##### 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, 2005.
 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
    
    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
 þ o
 o þ
  Outstanding atClass
    
    October 31, 2005Common Stock, $0.01 par value
    
    31,172,678




---



RENAISSANCE LEARNING, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    12Item 4. Controls and Procedures
    
    
    13PART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    13Item 6. Exhibits
    
    
    14Second Amendment to Credit AgreementThird Amendment to Credit AgreementSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO




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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 31,2005
    
    
    2004(In Thousands, Except Share and PerShare Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,789
    
    
    $
    27,460Investment securities
    
    
    22,833
    
    
    
    25,103Accounts receivable, less allowances of $1,511 and $1,283, respectively
    
    
    14,985
    
    
    
    8,441Inventories
    
    
    3,547
    
    
    
    2,364Prepaid expenses
    
    
    1,114
    
    
    
    1,194Deferred tax asset
    
    
    6,904
    
    
    
    3,800Assets of discontinued operations
    
    
    
    
    
    
    1,149Other current assets
    
    
    1,012
    
    
    
    453Total current assets
    
    
    66,184
    
    
    
    69,964Investment securities
    
    
    5,045
    
    
    
    21,003Property, plant and equipment, net
    
    
    11,267
    
    
    
    18,552Real estate held for sale
    
    
    7,584
    
    
    
    Deferred tax asset
    
    
    
    
    
    
    1,620Goodwill
    
    
    46,627
    
    
    
    2,757Other intangibles, net
    
    
    6,996
    
    
    
    192Capitalized software, net
    
    
    259
    
    
    
    636Other noncurrent assets
    
    
    1,392
    
    
    
    Total assets
    
    $
    145,354
    
    
    $
    114,724LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,178
    
    
    $
    1,226Deferred revenue
    
    
    17,415
    
    
    
    16,484Payroll and employee benefits
    
    
    3,642
    
    
    
    3,983Income taxes payable
    
    
    2,326
    
    
    
    925Liabilities of discontinued operations
    
    
    
    
    
    
    1,650Other current liabilities
    
    
    5,514
    
    
    
    3,881Total current liabilities
    
    
    33,075
    
    
    
    28,149Deferred revenue
    
    
    724
    
    
    
    620Deferred compensation
    
    
    1,463
    
    
    
    1,354Deferred tax liability
    
    
    444
    
    
    
    Other noncurrent liabilities
    
    
    51
    
    
    
    Total liabilities
    
    
    35,757
    
    
    
    30,123Minority interest
    
    
    243
    
    
    
    184Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at September 30, 2005 and December 31, 2004
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    56,593
    
    
    
    54,490Retained earnings
    
    
    113,752
    
    
    
    99,689Treasury stock, at cost 3,391,675 shares at September 30, 2005;
3,865,280 shares at December 31, 2004
    
    
    (61,086
    )
    
    
    (70,213
    )Deferred equity compensation
    
    
    (399
    )
    
    
    Accumulated other comprehensive income
    
    
    147
    
    
    
    104Total shareholders equity
    
    
    109,354
    
    
    
    84,417Total liabilities and shareholders equity
    
    $
    145,354
    
    
    $
    114,724
  - 1 -




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    25,615
    
    
    $
    20,164
    
    
    $
    70,375
    
    
    $
    71,051Services
    
    
    5,774
    
    
    
    4,847
    
    
    
    16,918
    
    
    
    15,415Total net sales
    
    
    31,389
    
    
    
    25,011
    
    
    
    87,293
    
    
    
    86,466Cost of sales:Products
    
    
    5,297
    
    
    
    1,525
    
    
    
    8,812
    
    
    
    5,017Services
    
    
    2,100
    
    
    
    2,003
    
    
    
    6,672
    
    
    
    7,461Total cost of sales
    
    
    7,397
    
    
    
    3,528
    
    
    
    15,484
    
    
    
    12,478Gross profit
    
    
    23,992
    
    
    
    21,483
    
    
    
    71,809
    
    
    
    73,988Operating expenses:Product development
    
    
    4,927
    
    
    
    3,841
    
    
    
    12,583
    
    
    
    10,997Selling and marketing
    
    
    8,325
    
    
    
    7,868
    
    
    
    22,432
    
    
    
    23,433General and administrative
    
    
    3,341
    
    
    
    2,970
    
    
    
    9,370
    
    
    
    9,189Total operating expenses
    
    
    16,593
    
    
    
    14,679
    
    
    
    44,385
    
    
    
    43,619Operating income
    
    
    7,399
    
    
    
    6,804
    
    
    
    27,424
    
    
    
    30,369Other income, net
    
    
    404
    
    
    
    531
    
    
    
    1,363
    
    
    
    1,215Income  continuing operations before income taxes
    
    
    7,803
    
    
    
    7,335
    
    
    
    28,787
    
    
    
    31,584Income taxes  continuing operations
    
    
    2,887
    
    
    
    2,739
    
    
    
    10,651
    
    
    
    11,764Income  continuing operations
    
    
    4,916
    
    
    
    4,596
    
    
    
    18,136
    
    
    
    19,820Income (loss) on discontinued operations,
net of tax benefit of $0 and $467 for the three months
ended September 30, 2005 and 2004, respectively; and
$1,417 and $1,489 for the nine months ended
September 30, 2005 and 2004, respectively
    
    
    
    
    
    
    (728
    )
    
    
    584
    
    
    
    (2,324
    )Net income
    
    $
    4,916
    
    
    $
    3,868
    
    
    $
    18,720
    
    
    $
    17,496Earnings (loss) per share:Basic:Continuing operations
    
    $
    0.16
    
    
    $
    0.14
    
    
    $
    0.58
    
    
    $
    0.64Discontinued operations
    
    
    0.00
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.08
    )Net income
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.60
    
    
    $
    0.56Diluted:Continuing operations
    
    $
    0.16
    
    
    $
    0.14
    
    
    $
    0.58
    
    
    $
    0.63Discontinued operations
    
    
    0.00
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.07
    )Net income
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.60
    
    
    $
    0.56Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.15
    
    
    $
    2.27
  - 2 -




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 For the Nine Months EndedSeptember 30,2005
    
    
    2004(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    18,720
    
    
    $
    17,496Adjustments to arrive at cash provided by operating activities:Depreciation and amortization
    
    
    2,460
    
    
    
    2,787Amortization of investment discounts/premiums
    
    
    332
    
    
    
    577Deferred income taxes
    
    
    (281
    )
    
    
    (259
    )(Gain) on disposal of discontinued operations
    
    
    (702
    )
    
    
    Income tax benefit from the exercise of stock options
    
    
    104
    
    
    
    1,073Change in assets and liabilities, net of effect of acquired business -Accounts receivable
    
    
    (1,663
    )
    
    
    277Inventories
    
    
    1,018
    
    
    
    (357
    )Prepaid expenses
    
    
    238
    
    
    
    640Accounts payable and other current liabilities
    
    
    1,216
    
    
    
    (2,339
    )Deferred revenue
    
    
    1,035
    
    
    
    5,466Other current assets
    
    
    838
    
    
    
    311Other
    
    
    (223
    )
    
    
    (24
    )Net cash provided by operating activities
    
    
    23,092
    
    
    
    25,648Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (1,724
    )
    
    
    (1,075
    )Purchase of investment securities
    
    
    (247
    )
    
    
    (34,922
    )Maturities/sales of investment securities
    
    
    18,143
    
    
    
    37,745Capitalized software development costs
    
    
    (4
    )
    
    
    (404
    )Net proceeds from disposal of discontinued operations
    
    
    75
    
    
    
    Acquisition of business, net of cash acquired
    
    
    (33,988
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (17,745
    )
    
    
    1,344Cash flows from financing activities:Return of capital to minority interest
    
    
    
    
    
    
    (54
    )Proceeds from exercise of stock options
    
    
    1,676
    
    
    
    4,174Dividends paid
    
    
    (4,657
    )
    
    
    (70,366
    )Purchase of treasury stock
    
    
    (14,037
    )
    
    
    Net cash (used by) financing activities
    
    
    (17,018
    )
    
    
    (66,246
    )Net decrease in cash
    
    
    (11,671
    )
    
    
    (39,254
    )Cash and cash equivalents, beginning of period
    
    
    27,460
    
    
    
    62,524Cash and cash equivalents, end of period
    
    $
    15,789
    
    
    $
    23,270
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##### Table of Contents



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 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic weighted average shares outstanding
    
    
    31,598,830
    
    
    
    31,126,343
    
    
    
    31,013,660
    
    
    
    31,055,595Dilutive effect of outstanding stock options
    
    
    97,461
    
    
    
    150,278
    
    
    
    70,092
    
    
    
    180,710Diluted weighted average shares outstanding
    
    
    31,696,291
    
    
    
    31,276,621
    
    
    
    31,083,752
    
    
    
    31,236,305
  - 4 -




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##### Table of Contents



4. Comprehensive Income
  5. Goodwill and Other Intangible Assets
    September 30, 2005
    
    
    December 31, 2004Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetNon-compete agreement
    
    $
    1,100
    
    
    $
    1,072
    
    
    $
    28
    
    
    $
    1,100
    
    
    $
    908
    
    
    $
    192Tradename
    
    
    3,000
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    Customer relationships
    
    
    4,150
    
    
    
    182
    
    
    
    3,968
    
    
    
    
    
    
    
    
    
    
    
    $
    8,250
    
    
    $
    1,254
    
    
    $
    6,996
    
    
    $
    1,100
    
    
    $
    908
    
    
    $
    192
 6. Stock Option Plan
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Net Income, as reported
    
    $
    4,916
    
    
    $
    3,868
    
    
    $
    18,720
    
    
    $
    17,496Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    909
    
    
    
    440
    
    
    
    2,516
    
    
    
    1,598Pro forma net income
    
    $
    4,007
    
    
    $
    3,428
    
    
    $
    16,204
    
    
    $
    15,898Earnings per share:Basic as reported
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.60
    
    
    $
    0.56Basic pro forma
    
    $
    0.13
    
    
    $
    0.11
    
    
    $
    0.52
    
    
    $
    0.51Diluted as reported
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.60
    
    
    $
    0.56Diluted pro forma
    
    $
    0.13
    
    
    $
    0.11
    
    
    $
    0.52
    
    
    $
    0.51
  - 5 -




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##### Table of Contents



7. Dividends
  8. Real Estate Held for Sale
  9. Business Combinations
    - 6 -




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Net sales
    
    $
    31,389
    
    
    $
    33,797
    
    
    $
    102,585
    
    
    $
    115,096Income from continuing operations
    
    
    4,916
    
    
    
    5,209
    
    
    
    18,072
    
    
    
    21,888Earnings per share from
continuing operations:Basic earnings per share
    
    
    .16
    
    
    
    .16
    
    
    
    .57
    
    
    
    .68Diluted earnings per share
    
    
    .16
    
    
    
    .16
    
    
    
    .57
    
    
    
    .68
 - 7 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Results of Operations
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Sales:Products
    
    
    81.6
    %
    
    
    80.6
    %
    
    
    80.6
    %
    
    
    82.2
    %Services
    
    
    18.4
    
    
    
    19.4
    
    
    
    19.4
    
    
    
    17.8Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    20.7
    %
    
    
    7.6
    %
    
    
    12.5
    %
    
    
    7.1
    %Services
    
    
    36.4
    
    
    
    41.3
    
    
    
    39.4
    
    
    
    48.4Total cost of sales
    
    
    23.6
    
    
    
    14.1
    
    
    
    17.7
    
    
    
    14.4Gross profit:Products
    
    
    79.3
    
    
    
    92.4
    
    
    
    87.5
    
    
    
    92.9Services
    
    
    63.6
    
    
    
    58.7
    
    
    
    60.6
    
    
    
    51.6Total gross profit
    
    
    76.4
    
    
    
    85.9
    
    
    
    82.3
    
    
    
    85.6Operating expenses:Product development
    
    
    15.7
    
    
    
    15.4
    
    
    
    14.4
    
    
    
    12.7Selling and marketing
    
    
    26.5
    
    
    
    31.4
    
    
    
    25.7
    
    
    
    27.1General and administrative
    
    
    10.6
    
    
    
    11.9
    
    
    
    10.8
    
    
    
    10.7Total operating expenses
    
    
    52.8
    
    
    
    58.7
    
    
    
    50.9
    
    
    
    50.5Operating income
    
    
    23.6
    
    
    
    27.2
    
    
    
    31.4
    
    
    
    35.1Other, net
    
    
    1.3
    
    
    
    2.1
    
    
    
    1.6
    
    
    
    1.4Income  continuing operations
before income taxes
    
    
    24.9
    
    
    
    29.3
    
    
    
    33.0
    
    
    
    36.5Income taxes  continuing operations
    
    
    9.2
    
    
    
    10.9
    
    
    
    12.2
    
    
    
    13.6Income  continuing operations
    
    
    15.7
    
    
    
    18.4
    
    
    
    20.8
    
    
    
    22.9Income (loss) on discontinued
operations, net of tax
    
    
    
    
    
    
    (2.9
    )
    
    
    .6
    
    
    
    (2.7
    )Net income
    
    
    15.7
    %
    
    
    15.5
    %
    
    
    21.4
    %
    
    
    20.2
    %
 - 8 -




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##### Table of Contents



Three Months Ended September 30, 2005 and 2004
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 
 *
    
    AR, AccelScan, AccelTest, Accelerated Grammar and Spelling, Accelerated Math, Accelerated
Reader, Accelerated Vocabulary, Accelerated Writer, Fluent Reader, AlphaSmart, AlphaSmart 3000,
AS3000, Dana, Math Facts in a Flash, Math Renaissance, Neo, Read Now, Reading Renaissance,
Renaissance, Renaissance Learning, Renaissance Place, School Renaissance, STAR Early Literacy, STAR
Reading, STAR Math, StandardsMaster,
TestCheck and Writing Renaissance are trademarks of Renaissance Learning, Inc. registered ® or
pending registration in the United States, with other applications issued or pending in other
countries. - 9 -




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##### Table of Contents



Nine Months Ended September 30, 2005 and 2004
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 - 10 -




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Liquidity and Capital Resources
    Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
    Payments due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual
Obligations
    
    Total
    
    
    1 year
    
    
    1- 3 years
    
    
    3-5 years
    
    
    5 years(In thousands)Operating lease obligations
    
    $
    1,938
    
    
    $
    893
    
    
    $
    481
    
    
    $
    440
    
    
    $
    124Purchase obligations
    
    
    1,956
    
    
    
    1,956
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,894
    
    
    $
    2,849
    
    
    $
    481
    
    
    $
    440
    
    
    $
    124
 Critical Accounting Policies and Estimates
  - 11 -




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##### Table of Contents



Forward-Looking Statements
 Business, Forward-Looking Statements; Risk Factors
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
   Foreign Currency Exchange Rate Risk.
 - 12 -




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##### Table of Contents



Item 4. Controls and Procedures
     
 Part II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number of
    
    
    MaximumShares
    
    
    Number ofTotal
    
    
    
    
    
    
    Purchased as
    
    
    Shares that MayNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    or ProgramsJuly 1-31, 2005
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    
    3,283,958August 1-31, 2005
    
    
    150,500
    
    
    
    17.78
    
    
    
    150,500
    
    
    
    3,133,458September 1-30, 2005
    
    
    254,900
    
    
    
    17.64
    
    
    
    254,900
    
    
    
    2,878,558Total
    
    
    405,400
    
    
    $
    17.69
    
    
    
    405,400
 - 13 -




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##### Table of Contents



Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Second Amendment to Credit Agreement dated as of December 1, 2003 by and
between Wells Fargo Bank, National Association and registrant10.2
    
    Third Amendment to Credit Agreement dated as of December 1, 2003 by and
between Wells Fargo Bank, National Association and registrant31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Mary T. Minch
 - 14 -




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##### Table of Contents



SIGNATURES
  RENAISSANCE LEARNING, INC.
(Registrant)November 8,
2005
    
    
    

/s/ John R. HickeyDate
    
    
    
    John R. HickeyPresident and Chief Executive Officer(Principal Executive Officer)November 8,
2005
    
    
    
/s/ Mary T. MinchDate
    
    
    
    Mary T. MinchVice President-Finance, Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)




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##### Table of Contents



Exhibit No.
    
    Description10.1
    
    Second Amendment to Credit Agreement dated as of December 1, 2003 by and between Wells
Fargo Bank, National Association and registrant10.2
    
    Third Amendment to Credit Agreement dated as of December 1, 2003 by and between Wells Fargo
Bank, National Association and registrant31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Mary T. Minch