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PLATO Learning 10-K 2010 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended October 31, 2009
or
p 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: 0-20842
PLATO
LEARNING, INC.
(Exact
name of Registrant as specified in its charter)
10801
Nesbitt Avenue South, Bloomington, MN 55437
(Address
of principal executive offices)
(952)
832-1000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes p No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes p No x
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 p
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes p No p Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.)
Yes p No x
The
aggregate market value of common stock held by non-affiliates of the registrant,
as of April 30, 2009 (the last business day of the Registrant’s most recently
completed second fiscal quarter) was approximately $60,000,000.
The
number of shares outstanding of the registrant’s common stock as of December 31,
2009 was 24,379,414.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s definitive Proxy Statement for the Company’s Annual Meeting of
Stockholders to be held on March 25, 2010 (the “2010 Proxy Statement”) are
incorporated by reference in Part III. Form
10-K
Fiscal
Year Ended October 31, 2009
TABLE
OF CONTENTS
Forward-Looking
Statements
In addition to historical information,
this Form 10-K contains forward-looking statements. These forward-looking
statements are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (“the Act”). The words
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,”
“should” and similar expressions are intended to identify “forward-looking
statements” within the meaning of the Act. Forward-looking statements include,
among others, statements about our future performance, future releases of our
products, new courses we intend to make available to our customers, the
sufficiency of our sources of capital for future needs, and the expected impact
of recently issued accounting pronouncements. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in Part I Item 1A of this Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management’s opinions only as of the date hereof. We undertake no
obligation to revise or publicly release any revision to these forward-looking
statements based on circumstances or events, which occur in the future. Readers
should carefully review the risk factors described in Part I Item 1A of this
report on Form 10-K and in other documents we file from time to time with the
Securities and Exchange Commission.
Trademark
and Copyright References
PLATO®,
Straight Curve® and Academic Systems® are registered trademarks of PLATO
Learning, Inc. PLATO Learning, PLATO Learning Environment™ and
PLE™ are trademarks of PLATO Learning, Inc. Solely for convenience,
we refer to our trademarks in this Form 10-K without the ™ and ® symbols, but
such references are not intended to indicate, in any way, that we will not
assert, to the fullest extent under applicable law, our rights to these
trademarks.
Business
Description
PLATO
Learning, Inc. is a Delaware corporation that was incorporated in 1989 and is
headquartered in Bloomington, Minnesota. We are a leading provider of
on-line instruction, curriculum management, assessment, and related professional
development services to K–12 schools, community colleges and other educational
institutions across the country. Our products are used by customers principally
to provide alternative instruction to students performing below their grade
level in order to help those students return to the classroom, recover course
credits, pass high school exit exams or prepare for college and other
post-secondary studies. In addition to the value provided to
students, our solutions allow school districts to retain state and federal
funding tied to student enrollment, and help educators meet the demands of state
and federal student achievement initiatives for intervention, dropout prevention
and college readiness. We also offer online and onsite staff professional
development services to ensure optimal use of our products and to help schools
meet their accountability requirements and school improvement
plans. Our
research-based courseware library includes thousands of hours of mastery-based
instruction covering discrete learning objectives in the subject areas of
reading, writing, language arts, mathematics, science, and social studies. Our
web-based assessment and alignment tools allow instruction to be personalized to
each student’s unique needs with curriculum that is aligned to local, state, and
national standards. Using our web-based products, educators are able to identify
each student’s instructional needs and prescribe an individual learning program
of PLATO Learning courseware, educational web sites, the school’s textbooks and
other core and supplemental instructional materials. A variety of reports are
available to help educators identify gaps in student understanding, monitor
student progress and ensure that standard learning objectives are being
addressed.
Beginning
in late fiscal year 2005, we implemented a strategy to deliver our products and
solutions on a subscription basis using a new internet-based learning management
platform we market as the PLATO Learning Environment, or PLE. As of October 31,
2009, approximately 1,360 school districts, community colleges and other
educational institutions across 50 states subscribed to our instructional
solutions delivered on PLE, and over 1.7 million students, teachers and
administrators at these institutions were registered to use PLE.
Our
principal business is the development and marketing of online curriculum
solutions and related services.
Market
Based on
recent market data from Simba Information (“Simba”), approximately $9.3 billion
is spent annually on print and electronic instructional materials in the U.S.
K-12 education market. Of that spending, approximately $1.75 billion is spent on
K-12 digital content.
Our
instructional products are delivered on a subscription basis over the internet,
via our learning management system, the PLATO Learning Environment, or PLE.
Today, 99% of the nation’s K-12 public schools have Internet access, and as a
result, schools are increasingly turning to web-based methods of instruction as
a supplement to their instructor-led programs due to their flexibility,
cost-efficiency, and effectiveness.
Our
instructional solutions are primarily used as alternative programs for students
that have not been successful in the traditional classroom environment, as well
as for online programs that offer first time credit for students at, below,
and/or above grade level. Additionally, many of our customers have
integrated our products into their core classroom
instruction. Earning a high-school diploma represents a key milestone
in an individual's schooling and social and economic advancement, but according
to the National Center for Education Statistics, more than 25% of incoming
freshman do not finish high school. Statistics like these raise the awareness of
the effectiveness of U.S. public schools and have led to legislative
requirements and public demand for increased accountability and improvements in
U.S. K-12 schools. These trends have led to increasing demand for solutions like
ours and others that address the need to improve school effectiveness and
graduation rates. As a result, we believe that technology-based instructional
materials have the ability to cost effectively create an individualized and
flexible instructional environment, and are generally preferred over print-based
materials by today’s students. We believe that these ongoing market
dynamics will cause technology-based instructional materials to continue to grow
faster than the total instructional materials market. Strategy
Our
strategy is focused on the following strategic initiatives:
Products
Our
products consist of a comprehensive portfolio of technology-based instructional
content, classroom assessment, and related professional development that we
market to K–12 schools, community colleges and other educational institutions.
Our products are used by these customers principally to provide individualized
instruction to students performing at or below their grade level. Our
programs are most frequently leveraged for students returning to the classroom,
course credits recovery, high school exit exam preparation and/or preparation
for college and other post-secondary studies.
Instructional
Content
Our
content library consists of rich, interactive, multimedia instructional content
that is highly engaging for both students and teachers. This research-based
courseware library includes more than 6,000 hours of mastery-based instruction
material covering the primary K-12 subject areas of mathematics, science,
reading/language arts, and social studies.
Our
content can be applied to multiple student learning profiles (e.g. general
education, special education, at-risk) and tailored for students across multiple
grade-levels. Content offerings are classified as intervention solutions when
applied to students performing below grade-level, as core or supplemental
instructional solutions for mainstream students performing at grade level, and
as advanced placement offerings for students performing above grade level. We
believe our content provides the following differentiating factors:
Learning
Management System
The PLATO
Learning Environment (PLE), a web-based platform to deliver all of our
instructional solutions, provides a unified curriculum management and delivery
system that requires only an Internet connection and a browser. In addition to
anytime-anywhere delivery of our products, PLE provides the following
differentiating factors:
Classroom Formative
Assessment
Formative
assessment involves collecting feedback from learning activities to adapt
instruction to a learner’s needs. Our assessment database consists of
more than 180,000 test items linked to state, district, and national learning
objectives across all subject areas of reading, math, science and social
studies. In conjunction with powerful data management tools, our assessment
solutions can provide assessment results by student demographic category and
facilitate data-driven decision making for school curriculum development,
textbook choices and providing personalized learning. PLATO Test Packs with
Prescriptions prescribe individual learning paths to PLATO content based on
student performance, which can then be completed at the student’s own learning
pace. As a result, PLATO Test Packs give teachers the flexibility to allow PLE
to automatically prescribe assignments or to make manual adjustments before
assigning lessons.
Instructional
Solutions
We
combine our large library of interactive content and assessments with the unique
features of PLE to deliver a variety of instructional solutions to educational
institutions. In K-12 schools, these solutions primarily address
at-risk students who have fallen behind in the classroom, allowing these
students to recover credits, move to the next grade level, avoid dropping out of
school or prepare for their high school exit exam. In the post-secondary market,
our developmental algebra products, sold under the Academic Systems brand, are
primarily intended for students who have completed high school but are not yet
ready for college level math courses. We also provide instructional
solutions to adult education markets for GED preparation, workforce readiness
and life and career skills.
Services
and Product Support
Our
professional services offerings ensure that customers receive the consultation,
training and services needed to successfully implement our solutions and integrate
educational technology into their day-to-day teaching and learning environment.
Services are delivered in face-to-face sessions as well as synchronous and
asynchronous online delivery methods. We
provide telephone and online product support to our customers. Subscription
customers are entitled to support as part of their subscription fees to our
online products. Customers who purchased perpetual license products
can choose to obtain telephone support by paying an annual software maintenance
fee.
Sales
and Marketing
Our sales
channel consists of direct sales representatives located throughout the U.S. and
inside sales representatives operating out of our corporate headquarters in
Bloomington, Minnesota. We also utilize distributors and resellers in certain
geographic markets.
In the
K–12 market we sell to school districts of all sizes, but generally target
larger school districts. In the post-secondary market, we target community
colleges, four-year universities, adult education centers, and correctional
institutions.
Competition
The
market for electronic instructional materials is served by hundreds of companies
that offer a range of instructional products and services. At one end of the
market are companies offering modular software applications or videos that
consist of a single element of instructional content or an individual course or
application. At the other end are companies like PLATO Learning that provide
full course offerings that span multiple grade levels and/or subject areas.
These companies are “comprehensive” in terms of being able to package a solution
that covers multiple grade levels, subjects, and associated reports and
assessments. Between the comprehensive and non-comprehensive categories there
are as many variations as there are companies.
In the
individualized instruction market we compete nationally with comprehensive
providers, such as Pearson Education, however we most frequently compete against
a number of smaller competitors, including Compass Learning, OdysseyWare,
Class.com, Apex Learning, American Education Corporation (A+), E2020, and
others. Many of these smaller companies focus on a geographic segment or
district size, rather than the national market. The needs, size, and location of
school districts often influence the opportunities for which companies choose to
compete.
When
competing with any company, we differentiate our solutions by emphasizing the
depth of our multimedia rich courseware aligned to standards, the benefits of a
single learning management system that delivers all content over the Internet
for all grades and core subject areas, the completeness of alignments to state
and national standards, and the unique diagnostic and prescriptive capabilities
of our products to improve performance on state exams and
standards. We also believe that our record of student improvement and
product development capabilities differentiate us from the competition. Based on
our experience, we believe that these are key factors that buyers use in
evaluating competitive offerings.
Product Development
Our
product development group develops, enhances, and maintains our courseware,
assessment, instructional management software, and delivery system platforms. We
utilize both domestic and offshore resources. In fiscal year 2009, approximately
40% of our total software development spending was incurred
offshore.
Our
courseware is proprietary and we attempt to protect it primarily under a
combination of the laws of copyrights, trademarks, and trade secrets. We also
utilize license agreements, employment agreements, employment termination
agreements, third-party non-disclosure agreements, and other methods to protect
our proprietary rights. We regard certain of our intellectual property rights as
essential to our business and enforce our intellectual property rights when we
become aware of any infringements or potential infringements and believe they
warrant such action.
Revenue Backlog>
We define
revenue backlog as the total of deferred revenue reported on our balance sheet
plus unbilled amounts due under non-cancelable subscription agreements which is
not included in the balance sheet. Following is a reconciliation of
deferred revenue to revenue backlog, and the components of revenue backlog, as
of the end of fiscal years 2009 and 2008:
At
October 31, 2009, we expect approximately $24.1 million of our deferred revenue
to be recognized subsequent to fiscal year 2010.
Seasonality
Our quarterly financial results
fluctuate as a result of a number of factors including public education budget
cycles and the mix of perpetual license fee and subscription product
sales. Historically we have experienced our lowest order levels, cash
balances and revenues in the first and second quarters of our fiscal year and
higher levels of orders, cash and revenues in our third and fourth quarters.
More recently, our increasing emphasis on sales of subscription products has
moderated the seasonality of our revenues. Because of these factors, the results
for interim periods are not necessarily indicative of the results to be expected
for the full fiscal year.
As of
October 31, 2009, we had approximately 300 employees. We also
contract with offshore resources in the development of new
products. We have never experienced a work stoppage as a result of a
labor dispute, and none of our employees are represented by a labor
organization.
Non-Audit
Services Performed by Independent Registered Public Accounting Firm
Pursuant
to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section
202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing to
investors the non-audit services approved by our Audit Committee to be performed
by, our independent registered public accounting firm. Non-audit
services are defined as services other than those provided in connection with an
audit or a review of our financial statements. During the period
covered by this Annual Report on Form 10-K, our Audit Committee pre-approved
non-audit services, consisting of fees paid for online research
materials.
Web
Site Access to Reports
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy
Statements on Schedule 14A, Current Reports on Form 8-K, and any amendments to
those reports, are made available free of charge on our web site (www.plato.com)
as soon as reasonably practical after such reports are filed with the Securities
and Exchange Commission (“SEC”). Statements of changes in beneficial
ownership of our securities on Form 4 by our executive officers and directors
are made available on our web site by the end of the business day following the
submission of such filings to the SEC. All reports mentioned above
are also available from the SEC’s web site (www.sec.gov).
We
operate in a market environment that involves significant risks, many of which
are beyond our control. The following risk factors may adversely
impact our results of operations, financial position, cash flow and the market
price of our common stock. Although we believe that we have
identified and discussed below the key risk factors affecting our business, they
are not the only ones facing us. There may be additional risks and
uncertainties that are not presently known or that are not currently believed to
be significant that also may affect our results of operations and financial
condition.
Risks Relating to Our
Industry>
We
derive a substantial portion of our revenues from public school funding, which
is dependent on support from federal, state, and local
governments. Changes or reductions in funding for public school
systems could reduce our revenues and cash flows and negatively impact our
margins and impede the growth of our business.
The
availability of funding to purchase our products is subject to many factors that
affect government spending. These factors include downturns in
general economic conditions, like those which we are currently experiencing,
that can reduce government tax revenues and may affect education funding,
emergence of other priorities that can divert government funding from
educational objectives, periodic changes in government leadership that can
change spending priorities, and the government appropriations process, which is
often slow and unpredictable. In many instances, customers rely on
specific funding appropriations to purchase our
products. Curtailments, delays, or reductions in this funding can
delay or reduce revenues and cash flow we had otherwise forecasted to
receive.
The
growth of our business depends on continued investment by public school systems
in interactive educational technology and products. Changes to funding of public
school systems can slow this type of investment and adversely affect our
revenues and market opportunities.
If
national educational standards and assessments are adopted, or if existing
metrics for applying state standards are revised, new competitors could more
easily enter our markets or the demands in the markets we currently serve may
change.
With the
reauthorization of the Elementary and Secondary Education Act, known as No Child
Left Behind, or NCLB, in 2001, Congress conditioned the receipt of federal
funding for education on the establishment of educational standards, annual
assessments and the achievement of adequate yearly progress milestones. These
standards are established at the state level, and there are currently no
national educational standards that are required to be assessed pursuant to
NCLB. As part of NCLB, each state is required to establish clear performance
standards for each grade level in reading, math and science in grades 3 through
8, and for high school exit or end-of-course exams. Our products are
specifically built to align to the educational and assessment standards in all
50 states, which we believe differentiates them from the products offered by our
competitors. If a uniform set of national standards and assessments were to
replace individual state level standards, it would be easier for competitors to
develop similar products. If such an increase in competition occurred, our
ability to compete effectively could be negatively impacted and our revenue and
profitability could materially decline.
Competition
in our industry is intense and growing, which could adversely affect our
performance.
Our
industry is intensely competitive, rapidly evolving, and subject to
technological change. We compete primarily against organizations
offering educational and training software and services, including comprehensive
curriculum software publishers, companies providing single-title retail
products, and Internet content and service providers. Some of our
competitors have substantially greater financial, technical and marketing
resources than us. The demand for e-learning products and services
has grown significantly with the advent of on-line educational institutions,
improvements
in Internet access and reductions in the cost of technology. While
this growing demand presents opportunities for us, it also results in the
addition or consolidation of competitors. Increased competition in
our industry could result in price reductions, reduced operating margins, or
loss of market share, which could seriously harm our business, cash flows, and
operating results. Risks
Relating to Our Company
The
success of our business model is dependent on growth in market acceptance of
online subscription products delivered over the Internet. If this acceptance
does not grow or is otherwise diminished, our revenues will continue to decline
and may affect our ability to maintain profitability.
Our
ability to generate revenue growth and to continue to be profitable is dependent
on significant growth of subscription fees to our Internet-based
products. Market acceptance of software solutions delivered over the
Internet can be negatively affected by factors such as customers’
confidentiality concerns with regard to student information that is stored
outside of their controlled computing environments, existing investments in
owned courseware, technology infrastructure and related personnel, customer
preferences with regard to perpetual licenses vs. annual subscription decisions,
and availability, reliability and security of access to the Internet within a
school district.
Adverse
changes in these factors could result in a decline in the acceptance of
web-based courseware solutions making it difficult for us to execute our current
business model. As a result, we may need to reevaluate that business
model, which may affect our ability to continue to achieve
profitability.
The
success of our product investment strategy and our ability to remain competitive
against companies with access to larger amounts of capital is dependent on our
ability to maintain our cost-effective off-shore development resources. If we
are unable to do so, we would experience significant product delays and
increases in product development costs which would adversely affect our
strategy, competitive position, revenues and profitability.
More than
40% of our total software development and maintenance spending in fiscal year
2009 was incurred on off-shore development resources. We believe the
use of these resources provides us greater flexibility, cost savings, and a
greater return on our development investments. These resources are also critical
to our ability to respond quickly to market changes and to compete against
companies with access to larger amounts of capital than we
have. However, this dependence introduces risks common to many
outsourcing relationships. These risks include the supplier’s ability
to maintain sufficient capacity, control costs, and hire, train, and retain
qualified resources, as well as risks associated with our limited direct control
and physical access to these resources including the ability to protect and
enforce our intellectual property rights. In our supplier agreements
we strive to include provisions intended to limit some of these risks; however,
that is not always possible and there can be no assurance that they will be
effective at doing so. If our supplier relationships are suddenly and
adversely affected, it would cause significant product delays, increased
development costs and could impact product usability, which would have a
material negative effect on our competitive position, revenues and
profitability. Our
future success may be dependent on our ability to compete in the broader
instructional materials market against larger competitors with significantly
greater resources than we have.
The
instructional materials market has been dominated for many years by a small
number of large publishers that provide textbooks and other printed materials to
the school market. These companies have well-established distribution
channels and significantly greater marketing, curriculum and financial resources
than us. As electronic instructional materials continue to grow and
take market share from print materials, competition from these companies will
increase and we may not be able to compete effectively.
If
we are unable to adapt our products and services to technological changes, to
the emergence of new computing devices and to more sophisticated online
services, we may lose market share and service revenue, and our business could
suffer.
We need to anticipate, develop and introduce new products, services and applications on a timely and cost effective basis that keeps pace with technological developments and changing customer needs. We may encounter difficulties responding to these changes that could delay our introduction of products and services or require us to make larger than anticipated investments to maintain existing products. Software industries are characterized by rapid technological change and obsolescence, frequent product introductions, and evolving industry standards. For example, the number of individuals who access the internet through devices other than a personal computer, such as personal digital assistants, mobile telephones, televisions and set-top box devices, has increased dramatically, and this trend is likely to continue. Our subscription services were designed for internet use on desktop and laptop computers. The lower resolution, functionality and memory associated with alternative devices currently available may make the use of our products through such devices difficult. We have no experience to date in operating versions of our products and services developed or optimized for users of alternative devices. Accordingly, it is difficult to predict the problems we may encounter in developing versions of our products and services for use on these alternative devices, and we may need to devote significant resources to the creation, support and maintenance of such versions. If we fail to develop or sell products and services cost effectively that respond to these or other technological developments and changing customer needs, we may lose market share and revenue and our business could materially suffer. Since
fiscal 2005 we have transitioned our business from products that are licensed on
a perpetual basis to those that are licensed on a subscription basis. The
different revenue recognition characteristics of these products affect the
comparability of our financial results. As a result, our business will be
difficult to compare from period to period. Our business is also seasonal. As a
result of these factors, we may continue to experience unexpected fluctuations
in our quarterly cash flows, revenues and results from operations, which may
adversely affect our stock price and the implementation of our
strategy.
We expect
sales of perpetual license products and related software maintenance to continue
to decline because we completed the transition of our business model to
subscription-based products. As a result, our operating results may be difficult
to compare
to historical periods, and may fluctuate from quarter-to-quarter due to factors
such as the size, timing, and product mix of license vs. subscription
orders. In addition, public school budget cycles result in
purchases that have historically been concentrated in the last two quarters of
our fiscal year. Accordingly, our annual operating performance can be materially
and adversely affected if factors such as school budget constraints,
availability of federal and state funding, sales productivity and new product
introductions do not align with these purchasing patterns. If such
annual results are not achieved we may have to delay or adjust components of our
strategy implementation which may affect our ability to maintain
profitability. Our
transition from perpetual to subscription-based products has resulted in an
increasing trend whereby cash receipts from the sale of our products has shifted
from payment shortly after the time of sale, to payment over the subscription
period. This trend, together with the seasonality of our business previously
discussed, may adversely affect our short-term liquidity.
We
generally require that one-year subscriptions and sales of perpetual licenses be
paid in full within a short time after completion of the
sale. Multi-year subscription customers may be given an option to pay
for these subscriptions annually in advance, and these customers are
increasingly electing, or negotiating, to make multi-year payments. This
increasing delay in the receipt of payment for the sales of our products,
together with the seasonality of our business discussed above, has adversely
affected our cash flows and may increase our short-term liquidity
needs.
Misuse
or misappropriation of our proprietary rights or inadvertent infringement by us
on the rights of others could adversely affect our results of
operations.
We regard
certain of our intellectual property rights as essential to our
business. We rely on a combination of the laws of copyrights,
trademarks, and trade secrets, as well as license agreements, employment and
employment termination agreements, third-party non-disclosure agreements, and
other methods to protect our proprietary rights. We enforce our
intellectual property rights when we become aware of any infringements or
potential infringements and believe they warrant such action. If we
were unsuccessful in our ability to protect these rights, our operating results
could be adversely affected.
Although
we believe our products and services have been independently developed and that
none of our products or services infringes on the rights of others, third
parties may assert infringement claims against us in the future. We
may be required to modify our products, services or technologies or obtain a
license to permit our continued use of those rights. We may not be
able to do so in a timely manner or upon reasonable terms and
conditions. Failure to do so could harm our business and operating
results. In addition, we leverage certain third party generated
products through license and/or royalty agreements and we have the risk that
certain of these relationships will not continue or that the underlying products
will not be properly supported or updated by the third parties.
We have a
number of technological mechanisms to prevent or inhibit unauthorized copying of
our software products and generally require the execution of a written license
agreement, which restricts use and copying of our software products.
However,
if such copying or misuse were to occur to any substantial degree, our operating
results could be adversely affected. If
our security measures are breached and unauthorized access is obtained to our
web-based products, they may be perceived as not being secure, customers may
curtail or stop using these products and we may incur significant legal and
financial exposure and liabilities.
The use
of our web-based subscription products involves the storage of certain personal
information with regard to the teachers and students using these products. If
our security measures are breached and unauthorized access to this information
occurs, our reputation will be damaged, our business may suffer and we could
incur significant liability. Because the techniques used to attempt unauthorized
access to systems such as ours change frequently and generally are not
recognized until attempted on a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. If an actual or
perceived breach of our security occurs, the market perception of the security
of our system could be harmed and we could lose sales and
customers.
Claims relating to content available
on or accessible from, our web sites may subject us to liabilities and
additional expense.
Our
web-based subscription products incorporate content not under our direct control
including content from, and links to, third-party web sites, and content
uploaded by our customers. As a result, we could be subject to claims
relating to this content. In addition to exposing us to potential
liability, claims of this type could require us to change our web sites in a
manner that could be less attractive to our customers and divert our financial
and development resources.
Interruptions
or delays in service from our third-party Web hosting facilities could impair
the delivery of our service and harm our business.
Our
subscription products are delivered using standard computer hardware located in
two, third-party Web hosting facilities, with the primary facility located on
the west coast of the United States. We do not control the operation of these
facilities, and they are vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunications failures and similar events.
Despite precautions taken at these facilities, the occurrence of a natural
disaster or other unanticipated problems at these facilities could result in
lengthy interruptions in our service. Even with disaster recovery arrangements
in place, our service could be interrupted. Interruptions in our service may
reduce our revenue, cause us to issue credits, cause customers to terminate
their subscriptions and adversely affect our renewal rates and our ability to
attract new customers. Our business will also be harmed if our customers and
potential customers believe our service is unreliable.
None.
We lease
all of our facilities, including our corporate headquarters in Bloomington,
Minnesota, which expires in June 2010. We currently anticipate that in 2010 we
will likely execute a new lease for a different facility in or near Bloomington,
although we may renew our current lease for less square footage. We also
continue to be a party to two leases for unoccupied office space in the United
Kingdom. Other than our plans to address the expiration of our
headquarters facility lease discussed above, our leased facilities are adequate
to meet our current and expected business requirements. From time
to time, we may become involved in litigation arising out of operations in the
normal course of business. As of October 31, 2009, we were not party
to any pending legal proceedings the outcome of which could reasonably be
expected to have a material unfavorable or favorable effect on our operating
results, financial position or cash flows.
None. Market
Information
Our
common stock has traded publicly on the NASDAQ Global Market under the symbol
“TUTR” since December 23, 1992. The quarterly ranges of high and low
prices per share of our common stock were as follows:
Holders
As of
December 31, 2009, there were approximately 480 record holders of our common
stock, excluding stockholders whose stock is held either in nominee name and/or
street name brokerage accounts. Based on information available to us,
there were approximately 1,727 holders of our common stock whose stock is held
either in nominee name and/or street name brokerage accounts.
Stock
Performance Graph
The
following stock performance graph does not constitute soliciting material, and
should not be deemed filed or incorporated by reference into any other Company
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent the Company specifically incorporates this stock
performance graph by reference therein.
In
accordance with Securities and Exchange Commission regulations, the following
performance graph compares the cumulative total stockholder return on our common
stock to the cumulative total return on the NASDAQ Composite Index and the
weighted average return of our peer group (described below) for the five years
ended October 31, 2009, assuming an initial investment of $100 and the
reinvestment of all dividends.
Our
current peer group consists of the following: LeapFrog Enterprises, Inc., Nobel
Learning Communities, Princeton Review, Inc., Renaissance Learning, Inc.,
Scholastic Corp., School Specialty, Inc. and Scientific Learning,
Inc. 
Dividends
We did
not declare or pay cash dividends on our common stock in fiscal years 2009, 2008
or 2007. While future cash dividend payments are at the discretion of
our Board of Directors, our current intentions are to reinvest all earnings in
the development and growth of our business.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
information required by Item 201(d) of Regulation S-K is set forth under Item 12
of this Annual Report on Form 10-K.
Repurchases
We
repurchased 1,471 shares of our common stock for an aggregate cost of
approximately $4,000 during the second quarter of fiscal 2009. The
shares were repurchased in accordance with employee elections to withhold shares
to fund tax withholdings due upon vesting of restricted stock. Shares
repurchased but not reissued are presented as treasury stock in the Consolidated
Balance Sheet.
Fiscal
Year
Our
fiscal year is from November 1 to October 31. Unless otherwise stated,
references to the years 2009, 2008, and 2007 relate to the fiscal years ended
October 31, 2009, 2008, and 2007, respectively. References to future years also
relate to our fiscal year ending October 31.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses. We continually evaluate our
critical accounting policies and estimates, and have identified the policies
relating to the following areas as those that are significant to our financial
statement presentation, and require difficult, subjective, or complex
judgments:
Our
discussion of these policies is intended to supplement, but not replace, the
more detailed discussion of these and other accounting policies and disclosures
contained in the Notes to Consolidated Financial Statements.
Revenue Recognition. We
derive our revenues from three sources: (1) subscription revenues, which are
comprised of subscription fees from customers accessing our online, web-based
products; (2) license revenues from non-cancelable perpetual license agreements;
and (3) related professional and support services and other
revenue.
We
recognize revenue when all of the following conditions are met:
Revenue
from the licensing of software under subscription arrangements is recognized on
a ratable basis over the subscription period starting the later of the first day
of the subscription period or when all revenue recognition criteria identified
above have been met. Amounts that have been invoiced are recorded in
accounts receivable and in deferred revenue or revenue, depending on whether the
revenue recognition criteria have been met. Amounts due under
non-cancelable subscription agreements are not
recognized in accounts receivable or deferred revenue until such amounts are
invoiced to the customer.
We also
provide professional services, which consist of training and implementation
services, as well as ongoing customer support and
maintenance. Training and implementation services are not essential
to the functionality of our software products. Revenues from these
services are recognized separately upon delivery where there is objective and
reliable evidence of fair value of each deliverable. Software support
revenue is deferred and recognized ratably over the support period.
For
revenue arrangements with multiple deliverables, we allocate the total amount
the customer will pay to the separate units of accounting based on their
relative fair values, as determined by the price of the undelivered items when
sold separately.
If
collectability of the fee is not probable, revenue is recognized as payments are
received from the customer provided all other revenue recognition criteria have
been met. If the fee due from the customer is not fixed or
determinable, revenue is recognized as the payments become due provided all
other revenue recognition criteria have been met.
Capitalized Software Development
Costs. Our investments in software development are significant, and the
rules that govern how these costs are accounted for in our financial statements
can have a significant impact on our operating results from period to
period.
At the
end of fiscal year 2008, we completed our transition to a software-as-a-service
business model in which substantially all of our products are now delivered on a
hosted, subscription service basis. Effective for fiscal year 2009,
we have applied authoritative guidance that accounts for the costs of computer
software developed for internal use. The guidance provides that
hosting arrangements in which customers do not have a contractual right to take
possession of the software are service arrangements, and such software, subject
to certain exceptions, is considered internal use software.
Our
software development costs relate to the research, development, enhancement, and
maintenance of our software products. Costs related to the initial
design and development of new products and the routine enhancement and
maintenance of existing products are expensed as incurred. When projects reach
the application development stage we begin capitalization of the related project
costs. Capitalization ends when a product is available for general release to
our customers, at which time amortization of the capitalized costs begins. The
amortization of these costs is included in cost of revenues.
Prior to
fiscal year 2009, we accounted for our software development costs as computer
software to be sold, leased or otherwise marketed. Capitalization
began when technological feasibility was achieved and an allocation of indirect
costs was included in the amounts capitalized. Capitalization ended when a
product was available for general release to our customers, at which time
amortization of the capitalized costs began.
We
evaluate our capitalized costs whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Prior to 2009, we evaluated
our capitalized costs on a quarterly basis to determine if the unamortized cost
related to any product, or group of products, exceeded its estimated net
realizable value. Estimating net realizable value requires us to use judgment in
projecting future revenues and cash flows to be generated by the product and
thereby quantifying the amount, if any, to be written off. Actual cash flows
realized could differ materially from those estimated. In addition, any future
changes to our software product offerings could result in write-offs of
previously capitalized costs and have a significant impact on our consolidated
results of operations. Our analysis as of October 31, 2008 resulted
in impairment charges on these assets of $4.6 million. There were no
impairment charges on capitalized software development costs
2009. Valuation of Deferred Income
Taxes. Our accounting policy for the valuation of deferred income taxes
is considered critical for several reasons. Significant judgment is required in
the assessment of the need for a valuation allowance. In addition, income tax
accounting rules, in combination with purchase accounting rules applied in the
acquisition of Lightspan in 2004, resulted in a complex tax accounting situation
in which, until 2008, we had not recognized tax benefits on operating losses or
on the realization of deferred tax assets, but regardless of our operating
results, had been recognizing tax expense on future tax liabilities related to
tax deductible goodwill.
The
majority of our deferred tax assets represent net operating loss carryforwards
which are available to offset future taxable income. These loss carryforwards
include those acquired in the acquisition of Lightspan in 2004, as well as
carryforward losses that existed prior to, or were incurred after, the
acquisition. Our ability to realize the benefit of these loss carryforwards is
dependent upon our ability to generate future taxable income., Our history of
cumulative operating losses over the past several years has led to our current
assessment that it is more likely than not that our net deferred taxes will not
be realized. As a result, our deferred tax assets are fully reserved
and will remain fully reserved until the related tax benefits are realized
through the generation of taxable income in a particular year, or until we can
demonstrate a history of generating taxable income.
Until
2008, our calculation of net deferred tax assets excluded a deferred tax
liability related to tax deductible goodwill. The timing of the reversal of this
difference was considered indefinite because it would not reverse until the
underlying assets that created the goodwill were disposed of or
sold. In 2008, the goodwill was determined to by fully impaired, and
as a result, the deferred tax liability associated with tax deductible goodwill
was reversed.
Goodwill and Identified Intangible
Assets. Goodwill and identified intangible assets are recorded when the
purchase price paid for an acquisition exceeds the fair value of the tangible
assets acquired. Most of the companies we have acquired have not had
significant tangible assets. As a result, a significant portion of
the purchase price paid in acquisitions has been allocated to identified
intangible assets and/or goodwill.
Identified
intangible assets are amortized to expense over their expected useful lives and
goodwill was not amortized. Once established, these assets are
subject to periodic impairment assessments to determine if their current
carrying values are recoverable based on information available at the time these
assessments are made. Significant assumptions and estimates are
required in making these assessments. Accordingly,
the assumptions and estimates we use in implementing this policy affect the
amount of identified intangible asset amortization and impairment charges, if
any, reflected in our operating results. Our impairment assessments at October
31, 2008 resulted in the elimination of goodwill and a related impairment charge
of $71.9 million, and impairment charges of $1.9 million on identified
intangible technology, trademark and customer assets acquired in previous
acquisitions. There were no impairment charges in 2009.
General
Factors Affecting our Financial Results
There are
a number of general factors that affect our results from period to period. These
factors are discussed below.
Revenue. In 2008, we
completed a transition of our business model from one that sells one-time
perpetual licenses to software, for which revenue is generally recognized
up-front upon delivery, to one that sells subscription-based products, for which
revenue is recognized over the subscription period. The transition began in late
fiscal 2005 when we introduced many of our new subscription-based products and
affects the comparability of our revenues over this period. In 2009,
a meaningful, but declining portion of our revenues continued to be derived from
sales of perpetual licenses of our software products and related maintenance.
These revenues are reported as license fees and software maintenance (included
in services revenue) in our consolidated statement of operations. As
subscription revenues grow as a percentage of total revenues, we expect our
period to period revenues to become more comparable and
predictable.
Cost of Revenues and Gross
Profit. Our cost of revenues and gross profit during a period is
dependent on a number of factors. License fee and software maintenance revenues
historically have had high gross profit due to the low direct cost of delivering
these products and services. As a result, the mix of license fee revenues to
total revenues in a given period significantly influences reported total gross
profit. In addition, a large portion of our costs of revenue are fixed in
nature. These costs include amortization of capitalized software development and
purchased technology, depreciation and other infrastructure costs to support our
hosted subscription services, customer support operations, and full-time
professional services personnel who deliver our training services. Accordingly,
increases in revenues allow us to leverage these costs resulting in higher gross
profit, while decreases in revenues have the opposite effect.
Operating Expenses. General
and administrative expenses are substantially fixed in nature. However, certain
components such as our provision for bad debts, professional fees, and other
expenses can vary based on business results, individual events, or initiatives
we may be pursuing at various times throughout the year.
Incentive
compensation is a significant variable component of our sales and marketing
expenses, approximating 8% to 9% of total revenues in any given period. Sales
and marketing expenses also include costs such as travel, tradeshows, and
conferences that can vary with revenue activity or individual events that occur
during the period.
Software maintenance and development expense in our consolidated statement of
operations does not reflect our total level of software product spending. Costs
to enhance or maintain existing products, or to develop products prior to the
application development stage, are charged to software maintenance and
development expense as incurred. Costs incurred to develop new products after
the preliminary project stage is completed, which represent the majority of our
total development spending, are capitalized and amortized to cost of revenues.
Accordingly, software maintenance and development expense in our consolidated
statement of operations can fluctuate from period to period, in terms of both
total dollars and as a percentage of revenue, based on the nature and timing of
activities occurring during the period.
Amortization
of intangibles represents the amortization of certain identified intangible
assets acquired through various acquisitions. While these expenses are generally
predictable from period to period because they are fixed over the course of
their individual useful lives, they can be affected by events and other factors
that result in impairment of these assets and a corresponding reduction in
future amortization.
Non-GAAP
Financial Measures
The
following discussion and analysis of our financial condition and results of
operations includes non-GAAP financial measures, identified in the
reconciliations below, that is not prepared in accordance with generally
accepted accounting principles and may be different from non-GAAP financial
measures used by other companies. Non-GAAP financial measures should
not be considered as a substitute for, or superior to, measures of financial
performance prepared in accordance with GAAP. Investors are encouraged to review
the following reconciliations of the non-GAAP financial measures used herein to
their most directly comparable GAAP financial measures as provided in our
consolidated financial statements.
Our
management has used these non-GAAP financial measures to gauge the success of
our transition to a software-as-a-service business model. This
transition affects comparability of our results between periods during the
transition, which began in late 2005 and was completed by the end of 2008,
because revenue accounting differences and the costs to support and deliver
products and services vary significantly between our current and prior business
models. Management therefore believes these non-GAAP measures provide
transparency to our results by excluding transitory effects of the change to our
business model and help gauge the success of our
transition. Management believes these non-GAAP measures are useful to
investors for the same reasons.
Reconciliation of 2008 and 2007 GAAP
Net Loss and Loss Per Share to Non-GAAP Net Loss and Loss Per Share Before
Impairments, Restructuring and Other Charges and Benefits (in thousands, except
per share amounts)
Reconciliation
of 2008 and 2007 GAAP Operating Expenses to Non-GAAP Operating Expenses before
Goodwill Impairments, Restructuring and Other Charges (in
thousands)
Overview
of Financial Results
Fiscal
2009 was a milestone year for our company as we achieved profitability for the
first time since 2001 and significantly improved cash flows. We also
achieved our first year of growth in total orders since our transition to a
software-as-a-service (“SaaS”) business model that began in
2005. Although total revenues in 2009 continued to be adversely
affected by declining emphasis on sales of legacy perpetual products and related
software maintenance, strong growth in subscription revenues on our SaaS
products have now substantially offset these declines. Compared to 2008, total
2009 revenues declined $3.2 million, or 4.7%, to $65.2 million.
Our cost
management efforts throughout the transition have led to significant declines in
the costs of operating our business. Operating expenses, excluding impairments,
restructuring and other charges and benefits (a non-GAAP measure) declined 16.9%
to $36.2 million in 2009 from $43.6 million in 2008. Together with the
moderating revenue declines, these cost declines led to an improvement in our
non-GAAP net
income (loss) excluding impairments, restructuring and other charges and
benefits, to $1.0 million, or $0.04 per share, from ($11.3) million, or ($0.48)
per share, in 2008. On a GAAP basis, our net income was $1.0 million
in 2009 compared to a net loss of ($91.9) million for 2008, with the change
primarily attributable to the non-cash impairment charge to goodwill and
restructuring charges incurred in fiscal year 2008. In 2010,
we will continue to make curriculum and platform investments specifically
designed to address the evolving needs of the online instruction
market. Early in the year we expect to launch PLE 2.0, our first
major new release of PLE since it was introduced four years ago. We also expect
to add up to ten new courses for mainstream and advanced placement students, and
additional platform features that enable virtual instruction between teachers
and students. While our investment and sales efforts are focused exclusively on
subscription-based products, the financial effects of the transition to
subscription products is not fully complete and may continue to impede the
progress of our year-over-year financial results in the near term. This and
other risks we face in our business are discussed in more detail in Item 1A of
Part I of this report.
Results
of Operations
Our
discussion and analysis of results of operations should be read in conjunction
with the section above captioned “General Factors Affecting our
Financial Results”.
Revenues
The
following tables summarize certain key information to aid in the understanding
of our discussion and analysis of revenues:
Order Information (in
thousands)
Revenue
by Category (in thousands)
2009
vs. 2008
Total
orders increased 11.9% from $72.1 million in 2008 to $80.7 million in 2009,
driven by continued strong demand for our subscription-based products.
Subscription orders grew 31.4% while legacy license and software maintenance
orders declined 42.3% reflecting our declining emphasis on sales of these
products and services.
Total
revenues decreased $3.2 million, or 4.7%, to $65.2 million in 2009. Subscription
revenues increased $6.0 million, or 17.0%, to $41.2 million on our growing base
of subscription customers. While subscription revenue growth was strong, it was
not
sufficient to fully offset the decline in legacy license fees and software
maintenance service revenues. Our strategic shift away from these
legacy products and services resulted in a $7.9 million, or 38.4% decline in
these revenues to $12.7 million. 2008
vs. 2007
Total
revenues decreased $1.2 million, or 1.8%, to $68.4 million in 2008. Subscription
revenues increased $11.0 million, or 45.7%, to $35.2 million as strong growth in
subscription product orders in 2007 and 2008 were recognized as revenue over the
portion of the subscription periods occurring in 2008. While subscription
revenue growth was strong, it was not sufficient to fully offset a decline in
license fees and software maintenance revenues. Our strategic shift
away from legacy perpetual software products resulted in a $9.3 million, or
52.2%, decline in license fee revenues, and a $1.8 million, or 12.8%, decline in
software maintenance revenue. Professional services revenues in 2008 declined
$1.4 million, or 12.6%, as 2007 professional services revenues benefited from a
focused effort to deliver the backlog of services unused by our
customers.
Total
orders declined from $77.7 million in 2007 to $72.1 million in 2008, reflecting
a slowing of orders in the second half of the fourth quarter of 2008 as news
worsened on the broader U.S. economy and school districts put spending decisions
on hold as they evaluated the effects on their budgets. The order decline also
reflects the continuing transition from selling products that are licensed on a
perpetual basis, which have higher one-time selling prices, to those that are
licensed on a subscription basis, which have lower selling prices but are
renewable at the end of each subscription period.
Cost
of Revenue
2009
vs. 2008
Total
cost of revenue in 2009 decreased $13.6 million, or 32.8%, to $27.9 million
compared to the same period in 2008. Cost of revenue in 2008 included
$5.1 million of impairment charges on capitalized software development costs and
purchased intangible assets. Subscription cost of revenue declined $2.5 million,
or 13.4%, in 2009 due to declines in software development amortization and
royalty costs. The decline in amortization is due to the
above-mentioned asset impairments, and reduced levels of capitalized software
development spending in 2009. The decline in royalty costs in 2009
relates to a royalty arrangement with a third party provider of curriculum
content that was renegotiated at a lower cost in late 2008.
License
fee cost of revenue declined $3.5 million in 2009 compared to 2008 due to a
reduction in related revenues, lower product amortization, and cost reduction
initiatives undertaken in 2008. The services cost of revenue decreased 20.5% to
$9.9 million in 2009 from $12.4 million for 2008 due to the lower professional
services costs on lower related revenues, and lower support costs due to our
declining base of customers using our legacy perpetual products.
2008
vs.
2007
Total
cost of revenue in 2008 increased $3.9 million, or 10.5%, due primarily to an
increase in impairment charges on capitalized software development costs and
purchased
intangible assets from $0.5 million in 2007, to $5.1 million in 2008, as
discussed above. Subscription cost of revenue increased $3.1 million or 20.2%,
in 2008 on increases in software development amortization and royalty costs. The
increase in amortization is due to investments in software development made as
we transitioned to a SaaS business model. The increased royalty costs
were associated with a third party provider of curriculum
content. License
fee cost of revenue in 2008 declined $3.1 million compared to 2007 due to lower
product amortization, royalty costs and lower material costs on reduced revenues
and changes in the license product mix. The services cost of revenue decreased
4.8% to $12.4 million in 2008 from $13.1 million 2007 due to the lower
professional services costs on lower revenue levels, and lower support costs due
to our declining base of customers using our legacy perpetual
products.
Operating
Expenses
To aid in
the understanding of our discussion and analysis of operating expenses, the
following table summarizes the amount and percentage change in the amounts from
the previous year for certain operating expense line items:
2009
vs. 2008
Total operating expenses in 2009 decreased to $36.2 million from operating
expenses excluding impairments, restructuring and other charges of $43.6 million
in 2008. See further discussion below and Note 14 to consolidated financial
statements for a detailed description of these restructuring, impairment and
other charges that occurred in 2008.
Sales and
marketing expenses declined 14.0% to $23.8 million in 2009 as compared to $27.6
million in 2008. This decrease primarily reflects reduced investments
in marketing activities and better management of travel costs and inside sales
resources. None of the decline was due to a reduction in the number of direct
field sales representatives which remained approximately the same from 2008 to
2009. General
and administrative expenses declined 13.3% to $9.0 million in 2009 as compared
to $10.4 million in 2008, due primarily to reductions in labor costs and
declines in the cost of compliance activities and facility related
expenses.
Software
maintenance and development expenses for 2009 were $2.6 million compared to $4.1
million for 2008. The reduction in software maintenance and development expenses
reflects the increasing stability of our PLE platform and efficiencies built
into delivering new releases of the platform. Total software
development spending, which represents the combination of spending on projects
that are capitalized and those that are expensed, was $7.5 million in 2009, or
11.5% of total revenues, compared to total spending in 2008 of $14.7 million, or
21.5% of total revenues. The decline reflects our intention to align product
investment levels with revenues.
Amortization
of intangibles represents the amortization of identified intangible assets,
other than technology, acquired in acquisitions. Amortization of $0.8
million in 2009 represented a decrease of 45.0% from 2008 as certain assets
acquired in earlier acquisitions became fully amortized or were impaired and
written off during 2008.
2008
vs. 2007
Total
operating expenses in 2008 increased to $122.2 million and included $78.6
million in impairments, restructuring and other charges. See further
discussion below and Note 14 to consolidated financial statements for a detailed
description of these charges. Operating expenses excluding
impairments, restructuring and other charges, declined 9.2% to $43.6 million in
2008 compared to $48.0 million in 2007.
Sales and
marketing expenses declined to $27.6 million in 2008 as compared to $29.9
million in 2007. This decrease primarily reflects improved management
of indirect sales and marketing costs and better leveraging of our inside sales
resources.
General
and administrative expenses declined 14.3% to $10.4 million in 2008 as compared
to $12.1 million in 2007, due primarily to reductions in labor and incentive
costs and declines in the cost of compliance activities and internal business
systems support.
Product
maintenance and development expenses for 2008 were $4.1 million compared to $4.3
million for 2007. The reduction in product maintenance and development expenses
reflects the increasing stability of our PLE platform and efficiencies built
into delivering new releases of the platform. Total product
development spending, which represents the combination of spending on projects
that are capitalized and those that are expensed, was $14.7 million in 2008, or
21.5% of total revenues, compared to total spending in 2007 of $20.0 million, or
28.8% of total revenues. The decline reflects completion of a three year product
roadmap for the first phase of our SaaS strategy initiated in late
2005.
Amortization
of intangibles represents the amortization of identified intangible assets,
other than technology, acquired in acquisitions. Amortization of $1.5
million in 2008 represented a decrease of 10.9% from 2007 as certain assets
acquired in earlier acquisitions became fully amortized during
2008. Operating
expenses in 2008 include a non-cash impairment charge of $71.9 million on
goodwill acquired in multiple acquisitions between 2000 and 2003, several years
prior to launching our SaaS business model strategy. As described in our
critical accounting policies, authoritative guidance requires that goodwill be
reviewed for potential impairment annually, or when events or changes in
circumstances indicate the carrying value of the goodwill might exceed its
current fair value. One of the indicators of impairment is a sustained decline
in a company’s share price whereby market capitalization of the company is less
than its book value for an extended period of time. We began to
experience such a decline starting in March 2008. After trading in a
range near our book value throughout the summer, we experienced a further
decline in our stock price as the financial markets reacted to the credit crisis
facing major lending institutions, and worsening conditions in the overall
economy. As a result of these factors, we concluded in the fourth quarter of
2008 that our recorded goodwill was impaired.
The
determination of the amount of the impairment required that the fair values of
our assets and liabilities be determined as if we had been acquired in a
hypothetical business combination with a purchase price equal to the market
capitalization of our company as of October 31, 2008, adjusted for certain
factors that might reasonably affect the value of our company if purchased in an
actual acquisition. The estimates and assumptions used in determining
the hypothetical purchase price and fair value determinations are inherently
subject to uncertainty.
Under
accounting rules for business combinations, goodwill exists only if the purchase
price exceeds the fair value of the net assets of the acquired entity. Our
impairment analysis concluded that the purchase price as determined above was
less than the sum of the fair value of our identified tangible and intangible
assets, less the fair value of our liabilities. Accordingly, no value was
assigned to goodwill resulting in full impairment of goodwill and a related
non-cash charge to 2008 operating results of $71.9 million. The impairment of
goodwill did not have any impact on our day-to-day business operations,
liquidity or long-term SaaS strategy.
Impairment,
restructuring and other charges consist of $1.4 million in non-cash impairment
charges on previously acquired intangible assets, and $5.3 million in cash and
non-cash charges related to achieving continued cost efficiencies in our SaaS
business model, and the transition of our CEO in late 2008.
Interest
Income
Interest
income decreased from $0.5 million in 2008 to $0.2 million in
2009. This decrease reflected a decline in interest rates earned on
investments partially offset by a slight increase in average cash and cash
equivalents balances.
Interest
income decreased from $1.3 million in 2007 to $0.5 million in
2008. This decrease is due to lower average cash and cash equivalents
balances as well as a decline in interest rates earned on these
balances.
Income
Taxes
As
discussed earlier under the caption “Critical Accounting Policies and
Estimates,” our net deferred tax assets are fully reserved. We did not record a
current income
tax expense related to our current year operating income because we utilized a
portion of the net operating loss carryforward. Prior to
2008, certain tax deductible goodwill could not be used to offset other net
deferred tax assets resulting in the recording of income tax expense related to
this liability of $0.6 million in 2007. In 2008, the full impairment
of the tax-deductible goodwill, as discussed above, resulted in the reversal of
the cumulative deferred tax liability and a corresponding income tax benefit of
$3.1 million.
Liquidity
and Capital Resources
At
October 31, 2009, our principal sources of liquidity included cash and cash
equivalents totaling $28.2 million, net billed accounts receivable of $10.7
million, and unbilled commitments under non-cancelable subscription contracts
totaling $14.6 million, of which $7.8 million is expected to be billed in
2010. We also have a three-year senior secured credit facility that
provides us with a revolving line of credit up to the lesser of $20 million or
the amount of our trailing twelve months subscription and software maintenance
revenues. Under this agreement, which expires in June 2010, we have
the option of selecting an interest rate for any drawdown under the facility
equal to the applicable Prime or LIBOR Rate plus a sliding margin that is based
on the amount of borrowings outstanding. Borrowings under the
agreement are secured by all of our assets. Financial covenants apply
only when the unused portion of the line of credit, plus cash and cash
equivalents on hand, is less than $12.5 million, and are limited to minimum
quarterly thresholds of earnings before interest, taxes, depreciation and
amortization (EBITDA). At October 31, 2009 and 2008, availability
under the line was $20 million and there were no borrowings
outstanding.
2009
vs. 2008
Cash
provided by operations increased to $13.6 million in 2009 from $6.5 million in
2008, due to the increase in total orders and reductions in overall spending as
discussed above. Cash used in investing activities declined to $5.6
million in 2009, from $11.0 million in 2008. This decline reflects a
reduction in our product investment requirements based on the completion of the
conversion of our extensive content to the PLE environment and our intention to
align our level of product investment to our level of revenue. These
changes resulted in an $8.1 million increase from 2008 to 2009 in our year end
balance of cash and cash equivalents.
2008
vs. 2007
Cash
provided by operations declined to $6.5 million in 2008 from $9.7 million, due
primarily to the decline from 2007 to 2008 in total orders discussed above,
partially offset by reductions in overall spending. Cash used in
investing activities declined to $11.0 million in 2008, from $17.9 million in
2007. This decline reflected a reduction in our product investment
requirements based on the substantial completion of the conversion of our
extensive content to the PLE environment. These changes resulted in a
$4.3 million decrease from 2007 to 2008 in our year end balance of cash and cash
equivalents.
Contractual
Obligations
Our
principal commitments consist of future minimum payments due under operating
leases, royalty and non-cancelable software license agreements. In
addition, any future borrowings under our revolving loan agreement as discussed
above would require future use of cash. At October 31, 2009, the
future minimum payments under these commitments were as follows:
Also, as
discussed in Item 2 of this Form 10-K, the lease of our office facility in
Bloomington, MN expires in June 2010. We currently anticipate that in 2010 we
will likely execute a new lease for a different facility in or near Bloomington,
although we may renew our current lease for less square footage. The table above
does not reflect these contemplated actions.
Purchase
orders are not included in the table above. Our purchase orders
represent authorizations to purchase rather than binding
agreements. The contractual commitment amounts in the table above are
associated with agreements that are enforceable and legally binding and that
specify all significant terms, including fixed or minimum services to be used,
fixed minimum or variable price provisions, and the approximate timing of the
transaction. Obligations under contracts that we can cancel without
significant penalty are not included in the table above.
We
believe our existing cash, cash equivalents, anticipated cash provided by
operating activities, and availability under our line of credit will be
sufficient to meet our working capital and capital expenditure needs over the
next 12 months. Our future capital requirements will depend on many
factors, including the timing and extent of software development expenditures,
order volume, and the timing and collection of receivables.
Disclosures
about Off-Balance Sheet Arrangements
We did
not have any off-balance sheet arrangements as of October 31, 2009 or October
31, 2008.
Interest
Rate Risk
On June
4, 2007, we entered into a three-year senior secured credit facility which
provides us with a revolving line of credit up to the lesser of $20 million or
the amount of our trailing twelve months subscription and software maintenance
revenue. Under the agreement, which expires in June 2010, we have the
option of selecting an interest rate for any drawdown under the facility equal
to the applicable Prime or Libor Rate plus a sliding margin that is based on the
amount of borrowings outstanding. There were no borrowings
outstanding at October 31, 2009 or 2008. Foreign
Currency Exchange Rate Risk
Our
foreign operations are not a significant component of our business, and as a
result, risks relating to foreign currency fluctuation are considered
minimal.
Recent
Accounting Pronouncements
In June
2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental
GAAP. All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting
literature not included in the Codification has become
non-authoritative. The Codification did not change GAAP, but instead
introduced a new structure that combines all authoritative standards into a
comprehensive, topically organized online database. The Codification
is effective for interim or annual periods ending after September 15, 2009, and
impacts our financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of our
financial statements or disclosures as a result of implementing the Codification
during the fiscal year ended October 31, 2009.
In
October 2009, the FASB’s Emerging Issues Task Force (EITF) issued authoritative
guidance addressing revenue arrangements with multiple
deliverables. The guidance eliminates the criterion for objective and
reliable evidence of fair value for the undelivered products or
services. Instead, revenue arrangements with multiple deliverables
should be divided into separate units provided the deliverables meet certain
criteria. This guidance also eliminates the use of the residual
method of allocation and requires that the arrangement consideration be
allocated at the inception of the arrangement to all deliverables based on their
relative selling price. The guidance also provides a hierarchy for
estimating the selling price of each of the deliverables. The
guidance is effective prospectively for revenue arrangements entered into or
materially modified at the beginning of our fiscal year 2011; however, earlier
application is permitted. We are currently evaluating this guidance
and anticipate that we will adopt it in the first quarter of fiscal year 2010,
but do not expect it to have a material effect on our consolidated financial
statements.
In
October 2009, the FASB’s EITF issued authoritative guidance that updated
software revenue arrangements that also include tangible
products. The amendments exclude tangible products and software
essential to the tangible product’s functionality from the software revenue
guidance. The guidance is effective prospectively for revenue
arrangements entered into or materially modified at the beginning of our fiscal
year 2011; however, earlier application is permitted. We do not
expect the provisions to have a material effect on our consolidated financial
statements.
In August
2009, the FASB issued updated guidance to reduce potential ambiguity in
financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides
clarification that in circumstances, in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in the
guidance. The provisions became effective during our fourth quarter
2009 and did not have a material effect on our consolidated financial
statements. In April
2008, the FASB issued authoritative guidance amending the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset as provided for under separate accounting guidance
topics. The provisions are effective for our fiscal year 2010 and are
currently not expected to have a material effect on our consolidated financial
statements.
In
December 2007, the FASB issued authoritative guidance that establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill
acquired. The guidance also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. The provisions will be adopted by us in the first
quarter of fiscal 2010 and are currently not expected to have a material effect
on our consolidated financial statements.
In
December 2007, the FASB issued a new accounting pronouncement regarding
noncontrolling interests and the deconsolidation of a
subsidiary. This will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
(NCI) and classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions with minority
interest holders. The provisions will be adopted by us in the first
quarter of fiscal year 2010 and are currently not expected to have a material
effect on our consolidated financial statements.
In
February 2007, the FASB issued authoritative guidance to permit entities to
measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The provisions were effective
beginning in our fiscal year 2009 and did not have a material effect on our
consolidated financial statements.
In
September 2006, the FASB issued authoritative guidance to establish a consistent
framework for measuring fair value and expand disclosures on fair value
measurements. The provisions were effective beginning in our fiscal
year 2009 and did not have a material effect on our consolidated financial
statements.
The
information appearing under the captions “Interest Rate Risk” and
“Foreign Currency Exchange
Risk” in Item 7 of this Annual Report on Form 10-K is incorporated herein
by reference. (a)(1) Consolidated
Financial Statements:
Board of
Directors and Stockholders
PLATO
Learning, Inc.
We have
audited the accompanying consolidated balance sheets of PLATO Learning, Inc. and
subsidiaries (the “Company”) as of October 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity
and comprehensive income (loss), and cash flows for each of the three years in
the period ended October 31, 2009. 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 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PLATO Learning, Inc. and
subsidiaries as of October 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2009, in conformity with accounting principles generally accepted in
the United States of America.
We also
have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), PLATO Learning, Inc. and
subsidiaries’ internal control over financial reporting as of October 31,
2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated January 14, 2010,
expressed an unqualified opinion.
/s/ Grant
Thornton LLP
Minneapolis,
Minnesota
January
14, 2010 Board of
Directors and Stockholders
PLATO
Learning, Inc.
We have
audited PLATO Learning, Inc. and subsidiaries (the “Company”) internal control
over financial reporting as of October 31, 2009, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the effectiveness of on PLATO
Learning, Inc. and subsidiaries’ internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, PLATO Learning, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of
October 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of PLATO
Learning, Inc. and subsidiaries as of October 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows for each
of the three years in the period ended October 31, 2009, and our report dated
January 14, 2010 expressed an unqualified opinion on those consolidated
financial statements.
/s/ Grant
Thornton LLP
Minneapolis,
Minnesota
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