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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
    FORM 10-Q    x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2004.
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM .................... TO ....................
 Commission file number: 0-22187 RENAISSANCE LEARNING, INC.  Wisconsin
(State or other
jurisdiction of incorporation)
    
    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) (715) 424-3636
(Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Outstanding atClass
    
    July 30, 2004Common Stock, $0.01 par value
    
    
    31,119,312




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RENAISSANCE LEARNING, INC. INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004  
 PagePART I -
FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets at June
30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    7Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    11Item 4.
    
    Controls and Procedures
    
    
    12PART II - OTHER INFORMATIONItem 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    14Transfer AgreementAssignment and Assumption of Transfer AgreementCertificationCertificationCertificationCertification
  - Index -




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  June 30, 2004
    December 31, 2003(In Thousands, Except Share and Per Share Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,524
    
    
    $
    62,524Investment securities
    
    
    24,476
    
    
    
    42,825Accounts receivable, less allowances of $1,509 and $1,629, respectively
    
    
    13,503
    
    
    
    13,182Inventories
    
    
    2,780
    
    
    
    2,354Prepaid expenses
    
    
    702
    
    
    
    1,352Deferred tax asset
    
    
    3,833
    
    
    
    3,743Other current assets
    
    
    621
    
    
    
    889Total current assets
    
    
    67,439
    
    
    
    126,869Investment securities
    
    
    15,132
    
    
    
    6,485Property, plant and equipment, net
    
    
    19,765
    
    
    
    20,536Deferred tax asset
    
    
    1,687
    
    
    
    1,795Goodwill
    
    
    2,642
    
    
    
    2,642Other intangibles, net
    
    
    331
    
    
    
    478Capitalized software, net
    
    
    737
    
    
    
    626Total assets
    
    $
    107,733
    
    
    $
    159,431LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,457
    
    
    $
    3,144Deferred revenue
    
    
    12,920
    
    
    
    10,705Payroll and employee benefits
    
    
    3,250
    
    
    
    3,153Income taxes payable
    
    
    503
    
    
    
    2,295Other current liabilities
    
    
    4,357
    
    
    
    4,869Total current liabilities
    
    
    23,487
    
    
    
    24,166Deferred revenue
    
    
    576
    
    
    
    800Deferred compensation
    
    
    1,095
    
    
    
    958Total liabilities
    
    
    25,158
    
    
    
    25,924Minority interest
    
    
    154
    
    
    
    177Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at June 30, 2004 and Dec. 31, 2003
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    54,360
    
    
    
    54,167Retained earnings
    
    
    93,102
    
    
    
    148,596Treasury stock, at cost 3,617,669 shares June 30, 2004;
3,860,802 shares Dec. 31, 2003
    
    
    (65,440
    )
    
    
    (69,838
    )Accumulated other comprehensive income
    
    
    52
    
    
    
    58Total shareholders equity
    
    
    82,421
    
    
    
    133,330Total liabilities and shareholders equity
    
    $
    107,733
    
    
    $
    159,431
 See accompanying notes to condensed consolidated financial statements. - 1 -




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    26,315
    
    
    $
    28,698
    
    
    $
    51,400
    
    
    $
    55,888Services
    
    
    4,866
    
    
    
    4,918
    
    
    
    11,314
    
    
    
    11,955Total net sales
    
    
    31,181
    
    
    
    33,616
    
    
    
    62,714
    
    
    
    67,843Cost of sales:Products
    
    
    1,798
    
    
    
    2,856
    
    
    
    3,588
    
    
    
    6,024Services
    
    
    2,191
    
    
    
    2,045
    
    
    
    5,937
    
    
    
    5,402Total cost of sales
    
    
    3,989
    
    
    
    4,901
    
    
    
    9,525
    
    
    
    11,426Gross profit
    
    
    27,192
    
    
    
    28,715
    
    
    
    53,189
    
    
    
    56,417Operating expenses:Product development
    
    
    4,247
    
    
    
    4,201
    
    
    
    8,451
    
    
    
    8,664Selling and marketing
    
    
    7,667
    
    
    
    6,748
    
    
    
    17,017
    
    
    
    14,851General and administrative
    
    
    3,366
    
    
    
    3,942
    
    
    
    6,763
    
    
    
    7,405Total operating expenses
    
    
    15,280
    
    
    
    14,891
    
    
    
    32,231
    
    
    
    30,920Operating income
    
    
    11,912
    
    
    
    13,824
    
    
    
    20,958
    
    
    
    25,497Other income:Interest income
    
    
    194
    
    
    
    483
    
    
    
    505
    
    
    
    1,038Other, net
    
    
    93
    
    
    
    229
    
    
    
    167
    
    
    
    406Income before taxes
    
    
    12,199
    
    
    
    14,536
    
    
    
    21,630
    
    
    
    26,941Income tax provision
    
    
    4,514
    
    
    
    5,560
    
    
    
    8,003
    
    
    
    10,305Net income
    
    $
    7,685
    
    
    $
    8,976
    
    
    $
    13,627
    
    
    $
    16,636Earnings per share:Basic
    
    $
    0.25
    
    
    $
    0.29
    
    
    $
    0.44
    
    
    $
    0.53Diluted
    
    $
    0.25
    
    
    $
    0.29
    
    
    $
    0.44
    
    
    $
    0.53Cash dividends declared per share
    
    $
    0.04
    
    
    $
    
    
    
    $
    2.23
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements. - 2 -




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 For the Six Months EndedJune 30,2004
    
    2003(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    13,627
    
    
    $
    16,636Noncash (income) expenses included in net income -Depreciation and amortization
    
    
    1,848
    
    
    
    2,071Amortization of investment discounts/premiums
    
    
    433
    
    
    
    964Deferred income taxes
    
    
    18
    
    
    
    (469
    )Change in assets and liabilities -Accounts receivable
    
    
    (321
    )
    
    
    2,431Inventories
    
    
    (426
    )
    
    
    40Prepaid expenses
    
    
    650
    
    
    
    692Accounts payable and other current liabilities
    
    
    (1,760
    )
    
    
    (1,015
    )Deferred revenue
    
    
    1,991
    
    
    
    (1,415
    )Other current assets
    
    
    268
    
    
    
    163Other
    
    
    33
    
    
    
    (85
    )Net cash provided by operating activities
    
    
    16,361
    
    
    
    20,013Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (644
    )
    
    
    (1,900
    )Purchase of investment securities
    
    
    (18,251
    )
    
    
    (22,593
    )Maturities/sales of investment securities
    
    
    27,520
    
    
    
    37,570Capitalized software development costs
    
    
    (404
    )
    
    
    (220
    )Net cash provided by investing activities
    
    
    8,221
    
    
    
    12,857Cash flows from financing activities:Return of capital to minority interest
    
    
    (54
    )
    
    
    Proceeds from issuance of stock
    
    
    
    
    
    
    1,047Proceeds from exercise of stock options
    
    
    3,593
    
    
    
    540Dividends paid
    
    
    (69,121
    )
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (23,727
    )Net cash (used) by financing activities
    
    
    (65,582
    )
    
    
    (22,140
    )Net (decrease) increase in cash and cash equivalents
    
    
    (41,000
    )
    
    
    10,730Cash and cash equivalents, beginning of period
    
    
    62,524
    
    
    
    18,220Cash and cash equivalents, end of period
    
    $
    21,524
    
    
    $
    28,950See accompanying notes to condensed consolidated financial statements.
 - 3 -




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Consolidation The condensed consolidated financial statements include the financial
results of Renaissance Learning, Inc. and our subsidiaries. Our significant
subsidiaries include Renaissance Corporate Services, Inc. and
Generation 21
Learning Systems, LLC. All significant intercompany transactions have been
eliminated in the condensed consolidated financial statements. 2. Basis of Presentation The condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in our opinion,
necessary for a fair presentation of the results of the interim periods, and
are presented on an unaudited basis. These financial statements should be read
in conjunction with the financial information contained in our Annual Report on
Form 10-K for the year ended December 31, 2003, which is on file with the U.S.
Securities and Exchange Commission (2003 Annual Report). The results of operations for the three and six month periods ended June
30, 2004 and 2003 are not necessarily indicative of the results to be expected
for the full year. 3. Earnings Per Common Share Basic earnings per common share is computed by dividing net income 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 has been
computed based on the weighted average number of common shares outstanding,
increased by the number of additional common shares that would have been
outstanding if the potentially dilutive stock option shares had been issued. 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. 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 will be used for stock-based employee benefit plans and for
other general corporate purposes. During the six months ending June 30, 2004,
we did not repurchase any shares under this program. The cumulative shares
repurchased under this program remain at 4.0 million with an associated cost of
$72.9 million. The weighted average shares outstanding are as follows: Three Months Ended June 30
    
    Six Months Ended June 302004
    
    2003
    
    2004
    
    2003Basic weighted average shares outstanding
    
    
    31,076,098
    
    
    
    30,927,711
    
    
    
    31,019,830
    
    
    
    31,289,921Dilutive effect of outstanding stock options
    
    
    178,116
    
    
    
    164,238
    
    
    
    209,136
    
    
    
    133,538Diluted weighted average shares outstanding
    
    
    31,254,214
    
    
    
    31,091,949
    
    
    
    31,228,966
    
    
    
    31,423,459
 For the three months ended June 30, 2004 and 2003, 781,102 and 833,432
shares attributable to outstanding stock options were excluded from the
calculation of diluted earnings per share because the effect was antidilutive.
For the six months ended June 30, 2004 and 2003, 774,536 and 902,542 shares
attributable to outstanding stock options were excluded from the calculation of
diluted earnings per share because the effect was antidilutive. These options
could be dilutive in the future. 4. Comprehensive Income Total comprehensive income was $13.6 million and $16.5 million in the
first six months of 2004 and 2003, respectively. For the quarters ended June
30, 2004 and 2003, comprehensive income was $7.7 million and $8.9 million,
respectively. Our comprehensive income includes foreign currency translation
adjustments. - 4 -




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5. Goodwill and Other Intangible Assets In accordance with SFAS No. 142 Goodwill and Other Intangible Assets,
goodwill is not amortized but is tested at least annually for impairment. Our
other intangible assets have finite lives and are amortized over their
estimated useful lives of four years for algorithms and purchased software
code, and five years for the non-compete agreement. Other intangibles with
finite lives are scheduled to be fully amortized in 2005 with corresponding
amortization estimated to be $139,000 for the remainder of 2004, and $192,000
for 2005. For the three months ended June 30, 2004 and 2003, we recognized
amortization expense on other intangibles of $74,000 and $114,000,
respectively. For the six months ended June 30, 2004 and 2003, we recognized
amortization expense of $147,000 and $249,000, respectively. No goodwill or
other intangibles were acquired or impaired during the six months ended June
30, 2004 or 2003. Other intangibles consisted of the following (in thousands): June 30, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    Other
    
    Gross
    
    
    
    
    
    OtherCarrying
    
    Accumulated
    
    Intangibles
    
    Carrying
    
    Accumulated
    
    IntangiblesAmount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetAlgorithms and software code
    
    $
    2,124
    
    
    $
    2,096
    
    
    $
    28
    
    
    $
    2,124
    
    
    $
    2,058
    
    
    $
    66Non-compete agreement
    
    
    1,100
    
    
    
    797
    
    
    
    303
    
    
    
    1,100
    
    
    
    688
    
    
    
    412Other intangibles
    
    $
    3,224
    
    
    $
    2,893
    
    
    $
    331
    
    
    $
    3,224
    
    
    $
    2,746
    
    
    $
    478
 6. Stock Option Plan We have established the 1997 Stock Incentive Plan for our officers, key
employees, non-employee directors and consultants. The intrinsic value method
as prescribed in APB 25, Accounting for Stock Issued to Employees, is used to
account for stock based compensation arrangements. Had compensation cost been
determined for our plan based on the fair value at the grant dates for awards
consistent with the alternative method set forth under SFAS 123, our net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below: Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share amounts)Net Income, as reported
    
    $
    7,685
    
    
    $
    8,976
    
    
    $
    13,627
    
    
    $
    16,636Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    564
    
    
    
    854
    
    
    
    1,158
    
    
    
    1,771Pro forma net income
    
    $
    7,121
    
    
    $
    8,122
    
    
    $
    12,469
    
    
    $
    14,865Earnings per share:Basic as reported
    
    $
    0.25
    
    
    $
    0.29
    
    
    $
    0.44
    
    
    $
    0.53Basic pro forma
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.40
    
    
    $
    0.48Diluted as reported
    
    $
    0.25
    
    
    $
    0.29
    
    
    $
    0.44
    
    
    $
    0.53Diluted pro forma
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.40
    
    
    $
    0.47
 No options were granted during the second quarter of 2004 or 2003. The
fair value of options granted in the first six months of 2004 and 2003 were
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: Six MonthsEnded June 30,2004
    
    2003Dividend yield
    
    
    0.64
    %
    
    
    0.00
    %Expected volatility
    
    
    65.00
    %
    
    
    77.39
    %Risk-free interest rate
    
    
    3.24
    %
    
    
    2.97
    %Expected life (in years)
    
    
    6
    
    
    
    6
 - 5 -




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7. Segment Reporting Beginning in 2004, our results are presented as one operating segment. We
had previously reported two operating segments: (i) software and (ii) training.
We are no longer organized by these segments and we now manage our operations
as one business. These changes were made to better support our customers
needs through offerings of bundled solutions which consist of software,
professional development, implementation assistance, technical consulting, and
ongoing maintenance and support plans. Accordingly, we do not produce discrete
financial information or make resource allocation decisions for separately
reportable segments as defined by SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. Foreign market operations are not
significant at this time. 8. Dividends On March 1, 2004, we paid a special cash dividend of $2.15 per share and
our first quarterly dividend of $.04 per share totaling $67.9 million. On June
1, 2004, we paid a quarterly cash dividend of $.04 per share totaling $1.2
million. On July 21, 2004, our Board of Directors declared a quarterly cash
dividend of $.04 per share, payable September 1, 2004 to shareholders of record
as of August 13, 2004. - 6 -




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Results of Operations Our results of operations can be affected by general economic factors and
their related impact on state and federal budgetary decisions. The difficult
funding environment existing in the 2003-2004 school year continued to impact
the first half of 2004 including reduced attendance at our National Renaissance
Conference. Another contributing factor was the delay in customer order
decisions as they evaluate our new Renaissance Place product line. The following table sets forth certain consolidated income statement data
as a percentage of net sales, except that individual components of costs of
sales and gross profit are shown as a percentage of their corresponding
component of net sales: Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net Sales:Products
    
    
    84.4
    %
    
    
    85.4
    %
    
    
    82.0
    %
    
    
    82.4
    %Services
    
    
    15.6
    
    
    
    14.6
    
    
    
    18.0
    
    
    
    17.6Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    6.8
    %
    
    
    9.9
    %
    
    
    7.0
    %
    
    
    10.8
    %Services
    
    
    45.0
    
    
    
    41.6
    
    
    
    52.5
    
    
    
    45.2Total cost of sales
    
    
    12.8
    
    
    
    14.6
    
    
    
    15.2
    
    
    
    16.8Gross profit:Products
    
    
    93.2
    
    
    
    90.1
    
    
    
    93.0
    
    
    
    89.2Services
    
    
    55.0
    
    
    
    58.4
    
    
    
    47.5
    
    
    
    54.8Total gross profit
    
    
    87.2
    
    
    
    85.4
    
    
    
    84.8
    
    
    
    83.2Operating expenses:Product development
    
    
    13.6
    
    
    
    12.5
    
    
    
    13.5
    
    
    
    12.8Selling and marketing
    
    
    24.6
    
    
    
    20.1
    
    
    
    27.1
    
    
    
    21.9General and administrative
    
    
    10.8
    
    
    
    11.7
    
    
    
    10.8
    
    
    
    10.9Operating income
    
    
    38.2
    
    
    
    41.1
    
    
    
    33.4
    
    
    
    37.6Other, net
    
    
    0.9
    
    
    
    2.1
    
    
    
    1.1
    
    
    
    2.1Income before taxes
    
    
    39.1
    
    
    
    43.2
    
    
    
    34.5
    
    
    
    39.7Income tax provision
    
    
    14.5
    
    
    
    16.5
    
    
    
    12.8
    
    
    
    15.2Net income
    
    
    24.6
    %
    
    
    26.7
    %
    
    
    21.7
    %
    
    
    24.5
    %
 - 7 -




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Three Months Ended June 30, 2004 and 2003 Net Sales. Our net sales decreased by $2.4 million, or 7.2%, to $31.2
million in the second quarter of 2004 from $33.6 million in the second quarter
of 2003. Revenues were down, partly as a result of the on-going state
budgetary concerns and their impact on funding for K-12 schools during the 2003-2004 school
year. Product sales declined by $2.4 million, or 8.3%, to $26.3 million in the
second quarter of 2004 from $28.7 million in the second quarter of 2003. Lower
product sales were partially due to our customers delaying their purchase
decisions to evaluate the benefits of the new Renaissance Placeversions of
Accelerated Readerand Accelerated Math,which we began to ship during May.
Product revenues were also impacted by sales of Renaissance Placewhich, unlike
our earlier perpetually licensed versions, is a subscription based product that
requires the sale to be initially recorded as deferred revenue and then
recognized into income over the subscription period, typically 12 months.
Sales of our six new products, which were introduced in 2002 or 2003, continued
at similar levels to the past two quarters. Service revenue for the second quarter of 2004 was $4.9 million, declining
by $52,000, or 1.1%, from the second quarter 2003. This decline was lower than
the 8 to 9% declines of the past three quarters due to increased district sales
that included more services. Our new academic coaching service began to gain
some momentum in the second quarter. This coaching service, offered at a list
price of $499 per teacher, per year, is subscription based which requires the
revenue to be deferred and recognized over the 12-month subscription period.
We expect coaching to be an important growth area for us and expect that, to
some extent, it will replace on-site and hotel training sessions. This shift
from our single events training to deferred service revenues is expected to
result in at least a short term decline in recognition of service revenue. As a result of the declines in sales and earnings experienced in the first
half of 2004, we expect sales and earnings for the full year 2004 to be down
from the 2003 levels. Cost of Sales. The cost of sales of products decreased by $1.1 million,
or 37.0%, to $1.8 million in the second quarter of 2004 from $2.9 million in
the second quarter of 2003. As a percentage of product sales, the cost of
sales of products decreased to 6.8% in the second quarter of 2004 from 9.9% in
the second quarter of 2003. This decrease is due, in part, to lower scanner
warranty and shipping costs, cost efficiencies in our custom assessment
products business in 2004, and to the sales mix this year compared to last with
proportionally lower sales of scanners, which is a lower gross profit margin
product than our core software products. The cost of sales of services increased by $146,000, or 7.1%, to $2.2
million in the second quarter of 2004 from $2.0 million in the second quarter
of 2003. As a percentage of sales of services, the cost of sales of services
increased to 45.0% in the second quarter of 2004 from 41.6% in the second
quarter of 2003. This increase in the cost of sales of services is partially a
result of incurring costs to ramp up our new service offerings prior to their
full utilization and the expected future revenues. Product Development. Product development expenses were $4.2 million in
the second quarter of 2004, which was up by $46,000 from the second quarter of
2003. As a percentage of net sales, product development costs increased to
13.6% in the second quarter of 2004 from 12.5% in the second quarter of 2003
primarily due to the decline in sales. We capitalized product development
expenses of $285,000 this quarter compared to $151,000 in the second quarter of
2003. No significant changes in product development initiatives are planned in
the short term, but since very little costs are expected to be capitalized in
the near term, we expect reported product development expense to be slightly
higher in the second half of the year than they were in the first half. Selling and Marketing. Selling and marketing expenses were $7.7 million
in the second quarter of 2004 an increase of $919,000, or 13.6%, from $6.7
million in the second quarter of 2003. As a percentage of net sales, selling
and marketing expenses increased to 24.6% in the second quarter of 2004 from
20.1% in the second quarter of 2003. The increase in selling and marketing
expenses is primarily due to the field sales force expansion. We expect
selling and marketing costs to continue to exceed the amount incurred in the
comparable prior year period due to the continued expansion of our field sales
force. At June 30, 2004, we had 42 professionals on our field sales team with
a goal to have approximately 60 within the next six to nine months.   *AR®, Accelerated Grammar and Spelling®, Accelerated Math®, Accelerated
Reader®, Accelerated Vocabulary®, Accelerated Writer®, AccelScan®,
AccelTest®, Generation 21®, MathFacts in a Flash®, Math Renaissance®,
Read Now®, Reading Renaissance®, Renaissance®, Renaissance Learning®,
Renaissance Place®, School Renaissance®, StandardsMaster®, STAR Early
Literacy®, STAR Math®, STAR Reading®and Writing Renaissance®are
registered trademarks of the company. - 8 -




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General and Administrative. General and administrative expenses were $3.4
million for the second quarter of 2004, a decrease of $577,000 from the $3.9
million in the second quarter of 2003. This decrease is primarily due to a
one-time executive severance charge incurred in the second quarter of 2003.
No significant change in general and administrative expenses is expected in the
second half of 2004 compared to the first half. As a percentage of net sales,
general and administrative expenses decreased to 10.8% from 11.7%. Operating Income. Operating income was $11.9 million, or 38.2% of net
sales in the second quarter of 2004, compared to $13.8 million, or 41.1% of net
sales in the second quarter of 2003. Income Tax Expense. Income tax expense of $4.5 million was recorded in
the second quarter of 2004 at an effective income tax rate of 37.0% of pre-tax
income, compared to $5.6 million, or 38.3% of pre-tax income in the second
quarter of 2003. We do not expect significant changes to our effective tax
rate for the balance of 2004. Six Months Ended June 30, 2004 and 2003 Net Sales. Our net sales of $62.7 million in the first six months of 2004
were $5.1 million less than the $67.8 million in the first six months of 2003.
Revenues were down, partly as a result of the on-going state
budgetary concerns and their impact on funding for K-12 schools during the 2003-2004 school year.
Product sales declined by $4.5 million, or 8.0%, to $51.4 million in the first
six months of 2004 from $55.9 million in the same period in 2003. Lower
product sales were partially due to our customers delaying their purchase
decisions to evaluate the benefits of the new Renaissance Placeversions of
Accelerated Readerand Accelerated Math,which we began to ship during May
2004. Second quarter product revenues were also impacted by sales of
Renaissance Placewhich, unlike our earlier perpetually licensed versions, is a
subscription based product that requires the sale to be initially recorded as
deferred revenue and then recognized into income over the subscription period,
typically 12 months. While sales of several of our established products
declined for the period, sales of our new products introduced in 2002 and 2003
helped to partly offset these declines. Service revenue declined by $641,000, or 5.4%, in the first six months of
2004 to $11.3 million from $12.0 million in the first six months of 2003.
Lower attendance at our 2004 National Renaissance Conference held in the first
quarter resulted in about $700,000 less revenue compared to our 2003 National
Renaissance Conference. Cost of Sales. The cost of sales of products decreased by $2.4 million,
or 40.4%, to $3.6 million in the first six months of 2004 from $6.0 million in
the first six months of 2003. As a percentage of product sales, the cost of
sales of products decreased to 7.0% in the first half of 2004 from 10.8% in the
first half of 2003. This decrease is due, in part, to lower scanner warranty
and shipping costs, cost efficiencies in our custom assessment products
business in 2004, and to the sales mix this year compared to last with
proportionally lower sales of scanners, which is a lower gross profit margin
product than our core software products. The cost of sales of services increased by $536,000, or 9.9%, to $5.9
million in the first six months of 2004 from $5.4 million in the same period in
2003. As a percentage of sales of services, the cost of sales of services
increased to 52.5% in the first six months of 2004 from 45.2% in the first six
months of 2003. This increase is primarily a result of lower attendance at our
2004 National Renaissance Conference. Since most of the costs of the
conference are relatively fixed, the lower revenue directly affects
profitability. In addition, the increased cost of sales of services was partly
due to incurring costs to ramp up our new service offerings prior to their full
utilization and the expected future revenues. Product Development. Product development expenses were $8.5 million or
13.5% of sales in the first six months of 2004, compared to $8.7 million or
12.8% of sales for the first six months of 2003. We capitalized product
development expenses of $404,000 in the first six months of 2004 compared to
$220,000 in the same period of 2003. No significant changes in product
development initiatives are planned in the short term, but since very little
costs are expected to be capitalized in the near term, we expect reported
product development expense to be slightly higher in the second half of the
year than they were in the first. Selling and Marketing. Selling and marketing expenses increased by $2.2
million, or 14.6%, to $17.0 million in the first half of 2004 from $14.9
million in the first half of 2003. The increase in selling and marketing
expenses was the result of growth in our field sales force group. As a
percentage of net sales, selling and marketing expenses increased to 27.1% in
the first half of 2004 from 21.9% in the first six months of 2003. Sales and
marketing expenses are expected to continue to exceed the amount incurred in
the comparable prior year period due to continued expansion of our field sales
force. - 9 -




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General and Administrative. General and administrative expenses were $6.8
million, or 10.8% of sales in the first six months of 2004 compared to $7.4
million or 10.9% of sales in the first six months of 2003. This decrease is
primarily due to a one-time executive severance charge incurred in the
second quarter of 2003. No significant change in general and administrative
expenses is expected in the second half of 2004 compared to the first half. Operating Income. Operating income decreased by $4.5 million, or 17.8%,
to $21.0 million in the first six months of 2004 from $25.5 million in the same
period in 2003. As a percentage of net sales, operating income decreased to
33.4% in the first half of 2004 from 37.6% in the first half of 2003. Income Tax Expense. Income tax expense of $8.0 million was recorded in
the first six months of 2004 at an effective income tax rate of 37.0% of income
before taxes compared to $10.3 million, or 38.3% of income before taxes, in the
first half of 2003. We do not expect significant changes to our effective tax
rate for the balance of 2004. Liquidity and Capital Resources As of June 30, 2004, our cash, cash equivalents and investment securities
were $61.1 million, down $50.7 million from the December 31, 2003 total of
$111.8 million. The decrease is primarily due to $16.4 million in net cash
provided by operating activities offset by a special cash dividend of $66.7
million and quarterly cash dividends of $2.4 million during the first six
months of 2004. Even with the payment of cash dividends during the period, we
continue to maintain a strong cash position, which we believe, when coupled
with cash flow from operations, will be sufficient to meet both our short-term
and long-term working capital requirements. At June 30, 2004, we had a $15.0 million unsecured revolving line of
credit with a bank that is available until May 31, 2005. 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, 2005. The line of credit bears interest based on the prime rate less
1.0%. As of June 30, 2004, the lines of credit had not been used. On April 17, 2002, our Board of Directors authorized the repurchase of up
to 5,000,000 shares of our common stock. No time limit was placed on the
duration of the repurchase program, nor is there any dollar limit on the
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 six months ended June 30, 2004, we did not repurchase any shares
under this program. Depending on our stock valuation, we may repurchase
additional shares as a beneficial use of our cash to enhance shareholder value.
The cumulative shares repurchased under this program remains at 4.0 million
with a cost of $72.9 million. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations As of June 30, 2004, we did not have any off-balance sheet transactions,
arrangements, or obligations (including contingent obligations) that would have
a material effect on our financial results. We enter into operating leases, primarily for facilities that we occupy in
order to carry out our business operations. As of June 30, 2004, there has
been no material change in our operating leases from that disclosed in our 2003
Annual Report. As of June 30, 2004, there has been no change in our long-term debt
obligations, capital-lease obligations or long-term purchase obligations from
that disclosed in our 2003 Annual Report. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. There have not been any significant changes
to our critical accounting policies that were disclosed in our 2003 Annual
Report. - 10 -




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Forward-Looking Statements In accordance with the Private Securities Litigation Reform Act of 1995,
we can obtain a safe-harbor for forward-looking statements by identifying
those statements and by accompanying those statements with cautionary
statements which identify factors that could cause actual results to differ
materially from those in the forward-looking statements. Accordingly, the
foregoing Managements Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements relating to
growth plans, projected sales, revenues, earnings and costs, and product
development schedules and plans. Our actual results may differ materially from
those contained in the forward-looking statements herein. Factors which may
cause such a difference to occur include (i) a delay or reduction in school
purchases of our products due to state budgetary constraints resulting in a
reduction in the funds available to schools and (ii) those factors identified
in Item 1, Business, Forward-Looking Statements, contained in our Form 10-K for
the year ended December 31, 2003, which factors are incorporated herein by
reference to such Form 10-K. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk. Our exposure to market interest rate risk consists
of: (i) the increase or decrease in the amount of interest income we can earn
on our investment portfolio, and (ii) the decrease or increase in value of our
investment security portfolio if market interest rates increase or decrease,
respectively. We anticipate that we will have sufficient liquidity to hold our
investments to maturity, therefore, we do not expect to recognize any material
losses or gains related to an increase or decrease in market interest rates. Market Risk.Our exposure to market risk relates to the quality of the
holdings in our investment security portfolio. The fair market value of our
investments is subject to increases or decreases in value resulting from the
performance of the securities issuer, from upgrades or downgrades in the credit
worthiness of the securities issuer, and from changes in general market
conditions. We seek to manage our exposure to market risk by investing
according to our board-approved investment policy which has the following
goals: (i) preservation of capital, (ii) provision of adequate liquidity to
meet projected cash requirements, (iii) minimization of risk of principal loss
through diversified short and medium term investments, and (iv) maximization of
yields in relationship to the guidelines, risk, market conditions and tax
considerations. Our investment policy specifically requires: (i) that each investment have
a maximum maturity of 36 months, (ii) that at least 10% of the portfolio be
available on 30 days notice and not more than 30% of the portfolio have a
maturity in excess of 24 months, (iii) that each investment meet minimum credit
quality requirements, (iv) that our portfolio be diversified such that not more
than 10% is invested in any one issuer (other than the U.S. Treasury or its
agencies, or money market funds), and (v) that each investment meet certain
maximum maturity or tender option limits based on its minimum credit rating.
As of June 30, 2004 our investment securities had a market value of
approximately $39.5 million and a carrying value of $39.6 million. Our investment policy parameters preclude investment in equity securities
and require that the Board of Directors review the policy annually and on an
interim basis as required. Foreign Currency Exchange Rate Risk.The financial position and results
of operations of our foreign subsidiaries are measured using local currency.
Revenues and expenses of such subsidiaries have been translated into U.S.
dollars at average exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange at the balance sheet
date. Translation gains or losses are deferred as a separate component of
shareholders equity. Aggregate foreign currency transaction gains and losses
are included in determining net income. As such, our operating results are
affected by fluctuations in the value of the U.S. dollar compared to the
Australian dollar, British pound, Canadian dollar, and Indian Rupee. At this
time, foreign exchange rate risk is not significant due to the relative size of
our foreign operations. - 11 -




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Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the companys disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control procedures and management
was necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. As of June 30, 2004, an evaluation was performed under the supervision and
with the participation of management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. There has been no change in our internal
control over financial reporting that has occurred during the quarter ended
June 30, 2004 that has materially affected, or is reasonably likely to
materially affect, such internal control over financial reporting. - 12 -




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Part II  OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities Common Stock. 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. 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 will 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 June 30, 2004: Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May yetPart of Publicly
    
    be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orPeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    ProgramsApril
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    977,758May
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    977,758June
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    977,758Total
    
    
    0
    
    
    $
    0
    
    
    
    0
 
 Item 4. Submission of Matters to a Vote of Security Holders  (a)
    
    On April 21, 2004, the Company held its Annual Meeting of Shareholders.  (b)
    
    Not applicable.  (c)
    
    Set forth below are descriptions of the matters voted upon at the Annual
Meeting of Shareholders and the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes, as to
each such matter.  1.
    
    Eight directors were elected to serve until the 2005 Annual Meeting
of Shareholders and until their successors are elected and qualified.
The results of this proposal are as follows: For
    Against/ Withheld(1) Judith A. Paul
    
    
    30,140,519
    
    
    
    447,333(2) Terrance D. Paul
    
    
    30,140,419
    
    
    
    447,333(3) John R. Hickey
    
    
    30,110,444
    
    
    
    477,408(4) John H. Grunewald
    
    
    30,493,471
    
    
    
    94,381(5) Gordon H. Gunnlaugsson
    
    
    30,493,171
    
    
    
    94,681(6) Harold E. Jordan
    
    
    30,493,371
    
    
    
    94,481(7) Addison L. Piper
    
    
    29,743,682
    
    
    
    844,170(8) Judith A. Ryan
    
    
    30,517,432
    
    
    
    70,420
  (d)
    
    Not applicable. - 13 -




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Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits. Exhibit No.
    
    Description10.1
    
    Transfer Agreement between the Company and Terrance D. Paul
dated as of June 16, 200410.2
    
    Assignment and Assumption of Transfer Agreement between the
Company and Terrance D. Paul dated as of June 16, 200431.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Steven A. Schmidt32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Steven A. Schmidt
  (b)
    
    Forms 8-K. The following Form 8-K filings were made during the three
months ended June 30, 2004:  1.
    
    Form 8-K dated April 20, 2004 (filed on April 26, 2004).
Press release regarding the Companys declaration of a quarterly cash
dividend to be paid June 1, 2004.
Furnished the press release regarding the first quarter 2004
financial results.
Furnished the transcript of the Investor Conference Call on April 20,
2004. - 14 -




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. RENAISSANCE LEARNING, INC.(Registrant)August 6, 2004
    
    /s/ John R. HickeyDate
    
    John R. HickeyPresident and Chief Executive Officer(Principal Executive Officer)August 6, 2004
    
    /s/ Steven A. SchmidtDate
    
    Steven A. SchmidtExecutive Vice President, and Chief Financial Officer(Principal Financial and Accounting Officer)
 - 15 -




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Index to Exhibits Exhibit No.
    
    Description10.1
    
    Transfer Agreement between the Company and Terrance D. Paul dated as of June 16, 200410.2
    
    Assignment and Assumption of Transfer Agreement between the Company and
Terrance D. Paul dated as of June 16, 200431.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Steven A. Schmidt32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Steven A. Schmidt