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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 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, 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 þ No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Class
    
    Outstanding at
October 29, 2004Common Stock, $0.01 par value
    
    31,144,399




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RENAISSANCE LEARNING, INC. INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004  
 PART I - FINANCIAL INFORMATIONPageItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2004
and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 5.
    
    Other Information
    
    
    13Item 6.
    
    Exhibits
    
    
    14First Amendment to Credit AgreementCertificationCertificationCertificationCertification
  - Index -




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) September 30,
    
    December 31,2004
    
    2003(In Thousands, Except Share and PerShare Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,271
    
    
    $
    62,524Investment securities
    
    
    28,786
    
    
    
    42,825Accounts receivable, less allowances of $1,881 and $1,629, respectively
    
    
    12,725
    
    
    
    13,182Inventories
    
    
    2,710
    
    
    
    2,354Prepaid expenses
    
    
    712
    
    
    
    1,352Deferred tax asset
    
    
    4,054
    
    
    
    3,743Other current assets
    
    
    578
    
    
    
    889Total current assets
    
    
    72,836
    
    
    
    126,869Investment securities
    
    
    17,142
    
    
    
    6,485Property, plant and equipment, net
    
    
    19,442
    
    
    
    20,536Deferred tax asset
    
    
    1,742
    
    
    
    1,795Goodwill
    
    
    2,732
    
    
    
    2,642Other intangibles, net
    
    
    257
    
    
    
    478Capitalized software, net
    
    
    591
    
    
    
    626Total assets
    
    $
    114,742
    
    
    $
    159,431LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,335
    
    
    $
    3,144Deferred revenue
    
    
    16,105
    
    
    
    10,705Payroll and employee benefits
    
    
    2,373
    
    
    
    3,153Income taxes payable
    
    
    910
    
    
    
    2,295Other current liabilities
    
    
    4,279
    
    
    
    4,869Total current liabilities
    
    
    27,002
    
    
    
    24,166Deferred revenue
    
    
    685
    
    
    
    800Deferred compensation
    
    
    1,184
    
    
    
    958Total liabilities
    
    
    28,871
    
    
    
    25,924Minority interest
    
    
    167
    
    
    
    177Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at September 30, 2004 and Dec. 31, 2003
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    54,418
    
    
    
    54,167Retained earnings
    
    
    95,726
    
    
    
    148,596Treasury stock, at cost 3,584,669 shares September 30, 2004;
3,860,802 shares Dec. 31, 2003
    
    
    (64,843
    )
    
    
    (69,838
    )Accumulated other comprehensive income
    
    
    56
    
    
    
    58Total shareholders equity
    
    
    85,704
    
    
    
    133,330Total liabilities and shareholders equity
    
    $
    114,742
    
    
    $
    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
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    20,315
    
    
    $
    25,640
    
    
    $
    71,714
    
    
    $
    81,528Services
    
    
    5,227
    
    
    
    5,675
    
    
    
    16,542
    
    
    
    17,629Total net sales
    
    
    25,542
    
    
    
    31,315
    
    
    
    88,256
    
    
    
    99,157Cost of sales:Products
    
    
    1,564
    
    
    
    2,581
    
    
    
    5,151
    
    
    
    8,605Services
    
    
    2,191
    
    
    
    2,510
    
    
    
    8,129
    
    
    
    7,911Total costs of sales
    
    
    3,755
    
    
    
    5,091
    
    
    
    13,280
    
    
    
    16,516Gross profit
    
    
    21,787
    
    
    
    26,224
    
    
    
    74,976
    
    
    
    82,641Operating expenses:Products development
    
    
    4,391
    
    
    
    4,262
    
    
    
    12,842
    
    
    
    12,926Selling and marketing
    
    
    8,486
    
    
    
    7,866
    
    
    
    25,503
    
    
    
    22,718General and
administrative
    
    
    3,292
    
    
    
    3,172
    
    
    
    10,055
    
    
    
    10,577Total operating expenses
    
    
    16,169
    
    
    
    15,300
    
    
    
    48,400
    
    
    
    46,221Operating income
    
    
    5,618
    
    
    
    10,924
    
    
    
    26,576
    
    
    
    36,420Other income:Interest income
    
    
    248
    
    
    
    434
    
    
    
    753
    
    
    
    1,472Other, net
    
    
    274
    
    
    
    107
    
    
    
    442
    
    
    
    513Income before taxes
    
    
    6,140
    
    
    
    11,465
    
    
    
    27,771
    
    
    
    38,405Income tax provision
    
    
    2,272
    
    
    
    3,187
    
    
    
    10,275
    
    
    
    13,492Net income
    
    $
    3,868
    
    
    $
    8,278
    
    
    $
    17,496
    
    
    $
    24,913Earnings per share:Basic
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.56
    
    
    $
    0.80Diluted
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.56
    
    
    $
    0.80Cash dividends declared per share
    
    $
    0.04
    
    
    $
    
    
    
    $
    2.27
    
    
    $
    
 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 Nine Months EndedSeptember 30,2004
    
    2003(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    17,496
    
    
    $
    24,913Noncash (income) expenses included in net income -Depreciation and amortization
    
    
    2,787
    
    
    
    2,997Amortization of investment discounts/premiums
    
    
    577
    
    
    
    1,324Deferred income taxes
    
    
    (258
    )
    
    
    (246
    )Change in assets and liabilities -Accounts receivable
    
    
    457
    
    
    
    (997
    )Inventories
    
    
    (356
    )
    
    
    (330
    )Prepaid expenses
    
    
    640
    
    
    
    768Accounts payable and other current liabilities
    
    
    (1,266
    )
    
    
    160Deferred revenue
    
    
    5,285
    
    
    
    (308
    )Other current assets
    
    
    311
    
    
    
    248Other
    
    
    (24
    )
    
    
    76Net cash provided by operating activities
    
    
    25,649
    
    
    
    28,605Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (1,075
    )
    
    
    (2,069
    )Purchase of investment securities
    
    
    (34,922
    )
    
    
    (40,560
    )Maturities/sales of investment securities
    
    
    37,745
    
    
    
    59,090Capitalized software development costs
    
    
    (404
    )
    
    
    (263
    )Acquisitions
    
    
    
    
    
    
    (521
    )Net cash provided by investing activities
    
    
    1,344
    
    
    
    15,677Cash flows from financing activities:Return of capital to minority interest
    
    
    (54
    )
    
    
    Proceeds from issuance of stock
    
    
    
    
    
    
    1,046Proceeds from exercise of stock options
    
    
    4,173
    
    
    
    1,239Dividends paid
    
    
    (70,365
    )
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (23,727
    )Net cash used by financing activities
    
    
    (66,246
    )
    
    
    (21,442
    )Net (decrease) increase in cash and cash equivalents
    
    
    (39,253
    )
    
    
    22,840Cash and cash equivalents, beginning of period
    
    
    62,524
    
    
    
    18,220Cash and cash equivalents, end of period
    
    $
    23,271
    
    
    $
    41,060
 See 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 Generation21
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 nine month periods ended
September 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 nine months ending September 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 EndedSeptember 30
    
    Nine Months EndedSeptember 302004
    
    2003
    
    2004
    
    2003Basic weighted average shares outstanding
    
    
    31,126,343
    
    
    
    30,826,913
    
    
    
    31,055,595
    
    
    
    31,163,711Dilutive effect of outstanding stock options
    
    
    150,278
    
    
    
    239,303
    
    
    
    180,710
    
    
    
    171,583Diluted weighted average shares outstanding
    
    
    31,276,621
    
    
    
    31,066,216
    
    
    
    31,236,305
    
    
    
    31,335,294
 For the three months ended September 30, 2004 and 2003, 827,627 and
744,768 shares attributable to outstanding stock options were excluded from the
calculation of diluted earnings per share because the effect was antidilutive.
For the nine months ended September 30, 2004 and 2003, 813,290 and 872,323
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 $17.5 million and $24.7 million in the
first nine months of 2004 and 2003, respectively. For the quarters ended
September 30, 2004 and 2003, comprehensive income was $3.9 million and $8.3
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 $65,000 for the remainder of 2004, and $192,000
for 2005. For both three-month periods ended September 30, 2004 and 2003, we
recognized amortization expense on other intangibles of $74,000. For the nine
months ended September 30, 2004 and 2003, we recognized amortization expense of
$221,000 and $322,000, respectively. No goodwill or other intangibles were
acquired or impaired during the nine months ended September 30, 2004. During
August 2003 we purchased a start-up enterprise for the purpose of acquiring a
potential new product concept. This transaction was accounted for using the
purchase method of accounting, which resulted in recorded goodwill of $329,000.
Other intangibles consisted of the following (in thousands): September 30,
2004
    
    
    December 31, 2003Gross
    
    
    
    
    
    Other
    
    Gross
    
    
    
    
    
    OtherCarrying
    
    Accumulated
    
    Intangibles
    
    Carrying
    
    Accumulated
    
    IntangiblesAmount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetAlgorithms and software code
    
    $
    2,124
    
    
    $
    2,115
    
    
    $
    9
    
    
    $
    2,124
    
    
    $
    2,058
    
    
    $
    66Non-compete agreement
    
    
    1,100
    
    
    
    852
    
    
    
    248
    
    
    
    1,100
    
    
    
    688
    
    
    
    412Other intangibles
    
    $
    3,224
    
    
    $
    2,967
    
    
    $
    257
    
    
    $
    3,224
    
    
    $
    2,746
    
    
    $
    478
  6.
    
    Stock Option Plan We have established the 1997 Stock Incentive Plan for our officers, key
employees and non-employee directors. 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, Accounting for
Stock-Based Compensation, our net income and earnings per share would have
been adjusted to the pro forma amounts indicated below: Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share amounts)Net Income, as reported
    
    $
    3,868
    
    
    $
    8,278
    
    
    $
    17,496
    
    
    $
    24,913Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    440
    
    
    
    1,040
    
    
    
    1,598
    
    
    
    2,827Pro forma net income
    
    $
    3,428
    
    
    $
    7,238
    
    
    $
    15,898
    
    
    $
    22,086Earnings per share:Basic as reported
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.56
    
    
    $
    0.80Basic pro forma
    
    $
    0.11
    
    
    $
    0.23
    
    
    $
    0.51
    
    
    $
    0.71Diluted as reported
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.56
    
    
    $
    0.80Diluted pro forma
    
    $
    0.11
    
    
    $
    0.23
    
    
    $
    0.51
    
    
    $
    0.70
 The fair value of options granted during the three months and nine months ended September 30, 2004 and
2003 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted
average assumptions: Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Dividend yield
    
    
    0.64
    %
    
    
    0.00
    %
    
    
    0.64
    %
    
    
    0.00
    %Expected volatility
    
    
    60.00
    %
    
    
    65.00
    %
    
    
    62.48
    %
    
    
    75.20
    %Risk-free interest rate
    
    
    3.54
    %
    
    
    3.64
    %
    
    
    3.39
    %
    
    
    3.09
    %Expected life (in years)
    
    
    6
    
    
    
    6
    
    
    
    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 and September 1, 2004 we paid quarterly cash dividends of $.04 per
share totaling $1.2 million each quarter. On October 20, 2004, our Board of Directors declared a quarterly cash
dividend of $.04 per share, payable December 1, 2004 to shareholders of record
as of November 12, 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 many factors including the
general economic environment and its impact on state and federal budgetary
decisions, the length and complexity of the sales cycle for school districts,
and the impacts on revenue of transitioning some of our offerings to new
subscription-based products and services which results in a significant portion
of the revenue being initially deferred and recognized as revenue over the
subscription period. Each of these factors negatively impacted our results of
operations for the three- and nine-month periods ended September 30, 2004. In
addition, as we transition to our new web-based platform, Renaissance Place, we
believe we are experiencing an interruption in our typical order pattern as
customers take time to evaluate the new version and the benefits that it
offers. 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
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net Sales:Products
    
    
    79.5
    %
    
    
    81.9
    %
    
    
    81.3
    %
    
    
    82.2
    %Services
    
    
    20.5
    
    
    
    18.1
    
    
    
    18.7
    
    
    
    17.8Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    7.7
    %
    
    
    10.1
    %
    
    
    7.2
    %
    
    
    10.6
    %Services
    
    
    41.9
    
    
    
    44.2
    
    
    
    49.1
    
    
    
    44.9Total cost of sales
    
    
    14.7
    
    
    
    16.3
    
    
    
    15.0
    
    
    
    16.7Gross profit:Products
    
    
    92.3
    
    
    
    89.9
    
    
    
    92.8
    
    
    
    89.4Services
    
    
    58.1
    
    
    
    55.8
    
    
    
    50.9
    
    
    
    55.1Total gross profit
    
    
    85.3
    
    
    
    83.7
    
    
    
    85.0
    
    
    
    83.3Operating expenses:Product development
    
    
    17.2
    
    
    
    13.6
    
    
    
    14.6
    
    
    
    13.0Selling and marketing
    
    
    33.2
    
    
    
    25.1
    
    
    
    28.9
    
    
    
    22.9General and administrative
    
    
    12.9
    
    
    
    10.1
    
    
    
    11.4
    
    
    
    10.7Operating income
    
    
    22.0
    
    
    
    34.9
    
    
    
    30.1
    
    
    
    36.7Other, net
    
    
    2.0
    
    
    
    1.8
    
    
    
    1.4
    
    
    
    2.0Income before taxes
    
    
    24.0
    
    
    
    36.6
    
    
    
    31.5
    
    
    
    38.7Income tax provision
    
    
    8.9
    
    
    
    10.2
    
    
    
    11.6
    
    
    
    13.6Net income
    
    
    15.1
    %
    
    
    26.4
    %
    
    
    19.8
    %
    
    
    25.1
    %
 - 7 -




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Three Months Ended September 30, 2004 and 2003 Net Sales. Our net sales decreased by $5.8 million, or 18.4%, to $25.5
million in the third quarter of 2004 from $31.3 million in the third quarter of
2003. Product sales declined by $5.3 million, or 20.8%, to $20.3 million in
the third quarter of 2004 from $25.6 million in the third quarter of 2003.
Lower product sales were partially due to what we believe is an interruption in
our customers typical order patterns including customers delaying their
purchase decisions as they evaluate the benefits of the new Renaissance Place
versions. Product revenues were also impacted by sales of Renaissance Place
which, unlike our perpetually licensed versions, is a subscription-based
product that requires a significant portion of the sale to be initially
recorded as deferred revenue and then recognized as revenue over the
subscription period, typically 12 months. Deferred revenue grew by $3.3
million in the third quarter, mainly due to sales of Renaissance Place,
StandardsMasterand our mentor coaching services which are all sold on a
subscription basis. Service revenue for the third quarter of 2004 was $5.2 million, declining
by $447,000, or 7.9%, from the third quarter 2003. This decline was mainly
due to a decline in onsite and hotel training events partially offset by an
increase in coaching and technical consulting. We continue to de-emphasize
onsite and hotel events because we believe we can more effectively help our
customers implement our product solutions by providing ongoing assistance such
as mentor coaching. This coaching service is subscription-based which requires
the revenue to be deferred and recognized over the 12-month subscription
period. Fourth quarter revenues and earnings are also expected to be lower than
the prior years fourth quarter. English in a Flash, software for helping
teachers with English language learners and English as a second language
students, which was originally expected to ship in the fourth quarter of 2004,
may be delayed until the first quarter of 2005. Cost of Sales. The cost of sales of products decreased by $1.0 million,
or 39.4%, to $1.6 million in the third quarter of 2004 from $2.6 million in the
third quarter of 2003. As a percentage of product sales, the cost of sales of
products decreased to 7.7% in the third quarter of 2004 from 10.1% in the third
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 decreased by $319,000, or 12.7%, to $2.2
million in the third quarter of 2004 from $2.5 million in the third quarter of
2003. As a percentage of sales of services, the cost of sales of services
decreased to 41.9% in the third quarter of 2004 from 44.2% in the third quarter
of 2003. This decrease in the cost of sales of services as a percentage of
service revenue is mainly attributable to cost efficiencies in software support
and professional development. Product Development. Product development expenses were $4.4 million in
the third quarter of 2004, which was up by $129,000 from the third quarter of
2003. As a percentage of net sales, product development costs increased to
17.2% in the third quarter of 2004 from 13.6% in the third quarter of 2003
primarily due to the decline in sales. We did not capitalize any product
development expenses in the third quarter of 2004 compared to $43,000
capitalized in the third quarter of 2003. Selling and Marketing. Selling and marketing expenses were $8.5 million
in the third quarter of 2004, an increase of $619,000, or 7.9%, from $7.9
million in the third quarter of 2003. As a percentage of net sales, selling
and marketing expenses increased to 33.2% in the third quarter of 2004 from
25.1% in the third quarter of 2003. The increase in selling and marketing
expenses is primarily due to the field sales force expansion as well as
increased advertising related to promoting Renaissance Place. We expect
selling and marketing costs to continue to exceed the amount incurred in the
comparable prior year period due to the expansion of our field sales force and
planned marketing strategies. At September 30, 2004, we had 36 professionals
on our field sales team. General and Administrative. General and administrative expenses were $3.3
million for the third quarter of 2004, an increase of $120,000 from the $3.2
million in the third quarter of 2003. No significant change in general and
administrative expenses is expected in the fourth quarter of 2004 compared to
the first three quarters. As a percentage of net sales, general and
administrative expenses were 12.9% compared to 10.1% in the third quarter of
2003. ________________ *AR®, Accelerated Grammar and Spelling®, Accelerated Math®, Accelerated
Reader®, Accelerated Vocabulary®, Accelerated Writer®, AccelScan®, AccelTest®,
Generation21®, 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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Operating Income. Operating income was $5.6 million, or 22.0% of net
sales in the third quarter of 2004, compared to $10.9 million, or 34.9% of net
sales in the third quarter of 2003. Income Tax Expense. Income tax expense of $2.3 million was recorded in
the third quarter of 2004 at an effective income tax rate of 37.0% of pre-tax
income, compared to $3.2 million, or 27.8% of pre-tax income in the third
quarter of 2003. The third quarter 2003 tax expense included a tax benefit of
$1.1 million related to tax credits for research activities in excess of
previously estimated amounts. On October 22, 2004, the American Jobs Creation
Act of 2004 (the Act) was signed into law. The Act contains $137 billion in
tax cuts over a ten-year period beginning in 2005, which are mainly targeted at
U.S. manufacturing businesses and multinational companies. We have not yet
completed our assessment of how the Act might impact our future results of
operations or cash flows. Nine Months Ended September 30, 2004 and 2003 Net Sales. Our net sales of $88.3 million in the first nine months of
2004 were $10.9 million less than the $99.2 million in the first nine months of
2003. Revenues were down for several reasons including the on-going tight
state budgetary environment and its impact on funding for K-12 schools during
the 2003-2004 school year, the length and complexity of the sales cycle for
school districts, and due to increasing sales being recorded to deferred
revenue as further explained below. Product sales declined by $9.8 million, or 12.0%, to $71.7 million in the
first nine months of 2004 from $81.5 million in the same period in 2003. Lower
product sales were partially due to what we believe is an interruption in our
customers typical order patterns including customers delaying purchase
decisions to evaluate the benefits of the new Renaissance Placeversions.
Second and third quarter product revenues were also impacted by sales of
Renaissance Placewhich, unlike our perpetually licensed versions, is a
subscription-based product that requires a significant portion of the sale to
be initially recorded as deferred revenue and then recognized as revenue over
the subscription period, typically 12 months. Deferred revenue grew by $5.3
million in the first nine months of 2004, mainly due to sales of Renaissance
Placeand our mentor coaching services which are sold on a subscription basis.
While sales of several of our established products declined for the period,
sales of our new products introduced in 2002 and 2003 were slightly improved
over the same period in 2003. Service revenue declined by $1.1 million, or 6.2%, in the first nine
months of 2004 to $16.5 million from $17.6 million in the first nine 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. This decline was also partly due to less
onsite and hotel training events partially offset by an increase in technical
consulting and mentor coaching. Mentor coaching is a subscription-based
service that requires the revenue to be deferred and recognized over the
12-month subscription period. Cost of Sales. The cost of sales of products decreased by $3.5 million,
or 40.1%, to $5.2 million in the first nine months of 2004 from $8.6 million in
the first nine months of 2003. As a percentage of product sales, the cost of
sales of products decreased to 7.2% in the first nine months of 2004 from 10.6%
in the first nine months 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 $217,000, or 2.7%, to $8.1
million in the first nine months of 2004 from $7.9 million in the same period
in 2003. As a percentage of sales of services, the cost of sales of services
increased to 49.1% in the first nine months of 2004 from 44.9% in the first
nine 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. Product Development. Product development expenses were $12.8 million, or
14.6% of sales, in the first nine months of 2004, compared to $12.9 million, or
13.0% of sales, for the first nine months of 2003. We capitalized product
development expenses of $404,000 in the first nine months of 2004 compared to
$263,000 in the same period of 2003. Selling and Marketing. Selling and marketing expenses increased by $2.8
million, or 12.3%, to $25.5 million in the first nine months of 2004 from $22.7
million in the first nine months of 2003. The increase in selling and
marketing expenses was the result of growth in our field sales force. As a
percentage of net sales, selling and - 9 -




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marketing expenses increased to 28.9% in the first nine months of 2004 from
22.9% in the first nine months of 2003. Sales and marketing expenses are
expected to continue to exceed the amount incurred in the comparable prior year
period due to the expansion of our field sales force. General and Administrative. General and administrative expenses were
$10.1 million, or 11.4% of sales in the first nine months of 2004 compared to
$10.6 million or 10.7% of sales in the first nine months of 2003. This
decrease is primarily due to a one-time executive severance charge incurred in
the second quarter of 2003. Operating Income. Operating income decreased by $9.8 million, or 27.0%,
to $26.6 million in the first nine months of 2004 from $36.4 million in the
same period in 2003. As a percentage of net sales, operating income decreased
to 30.1% in the first nine months of 2004 from 36.7% in the first nine months
of 2003. Income Tax Expense. Income tax expense of $10.3 million was recorded in
the first nine months of 2004 at an effective income tax rate of 37.0% of
income before taxes compared to $13.5 million, or 35.1% of income before taxes,
in the first nine months of 2003. The 2003 tax expense included a tax benefit
of $1.1 million related to tax credits for research activities in excess of
previously estimated amounts. Liquidity and Capital Resources As of September 30, 2004, our cash, cash equivalents and investment
securities were $69.2 million, down $42.6 million from the December 31, 2003
total of $111.8 million. The decrease is primarily due to $25.6 million in net
cash provided by operating activities offset by a special cash dividend of
$66.7 million and quarterly cash dividends of $3.7 million during the first
nine 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 September 30, 2004, we had a $15.0 million unsecured revolving line of
credit with a bank that is available until May 31, 2006. 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 September 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 nine months ended September 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 remain at 4.0 million
shares with a cost of $72.9 million. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations As of September 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 September 30, 2004, there
has been no material change in our operating leases from that disclosed in our
2003 Annual Report. As of September 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 2003 Annual
Report, which factors are incorporated herein by reference to such report. 
 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 exposure to market risk by investing in accordance with
our corporate investment policy as established by our Board of Directors. The
goals of the policy are: (i) preservation of capital, (ii) provision of
adequate liquidity to meet projected cash requirements, (iii) minimization of
risk of principal loss through diversified short and medium term investments,
and (iv) maximization of yields in relationship to the guidelines, risk, market
conditions and tax considerations. Our investment policy specifically requires that: (i) each investment have
a maximum maturity of 36 months, (ii) 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) each investment meet minimum credit
quality requirements, (iv) 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) each investment meet certain maximum
maturity or tender option limits based on its minimum credit rating. Our
investment policy generally precludes investment in equity securities.
Substantially all of our investments are either: (i) money market funds, (ii)
municipal bonds, or (ii) investment grade commercial paper and corporate bonds.
Due to the type and duration of investments in our portfolio we do not expect
to realize any material gains or losses related to market risk. As of
September 30, 2004 our investment securities had a market value of
approximately $45.9 million and a carrying value of $45.9 million. 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 objectives and management
was necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. As of September 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 September 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 September 30, 2004: Total Number of
    
    MaximumShares Purchased
    
    Number of Sharesas Part of
    
    that May yet beTotal Number
    
    Average Price
    
    Publicly
    
    Purchased Underof Shares
    
    Paid per
    
    Announced Plans
    
    the Plans orPeriod
    
    Purchased
    
    Share
    
    or Programs
    
    ProgramsJuly
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    977,758August
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    977,758September
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    977,758Total
    
    
    0
    
    
    $
    0
    
    
    
    0
 
 Item 5. Other Information On September 1, 2004, we entered into the first amendment to the credit
agreement dated as of December 1, 2003 with Wells Fargo Bank, National
Association (as successor in interest to Wells Fargo Bank Wisconsin, National
Association). The agreement provides for a $15.0 million unsecured revolving
line of credit that is available until May 31, 2006. 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. As of September
30, 2004, the line of credit had not been used. - 13 -




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Item 6. Exhibits Exhibit No.
    
    Description10.1
    
    First Amendment to Credit Agreement dated as of December
1, 2003, by and between Wells Fargo Bank, National Association (as
successor in interest to Wells Fargo Bank Wisconsin, National
Association) and Registrant.
31.1
    
    Section 302 certification by John R. Hickey
31.2
    
    Section 302 certification by Steven A. Schmidt
32.1
    
    Section 906 certification by John R. Hickey
32.2
    
    Section 906 certification by Steven A. Schmidt
 - 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)November 5, 2004
    
    /s/ John R. HickeyDate
    
    John R. HickeyPresident and Chief Executive Officer(Principal Executive Officer)November 5,
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
    
    First Amendment to Credit Agreement dated as of December 1, 2003, by
and between Wells Fargo Bank, National Association (as successor in
interest to Wells Fargo Bank Wisconsin, National Association) and
Registrant.31.1
    
    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