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Renaissance Learning (RLRN)
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Annual Reports

  • 10-K (Aug 31, 2011)
  • 10-K (Apr 15, 2011)
  • 10-K (Mar 8, 2011)
  • 10-K (Mar 10, 2010)
  • 10-K (Mar 11, 2009)
  • 10-K (Mar 3, 2008)

 
Quarterly Reports

 
8-K

 
Other

Renaissance Learning 10-K 2008

Documents found in this filing:

  1. Annual Report
  2. Subsidiaries
  3. Consent of Independent Registered Public Accounting Firm
  4. Directors' Powers of Attorney
  5. Section 302 Certification By CEO
  6. Section 302 Certification By CFO
  7. Section 906 Certification By CEO
  8. Section 906 Certification By CFO
  9. Schedule Ii - Valuation and Qualifying Accounts
  10. Graphic
  11. Complete submission text file
Click here if you are unable to view this document
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0000950137-08-003154.txt : 20080303
0000950137-08-003154.hdr.sgml : 20080303
20080303103535
ACCESSION NUMBER:		0000950137-08-003154
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		10
CONFORMED PERIOD OF REPORT:	20071231
FILED AS OF DATE:		20080303
DATE AS OF CHANGE:		20080303

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			RENAISSANCE LEARNING INC
		CENTRAL INDEX KEY:			0001030484
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-PREPACKAGED SOFTWARE [7372]
		IRS NUMBER:				391559474
		STATE OF INCORPORATION:			WI
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-22187
		FILM NUMBER:		08658157

	BUSINESS ADDRESS:	
		STREET 1:		2911 PEACH STREET
		STREET 2:		PO BOX 8036
		CITY:			WISCONSIN RAPIDS
		STATE:			WI
		ZIP:			54495-8036
		BUSINESS PHONE:		7154243636

	MAIL ADDRESS:	
		STREET 1:		PO BOX 8361
		CITY:			WISCONSIN RAPIDS
		STATE:			WI
		ZIP:			54495

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	ADVANTAGE LEARNING SYSTEMS INC
		DATE OF NAME CHANGE:	19970110


10-K
1
c22857e10vk.htm
ANNUAL REPORT



e10vk



Table of Contents










 







    UNITED STATES

    SECURITIES AND EXCHANGE COMMISSION

    Washington, D.C. 20549


 




 




 




 























     	     	     	


    þ


 

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended
    December 31, 2007


    OR



    o


 

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934







    Commission File No. 0-22187





    (Exact name of Registrant as
    specified in its charter)
    


 




























     	     	     	
 

    Wisconsin

    (State or other jurisdiction
    of

    incorporation or organization)
    

 

    39-1559474

    (I.R.S. Employer

    Identification No.)
    

 

 

 


    2911 Peach Street

    P.O. Box 8036

    Wisconsin Rapids, Wisconsin

     (Address of principal
    executive offices)
    


 

    54495-8036

     (Zip Code) 






 



    Registrant’s telephone number, including area code:
    (715) 424-3636


 



    Securities registered pursuant to Section 12(b) of the Act:


 























     	     	     	


    Title of Each Class:


 


    Name of Each Exchange on Which Registered:

 


    Common Stock, $.01 par value


 

    The NASDAQ Global Select Market






 



    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 o     No þ
    


 



    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 o     No þ
    


 



    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 þ     No o
    


 



    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.  o
    


 



    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 the definitions of
    “large accelerated filer”, “accelerated
    filer” and “smaller reporting company” in
    Rule 12b-2 of the Exchange Act. (Check One):

























     	     	     	     	     	     	     	


    Large accelerated
    filer o
    


 

    Accelerated
    filer þ
    

 

    Non-accelerated
    filer o

    (Do not check if a smaller

    reporting company)

 

    Smaller reporting
    company o






 



    Indicate by check mark whether the registrant is a shell company
    (as defined in
    Rule 12b-2
    of the Exchange
    Act).  Yes o     No þ
    


 



    The aggregate market value of the voting stock held by
    non-affiliates of the Registrant was approximately $116,195,000
    as of June 29, 2007. As of February 20, 2008, there
    were 29,049,791 of the Registrant’s shares of common stock
    outstanding.


 




 



    Part III is incorporated by reference from the Proxy
    Statement for the Registrant’s Annual Meeting of
    Shareholders to be held on April 16, 2008.


 











 













 




 












































































































































































































































































































































     	     	     	     	     	     	     	

 

 

 

 

    Page
 





 

    Business

 
 

 
 

 

 

    Overview

 
 

    2
 

 

 

    Software, Laptop Computing Solutions and Other
    Educational Products

 
 

    3
 

 

 

    Professional Services

 
 

    5
 

 

 

    Product Development

 
 

    5
 

 

 

    Selling and Marketing

 
 

    5
 

 

 

    Production

 
 

    6
 

 

 

    Competition

 
 

    6
 

 

 

    Intellectual Property

 
 

    7
 

 

 

    Employees

 
 

    7
 

 

 

    Backlog

 
 

    7
 

 

 

    Forward-Looking Statements

 
 

    7
 



 

    Risk Factors

 
 

    8
 



 

    Unresolved Staff Comments

 
 

    11
 



 

    Properties

 
 

    12
 



 

    Legal Proceedings

 
 

    12
 



 

    Submission of Matters to a Vote of Security
    Holders

 
 

    12
 

 

    PART II



 

    Market for Registrant’s Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

 
 

    14
 



 

    Selected Financial Data

 
 

    17
 



 

    Management’s Discussion and Analysis of
    Financial Condition and Results of Operations

 
 

    18
 



 

    Quantitative and Qualitative Disclosures About
    Market Risk

 
 

    26
 



 

    Financial Statements and Supplementary
    Data

 
 

    28
 



 

    Changes In and Disagreements With Accountants
    on Accounting and Financial Disclosure

 
 

    49
 



 

    Controls and Procedures

 
 

    49
 



 

    Other Information

 
 

    49
 

 

    PART III



 

    Directors and Executive Officers of the
    Registrant

 
 

    50
 



 

    Executive Compensation

 
 

    50
 



 

    Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters

 
 

    50
 



 

    Certain Relationships and Related
    Transactions

 
 

    51
 



 

    Principal Accountant Fees and Services

 
 

    51
 

 

    PART IV



 

    Exhibits and Financial Statement
    Schedules

 
 

    52
 
 Subsidiaries
 Consent of Independent Registered Public Accounting Firm
 Directors' Powers of Attorney
 Section 302 Certification by CEO
 Section 302 Certification by CFO
 Section 906 Certification by CEO
 Section 906 Certification by CFO
 Schedule II - Valuation and Qualifying Accounts











    

    1



Table of Contents




 




    PART I


 














        
    
    Item 1. 
    
    Business


 




 



    Renaissance Learning, Inc. is a leading provider of
    computer-based assessment technology for pre-kindergarten
    through senior high (“pre-K-12”) schools and
    districts. Our tools provide daily formative assessment and
    periodic progress-monitoring technology to enhance core
    curriculum, support differentiated instruction and personalize
    practice in reading, writing, and math. Renaissance Learning
    products help educators make the practice component of their
    existing curriculum more effective by providing tools to
    personalize practice and easily manage the daily activities for
    students of all levels.


 



    Our products, which support and enhance all curriculum and
    instructional approaches, are backed by research studies that
    support the demonstrated effectiveness of our products. Our
    products and services are primarily focused on three key
    pre-K-12 curriculum areas: reading, writing and math.
    Accelerated Reader*, STAR Reading, STAR Early Literacy
    and Read Now Power Up! comprise our reading products.
    Our math products include Accelerated Math, STAR Math
    and Math Facts in a Flash. AlphaSmart laptops and
    related software are our primary writing and keyboarding
    products. We also address language acquisition for English
    language learners with our English in a Flash software.
    Our 2Know! response system is a versatile classroom tool
    which encourages classroom participation and provides
    instantaneous feedback to instructors in any educational
    setting. Our products also include an optical-mark card scanner,
    which is primarily used with Accelerated Math, to
    automate scoring and recordkeeping tasks. Additionally, our
    product offerings include supplemental resources for educators
    and classroom use such as handbooks, workbooks, learning cards
    and motivational items.


 



    Our flagship product, Accelerated Reader, is software
    that provides information for motivating and monitoring
    increased literature-based reading practice. We believe that
    Accelerated Reader and our other products have achieved
    their significant market positions as a result of demonstrated
    effectiveness in assisting educators accelerate learning and
    improve essential skills by facilitating increased student
    practice, increasing the quality, quantity, and timeliness of
    performance data available to educators, helping educators
    motivate students and providing student access to low cost
    computing solutions. Our products help educators manage student
    practice of curriculum, provide targeted instruction, keep
    students engaged and measure student progress in order to
    accelerate student learning.


 



    Our educational software products are available on two separate
    platforms: our web-based Renaissance Place software
    platform and our traditional desktop versions that run on local
    area networks of individual schools. The Renaissance Place
    platform meets the needs of district-wide installations such
    as: scalability, remote access, centralized database and server
    for multiple campus use, sophisticated statistical analysis,
    ease of administration and support, and integration with student
    data from other district systems. Renaissance Place
    products are sold primarily on a subscription basis
    typically for terms of one year. Our popular Accelerated
    Reader Enterprise and Accelerated Math Enterprise
    packages are turn-key solutions consisting of the
    Renaissance Place platform with enhanced features,
    unlimited access to all of our reading quizzes and math content,
    remote software hosting, professional development and technical
    consulting services. Enterprise versions of Accelerated
    Reader and Accelerated Math are sold on a
    subscription basis.


 



    Our desktop products are relatively simple to set up and
    maintain for an individual school, are designed to require only
    modest technology resources and are competitively
    priced — at or below the discretionary spending level
    of most school principals. Our traditional desktop products are
    typically sold as school-wide perpetual

 
 


    * AR, AccelScan, Accelerated Math, Accelerated Reader,
    Accelerated Vocabulary, AlphaSmart, Dana, English in a Flash,
    MathFacts in a Flash, Neo, Neo 2, Read Now, Renaissance,
    Renaissance Learning, Renaissance Place, STAR Early Literacy,
    STAR Reading, STAR Math and 2Know! are trademarks of Renaissance
    Learning, Inc. registered
    ®,
    common law or pending registration in the United States and
    other countries. Other trademarks are the property of their
    respective owners.

    

    Power Up! and Steck-Vaughn are trademarks of Houghton Mifflin
    Harcourt Supplemental Publishers, Inc.



    

    2



Table of Contents





    software licenses with optional annual support plans, student
    expansions, and add-on reading quizzes and math content
    libraries.


 



    We offer a full line of professional service and support
    solutions that integrate with, complement, and enhance the
    effectiveness of, our products. Sold separately or bundled with
    our products to provide a complete solution, our service
    offerings include professional development and product training
    seminars and conferences, report and data analysis, program
    evaluation, guided implementation, distance training, software
    support, software installation, database conversion and
    integration services, and application hosting. Further, we
    conduct research on best practices, perform field validation of
    techniques, publish internally generated as well as third-party
    research, and gather information to guide the development of new
    and improved products.


 



    Renaissance Learning, Inc. was founded in 1986 and is
    incorporated under the laws of the State of Wisconsin. Our
    common stock trades on The NASDAQ Global Select
    Market®
    under the symbol “RLRN.” Our principal executive
    offices are located at 2911 Peach Street,
    P.O. Box 8036, Wisconsin Rapids, Wisconsin
    54495-8036
    (telephone:
    (715) 424-3636).
    You may obtain, free of charge, copies of this Annual Report on
    Form 10-K
    as well as our Quarterly Reports on
    Form 10-Q
    and our Current Reports on
    Form 8-K
    (and amendments to those reports) filed with, or furnished to,
    the Securities Exchange Commission (the “SEC”) as soon
    as reasonably practicable after we have filed, or furnished,
    such reports by accessing our website at
    http://www.renlearn.com,
    clicking on “About Us” and scrolling down to the
    “SEC Filings” link. You may read and copy any
    materials filed by us with the SEC at the SEC’s Public
    Reference Room located at 100 F Street, NE,
    Washington, DC 20549. You may obtain information on the
    operation of the Public Reference Room by calling the SEC at
    1-800-SEC-0330.
    Information contained on our website is not part of this Annual
    Report on
    Form 10-K.


 




 



    Accelerated Reader is software for motivating and
    monitoring increased literature-based reading practice and for
    providing educators with student progress information to support
    instruction. A student selects a book at an appropriate reading
    level from a list of books for which the school has an
    Accelerated Reader quiz, reads the book, and then takes a
    multiple-choice quiz on a computer. For each book read,
    Accelerated Reader tracks the amount of reading practice
    achieved by calculating points based on the length and
    difficulty of the book and the student’s performance on the
    quiz. The information generated from this process —
    titles read, percent of comprehension and amount of reading
    completed — creates a database of student reading
    achievement from which reports are generated that help educators
    monitor the amount and quality of reading practice for each
    individual student and thereby effectively target their
    instruction of comprehension, vocabulary and fluency. We
    currently have computerized book quizzes for Accelerated
    Reader on over 122,000 titles. Accelerated Reader
    supports recorded-voice versions of quizzes on literature
    books for emergent readers, quizzes for assessing reading
    instruction assignments from reading textbooks, and Literacy
    Skills quizzes which allow educators to assess
    students’ proficiency on specific skills found in state and
    district language arts standards.


 



    STAR Reading is an easy to use, computer-adaptive
    formative reading assessment system that determines a
    student’s reading level, statistically correlated to
    national norms, in ten minutes or less. STAR Reading
    adapts itself during testing by utilizing proprietary
    branching logic that evaluates the pattern of the student’s
    answers to determine the level of difficulty required for
    subsequent questions. Tests can be administered several times a
    year and the results provide educators with a database of
    statistically accurate reading level information on their
    students, grades 1-12, from which they can generate useful
    diagnostic reports and adjust instructional strategies
    accordingly.


 



    STAR Early Literacy computer adaptive assessment software
    provides educators with a fast, accurate and easy solution to
    assess the phonemic awareness, phonic and other readiness and
    literacy skills of students in grades pre-K-3. The software
    helps educators identify each student’s specific strengths
    and diagnose specific weaknesses in skills covered by early
    literacy curricula and standards. STAR Early Literacy
    allows for the assessment process to be quickly and easily
    repeated several times throughout a school year at a lower cost
    and on a timelier basis than conventional assessments.


 



    Read Now Power Up! is a comprehensive reading
    intervention curriculum solution for grades 5-9 that combines
    the instructional materials of Steck-Vaughn with the
    technology of Renaissance Learning to help



    

    3



Table of Contents





    educators assist students identified as struggling readers.
    Read Now Power Up! employs a comprehensive instruction
    model, multimedia instructional materials, a software
    e-learning
    package hosted on a dedicated interactive website and
    professional development services to support educators with
    implementation. These components work together to help educators
    direct students to material appropriate to their reading
    ability, provide the extensive practice crucial to improving
    reading skills, and develop the range of skills necessary to
    read successfully, from phonemic awareness through fluency and
    comprehension.


 



    Accelerated Math software helps educators personalize
    math instruction and manage the extensive curriculum practice
    students need to develop math skills, master state standards and
    to ensure math success for students of all abilities —
    average, gifted and remedial — from grade one through
    calculus, regardless of a district’s chosen math
    curriculum. Accelerated Math software generates
    personalized assignments targeted to each individual
    student’s level and scores them automatically using our
    AccelScan optical mark reader. Accelerated Math
    offers state standards-aligned libraries, textbook-aligned
    libraries for popular math textbooks and extended response
    libraries that integrate the application of multiple math
    objectives.


 



    AccelScan, primarily used with Accelerated Math,
    is our innovative, patented optical mark card reader. The reader
    has intelligent mark recognition capability, which results in
    more accurate recognition of student marks by distinguishing
    many degrees of darkness from a variety of marking instruments
    and ignoring lighter erasures. AccelScan automates
    scoring of assignments and updating of student records,
    providing educators with immediate information on student
    progress without manual scoring.


 



    STAR Math is a computer-adaptive, formative math
    assessment test and database that provides the same benefits as
    STAR Reading. STAR Math reports provide objective
    information to help educators instantly place their students,
    monitor progress, and match instruction to individual student
    levels. Quick, accurate, and easy to administer, STAR Math
    provides math scores for grades 1-12 in approximately 15
    minutes, provides comparisons to national norms, forecasts
    results on major high-stakes tests, and can be administered
    several times throughout the school year to track student
    development of math proficiency.


 



    MathFacts in a Flash software helps educators motivate
    students to master computational fluency. It gives students at
    all skill levels valuable practice on their addition,
    subtraction, multiplication, and division facts as well as on
    mental math skills such as squares and fraction/decimal
    conversion. Timed tests administered by the system accurately
    measure students’ practice and mastery, while detailed
    reports give educators timely, reliable feedback on the progress
    of individual students or entire classrooms.


 



    English in a Flash software utilizes a research-based
    approach to helping educators accelerate the language
    acquisition for students who are English Language Learners
    (ELLs) and English as a Second Language (ESL) students. This
    approach is based on a systematic method of learning language
    without reliance upon translation, grammatical instruction, or
    multimedia distractions, which is significantly faster than
    traditional methods of language acquisition.


 



    AlphaSmart Laptops are rugged, portable, easy-to-use, low
    total-cost-of-ownership computing devices that can operate
    independently or complement existing computers. Models offered
    include the Neo 2, Neo and Dana. AlphaSmart
    laptops are particularly well suited to keyboarding skill
    development and facilitating writing practice in a classroom
    setting. In addition, AlphaSmart laptops run a variety of
    curriculum-specific software focused on skills improvement and
    real-time formative assessment in writing, language arts, math,
    science, keyboarding, social studies, technology literacy and
    special needs. AlphaSmart laptops also perform
    word-processing, function as a calculator, are expandable and
    feature advanced wireless capabilities, thereby increasing
    student access to affordable portable computing. They can
    operate up to 700 hours on a single set of batteries. The
    Neo 2 contains the functionality of, and integrates with,
    our 2Know! response system. Concurrent with the March
    2008 release of Accelerated Reader, Renaissance Place
    schools will have the ability to administer Accelerated
    Reader quizzes using the Neo 2, which will
    effectively leverage the functionality and benefits of these two
    popular products in an educational setting.


 



    2Know! response system is an interactive system that
    allows educators to easily encourage student classroom
    participation and obtain instantaneous feedback that can be used
    to quickly assess student comprehension and performance. The
    system employs state-of-the-art radio frequency technology
    allowing wireless communication



    

    4



Table of Contents





    between students’ handheld devices and Renaissance
    Learning software. Educators can use the system and the
    large amount of available assessment content for quizzes, tests,
    surveys and exercises while encouraging increased classroom
    participation and saving time through automatic real-time
    scoring.


 



    Educator Resource Products. We also produce
    videotapes, handbooks, lesson books, math learning cards,
    workbooks and motivational items for use by educators in
    conjunction with our software and training programs.


 




 



    We offer a full line of professional services to our customers.
    Our services include support plans for our software solutions,
    technical services, product training and multiple professional
    development options.


 



    Support Plans. We offer extended service and support
    plans that provide users of our products access to telephone
    support. Support plans are packaged with software and also sold
    separately and typically cover a period of 12 months.


 



    Technical Services. We provide our customers with a
    variety of services to help with the implementation and support
    of their Renaissance programs. These include system
    setup, software installation, application hosting,
    troubleshooting, technical training, data conversion, interface
    programming and custom report writing.


 



    Training and Professional Development Services. Our
    professional development sessions provide leadership development
    opportunities, instruct educators in proven best practices to
    enhance their curriculum and instruction, and inform educators
    on how to most effectively use our products and the information
    they generate. Our content has been organized into beginning,
    advanced and special topics that can be delivered over time
    allowing educators to integrate best practices into the
    classroom and assimilate information as they need it. We offer
    several delivery options to meet specific customer needs and
    constraints including: (i) online self-study,
    (ii) online webinars conducted by a Renaissance
    implementation specialist using the web and a telephone,
    (iii) full-day
    professional development seminars, (iv) consulting provided
    on an
    on-site or
    remote basis, (v) implementation coaching in which the
    educator is paired with one of our specialists for
    implementation support over an entire school year and
    (vi) large training events like our regional symposiums and
    national conference.


 



    Our training and professional development services can be
    accessed online through the Renaissance Training Center
    which is the gateway to all of our professional development
    services. Customers can access online self-study content or
    webinars as well as register for regional symposiums. The site
    also tracks each person’s courses, online certificates,
    continuing education (CEU) credits and maintains a transcript of
    completed professional development.


 




 



    We believe that continued substantial investment in product
    development is required to remain competitive and grow in the
    educational marketplace. We invest continuously in the
    development of new products and services, enhancement of
    existing products and services, development of new content for
    existing products, development of tools to increase the
    efficiency of product development, and scientific research that:
    generates concepts for new products and services, validates the
    efficacy of our existing products and services and provides
    useful feedback for improvement of new and existing products and
    services. For the years ended December 31, 2007, 2006, and
    2005, our development expenses were $18.5 million,
    $17.3 million and $17.0 million, respectively
    (excluding capitalized amounts of $0.2 million, $0.7 million and
    $0.3 million, respectively).


 




 



    We market our educational products and services to teachers,
    school librarians, principals, entire schools, school district
    personnel, and state departments of education as well as
    internationally through our United Kingdom sales office and
    distributors. Our sales and marketing strategy consists of
    direct marketing to potential and existing customers and
    relationship selling through a dual sales channel encompassing
    both a telesales organization primarily designed for school
    level sales and a field sales team focused on multiple schools
    or district wide sales. We



    

    5



Table of Contents





    use a variety of lead-generating techniques, including trade
    shows, advertisements in educational publications, direct mail,
    websites and referrals.


 



    We have resale arrangements with various book dealers and book
    publishers that sell our software products to their customers.
    These firms are particularly receptive to such alliances because
    the use of our products in schools encourages increased
    purchases of the books and other products that they sell. Some
    of our hardware products are also distributed by various
    third-party resellers. We offer only limited, short-term price
    protection and stock balancing rights to our resellers.


 



    Part of our distribution strategy is to develop cross-marketing
    arrangements with third-party firms, which sell non-competing
    products into the education market. We have formed strategic
    alliances with book distributors, publishers, and other
    organizations in the pre-K-12 market to develop additional new
    product opportunities and to enhance the channels available to
    sell and distribute our products. These alliances take several
    forms. For example, we offer Accelerated Reader quizzes
    and Accelerated Math software libraries aligned to
    popular textbook series and other curriculum materials. Our
    Read Now Power Up! product is the result of a combined
    development effort and cross-marketing arrangement with a major
    textbook publisher. We also have other arrangements in which we
    have aligned our products to work with
    and/or
    complement other educational materials.


 



    We experience seasonal variations in customer orders primarily
    due to the budget and school-year cycles of our customers. Total
    quarterly orders received are generally highest in the third
    quarter. Our service revenues tend to be higher in the second
    and third quarters due to customer preferences as to when
    services are delivered. Due to increased interest in our
    subscription-based products and services, particularly
    Accelerated Reader Enterprise and Accelerated Math
    Enterprise, the current trend is toward software order
    levels being higher in the second and third quarters. Also, due
    to Accelerated Reader Enterprise and Accelerated Math
    Enterprise, which include access to all reading quizzes and
    math libraries, we have recently experienced reduced orders for
    reading quizzes and math libraries. This change in reading quiz
    and math library ordering patterns has tended to reduce order
    levels in the first and fourth quarters, thus further adding to
    the seasonally high proportion of orders received in the second
    and third quarter.


 




 



    A growing number of customers purchase our software on a hosted
    basis and therefore access our products directly from our data
    center servers through the internet. Our software products are
    also distributed on CD-ROM. Bulk CD-ROMs are produced by
    third-party contractors. We produce order-specific and smaller
    batches of CD-ROMs at our distribution facility. Accelerated
    Reader quizzes and Accelerated Math libraries can be
    purchased and downloaded from our website and selected patches
    and software updates are available for download on our website
    as well.


 



    Our AlphaSmart laptops, the 2Know! response system
    and our AccelScan scanners are produced to our
    specifications by third-party contract manufacturers, some of
    which are located outside of the United States. Other related
    products, including videotapes, books, graphics, and
    motivational items, are produced by third-party vendors.


 




 



    The educational technology and professional development markets
    in which we operate are very competitive and fragmented. We
    compete with many other companies offering educational software
    products, computing devices, interactive response systems,
    professional development and technology consulting services to
    schools. Education continues to emerge as a major global
    industry and potential competitors, including large hardware
    manufacturers, software developers, educational publishers, and
    consulting firms, may enter or increase their focus on the
    schools market, resulting in greater competition for us. In
    addition, we compete against other more traditional methods of
    education, training and testing, including pencil and paper
    testing.


 



    As we enter into new markets, existing competitors could
    increase the barriers to entering these markets by driving
    prices lower or making modifications to enhance their products.
    Success in selling our established products



    

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    and services may cause competitors to focus on us in their
    marketing efforts thereby increasing direct competition. There
    can be no assurance that we will continue to be able to market
    our products and services successfully or compete effectively in
    the educational marketplace.


 




 



    We regard certain of our technologies as proprietary and rely
    primarily on a combination of patent, copyright, trademark, and
    trade secret laws as well as employee non-disclosure agreements
    to establish and protect our intellectual property rights. We
    also employ serialization techniques to prevent unauthorized
    installation of our software products and related content. There
    can be no assurance that the steps taken by us to protect our
    rights will adequately prevent and deter misappropriation. In
    addition, while we do not believe that our products, trademarks
    or other proprietary rights infringe upon the proprietary rights
    of third parties, there can be no assurance that a third party
    will not make a contrary assertion. The cost of responding to
    such assertions can be material, regardless of whether an
    assertion is validated. The software publishing industry has
    traditionally experienced widespread unauthorized reproduction
    of products in violation of intellectual property rights. Such
    activity is difficult to detect and legal proceedings to enforce
    intellectual property rights are often burdensome and involve a
    high degree of uncertainty and costs. There can be no assurance
    that our software products will not experience unauthorized
    reproduction, which would have a material adverse effect on our
    business, financial condition and results of operations.


 




 



    As of February 1, 2008, we had 991 full-time and
    part-time employees. We believe our relations with employees are
    good. None of our employees is represented by a union or subject
    to collective bargaining agreements.


 




 



    As of December 31, 2007 and 2006, we had backlogs that
    aggregated approximately $39.6 million and
    $26.2 million, respectively. These backlogs include
    deferred revenue related to software subscriptions, software
    support agreements, technology consulting and professional
    development of $38.4 million and $24.6 million at
    December 31, 2007 and 2006, respectively. Substantially all
    of the 2007 backlog is expected to be realized during 2008.


 




 



    In accordance with the Private Securities Litigation Reform Act
    of 1995, we can obtain a “safe-harbor” for
    forward-looking statements by identifying those statements and
    by accompanying those statements with cautionary statements
    which identify factors that could cause actual results to differ
    materially from those in the forward-looking statements.
    Accordingly, the following information contains or may contain
    forward-looking statements: (1) information included or
    incorporated by reference in this Annual Report on
    Form 10-K,
    including, without limitation, statements made under
    “Item 1-Business”
    and
    “Item 7-Management’s
    Discussion and Analysis of Financial Condition and Results of
    Operations,” including, without limitation, statements with
    respect to growth initiatives, growth prospects, projected
    sales, revenues, earnings and costs, and product development
    schedules and plans, and management’s expectations
    regarding orders and financial results for future periods
    (2) information included or incorporated by reference in
    our future filings with the SEC including, without limitation,
    statements with respect to growth initiatives, growth prospects,
    projected sales, revenues, earnings and costs, and product
    development schedules and plans, and management’s
    expectations regarding orders and financial results for future
    periods and (3) information contained in written material,
    releases and oral statements issued by us, or on our behalf,
    including, without limitation, statements with respect to growth
    initiatives, growth prospects, projected sales, revenues,
    earnings and costs, and product development schedules and plans,
    and management’s expectations regarding orders and
    financial results for future periods. Our actual results may
    differ materially from those contained in the forward-looking
    statements identified above. Factors which may cause such a
    difference to occur include, but are not limited to, the factors
    listed in
    “Item 1A-Risk
    Factors.”



    

    7



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    Item 1A. 
    
    Risk
    Factors


 



    Reliance on Single Product Line. Our Accelerated
    Reader software and supplemental Accelerated Reader
    quizzes accounted for approximately 38%, 37% and 37% of our
    net sales in 2007, 2006 and 2005, respectively. An overall
    decline in sales of Accelerated Reader and supplemental
    quizzes would have a material adverse effect on our business,
    financial condition and results of operations.


 



    Geographic Concentration of Sales. A substantial
    portion of our sales is concentrated in several states,
    including California, Texas, Florida, North Carolina and
    Georgia, which accounted for approximately 15%, 14%, 6%, 4% and
    4%, respectively, of our net sales in 2007. If large numbers of
    schools or a district or districts controlling a large number of
    schools in such states were to discontinue purchasing our
    products and services, our business, financial condition, and
    results of operations would be materially adversely affected.


 



    Dependence on Educational Institutions and Government
    Funding. Substantially all of our revenue is derived
    from sales to educational institutions, individual educators,
    and their other suppliers. There can be no assurance that
    educational institutions
    and/or
    individual educators will continue to invest in technology-based
    products and professional development for reading and other
    curricula or continue to respond favorably to our marketing. Our
    inability to increase the number of products sold or number of
    schools served would adversely affect our business, financial
    condition and results of operations. Because of our dependence
    on educational institutions, the funding of which is largely
    dependent on government support, a substantial decrease in
    government budgets or funding for educational software or
    technology would have a material adverse effect on our business,
    financial condition and results of operations. Economic slow
    downs that negatively affect school funding can adversely impact
    the sale of our products and services to schools. In addition,
    certain aspects of government sponsored education initiatives
    may not endorse, or be complementary to, the principles and
    methodologies underlying and associated with our products and
    services, which could adversely affect our business, financial
    condition and results of operations.


 



    Dependence on Continued Product Development. The
    educational technology and services markets in which we compete
    are characterized by evolving industry standards, frequent
    product introductions and sudden technological change. Our
    future success depends, to a significant extent, on a number of
    factors, including our ability to enhance our existing products,
    develop and successfully introduce new products in a timely
    fashion, and respond quickly and cost effectively to
    technological change, including: shifts in operating systems,
    hardware platforms, programming languages, alternative delivery
    systems, the internet and other uncertainties. There can be no
    assurance that new products will be as well received as our
    established products, particularly since they may require
    technology
    and/or
    resources not generally available in all schools. We attempt to
    maintain high standards for the demonstrated academic
    effectiveness of our products. Our adherence to these standards
    could delay or inhibit the introduction of new products.
    Moreover, there can be no assurance that our products will not
    be rendered obsolete or that we will have sufficient resources
    to make the necessary investments or be able to develop and
    market the products required to maintain our competitive
    position.


 



    Acquisitions. In order to strengthen our business,
    we continually evaluate strategic opportunities, including
    acquisitions. Acquisitions involve a number of difficulties and
    risks, including, among others: the failure to integrate
    personnel, technology, research and development, marketing and
    sales operations of the acquired company; the diversion of
    management time and resources and the resulting disruption to
    our ongoing business; the potential loss of the acquired
    company’s customers, as well as our own; and unanticipated
    costs and liabilities. Any integration process will require
    significant time and resources, and we may not be able to manage
    the process successfully. If customers of the acquired company,
    or our customers, are uncertain about our ability to operate on
    a combined basis with the acquired company, they could delay or
    cancel orders for products and services. Moreover, we may not
    successfully evaluate or utilize the acquired technology or
    accurately forecast the financial impact of an acquisition
    transaction. If we fail to integrate an acquired company or
    business successfully, our business, financial condition, and
    results of operations could be adversely affected, including the
    potential need to record a non-cash charge for the impairment of
    goodwill and other intangibles.


 



    Reliance on statistical studies to demonstrate effectiveness
    of our products and services. We rely on statistical
    studies to demonstrate that our products and related services
    improve student achievement. We believe that these studies
    accurately reflect the performance of our products. These
    studies, however, involve the following risks: (i) the
    sample sizes used in our studies may yield results that are not
    representative of the general population of



    

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    students who use our products; (ii) the methods used to
    gather the information upon which these studies are based depend
    on cooperation from students and other participants, and
    inaccurate or incomplete responses could distort results;
    (iii) schools studying the effectiveness of our products
    may apply different methodologies and data collection
    techniques, making results difficult to aggregate and compare;
    (iv) we facilitate the collection and analysis of data for
    some of these studies; and (v) we hire researchers to
    aggregate and present the results of some of these studies and,
    in some cases, to conduct the studies. There is growing demand
    from the No Child Left Behind Act and other sources for research
    and studies to demonstrate the effectiveness of educational
    programs and products. Our selling and marketing efforts, as
    well as our reputation, could be adversely impacted if the
    public, including our existing and potential customers, is not
    convinced that the product effectiveness is proven by the
    studies.


 



    Limited Protection of Intellectual Property and Proprietary
    Rights. We regard certain of our technologies as
    proprietary and rely primarily on a combination of patent,
    copyright, trademark and trade secret laws and employee
    non-disclosure agreements to establish and protect our
    intellectual property rights. We also employ serialization
    techniques to prevent unauthorized installation of our software
    products and related content. There can be no assurance that the
    steps taken by us to protect our rights will be adequate to
    prevent or deter misappropriation. In addition, while we do not
    believe that our products, trademarks or other proprietary
    rights infringe upon the proprietary rights of third parties,
    there can be no assurance that a third party will not make a
    contrary assertion. The cost of responding to such assertions
    can be material, regardless of whether an assertion is
    validated. The software publishing industry has traditionally
    experienced widespread unauthorized reproduction of products in
    violation of intellectual property rights. Such activity is
    difficult to detect and legal proceedings to enforce
    intellectual property rights are often burdensome and involve a
    high degree of uncertainty and costs. There can be no assurance
    that our software products will not experience unauthorized
    reproduction, which would have a material adverse effect on our
    business, financial condition and results of operations.


 



    Selling and Marketing Strategy and Product
    Acceptance. Our selling and marketing strategy includes
    the introduction of new products and services directed at new
    markets as well as the development of new sales and distribution
    channels. There can be no assurance that we will be successful
    in offering new products and services, entering new markets and
    developing new sales and distribution channels or that any such
    products or services, if introduced, will achieve acceptance in
    the marketplace.


 



    Risks of International Expansion. A component of our
    growth strategy is the expansion of our operations in
    international markets. Doing business in international markets
    is subject to a number of risks, including, among others:
    acceptance by foreign educational systems of our approach to
    educational products; lack of existing customer base; unexpected
    changes in regulatory requirements; potentially adverse tax
    consequences; tariffs and other trade barriers; difficulties in
    staffing and managing foreign operations; changing economic
    conditions; exposure to different legal standards (particularly
    with respect to intellectual property); burdens of complying
    with a variety of foreign laws; and fluctuations in currency
    exchange rates. If any of these risks were to materialize, our
    business, financial condition, and results of operations could
    be adversely affected.


 



    Educational Philosophies. Our products support all
    teaching methods and curricula by focusing on continuous
    feedback, increased student practice of essential skills, and
    demonstrated product effectiveness through measurable results.
    Certain educators, academics, politicians, and theorists,
    however, advocate philosophies of instruction that can lead them
    to oppose certain educational products or services. These
    philosophies can include, but are not limited to, opposition to
    standardized testing or over-reliance on the same; opposition to
    computers or motivational techniques; exclusive focus on
    particular types of direct instruction; and highly technical
    definitions of acceptable research. Some of these philosophical
    stances have the capacity to negatively influence the market for
    our products and services, and such influence could have a
    material adverse impact on demand for our products and services
    and thus on our business, financial condition and results of
    operations.


 



    Highly Competitive Industry. The educational
    technology and professional development markets in which we
    operate are very competitive and fragmented. We compete with
    other companies offering educational software products,
    computing devices, interactive response systems, professional
    development, and technology consulting services to schools.
    Education continues to emerge as a major global industry and
    potential competitors, including large hardware manufacturers,
    software developers, educational publishers, and consulting
    firms, may enter or



    

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    increase their focus on the schools market, resulting in greater
    competition for us. In addition, we compete against more
    traditional methods of education, training and testing,
    including pencil and paper testing.


 



    As we enter into new markets, existing competitors could
    increase the barriers to entering this market by driving prices
    lower or making modifications to enhance their products. Success
    in selling our established products and services may cause
    competitors to focus on us in their marketing efforts thereby
    increasing direct competition. There can be no assurance that we
    will continue to be able to market our products successfully or
    compete effectively in the educational marketplace.


 



    Dependence on Key Personnel. Our success depends to
    a significant extent upon the continued active participation of
    certain key members of management. We do not have employment
    agreements with these individuals and have no current intention
    of entering into any such employment agreements. The loss of the
    services of key personnel could have a material adverse effect
    on our business, financial condition and results of operations.


 



    Ability to Attract and Retain Qualified
    Personnel. Our future success will depend, in part,
    upon our continuing ability to retain the employees, including
    senior management personnel, who have assisted in the
    development and marketing of our products and to attract and
    retain qualified additional employees trained in computer
    technology, sales, marketing, finance, and other disciplines to
    enhance our product offerings and broaden our operations. There
    can be no assurance that we will continue to be able to attract
    and retain such personnel. The failure to attract or retain the
    necessary personnel would have a material adverse effect on our
    business, financial condition and results of operations.


 



    Fluctuations in Quarterly Performance. We generally
    deliver products as orders are received. The quantity of product
    orders in any quarter can be affected by a variety of factors,
    including:


 














































            
             • 
    
    delays in the development
    and/or
    shipment of new products;
 
             • 
    
    the closing of large contract sales, such as those to school
    districts;
 
             • 
    
    the shipment of new products for which orders have been building
    for a period of time; and
 
             • 
    
    seasonal variations due to, among other things, the budget and
    school year cycles of our school customers and annual ordering
    patterns related to subscription-based products and services,
    particularly Accelerated Reader Enterprise and
    Accelerated Math Enterprise.


 



    In addition, our quarterly results can also be affected by:


 


































































            
             • 
    
    charges related to acquisitions and divestitures, including
    related expenses, the write-off of in-process research and
    development, the amortization of intangible assets, asset
    impairments and similar items;
 
             • 
    
    charges related to obsolete or impaired tangible assets,
    intangible assets, goodwill, capitalized software development
    costs and similar items;
 
             • 
    
    supply-chain issues such as manufacturing problems, delivery
    delays, component shortages, strikes or quality issues;
 
             • 
    
    expenses related to product development and marketing
    initiatives;
 
             • 
    
    seasonal variability of product support costs; and
 
             • 
    
    seasonal variations due to delays in quiz order patterns as
    customers consider upgrading to Accelerated Reader
    Enterprise, our turn-key solution, which includes all quiz
    content.


 



    Our overall gross margins also fluctuate based upon the mix of
    software, hardware and service sales. We realize higher margins
    on our software product sales than our hardware and service
    sales. Some of our revenues tend to be seasonal due to annual
    school budget cycles, customer preferences as to when products
    and services are delivered and the timing of our larger
    professional development events, resulting in seasonal
    variations in margins.


 



    Share Price Volatility. Numerous factors, many of
    which are beyond our control, may cause the market price of our
    common stock to fluctuate significantly. These factors include
    announcements of technological innovations



    

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    and/or new
    products by us and our competitors, earnings releases and
    earnings warnings by us and our competitors, expectations
    regarding government funding levels for education, market
    conditions in the industry, announcements by us of significant
    acquisitions
    and/or
    divestitures, and the general state of the securities markets.
    The market price of our common stock may decline significantly
    if we fail to meet our forecasts or the published earnings
    estimates of analysts and others. In addition, quarterly
    fluctuations of our results of operations as described above may
    cause a significant variation in the market price of our common
    stock.


 



    War, Acts of War and Terrorism. Delays and
    reductions in purchases of our products and services may occur
    as a result of war, acts of war and terrorism, and the related
    impacts, including a reduction of funds available to our
    customers to purchase our products and services and disruptions
    in our ability to develop, produce and distribute products and
    services to our customers. These events would have a material
    adverse effect on our business, financial condition and results
    of operations.


 



    Concentration of Share Ownership; Control by Principal
    Shareholders/Management. As of February 20, 2008,
    our principal shareholders, Judith Paul and Terrance Paul, our
    chairman and chief executive officer, respectively, and
    co-founders of the company, beneficially owned approximately 67%
    of our outstanding common stock. As a result, these principal
    shareholders have the ability to control and direct our business
    and affairs.


 



    Shares Eligible for Future Sale. Sales of a
    substantial number of shares of our common stock in the public
    market could adversely affect the market price of the common
    stock. As of February 20, 2008, approximately
    19.5 million shares of our common stock were held by
    “affiliates” and may be publicly sold only if
    registered under the Securities Act of 1933 or sold in
    accordance with an applicable exemption from registration, such
    as Rule 144. In addition, we have filed registration
    statements under the Securities Act of 1933 to register an
    aggregate of 6,000,000 shares of common stock reserved for
    issuance under our 1997 Stock Incentive Plan and an aggregate of
    500,000 shares of common stock reserved for issuance under
    our Employee Stock Purchase Plan (ESPP), which will, when issued
    in accordance with such plans, be eligible for immediate sale in
    the public market, subject to the Rule 144 resale
    limitations for affiliates. We did not offer the ESPP to our
    employees in 2005, 2006 or 2007 and have no intention of
    offering it in 2008.


 



    Cash Dividends. We declared quarterly cash dividends
    of: $0.05 per share in the first and second quarter of 2007 and
    $0.07 in the third and fourth quarter of 2007. We also declared
    a special dividend of $0.75 per share during 2007. Our dividend
    policy may be affected by, among other things, our views on
    potential future capital requirements, including those related
    to research and development, creation and expansion of sales
    distribution channels, acquisitions, legal risks and stock
    repurchases. Our dividend policy may change from time to time,
    and we cannot provide assurance that we will continue to declare
    dividends at all or in any particular amounts. A change in our
    dividend policy could have a negative effect on the market price
    of our common stock.


 



    Possible Antitakeover Effects of Certain Articles and By-Laws
    Provisions and Provisions of Wisconsin Law. Our Amended
    and Restated Articles of Incorporation and Amended and Restated
    By-Laws, along with Wisconsin statutory law, contain provisions
    that could discourage potential acquisition proposals and might
    delay or prevent a change in control of the company. Such
    provisions could result in our being less attractive to a
    potential acquirer and could result in the shareholders
    receiving less for their common stock than otherwise might be
    available in the event of a takeover attempt.


 



    Divestitures. From time to time, we may, for any
    number of reasons, determine it is in our best interests and in
    the interests of our shareholders to dispose of a business or
    product line. Divestitures involve a number of difficulties and
    risks, including, among others, the diversion of management time
    and resources and the resulting disruption to our ongoing
    business, and unanticipated costs and liabilities. If we are
    unable to manage the divestiture process successfully or if we
    are incorrect in our assumptions regarding the costs associated
    with a disposition, our business, financial condition and
    results of operations could be adversely affected.


 














        
    
    Item 1B. 
    
    Unresolved
    Staff Comments


 



    None.



    

    11



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    Item 2. 
    
    Properties


 



    Our corporate headquarters is located in Wisconsin Rapids,
    Wisconsin, in a 125,000 square foot facility owned by us
    which was constructed in 1996. We lease various other office and
    warehouse space. We believe our facilities are adequate to
    support our operations for the foreseeable future.


 














        
    
    Item 3. 
    
    Legal
    Proceedings


 



    We are subject to various claims and proceedings covering a wide
    range of matters that arise in the ordinary course of our
    business activities. We believe that any liability that may
    ultimately arise from the resolution of these matters will not
    have a material adverse effect on our financial position,
    results of operations or shareholders’ equity.


 














        
    
    Item 4. 
    
    Submission
    of Matters to a Vote of Security Holders


 



    We did not submit any matters to a vote of our security holders
    during the fourth quarter of the fiscal year ended
    December 31, 2007.



    

    12



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    Name and Age of Officer


 


    Office

 


    Judith Ames Paul

    Age 61


 

    Ms. Paul is the co-founder of the company and has been
    chairman of the board of directors since February 2006. From
    1986 until July 2001, and again from August 2002 until July
    2003, Ms. Paul served as chairman of the board, and from
    July 2001 until August 2002, and again from July 2003 until
    February 2006, Ms. Paul served as co-chairman with
    Mr. Paul. Ms. Paul has been a director since 1986.
    Ms. Paul acts as our spokesperson and is a leading teacher
    advocate. Ms. Paul holds a bachelor’s degree in
    elementary education from the University of Illinois. Judith
    Paul is Terrance Paul’s wife.

 

 

 


    Terrance D. Paul

    Age 61


 

    Mr. Paul is the co-founder of the company and has been our
    chief executive officer since February 2006. From February 2006
    to April 2006, Mr. Paul also served as our president. From
    August 2002 until July 2003, Mr. Paul served as our chief
    executive officer. From July 1996 until July 2001, Mr. Paul
    served as vice chairman of the board and from July 2001 until
    August 2002, and again from July 2003 until February 2006,
    Mr. Paul served as co-chairman with Ms. Paul.
    Mr. Paul has been a director since 1986. Mr. Paul
    holds a law degree from the University of Illinois and an MBA
    from Bradley University. Terrance Paul is Judith Paul’s
    husband.

 

 

 


    Steven A. Schmidt

    Age 53


 

    Mr. Schmidt has been our president and chief operating
    officer since April 2006. From November 2005 until January 2006,
    he served as our senior vice president, administration and
    operations. From July 2003 to November 2005, Mr. Schmidt
    served as our executive vice president. From August 1999 until
    November 2004, he served as our chief financial officer and
    secretary, and from August 1999 until July 2003, he also served
    as a vice president. Mr. Schmidt holds a bachelor’s
    degree in accountancy from the University of
    Wisconsin-La Crosse, and is a certified public accountant.

 

 

 


    Mary T. Minch

    Age 41


 

    Ms. Minch has been our chief financial officer and
    secretary since November 2004 and has served as senior vice
    president, finance since January 2007. From December 2003 to
    January 2007, Ms. Minch served as our vice president,
    finance. From February 2003 to December 2003, Ms. Minch
    held the position of North American division controller for
    Stora Enso North American Corp., a forest product company whose
    parent company acquired Consolidated Papers, Inc. From October
    2000 to February 2003, she served as controller-magazine papers
    at Stora Enso North American Corp. Ms. Minch holds
    bachelor’s degrees in managerial accounting and finance
    from the University of Wisconsin-Stevens Point and a
    master’s degree from the University of Wisconsin-Oshkosh,
    and is a certified public accountant.






 



    The term of office of each executive officer is from one annual
    meeting of the board of directors until the next annual meeting
    of the board of directors or until a successor has been duly
    elected and qualified or until his or her death or until he or
    she resigns or has been removed from office.


 



    There are no arrangements or understandings between any of our
    executive officers and any other person (not an officer or
    director of the company acting as such) pursuant to which any of
    the executive officers were selected as an officer of the
    company.



    

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    Item 5. 
    
    Market
    for Registrant’s Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities


 




 



    Our common stock is traded under the symbol “RLRN” on
    The NASDAQ Global Select Market. Information regarding the
    market prices of our common stock may be found in Note 16
    of our Notes to Consolidated Financial Statements.


 




    Holders


 



    As of February 20, 2008, there were 609 record holders of
    our common stock.


 




 



    We declared quarterly cash dividends of $0.05 per share in each
    of the four quarters of 2006. We declared quarterly cash
    dividends of: $0.05 per share in the first and second quarter of
    2007 and $0.07 in the third and fourth quarter of 2007. We also
    declared a special dividend of $0.75 per share during 2007. We
    intend to continue to pay quarterly cash dividends, subject to
    capital availability and a determination that cash dividends
    continue to be in the best interests of the company and our
    shareholders.



    

    14



Table of Contents






 



    The following graph compares the total shareholder return on our
    common stock for the five year period from December 31,
    2002 through December 31, 2007 with that of the NASDAQ
    Composite Index and a peer group index constructed by us. The
    companies included in our peer group index are Blackboard Inc.
    (BBBB), Learning Tree International, Inc. (LTRE), The Princeton
    Review, Inc. (REVU), School Specialty, Inc. (SCHS), Skillsoft
    Public Company Limited (SKIL) and Plato Learning, Inc. (TUTR).


 



    The total return calculations set forth below assume $100
    invested on December 31, 2002 with reinvestment of
    dividends into additional shares of the same class of securities
    at the frequency with which dividends were paid on such
    securities through December 31, 2007. The stock performance
    graph shown in the graph below should not be considered
    indicative of potential future stock price performance.


 




    COMPARISON
    OF A 5 YEAR CUMULATIVE TOTAL RETURN*



    Among Renaissance Learning,
    Inc., The NASDAQ Composite Index




 



    (PERFORMANCE GRAPH)
    


 





























































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    Cumulative Return

 

 

 

    12/02

 

 

    12/03

 

 

    12/04

 

 

    12/05

 

 

    12/06

 

 

    12/07

 


    Renaissance Learning, Inc. 


 

 

    100.00

 

 

 

    127.35

 

 

 

    106.79

 

 

 

    110.03

 

 

 

    104.58

 

 

 

    89.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    NASDAQ Composite Index


 

 

    100.00

 

 

 

    149.89

 

 

 

    165.01

 

 

 

    169.26

 

 

 

    188.17

 

 

 

    207.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Peer Group


 

 

    100.00

 

 

 

    186.17

 

 

 

    149.69

 

 

 

    166.92

 

 

 

    167.36

 

 

 

    220.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 



    * $100 invested on 12/31/02 in
    stock or index-including reinvestment of dividends. 

    Fiscal year ending December 31.
    



    

    15



Table of Contents






 



    There were no sales of unregistered securities during the year
    ended December 31, 2007.


 




 



    On April 17, 2002, our Board of Directors authorized a
    repurchase program which provides for the repurchase of up to
    5,000,000 shares of our common stock. On February 9,
    2005, our Board of Directors authorized the repurchase of an
    additional 3,000,000 shares under the stock repurchase
    program. On February 6, 2008 our Board of Directors
    authorized the purchase of an additional 1.0 million shares
    under the stock repurchase program.


 



    No time limit was placed on the duration of the repurchase
    program, nor is there any dollar limit on the program.
    Repurchased shares will become treasury shares and may be used
    for stock-based employee benefit plans and for other general
    corporate purposes.


 



    The following table shows information relating to the repurchase
    of shares of our common stock during the three months ended
    December 31, 2007:


 
























































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

 

 

 

 

 

 

    Total Number of

    

 

 

 

 

 

 

 

 

 

 

 

 

    Shares Purchased as

    

 

 

    Maximum Number of

    

 

 

 

 

 

 

 

 

 

    Part of Publicly

    

 

 

    Shares that May Yet Be

    

 

 

 

    Total Number of

    

 

 

    Average Price

    

 

 

    Announced Plans or

    

 

 

    Purchased Under the

    

 


    Period


 

    Shares Purchased

 

 

    Paid per Share

 

 

    Programs

 

 

    Plans or Programs

 
 


    October 1-31


 

 

    93

 

 

    $

    13.10

 

 

 

    93

 

 

 

    246,767

 


    November 1-30


 

 

    0

 

 

 

    0

 

 

 

    0

 

 

 

    246,767

 


    December 1-31


 

 

    36

 

 

 

    15.48

 

 

 

    36

 

 

 

    246,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total


 

 

    129

 

 

    $

    13.76

 

 

 

    129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







    

    16



Table of Contents
















        
    
    Item 6. 
    
    Selected
    Financial Data


 




    SELECTED
    HISTORICAL CONSOLIDATED FINANCIAL DATA

    (In thousands, except per share amounts)


 





















































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    Year Ended December 31,

 

 

 

    2007

 

 

    2006

 

 

    2005

 

 

    2004

 

 

    2003

 
 


    Consolidated Income Statement Data


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net sales:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Products


 

    $

    84,628

 

 

    $

    90,750

 

 

    $

    94,296

 

 

    $

    91,482

 

 

    $

    106,080

 


    Services


 

 

    23,304

 

 

 

    20,778

 

 

 

    21,987

 

 

 

    20,242

 

 

 

    21,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total net sales


 

 

    107,932

 

 

 

    111,528

 

 

 

    116,283

 

 

 

    111,724

 

 

 

    127,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cost of sales:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Products


 

 

    15,673

 

 

 

    16,455

 

 

 

    12,917

 

 

 

    6,167

 

 

 

    10,656

 


    Services


 

 

    11,830

 

 

 

    10,011

 

 

 

    8,669

 

 

 

    9,532

 

 

 

    9,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total cost of sales


 

 

    27,503

 

 

 

    26,466

 

 

 

    21,586

 

 

 

    15,699

 

 

 

    20,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Gross profit


 

 

    80,429

 

 

 

    85,062

 

 

 

    94,697

 

 

 

    96,025

 

 

 

    107,348

 


    Operating expenses:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Product development


 

 

    18,506

 

 

 

    17,291

 

 

 

    17,046

 

 

 

    14,536

 

 

 

    14,881

 


    Selling and marketing


 

 

    36,042

 

 

 

    33,639

 

 

 

    30,778

 

 

 

    30,551

 

 

 

    27,997

 


    General and administrative


 

 

    14,951

 

 

 

    16,330

 

 

 

    12,989

 

 

 

    12,005

 

 

 

    12,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total operating expenses


 

 

    69,499

 

 

 

    67,260

 

 

 

    60,813

 

 

 

    57,092

 

 

 

    55,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Operating income


 

 

    10,930

 

 

 

    17,802

 

 

 

    33,884

 

 

 

    38,933

 

 

 

    52,124

 


    Other, net


 

 

    1,178

 

 

 

    1,234

 

 

 

    3,494

 

 

 

    1,640

 

 

 

    2,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income — continuing operations before income taxes


 

 

    12,108

 

 

 

    19,036

 

 

 

    37,378

 

 

 

    40,573

 

 

 

    54,391

 


    Income taxes — continuing operations


 

 

    4,541

 

 

 

    7,043

 

 

 

    13,211

 

 

 

    15,012

 

 

 

    19,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income — continuing operations


 

 

    7,567

 

 

 

    11,993

 

 

 

    24,167

 

 

 

    25,561

 

 

 

    34,985

 


    Income (loss) — discontinued operations


 

 

    —

 

 

 

    —

 

 

 

    584

 

 

 

    (2,859

    )

 

 

    (2,444

    )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net income


 

    $

    7,567

 

 

    $

    11,993

 

 

    $

    24,751

 

 

    $

    22,702

 

 

    $

    32,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Earnings (loss) per share:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Basic:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Continuing operations


 

 

    0.26

 

 

 

    0.41

 

 

 

    0.78

 

 

 

    0.82

 

 

 

    1.12

 


    Discontinued operations


 

 

    0.00

 

 

 

    0.00

 

 

 

    0.02

 

 

 

    (0.09

    )

 

 

    (0.07

    )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net income


 

    $

    0.26

 

 

    $

    0.41

 

 

    $

    0.80

 

 

    $

    0.73

 

 

    $

    1.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Diluted:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Continuing operations


 

 

    0.26

 

 

 

    0.41

 

 

 

    0.78

 

 

 

    0.82

 

 

 

    1.12

 


    Discontinued operations


 

 

    0.00

 

 

 

    0.00

 

 

 

    0.02

 

 

 

    (0.09

    )

 

 

    (0.08

    )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net income


 

    $

    0.26

 

 

    $

    0.41

 

 

    $

    0.80

 

 

    $

    0.73

 

 

    $

    1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cash dividends declared per share


 

    $

    0.99

    *

 

    $

    0.20

 

 

    $

    0.20

 

 

    $

    2.31

    **

 

    $

    —

 


    Consolidated Balance Sheet Data


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Working capital


 

    $

    (6,543

    )

 

    $

    15,282

 

 

    $

    21,539

 

 

    $

    41,815

 

 

    $

    103,240

 


    Total assets


 

 

    113,300

 

 

 

    117,711

 

 

 

    128,382

 

 

 

    114,724

 

 

 

    159,601

 


    Shareholders’ equity


 

 

    57,987

 

 

 

    79,571

 

 

 

    95,866

 

 

 

    84,417

 

 

 

    133,330

 






 




 



























            
    
    * 		        
    Includes a special dividend in 2007 of $0.75 per share.
 
    
    ** 		        
    Includes a special dividend in 2004 of $2.15 per share.


 



    Generation21 Learning Systems, LLC (“Generation21”)
    was divested during 2005 and, therefore, its results for all
    periods presented in the consolidated financial statements are
    reflected as discontinued operations.



    

    17



Table of Contents
















        
    
    Item 7. 
    
    Management’s
    Discussion and Analysis of Financial Condition and Results of
    Operations


 




 



    Renaissance Learning, Inc. is a leading provider of
    computer-based assessment technology for pre-K-12 schools. Our
    tools provide daily formative assessment and periodic
    progress-monitoring technology to enhance core curriculum,
    support differentiated instruction and personalize practice in
    reading, writing and math. Renaissance Learning products help
    educators make the practice component of their existing
    curriculum more effective by providing tools to personalize
    practice and easily manage the daily activities for students of
    all levels.


 



    Our sales are derived primarily from the sale of software
    products, computerized hardware products and related services.
    Revenues are recorded net of an allowance for estimated returns.
    Allowances for bad debts are also recorded at the time of the
    sale.


 



    Product revenue is derived primarily from the sale of
    educational software and hardware. Revenue from sales of
    hardware is generally recognized when the product is shipped to
    the customer. Revenue recognition from sales of our software
    depends on whether the software is: (i) off-the-shelf or
    customized and (ii) whether it is licensed on a perpetual
    basis or as a subscription. We recognize revenue from
    off-the-shelf perpetually licensed software sales upon delivery
    to customers. Subscription-based software sales are recognized
    as revenue on a straight-line basis over the subscription
    period. Sales of software that require substantial modification
    or customization are recognized as revenue using the
    percentage-of-completion method of accounting. Revenues and
    deferred revenues from software that require substantial
    modification or customization are not significant in any of the
    years presented.


 



    Service revenue is primarily derived from: (i) product
    support services, (ii) professional development and product
    training seminars and conferences, (iii) application
    hosting, (iv) technical services, (v) consulting and
    (vi) other remote services. Product support services
    included with sales of perpetual software licenses has a
    duration of 12 months or less and the associated revenue is
    recognized at the time the software is shipped with the related
    costs of providing the telephone support accrued for at the same
    time. Revenue from professional development and product training
    seminars and conferences is recognized when the seminar or
    conference is held. Revenue from other product support services
    and application hosting is initially recorded as deferred
    revenue and then recognized as revenue on a straight-line basis
    over the term of the agreement, typically 12 months.
    Revenue from technical services, consulting and other remote
    services is recognized as the services are performed or on a
    straight-line basis over the contractual period. Deferred
    revenue includes: (i) amounts invoiced for products not yet
    delivered and services not yet performed, (ii) advance
    invoicing on contracts and (iii) that portion of product
    support agreements and subscription-based product sales that has
    not yet been recognized as revenue.


 



    It is our practice to announce new products prior to when the
    products are ready for shipment to allow customers sufficient
    lead time for budgeting and curriculum purposes. This practice
    can result in fluctuations in backlog for orders of new
    products. These orders are generally filled within a relatively
    short period of time after the product is ready for shipment.
    Registrations for seminars and conferences are generally
    received from customers in advance of the events, resulting in a
    backlog for these services. Additionally, under district-wide
    implementations, customers commit to a comprehensive solution
    consisting of products and services in advance of delivery of
    the products and services. The delivery of backlogged products
    and services in certain periods can cause those periods to have
    higher revenue and higher revenue growth rates than other
    periods.


 



    Cost of sales consists of expenses associated with sales of our
    software and hardware products and the delivery of services.
    These costs include: (i) personnel-related costs,
    (ii) costs of purchased materials such as our AlphaSmart
    laptops, optical-mark card scanners, interactive response
    systems, educational products, training materials, manuals and
    motivational items, (iii) shipping and freight costs,
    (iv) amortization of capitalized development costs and
    (v) other overhead costs. We realize higher gross margins
    on our software sales than on our hardware and service sales.


 



    We expense all development costs associated with a software
    product until technological feasibility is established, after
    which time such costs are capitalized until the product is
    available for general release to customers. Capitalized product
    development costs are amortized into cost of sales, beginning
    when the product is



    

    18



Table of Contents





    available for general release, using the straight-line method
    over the estimated economic life of the product, which is
    generally estimated to be 24 months.


 




 



    On June 27, 2005, we acquired AlphaSmart, Inc., a provider
    of affordable, laptop computing solutions for K-12 schools. The
    results of AlphaSmart’s operations are included in our
    consolidated financial statements since that date. In February
    2005, we consummated the sale of our Generation21 subsidiary, a
    non-core part of our business. The results of Generation21, for
    all periods presented in our consolidated financial statements,
    are reflected as discontinued operations. Amounts referred to in
    this Item 7 relate to continuing operations, except as
    otherwise indicated.


 




    Results
    of Operations


 



    Our results of operations can be affected by many factors
    including the general economic environment, state and federal
    budgetary decisions and the length and complexity of the sales
    cycle for school districts. National trends, federal and state
    legislation, Department of Education administrative policies and
    the way the foregoing align with our products and services can
    impact our business.


 



    An important component of our software product strategy is a
    transition to a subscription-based software sales model. We
    believe that a business model based on subscription-based
    software offers long-term advantages over traditional perpetual
    licensing, including: (i) improved product utilization
    leading to higher levels of customer satisfaction,
    (ii) product adoption by more schools, (iii) more
    lifetime revenue per customer and (iv) a more predictable
    and reliable revenue stream.


 



    This transition can significantly impact reported financial
    results and customer ordering patterns. An increasing proportion
    of customer orders attributable to our subscription-based
    product and service offerings relative to customer orders of
    non-subscription-based offerings can result in a significant
    portion of a period’s sales being initially deferred and
    recognized as revenue in future periods over the subscription
    term, generally 12 months. This can result in reported
    revenue that significantly lags customer orders in a given
    period. Transitioning to subscription-based software can also
    adversely impact revenue as our customers that already own our
    products under perpetual license agreements may delay purchases
    of expansions, reading quizzes and math libraries while they are
    contemplating a transition to subscription-based versions of our
    products. Also, after customers transition to our
    subscription-based enterprise products, they no longer order
    reading quizzes and math libraries since this content is
    included in their subscription. We believe that these factors
    influenced our results of operations in both 2007 and to a
    lesser extent in 2006.


 



    Our Renaissance Place products are often sold at the
    school district level. District level sales are more complex,
    have a longer sales cycle, and are typically for a larger dollar
    amount than sales made to individual schools. Thus, revenues
    from district sales can be more uneven and are more difficult to
    accurately predict. Consequently, our revenues and results of
    operations can be significantly impacted by the timing of large
    district orders.


 



    Since our Renaissance Place product and service offerings
    are typically sold on a subscription basis with a term of
    12 months, a greater portion of our revenue is initially
    deferred and recognized into income over the subscription
    period. This can cause our revenue to show a greater decline
    than it would have if these products had been sold as perpetual
    licenses, for which the revenue is recognized immediately upon
    shipment. Deferred revenue increased $13.7 million and
    $5.7 million, over the years ended December 31, 2007
    and 2006, respectively. The increase in deferred revenue during
    2007 was driven primarily by sales of subscription-based
    enterprise software packages.


 



    We took a one-time charge of $0.5 million in the first
    quarter of 2007 that related to a reorganization of our product
    development resources and resulted in a reduction in staff and
    assets related to the laptop line. Our net income and results of
    operations was impacted in 2006 by a $1.9 million charge
    that was comprised of separation expenses, primarily for former
    executives. Items that impacted 2005 were: (i) the
    acquisition of AlphaSmart, (ii) the



    

    19



Table of Contents





    divestiture of Generation21, (iii) the sale of our Madison,
    Wisconsin office building and (iv) recognition of the tax
    benefit related to the settlement of certain state and federal
    tax positions in 2005.


 



    The following table sets forth certain consolidated income
    statement data as a percentage of net sales, except that
    individual components of cost of sales and gross profit are
    shown as a percentage of their corresponding component of net
    sales:


 






















































































































































































































































































































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    For the Years Ended December 31,

 

 

 

    2007

 

 

    2006

 

 

    2005

 
 


    Net Sales:


 

 

 

 

 

 

 

 

 

 

 

 


    Products


 

 

    78.4

    %

 

 

    81.4

    %

 

 

    81.1

    %


    Services


 

 

    21.6

 

 

 

    18.6

 

 

 

    18.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total net sales


 

 

    100.0

    %

 

 

    100.0

    %

 

 

    100.0

    %

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cost of sales:


 

 

 

 

 

 

 

 

 

 

 

 


    Products


 

 

    18.5

    %

 

 

    18.1

    %

 

 

    13.7

    %


    Services


 

 

    50.8

 

 

 

    48.2

 

 

 

    39.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total cost of sales


 

 

    25.5

 

 

 

    23.7

 

 

 

    18.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Gross profit:


 

 

 

 

 

 

 

 

 

 

 

 


    Products


 

 

    81.5

 

 

 

    81.9

 

 

 

    86.3

 


    Services


 

 

    49.2

 

 

 

    51.8

 

 

 

    60.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total gross profit


 

 

    74.5

 

 

 

    76.3

 

 

 

    81.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Operating expenses:


 

 

 

 

 

 

 

 

 

 

 

 


    Product development


 

 

    17.1

 

 

 

    15.5

 

 

 

    14.7

 


    Selling and marketing


 

 

    33.4

 

 

 

    30.2

 

 

 

    26.5

 


    General and administrative


 

 

    13.9

 

 

 

    14.6

 

 

 

    11.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Operating income


 

 

    10.1

 

 

 

    16.0

 

 

 

    29.1

 


    Other, net


 

 

    1.1

 

 

 

    1.1

 

 

 

    3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income — continuing operations before income taxes


 

 

    11.2

 

 

 

    17.1

 

 

 

    32.2

 


    Income taxes — continuing operations


 

 

    4.2

 

 

 

    6.3

 

 

 

    11.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income — continuing operations


 

 

    7.0

 

 

 

    10.8

 

 

 

    20.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income — discontinued operations


 

 

    0.0

 

 

 

    0.0

 

 

 

    0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net Income


 

 

    7.0

    %

 

 

    10.8

    %

 

 

    21.3

    %

 

 

 

 

 

 

 

 

 

 

 

 

 






 




    Years
    Ended December 31, 2007 and 2006


 



    Net Sales. Our net sales decreased by
    $3.6 million or 3.2%, to $107.9 million in 2007 from
    $111.5 million in 2006. A significant portion of this
    decline was related to our customers purchasing more
    subscription-based products and services, particularly
    Accelerated Reader. Revenues from subscription-based
    products are initially deferred and then recognized ratably over
    the subscription period, generally one year, while the majority
    of revenues from non-subscription-based sales are recognized
    immediately upon delivery. During 2007, deferred revenue
    increased by $13.7 million as compared to an increase of
    $5.7 million in 2006. Customer orders for our products and
    services increased by approximately $5.2 million or 4.3% in
    2007 as compared to 2006.


 



    Product revenue decreased by $6.1 million, or 6.7%, to
    $84.6 million in 2007 from $90.7 million in 2006.
    Product revenues decreased primarily due to the significant
    increase in deferred revenue and to a lesser extent due to lower
    laptop sales.



    

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    Service revenue increased by $2.5 million, or 12.2%, to
    $23.3 million in 2007 compared to $20.8 million in
    2006. Service revenues increased primarily due to order
    improvements for technical services such as application hosting
    and installations, and in professional development services,
    both remote and onsite, partially offset by the impact of not
    holding a national conference in 2007.


 



    Cost of Sales. The cost of sales of products
    decreased by $0.8 million, or 4.7%, to $15.7 million
    in 2007 from $16.5 million in 2006. As a percentage of
    product sales, the cost of sales of products was 18.5% in 2007,
    relatively unchanged from 18.1% in 2006.


 



    The cost of sales of services increased by $1.8 million, or
    18.2%, to $11.8 million in 2007 from $10.0 million in
    2006. As a percentage of sales of services, the cost of sales of
    services increased to 50.8% in 2007 from 48.2% in 2006 primarily
    due to personnel and infrastructure additions that were required
    for some of our remote and technical services, and to price
    reductions in some of our
    on-site
    professional development service offerings.


 



    Our overall gross profit margin percentage decreased to 74.5% in
    2007 from 76.3% in 2006. This resulted from the lower service
    margins and the higher proportion of total revenue attributable
    to services in 2007.


 



    Product Development. Product development expense,
    which excludes amounts capitalized, increased to
    $18.5 million in 2007 from $17.3 million in 2006. As a
    percentage of net sales, product development expenses increased
    to 17.1% in 2007 from 15.5% in 2006. We capitalized product
    development expenses of $0.2 million in 2007 compared to
    $0.7 million in 2006. Product development expenses were
    higher in 2007 primarily due to: (i) a $0.5 million
    restructuring cost related to a partial reorganization of
    product development resources for the laptop line in 2007,
    (ii) the higher level of software development cost
    capitalized in 2006 than in 2007 and (iii) a
    $0.3 million increase in research and development costs
    related to our United Kingdom products.


 



    Selling and Marketing. Selling and marketing
    expenses increased by $2.4 million, or 7.1%, to
    $36.0 million in 2007 compared to $33.6 million in
    2006. Selling and marketing expenses increased in 2007, partly
    due to increased commissions as a result of higher customer
    order levels and partly due to salaries as a result of our sales
    force expansion; partially offset by lower spending on
    advertising and direct marketing. As a percentage of net sales,
    selling and marketing expenses were 33.4% in 2007 compared to
    30.2% in 2006.


 



    General and Administrative. General and
    administrative expenses decreased by $1.4 million, or 8.4%,
    to $14.9 million in 2007 from $16.3 million in 2006.
    General and administrative expenses were lower in 2007 primarily
    due to the impact of a one-time executive severance charge taken
    in 2006. As a percentage of net sales, general and
    administrative costs decreased to 13.9% in 2007 from 14.6% in
    2006.


 



    Operating Income. Operating income decreased by
    $6.9 million, or 38.6%, to $10.9 million in 2007 from
    $17.8 million in 2006. As a percentage of net sales,
    operating income decreased to 10.1% in 2007 from 16.0% in 2006
    due to the combined effect of the factors discussed above.


 



    Other Income. Other income was unchanged at
    $1.2 million in 2007 and 2006.


 



    Income Tax Expense — Continuing
    Operations. Income tax expense of $4.5 million,
    from continuing operations, was recorded in 2007 at an effective
    income tax rate of 37.5% of pre-tax income, compared to
    $7.0 million, or 37.0% of pre-tax income for 2006. The
    higher tax rate in 2007 was primarily the result of the adoption
    of the new accounting standard for uncertain tax positions,
    Financial Interpretation No. 48 (“FIN 48”).
    The method for estimating, accruing and recognizing expenses and
    benefits of uncertain income tax positions under FIN 48 is
    substantially different than under the previous accounting
    standard.


 




    Years
    Ended December 31, 2006 and 2005


 



    Net Sales. Our net sales decreased by
    $4.8 million or 4.1%, to $111.5 million in 2006 from
    $116.3 million in 2005. Revenues, excluding AlphaSmart
    laptops in both periods, declined by $12.2 million or
    12.0% for the full year. A significant portion of this decline
    was related to our customers purchasing more subscription-based
    products and services, particularly Accelerated Reader.
    Revenues from subscription-based products are initially deferred
    and then recognized ratably over the subscription period,
    generally one year, while the majority of revenues from
    non-subscription-based sales are recognized immediately upon
    delivery. During 2006, deferred revenue increased by



    

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    $5.7 million as compared to an increase of
    $1.8 million in 2005. We believe that revenue excluding the
    impact of laptops is a useful metric for investors because it
    provides a basis upon which to compare the performance of our
    business, as it existed prior to the June 27, 2005
    AlphaSmart acquisition, to earlier periods.


 



    Product revenue, including AlphaSmart in both periods, decreased
    by $3.5 million, or 3.8%, to $90.8 million in 2006
    from $94.3 million in 2005. The decrease was driven by the
    transition to more subscription-based sales discussed above and
    generally lower order rates which impacted most product lines.
    This decrease was partially offset by the inclusion of
    AlphaSmart’s results for the full year in 2006 as compared
    to a partial year in 2005.


 



    Service revenue decreased by $1.2 million, or 5.5%, to
    $20.8 million in 2006 compared to $22.0 million in
    2005. Service revenues were down due to decreased revenue from
    professional development services, primarily onsite events,
    which was partially offset by increases in remote services such
    as consulting and application hosting. Revenue from onsite
    events was impacted in 2006 by reduced pricing as well as our
    increased emphasis on remote services.


 



    Cost of Sales. The cost of sales of products
    increased by $3.5 million, or 27.4%, to $16.4 million
    in 2006 from $12.9 million in 2005. As a percentage of
    product sales, the cost of sales of products increased to 18.1%
    in 2006 from 13.7% in 2005. The product cost of sales percentage
    increased primarily due to a higher proportion of sales
    attributable to hardware in 2006 as compared to 2005 as we
    realize lower gross profit margins on hardware sales than on
    software sales.


 



    The cost of sales of services increased by $1.3 million, or
    15.5%, to $10.0 million in 2006 from $8.7 million in
    2005. As a percentage of sales of services, the cost of sales of
    services increased to 48.2% in 2006 from 39.4% in 2005. The
    higher cost of sales percentage is the result of personnel and
    infrastructure investments made in 2006, and to reduced pricing
    of our onsite events.


 



    Our overall gross profit margin percentage decreased to 76.3% in
    2006 from 81.4% in 2005. This resulted from the higher cost of
    sales percentages in 2006, from both products and services, as
    discussed above.


 



    Product Development. Product development expense,
    which excludes amounts capitalized, increased to
    $17.3 million in 2006 from $17.0 million in 2005. As a
    percentage of net sales, product development expenses increased
    to 15.5% in 2006 from 14.7% in 2005. We capitalized product
    development expenses of $0.7 million in 2006 compared to
    $0.3 million in 2005. Product development spending was
    higher in 2006 due to the inclusion of AlphaSmart for the full
    year as compared to only a partial year in 2005.


 



    Selling and Marketing. Selling and marketing
    expenses increased by $2.9 million, or 9.3%, to
    $33.6 million in 2006 compared to $30.8 million in
    2005. Selling and marketing expenses increased primarily due to
    our sales force expansion, partially offset by reduced marketing
    expenses as we focus on a more targeted direct marketing
    approach. As a percentage of net sales, selling and marketing
    expenses were 30.2% in 2006 compared to 26.5% in 2005.


 



    General and Administrative. General and
    administrative expenses increased by $3.3 million, or
    25.7%, to $16.3 million in 2006 from $13.0 million in
    2005. General and administrative expenses were higher in 2006
    primarily due to: (i) a $1.9 million charge related to
    separation expenses, primarily for former executives,
    (ii) a $0.6 million increase in share-based
    compensation and (iii) the inclusion of AlphaSmart for a
    full year in 2006 as compared to a partial year in 2005. As a
    percentage of net sales, general and administrative costs
    increased to 14.6% in 2006 from 11.1% in 2005.


 



    Operating Income. Operating income decreased by
    $16.1 million, or 47.5%, to $17.8 million in 2006 from
    $33.9 million in 2005. As a percentage of net sales,
    operating income decreased to 16.0% in 2006 from 29.1% in 2005
    due to the combined effect of the factors discussed above.


 



    Other Income. Other income decreased
    $2.3 million to $1.2 million in 2006 from
    $3.5 million in 2005, primarily due to the sale of an
    office building which generated a $1.8 million pre-tax gain
    in 2005.


 



    Income Tax Expense — Continuing
    Operations. Income tax expense of $7.0 million,
    from continuing operations, was recorded in 2006 at an effective
    income tax rate of 37.0% of pre-tax income, compared to
    $13.2 million, or 35.3% of pre-tax income for 2005. In
    2005, we recognized a tax benefit of approximately
    $0.8 million related to



    

    22



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    the favorable resolution of certain state and federal tax
    positions, which was the primary reason for the lower effective
    tax rate in 2005.


 



    Discontinued Operations. In 2005 we realized a gain
    of approximately $0.7 million on the sale of Generation21,
    which includes a one-time tax benefit of $1.3 million. When
    combined with the operating losses incurred in January and
    February 2005 for that subsidiary, the net income from
    discontinued operations totaled approximately $0.6 million
    in 2005.


 




 



    As of December 31, 2007, our cash, cash equivalents and
    investment securities were $24.5 million, down
    $5.6 million from the December 31, 2006 total of
    $30.1 million. During 2007, we generated operating cash
    flow of $26.0 million.


 



    At December 31, 2007, we had a $15.0 million secured
    revolving line of credit with a bank which is available until
    May 31, 2009. The line of credit bears interest at either a
    floating rate based on the prime rate less 1.0%, or a fixed rate
    for a period of up to 90 days based on LIBOR plus 1.25%.
    The rate is at our option and is determined at the time of
    borrowing. We also have a $2.0 million unsecured revolving
    line of credit with a bank available until April 30, 2009.
    The line of credit bears interest based on the prime rate less
    1.0%. As of December 31, 2007, the lines of credit had not
    been used.


 



    On April 17, 2002, our Board of Directors authorized the
    repurchase of up to 5,000,000 shares of our common stock.
    On February 9, 2005, our Board of Directors authorized the
    repurchase of an additional 3,000,000 shares under the
    stock repurchase program. No time limit was placed on the
    duration of the repurchase program. Repurchased shares will
    become treasury shares and will be used for stock-based employee
    benefit plans and for other general corporate purposes. During
    the period of January 1, 2007 through December 31,
    2007, we repurchased approximately 117,000 shares at a cost
    of $1.4 million. Since the original authorization of the
    repurchase program in 2002, we have repurchased 7.8 million
    shares at a cost of $134.8 million. Depending on our stock
    valuation, cash availability and other factors, we may
    repurchase additional shares as a beneficial use of our cash to
    enhance shareholder value.


 



    We declared quarterly cash dividends of $0.05 per share in each
    of the four quarters of 2006. We declared quarterly cash
    dividends of: $0.05 per share in the first and second quarter of
    2007 and $0.07 in the third and fourth quarter of 2007. We also
    declared a special dividend of $0.75 per share during 2007. We
    intend to continue to pay quarterly cash dividends, subject to
    capital availability and a determination that cash dividends
    continue to be in the best interests of the company and our
    shareholders.


 



    We believe our strong cash position coupled with cash flow from
    operations will be sufficient to meet both our short-term and
    long-term working capital requirements.


 




 



    We do not have any off-balance sheet transactions, arrangements,
    or obligations (including contingent obligations), that would
    have a material effect on our financial results.


 



    Operating Leases. We enter into operating leases,
    primarily for facilities that we occupy in order to carry out
    our business operations. We utilize operating leases for some of
    our facilities to gain flexibility as compared to purchasing
    facilities outright and limit our exposure to many of the risks
    of owning commercial property, particularly with regard to
    international operations. These agreements are generally for
    terms of one to five years and cannot be terminated by either
    the lessor or us for reasons other than breach of the lease
    agreement. We do not anticipate early termination of any of
    these agreements. For each of the years ended December 31,
    2007, 2006 and 2005, we incurred expenses of approximately
    $2.2 million, $2.0 million, and $0.9 million,
    respectively, related to these operating leases.



    

    23



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    Purchase Obligations. We enter into commitments with
    certain suppliers to purchase components for our hardware
    products, such as AlphaSmart computing devices,
    AccelScan scanners and the 2Know! response system.
    The majority of these obligations will be satisfied within one
    year.


 



    Tax audit settlements and deposits. We anticipate
    making cash payments related to the settlement of tax audits or
    deposits for unsettled audit issues in the range of $0.8 to
    $1.6 million during 2008. The mid-point of this range is
    included in the table below. Estimation of the amounts and
    timing of payments in periods after 2008 are highly uncertain
    and therefore are not included in the table.


 



    As of December 31, 2007, our approximate contractual
    obligations for operating leases, tax audit payments and
    purchase obligations (by period due) were as follows:


 


































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    Payments Due by Period

 

 

 

 

 

 

    Less than 1

    

 

 

    1-3

    

 

 

    3-5

    

 

 

    More than

    

 


    Contractual Obligations


 


    Total


 

 


    year


 

 


    years


 

 


    years


 

 


    5 years


 

 

 

 

 

 

 

 

 

    (In Thousands)

 

 

 

 
 


    Operating lease obligations


 

    $

    6,498

 

 

    $

    2,225

 

 

    $

    2,610

 

 

    $

    1,259

 

 

    $

    404

 


    Tax audit related payments


 

 

    1,200

 

 

 

    1,200

 

 

 

    —

 

 

 

    —

 

 

 

    —

 


    Purchase obligations


 

 

    3,668

 

 

 

    3,668

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total


 

    $

    11,366

 

 

    $

    7,093

 

 

    $

    2,610

 

 

    $

    1,259

 

 

    $

    404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 



    Supplemental Executive Retirement Plan. We have
    established a Supplemental Executive Retirement Plan
    (“SERP”) for the provision of retirement benefits to
    members of our senior management. Under the terms of the plan,
    participants elect to defer receipt of a portion of their
    compensation and invest their deferrals in certain mutual funds
    which are nearly identical to the investment selections offered
    to participants in our 401(k) retirement plan. Upon a SERP
    participant’s retirement (or certain other events), we have
    an obligation to repay the current market value of the
    participant’s account balance. As of December 31,
    2007, we have fully funded the $1.9 million aggregate
    contractual obligation for future payments to SERP participants.
    Payouts of our obligations related to the SERP are dependant on
    when participants leave service and how they elect to receive
    their accrued benefit payments, which can range from a single
    lump-sum payment to a
    10-year
    series of payments. Due to the inherent uncertainties in
    predicting when the SERP obligations will be repaid, they are
    not included in the above table. The SERP is more fully
    described in Note 12 of our Notes to Consolidated Financial
    Statements.


 



    Other Obligations. As of December 31, 2007, we
    did not hold any long-term debt obligations, long-term purchase
    obligations or material capital lease obligations.


 




 



    The foregoing discussion is based on 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
    management to make judgments, estimates and assumptions that
    affect the amounts reported in the financial statements and
    accompanying notes. Actual results could differ from those
    estimates. The following is a list of our critical accounting
    policies defined as those policies that we believe are the most
    important to the portrayal of our financial condition and
    results of operations
    and/or
    require management’s significant judgments and estimates.
    This is not intended to be a comprehensive list of all of our
    accounting policies. Our significant accounting policies are
    more fully described in Note 5 of our Notes to Consolidated
    Financial Statements.


 



    Revenue Recognition. We recognize revenue from our
    software products in accordance with Statement of Position
    No. 97-2
    Software Revenue Recognition issued by the Accounting
    Standards Executive Committee of the American Institute of
    Certified Public Accountants. Under this accounting standard,
    revenue is recognized when the following have occurred:
    persuasive evidence of an arrangement exists, product delivery
    and acceptance has occurred or a service has been performed,
    pricing is fixed and determinable, and collectibility is
    probable. Revenue is recognized as follows: (i) at the time
    of shipment to customers for perpetually licensed off-the-shelf
    software products and related telephone support with a duration
    of 12 months or less sold with the product, (ii) on
    the



    

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    percentage-of-completion basis for software products which
    require significant customization or modification, (iii) as
    seminars are performed for training and professional development
    services, (iv) straight-line over the term of the support
    agreement for other software support agreements, (v) as the
    service is performed or on a straight-line basis over the
    contractual period for technical and consulting services and
    (vi) straight-line over the subscription period for
    subscription based products and services. Accordingly,
    management is required to make judgments as to whether pricing
    is fixed and determinable, whether collectibility is reasonably
    assured and what the percentage of completion is as of the
    financial reporting date.


 



    Expenses are recognized and matched against revenues for the
    reporting period presented in the financial statements. We
    record accruals for sales returns and doubtful accounts at the
    time of revenue recognition based upon historical experience as
    well as other factors that in our judgment could reasonably be
    expected to cause sales returns or doubtful accounts to differ
    from historical experience. Changes in such allowances may be
    required if future returns or bad debt activity differs from our
    estimates.


 



    Goodwill and Long-Lived Assets. We assess the value
    of our goodwill on at least an annual basis by comparing its
    fair value with its carrying value. Fair value is determined
    primarily based on valuation analysis performed by management
    using a discounted cash flow methodology. The valuation analysis
    requires significant judgments and estimates to be made
    regarding future cash flows. Our estimates could be materially
    impacted by factors such as competitive forces, customer
    behavior, product acceptance, specific industry factors and
    changes in interest rates.


 



    In 2007 and 2006, our laptop revenues decreased primarily as a
    result of difficulties in integrating the selling operations of
    AlphaSmart into our overall organization. We believe that our
    long-term strategies will be successful in returning the laptop
    line to growth and higher levels of profitability.


 



    We have goodwill of $44.2 million, a trademark of
    $3.0 million and other intangibles of $2.6 million
    related to the laptop business. We reviewed the value of these
    assets for impairment at the end of 2007 and our review
    indicated that there was no impairment at December 31,
    2007. The valuation of any long-lived asset is inherently
    subjective and dependent on projections of future operating
    results. If we do not achieve the estimated future operating
    results, or if other key variables and assumptions change, these
    assets may be impaired in the future.


 



    Software Support and Product Warranty
    Obligations. We record a liability for the estimated
    cost of software support and hardware warranties at the time of
    sale. Estimated costs are based upon our historical cost
    experience of fulfilling these obligations as well as other
    factors that in our judgment could reasonably be expected to
    affect those costs, such as trends in the cost of providing
    telephone support and product return rates. If the actual costs
    of fulfilling these obligations differ from our estimates, it
    could result in additional charges to cost of sales in future
    periods.


 



    Software Development Costs. We capitalize certain
    software development costs incurred after technological
    feasibility is achieved. Capitalized software development costs
    are amortized on a
    product-by-product
    basis using the straight-line method over the estimated economic
    life of the products, which is generally estimated to be
    24 months. Amortization begins when the products are
    available for general release to customers. If the actual
    economic life of our products is shorter than our estimates, it
    could result in an impairment charge in future periods.


 



    Taxes. At the end of each interim reporting period,
    we estimate the effective income tax rate anticipated to be
    applicable for the full fiscal year. The estimated effective
    income tax rate contemplates the expected jurisdiction where
    income is earned (e.g., United States compared to
    non-United
    States), the estimated amount of certain tax credits, as well as
    tax planning strategies. If the actual distribution of taxable
    income by jurisdiction varies from our expectations, if the
    actual amount of tax credits varies from our estimates, or if
    the results of tax planning strategies are different from our
    estimates, adjustments to the effective income tax rate may be
    required in the period such determination is made.


 



    We record a liability for uncertain tax positions based on our
    estimate of the potential exposure. Due to the subjectivity and
    complex nature of the underlying issues, there is significant
    inherent uncertainty in these estimates. Actual payments or
    assessments may differ from our estimates and require tax
    provision adjustments in future periods.



    

    25



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    In December 2007, the FASB issued SFAS No. 141(R)
    Business Combination (“SFAS 141R”).
    SFAS 141R 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. SFAS 141R also establishes disclosure
    requirements to enable the evaluation of the nature and
    financial effects of the business combination. SFAS 141R is
    effective for us on January 1, 2009. SFAS 141R is not
    expected to have a material effect on our consolidated financial
    statements.


 



    In December 2007, the FASB issued SFAS No. 160
    Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB No. 51
    (“SFAS 160”). SFAS 160 will change the
    accounting and reporting for minority interests, which will be
    recharacterized as noncontrolling interests and classified as a
    component of equity. This new consolidation method will
    significantly change the accounting for transactions with
    minority interest holders. SFAS 160 is effective for us on
    January 1, 2009. SFAS 160 is not expected to have a
    material effect on our consolidated financial statements.


 



    In February 2007, the FASB issued SFAS No. 159 The
    Fair Value Option for Financial Assets and Financial
    Liabilities — Including an amendment of FASB Statement
    No. 115, (“SFAS 159”). This standard
    permits 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 of
    SFAS 159 are effective for us on January 1, 2008 and
    are not expected to have a material effect on our consolidated
    financial statements.


 



    In September 2006, the FASB issued SFAS No. 157
    Fair Value Measurements, (“SFAS 157”), to
    establish a consistent framework for measuring fair value and
    expand disclosures on fair value measurements. The provisions of
    SFAS 157 are effective for us on January 1, 2008 and
    are not expected to have a material effect on our consolidated
    financial statements.


 














        
    
    Item 7A. 
    
    Quantitative
    and Qualitative Disclosures About Market Risk


 



    Interest Rate Risk. Our exposure to market interest
    rate risk consists of: (i) the increase or decrease in the
    amount of interest income we can earn on our investment
    portfolio and (ii) the decrease or increase in value of our
    investment security portfolio if market interest rates increase
    or decrease, respectively. We anticipate that we will have
    sufficient liquidity to hold our investments to maturity;
    therefore, we do not expect to recognize any material losses or
    gains related to an increase or decrease in market interest
    rates.


 



    Market Risk. Our exposure to market risk relates to
    the quality of the holdings in our investment security
    portfolio. The fair market value of our investments is subject
    to increases or decreases in value resulting from the
    performance of the securities issuer, from upgrades or
    downgrades in the credit worthiness of the securities issuer,
    upgrades or downgrades in the credit worthiness and the insurer
    of the securities and from changes in general market conditions.


 



    We seek to manage our exposure to market risk by investing in
    accordance with our corporate investment policy as established
    by our Board of Directors. The goals of the policy are:
    (i) preservation of capital, (ii) provision of
    adequate liquidity to meet projected cash requirements,
    (iii) minimization of risk of principal loss through
    diversified short and medium term investments and
    (iv) maximization of yields in relationship to the
    guidelines, risk, market conditions and tax considerations.


 



    Our investment policy permits investments in obligations of the
    U.S. Treasury department and its agencies, money market
    funds, and high quality investment-grade corporate and municipal
    interest-bearing obligations. The policy requires
    diversification to prevent excess concentration of issuer risk
    and requires the maintenance of minimum liquidity levels. The
    policy precludes investment in equity securities except for the
    specific purpose of funding the obligations related to our
    Supplemental Executive Retirement Plan (see Note 12 of our
    Notes to Consolidated Financial Statements). As of
    December 31, 2007, our investment securities had a market
    value of approximately $17.2 million and a carrying value
    of $17.1 million. Due to the type and duration of our
    investments, we do not expect to realize any material gains or
    losses related to market risk.



    

    26



Table of Contents





    Foreign Currency Exchange Rate Risk. The financial
    position and results of operations of our foreign subsidiaries
    are measured using local currency. Revenues and expenses of such
    subsidiaries have been translated into U.S. dollars using
    average exchange rates prevailing during the period. Assets and
    liabilities have been translated at the rates of exchange on the
    balance sheet date. Translation gains or losses are deferred as
    a separate component of shareholders’ equity. Aggregate
    foreign currency transaction gains and losses are included in
    determining net income. As such, our operating results are
    affected by fluctuations in the value of the U.S. dollar
    compared to the British pound, Canadian dollar, Euro and Indian
    rupee. At this time, foreign exchange rate risk is not
    significant due to the relative size of our foreign operations
    and revenues derived from sales in foreign currency.



    

    27



Table of Contents
















        
    
    Item 8. 
    
    Financial
    Statements and Supplementary Data


 




 



    To the Board of Directors and Shareholders of

    Renaissance Learning, Inc. and Subsidiaries


 



    We have audited the accompanying consolidated balance sheets of
    Renaissance Learning, Inc. and subsidiaries (the
    “Company”) as of December 31, 2007 and 2006, and
    the related consolidated statements of income,
    shareholders’ equity, and cash flows for each of the three
    years in the period ended December 31, 2007. Our audits
    also included the financial statement schedule listed in the
    Index at Item 15(a)(2). We also have audited the
    Company’s internal control over financial reporting as of
    December 31, 2007, based on criteria established in
    Internal Control — Integrated Framework issued
    by the Committee of Sponsoring Organizations of the Treadway
    Commission. The Company’s management is responsible for
    these financial statements and financial statement schedule, 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 these
    financial statements and financial statement schedule and an
    opinion on the Company’s internal control over financial
    reporting 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 and whether effective internal
    control over financial reporting was maintained in all material
    respects. Our audits of the financial statements included
    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. Our audit of internal control over financial
    reporting 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. Our audits also included performing such other
    procedures as we considered necessary in the circumstances. We
    believe that our audits provide a reasonable basis for our
    opinions.


 



    A company’s internal control over financial reporting is a
    process designed by, or under the supervision of, the
    company’s principal executive and principal financial
    officers, or persons performing similar functions, and effected
    by the company’s board of directors, management, and other
    personnel 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 the inherent limitations of internal control over
    financial reporting, including the possibility of collusion or
    improper management override of controls, material misstatements
    due to error or fraud may not be prevented or detected on a
    timely basis. Also, projections of any evaluation of the
    effectiveness of the internal control over financial reporting
    to future periods are subject to the risk that the controls may
    become inadequate because of changes in conditions, or that the
    degree of compliance with the policies or procedures may
    deteriorate.


 



    As described in Note 5 to the Consolidated Financial
    Statements, on January 1, 2006, the Company adopted
    Statement of Financial Accounting Standard No. 123R,
    Accounting for Stock Based Compensation. As described in
    Note 8 to the Consolidated Financial Statements, on
    January 1, 2007, the Company adopted FASB Interpretation
    No. 48, Accounting for Uncertainty in Income Taxes.


 



    In our opinion, the consolidated financial statements referred
    to above present fairly, in all material respects, the financial
    position of Renaissance Learning, Inc. and subsidiaries as of
    December 31, 2007 and 2006, and the results of its
    operations and its cash flows for each of the three years in the
    period ended December 31, 2007, in conformity with
    accounting principles generally accepted in the United States of
    America. Also, in our opinion, such financial statement
    schedule, when considered in relation to the basic consolidated
    financial statements taken as a whole, presents fairly, in all
    material respects, the information set forth therein. Also, in
    our opinion, the Company maintained, in all material respects,
    effective internal control over financial reporting as of
    December 31, 2007, based on the criteria established in
    Internal Control — Integrated Framework issued
    by the Committee of Sponsoring Organizations of the Treadway
    Commission.


 



    /s/ DELOITTE & TOUCHE LLP
    


 



    Milwaukee, Wisconsin



    February 27, 2008



    

    28



Table of Contents






    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    CONSOLIDATED
    BALANCE SHEETS

    




    As of
    December 31, 2007 and 2006


 

















































































































































































































































































































































































































































































































































































     	     	     	     	     	     	     	     	     	

 

 

    2007

 

 

    2006

 

 

 

    (In Thousands,

    

 

 

 

    Except Share and

    

 

 

 

    Per Share Amounts)

 
 


    ASSETS



    Current assets:


 

 

 

 

 

 

 

 


    Cash and cash equivalents


 

    $

    7,337

 

 

    $

    5,953

 


    Investment securities


 

 

    8,136

 

 

 

    22,525

 


    Accounts receivable, less allowance of $1,072 and $1,133,
    respectively


 

 

    8,791

 

 

 

    10,528

 


    Inventories


 

 

    6,273

 

 

 

    4,108

 


    Prepaid expenses


 

 

    2,197

 

 

 

    1,896

 


    Income taxes receivable


 

 

    1,450

 

 

 

    1,291

 


    Deferred tax asset


 

 

    4,406

 

 

 

    3,596

 


    Other current assets


 

 

    300

 

 

 

    97

 

 

 

 

 

 

 

 

 

 


    Total current assets


 

 

    38,890

 

 

 

    49,994

 


    Investment securities


 

 

    8,982

 

 

 

    1,625

 


    Property, plant and equipment, net


 

 

    10,578

 

 

 

    11,811

 


    Deferred tax asset


 

 

    1,587

 

 

 

    —

 


    Goodwill


 

 

    47,065

 

 

 

    46,973

 


    Other intangibles, net


 

 

    5,579

 

 

 

    6,124

 


    Capitalized software, net


 

 

    452

 

 

 

    727

 


    Other non-current assets


 

 

    167

 

 

 

    457

 

 

 

 

 

 

 

 

 

 


    Total assets


 

    $

    113,300

 

 

    $

    117,711

 

 

 

 

 

 

 

 

 

 

 

    LIABILITIES AND SHAREHOLDERS’ EQUITY


    Current liabilities:


 

 

 

 

 

 

 

 


    Accounts payable


 

    $

    2,011

 

 

    $

    2,782

 


    Deferred revenue


 

 

    35,675

 

 

 

    23,751

 


    Payroll and employee benefits


 

 

    4,184

 

 

 

    4,750

 


    Other current liabilities


 

 

    3,563

 

 

 

    3,429

 

 

 

 

 

 

 

 

 

 


    Total current liabilities


 

 

    45,433

 

 

 

    34,712

 


    Deferred revenue


 

 

    2,707

 

 

 

    885

 


    Deferred compensation and other employee benefits


 

 

    1,933

 

 

 

    1,665

 


    Deferred tax liability


 

 

    —

 

 

 

    878

 


    Income taxes payable


 

 

    5,104

 

 

 

    —

 


    Other noncurrent liabilities


 

 

    136

 

 

 

    —

 

 

 

 

 

 

 

 

 

 


    Total liabilities


 

 

    55,313

 

 

 

    38,140

 


    Shareholders’ equity:


 

 

 

 

 

 

 

 


    Common stock, $.01 par; shares authorized: 150,000,000;
    issued: 34,736,647 shares at December 31, 2007 and 2006


 

 

    347

 

 

 

    347

 


    Additional paid-in capital


 

 

    52,683

 

 

 

    54,125

 


    Retained earnings


 

 

    102,887

 

 

 

    124,290

 


    Treasury stock, at cost: 5,703,450 shares at
    December 31, 2007; 5,733,130 shares at
    December 31, 2006


 

 

    (98,123

    )

 

 

    (99,265

    )


    Accumulated other comprehensive income


 

 

    193

 

 

 

    74

 

 

 

 

 

 

 

 

 

 


    Total shareholders’ equity


 

 

    57,987

 

 

 

    79,571

 

 

 

 

 

 

 

 

 

 


    Total liabilities and shareholders’ equity


 

    $

    113,300

 

 

    $

    117,711

 

 

 

 

 

 

 

 

 

 






 



    The accompanying notes to the consolidated financial statements
    are an integral part of these balance sheets.



    

    29



Table of Contents






    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    CONSOLIDATED
    STATEMENTS OF INCOME

    




    For the
    Years Ended December 31, 2007, 2006 and 2005


 



























































































































































































































































































































































































































































































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 


    2005


 

 

 

    (In Thousands, Except Per Share Amounts)

 
 


    Net Sales:


 

 

 

 

 

 

 

 

 

 

 

 


    Products


 

    $

    84,628

 

 

    $

    90,750

 

 

    $

    94,296

 


    Services


 

 

    23,304

 

 

 

    20,778

 

 

 

    21,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total net sales


 

 

    107,932

 

 

 

    111,528

 

 

 

    116,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cost of sales:


 

 

 

 

 

 

 

 

 

 

 

 


    Products


 

 

    15,673

 

 

 

    16,455

 

 

 

    12,917

 


    Services


 

 

    11,830

 

 

 

    10,011

 

 

 

    8,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total cost of sales


 

 

    27,503

 

 

 

    26,466

 

 

 

    21,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Gross profit


 

 

    80,429

 

 

 

    85,062

 

 

 

    94,697

 


    Operating expenses:


 

 

 

 

 

 

 

 

 

 

 

 


    Product development


 

 

    18,506

 

 

 

    17,291

 

 

 

    17,046

 


    Selling and marketing


 

 

    36,042

 

 

 

    33,639

 

 

 

    30,778

 


    General and administrative


 

 

    14,951

 

 

 

    16,330

 

 

 

    12,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total operating expenses


 

 

    69,499

 

 

 

    67,260

 

 

 

    60,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Operating income


 

 

    10,930

 

 

 

    17,802

 

 

 

    33,884

 


    Other income:


 

 

 

 

 

 

 

 

 

 

 

 


    Interest income


 

 

    1,009

 

 

 

    1,078

 

 

 

    1,324

 


    Other, net


 

 

    169

 

 

 

    156

 

 

 

    2,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income — continuing operations before income taxes


 

 

    12,108

 

 

 

    19,036

 

 

 

    37,378

 


    Income taxes — continuing operations


 

 

    4,541

 

 

 

    7,043

 

 

 

    13,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income — continuing operations


 

 

    7,567

 

 

 

    11,993

 

 

 

    24,167

 


    Income — discontinued operations


 

 

    —

 

 

 

    —

 

 

 

    584

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net Income


 

    $

    7,567

 

 

    $

    11,993

 

 

    $

    24,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Earnings per share:


 

 

 

 

 

 

 

 

 

 

 

 


    Basic


 

 

 

 

 

 

 

 

 

 

 

 


    Continuing operations


 

    $

    0.26

 

 

    $

    0.41

 

 

    $

    0.78

 


    Discontinued operations


 

 

    0.00

 

 

 

    0.00

 

 

 

    0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net income


 

    $

    0.26

 

 

    $

    0.41

 

 

    $

    0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Diluted


 

 

 

 

 

 

 

 

 

 

 

 


    Continuing operations


 

    $

    0.26

 

 

    $

    0.41

 

 

    $

    0.78

 


    Discontinued operations


 

 

    0.00

 

 

 

    0.00

 

 

 

    0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net income


 

    $

    0.26

 

 

    $

    0.41

 

 

    $

    0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 



    The accompanying notes to the consolidated financial statements
    are an integral part of these statements.



    

    30



Table of Contents






    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS’ EQUITY

    




    For the
    Years Ended December 31, 2007, 2006 and 2005


 











































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Accumulated

    

 

 

 

    Common

    

 

 

    Additional

    

 

 

 

 

 

 

 

 

    Other

    

 

 

    Total

    

 

 

 

    Stock

    

 

 

    Paid-in

    

 

 

    Retained

    

 

 

    Treasury

    

 

 

    Comprehensive

    

 

 

    Shareholders’

    

 

 

 

    Amount(1)

 

 

    Capital

 

 

    Earnings

 

 

    Stock

 

 

    Income (Loss)

 

 

    Equity

 

 

 

    (In Thousands)

 
 


    Balance, December 31, 2004


 

    $

    347

 

 

    $

    54,490

 

 

    $

    99,689

 

 

    $

    (70,213

    )

 

    $

    104

 

 

    $

    84,417

 


    Net income


 

 

    —

 

 

 

    —

 

 

 

    24,751

 

 

 

    —

 

 

 

    —

 

 

 

    24,751

 


    Foreign currency translation


 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    (57

    )

 

 

    (57

    )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Comprehensive income


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    24,694

 


    Dividends ($.20 per share)


 

 

    —

 

 

 

    —

 

 

 

    (6,207

    )

 

 

    —

 

 

 

    —

 

 

 

    (6,207

    )


    Stock repurchased for treasury


 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    (32,374

    )

 

 

    —

 

 

 

    (32,374

    )


    Treasury shares issued for


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    purchase of AlphaSmart


 

 

    —

 

 

 

    2,171

 

 

 

    —

 

 

 

    20,895

 

 

 

    —

 

 

 

    23,066

 


    Exercise of stock options


 

 

    —

 

 

 

    (350

    )

 

 

    —

 

 

 

    2,455

 

 

 

    —

 

 

 

    2,105

 


    Excess tax benefits from share based payment arrangements


 

 

    —

 

 

 

    112

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    112

 


    Restricted stock grants


 

 

    —

 

 

 

    (392

    )

 

 

    —

 

 

 

    392

 

 

 

    —

 

 

 

    —

 


    Shared-based compensation


 

 

    —

 

 

 

    53

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Balance, December 31, 2005


 

 

    347

 

 

 

    56,084

 

 

 

    118,233

 

 

 

    (78,845

    )

 

 

    47

 

 

 

    95,866

 


    Net income


 

 

    —

 

 

 

    —

 

 

 

    11,993

 

 

 

    —

 

 

 

    —

 

 

 

    11,993

 


    Foreign currency translation


 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    27

 

 

 

    27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Comprehensive income


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    12,020

 


    Dividends ($.20 per share)


 

 

    —

 

 

 

    —

 

 

 

    (5,936

    )

 

 

    —

 

 

 

    —

 

 

 

    (5,936

    )


    Stock repurchased for treasury


 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    (22,474

    )

 

 

    —

 

 

 

    (22,474

    )


    Exercise of stock options


 

 

    —

 

 

 

    (2

    )

 

 

    —

 

 

 

    18

 

 

 

    —

 

 

 

    16

 


    Payment for cancellation of stock options


 

 

 

 

 

 

    (1,001

    )

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    (1,001

    )


    Share-based compensation


 

 

    —

 

 

 

    687

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    687

 


    Excess tax benefits from share based payment arrangements


 

 

    —

 

 

 

    393

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    393

 


    Restricted stock grants


 

 

    —

 

 

 

    (2,036

    )

 

 

    —

 

 

 

    2,036

 

 

 

    —

 

 

 

    —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Balance, December 31, 2006


 

 

    347

 

 

 

    54,125

 

 

 

    124,290

 

 

 

    (99,265

    )

 

 

    74

 

 

 

    79,571

 


    Net income


 

 

    —

 

 

 

    —

 

 

 

    7,567

 

 

 

    —

 

 

 

    —

 

 

 

    7,567

 


    Foreign currency translation


 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    119

 

 

 

    119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Comprehensive income


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    7,686

 


    Dividends ($.99 per share)


 

 

    —

 

 

 

    —

 

 

 

    (28,699

    )

 

 

    —

 

 

 

    —

 

 

 

    (28,699

    )


    Stock repurchased for treasury


 

 

    —

 

 

 

    1

 

 

 

    —

 

 

 

    (1,435

    )

 

 

    —

 

 

 

    (1,434

    )


    Exercise of stock options


 

 

    —

 

 

 

    (15

    )

 

 

    —

 

 

 

    30

 

 

 

    —

 

 

 

    15

 


    Share-based compensation


 

 

    —

 

 

 

    1,109

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    1,109

 


    Effect of adoption of new acct principle


 

 

 

 

 

 

 

 

 

 

    (271

    )

 

 

 

 

 

 

 

 

 

 

    (271

    )


    Excess tax benefits from share based payment arrangements


 

 

    —

 

 

 

    10

 

 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

    10

 


    Restricted stock grants


 

 

    —

 

 

 

    (2,547

    )

 

 

    —

 

 

 

    2,547

 

 

 

    —

 

 

 

    —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Balance, December 31, 2007


 

    $

    347

 

 

    $

    52,683

 

 

    $

    102,887

 

 

    $

    (98,123

    )

 

    $

    193

 

 

    $

    57,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 




 


















            
    
    (1) 		        
    Common Stock, $0.01 par value, 150,000,000 shares
    authorized.


 



    The accompanying notes to the consolidated financial statements
    are an integral part of these statements.



    

    31



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    CONSOLIDATED
    STATEMENTS OF CASH FLOWS

    




    For the
    Years Ended December 31, 2007, 2006 and 2005


 













































































































































































































































































































































































































































































































































































































































































































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 


    2005


 

 

 

    (In Thousands)

 
 


    Reconciliation of net income to net cash provided by operating
    activities:


 

 

 

 

 

 

 

 

 

 

 

 


    Net income


 

    $

    7,567

 

 

    $

    11,993

 

 

    $

    24,751

 


    Income from discontinued operations


 

 

    —

 

 

 

    —

 

 

 

    (584

    )

 

 

 

 

 

 

 

 

 

 

 

 

 


    Income from continuing operations


 

 

    7,567

 

 

 

    11,993

 

 

 

    24,167

 


    Adjustments to arrive at cash provided by operating activities:


 

 

 

 

 

 

 

 

 

 

 

 


    Depreciation and amortization


 

 

    3,838

 

 

 

    3,541

 

 

 

    3,179

 


    Amortization of investment discounts/premiums


 

 

    34

 

 

 

    163

 

 

 

    396

 


    Share-based compensation expense


 

 

    1,109

 

 

 

    687

 

 

 

    53

 


    Deferred income taxes


 

 

    (1,305

    )

 

 

    2,719

 

 

 

    1,437

 


    Excess tax benefits from share based payment arrangements


 

 

    (10

    )

 

 

    (393

    )

 

 

    (112

    )


    Gain on sale of property


 

 

    30

 

 

 

    (4

    )

 

 

    (1,798

    )


    Change in assets and liabilities, excluding the effects of
    acquisitions and divestitures


 

 

 

 

 

 

 

 

 

 

 

 


    Accounts receivable


 

 

    1,737

 

 

 

    938

 

 

 

    1,903

 


    Inventories


 

 

    (2,165

    )

 

 

    (334

    )

 

 

    568

 


    Prepaid expenses


 

 

    (331

    )

 

 

    (291

    )

 

 

    (369

    )


    Income taxes


 

 

    2,715

 

 

 

    (975

    )

 

 

    (937

    )


    Accounts payable and other liabilities


 

 

    (1,147

    )

 

 

    (1,405

    )

 

 

    (483

    )


    Deferred revenue


 

 

    13,747

 

 

 

    5,711

 

 

 

    1,821

 


    Other current assets


 

 

    (203

    )

 

 

    293

 

 

 

    1,460

 


    Other


 

 

    337

 

 

 

    (375

    )

 

 

    128

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cash provided by continuing operating activities


 

 

    25,953

 

 

 

    22,268

 

 

 

    31,413

 


    Cash used by discontinued operations


 

 

    —

 

 

 

    —

 

 

 

    (116

    )

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net cash provided by operating activities


 

 

    25,953

 

 

 

    22,268

 

 

 

    31,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cash flows from investing activities:


 

 

 

 

 

 

 

 

 

 

 

 


    Purchase of property, plant and equipment


 

 

    (2,147

    )

 

 

    (2,819

    )

 

 

    (2,419

    )


    Purchase of investment securities


 

 

    (26,441

    )

 

 

    (20,040

    )

 

 

    (36,866

    )


    Maturities/sales of investment securities


 

 

    33,746

 

 

 

    23,220

 

 

 

    71,481

 


    Capitalized software development costs


 

 

    (203

    )

 

 

    (689

    )

 

 

    (279

    )


    Proceeds from mortgage note


 

 

    —

 

 

 

    5,909

 

 

 

    —

 


    Net proceeds from sale of property


 

 

    570

 

 

 

    23

 

 

 

    3,166

 


    Net proceeds from sale of subsidiary


 

 

    —

 

 

 

    —

 

 

 

    75

 


    Acquisitions of business, net of cash acquired


 

 

    —

 

 

 

    —

 

 

 

    (33,970

    )

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cash provided by investing activities


 

 

    5,525

 

 

 

    5,604

 

 

 

    1,188

 


    Cash used by discontinued operations


 

 

    —

 

 

 

    —

 

 

 

    —

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net cash provided by investing activities


 

 

    5,525

 

 

 

    5,604

 

 

 

    1,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cash flows from financing activities:


 

 

 

 

 

 

 

 

 

 

 

 


    Return of capital to minority interest


 

 

 

 

 

 

    —

 

 

 

    (98

    )


    Proceeds from exercise of stock options


 

 

    30

 

 

 

    16

 

 

 

    2,105

 


    Payment for cancellation of stock options


 

 

 

 

 

 

    (1,001

    )

 

 

    —

 


    Excess tax benefits from share based payment arrangements


 

 

    10

 

 

 

    393

 

 

 

    112

 


    Dividends paid


 

 

    (28,699

    )

 

 

    (5,936

    )

 

 

    (6,207

    )


    Purchase of treasury stock


 

 

    (1,435

    )

 

 

    (22,474

    )

 

 

    (32,374

    )

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net cash used by financing activities


 

 

    (30,094

    )

 

 

    (29,002

    )

 

 

    (36,462

    )

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net increase (decrease) in cash and cash equivalents


 

 

    1,384

 

 

 

    (1,130

    )

 

 

    (3,977

    )


    Cash and cash equivalents, beginning of period


 

 

    5,953

 

 

 

    7,083

 

 

 

    11,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Cash and cash equivalents, end of period


 

    $

    7,337

 

 

    $

    5,953

 

 

    $

    7,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Supplemental cash flow information


 

 

 

 

 

 

 

 

 

 

 

 


    Cash paid during the year for —


 

 

 

 

 

 

 

 

 

 

 

 


    Income taxes (net of refunds)


 

    $

    2,979

 

 

    $

    5,281

 

 

    $

    11,121

 






 



    The accompanying notes to the consolidated financial statements
    are an integral part of these statements.



    

    32



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS


 














        
    
    (1) 
    
    Consolidation


 



    The consolidated financial statements include the financial
    results of Renaissance Learning, Inc. (“Renaissance
    Learning”) and our subsidiaries (collectively, the
    “Company”).


 














        
    
    (2) 
    
    Basis of
    presentation


 



    Except as indicated, amounts reflected in the consolidated
    financial statements or the notes thereto, relate to our
    continuing operations. Generation21 Learning Systems, LLC
    (“Generation21”) was divested during the first quarter
    of 2005 and, therefore, its results for all periods presented in
    the consolidated financial statements are reflected as
    discontinued operations. All significant intercompany
    transactions and accounts have been eliminated in consolidation.


 














        
    
    (3) 
    
    Nature of
    operations


 



    Renaissance Learning, Inc. is a leading provider of technology
    for personalizing reading, math, and writing practice for
    pre-kindergarten through senior high (“pre-K-12”)
    schools and districts. Our products accelerate learning and
    improve test scores by facilitating increased student practice
    of essential skills, increasing the quality, quantity, and
    timeliness of performance data available to educators, helping
    educators motivate students and providing student access to low
    cost computing solutions.


 



    Our educational software covers a wide range of subject areas
    including reading, early literacy, math, writing, vocabulary and
    language acquisition. We provide customized assessment software
    to educational publishers, which supports many of the popular
    textbook series used in K-12 and post-secondary educational
    institutions. Our flagship product is Accelerated Reader,
    which provides educators with information for motivating and
    monitoring increased literature-based reading practice and to
    support instruction. Our other software and service brands
    include: STAR Reading, STAR Early Literacy, Read Now Power
    Up!, Accelerated Math, STAR Math, MathFacts in a Flash and
    English in a Flash.


 



    Our hardware products include AlphaSmart laptop computing
    devices that run curriculum-specific software focused on skills
    improvement and real-time formative assessments. The units offer
    schools the ability to provide students with significantly
    improved access to portable computing at a fraction of the cost
    of conventional personal computers. Our 2Know! response
    system allows educators to easily encourage student classroom
    participation and obtain instantaneous feedback that can be used
    to quickly assess student comprehension and performance.
    Additionally, we sell our patented AccelScan optical-mark
    card scanner which is used primarily with Accelerated Math
    to automate scoring and recordkeeping tasks.


 



    We offer a full line of professional service and support
    solutions that integrate with, complement, and enhance the
    effectiveness of, our products. Sold separately or bundled with
    our products to provide a complete solution, our service
    offerings include professional development and product training
    seminars and conferences, report and data analysis, program
    evaluation, guided implementation, remote web-based training,
    software support, software installation, database conversion and
    integration services, and application hosting.


 














        
    
    (4) 
    
    Acquisition


 



    On June 27, 2005, we acquired all of the outstanding common
    stock of AlphaSmart, Inc. (“AlphaSmart”), a provider
    of laptop computing devices for K-12 schools. The results of
    AlphaSmart’s operations are included in our consolidated
    financial statements since that date. AlphaSmart products are
    easy-to-use laptop computing devices that run
    curriculum-specific software focused on skills improvement and
    real-time formative assessments. The units offer schools the
    ability to provide students with significantly improved access
    to portable computing at a fraction of the cost of conventional
    personal computers.



    

    33



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    The aggregate purchase price was approximately $58 million,
    which consisted of $34 million in cash, $23 million of
    our common stock (1,157,355 shares) and $1 million of
    transaction costs. The purchase price was allocated to the
    assets acquired and liabilities assumed according to their
    estimated fair values. The values assigned to tradename and
    customer relationships are based on an independent appraisal.
    The tradename has an indefinite life and is not amortized. The
    customer relationships intangible has a
    10-year
    estimated useful life and is being amortized on an accelerated
    method (Note 6).


 



    The following table includes our pro forma results of operations
    for the twelve months ended December 31, 2005. The pro
    forma financial information summarizes the results of operations
    for the period indicated as if the AlphaSmart acquisition had
    occurred at the beginning of 2005. The pro forma information
    contains the actual operating results of AlphaSmart with the
    results prior to the acquisition date adjusted to include the
    pro forma impact of: the amortization of intangible assets,
    lower interest income as a result of the sale of
    available-for-sale
    securities to fund the acquisition and the elimination of merger
    related costs. These pro forma amounts are not necessarily
    indicative of the results that would have been obtained if the
    acquisition occurred at the beginning of 2005.


 










































































     	     	     	     	     	

 

 

    Twelve Months Ended

    

 

 

 

    December 31, 2005

 

 

 

    (In Thousands, Except

    

 

 

 

    Per Share Amounts)

 
 


    Net sales


 

    $

    131,576

 


    Income from continuing operations


 

 

    24,104

 


    Earnings per share from continuing operations


 

 

 

 


    Basic earnings per share


 

    $

    0.75

 


    Diluted earnings per share


 

 

    0.75

 






 














        
    
    (5) 
    
    Significant
    accounting policies


 














        
    
    (a) 
    
    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 amount of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of
    the financial statements and the reported amounts of revenues
    and expenses during the reporting period. Actual results could
    differ from those estimates.


 














        
    
    (b) 
    
    Revenue
    recognition


 



    We recognize revenue from our software products in accordance
    with Statement of Position
    No. 97-2
    Software Revenue Recognition
    (“SOP 97-2”)
    issued by the Accounting Standards Executive Committee of the
    American Institute of Certified Public Accountants. Revenues are
    recorded net of an allowance for estimated returns. Allowances
    for bad debts are also recorded at the time of the sale.


 



    Product revenue is derived primarily from the sale of
    educational software and hardware. Revenue from sales of
    hardware is generally recognized when the product is shipped to
    the customer. Revenue recognition from sales of our software
    depends on whether the software is:
    (i) off-the-shelf
    or customized and (ii) whether it is licensed on a
    perpetual basis or as a subscription. We recognize revenue from
    off-the-shelf
    perpetually licensed software sales upon shipment to customers.
    Subscription-based software sales are recognized as revenue on a
    straight-line basis over the subscription period. Sales of
    software that require substantial modification or customization
    are recognized as revenue using the
    percentage-of-completion
    method of accounting. Revenues and deferred revenues from
    software that require substantial modification or customization
    are not significant in any of the years presented.



    

    34



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    Service revenue is derived from (i) product support
    services, (ii) professional development and product
    training seminars and conferences, (iii) application
    hosting, (iv) technical services, (v) consulting and
    (vi) other remote services. Product support services
    included with sales of perpetually licensed software have a
    duration of 12 months or less and the associated revenue is
    recognized at the time the software is shipped with the related
    costs of providing the telephone support accrued for at the same
    time. Revenue from professional development and product training
    seminars and conferences is recognized when the seminar or
    conference is held. Revenue from other product support services
    and application hosting is initially recorded as deferred
    revenue and then recognized as revenue on a straight-line basis
    over the term of the agreement, typically 12 months.
    Revenue from technical services, consulting and other remote
    services is recognized as the services are performed or on a
    straight-line basis over the contractual period.


 



    Deferred revenue includes (i) amounts invoiced for products
    not yet delivered and services not yet performed,
    (ii) advance invoicing on contracts and (iii) that
    portion of support agreements and subscription-based product
    sales that has not yet been recognized as revenue.


 














        
    
    (c) 
    
    Impairment
    or Disposal of Long-Lived Assets.


 



    We evaluate the recoverability of the carrying amount of
    long-lived assets whenever events or changes in circumstances
    indicate that the carrying amount of an asset may not be fully
    recoverable. We evaluate the recoverability of goodwill and
    other intangible assets with indefinite useful lives annually,
    or more frequently if events or circumstances indicate that an
    asset may be impaired. Management uses its judgment when
    applying impairment rules to determine when an impairment test
    is necessary. Examples of factors which could trigger an
    impairment review include: (i) a significant decrease in
    the market value of an asset, (ii) a significant change in
    the extent or manner in which an asset is used and
    (iii) significant adverse changes in legal factors or the
    business climate that impact the value of an asset.


 



    Impairment losses are measured as the amount by which the
    carrying value of an asset exceeds its estimated fair value.
    Estimating fair value requires that we forecast future cash
    flows related to the asset subject to review. These forecasts
    require assumptions about demand for our products and services,
    future market conditions and technological developments. Other
    assumptions include determining the discount rate and future
    growth rates. Changes to these assumptions could result in an
    impairment charge in future periods.


 














        
    
    (d) 
    
    Cash and
    cash equivalents


 



    Cash amounts on deposit at banks and highly liquid debt
    instruments purchased with an original maturity date of three
    months or less are included in cash and cash equivalents. Cash
    and cash equivalents consisted solely of cash and time deposits
    at December 31, 2007 and 2006.


 














        
    
    (e) 
    
    Investment
    securities


 



    We classify our investment securities as
    “held-to-maturity,”
    “available for sale” or “trading” in
    accordance with the provisions of Statement of Financial
    Accounting Standards No. 115, Accounting for Certain
    Investments in Debt and Equity Securities (SFAS 115).


 



    Debt securities have an original maturity of more than three
    months and a remaining maturity of less than 24 months. Our
    investments in debt securities consist of auction rate
    securities and municipal bonds. Municipal bonds are classified
    as
    held-to-maturity
    and are carried at amortized cost. The fair value of our debt
    securities listed below is based on quoted market prices.


 



    Auction rate securities are classified as available for sale.
    Auction rate securities are liquid investments with interest
    rates that are reset through a “Dutch auction” process
    that occurs every 7 to 49 days, depending on the terms of
    the individual security. The underlying securities have
    long-term maturities. Our auction rate securities are stated



    

    35



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    at cost, which closely approximates fair market value and,
    therefore, there were no unrealized gains or losses related to
    these securities included in accumulated other comprehensive
    income (loss).


 



    The equity securities we own are held for the purpose of funding
    our Supplemental Executive Retirement Plan (“SERP”),
    as further described in Note 12. These equity securities
    are classified as trading and are therefore carried at their
    current fair value based on quoted market prices. Our
    investments in equity securities consist entirely of various
    mutual fund shares in amounts that conform to the aggregate
    investment selections of the participants in the SERP.


 



    Investment securities consisted of the following at December 31:


 





































































































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    2007

 

 

    2006

 

 

 

    Carrying

    

 

 

    Fair

    

 

 

    Carrying

    

 

 

    Fair

    

 

 

 

    Value

 

 

    Value

 

 

    Value

 

 

    Value

 

 

 

    (In Thousands)

 
 


    Debt securities due in less than 1 year:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Auction rate securities


 

    $

    2,500

 

 

    $

    2,500

 

 

    $

    20,025

 

 

    $

    20,025

 


    Municipal bonds


 

 

    5,636

 

 

 

    5,654

 

 

 

    2,500

 

 

 

    2,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Current investment securities


 

 

    8,136

 

 

 

    8,154

 

 

 

    22,525

 

 

 

    22,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Debt securities due in 1 to 2 years:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Municipal bonds


 

 

    7,051

 

 

 

    7,078

 

 

 

    —

 

 

 

    —

 


    Equity securities:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Mutual fund investments


 

 

    1,931

 

 

 

    1,931

 

 

 

    1,625

 

 

 

    1,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Non-current investment securities


 

 

    8,982

 

 

 

    9,009

 

 

 

    1,625

 

 

 

    1,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total investment securities


 

    $

    17,118

 

 

    $

    17,163

 

 

    $

    24,150

 

 

    $

    24,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 




 



    Inventories are carried at the lower of
    first-in,
    first-out (FIFO) cost or market. Inventories primarily consist
    of purchased materials which include laptop computing devices,
    optical-mark card scanners, interactive response systems,
    educational products, training materials, manuals, and
    motivational items.


 














        
    
    (g) 
    
    Advertising
    costs


 



    Advertising costs are expensed as the advertising takes place.
    Advertising expenses for 2007, 2006 and 2005 were approximately
    $4.6 million, $6.5 million and $8.2 million,
    respectively.


 














        
    
    (h) 
    
    Property,
    plant and equipment


 



    Property, plant and equipment are recorded at cost and are
    depreciated over their estimated useful lives using principally
    the straight-line method for financial reporting purposes.
    Maintenance and repair costs are charged to expense as incurred,
    and renewals and improvements that significantly extend the
    useful life of an asset are added to the plant and equipment
    accounts. Depreciation expense was $2.8 million,
    $2.5 million and $2.1 million for 2007, 2006 and 2005,
    respectively.


 



    The estimated useful lives for property, plant and equipment are
    as follows: buildings-25 to 40 years; furniture, fixtures
    and office equipment-5 to 8 years; computer and production
    equipment-3 to 5 years; vehicles-5 years; and
    leasehold improvements-the lease term.



    

    36



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    Net property, plant and equipment consisted of the following at
    December 31:


 



























































































































































     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 

 

    (In Thousands)

 
 


    Land and improvements


 

    $

    1,146

 

 

    $

    1,219

 


    Buildings


 

 

    9,587

 

 

 

    9,967

 


    Furniture, fixtures and office equipment


 

 

    4,772

 

 

 

    4,694

 


    Computer and production equipment


 

 

    12,870

 

 

 

    11,474

 


    Other


 

 

    1,490

 

 

 

    1,713

 

 

 

 

 

 

 

 

 

 


    Total property, plant and equipment


 

 

    29,865

 

 

 

    29,067

 


    Less — accumulated depreciation and amortization


 

 

    19,287

 

 

 

    17,256

 

 

 

 

 

 

 

 

 

 


    Property, plant and equipment, net


 

    $

    10,578

 

 

    $

    11,811

 

 

 

 

 

 

 

 

 

 






 














        
    
    (i) 
    
    Software
    development costs


 



    We capitalize certain software development costs incurred after
    technological feasibility is achieved. Capitalized costs are
    reported at the lower of amortized cost or net realizable value.
    Capitalized software development costs are amortized on a
    product-by-product
    basis using the straight-line method over the estimated economic
    life of the products, which is generally estimated to be
    24 months. Amortization begins when the products are
    available for general release to customers. All other research
    and development expenditures are charged to product development
    expense in the period incurred. When capitalized software is
    fully amortized, the balance is removed from the capitalized
    software and accumulated amortization accounts. Amounts
    capitalized were approximately $0.2 million,
    $0.7 million and $0.3 million in 2007, 2006 and 2005,
    respectively. Amortization expense of approximately
    $0.5 million, $0.4 million and $0.5 million for
    2007, 2006 and 2005, respectively, is included in cost of
    sales-products in the consolidated statements of income. At
    December 31, 2007 and 2006, accumulated amortization of
    capitalized software development costs was $0.4 million and
    $1.3 million, respectively.


 














        
    
    (j) 
    
    Sales and
    concentration of credit risks


 



    We grant credit to our customers in the ordinary course of
    business. The majority of our customers are schools or school
    districts, although we do sell some of our products through
    resellers. Concentrations of credit risk with respect to trade
    receivables are limited due to the significant number of
    customers and their geographic dispersion. In 2007, 2006, and
    2005, no single customer represented more than 10% of net sales.


 














        
    
    (k) 
    
    Share-based
    compensation


 



    Effective January 1, 2006, we adopted Statement of
    Financial Accounting Standards No. 123(R) Share-Based
    Payments (“SFAS 123R”), using the modified
    prospective application transition method. The modified
    prospective application transition method requires compensation
    cost to be recognized beginning on the effective date
    (a) based on the requirements of SFAS 123R for all
    share-based payments granted after the effective date and
    (b) based on the requirements of SFAS 123R for all
    awards granted to employees prior to the effective date of
    SFAS 123R that remain unvested on the effective date. As
    such, prior periods will not reflect restated amounts.


 



    Prior to January 1, 2006, we elected to follow the
    intrinsic value based method of accounting for stock options
    consistent with Accounting Principles Board Opinion No. 25
    Accounting for Stock Issued to Employees (“APB
    25”) and to provide the pro forma disclosures of net income
    and earnings per share as if the fair value based method had
    been applied. Under the intrinsic value method, compensation
    cost for stock options is measured by the excess, if any, of the
    quoted price of our stock at the measurement date over the
    exercise price.


 



    No stock-based employee compensation expense related to stock
    options or our stock purchase plans was reflected in net income
    prior to January 1, 2006. SFAS 123R requires us to
    report the tax benefit from the tax



    

    37



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    deduction that is in excess of recognized compensation costs
    (excess tax benefits) as a financing cash flow. Restricted
    shares or restricted stock units are granted to certain
    employees and our directors. For employees, restricted stock
    awards generally vest over a period of four years and for
    non-employee directors, upon termination of the
    individual’s tenure on our board. Restricted stock awards
    to employees are expensed over the vesting period and those made
    to our non-employee directors are expensed when granted.


 



    During the year ended December 31, 2007, we recognized
    approximately $1.1 million in share-based compensation
    expense related primarily to restricted stock and to a lesser
    extent, stock options as compared to $0.7 million in 2006.
    Cash received from stock option exercises was approximately
    $17,000 in 2007 and $16,000 in 2006. The total income tax
    benefit recognized related to share-based compensation, which is
    recorded in additional paid-in capital, was approximately
    $10,000 and $393,000 for the years ended December 31, 2007
    and 2006, respectively.


 



    The Black-Scholes option-pricing model was used to compute the
    fair value of each option granted for purposes of the pro forma
    disclosures required by SFAS 123R. Had compensation cost in
    2005 been determined for the stock option grants based on the
    fair value method set forth under SFAS 123R, prior to its
    adoption, net income and earnings per share would have been
    adjusted to the pro forma amounts indicated below:


 














































































































     	     	     	     	     	

 

 


    2005


 

 

 

    (In Thousands, Except

    

 

 

 

    Per Share Amounts)

 
 


    Net Income, as reported


 

    $

    24,751

 


    Add: share based compensation included in reported net income,
    net of tax


 

 

    33

 


    Deduct: total share-based compensation expense determined under
    fair-value based method for all awards, net of tax


 

 

    2,518

 


    Pro forma net income


 

    $

    22,266

 


    Basic earnings per share:


 

 

 

 


    As reported


 

    $

    0.80

 


    Pro forma


 

 

    0.72

 


    Diluted earnings per share:


 

 

 

 


    As reported


 

    $

    0.80

 


    Pro forma


 

 

    0.72

 


    The per share weighted average fair value of options granted
    under the plan during the year is:


 

    $

    10.06

 






 



    The fair value of each option grant is estimated on the date of
    grant using the Black-Scholes option pricing model with the
    following weighted average assumptions:


 































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 


    2005


 
 


    Dividend yield


 

 

    2.01

    %

 

 

    1.39

    %

 

 

    1.01

    %


    Expected volatility


 

 

    48.21

    %

 

 

    55.00

    %

 

 

    57.08

    %


    Risk-free interest rate


 

 

    4.37

    %

 

 

    4.66

    %

 

 

    4.00

    %


    Expected life (in years)


 

 

    5

 

 

 

    5

 

 

 

    5

 






 



    In April 2005, our Board of Directors approved the acceleration
    of vesting of the unvested stock options under our 1997 Stock
    Incentive Plan. This resulted in options to purchase
    approximately 438,000 shares of our common stock becoming
    immediately exercisable. All of the unvested stock options for
    which vesting was accelerated were “underwater,” with
    exercise prices greater than the closing price of our common
    stock on the date of acceleration. Vesting of the options was
    accelerated as part of our plan to transition the equity-based
    portion of our executive compensation plan from stock options to
    grants of restricted stock, which we believe will be a more
    effective performance incentive and retention tool. Also,
    accelerated vesting of the options produced a more favorable
    impact



    

    38



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    on our future results of operations in light of SFAS 123R.
    Early vesting of these options resulted in approximately
    $1.0 million less future compensation expense that would
    otherwise have been recognized over the remaining life of the
    options beginning on January 1, 2006.


 














        
    
    (l) 
    
    Earnings
    per common share


 



    Earnings per share is computed in accordance with Statement of
    Financial Accounting Standards No. 128 Earnings per
    Share (“SFAS 128”). Basic earnings per common
    share (“Basic EPS”) is computed by dividing income
    available to common shareholders by the weighted average number
    of common shares outstanding during the period. Shares issued
    and shares reacquired during the period are weighted for the
    portion of the period they were outstanding.


 



    Diluted earnings per common share (“Diluted EPS”) is
    computed similarly to Basic EPS except that the weighted average
    number of shares outstanding is increased to include the number
    of additional common shares that would have been outstanding if
    the potentially dilutive common shares had been issued. Our
    potentially dilutive common shares consist of unexercised stock
    options and restricted shares.


 



    The computation of Diluted EPS does not assume conversion,
    exercise or contingent issuance of securities that may have an
    antidilutive effect on earnings per share. Consequently, stock
    options with an exercise price greater than the average market
    price for the period are not included in the computation of
    potentially dilutive common shares. For the years ended
    December 31, 2007, 2006 and 2005, there were approximately
    833,000, 829,000 and 895,000, respectively, antidilutive options
    excluded from the computation of diluted earnings per share.


 



    The weighted average shares outstanding are as follows:


 





























































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 


    2005


 
 


    Basic weighted average shares outstanding


 

 

    28,792,337

 

 

 

    29,551,309

 

 

 

    30,966,501

 


    Dilutive effect of outstanding stock options


 

 

    2,982

 

 

 

    7,626

 

 

 

    63,151

 


    Dilutive effect of restricted shares


 

 

    31,301

 

 

 

    10,325

 

 

 

    20

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Diluted weighted average shares outstanding


 

 

    28,826,620

 

 

 

    29,569,260

 

 

 

    31,029,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 














        
    
    (m) 
    
    Income
    taxes


 



    We account for income taxes according to the provisions of
    Statement of Financial Accounting Standards No. 109
    Accounting for Income Taxes (“SFAS 109”).
    SFAS 109 requires an asset and liability based approach to
    accounting for income taxes. Deferred income tax assets and
    liabilities are recorded to reflect the tax consequences on
    future years of temporary differences between financial and tax
    accounting of revenue and expense items (see Note 7).
    Valuation allowances are provided when it is anticipated that a
    deferred tax asset is not likely to be fully realized. Effective
    January 1, 2007, we adopted Financial Interpretation
    No. 48 Accounting for Uncertainty in Income Taxes
    (“FIN 48”) and account for liabilities
    related to uncertain tax positions in accordance with its
    provisions (see Note 8).


 














        
    
    (n) 
    
    Comprehensive
    income (loss)


 



    Our comprehensive income (loss) includes foreign currency
    translation adjustments, which are included in accumulated other
    comprehensive income in the consolidated statements of
    shareholders’ equity. At December 31, 2007, 2006 and
    2005, accumulated other comprehensive income consisted entirely
    of foreign currency translation adjustments, which resulted from
    translation of the balance sheets of our international
    operations to U.S. dollars using the exchange rate in
    effect on the balance sheet date.



    

    39



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 














        
    
    (o) 
    
    Shipping
    and handling revenues and costs


 



    We include shipping and handling fees billed to customers in net
    sales. The related shipping and handling costs are included in
    cost of sales.


 














        
    
    (p) 
    
    Sales,
    use and value added taxes


 



    We do not include sales, use, value added or similar taxes
    billed to customers in net sales.


 














        
    
    (q) 
    
    Product
    warranty and support obligations


 



    We recognize expense for the estimated costs of hardware
    warranties and software support at the time the related revenue
    is recognized. For hardware warranty, we estimate the costs
    based on historical and projected product failure rates,
    historical and projected repair costs, and knowledge of specific
    product failures (if any). The specific hardware warranty terms
    and conditions vary depending upon the product sold, but
    generally include technical support, parts, and labor over a
    period generally ranging from 90 days to three years. For
    software warranty, we estimate the costs to provide customers
    with service during the term of the support period. We regularly
    reevaluate our estimates to assess the adequacy of the recorded
    warranty and support liabilities and adjust the amounts as
    necessary.


 



    The changes in our aggregate product warranty and support
    liabilities were as follows:


 



























































































     	     	     	     	     	

 

 

    (In Thousands)

 
 


    Balance at December 31, 2005


 

    $

    1,297

 


    Amount expensed for new warranty and support obligations and
    changes in estimates for pre-existing obligations


 

 

    4,375

 


    Cost of warranty and support provided during the year


 

 

    (4,477

    )

 

 

 

 

 


    Balance at December 31, 2006


 

 

    1,195

 


    Amount expensed for new warranty and support obligations and
    changes in estimates for pre-existing obligations


 

 

    4,571

 


    Cost of warranty and support provided during the year


 

 

    (4,463

    )

 

 

 

 

 


    Balance at December 31, 2007


 

    $

    1,303

 

 

 

 

 

 






 














        
    
    (6) 
    
    Goodwill
    and other intangible assets


 



    Under Statement of Financial Accounting Standards No. 142
    Goodwill and Other Intangible Assets
    (“SFAS 142”), we are required to assess goodwill
    and other intangibles with indefinite lives at least annually
    for impairment by applying a fair-value-based test. We completed
    this testing in 2007 and 2006, and found no instances of
    impairment.


 



    The following table summarizes the change in goodwill during
    2005, 2006 and 2007:


 




















































































     	     	     	     	     	

 

 

    (In Thousands)

 
 


    Balance at December 31, 2005


 

 

    45,906

 


    Acquisition — final allocation adjustment


 

 

    1,066

 


    Currency translation


 

 

    1

 

 

 

 

 

 


    Balance at December 31, 2006


 

    $

    46,973

 


    Currency translation


 

 

    92

 

 

 

 

 

 


    Balance at December 31, 2007


 

    $

    47,065

 

 

 

 

 

 







    

    40



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    For the years ended December 31, 2007, 2006, and 2005, we
    recognized amortization expense of $0.5 million,
    $0.7 million and $0.6 million, respectively, on other
    intangibles with finite lives. The tradename has an indefinite
    life and therefore is not amortized. The customer relationships
    intangible has a
    10-year
    estimated useful life and is being amortized on an accelerated
    method. Intangible amortization expense is estimated to be
    $0.5 million, $0.4 million, $0.3 million,
    $0.3 million and $0.3 million for 2008, 2009, 2010,
    2011 and 2012, respectively.


 



    Other intangibles consisted of the following:


 















































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    December 31, 2007

 

 

    December 31, 2006

 

 

 

    Gross

    

 

 

    Accumulated

    

 

 

 

 

 

    Gross

    

 

 

    Accumulated

    

 

 

 

 

 

 

    Amount

 

 

    Amortization

 

 

    Net

 

 

    Amount

 

 

    Amortization

 

 

    Net

 

 

 

 

 

 

 

 

 

    (In Thousands)

 

 

 

 

 

 

 
 


    Tradename


 

    $

    3,000

 

 

    $

    —

 

 

    $

    3,000

 

 

    $

    3,000

 

 

    $

    —

 

 

    $

    3,000

 


    Customer relationships


 

 

    4,150

 

 

 

    1,571

 

 

 

    2,579

 

 

 

    4,150

 

 

 

    1,026

 

 

 

    3,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Other intangibles


 

    $

    7,150

 

 

    $

    1,571

 

 

    $

    5,579

 

 

    $

    7,150

 

 

    $

    1,026

 

 

    $

    6,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 














        
    
    (7) 
    
    Income
    taxes


 



    The provision for income taxes from continuing operations
    consisted of:


 










































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 


    2005


 

 

 

    (In Thousands)

 
 


    Current tax provision:


 

 

 

 

 

 

 

 

 

 

 

 


    U.S. federal


 

    $

    5,081

 

 

    $

    3,783

 

 

    $

    9,840

 


    State and local


 

 

    696

 

 

 

    518

 

 

 

    1,850

 


    Foreign


 

 

    69

 

 

 

    23

 

 

 

    84

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total current tax provision


 

 

    5,846

 

 

 

    4,324

 

 

 

    11,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Deferred tax provision:


 

 

 

 

 

 

 

 

 

 

 

 


    U.S. federal


 

 

    (1,231

    )

 

 

    2,571

 

 

 

    1,329

 


    State and local


 

 

    (74

    )

 

 

    148

 

 

 

    108

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total deferred tax provision


 

 

    (1,305

    )

 

 

    2,719

 

 

 

    1,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Provision for income taxes


 

    $

    4,541

 

 

    $

    7,043

 

 

    $

    13,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 



    Effective rate reconciliation:


 




















































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 


    2005


 

 

 

 

 

 

 

 

 

    (In Thousands)

 

 

 

 

 

 

 
 


    Income tax provision at statutory tax rate


 

    $

    4,239

 

 

 

    35.0

    %

 

    $

    6,663

 

 

 

    35.0

    %

 

    $

    13,083

 

 

 

    35.0

    %


    State and local taxes, net of federal tax benefit


 

 

    379

 

 

 

    3.1

    %

 

 

    433

 

 

 

    2.3

    %

 

 

    1,273

 

 

 

    3.4

    %


    Federal tax credits and exclusions


 

 

    (469

    )

 

 

    (3.9

    )%

 

 

    (82

    )

 

 

    (0.4

    )%

 

 

    (327

    )

 

 

    (0.9

    )%


    Resolution of prior period tax matters


 

 

    —

 

 

 

    0.0

    %

 

 

    —

 

 

 

    0.0

    %

 

 

    (658

    )

 

 

    (1.8

    )%


    Provision for uncertain tax positions


 

 

    507

 

 

 

    4.2

    %

 

 

    171

 

 

 

    0.9

    %

 

 

    (121

    )

 

 

    (0.3

    )%


    Other


 

 

    (115

    )

 

 

    (0.9

    )%

 

 

    (142

    )

 

 

    (0.8

    )%

 

 

    (39

    )

 

 

    (0.1

    )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Provision for income taxes


 

    $

    4,541

 

 

 

    37.5

    %

 

    $

    7,043

 

 

 

    37.0

    %

 

    $

    13,211

 

 

 

    35.3

    %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







    

    41



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    Deferred tax assets consisted of the following at December 31:


 


















































































































































































































     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 

 

    (In Thousands)

 
 


    Current deferred tax assets:


 

 

 

 

 

 

 

 


    Deferred revenue


 

    $

    1,768

 

 

    $

    1,062

 


    Expenses not currently deductible


 

 

    2,638

 

 

 

    2,534

 

 

 

 

 

 

 

 

 

 


    Net current deferred tax assets


 

 

    4,406

 

 

 

    3,596

 

 

 

 

 

 

 

 

 

 


    Noncurrent deferred tax assets (liabilities):


 

 

 

 

 

 

 

 


    Deferred revenue


 

 

    104

 

 

 

    32

 


    Expenses not currently deductible


 

 

    2,401

 

 

 

    86

 


    Depreciation and amortization


 

 

    495

 

 

 

    388

 


    Intangibles


 

 

    (1,413

    )

 

 

    (1,384

    )

 

 

 

 

 

 

 

 

 


    Net noncurrent deferred tax asset (liability)


 

 

    1,587

 

 

 

    (878

    )

 

 

 

 

 

 

 

 

 


    Total deferred tax assets


 

    $

    5,993

 

 

    $

    2,718

 

 

 

 

 

 

 

 

 

 






 




 



    We file income tax returns with the U.S., various states and
    certain foreign jurisdictions. Our most significant
    jurisdictions are the U.S. and the state of Wisconsin. We
    are no longer subject to examinations by the U.S. for years
    before 2004. For Wisconsin and the remaining jurisdictions, with
    few exceptions, we are no longer subject to examinations by tax
    authorities for years before 2003. We are not currently under
    examination by the Internal Revenue Service. We are currently
    under examination by the State of Wisconsin for 2003 through
    2006.


 



    Effective January 1, 2007, we adopted FIN 48. This
    interpretation provides specific guidance on how enterprises
    recognize and measure tax benefits associated with uncertain tax
    positions. As a result of the adoption of FIN 48, we
    recognized a $0.3 million increase in the liability for
    unrecognized tax benefits, which was accounted for as a
    reduction to the January 1, 2007 balance of retained
    earnings. We classify interest and penalties related to
    unrecognized tax benefits as income tax expense. During the year
    ended December 31, 2007, we recognized approximately
    $0.3 million of tax expense related to interest and
    penalties.


 



    A reconciliation of the beginning and ending amount of
    unrecognized tax benefits is as follows:


 

































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    Tax

 

 

    Interest & penalties

 

 

    Total

 

 

 

    (In Thousands)

 
 


    Balance at January 1, 2007


 

    $

    3,034

 

 

    $

    1,159

 

 

    $

    4,193

 


    Additions for tax positions related to the current year


 

 

    730

 

 

 

    40

 

 

 

    770

 


    Additions for tax positions of prior years


 

 

    61

 

 

 

    265

 

 

 

    326

 


    Reductions due to lapse of applicable statute of limitations


 

 

    (55

    )

 

 

    (17

    )

 

 

    (72

    )


    Settlements


 

 

    (81

    )

 

 

    (32

    )

 

 

    (113

    )

 

 

 

 

 

 

 

 

 

 

 

 

 


    Balance at December 31, 2007


 

    $

    3,689

 

 

    $

    1,415

 

 

    $

    5,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 



    Included in the unrecognized tax benefits of $3.7 million
    at December 31, 2007 is $2.5 million of tax benefits
    that, if recognized, would reduce our annual effective tax rate.
    We do not anticipate that our total amount of unrecognized tax
    benefits will significantly change during 2008 or that we will
    be required to make any payments related to tax positions that
    will have a significant adverse impact on our financial
    position, results of operations or shareholders’ equity.



    

    42



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    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 














        
    
    (9) 
    
    Lines of
    credit


 



    We have a $15.0 million secured revolving line of credit
    with a bank, which is available until May 31, 2009. The
    line of credit bears interest at either a floating rate based on
    the prime rate less 1.0%, or a fixed rate for a period of up to
    90 days based on LIBOR plus 1.25%. The rate is at our
    option and is determined at the time of borrowing. We also have
    a $2.0 million unsecured revolving line of credit with a
    bank available until April 30, 2009. The line of credit
    bears interest based on the prime rate less 1.0%. As of
    December 31, 2007 and 2006, the lines of credit had not
    been used.


 














        
    
    (10) 
    
    Lease
    commitments


 



    We are party to various operating leases for office and
    warehouse facilities we occupy to carry out our business
    operations. Certain of these leases provide for scheduled rent
    increases based on price-level factors. We have not entered into
    leases that call for contingent rent. In most cases, management
    expects that, in the normal course of business, leases will be
    renewed or replaced. Approximate rent expense for 2007, 2006 and
    2005 was $2.2 million, $2.0 million and
    $0.9 million, respectively.


 



    Future approximate minimum rental payments (including estimated
    operating costs) required under operating leases as of
    December 31, 2007 are as follows:


 




















































































     	     	     	     	     	

 

 

    (In Thousands)

 
 


    2008


 

    $

    2,225

 


    2009


 

 

    1,508

 


    2010


 

 

    1,102

 


    2011


 

 

    716

 


    2012


 

 

    543

 


    After 2012


 

 

    404

 

 

 

 

 

 

 

 

    $

    6,498

 

 

 

 

 

 






 




 



    We are subject to various claims and proceedings covering a wide
    range of matters that arise in the ordinary course of business
    activities. We believe that any liability that may ultimately
    arise from the resolution of these matters will not have a
    material adverse effect on our financial position, results of
    operations or shareholders’ equity.


 














        
    
    (12) 
    
    Retirement
    plans


 



    In order to provide retirement benefits for our employees, we
    have established a defined contribution 401(k) Savings Plan
    covering all employees in the United States who meet certain
    service requirements and a Supplemental Executive Retirement
    Plan (“SERP”) available to senior management.


 



    Employees participating in the 401(k) plan may elect to
    contribute up to 50% of their annual pretax compensation subject
    to certain IRS limitations. SERP participants may elect to defer
    up to 20% of their annual pretax compensation to the SERP.


 



    Vesting and employer matching contributions are the same under
    both plans. Vesting of employer contributions takes place
    ratably over an employee’s first four years of service with
    full vesting of past and future employer contributions once four
    years of service is reached.


 



    Employer matching contributions are currently $0.75 for each
    $1.00 contributed by a participant and are limited to a maximum
    of 4.5% of a participant’s pretax compensation. For those
    employees participating in the



    

    43



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 



    SERP, the maximum employer contribution is determined on a
    combined basis with the 401(k) plan. Discretionary employer
    contributions may also be made to the plans. No discretionary
    contributions were made to the plans in 2007, 2006 or 2005.


 



    SERP participants elect to defer receipt of a portion of their
    compensation and invest their deferrals in certain mutual funds,
    which are nearly identical to the investment selections offered
    to participants in our 401(k) plan. The liability for the SERP
    is included in deferred compensation and other employee
    benefits. The SERP is fully funded and the related investments
    are classified as investment securities on our consolidated
    balance sheets. Our liability for the SERP was $1.9 million
    at December 31, 2007 and $1.6 million, at
    December 31, 2006.


 



    The following summarizes our expense under these retirement
    plans:


 




















































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    2007


 

 


    2006


 

 


    2005


 

 

 

    (In Thousands)

 
 


    Employer matching contribution — 401(k) Plan


 

    $

    1,459

 

 

    $

    1,318

 

 

    $

    1,027

 


    Employer matching contribution — SERP


 

 

    18

 

 

 

    15

 

 

 

    16

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Total


 

    $

    1,477

 

 

    $

    1,333

 

 

    $

    1,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 




    (13) Stock
    incentive plan


 



    We have established the 1997 Stock Incentive Plan (the
    “Plan”) for our officers, key employees, non-employee
    directors and consultants. A combined maximum of 6,000,000
    options, stock appreciation rights (“SARs”) and share
    awards may be granted under the plan. No incentive stock options
    (“ISOs”) or SARs have been granted under the Plan. At
    December 31, 2007, there were approximately
    2.2 million shares available for issuance under our 1997
    Stock Incentive Plan.


 



    (a) Stock option awards — Options granted
    under the Plan may be in the form of nonqualified stock options
    (“NSOs”) or ISOs which comply with Section 422 of
    the Internal Revenue Code. The exercise price of the options is
    the market value of our common stock at the date of grant.
    Options become exercisable ratably over their respective vesting
    period which ranges from immediate vesting up to a four year
    vesting period. The options expire 10 years from the grant
    date.


 



    A summary of stock option activity under the plan is as follows:


 






















































































































































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    2007

 

 

    2006

 

 

    2005

 

 

 

 

 

 

    Weighted

    

 

 

 

 

 

    Weighted

    

 

 

 

 

 

    Weighted

    

 

 

 

 

 

 

    average

    

 

 

 

 

 

    average

    

 

 

 

 

 

    average

    

 

 

 

 

 

 

    exercise

    

 

 

 

 

 

    exercise

    

 

 

 

 

 

    exercise

    

 

 

 

    Shares

 

 

    price

 

 

    Shares

 

 

    price

 

 

    Shares

 

 

    price

 
 


    Outstanding at beginning of year


 

 

    895,516

 

 

    $

    22.96

 

 

 

    1,519,820

 

 

    $

    22.42

 

 

 

    1,625,038

 

 

    $

    22.85

 


    Granted


 

 

    11,551

 

 

 

    12.37

 

 

 

    9,616

 

 

 

    14.86

 

 

 

    223,044

 

 

 

    20.58

 


    Exercised


 

 

    (1,755

    )

 

 

    8.88

 

 

 

    (241,149

    )*

 

 

    13.54

 

 

 

    (135,880

    )

 

 

    15.49

 


    Forfeitures


 

 

    (25,015

    )

 

 

    23.06

 

 

 

    (392,771

    )

 

 

    26.47

 

 

 

    (192,382

    )

 

 

    28.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Outstanding at end of year


 

 

    880,297

 

 

 

    22.85

 

 

 

    895,516

 

 

 

    22.96

 

 

 

    1,519,820

 

 

 

    22.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Options exercisable at end of year


 

 

    880,297

 

 

    $

    22.85

 

 

 

    893,297

 

 

    $

    22.98

 

 

 

    1,515,381

 

 

    $

    22.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 




 


















            
    
    * 		        
    Includes 240,119 of shares related to payment of $1,000,501 to
    cancel
    in-the-money
    options, primarily of the company’s former chief executive
    officer in 2006.



    

    44



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 


 



    The following table summarizes information about stock options
    outstanding at December 31, 2007:


 








































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

    Exercisable and Outstanding Options

 

 

 

 

 

 

    Weighted Average

    

 

 

    Weighted

    

 

    Range of

    

 

    Options

    

 

 

    Remaining

    

 

 

    Average

    

 


    Exercise price


 

    Outstanding

 

 

    Contractual Life

 

 

    Exercise Price

 
 


    $8.00 to $16.00


 

 

    76,599

 

 

 

    3.26

 

 

    $

    12.59

 


    $16.01 to $22.00


 

 

    420,093

 

 

 

    4.07

 

 

 

    17.82

 


    $22.01 to $29.00


 

 

    95,819

 

 

 

    6.41

 

 

 

    24.48

 


    $29.01 to $34.00


 

 

    186,427

 

 

 

    3.42

 

 

 

    60.63

 


    $34.01 to $40.00


 

 

    100,825

 

 

 

    2.92

 

 

 

    35.46

 


    $40.01 to $52.00


 

 

    534

 

 

 

    3.55

 

 

 

    51.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    $8.00 to $51.58


 

 

    880,297

 

 

 

    3.99

 

 

    $

    22.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 



    (b) Restricted stock awards — Restricted
    shares or restricted stock units are granted to certain
    employees and our directors. For employees, restricted stock
    awards generally vest over a period of four years and for
    non-employee directors, upon termination of the
    individual’s tenure on our board. Restricted stock awards
    to employees are expensed over the vesting period, and those
    made to our non-employee directors are expensed when granted.


 



    Unearned restricted stock compensation is recorded based on the
    market price on the grant date and is expensed equally over the
    vesting period. In 2007, 153,401 restricted shares were granted
    at a weighted average market price at the grant date of $12.93
    and compensation expense related to restricted shares was
    approximately $1.0 million for the year. In 2006, 125,056
    restricted shares were granted at a weighted average market
    price at the grant date of $14.16 and compensation expense
    related to restricted shares was approximately $0.6 million
    for the year. In 2005, 23,409 restricted shares were granted at
    a weighted average market price at the grant date of $22.70 and
    compensation expense related to restricted shares was $53,000
    for the year.


 














        
    
    (14) 
    
    Shareholders’
    equity


 



    On April 17, 2002, our Board of Directors authorized the
    repurchase of up to 5,000,000 shares of our common stock.
    On February 9, 2005, our Board of Directors authorized the
    repurchase of an additional 3,000,000 shares of common
    stock. No time limit was placed on the duration of the
    repurchase program. Repurchased shares will become treasury
    shares and will be used for share-based employee compensation
    plans and for other general corporate purposes. Since initial
    authorization was granted, we have repurchased 7.8 million
    common shares of common stock at a cost of $134.8 million
    under this repurchase program.


 



    A summary of stock repurchase activity is as follows:


 




















































































































     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 

 

 

 

 

 

 

    Aggregate annual

    

 

 

 

 

 

 

    Weighted average

    

 

 

    cost of

    

 

 

 

    Number of shares

    

 

 

    repurchased price

    

 

 

    repurchased

    

 

 

 

    repurchased

 

 

    per share*

 

 

    stock*

 
 


    2007


 

 

    117,480

 

 

    $

    12.22

 

 

    $

    1,435,099

 


    2006


 

 

    1,461,216

 

 

    $

    15.38

 

 

    $

    22,474,628

 


    2005


 

 

    1,837,231

 

 

    $

    18.00

 

 

    $

    32,373,719

 






 




 


















            
    
    * 		        
    Includes broker commission


 



    On April 14, 1999, our shareholders approved an amendment
    to the Company’s Amended and Restated Articles of
    Incorporation to increase the authorized common stock of the
    Company from 50,000,000 shares to 150,000,000 shares
    with a $.01 par value per share. The Company’s Amended
    and Restated Articles of Incorporation also includes
    authorization to issue up to 5,000,000 shares of preferred
    stock with a $.01 par value per share. No preferred stock
    has been issued.



    

    45



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 














        
    
    (15) 
    
    Segment
    reporting


 



    Statement of Financial Accounting Statement No. 131
    Disclosures about Segments of an Enterprise and Related
    Information (“SFAS 131”) establishes annual
    and interim reporting standards for an enterprise’s
    business segments and related disclosures about its products,
    services, geographic areas and major customers. The method of
    determining what information to report is based on the way
    management organizes the operating segments within the Company
    for making operating decisions and assessing financial
    performance. In addition, SFAS 131 applies both qualitative
    and quantitative aggregation rules to operating segments in
    order to determine the final reportable segments. Under
    SFAS 131, we have one reportable segment. Foreign market
    operations are not significant at this time.


 














        
    
    (16) 
    
    Quarterly
    results of operations (unaudited)


 



    The following table sets forth unaudited consolidated income
    statement data for each quarter of the last two fiscal years.
    This unaudited quarterly financial information is prepared on
    the same basis as the annual information presented in the
    consolidated financial statements and, in our opinion, reflects
    all adjustments (consisting of normal recurring entries)
    necessary for a fair presentation of the information. The
    operating results for any quarter are not necessarily indicative
    of results for future periods.


 


























































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    Quarter Ended


 

 

 


    March 31


 

 


    June 30


 

 


    September 30


 

 


    December 31


 

 

 

    (In Thousands, Except Per Share Amounts)

 
 


    2007


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net sales


 

    $

    26,688

 

 

    $

    27,177

 

 

    $

    25,809

 

 

    $

    28,258

 


    Gross profit


 

 

    20,118

 

 

 

    20,244

 

 

 

    18,969

 

 

 

    21,098

 


    Operating income


 

 

    1,805

 

 

 

    3,161

 

 

 

    1,898

 

 

 

    4,066

 


    Income — before income taxes


 

 

    2,107

 

 

 

    3,485

 

 

 

    2,188

 

 

 

    4,328

 


    Income taxes


 

 

    790

 

 

 

    1,307

 

 

 

    821

 

 

 

    1,623

 


    Net income


 

 

    1,317

 

 

 

    2,178

 

 

 

    1,367

 

 

 

    2,705

 


    Earnings per share:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Basic and diluted


 

 

    0.05

 

 

 

    0.08

 

 

 

    0.05

 

 

 

    0.09

 


    Common stock price per share:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    High


 

 

    17.94

 

 

 

    13.29

 

 

 

    13.81

 

 

 

    15.75

 


    Low


 

 

    12.51

 

 

 

    10.97

 

 

 

    10.92

 

 

 

    11.37

 



    

    46



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 


























































































































































































































































































     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	     	

 

 


    Quarter Ended


 

 

 


    March 31


 

 


    June 30


 

 


    September 30


 

 


    December 31


 

 

 

    (In Thousands, Except Per Share Amounts)

 
 


    2006


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Net sales


 

    $

    31,117

 

 

    $

    29,319

 

 

    $

    25,167

 

 

    $

    25,925

 


    Gross profit


 

 

    23,983

 

 

 

    22,462

 

 

 

    18,768

 

 

 

    19,849

 


    Operating income


 

 

    5,240

 

 

 

    7,076

 

 

 

    2,987

 

 

 

    2,499

 


    Income — before income taxes


 

 

    5,522

 

 

 

    7,419

 

 

 

    3,303

 

 

 

    2,792

 


    Income taxes


 

 

    2,043

 

 

 

    2,745

 

 

 

    1,222

 

 

 

    1,033

 


    Net income


 

 

    3,479

 

 

 

    4,674

 

 

 

    2,081

 

 

 

    1,759

 


    Earnings per share:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    Basic and diluted


 

 

    0.12

 

 

 

    0.16

 

 

 

    0.07

 

 

 

    0.06

 


    Common stock price per share:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


    High


 

 

    19.96

 

 

 

    17.21

 

 

 

    15.19

 

 

 

    18.76

 


    Low


 

 

    15.98

 

 

 

    12.64

 

 

 

    10.61

 

 

 

    13.71

 






 



    Earnings per share amounts for each quarter are required to
    be calculated independently and therefore may not total to the
    amount calculated for the year.


 














        
    
    (17) 
    
    Recent
    accounting pronouncements


 



    In December 2007, the FASB issued SFAS No. 141(R)
    Business Combinations (“SFAS 141R”).
    SFAS 141R 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. SFAS 141R also establishes disclosure
    requirements to enable the evaluation of the nature and
    financial effects of the business combination. SFAS 141R is
    effective for us on January 1, 2009. SFAS 141R is not
    expected to have a material effect on our consolidated financial
    statements.


 



    In December 2007, the FASB issued SFAS No. 160
    Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB No. 51
    (“SFAS 160”). SFAS 160 will change the
    accounting and reporting for minority interests, which will be
    recharacterized as noncontrolling interests and classified as a
    component of equity. This new consolidation method will
    significantly change the accounting for transactions with
    minority interest holders. SFAS 160 is effective for us on
    January 1, 2009. SFAS 160 is not expected to have a
    material effect on our consolidated financial statements.


 



    In February 2007, the FASB issued SFAS No. 159 The
    Fair Value Option for Financial Assets and Financial
    Liabilities — Including an amendment of FASB Statement
    No. 115 (“SFAS 159”). This standard
    permits 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 of
    SFAS 159 are effective for us on January 1, 2008 and
    are not expected to have a material effect on our consolidated
    financial statements.


 



    In September 2006, the FASB issued SFAS No. 157
    Fair Value Measurements (“SFAS 157”), to
    establish a consistent framework for measuring fair value and
    expand disclosures on fair value measurements. The provisions of
    SFAS 157 are effective for us on January 1, 2008 and
    are not expected to have a material effect on our consolidated
    financial statements.



    47



Table of Contents




 




    RENAISSANCE
    LEARNING, INC. AND SUBSIDIARIES

    


 




    NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)

 














        
    
    (18) 
    
    Discontinued
    operations


 



    In February 2005, we consummated the sale of our Generation21
    subsidiary, a non-core part of our business, for $75,000. The
    results of Generation21 for all periods presented in our
    consolidated financial statements are reflected as discontinued
    operations.


 



    Results of discontinued operations consist of the following:


 















































































































     	     	     	     	     	

 

 


    2005


 

 

 

    (In Thousands)

 
 


    Operating loss


 

    $

    (192

    )


    Income tax benefit


 

 

    76

 

 

 

 

 

 


    Loss from operations, net


 

 

    (116

    )

 

 

 

 

 


    Loss on disposal


 

 

    (642

    )


    Tax benefit on disposal


 

 

    1,342

 

 

 

 

 

 


    Gain on disposal, net


 

 

    700

 

 

 

 

 

 


    Gain from discontinued operations, net


 

    $

    584

 

 

 

 

 

 






 














        
    
    (19) 
    
    Subsequent
    event


 



    On February 6, 2008 our Board of Directors declared a
    quarterly cash dividend of $0.07 per share. The board also
    authorized the purchase of an additional 1.0 million shares
    under the stock repurchase program. With this authorization, we
    may repurchase an additional 1.2 million shares as of that
    date.



    

    48



Table of Contents
















        
    
    Item 9. 
    
    Changes
    In and Disagreements With Accountants on Accounting and
    Financial Disclosure


 



    Not applicable.


 














        
    
    Item 9A. 
    
    Controls
    and Procedures


 




 



    Under the supervision and with the participation of our
    management, including our chief executive officer and chief
    financial officer, we conducted an evaluation of our disclosure
    controls and procedures, as such term is defined under
    Rule 13a-15(e)
    promulgated under the Securities Exchange Act of 1934, as
    amended (the “Exchange Act”). Based on this
    evaluation, management, including our chief executive officer
    and chief financial officer, concluded that our disclosure
    controls and procedures were effective as of December 31,
    2007.


 



    There has been no change in our internal control over financial
    reporting that has occurred during the quarter ended
    December 31, 2007 that has materially affected, or is
    reasonably likely to materially affect, our internal control
    over financial reporting.


 




 



    Our management is responsible for establishing and maintaining
    adequate internal control over financial reporting, as such term
    is defined under
    Rule 13a-15(f)
    promulgated under the Exchange Act. Under the supervision and
    with the participation of our management, including our chief
    executive officer and chief financial officer, we conducted an
    evaluation of the effectiveness of our internal control over
    financial reporting based on the framework in Internal
    Control — Integrated Framework issued by the
    Committee of Sponsoring Organizations of the Treadway
    Commission. Based on our evaluation using the framework in
    Internal Control — Integrated Framework, our
    management concluded that our internal control over financial
    reporting was effective as of December 31, 2007 and during
    the year then ended.


 



    The effectiveness of our internal control over financial
    reporting has been audited by Deloitte & Touche LLP,
    our independent registered public accounting firm, as stated in
    their report which is included herein.


 














        
    
    Item 9B. 
    
    Other
    Information


 



    Not applicable.



    

    49