services revenue. Gross margin increased to 90% for 2001, as
compared to 88% for 2000, mainly due to the increased mix of higher margin
courseware revenues.
Gross profit for 2000 increased $10,846 or 28% to $49,629 as compared to $38,783
for 1999. This increase was primarily due to the increase in courseware and
professional services revenue. Gross margin was a comparable 88% for both 2000
and 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for 2001 increased $10,207 or 30% to
$44,226 as compared to $34,019 for 2000. Commissions increased due to increased
revenues and a new compensation plan structure resulting in many top performing
sales representatives reaching their bonus levels in 2001. In addition, the
increase resulted from infrastructure expansion and marketing expenses
associated with a large consumer sale. As a percentage of revenue, total
selling, general and administrative expense increased from 61% in 2000 to 63% in
2001.
Selling, general and administrative expense for 2000 increased $7,555 or 29% to
$34,019 as compared to $26,464 for 1999. The increase resulted from
infrastructure expansion, higher commissions due to increased revenues and
incentive bonuses, which were not available in 1999. As a percentage of revenue,
total selling, general and administrative expense increased from 60% in 1999 to
61% in 2000.
16
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS, CONTINUED
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT EXPENSE
Product development and customer support expense for 2001 increased $2,347 or
37% to $8,686 as compared to $6,339 for 2000. The increase was due primarily to
increased spending associated with new reading products, enhanced math products,
the PLATO(R) Web Learning Network, the PLATO(R) Simulated Test System and the
PLATO(R) Pathways Management System. In addition, customer support expense
increased as a result of the Company's expanding customer base. As a percentage
of revenue, total product development and customer support expense increased
from 11% in 2000 to 12% in 2001.
Product development and customer support expense for 2000 increased $868 or 16%
to $6,339 as compared to $5,471 for 1999. The increase was due primarily to
increased spending associated with enhanced reading products, simulated test
products and the PLATO Web Learning Network. In addition, customer support
expense increased as a result of the Company's expanding customer base. As a
percentage of revenue, total product development and customer support expense
decreased from 12% in 1999 to 11% in 2000.
GOODWILL AND INTANGIBLE AMORTIZATION EXPENSE
Goodwill and intangible amortization expense was $2,112 for 2001 as compared to
$144 for 2000. The increase was attributable to the Wasatch acquisition in the
second quarter of 2001 and the CyberEd acquisition late in the third quarter of
2000 (see Note 2 to Consolidated Financial Statements).
SPECIAL CHARGE
The special charge in 2001 represented costs associated with the November 2000
retirement of the Company's founder and former chief executive officer, and
included non-cash amounts of $463 for the accelerated vesting of stock options.
OPERATING PROFIT
Operating profit for 2001 was $6,903 as compared to $9,127 for 2000. This
decline in operating results was due principally to the fourth quarter 2001
delay in federal funding, the events of September 11, 2001, and the special
charge of $1,260 combined with increased operating expenses in 2001 that were
not offset by the increase in courseware and professional services revenue.
Operating profit, as a percentage of revenue, decreased from 16% in 2000 to 10%
in 2001.
Operating profit for 2000 was $9,127 as compared to $6,848 for 1999. This
improvement in operating results was due principally to the increase in
courseware and professional services revenue, partially offset by increased
selling, general and administrative expenses in 2000. Operating profit, as a
percentage of revenue, increased slightly from 15.5% in 1999 to 16.2% in 2000.
17
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST EXPENSE
Interest expense decreased to $585 for 2001 from $971 for 2000 primarily as a
result of the decreased level of bank borrowings compared to 2000 and the
conversion of the 10% subordinated convertible debentures during 2000 (see Note
5 to Consolidated Financial Statements). Interest expense decreased to $971 for
2000 from $1,651 for 1999 primarily as a result of the decreased level of bank
debt that resulted from cash flow from operations.
INTEREST INCOME
Interest income was $817 for 2001 as compared to $12 for 2000. This increase was
due to interest income on the invested proceeds from the public stock offering
completed in June 2001 (see Note 8 to Consolidated Financial Statements).
INCOME TAXES
The Company's effective tax rate for 2001 was 50% as compared to 39% for 2000.
This increase was due primarily to the effect of non-deductible goodwill
amortization in 2001. The Company expects that the effective tax rate will
decrease in 2002, as compared to 2001, since goodwill will no longer be
amortized with the expected adoption of SFAS 142.
Income taxes for 1999 reflect a nonrecurring tax benefit of $10,000 resulting
from the reversal of the valuation allowance placed on the Company's deferred
tax asset, related to its net operating loss carryforwards in the United States.
This reversal was based on updated expectations about future years' taxable
income to reflect continuing improvements in operating results influenced by the
Company's continued revenue growth and other indications that certain concerns
that had previously limited management's expectation about future taxable income
no longer were applicable.
18
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2001, the Company's principal sources of liquidity included
cash and cash equivalents of $61,568 and net accounts receivable of $28,739. The
Company had total installment receivables of $18,108 at October 31, 2001, of
which $16,087 are to be billed within one year from the balance sheet date and
are included in net accounts receivable. Working capital was $74,049 at October
31, 2001, an increase of $56,546 from October 31, 2000 due primarily to
increased cash and cash equivalents and accounts receivable, partially offset by
increased expense accruals and deferred revenue.
Net cash provided by the Company's operating activities was $10,305 in 2001
compared to $14,248 in 2000. Cash flows from operations were used principally to
fund the Company's working capital requirements.
The Company's net cash used in investing activities was $12,906 in 2001 and
$8,416 in 2000. Net cash used included $6,742 for the TeachMaster and Wasatch
acquisitions in 2001 and $4,387 for the CyberEd acquisition in 2000 (see Note 2
to Consolidated Financial Statements). Capitalized product development costs
were $5,030 in 2001 and $2,932 in 2000. The Company's cash capital expenditures
totaled $1,134 in 2001 and $1,097 in 2000. Additionally in 2001, the Company
financed $1,076 of capital expenditures through capital leases. At October 31,
2001, the Company had no material commitments for capital expenditures.
Net cash provided by financing activities was $57,827 for 2001, primarily from
common stock issued through the public stock offering and the exercise of stock
options and warrants (see Note 8 to Consolidated Financial Statements). In June
2001, the Company completed a public stock offering, selling 3,680,000 shares of
its common stock at a price of $15.75 per share. Net proceeds were approximately
$55,000, after payment of underwriting discounts, commissions and offering
costs. The Company's net cash provided by financing activities was $750 in 2000.
The Company completed a private placement of common stock, resulting in net
proceeds of $4,771 (see Note 8 to Consolidated Financial Statements), which were
offset by the $4,587 of net repayments of short-term borrowings.
Income taxes for 1999 reflect a nonrecurring tax benefit of $10,000, resulting
from the reversal of the valuation allowance placed on the Company's deferred
tax asset, related to its net operating loss carryforwards in the United States.
This reversal was based on updated expectations about future years' taxable
income to reflect continuing improvements in operating results influenced by the
Company's continued revenue growth and other indications that certain concerns
that had previously limited management's expectation about future taxable income
no longer were applicable. In prior years, the primary differences between
pretax earnings for financial reporting purposes and taxable income for income
tax purposes included revenue recognition, the capitalization of product
development costs and various reserves. The Company has total net operating loss
carryforwards of approximately $40,250 which expire between 2004 and 2021.
19
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
From time to time, the Company evaluates potential acquisitions of products or
businesses that complement the Company's core business. The Company may consider
and acquire other complementary businesses, products, or technologies in the
future.
The Company maintains adequate cash reserves to meet its anticipated working
capital, capital expenditure and business investment requirements.
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, client spending patterns, budget cycles
and fiscal year ends, and promotional programs. The Company historically has
experienced its lowest revenues in the first quarter and increasingly higher
levels of revenues in each of the next three quarters.
INTEREST RATE RISK
At October 31, 2001, the Company's debt consisted of capital lease obligations
at fixed interest rates. As a result, risk relating to interest rate fluctuation
is considered minimal.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company markets its products worldwide and has operations in Canada and the
United Kingdom. As a result, financial results could be affected by changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Working funds necessary to facilitate the short-term operations of foreign
subsidiaries are kept in local currencies in which they do business.
Approximately 8% of total revenues for 2001 were denominated in currencies other
than the U.S. dollar.
20
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standards No. 141, "Business
Combinations"("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). These statements eliminate the pooling-of-interests method of
accounting for business combinations and require that goodwill and intangible
assets with indefinite useful lives not be amortized. Instead, these assets will
be reviewed for impairment annually with any related losses recognized when
incurred. SFAS 141 is generally effective for business combinations completed
after June 30, 2001. SFAS 142 is effective for fiscal years beginning after
December 15, 2001 with early application permitted in certain circumstances.
Additionally, goodwill and intangible assets acquired after June 30, 2001 are
subject immediately to the nonamortization and amortization provisions of SFAS
142. The Company expects to adopt SFAS 142 effective as of November 1, 2001. At
October 31, 2001, the net book value of the Company's goodwill was $15,950, and
goodwill amortization expense was $1,483, $90 and $0 for 2001, 2000 and 1999,
respectively. The adoption of these statements is expected to reduce 2002 annual
goodwill amortization expense by approximately $2,190. Additionally, the effects
of any future impairment, as provided by SFAS 142, on the Company's consolidated
financial position and results of operations are unknown.
In October 2001, the FASB approved Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of and
supersedes SFAS 121 and APB Opinion No. 30. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. Additionally, the effects of any
future impairment and disposal of long-lived assets, as provided by SFAS 144, on
the Company's consolidated financial position and results of operations are
unknown.
21
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CAUTIONARY STATEMENTS
As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors could cause actual future
results of operations to vary from those anticipated in previously made
forward-looking statements and any other forward-looking statements made in this
document and elsewhere by or on behalf of the Company. Net revenues could be
materially affected by products introduced by competitors with advanced
technology and better features and benefits or lower prices or government
funding priorities. Operations could be affected by the Company's ability to
execute its diversification strategy or to integrate acquired companies.
22
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
REPORT OF MANAGEMENT
The management of PLATO Learning, Inc. is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America and include amounts which
reflect management's best estimates based on its informed judgment and
consideration given to materiality. Management is also responsible for the
accuracy of the related data in the annual report and its consistency with the
financial statements.
In the opinion of management, the Company's accounting systems and procedures,
and related internal controls, provide reasonable assurance that transactions
are executed in accordance with management's intention and authorization, that
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, and that assets are properly
accounted for and safeguarded. The concept of reasonable assurance is based on
the recognition that there are inherent limitations in all systems of internal
control, and that the cost of such systems should not exceed the benefits to be
derived there from. Management reviews and modifies the system of internal
controls to improve its effectiveness. The effectiveness of the controls system
is supported by the selection, retention and training of qualified personnel, an
organizational structure that provides an appropriate division of responsibility
and a budgeting system of control.
The adequacy of the Company's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent
audits are reviewed by the Audit Committee of the Board of Directors, consisting
solely of outside directors. The independent accountants meet with, and have
confidential access to, the Audit Committee to discuss the results of their
audit work.
/s/ J Murray
John Murray
President and Chief Executive Officer
/s/ John M. Buske
John M. Buske
Chief Operating Officer and
Chief Financial Officer
23
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
PLATO Learning, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of stockholders' equity and comprehensive
income, and of cash flows present fairly, in all material respects, the
financial position of PLATO Learning, Inc. and its subsidiaries at October 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
December 3, 2001, except as to Note 15,
which is as of December 20, 2001
24
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31
2001 2000 1999
REVENUES $ 70,107 $ 56,123 $ 44,135
Cost of revenues 6,920 6,494 5,352
-------- -------- --------
Gross profit 63,187 49,629 38,783
OPERATING EXPENSES:
Selling, general and administrative 44,226 34,019 26,464
Product development and customer support 8,686 6,339 5,471
Goodwill and intangible amortization 2,112 144 --
Special charge 1,260 -- --
-------- -------- --------
Total operating expenses 56,284 40,502 31,935
-------- -------- --------
OPERATING PROFIT 6,903 9,127 6,848
Interest expense 585 971 1,651
Interest income (817) (12) (22)
Other expense, net 125 230 188
-------- -------- --------
Earnings before income taxes 7,010 7,938 5,031
Income tax expense (benefit) 3,505 3,096 (10,000)
-------- -------- --------
NET EARNINGS 3,505 4,842 15,031
Preferred stock accretion -- (129) (670)
-------- -------- --------
Net earnings available to common stockholders $ 3,505 $ 4,713 $ 14,361
======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.26 $ 0.47 $ 1.63
Diluted 0.24 0.45 1.52
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 13,364 9,935 8,787
Diluted 14,383 10,521 10,068
See Notes to Consolidated Financial Statements
25
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OCTOBER 31
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,568 $ 6,415
Accounts receivable,
less allowances of $2,545 and $2,308, respectively 28,739 21,829
Inventories 401 615
Prepaid expenses and other current assets 916 627
Deferred income taxes 2,468 2,315
--------- ---------
Total current assets 94,092 31,801
Equipment and leasehold improvements, less accumulated
depreciation of $3,829 and $2,882, respectively 2,803 1,495
Product development costs, less accumulated amortization
of $12,094 and $9,072, respectively 9,949 7,921
Deferred income taxes 6,832 4,229
Goodwill, less accumulated amortization of
$1,573 and $90, respectively 15,950 3,003
Other assets 6,285 2,141
--------- ---------
TOTAL ASSETS $ 135,911 $ 50,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 242 $ 600
Accounts payable 2,216 1,502
Accrued employee salaries and benefits 4,539 4,087
Accrued liabilities 3,883 2,129
Deferred revenue 9,163 5,980
--------- ---------
Total current liabilities 20,043 14,298
Long-term debt 720 --
Deferred revenue 1,170 287
Other liabilities 79 160
--------- ---------
TOTAL LIABILITIES 22,012 14,745
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 25,000,000 shares authorized;
16,689,000 shares issued and 16,411,000 shares outstanding
at October 31, 2001; 11,090,000 shares issued and 10,967,000
shares outstanding at October 31, 2000 164 110
Paid in capital 113,767 35,498
Treasury stock at cost, 278,000 and 123,000 shares, respectively (4,914) (1,209)
Retained earnings 5,786 2,281
Accumulated other comprehensive loss (904) (835)
--------- ---------
Total stockholders' equity 113,899 35,845
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 135,911 $ 50,590
========= =========
See Notes to Consolidated Financial Statements
26
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31
2001 2000 1999
OPERATING ACTIVITIES:
Net earnings $ 3,505 $ 4,842 $ 15,031
-------- -------- --------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Deferred income taxes 3,505 3,096 (10,000)
Depreciation and amortization 6,380 2,928 2,894
Provision for doubtful accounts 1,868 2,173 2,170
Stock-based compensation 576 109 106
Common stock received for employee payroll tax (1,351) -- --
Loss on disposal of fixed assets 29 102 9
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (8,447) (3,798) (5,557)
Inventories 214 37 2
Prepaid expenses and other current and
noncurrent assets (1,956) 923 217
Accounts payable 530 173 (1,610)
Accrued liabilities, accrued employee salaries and
benefits and other liabilities 1,416 1,989 (841)
Deferred revenue 4,036 1,674 898
-------- -------- --------
Total adjustments 6,800 9,406 (11,712)
-------- -------- --------
Net cash provided by operating activities 10,305 14,248 3,319
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (6,742) (4,387) --
Capital expenditures (1,134) (1,097) (832)
Capitalization of product development costs (5,030) (2,932) (2,731)
-------- -------- --------
Net cash used in investing activities (12,906) (8,416) (3,563)
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of capital leases (271) -- --
Net repayments of revolving loan (41) (4,587) (2,293)
Repayment of long-term debt -- -- (2,441)
Net proceeds from issuance of common stock 58,139 5,337 75
Net proceeds from issuance of convertible
redeemable preferred stock -- -- 4,499
-------- -------- --------
Net cash provided by (used in) financing activities 57,827 750 (160)
-------- -------- --------
Effect of foreign currency on cash (73) (230) 1
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 55,153 6,352 (403)
Cash and cash equivalents at beginning of year 6,415 63 466
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 61,568 $ 6,415 $ 63
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 363 $ 908 $ 1,476
Cash paid for income taxes 472 100 --
Noncash investing and financing activities:
Assets acquired in acquisitions 927 1,300 --
Liabilities assumed in acquisitions 863 230 --
Common stock issued in acquisitions 12,526 -- --
Capital lease obligations incurred 1,076 -- --
Debt converted to common stock 600 2,450 --
Preferred stock converted to common stock -- 3,934 --
Exercise of stock options with common stock 2,354 -- --
Accretion of preferred stock -- 129 670
See Notes to Consolidated Financial Statements
27
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS)
COMMON STOCK RETAINED ACCUMULATED
------------------------------------------- EARNINGS OTHER TOTAL
PAR PAID IN TREASURY (ACCUMULATED COMPREHEN- STOCKHOLDERS'
SHARES VALUE CAPITAL STOCK DEFICIT) SIVE LOSS EQUITY
BALANCE, NOVEMBER 1, 1998 8,553 $ 86 $ 22,934 $ (1,176) $ (17,592) $ (583) $ 3,669
Comprehensive income:
Net earnings -- -- -- -- 15,031 -- 15,031
Foreign currency
translation adjustments -- -- -- -- -- 3 3
---------
Total comprehensive income 15,034
---------
Exercise of stock options and shares
issued under employee stock
purchase plan 52 -- 80 -- -- -- 80
Restricted stock (19) -- 106 -- -- -- 106
Warrants issued with
preferred stock -- -- 541 -- -- -- 541
Beneficial conversion feature associated
with preferred stock -- -- 826 -- -- -- 826
Preferred stock accretion -- -- (670) -- -- -- (670)
Repurchase of shares (2) -- -- (10) -- -- (10)
------- --------- --------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1999 8,584 86 23,817 (1,186) (2,561) (580) 19,576
Comprehensive income:
Net earnings -- -- -- -- 4,842 -- 4,842
Foreign currency
translation adjustments -- -- -- -- -- (255) (255)
---------
Total comprehensive income 4,587
---------
Common stock issued 474 5 4,766 -- -- -- 4,771
Debenture conversions 363 4 2,446 -- -- -- 2,450
Preferred stock conversions 1,415 14 3,920 -- -- -- 3,934
Exercise of stock options, warrants
and shares issued under employee
stock purchase plan 148 1 569 -- -- -- 570
Restricted stock (16) -- 109 -- -- -- 109
Preferred stock accretion -- -- (129) -- -- -- (129)
Repurchase of shares (1) -- -- (23) -- -- (23)
------- --------- --------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 2000 10,967 110 35,498 (1,209) 2,281 (835) 35,845
Comprehensive income:
Net earnings -- -- -- -- 3,505 -- 3,505
Foreign currency
translation adjustments -- -- -- -- -- (69) (69)
---------
Total comprehensive income 3,436
---------
Common stock issued 3,691 36 54,773 -- -- -- 54,809
Debenture conversions 88 -- 600 -- -- -- 600
Exercise of stock options, warrants and
shares issued under employee
stock purchase plan 928 9 5,675 -- -- -- 5,684
Restricted stock (7) -- 87 -- -- -- 87
Common stock and warrants issued
for acquisitions 899 9 12,517 -- -- -- 12,526
Accelerated vesting of stock options -- -- 489 -- -- -- 489
Income tax benefit of stock
options exercised -- -- 4,128 -- -- -- 4,128
Common stock surrendered in conjunction
with exercise of stock options (155) -- -- (3,705) -- -- (3,705)
------- --------- --------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 2001 16,411 $ 164 $ 113,767 $ (4,914) $ 5,786 $ (904) $ 113,899
======= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements
28
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
PLATO Learning, Inc. and its subsidiaries (the "Company") provide computer-based
and e-learning instruction and related services, offering basic to advanced
level courseware in reading, writing, math, science, social studies and life and
job skills. The Company's PLATO(R) Learning System and PLATO(R) Web Learning
Network provide more than 3,500 hours of objective-based, problem solving
courseware and include assessment, alignment and management tools to create
standards-based curricula and facilitate the learning process. PLATO courseware
is delivered via networks, CD-ROM, private intranets and the Internet. In
addition, single topic PLATO courseware is available through the Company's
e-commerce web site and distributors. PLATO courseware is marketed to K-12
schools, colleges, job training programs, correctional institutions, military
education programs, corporations and individuals.
The Company's fiscal year is from November 1 to October 31. Unless otherwise
stated, references to the years 2001, 2000 and 1999 relate to the fiscal years
ended October 31, 2001, 2000 and 1999, respectively.
On March 30, 2000, the Company's stockholders approved a change in the Company's
name from TRO Learning, Inc. to PLATO Learning, Inc.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of PLATO
Learning, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Certain reclassifications of previously reported amounts have been made to
conform to the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Any such investments are carried at
cost, which approximates fair value.
INVENTORIES
Inventories, which consist principally of goods purchased for resale, are stated
at the lower of cost or market with cost determined using the first-in,
first-out method.
29
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally three to five years for
equipment and over the lease term for leasehold improvements. Upon retirement or
disposition, cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is included in the results of operations.
Maintenance and repairs are expensed as incurred. Depreciation expense was
$1,073, $811 and $626 for 2001, 2000 and 1999, respectively.
GOODWILL AND OTHER LONG-TERM ASSETS
Other assets include intangible assets and installment receivables with terms
greater than one year. The Company investigates potential impairments of
long-lived assets, identifiable intangibles and associated goodwill when events
or changes in circumstances have made recovery of an asset's carrying value
unlikely. An impairment loss would be recognized if the sum of the expected
future net cash flows were less than the carrying amount of the asset. There
were no such impairments of long-lived assets during the periods presented.
FINANCIAL INSTRUMENTS
The carrying value of cash equivalents, accounts receivable, accounts payable
and accrued liabilities approximates their fair value due to the short-term
nature of these financial instruments. The fair value of the Company's debt is
estimated to approximate the carrying value of these liabilities based upon
borrowing rates currently available to the Company for borrowings with similar
terms.
REVENUE RECOGNITION
Revenue is recognized in accordance with the provisions of Statement of Position
No. 97-2 "Software Revenue Recognition", as amended and modified and Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101").
Revenue from the sale of courseware licenses, computer hardware and related
services is recognized upon meeting the following criteria: (i) execution of a
written customer order, (ii) delivery of the courseware, hardware and related
services, (iii) the license fee is fixed or determinable and (iv) collectibility
of the proceeds is probable. For software arrangements that include more than
one element, the Company allocates the total arrangement fee among each
deliverable based on vendor-specific objective evidence of the relative fair
value of each deliverable. Vendor-specific objective evidence of fair value is
determined using the price charged when that element is sold separately. Upon
delivery, future service costs, if any, are accrued. Future service costs
represent the Company's problem resolution and support "hotline" service for a
one-year period. Service revenue includes software support, which is deferred
and recognized ratably over the support period, and revenue from installation
and training services, which is recognized as services are performed.
Installation and training services are customarily billed at a fixed daily rate.
Deferred revenue represents the portion of billings made or payments received in
advance of services being performed or products being delivered.
30
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRODUCT DEVELOPMENT, ENHANCEMENT AND MAINTENANCE COSTS
Costs incurred in the development, enhancement and routine maintenance of the
Company's current generation courseware products are expensed as incurred. Costs
incurred in establishing the technological feasibility of new courseware
products are expensed as incurred. Once technological feasibility has been
established, costs incurred in the development of new generation courseware
products are capitalized.
Capitalized costs are amortized to product development and customer support
expense over the estimated useful life of the new courseware products, which is
generally three years. Amortization begins when the product is available for
general release to customers. Unamortized costs determined to be in excess of
the net realizable value of the product, if any, are expensed at the date of
such determination. Amortization expense was $3,195, $1,973 and $2,268 for 2001,
2000 and 1999, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax basis
of assets and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount "more
likely than not" to be realized in future tax returns. Tax rate changes are
reflected in income during the period such changes are enacted.
STOCK SPLIT
Effective October 26, 2001, the Company's Board of Directors authorized a
4-for-3 stock split, effective in the form of a stock dividend, of the then
issued and outstanding shares of the Company's common stock. All references to
common stock amounts, shares and per share data included in the consolidated
financial statements and related notes have been adjusted to give retroactive
effect to the stock split.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing net
earnings available to common stockholders, adjusted for any convertible
preferred stock accretion and convertible debt interest (if those securities are
dilutive), by the weighted average number of common and, where dilutive,
potential common shares outstanding during the period. Potential common shares
include options, warrants and convertible securities.
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the balance sheet date. Resulting translation
adjustments are recorded as a component of comprehensive income in the
consolidated financial statements.
31
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMPREHENSIVE INCOME
The Company's components of comprehensive income include net earnings and
foreign currency translation adjustments. Comprehensive income for all periods
presented is included in the consolidated statements of stockholders' equity and
comprehensive income.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company accounts for stock
options and awards under the intrinsic value method of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". The intrinsic
value method recognizes compensation expense equal to the excess, if any, of the
stock's fair market value on the grant date over the exercise price. SFAS 123
requires pro forma disclosure of net earnings and earnings per share as if the
fair value method of SFAS 123 had been applied. The Black-Scholes stock option
pricing model was used to estimate the fair value of options granted for the pro
forma disclosure.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
These statements eliminate the pooling-of-interests method of accounting for
business combinations and require that goodwill and intangible assets with
indefinite useful lives not be amortized. Instead, these assets will be reviewed
for impairment annually with any related losses recognized when incurred. SFAS
141 is generally effective for business combinations completed after June 30,
2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001
with early application permitted in certain circumstances. Additionally,
goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the nonamortization and amortization provisions of SFAS 142. The
Company expects to adopt SFAS 142 effective as of November 1, 2001. At October
31, 2001, the net book value of the Company's goodwill was $15,950, and goodwill
amortization expense was $1,483, $90 and $0 for 2001, 2000 and 1999,
respectively. The adoption of these statements is expected to reduce 2002 annual
goodwill amortization expense by approximately $2,190. Additionally, the effects
of any future impairment, as provided by SFAS 142, on the Company's consolidated
financial position and results of operations are unknown.
In October 2001, the FASB approved Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of and
supersedes SFAS 121 and APB Opinion No. 30. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. Additionally, the effects of any
future impairment and disposal of long-lived assets, as provided by SFAS 144, on
the Company's consolidated financial position and results of operations are
unknown.
32
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. ACQUISITIONS
TEACHMASTER TECHNOLOGIES, INC.
In September 2001, the Company acquired TeachMaster Technologies, Inc.
("TeachMaster"), a privately-held South Dakota corporation, for $1,550 in cash,
approximately 24,000 shares of the Company's common stock with an aggregate fair
value of $500, approximately $726 to retire certain of TeachMaster's debts, and
additional consideration not to exceed $750. The additional consideration will
be paid only upon TeachMaster achieving certain financial targets in fiscal
years 2002 and 2003. TeachMaster, a research-based educational software
development and consulting services company, specializes in the implementation
of cross-platform standards-based educational solutions for K-12 school
districts.
The purchase price consisted of the following components:
Cash paid $ 1,550
Common stock issued 500
Debt paid 726
Direct acquisition costs 100
Liabilities assumed 234
-------
$ 3,110
=======
The allocation of the total purchase price was as follows:
Estimated fair value of tangible assets acquired $ 332
Estimated fair value of identified intangible assets 965
Goodwill 2,180
Deferred tax liabilities (367)
-------
$ 3,110
=======
The TeachMaster acquisition was accounted for under SFAS 141 using the purchase
method of accounting and, accordingly, the assets and liabilities acquired were
recorded at their estimated fair values on the acquisition date. The valuation
of identified intangible assets, consisting of an employment agreement and
acquired technology, was performed by the Company. Goodwill and intangible
assets are subject to the provisions of SFAS 142. Intangible assets are being
amortized over three to five years. Goodwill will not be amortized; however, it
will be tested for impairment on an annual basis.
The operating results of TeachMaster were included in the Company's consolidated
statements of earnings from the date of acquisition; however, they were not
material to the Company's consolidated financial statements and, accordingly,
pro forma financial disclosures are not presented.
33
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
WASATCH INTERACTIVE LEARNING CORPORATION
In April 2001, the Company acquired Wasatch Interactive Learning Corporation
("Wasatch"), a publicly-held Washington corporation and provider of multimedia
courseware for K-8 education. Following the approval of Wasatch stockholders,
the Company acquired all of the outstanding securities of Wasatch in exchange
for approximately 875,000 shares of the Company's common stock with an aggregate
fair value of $11,996, and Wasatch became a wholly owned subsidiary. In
addition, the Company assumed all existing warrants to purchase Wasatch common
stock and converted them into warrants to purchase the Company's common stock
(see Note 8).
In a separate transaction immediately prior to the closing date, the Company
purchased Wasatch's outstanding 7% convertible debenture from the holder for
approximately $4,056 with funds borrowed under the Company's revolving loan
agreement. The 7% convertible debenture was redeemed for cash upon the closing
of the acquisition.
The purchase price consisted of the following components:
Common stock issued $ 11,996
Debenture purchase 4,056
Direct acquisition costs 616
Liabilities assumed 629
Common stock warrants assumed (see Note 8) 30
--------
$ 17,327
========
The allocation of the total purchase price was as follows:
Estimated fair value of tangible assets acquired $ 595
Estimated fair value of identified intangible assets 2,200
Goodwill 12,290
Deferred tax asset 3,100
Deferred tax liabilities (858)
--------
$ 17,327
========
The Wasatch acquisition was accounted for using the purchase method of
accounting and, accordingly, the assets and liabilities acquired were recorded
at their estimated fair values on the acquisition date. The valuation of
identified intangible assets, consisting of a customer list, acquired technology
and the assembled workforce, was performed by an independent appraisal firm.
Beginning in 2002, goodwill and intangible amortization will be subject to the
provisions of SFAS 142. Intangible assets will continue to be amortized over
three to five years. Goodwill was being amortized over seven years; under SFAS
142 it will no longer be amortized and will be tested for impairment on an
annual basis.
34
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. ACQUISITIONS, CONTINUED
The operating results of Wasatch were included in the Company's consolidated
statements of earnings from the date of acquisition. The unaudited pro forma
consolidated results of operations of the Company, as if the Wasatch acquisition
had occurred at the beginning of the years presented, were as follows:
2001 2000
(Unaudited) (Unaudited)
Revenues $ 70,640 $ 57,963
Net earnings 1,903 1,034
Basic earnings per share 0.14 0.08
Diluted earnings per share 0.13 0.08
The unaudited pro forma consolidated results of operations are for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisition occurred at the beginning of the years presented or
the results which may occur in the future.
CYBERED, INC.
In July 2000, the Company acquired CyberEd, Inc. ("CyberEd"), a privately-held
Nevada corporation and provider of multimedia science courseware for high
schools, for approximately $4,400 in cash, net of cash acquired.
The purchase price consisted of the following components:
Cash paid $ 4,952
Direct acquisition costs 120
Liabilities assumed 230
-------
$ 5,302
=======
The allocation of the total purchase price was as follows:
Estimated fair value of tangible assets acquired $ 1,300
Estimated fair value of identified intangible assets 1,530
Goodwill 3,053
Deferred tax liabilities (581)
-------
$ 5,302
=======
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets and liabilities acquired were recorded at their
estimated fair values on the acquisition date. The valuation of identified
intangible assets, consisting of a trademark, two non-compete agreements and the
assembled workforce, was performed by an independent appraisal firm. Beginning
in 2002, goodwill and intangible amortization will be subject to the provisions
of SFAS 142. Intangible assets will continue to be amortized over two to seven
years. Goodwill was being amortized over seven years; under SFAS 142 it will no
longer be amortized and will be tested for impairment on an annual basis.
The operating results of CyberEd were included in the Company's consolidated
statements of earnings from the date of acquisition; however, they were not
material to the Company's consolidated financial statements and, accordingly,
pro forma financial disclosures are not presented.
35
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. ACCOUNTS RECEIVABLE
Accounts receivable include net installment receivables of $16,087 and $13,040
at October 31, 2001 and 2000, respectively. Installment receivables to be billed
beyond one year from the balance sheet date were $2,021 and $193 at October 31,
2001 and 2000, respectively, and are included in other assets on the
consolidated balance sheets (see Note 4).
The provision for doubtful accounts, included in selling, general and
administrative expense on the consolidated statements of earnings, was $1,868,
$2,173 and $2,170 for 2001, 2000 and 1999, respectively.
4. OTHER ASSETS
The components of other assets were as follows:
2001 2000
Identified intangibles (see Note 2) $ 4,695 $ 1,530
Installment receivables (see Note 3) 2,021 193
Other 650 659
------- -------
7,366 2,382
Less accumulated amortization (1,081) (241)
------- -------
$ 6,285 $ 2,141
======= =======
36
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. DEBT
The components of debt were as follows:
2001 2000
Current:
Current portion of capital lease obligations $242 $ --
Current portion of 10% subordinated
convertible debentures -- 600
---- ----
$242 $600
==== ====
Long-term:
Capital lease obligations $720 $ --
==== ====
REVOLVING LOAN
The Company's revolving loan agreement provided for a maximum $15,000 line of
credit through February 26, 2002. Substantially all of the Company's assets were
pledged as collateral under the agreement.
Borrowings were limited by the available borrowing base, as defined, consisting
of certain accounts receivable and inventory, with interest payable at the prime
rate plus 1% or the London Interbank Offered Rate (LIBOR) plus 3%, at the option
of the Company pursuant to the agreement. A commitment fee was payable quarterly
based on the unused portion of the line of credit. The agreement contained
restrictive financial covenants (including Minimum Net Worth, Minimum Earnings
Before Interest Taxes Depreciation and Amortization (EBITDA), and Minimum
Interest Coverage) and restrictions on additional borrowings, asset sales and
dividends, as defined.
This revolving loan agreement was terminated on September 19, 2001 at the
request of the Company. On December 20, 2001, the Company entered into a new
revolving loan agreement with a new lender (see Note 15).
10% SUBORDINATED CONVERTIBLE DEBENTURES
The Company's 10% subordinated convertible debentures had an original principal
balance of $3,050 with interest payable semi-annually. At the option of the
holder, the debentures were convertible into the Company's common stock. The
Company could redeem the debentures at 101% of principal, plus interest, subject
to certain terms and conditions. The debentures had a scheduled maturity in 2004
and were subject to mandatory redemption at 25% of principal annually beginning
in 2001.
In 2000, $2,450 of the debentures were converted by the holders into
approximately 363,000 shares of the Company's common stock at $6.76 per share.
Pursuant to the terms of the debentures, the conversion price was adjusted from
the original $7.20 per share to $6.76 per share prior to the conversions.
37
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In October 2000, the Company notified the holders of its intent to redeem the
remaining $600 of debentures, and the remaining debenture balance at October 31,
2000 was classified as a current liability on the consolidated balance sheets.
In November 2000, the remaining $600 of debentures were converted into
approximately 88,000 shares of the Company's common stock.
CAPITAL LEASE OBLIGATIONS
At October 31, 2001, the Company's long-term debt consisted of various capital
lease obligations for equipment. Amounts due in the next twelve months under
these leases are classified as a current liability in the consolidated balance
sheets.
Scheduled maturities of long-term debt were as follows:
2002 $242
2003 243
2004 223
2005 206
2006 48
----
$962
====
6. COMMITMENTS
The Company leases its various facilities. Certain of these leases contain
renewal options, escalation clauses and requirements that the Company pay taxes,
insurance and maintenance costs. Commitments for future minimum rental payments
under noncancelable leases for the next five years ending October 31 are as
follows:
2002 $1,437
2003 1,185
2004 836
2005 616
2006 615
Thereafter 2,235
------
$6,924
======
Rent expense was $1,432, $1,393 and $1,499 for 2001, 2000 and 1999,
respectively.
38
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In January 1999, the Company issued 540 shares of its Series C Convertible
Redeemable Preferred Stock (the "Series C Preferred") and warrants to purchase
167,000 shares of the Company's common stock at $7.13 per share for an aggregate
purchase price of $5,000. Additionally, in July 1999, the Company issued
warrants to purchase approximately 84,000 shares of the Company's common stock
at $6.54 per share related to the issuance of the Series C Preferred. The
Company received proceeds of $5,000 and paid offering costs of $501 resulting in
net proceeds of $4,499 for the Series C Preferred and warrants. The warrants
were assigned a value of $541 resulting in an increase to paid in capital and a
reduction to the carrying value of the Series C Preferred.
Each share of the Series C Preferred had a par value of $0.01 and a stated value
of $10,000 per share. The Series C Preferred ranked senior to the Company's
common stock, had no voting rights, and was not entitled to any dividends.
The Series C Preferred, as amended, was convertible after 90 days into shares of
the Company's common stock, at the option of the holder, and may have been
converted up to ten years from the issue date. Conversion was mandatory for all
such securities still outstanding on January 13, 2009.
The conversion price of the Series C Preferred was equal to the lower of (a)
$7.13 per share or (b) the applicable percentage of the average of the three
lowest closing prices of the Company's common stock during the 30 trading days
immediately prior to the date of conversion. The applicable percentage was to
decrease over time from 90% (after 90 days) to 82% (after 631 days from
issuance). The aggregate maximum number of shares of the Company's common stock
that could have been issued for all conversions was 1,535,367.
The conversion terms of the Series C Preferred included a beneficial conversion
feature at the issue date. The most beneficial conversion price was determined
to be 82% of the average of the three lowest closing prices of the Company's
common stock during the 30 trading days prior to the issue date. As of the issue
date, the Company allocated approximately $826 to the beneficial conversion
feature resulting in an increase to paid in capital and a reduction to the
carrying value of the Series C Preferred. The beneficial conversion feature was
to be recognized as a deemed dividend to the preferred stockholders over the 631
day period from the issue date to the date of the most beneficial conversion
percentage using the greater of the effective interest method or the amount the
holder could realize at each reporting date. Amortization of the beneficial
conversion feature was $0, $129 and $670 for 2001, 2000 and 1999, respectively.
The Company was permitted to redeem the Series C Preferred in cash at any time,
under certain defined conditions.
39
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Series C Preferred, and shares of the Company's common stock obtained
through conversions of the Series C Preferred and currently held by the holder,
were subject to redemption in cash, at the option of the holder, upon certain
events, as defined. As these events were outside of the Company's control and
redemption would be in cash, the Series C Preferred, and shares of the Company's
common stock obtained through conversions of the Series C Preferred and
currently held by the holder, were presented between total liabilities and
stockholders' equity on the consolidated balance sheets.
In 1999, 255 shares of the Series C Preferred were converted by the holders into
approximately 653,000 shares of the Company's common stock. In 2000, the
remaining 285 shares of the Series C Preferred were converted by the holders
into approximately 761,000 shares of the Company's common stock.
Since all of the Series C Preferred has been converted, shares of the Company's
common stock obtained through conversions (approximately 1,415,000 shares) are
no longer subject to redemption in cash at the option of the holder upon certain
events. Accordingly, the carrying value of these common shares (approximately
$3,934) was transferred to stockholders' equity on the consolidated balance
sheets.
40
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCKHOLDERS' EQUITY
COMMON STOCK ISSUED
In September 2001, the Company issued approximately 24,000 shares of common
stock in connection with the acquisition of TeachMaster (see Note 2).
In June 2001, the Company completed a public stock offering, selling 3,680,000
shares of common stock at a price of $15.75 per share. Net proceeds were
approximately $55,000 after payment of underwriting discounts, commissions and
offering costs.
In April 2001, the Company issued approximately 875,000 shares of common stock
in connection with the acquisition of Wasatch (see Note 2).
In January 2001, the Company issued approximately 11,000 shares of common stock
pursuant to the adjustment warrants issued in connection with the private
placement of common stock in July 2000.
In November 2000, the remaining $600 of 10% subordinated convertible debentures
were converted by the holders into approximately 88,000 shares of the Company's
common stock (see Note 5).
In July 2000, the Company issued approximately 474,000 shares of its common
stock at $10.53 per share in a $5,000 private placement with institutional
investors. The Company received net proceeds of approximately $4,800 which were
used for the acquisition of CyberEd (see Note 2).
STOCK INCENTIVE AND STOCK OPTION PLANS
The Company has adopted various stock incentive and stock option plans that
authorize the granting of stock options, stock appreciation rights and stock
awards to directors, officers and key employees, subject to certain conditions,
including continued employment. Under these plans, approximately 139,000 shares
are reserved for future grants.
Stock options are granted with an exercise price equal to the fair market value
of the Company's common stock on the date of grant, and accordingly, no
compensation expense has been recognized in the consolidated financial
statements. Options granted to the Company's outside directors are exercisable
immediately. All other options granted become exercisable ratably over three
years. Options granted expire ten years from the grant date.
41
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Stock option transactions under these plans were as follows:
2001 2000 1999
Options outstanding at beginning of year 1,965,464 1,763,600 1,480,611
Options granted 1,123,669 396,800 391,133
Options exercised (887,652) (120,552) (10,004)
Options forfeited (56,724) (74,384) (98,140)
------------- ------------- -------------
Options outstanding at end of year 2,144,757 1,965,464 1,763,600
============= ============= =============
Options exercisable at end of year 855,599 1,295,777 1,084,991
============= ============= =============
Weighted average exercise prices:
Outstanding at beginning of year $ 6.94 $ 6.04 $ 6.17
Granted 15.07 10.07 5.72
Exercised 6.14 4.36 2.91
Forfeited 10.97 6.47 7.08
Outstanding at end of year 11.42 6.94 6.04
Exercisable at end of year 7.72 6.44 6.20
The following table summarizes information concerning currently outstanding and
exercisable stock options at October 31, 2001:
Options Outstanding Options Exercisable
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING YEARS AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$ 0.62 - $ 5.16 274,581 7.0 $ 4.46 168,095 $ 4.50
$ 5.34 - $ 6.23 291,309 6.1 5.65 290,687 5.65
$ 6.75 - $12.11 450,937 8.3 9.81 203,147 7.88
$13.13 - $14.20 584,975 8.8 13.67 190,337 13.40
$15.65 - $23.62 542,955 9.8 16.96 3,333 15.65
--------- --- -------- ------- ------
2,144,757 8.3 $ 11.42 855,599 $ 7.72
========= === ======== ======= ======
Had compensation expense been recognized based on the fair value of options
granted, consistent with the provisions of SFAS 123, the Company's net earnings
and diluted earnings per share would have been reduced by $3,282 or $0.22 per
share in 2001, $1,054, or $0.10 per share in 2000, and $771, or $0.07 per share
in 1999.
The weighted-average fair value of options granted and assumptions used in the
Black-Scholes stock option pricing model were as follows:
2001 2000 1999
Fair value of options granted $12.30 $6.15 $3.44
Expected life (years) 5 5 5
Risk-free rate of return 4.8% 6.2% 5.2%
Volatility 75% 67% 67%
Dividend yield 0% 0% 0%
42
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCKHOLDERS' EQUITY, CONTINUED
COMMON STOCK WARRANTS
In 2001, as part of the Wasatch acquisition (see Note 2), the Company assumed
all existing warrants to purchase Wasatch common stock and converted them into
warrants to purchase approximately 309,000 shares of the Company's common stock,
at exercise prices ranging from $56.15 to $296.09 per share. These warrants
expire from 2002 to 2004.
In 2000, the Company issued shares of its common stock in a private placement.
Concurrent with this transaction, the Company issued (a) fully exercisable
warrants to purchase approximately 95,000 shares of its common stock at $12.54
per share and (b) adjustment warrants for the automatic issuance, if at all, of
shares of its common stock for $0.01 per share. Pursuant to the adjustment
warrants, the number of shares of common stock issued with this transaction will
be adjusted, if at all, during various adjustment periods over the eleven months
subsequent to the issue date. During each adjustment period, a portion of the
common stock issued will be adjusted, and adjustment warrants issued, if the
market price of the Company's common stock, as defined, is less than $11.58 per
share. All warrants issued with this transaction expire in 2003.
In 1999, the Company issued shares of convertible redeemable preferred stock
(see Note 7). Concurrent with this issuance, the Company issued fully
exercisable warrants to purchase approximately 251,000 shares of common stock at
$6.54 to $7.13 per share. These warrants expire in 2004. In 2000, approximately
43,000 of these warrants were converted into approximately 28,000 shares of
common stock in a noncash transaction.
The Company previously issued subordinated convertible debentures (see Note 5).
Concurrent with this issuance, the Company issued fully exercisable warrants to
purchase approximately 68,000 shares of common stock at $6.76 per share, as
adjusted. These warrants expire from 2002 to 2007. In 2000, approximately 3,000
of these warrants were exercised for cash. In addition, approximately 35,000 of
these warrants were converted into approximately 21,000 shares of common stock
in noncash transactions.
OTHER
Stock-based compensation for 2001 included non-cash charges of $489 for the
accelerated vesting of stock options related to the Company's succession plans.
The Company previously granted restricted stock awards to certain key employees
for the purchase price of $1.00 per share. The restrictions on these shares of
the Company's common stock lapse over a five-year period and, only upon lapsing,
may be sold or transferred. Compensation expense recorded for these shares was
$87, $120 and $116 in 2001, 2000 and 1999, respectively. At October 31, 2001,
approximately 20,000 restricted shares were outstanding.
43
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. SPECIAL CHARGE
The consolidated statement of earnings for 2001 included a special charge of
$1,260. This charge represented costs associated with the November 2000
retirement of the Company's founder and former chief executive officer, and
included non-cash amounts of $463 for the accelerated vesting of stock options.
10. INCOME TAXES
The components of earnings before income taxes were as follows:
2001 2000 1999
United States $ 6,811 $ 7,710 $ 5,373
Foreign 199 228 (342)
-------- ------- --------
$ 7,010 $ 7,938 $ 5,031
======== ======= ========
The components of income tax expense (benefit) were as follows:
2001 2000 1999
Federal $ 3,007 $ 2,798 $(10,012)
Foreign 120 -- --
State and local 378 298 12
-------- ------- --------
$ 3,505 $ 3,096 $(10,000)
======== ======= ========
The income tax expense (benefit) differs from the amount computed by applying
the U.S. federal statutory income tax rate to earnings before income taxes as
follows:
2001 2000 1999
U.S. federal statutory rate at 34% $ 2,383 $ 2,699 $ 1,711
State taxes, net of U.S. federal income tax 272 197 12
Nondeductible expenses 624 141 90
Valuation allowance change -- -- (10,200)
Previously unrecognized benefit from
utilizing tax loss carryforwards -- -- (1,711)
Other 226 59 98
-------- ------- --------
$ 3,505 $ 3,096 $(10,000)
======== ======= ========
44
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. INCOME TAXES, CONTINUED
The components of the deferred tax asset were as follows:
2001 2000
Current:
Revenue recognition $ (2,622) $ (2,385)
Accrued liabilities and reserves 1,471 1,376
Net operating loss carryforward 3,619 3,324
-------- --------
Total current deferred tax asset 2,468 2,315
-------- --------
Long-term:
Net operating loss carryforward 11,613 8,041
Tax credit carryforwards 541 506
Product development expense recognition (1,993) (1,988)
Equipment basis difference 149 200
Identified intangible asset basis difference (1,534) (581)
Other -- (5)
Valuation allowance (1,944) (1,944)
-------- --------
Total long-term deferred tax asset 6,832 4,229
-------- --------
$ 9,300 $ 6,544
======== ========
At October 31, 2001, the Company had a federal net operating loss carryforward
of approximately $34,500 and a foreign net operating loss carryforward of
approximately $5,750. The foreign net operating loss carryforward is subject to
uncertainty regarding utilization and, therefore, has a full valuation allowance
placed on it. These net operating loss carryforwards expire between 2004 and
2021.
In 1999, the Company reversed approximately $10,200 of valuation allowance
placed on the U.S. portion of the Company's deferred tax asset. This reversal
was based on updated expectations about future years' taxable income to reflect
continuing improvements in operating results influenced by the Company's
continued revenue growth, and other indications that certain concerns that had
previously limited management's expectations about future taxable income no
longer were applicable.
45
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. EARNINGS PER SHARE
2001 2000 1999
BASIC:
Net earnings available to common stockholders $ 3,505 $ 4,713 $ 14,361
=========== =========== ===========
Weighted average common shares outstanding 13,364,000 9,935,000 8,787,000
=========== =========== ===========
Basic earnings per share $ 0.26 $ 0.47 $ 1.63
=========== =========== ===========
DILUTED:
Net earnings available to common stockholders $ 3,505 $ 4,713 $ 14,361
Preferred stock accretion -- -- 670
Convertible debentures interest -- -- 305
----------- ----------- -----------
Net earnings for diluted earnings per share $ 3,505 $ 4,713 $ 15,336
=========== =========== ===========
Weighted average common shares outstanding 13,364,000 9,935,000 8,787,000
Potential common shares:
Stock options and warrants 1,019,000 586,000 75,000
Convertible redeemable preferred stock -- -- 782,000
Convertible debentures -- -- 424,000
----------- ----------- -----------
Weighted average common and potential
common shares outstanding for diluted
earnings per share 14,383,000 10,521,000 10,068,000
=========== =========== ===========
Diluted earnings per share $ 0.24 $ 0.45 $ 1.52
=========== =========== ===========
In 2000, approximately 603,000 potential common shares from the convertible
redeemable preferred stock and the convertible debentures were antidilutive and
excluded from the calculation of diluted earnings per share.
12. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company performs
evaluations of its customers' credit worthiness and generally requires no
collateral from its customers. Credit risk is minimized as a result of the large
number of customers and their geographic dispersion. Although many of the
Company's educational customers are dependent upon various government funding
sources, and are subject to appropriation of funds, the Company does not believe
there is a significant concentration of risk associated with any specific
governmental program or funding source.
46
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment, namely educational software.
Information about the Company's geographic operations were as follows:
2001 2000 1999
REVENUES FROM UNAFFILIATED CUSTOMERS:
United States $ 64,658 $ 51,237 $ 41,081
Canada 464 622 1,055
United Kingdom 4,985 4,264 1,999
--------- --------- ---------
$ 70,107 $ 56,123 $ 44,135
========= ========= =========
OPERATING PROFIT (LOSS):
United States $ 6,713 $ 8,897 $ 7,188
Canada (149) (17) (306)
United Kingdom 339 247 (34)
--------- --------- ---------
$ 6,903 $ 9,127 $ 6,848
========= ========= =========
TOTAL ASSETS (AT OCTOBER 31):
United States $ 130,602 $ 48,065 $ 38,703
Canada 589 665 805
United Kingdom 4,720 1,860 1,680
--------- --------- ---------
$ 135,911 $ 50,590 $ 41,188
========= ========= =========
47
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
JAN 31 APR 30 JUL 31 OCT 31 TOTAL
2001:
Revenues $ 9,754 $15,364 $22,803 $22,186 $70,107
Gross profit 8,275 13,895 21,136 19,881 63,187
Net earnings (loss) (2,351) 825 3,573 1,458 3,505
Diluted earnings
(loss) per share (0.21) 0.07 0.22 0.08 0.24
2000:
Revenues $ 7,525 $12,240 $16,138 $20,220 $56,123
Gross profit 6,168 10,631 14,431 18,399 49,629
Net earnings (loss) (1,494) 356 2,323 3,657 4,842
Diluted earnings
(loss) per share (0.17) 0.04 0.21 0.31 0.45
15. SUBSEQUENT EVENT
The Company's new revolving loan agreement with Wells Fargo Bank, N.A. was
closed on December 20, 2001 and provides for a maximum $12,500 line of credit
through July 1, 2003. Substantially all of the Company's assets are pledged as
collateral under the agreement.
Borrowings are limited by the available borrowing base, as defined, consisting
of certain accounts receivable and bear interest at the prime rate plus 0.25% or
the London Interbank Offered Rate (LIBOR) plus 1.75 to 2.75%, depending on cash
flow leverage, as defined, at the option of the Company pursuant to the
agreement. A commitment fee is payable quarterly based on unused portion of the
line of credit. The agreement contains restrictive financial covenants
(including Minimum Tangible Net Worth, Minimum Debt Service Coverage, Maximum
Leverage, Maximum Cash Flow Leverage, Minimum Current Ratio, and Maximum Annual
Capital Expenditures) and restrictions on additional borrowings, asset sales and
dividends, as defined.
A commitment fee of approximately $63 was paid upon commencement of the
facility.
48
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
FIVE-YEAR SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED OCTOBER 31
2001 2000 1999 1998 1997
STATEMENT OF EARNINGS DATA:
Revenues by product line:
PLATO $ 70,107 $ 56,123 $ 44,135 $ 39,385 $ 33,265
Aviation Training -- -- -- 3,893 3,694
-------- -------- -------- -------- --------
Total revenues 70,107 56,123 44,135 43,278 36,959
Gross profit 63,187 49,629 38,783 38,269 30,484
Operating expenses:
Selling, general and administrative 44,226 34,019 26,464 25,408 36,988
Product development and
customer support 8,686 6,339 5,471 7,341 8,036
Goodwill and intangible amortization 2,112 144 -- -- --
Special charge 1,260 -- -- -- --
Operating profit (loss) 6,903 9,127 6,848 5,520 (14,540)
Interest expense 585 971 1,651 2,217 1,480
Interest income 817 12 22 -- --
Income tax expense (benefit) 3,505 3,096 (10,000) -- 4,061
Net earnings (loss) 3,505 4,842 15,031 3,068 (20,217)
PER SHARE OF COMMON STOCK:
Net earnings (loss) - diluted 0.24 0.45 1.52 0.35 (2.43)
Cash dividends -- -- -- -- --
BALANCE SHEET DATA:
Total assets 135,911 50,590 41,188 27,407 29,088
Long-term debt 720 -- 3,050 3,050 3,050
Total liabilities 22,012 14,745 17,807 23,738 28,341
Convertible redeemable
preferred stock -- -- 2,006 -- --
Redeemable common stock -- -- 1,799 -- --
Stockholders' equity 113,899 35,845 19,576 3,669 747
49
REAL LEARNING. REAL RESULTS.(TM)
PLATO LEARNING, INC. AND SUBSIDIARIES
STOCKHOLDER INFORMATION
TRANSFER AGENT
Requests concerning the transfer or exchange of shares, lost stock certificates,
duplicate mailings or change of address should be directed to the Company's
Transfer Agent at:
Wells Fargo Bank Minnesota, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
1-800-468-9716
www.wellsfargo.com/com/shareowner_services
TDD# 651-450-4144
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders will be held at 12:00 PM on Thursday, March
14, 2002, at the Radisson South Hotel, 7800 Normandale Boulevard, Bloomington,
MN 55439
INVESTOR CONTACTS
John M. Buske, Chief Operating Officer and Chief Financial Officer
Steven R. Schuster, Vice President, Treasurer and Corporate Secretary
To obtain information about the Company call 1-800-869-2000, visit our Web site
www.plato.com, or write to:
Investor Relations
PLATO Learning, Inc.
10801 Nesbitt Avenue South
Bloomington, MN 55437
The latest Company news releases, including quarterly results, and other
information can be received by calling Investor Relations at 1-800-869-2000 or
from the PLATO home page.
STOCK EXCHANGE LISTING
NASDAQ-NMS
Symbol: TUTR
The quarterly range of high and low closing prices for the Company's common
stock are set forth below.
FISCAL YEAR ENDED OCTOBER 31
2001 2000
Quarter High Low High Low
First $ 19.03 $ 9.33 $ 5.25 $ 3.38
Second 16.88 11.45 9.38 4.69
Third 25.46 12.75 11.06 7.94
Fourth 26.21 13.22 18.98 9.66
Trademark References
Copyright(C) 2002 PLATO Learning, Inc. All rights reserved. Printed in the
U.S.A. PLATO(R) is a registered trademark of PLATO Learning, Inc.
All other company and product names may be trademarks or registered trademarks
of their respective companies.
51