##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMTO
 Commission file number: 0-22187
 RENAISSANCE LEARNING, INC.
  Wisconsin
    
    39-1559474(State or other
    
    (I.R.S. Employerjurisdiction of incorporation)
    
    Identification No.)
 2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
 54495-8036
 (715) 424-3636
 þ o
  o þ o
 o þ
  Outstanding atClass
    
    October 31, 2007Common Stock, $0.01 par value
    
    29,033,003




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##### 



RENAISSANCE LEARNING, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2007 and
December 31, 2006
    
    
    1Condensed Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 2007 and 2006
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    6Item 3.
    
    Quantitative and Qualitative Disclosures About
Market Risk
    
    
    10Item 4.
    
    Controls and Procedures
    
    
    11PART II  OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    12Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Item 6.
    
    Exhibits
    
    
    13Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
 September 30,
    
    
    December 31,2007
    
    
    2006(In Thousands, Except Share and PerShare Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,301
    
    
    $
    5,953Investment securities
    
    
    3,116
    
    
    
    22,525Accounts receivable, less allowance of
$1,100 and $1,133, respectively
    
    
    15,699
    
    
    
    10,528Inventories
    
    
    5,667
    
    
    
    4,108Prepaid expenses
    
    
    2,151
    
    
    
    1,896Income taxes receivable
    
    
    2,272
    
    
    
    1,291Deferred tax asset
    
    
    3,602
    
    
    
    3,596Other current assets
    
    
    288
    
    
    
    97Total current assets
    
    
    39,096
    
    
    
    49,994Investment securities
    
    
    8,690
    
    
    
    1,625Property, plant and equipment, net
    
    
    11,144
    
    
    
    11,811Deferred tax asset
    
    
    288
    
    
    
    Goodwill
    
    
    47,058
    
    
    
    46,973Other intangibles, net
    
    
    5,702
    
    
    
    6,124Capitalized software, net
    
    
    540
    
    
    
    727Other non-current assets
    
    
    38
    
    
    
    457Total assets
    
    $
    112,556
    
    
    $
    117,711LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,883
    
    
    $
    2,782Deferred revenue
    
    
    36,209
    
    
    
    23,751Payroll and employee benefits
    
    
    3,962
    
    
    
    4,750Other current liabilities
    
    
    3,769
    
    
    
    3,429Total current liabilities
    
    
    46,823
    
    
    
    34,712Deferred revenue
    
    
    2,333
    
    
    
    885Deferred compensation and other employee benefits
    
    
    1,917
    
    
    
    1,665Deferred tax liability
    
    
    
    
    
    
    878Income taxes payable
    
    
    4,193
    
    
    
    Other noncurrent liabilities
    
    
    175
    
    
    
    Total liabilities
    
    
    55,441
    
    
    
    38,140Shareholders equity:Common stock, $.01 par value; shares authorized: 150,000,000;
issued: 34,736,647 shares at September 30, 2007 and December
31, 2006
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    54,912
    
    
    
    55,542Retained earnings
    
    
    102,211
    
    
    
    124,290Treasury stock, at cost: 5,703,551 shares at September 30, 2007;
5,733,130 shares at December 31, 2006
    
    
    (98,125
    )
    
    
    (99,265
    )Unearned restricted stock compensation
    
    
    (2,442
    )
    
    
    (1,417
    )Accumulated other comprehensive income
    
    
    212
    
    
    
    74Total shareholders equity
    
    
    57,115
    
    
    
    79,571Total liabilities and shareholders equity
    
    $
    112,556
    
    
    $
    117,711
   -1-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    18,674
    
    
    $
    19,533
    
    
    $
    62,581
    
    
    $
    69,783Services
    
    
    7,135
    
    
    
    5,634
    
    
    
    17,093
    
    
    
    15,822Total net sales
    
    
    25,809
    
    
    
    25,167
    
    
    
    79,674
    
    
    
    85,605Cost of sales:Products
    
    
    3,539
    
    
    
    3,708
    
    
    
    11,732
    
    
    
    13,019Services
    
    
    3,301
    
    
    
    2,691
    
    
    
    8,612
    
    
    
    7,372Total cost of sales
    
    
    6,840
    
    
    
    6,399
    
    
    
    20,344
    
    
    
    20,391Gross profit
    
    
    18,969
    
    
    
    18,768
    
    
    
    59,330
    
    
    
    65,214Operating expenses:Product development
    
    
    4,410
    
    
    
    3,990
    
    
    
    14,111
    
    
    
    12,477Selling and marketing
    
    
    8,852
    
    
    
    8,036
    
    
    
    27,093
    
    
    
    24,781General and administrative
    
    
    3,809
    
    
    
    3,755
    
    
    
    11,263
    
    
    
    12,653Total operating expenses
    
    
    17,071
    
    
    
    15,781
    
    
    
    52,467
    
    
    
    49,911Operating income
    
    
    1,898
    
    
    
    2,987
    
    
    
    6,863
    
    
    
    15,303Other income, net
    
    
    290
    
    
    
    316
    
    
    
    916
    
    
    
    942Income before taxes
    
    
    2,188
    
    
    
    3,303
    
    
    
    7,779
    
    
    
    16,245Income taxes
    
    
    821
    
    
    
    1,222
    
    
    
    2,917
    
    
    
    6,011Net income
    
    $
    1,367
    
    
    $
    2,081
    
    
    $
    4,862
    
    
    $
    10,234Earnings per share:Basic
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.34Diluted
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.34Cash dividends declared per share
    
    $
    0.82
    
    
    $
    0.05
    
    
    $
    0.92
    
    
    $
    0.15
   -2-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 For the Nine Months EndedSeptember 30,2007
    
    
    2006(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    4,862
    
    
    $
    10,234Adjustments to arrive at cash provided by operating activities:Depreciation and amortization
    
    
    2,874
    
    
    
    2,585Amortization of investment discounts/premiums
    
    
    59
    
    
    
    153Share-based compensation expense
    
    
    902
    
    
    
    490Deferred income taxes
    
    
    (1,172
    )
    
    
    1,860Loss on sale of property
    
    
    32
    
    
    
    Excess tax benefits from share based payment arrangements
    
    
    
    
    
    
    (393
    )Change in assets and liabilities, excluding the effects of
acquisitions and divestitures:Accounts receivable
    
    
    (5,171
    )
    
    
    (2,245
    )Inventories
    
    
    (1,559
    )
    
    
    223Prepaid expenses
    
    
    (185
    )
    
    
    (315
    )Income taxes
    
    
    2,941
    
    
    
    (1,070
    )Accounts payable and other liabilities
    
    
    (251
    )
    
    
    (881
    )Deferred revenue
    
    
    13,906
    
    
    
    4,564Other
    
    
    159
    
    
    
    74Net cash provided by operating activities
    
    
    17,397
    
    
    
    15,279Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (1,993
    )
    
    
    (2,096
    )Purchase of investment securities
    
    
    (21,129
    )
    
    
    (3,800
    )Maturities/sales of investment securities
    
    
    33,746
    
    
    
    17,679Capitalized software development costs
    
    
    (167
    )
    
    
    (689
    )Net proceeds from sale of property
    
    
    567
    
    
    
    Net cash provided by investing activities
    
    
    11,024
    
    
    
    11,094Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    30
    
    
    
    16Payment for cancellation of stock options
    
    
    
    
    
    
    (993
    )Excess tax benefits from share based payment arrangements
    
    
    
    
    
    
    393Dividends paid
    
    
    (26,670
    )
    
    
    (4,479
    )Purchase of treasury stock
    
    
    (1,433
    )
    
    
    (19,081
    )Net cash used by financing activities
    
    
    (28,073
    )
    
    
    (24,144
    )Net increase in cash and cash equivalents
    
    
    348
    
    
    
    2,229Cash and cash equivalents, beginning of period
    
    
    5,953
    
    
    
    7,083Cash and cash equivalents, end of period
    
    $
    6,301
    
    
    $
    9,312
   -3-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Consolidation
  2. Basis of Presentation
   3. Earnings Per Common Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic weighted average shares outstanding
    
    
    28,750,945
    
    
    
    29,257,702
    
    
    
    28,806,086
    
    
    
    29,740,992Dilutive effect of outstanding stock options
    
    
    1,169
    
    
    
    3,103
    
    
    
    2,523
    
    
    
    7,044Dilutive effect of restricted shares
    
    
    25,241
    
    
    
    8,228
    
    
    
    25,241
    
    
    
    8,228Diluted weighted average shares outstanding
    
    
    28,777,355
    
    
    
    29,269,033
    
    
    
    28,833,850
    
    
    
    29,756,264
  4. Comprehensive Income
  5. Goodwill and Other Intangible Assets
   -4-




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September 30, 2007
    
    
    December 31, 2006Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net(In Thousands)Tradename
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000
    
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000Customer relationships
    
    
    4,150
    
    
    
    1,448
    
    
    
    2,702
    
    
    
    4,150
    
    
    
    1,026
    
    
    
    3,124$
    7,150
    
    
    $
    1,448
    
    
    $
    5,702
    
    
    $
    7,150
    
    
    $
    1,026
    
    
    $
    6,124
 6. Share Based Compensation
     Weighted Average
    
    
    AggregateShares
    
    
    Value Per Share
    
    
    Intrinsic Value(In Thousands, except per share amount)Balance at January 1, 2007
    
    
    132
    
    
    $
    15.31
    
    
    $
    2,337Granted
    
    
    153
    
    
    
    12.93Vested
    
    
    (26
    )
    
    
    12.63Forfeitures
    
    
    (8
    )
    
    
    14.73Balance at September 30, 2007
    
    
    251
    
    
    $
    14.16
    
    
    $
    3,031
 7. Dividends
   8. Income Taxes
   -5-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Results of Operations
      -6-




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net Sales:Products
    
    
    72.4
    %
    
    
    77.6
    %
    
    
    78.5
    %
    
    
    81.5
    %Services
    
    
    27.6
    %
    
    
    22.4
    %
    
    
    21.5
    %
    
    
    18.5
    %Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    19.0
    %
    
    
    19.0
    %
    
    
    18.7
    %
    
    
    18.7
    %Services
    
    
    46.3
    %
    
    
    47.8
    %
    
    
    50.4
    %
    
    
    46.6
    %Total cost of sales
    
    
    26.5
    %
    
    
    25.4
    %
    
    
    25.5
    %
    
    
    23.8
    %Gross profit:Products
    
    
    81.0
    %
    
    
    81.0
    %
    
    
    81.3
    %
    
    
    81.3
    %Services
    
    
    53.7
    %
    
    
    52.2
    %
    
    
    49.6
    %
    
    
    53.4
    %Total gross profit
    
    
    73.5
    %
    
    
    74.6
    %
    
    
    74.5
    %
    
    
    76.2
    %Operating expenses:Product development
    
    
    17.1
    %
    
    
    15.9
    %
    
    
    17.7
    %
    
    
    14.6
    %Selling and marketing
    
    
    34.3
    %
    
    
    31.9
    %
    
    
    34.0
    %
    
    
    28.9
    %General and administrative
    
    
    14.7
    %
    
    
    14.9
    %
    
    
    14.1
    %
    
    
    14.8
    %Total operating expenses
    
    
    66.1
    %
    
    
    62.7
    %
    
    
    65.8
    %
    
    
    58.3
    %Operating income
    
    
    7.4
    %
    
    
    11.9
    %
    
    
    8.7
    %
    
    
    17.9
    %Other, net
    
    
    1.1
    %
    
    
    1.3
    %
    
    
    1.1
    %
    
    
    1.1
    %Income before taxes
    
    
    8.5
    %
    
    
    13.2
    %
    
    
    9.8
    %
    
    
    19.0
    %Income taxes
    
    
    3.2
    %
    
    
    4.9
    %
    
    
    3.7
    %
    
    
    7.0
    %Net Income
    
    
    5.3
    %
    
    
    8.3
    %
    
    
    6.1
    %
    
    
    12.0
    %
 Three Months Ended September 30, 2007 and 2006
 Net Sales
  Cost of Sales
   -7-




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Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense.
 Nine Months Ended September 30, 2007 and 2006
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
  -8-




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General and Administrative
 Operating Income
 Income Tax Expense
 Liquidity and Capital Resources
     Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Operating Leases.
 Purchase Obligations.
  -9-




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Contractual Obligations
    
    Payments due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More than(In thousands)
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating lease obligations
    
    $
    6,915
    
    
    $
    628
    
    
    $
    4,654
    
    
    $
    1,237
    
    
    $
    396Purchase obligations
    
    
    3,987
    
    
    
    3,852
    
    
    
    135
    
    
    
    
    
    
    
    Total
    
    $
    10,902
    
    
    $
    4,480
    
    
    $
    4,789
    
    
    $
    1,237
    
    
    $
    396
 Critical Accounting Policies and Estimates
  Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
   -10-




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Foreign Currency Exchange Rate Risk.
 
 Item 4. Controls and Procedures
     -11-




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number ofShares Purchased as
    
    
    Maximum Number ofTotal Number
    
    
    Average Price
    
    
    Part of Publicly
    
    
    Shares that May Yetof Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    Be Purchased UnderPeriod
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    the Plans or ProgramsJuly 1-31, 2007
    
    
    2,068
    
    
    $
    12.93
    
    
    
    2,068
    
    
    
    271,960August 1-31, 2007
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    271,960September 1-30, 2007
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    271,960Total
    
    
    2,068
    
    
    $
    12.93
    
    
    
    2,068
  -12-




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##### Table of Contents



Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Credit Agreement dated as of October 1, 2007 by and
between Wells Fargo Bank, National Association and Registrant31.1
    
    Section 302 certification by Terrance D. Paul31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by Terrance D. Paul32.2
    
    Section 906 certification by Mary T. Minch
  -13-




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##### Table of Contents



SIGNATURES
  RENAISSANCE LEARNING, INC.(Registrant)November 5, 2007
    
    
    
    /s/ Terrance D. PaulDate
    
    
    
    Terrance D. PaulChief Executive Officer and a Director(Principal Executive Officer)November 5, 2007
    
    
    
    /s/ Mary T. MinchDate
    
    
    
    Mary T. MinchSenior Vice President-Finance, Chief Financial Officer and Secretary (Principal
Financial and Accounting Officer)




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Exhibit No.
    
    Description10.1
    
    
    
    Credit Agreement dated as of October 1, 2007 by and between Wells Fargo
Bank, National Association and Registrant31.1
    
    
    
    Section 302 certification by Terrance D. Paul31.2
    
    
    
    Section 302 certification by Mary T. Minch32.1
    
    
    
    Section 906 certification by Terrance D. Paul32.2
    
    
    
    Section 906 certification by Mary T. Minch