##### 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 JUNE 30, 2006.
 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
  o þ o
 o þ
  Outstanding atClass
    
    July 31, 2006Common Stock, $0.01 par value
    
    29,474,065




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##### 



RENAISSANCE LEARNING, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005
    
    
    1Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    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 1A. Risk Factors
    
    
    12Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Item 6. Exhibits
    
    
    13Executive Officer Compensation SummarySection 302 Certification by Terrance D. PaulSection 302 Certification by Mary T. MinchSection 906 Certification by Terrance D. PaulSection 906 Certification by Mary T. Minch




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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)
 June 30,
    
    
    December 31,2006
    
    
    2005(In Thousands, Except Share and PerShare Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,236
    
    
    $
    7,083Investment securities
    
    
    13,463
    
    
    
    23,363Accounts receivable, less allowances of $1,140 and $1,340, respectively
    
    
    13,370
    
    
    
    11,393Inventories
    
    
    2,959
    
    
    
    4,138Prepaid expenses
    
    
    1,650
    
    
    
    1,722Income taxes receivable
    
    
    3,168
    
    
    
    Deferred tax asset
    
    
    4,575
    
    
    
    3,693Other current assets
    
    
    267
    
    
    
    390Total current assets
    
    
    44,688
    
    
    
    51,782Investment securities
    
    
    2,823
    
    
    
    4,132Property, plant and equipment, net
    
    
    11,621
    
    
    
    11,475Deferred tax asset
    
    
    
    
    
    
    738Goodwill
    
    
    46,870
    
    
    
    45,906Other intangibles, net
    
    
    6,423
    
    
    
    6,787Capitalized software, net
    
    
    197
    
    
    
    420Other receivables
    
    
    5,816
    
    
    
    5,909Other non-current assets
    
    
    484
    
    
    
    1,233Total assets
    
    $
    118,922
    
    
    $
    128,382LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,907
    
    
    $
    3,280Deferred revenue
    
    
    17,810
    
    
    
    18,255Payroll and employee benefits
    
    
    5,000
    
    
    
    4,156Income taxes payable
    
    
    
    
    
    
    313Other current liabilities
    
    
    3,817
    
    
    
    4,239Total current liabilities
    
    
    29,534
    
    
    
    30,243Deferred revenue
    
    
    501
    
    
    
    670Deferred compensation and other employee benefits
    
    
    2,119
    
    
    
    1,603Deferred tax liability
    
    
    1,000
    
    
    
    Total liabilities
    
    
    33,154
    
    
    
    32,516Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000; issued:34,736,647 shares at June 30, 2006 and December 31, 2005
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    55,848
    
    
    
    56,522Retained earnings
    
    
    123,378
    
    
    
    118,233Treasury stock, at cost: 5,269,218 shares at June 30, 2006;
4,387,594 shares at December 31, 2005
    
    
    (92,657
    )
    
    
    (78,845
    )Unearned restricted stock compensation
    
    
    (1,212
    )
    
    
    (438
    )Accumulated other comprehensive income
    
    
    64
    
    
    
    47Total shareholders equity
    
    
    85,768
    
    
    
    95,866Total liabilities and shareholders equity
    
    $
    118,922
    
    
    $
    128,382
  - 1 -




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    24,925
    
    
    $
    23,634
    
    
    $
    50,249
    
    
    $
    44,760Services
    
    
    4,394
    
    
    
    4,712
    
    
    
    10,188
    
    
    
    11,143Total net sales
    
    
    29,319
    
    
    
    28,346
    
    
    
    60,437
    
    
    
    55,903Cost of sales:Products
    
    
    4,982
    
    
    
    2,325
    
    
    
    9,311
    
    
    
    3,514Services
    
    
    1,875
    
    
    
    1,811
    
    
    
    4,681
    
    
    
    4,571Total cost of sales
    
    
    6,857
    
    
    
    4,136
    
    
    
    13,992
    
    
    
    8,085Gross profit
    
    
    22,462
    
    
    
    24,210
    
    
    
    46,445
    
    
    
    47,818Operating expenses:Product development
    
    
    4,305
    
    
    
    4,037
    
    
    
    8,487
    
    
    
    7,655Selling and marketing
    
    
    7,389
    
    
    
    6,062
    
    
    
    16,744
    
    
    
    14,107General and administrative
    
    
    3,692
    
    
    
    2,961
    
    
    
    8,898
    
    
    
    6,030Total operating expenses
    
    
    15,386
    
    
    
    13,060
    
    
    
    34,129
    
    
    
    27,792Operating income
    
    
    7,076
    
    
    
    11,150
    
    
    
    12,316
    
    
    
    20,026Other income, net
    
    
    343
    
    
    
    502
    
    
    
    625
    
    
    
    958Income  continuing operations before income taxes
    
    
    7,419
    
    
    
    11,652
    
    
    
    12,941
    
    
    
    20,984Income taxes  continuing operations
    
    
    2,745
    
    
    
    4,311
    
    
    
    4,788
    
    
    
    7,764Income  continuing operations
    
    
    4,674
    
    
    
    7,341
    
    
    
    8,153
    
    
    
    13,220Income from discontinued operations, net of tax benefit
of $1,417 for the six months ended June 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    584Net income
    
    $
    4,674
    
    
    $
    7,341
    
    
    $
    8,153
    
    
    $
    13,804Earnings per share:Basic:Continuing operations
    
    $
    0.16
    
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.43Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.02Net income
    
    $
    0.16
    
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.45Diluted:Continuing operations
    
    $
    0.16
    
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.43Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.02Net income
    
    $
    0.16
    
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.45Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.10
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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 For the Six Months EndedJune 30,2006
    
    
    2005(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    8,153
    
    
    $
    13,804(Income) from discontinued operations
    
    
    
    
    
    
    (584
    )Income from continuing operations
    
    
    8,153
    
    
    
    13,220Adjustments to arrive at cash provided by operating activitiesDepreciation and amortization
    
    
    1,791
    
    
    
    1,509Amortization of investment discounts/premiums
    
    
    134
    
    
    
    244Restricted stock compensation expense
    
    
    223
    
    
    
    Deferred income taxes
    
    
    1,862
    
    
    
    (225
    )Excess tax benefits from share based payment arrangements
    
    
    (393
    )
    
    
    (26
    )Loss on sale of property
    
    
    17
    
    
    
    Change in assets and liabilities, excluding the effects of acquisitions and divestituresAccounts receivable
    
    
    (1,904
    )
    
    
    (1,102
    )Inventories
    
    
    814
    
    
    
    830Prepaid expenses
    
    
    (142
    )
    
    
    229Income taxes
    
    
    (2,728
    )
    
    
    3,060Accounts payable and other liabilities
    
    
    (189
    )
    
    
    (120
    )Deferred revenue
    
    
    (614
    )
    
    
    (1,606
    )Other current assets
    
    
    123
    
    
    
    (9
    )Other
    
    
    (172
    )
    
    
    119Cash provided by continuing operating activities
    
    
    6,975
    
    
    
    16,123Cash used by discontinued operations
    
    
    
    
    
    
    (116
    )Net cash provided by operating activities
    
    
    6,975
    
    
    
    16,007Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (1,373
    )
    
    
    (740
    )Purchase of investment securities
    
    
    (284
    )
    
    
    (164
    )Maturities/sales of investment securities
    
    
    11,359
    
    
    
    13,266Capitalized software development costs
    
    
    
    
    
    
    (4
    )Net proceeds from sale of subsidiary
    
    
    
    
    
    
    75Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (33,353
    )Net cash provided (used) by investing activities
    
    
    9,702
    
    
    
    (20,920
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    16
    
    
    
    832Payment for cancellation of stock options
    
    
    (993
    )
    
    
    Excess tax benefits from share based payment arrangements
    
    
    393
    
    
    
    26Dividends paid
    
    
    (3,007
    )
    
    
    (3,071
    )Purchase of treasury stock
    
    
    (14,933
    )
    
    
    (6,865
    )Net cash (used by) financing activities
    
    
    (18,524
    )
    
    
    (9,078
    )Net decrease in cash and cash equivalents
    
    
    (1,847
    )
    
    
    (13,991
    )Cash and cash equivalents, beginning of period
    
    
    7,083
    
    
    
    27,460Cash and cash equivalents, end of period
    
    $
    5,236
    
    
    $
    13,469
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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 June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Basic weighted average shares outstanding
    
    
    29,830,082
    
    
    
    30,617,025
    
    
    
    29,986,642
    
    
    
    30,716,224Dilutive effect of outstanding stock options
    
    
    6,559
    
    
    
    72,791
    
    
    
    9,226
    
    
    
    55,532Dilutive
effect of restricted shares
    
    
    564
    
    
    
    
    
    
    
    564
    
    
    
    Diluted weighted average shares outstanding
    
    
    29,837,205
    
    
    
    30,689,816
    
    
    
    29,996,432
    
    
    
    30,771,756
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4. Comprehensive Income
  5. Goodwill and Other Intangible Assets
    June 30, 2006
    
    
    December 31, 2005Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetTradename
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000
    
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000Customer relationships
    
    
    4,150
    
    
    
    727
    
    
    
    3,423
    
    
    
    4,150
    
    
    
    363
    
    
    
    3,787$
    7,150
    
    
    $
    727
    
    
    $
    6,423
    
    
    $
    7,150
    
    
    $
    363
    
    
    $
    6,787
 6. Stock Based Compensation
  Three Months
    
    
    Six MonthsEnded June 30, 2005(In thousands except per share amounts)Net Income, as reported
    
    $
    7,341
    
    
    $
    13,804Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    1,359
    
    
    
    1,607Pro forma net income
    
    $
    5,982
    
    
    $
    12,197Earnings per share:Basic as reported
    
    $
    0.24
    
    
    $
    0.45Basic pro forma
    
    $
    0.20
    
    
    $
    0.40Diluted as reported
    
    $
    0.24
    
    
    $
    0.45Diluted pro forma
    
    $
    0.19
    
    
    $
    0.39
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7. Dividends
  8. Business Combinations
   Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2005
    
    June 30, 2005(In thousands, except per share amounts)Net sales
    
    $
    36,658
    
    
    $
    71,196Income from continuing operations
    
    
    7,643
    
    
    
    13,156Earnings per
share from continuing operationsBasic earnings per share
    
    
    0.24
    
    
    
    0.41Diluted earnings per share
    
    
    0.24
    
    
    
    0.41
 9. Recent Accounting Pronouncement
  - 6 -




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Results of Operations
     Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Net Sales:Products
    
    
    85.0
    %
    
    
    83.4
    %
    
    
    83.1
    %
    
    
    80.1
    %Services
    
    
    15.0
    
    
    
    16.6
    
    
    
    16.9
    
    
    
    19.9Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    20.0
    %
    
    
    9.8
    %
    
    
    18.5
    %
    
    
    7.9
    %Services
    
    
    42.7
    
    
    
    38.4
    
    
    
    45.9
    
    
    
    41.0Total cost of sales
    
    
    23.4
    
    
    
    14.6
    
    
    
    23.2
    
    
    
    14.5Gross profit:Products
    
    
    80.0
    
    
    
    90.2
    
    
    
    81.5
    
    
    
    92.1Services
    
    
    57.3
    
    
    
    61.6
    
    
    
    54.1
    
    
    
    59.0Total gross profit
    
    
    76.6
    
    
    
    85.4
    
    
    
    76.8
    
    
    
    85.5Operating expenses:Product development
    
    
    14.7
    
    
    
    14.2
    
    
    
    14.0
    
    
    
    13.7Selling and marketing
    
    
    25.2
    
    
    
    21.4
    
    
    
    27.7
    
    
    
    25.3General and administrative
    
    
    12.6
    
    
    
    10.4
    
    
    
    14.7
    
    
    
    10.8Total operating expenses
    
    
    52.5
    
    
    
    46.0
    
    
    
    56.4
    
    
    
    49.8Operating income
    
    
    24.1
    
    
    
    39.4
    
    
    
    20.4
    
    
    
    35.7Other, net
    
    
    1.2
    
    
    
    1.7
    
    
    
    1.0
    
    
    
    1.9Income  continuing operations
before income taxes
    
    
    25.3
    
    
    
    41.1
    
    
    
    21.4
    
    
    
    37.6Income taxes  continuing operations
    
    
    9.4
    
    
    
    15.2
    
    
    
    7.9
    
    
    
    13.9Income  continuing operations
    
    
    15.9
    
    
    
    25.9
    
    
    
    13.5
    
    
    
    23.7Income from discontinued
operations, net of tax benefit of
$1,417 in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Net income
    
    
    15.9
    %
    
    
    25.9
    %
    
    
    13.5
    %
    
    
    24.7
    %
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Three Months Ended June 30, 2006 and 2005
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 
 ®
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Six Months Ended June 30, 2006 and 2005
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 Liquidity and Capital Resources
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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Operating Leases.
 Purchase Obligations.
  Contractual Obligations
    
    Payments due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More than(In thousands)
    
    Total
    
    
    1 year
    
    
    1- 3 years
    
    
    3-5 years
    
    
    5 yearsOperating lease obligations
    
    $
    4,056
    
    
    $
    815
    
    
    $
    2,752
    
    
    $
    489
    
    
    $
    Purchase obligations
    
    
    4,158
    
    
    
    3,924
    
    
    
    234
    
    
    
    
    
    
    
    Total
    
    $
    8,214
    
    
    $
    4,739
    
    
    $
    2,986
    
    
    $
    489
    
    
    $
    
 Critical Accounting Policies and Estimates
  -10-




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Forward-Looking Statements
 Risk Factors
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
   Foreign Currency Exchange Rate Risk.
 -11-




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##### Table of Contents



Item 4. Controls and Procedures
    
 Part II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   MaximumTotal Number of
    
    
    Number of SharesShares Purchased
    
    
    that May Yet BeTotal Number
    
    
    Average Price
    
    
    as Part of Publicly
    
    
    Purchased Underof Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    the Plans orPeriod

    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    ProgramsApril 1-30, 2006
    (1)
    
    
    5,791
    
    
    $
    15.81
    
    
    
    0
    
    
    
    1,522,055May 1-31, 2006
    (2)
    
    
    152,909
    
    
    
    14.75
    
    
    
    148,700
    
    
    
    1,369,146June 1-30, 2006

    
    
    466,800
    
    
    
    14.58
    
    
    
    466,800
    
    
    
    902,346Total

    
    
    625,500
    
    
    $
    14.64
    
    
    
    615,500
 
 (1)
    
    Includes 5,000 and 791 shares purchased in open-market
transactions by two of our directors,
Harold E. Jordan and Addison L. Piper, respectively.(2)
    
    Includes 4,209 shares purchased in an open-market transaction by Addison L. Piper -12-




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##### Table of Contents



Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Executive Officer Compensation Summary10.2
    
    Form of Restricted Stock Agreement with Certain Non-Employee Directors (1)10.3
    
    Non-Employee Director Compensation Summary (1)10.4
    
    Form of Restricted Stock Agreement with Certain Executive Officers (1)31.1
    
    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
 
 (1)
    
    Incorporated by reference to Registrants Form 8-K dated May 10, 2006 (SEC File No.
0-22187) -13-




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##### Table of Contents



SIGNATURES
  RENAISSANCE LEARNING, INC.(Registrant)August 3,
2006
    
    /s/ Terrance D. PaulDate
    
    Terrance D. PaulChief Executive Officer and a Director(Principal Executive Officer)August 3,
2006
    
    /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
    
    Executive officer Compensation Summary10.2
    
    Form of Restricted Stock Agreement with Certain Non-Employee Directors (1)10.3
    
    Non-Employee Director Compensation Summary (1)10.4
    
    Form of Restricted Stock Agreement with Certain Executive Officers (1)31.1
    
    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
 
 (1)
    
    Incorporated by reference to Registrants Form 8-K dated May 10, 2006 (SEC File No.
0-22187)