##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K/A
 (Amendment No. 2)
 
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:
For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 0-22187
 RENAISSANCE LEARNING, INC.
  Wisconsin
    
    39-1559474(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)2911 Peach StreetP.O. Box 8036Wisconsin Rapids, Wisconsin
    
    54495-8036(Address of principal executive offices)
    
    (Zip Code)
 (715) 424-3636
  Title of each class:
    
    Name of each exchange on which registered:Common Stock, $.01 par value
    
    The NASDAQ Global Select Market
 None
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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Explanatory Note




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##### 



INDEX
 PagePART IItem 1.
    
    BusinessOverview
    
    
    2Software, Laptop Computing Solutions and Other Educational Products
    
    
    3Professional Services
    
    
    5Product Development
    
    
    5Selling and Marketing
    
    
    6Production
    
    
    6Competition
    
    
    6Intellectual Property
    
    
    7Employees
    
    
    7Backlog
    
    
    7Forward-Looking Statements
    
    
    7Item 1A.
    
    Risk Factors
    
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    
    12Item 2.
    
    Properties
    
    
    12Item 3.
    
    Legal Proceedings
    
    
    12Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    12PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    14Item 6.
    
    Selected Financial Data
    
    
    16Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 8.
    
    Financial Statements and Supplementary Data
    
    
    27Item 9.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    48Item 9A.
    
    Controls and Procedures
    
    
    48Item 9B.
    
    Other Information
    
    
    50PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    50Item 11.
    
    Executive Compensation
    
    
    50Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    50Item 13.
    
    Certain Relationships and Related Transactions
    
    
    51Item 14.
    
    Principal Accountant Fees and Services
    
    
    51PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    52SubsidiariesConsent of Independent Registered Public Accounting FirmDirectors' Powers of AttorneySection 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial OfficerSchedule II - Valuation and Qualifying Accounts
  1




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##### Table of Contents



PART I
 
 Item 1. Business
 
 Overview
  ccelerated Reader*, STAR Reading STAR Early Literacy Read Now Power
Up! Accelerated Math STAR Math Math
Facts in a Flash AlphaSmart English in a Flash 2Know! Accelerated
Math
 Accelerated Reader Accelerated Reader
 Renaissance Place Renaissance Place Renaissance Place Accelerated Reader
Enterprise Accelerated Math Enterprise Renaissance Place
   
 *
    
    AR, AccelScan, Accelerated Math, Accelerated Reader, Accelerated Vocabulary, AlphaSmart,
Dana, English in a Flash, MathFacts in a Flash, Neo, Read Now, Renaissance, Renaissance Learning,
Renaissance Place, STAR Early Literacy, STAR Reading, STAR Math and 2Know! are trademarks of
Renaissance Learning, Inc. registered ®, common law or pending registration in the United States
and other countries. Other trademarks are the property of their respective owners.Power Up! and Steck-Vaughn are trademarks of Harcourt Achieve, Inc., registered in the United
States of America and/or other jurisdictions. 2




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NASDAQ Global Select Market ® http://www.renlearn.com
 
 Software, Laptop Computing Solutions and Other Educational Products
 Accelerated Reader Accelerated Reader Accelerated Reader Accelerated
Reader Accelerated Reader Literacy Skills
 STAR Reading STAR Reading
 STAR Early Literacy STAR Early
Literacy
 Read Now Power Up! Steck-Vaughn Read Now Power Up! Read Now Power Up!
 3




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##### Table of Contents



Accelerated Math Accelerated Math AccelScan Accelerated Math
 AccelScan , Accelerated Math is AccelScan
 STAR Math STAR Reading STAR Math STAR Math
 MathFacts in a Flash
 English in a Flash
 AlphaSmart Laptops Neo Dana AlphaSmart AlphaSmart
 2Know! Renaissance
Learning
 Educator Resource Products.
 4




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##### Table of Contents



Professional Services
  Support Plans.
 Technical Services. Renaissance Renaissance Place
 Training and Professional Development Services.
 Renaissance Online
University
 
 Product Development
   5




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Selling and Marketing
 .
   Accelerated
Reader ccelerated Math Read Now Power Up!
 
 Production
 Accelerated Reader Accelerated Math
 AlphaSmart 2Know! AccelScan
 
 Competition
  6




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Intellectual Property
  
 Employees
  
 Backlog
  
 Forward-Looking Statements
  7




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##### Table of Contents



Item 1A. Risk Factors
 Reliance on Single Product Line. Accelerated Reader Accelerated
Reader Accelerated Reader
 Geographic Concentration of Sales.
 Dependence on Educational Institutions and Government Funding.
 Dependence on Continued Product Development.
 Acquisitions
 8




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Reliance on statistical studies to demonstrate effectiveness of our products and
services.
  Limited Protection of Intellectual Property and Proprietary Rights
 Selling and Marketing Strategy and Product Acceptance
 Risks of International Expansion.
 Educational Philosophies.
 9




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Highly Competitive Industry
  Dependence on Key Personnel
 Ability to Attract and Retain Qualified Personnel
 Fluctuations in Quarterly Performance
 
    
    delays in the development and/or shipment of new products;
    
    the closing of large contract sales, such as those to school districts;
    
    the shipment of new products for which orders have been building for a period of
time; and
    
    seasonal variations due to, among other things, the budget and school year cycles of
our school customers.
  
    
    charges related to acquisitions and divestitures, including related expenses, the
write-off of in-process research and development, the amortization of intangible
assets, asset impairments and similar items;
    
    charges related to obsolete or impaired assets;
    
    supply-chain issues such as manufacturing problems, delivery delays, or quality issues;
    
    expenses related to product development and marketing initiatives; and
    
    seasonal variability of product support costs.
  10




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Management of Growth.
 Share Price Volatility.
 War, Acts of War and Terrorism
 Concentration of Share Ownership; Control by Principal Shareholders/Management
 Shares Eligible for Future Sale
 Cash Dividends
 Possible Antitakeover Effects of Certain Articles and By-Laws Provisions and Provisions of
Wisconsin Law
 11




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Divestitures
 
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  12




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EXECUTIVE OFFICERS OF THE REGISTRANT
 Name and Age of Officer
    
    OfficeJudith Ames Paul
          Age 60
    
    Ms. Paul is the co-founder of the company and has
been chairman of the board of directors since
February 2006. From 1986 until July 2001, and again
from August 2002 until July 2003, Ms. Paul served as
chairman of the board, and from July 2001 until
August 2002, and again from July 2003 until February
2006, Ms. Paul served as co-chairman with Mr. Paul.
Ms. Paul has been a director since 1986. Ms. Paul
acts as our spokesperson and is a leading teacher
advocate. Ms. Paul holds a bachelors degree in
elementary education from the University of
Illinois. Judith Paul is Terrance Pauls wife.Terrance D. Paul
          Age 60
    
    Mr. Paul is the co-founder of the company and has
been our chief executive officer since February
2006. From February 2006 to April 2006, Mr. Paul
also served as our president. From August 2002
until July 2003, Mr. Paul served as our chief
executive officer. From July 1996 until July 2001,
Mr. Paul served as vice chairman of the board and
from July 2001 until August 2002, and again from
July 2003 until February 2006, Mr. Paul served as
co-chairman with Ms. Paul. Mr. Paul has been a
director since 1986. Mr. Paul holds a law degree
from the University of Illinois and an MBA from
Bradley University. Terrance Paul is Judith Pauls
husband.Steven A. Schmidt
          Age 52
    
    Mr. Schmidt has been our president and chief
operating officer since April 2006. From November
2005 until January 2006, he served as the companys
senior vice president, administration and
operations. From July 2003 to November 2005, Mr.
Schmidt served as the companys executive vice
president. From August 1999 until November 2004, he
served as our chief financial officer and secretary,
and from August 1999 until July 2003, he also served
as a vice president. From January 1998 until
December 1998, he served as corporate controller for
Wausau-Mosinee Paper Corporation, a specialty paper
manufacturer. Mr. Schmidt holds a bachelors degree
in accountancy from the University of Wisconsin-La
Crosse, and is a certified public accountant (CPA).Mary T. Minch
          Age 40
    
    Ms. Minch has been our chief financial officer and
secretary since November 2004 and has served as
senior vice president, finance since January 2007.
From December 2003 to January 2007, Ms. Minch served
as the companys vice president, finance. From
February 2003 to December 2003, Ms. Minch held the
position of North American division controller for
Stora Enso North American, Corp., a forest product
company whose parent company acquired Consolidated
Papers, Inc. From October 2000 to February 2003,
she served as controller-magazine papers at Stora
Enso North American, Corp. Ms. Minch holds
bachelors degrees in managerial accounting and
finance from the University of Wisconsin-Stevens
Point and a masters degree from the University of
Wisconsin-Oshkosh, and is a certified public
accountant (CPA).
   13




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  Holders
  Historical Dividends
  Performance Graph
   
 14




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Cumulative Return12/01
    
    12/02
    
    12/03
    
    12/04
    
    12/05
    
    12/06Renaissance Learning, Inc.
    
    
    100.00
    
    
    
    62.03
    
    
    
    79.00
    
    
    
    66.24
    
    
    
    68.25
    
    
    
    64.87NASDAQ Composite Index
    
    
    100.00
    
    
    
    71.97
    
    
    
    107.18
    
    
    
    117.07
    
    
    
    120.50
    
    
    
    137.02Peer Group
    
    
    100.00
    
    
    
    44.57
    
    
    
    81.10
    
    
    
    85.92
    
    
    
    98.88
    
    
    
    95.45
 Recent Sales of Unregistered Securities
  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    Total Number ofShares Purchased
    
    
    Maximum Number ofTotal Number
    
    
    Average Price
    
    
    as Part of Publicly
    
    
    Shares that May Yet Beof Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    Plans or ProgramsOctober 1-31
    
    
    54,341
    
    
    $
    14.86
    
    
    
    54,341
    
    
    
    538,722November 1-30
    
    
    47,277
    
    
    
    16.88
    
    
    
    47,277
    
    
    
    491,445December 1-31
    
    
    102,134
    
    
    
    17.51
    
    
    
    102,134
    
    
    
    389,311Total
    
    
    203,752
    
    
    $
    16.66
    
    
    
    203,752
 15




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Item 6. Selected Financial Data
 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Consolidated Income Statement DataNet sales:Products
    
    $
    90,750
    
    
    $
    94,296
    
    
    $
    91,482
    
    
    $
    106,080
    
    
    $
    108,406Services
    
    
    20,778
    
    
    
    21,987
    
    
    
    20,242
    
    
    
    21,552
    
    
    
    20,985Total net sales
    
    
    111,528
    
    
    
    116,283
    
    
    
    111,724
    
    
    
    127,632
    
    
    
    129,391Cost of sales:Products
    
    
    16,455
    
    
    
    12,917
    
    
    
    6,167
    
    
    
    10,656
    
    
    
    11,782Services
    
    
    10,011
    
    
    
    8,669
    
    
    
    9,532
    
    
    
    9,628
    
    
    
    9,243Total cost of sales
    
    
    26,466
    
    
    
    21,586
    
    
    
    15,699
    
    
    
    20,284
    
    
    
    21,025Gross profit
    
    
    85,062
    
    
    
    94,697
    
    
    
    96,025
    
    
    
    107,348
    
    
    
    108,366Operating expenses:Product development
    
    
    17,291
    
    
    
    17,046
    
    
    
    14,536
    
    
    
    14,881
    
    
    
    14,960Selling and marketing
    
    
    33,639
    
    
    
    30,778
    
    
    
    30,551
    
    
    
    27,997
    
    
    
    28,013General and administrative
    
    
    16,330
    
    
    
    12,989
    
    
    
    12,005
    
    
    
    12,346
    
    
    
    12,682Total operating expenses
    
    
    67,260
    
    
    
    60,813
    
    
    
    57,092
    
    
    
    55,224
    
    
    
    55,655Operating income
    
    
    17,802
    
    
    
    33,884
    
    
    
    38,933
    
    
    
    52,124
    
    
    
    52,711Other, net
    
    
    1,234
    
    
    
    3,494
    
    
    
    1,640
    
    
    
    2,267
    
    
    
    3,760Income  continuing operations before
income taxes
    
    
    19,036
    
    
    
    37,378
    
    
    
    40,573
    
    
    
    54,391
    
    
    
    56,471Income taxes  continuing operations
    
    
    7,043
    
    
    
    13,211
    
    
    
    15,012
    
    
    
    19,406
    
    
    
    21,744Income  continuing operations
    
    
    11,993
    
    
    
    24,167
    
    
    
    25,561
    
    
    
    34,985
    
    
    
    34,727Income (loss)  discontinued operations
    
    
    
    
    
    
    584
    
    
    
    (2,859
    )
    
    
    (2,444
    )
    
    
    (3,289
    )Net income
    
    $
    11,993
    
    
    $
    24,751
    
    
    $
    22,702
    
    
    $
    32,541
    
    
    $
    31,438Earnings (loss) per share:Basic:Continuing operations
    
    
    0.41
    
    
    
    0.78
    
    
    
    0.82
    
    
    
    1.12
    
    
    
    1.03Discontinued operations
    
    
    0.00
    
    
    
    0.02
    
    
    
    (0.09
    )
    
    
    (0.07
    )
    
    
    (0.10
    )Net income
    
    $
    0.41
    
    
    $
    0.80
    
    
    $
    0.73
    
    
    $
    1.05
    
    
    $
    0.93Diluted:Continuing operations
    
    
    0.41
    
    
    
    0.78
    
    
    
    0.82
    
    
    
    1.12
    
    
    
    1.02Discontinued operations
    
    
    0.00
    
    
    
    0.02
    
    
    
    (0.09
    )
    
    
    (0.08
    )
    
    
    (0.10
    )Net income
    
    $
    0.41
    
    
    $
    0.80
    
    
    $
    0.73
    
    
    $
    1.04
    
    
    $
    0.92Cash dividends declared per share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    2.31
    *
    
    $
    
    
    
    $
    Consolidated Balance Sheet DataWorking capital
    
    $
    15,282
    
    
    $
    21,539
    
    
    $
    41,815
    
    
    $
    103,240
    
    
    $
    74,496Total assets
    
    
    117,711
    
    
    
    128,382
    
    
    
    114,724
    
    
    
    159,601
    
    
    
    147,611Shareholders equity
    
    
    79,571
    
    
    
    95,866
    
    
    
    84,417
    
    
    
    133,330
    
    
    
    121,236
 
 *
    
    Includes a special dividend of $2.15 per share.  16




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Overview
       17




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Acquisition and Divestiture
 AlphaSmart Neo Dana AlphaSmart
  Results of Operations
  Renaissance Place
 Renaissance Place
 18




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For the Years Ended December 31,2006
    
    2005
    
    2004Net Sales:Products
    
    
    81.4
    %
    
    
    81.1
    %
    
    
    81.9
    %Services
    
    
    18.6
    
    
    
    18.9
    
    
    
    18.1Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    18.1
    %
    
    
    13.7
    %
    
    
    6.7
    %Services
    
    
    48.2
    
    
    
    39.4
    
    
    
    47.1Total cost of sales
    
    
    23.7
    
    
    
    18.6
    
    
    
    14.1Gross profit:Products
    
    
    81.9
    
    
    
    86.3
    
    
    
    93.3Services
    
    
    51.8
    
    
    
    60.6
    
    
    
    52.9Total gross profit
    
    
    76.3
    
    
    
    81.4
    
    
    
    85.9Operating expenses:Product development
    
    
    15.5
    
    
    
    14.7
    
    
    
    13.0Selling and marketing
    
    
    30.2
    
    
    
    26.5
    
    
    
    27.4General and administrative
    
    
    14.6
    
    
    
    11.1
    
    
    
    10.7Operating income
    
    
    16.0
    
    
    
    29.1
    
    
    
    34.8Other, net
    
    
    1.1
    
    
    
    3.1
    
    
    
    1.5Income  continuing operations before income taxes
    
    
    17.1
    
    
    
    32.2
    
    
    
    36.3Income taxes  continuing operations
    
    
    6.3
    
    
    
    11.4
    
    
    
    13.4Income  continuing operations
    
    
    10.8
    
    
    
    20.8
    
    
    
    22.9Income  discontinued operations
    
    
    0.0
    
    
    
    0.5
    
    
    
    (2.6
    )Net Income
    
    
    10.8
    %
    
    
    21.3
    %
    
    
    20.3
    %
 Years Ended December 31, 2006 and 2005
 Net Sales. Accelerated Reader
 19




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Cost of Sales.
   Product Development.
 Selling and Marketing.
 General and Administrative.
 Operating Income.
 20




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Other income.
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 Years Ended December 31, 2005 and 2004
 Net Sales.
  Cost of Sales.
 National School Renaissance Conference
  Product Development.
 Selling and Marketing.
 21




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General and Administrative. G
 Operating Income.
 Other income.
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 Liquidity and Capital Resources
     22




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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Operating Leases.
 Purchase Obligations. AlphaSmart AccelScan 2Know!
  Contractual Obligations
    
    
    
    
    
    Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More than(In Thousands)
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating lease obligations
    
    $
    7,108
    
    
    $
    1,969
    
    
    $
    3,700
    
    
    $
    653
    
    
    $
    786Purchase obligations
    
    
    5,170
    
    
    
    5,151
    
    
    
    19
    
    
    
    
    
    
    
    Total
    
    $
    12,278
    
    
    $
    7,120
    
    
    $
    3,719
    
    
    $
    653
    
    
    $
    786
 Retirement Plan.
 Other Obligations.
 Critical Accounting Policies and Estimates
  23




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Revenue Recognition.
  Impairment or Disposal of Long-Lived Assets.
  Software Support and Product Warranty Obligations.
 Software Development Costs.
 24




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Taxes.
  Recent Accounting Pronouncement
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
   25




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Foreign Currency Exchange Rate Risk
 26




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Item 8. Financial Statements and Supplementary Data
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      Internal ControlIntegrated
Framework
 
 
 27




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2006 and 2005
 As Restated,See Note 192006
    
    
    2005(In Thousands, Except Share andPer Share Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,953
    
    
    $
    7,083Investment securities
    
    
    22,525
    
    
    
    23,363Accounts receivable, less allowance of
$1,133 and $1,340, respectively
    
    
    10,528
    
    
    
    11,393Inventories
    
    
    4,108
    
    
    
    4,138Prepaid expenses
    
    
    1,896
    
    
    
    1,722Income taxes receivable
    
    
    1,291
    
    
    
    Deferred tax asset
    
    
    3,596
    
    
    
    3,693Other current assets
    
    
    97
    
    
    
    390Total current assets
    
    
    49,994
    
    
    
    51,782Investment securities
    
    
    1,625
    
    
    
    4,132Property, plant and equipment, net
    
    
    11,811
    
    
    
    11,475Deferred tax asset
    
    
    
    
    
    
    738Goodwill
    
    
    46,973
    
    
    
    45,906Other intangibles, net
    
    
    6,124
    
    
    
    6,787Capitalized software, net
    
    
    727
    
    
    
    420Other receivables
    
    
    
    
    
    
    5,909Other non-current assets
    
    
    457
    
    
    
    1,233Total assets
    
    $
    117,711
    
    
    $
    128,382LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,782
    
    
    $
    3,280Deferred revenue
    
    
    23,751
    
    
    
    18,255Payroll and employee benefits
    
    
    4,750
    
    
    
    4,156Income taxes payable
    
    
    
    
    
    
    313Other current liabilities
    
    
    3,429
    
    
    
    4,239Total current liabilities
    
    
    34,712
    
    
    
    30,243Deferred revenue
    
    
    885
    
    
    
    670Deferred compensation and other employee benefits
    
    
    1,665
    
    
    
    1,603Deferred tax liability
    
    
    878
    
    
    
    Total liabilities
    
    
    38,140
    
    
    
    32,516Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at December 31, 2006 and 2005
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    55,542
    
    
    
    56,522Retained earnings
    
    
    124,290
    
    
    
    118,233Treasury stock, at cost: 5,733,130 shares at
December 31, 2006;
4,387,594 shares at December 31, 2005
    
    
    (99,265
    )
    
    
    (78,845
    )Unearned restricted stock compensation
    
    
    (1,417
    )
    
    
    (438
    )Accumulated other comprehensive income
    
    
    74
    
    
    
    47Total shareholders equity
    
    
    79,571
    
    
    
    95,866Total liabilities and shareholders equity
    
    $
    117,711
    
    
    $
    128,382
  28




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2006, 2005 and 2004
 2006
    
    
    2005
    
    
    2004(In Thousands,Except Per Share Amounts)Net Sales:Products
    
    $
    90,750
    
    
    $
    94,296
    
    
    $
    91,482Services
    
    
    20,778
    
    
    
    21,987
    
    
    
    20,242Total net sales
    
    
    111,528
    
    
    
    116,283
    
    
    
    111,724Cost of sales:Products
    
    
    16,455
    
    
    
    12,917
    
    
    
    6,167Services
    
    
    10,011
    
    
    
    8,669
    
    
    
    9,532Total cost of sales
    
    
    26,466
    
    
    
    21,586
    
    
    
    15,699Gross profit
    
    
    85,062
    
    
    
    94,697
    
    
    
    96,025Operating expenses:Product development
    
    
    17,291
    
    
    
    17,046
    
    
    
    14,536Selling and marketing
    
    
    33,639
    
    
    
    30,778
    
    
    
    30,551General and administrative
    
    
    16,330
    
    
    
    12,989
    
    
    
    12,005Total operating expenses
    
    
    67,260
    
    
    
    60,813
    
    
    
    57,092Operating income
    
    
    17,802
    
    
    
    33,884
    
    
    
    38,933Other income:Interest income
    
    
    1,078
    
    
    
    1,324
    
    
    
    1,072Other, net
    
    
    156
    
    
    
    2,170
    
    
    
    568Income  continuing operations before income taxes
    
    
    19,036
    
    
    
    37,378
    
    
    
    40,573Income taxes  continuing operations
    
    
    7,043
    
    
    
    13,211
    
    
    
    15,012Income  continuing operations
    
    
    11,993
    
    
    
    24,167
    
    
    
    25,561Income (loss)  discontinued operations
    
    
    
    
    
    
    584
    
    
    
    (2,859
    )Net Income
    
    $
    11,993
    
    
    $
    24,751
    
    
    $
    22,702Earnings (Loss) per share:BasicContinuing operations
    
    $
    0.41
    
    
    $
    0.78
    
    
    $
    0.82Discontinued operations
    
    
    0.00
    
    
    
    0.02
    
    
    
    (0.09
    )Net income
    
    $
    0.41
    
    
    $
    0.80
    
    
    $
    0.73DilutedContinuing operations
    
    $
    0.41
    
    
    $
    0.78
    
    
    $
    0.82Discontinued operations
    
    
    0.00
    
    
    
    0.02
    
    
    
    (0.09
    )Net income
    
    $
    0.41
    
    
    $
    0.80
    
    
    $
    0.73
  29




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2006, 2005 and 2004
 Unearned
    
    
    
    
    
    
    AccumulatedCommon
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Restricted
    
    
    Other
    
    
    TotalStock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    Stock
    
    
    Comprehensive
    
    
    ShareholdersAmount (1)
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Equity(In Thousands)Balance, December 31, 2003
    
    $
    347
    
    
    $
    54,167
    
    
    $
    148,596
    
    
    $
    (69,838
    )
    
    $
    
    
    
    $
    58
    
    
    $
    133,330Net income
    
    
    
    
    
    
    
    
    
    
    22,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,702Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    46Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,748Dividends ($2.31 per share)
    
    
    
    
    
    
    
    
    
    
    (71,609
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,609
    )Stock repurchased for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,539
    )
    
    
    
    
    
    
    
    
    
    
    (5,539
    )Exercise of stock options
    
    
    
    
    
    
    (833
    )
    
    
    
    
    
    
    5,164
    
    
    
    
    
    
    
    
    
    
    
    4,331Tax benefit on stock options
    
    
    
    
    
    
    1,156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,156Balance, December 31, 2004
    
    
    347
    
    
    
    54,490
    
    
    
    99,689
    
    
    
    (70,213
    )
    
    
    
    
    
    
    104
    
    
    
    84,417Net income
    
    
    
    
    
    
    
    
    
    
    24,751
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,751Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    (57
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,694Dividends ($.20 per share)
    
    
    
    
    
    
    
    
    
    
    (6,207
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,207
    )Stock repurchased for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,374
    )
    
    
    
    
    
    
    
    
    
    
    (32,374
    )Treasury shares issued for
purchase of AlphaSmart
    
    
    
    
    
    
    2,171
    
    
    
    
    
    
    
    20,895
    
    
    
    
    
    
    
    
    
    
    
    23,066Exercise of stock options
    
    
    
    
    
    
    (350
    )
    
    
    
    
    
    
    2,455
    
    
    
    
    
    
    
    
    
    
    
    2,105Tax benefit on stock options
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Restricted stock grants
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    392
    
    
    
    (491
    )
    
    
    
    
    
    
    Shared-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    53Balance, December 31, 2005
    
    
    347
    
    
    
    56,522
    
    
    
    118,233
    
    
    
    (78,845
    )
    
    
    (438
    )
    
    
    47
    
    
    
    95,866Net income
    
    
    
    
    
    
    
    
    
    
    11,993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,993Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,020Dividends ($.20 per share)
    
    
    
    
    
    
    
    
    
    
    (5,936
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,936
    )Stock repurchased for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,474
    )
    
    
    
    
    
    
    
    
    
    
    (22,474
    )Exercise of stock options
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    16Payment for cancellation of
stock options
    
    
    
    
    
    
    (1,001
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,001
    )Share-based compensation
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    601
    
    
    
    
    
    
    
    687Tax benefit on stock options
    
    
    
    
    
    
    393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    393Restricted stock grants
    
    
    
    
    
    
    (456
    )
    
    
    
    
    
    
    2,036
    
    
    
    (1,580
    )
    
    
    
    
    
    
    Balance, December 31, 2006
    
    $
    347
    
    
    $
    55,542
    
    
    $
    124,290
    
    
    $
    (99,265
    )
    
    $
    (1,417
    )
    
    $
    74
    
    
    $
    79,571
 
 (1)
    
    Common Stock, $0.01 par value, 150,000,000 shares authorized.  30




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2006, 2005 and 2004
 As Restated, See Note 192006
    
    
    2005
    
    
    2004(In Thousands)Reconciliation of net income to net cash provided by
operating activities:Net income
    
    $
    11,993
    
    
    $
    24,751
    
    
    $
    22,702(Income) loss from discontinued operations
    
    
    
    
    
    
    (584
    )
    
    
    2,859Income from continuing operations
    
    
    11,993
    
    
    
    24,167
    
    
    
    25,561Adjustments to arrive at cash provided by operating
activities:Depreciation and amortization
    
    
    3,541
    
    
    
    3,179
    
    
    
    3,315Amortization of investment discounts/premiums
    
    
    163
    
    
    
    396
    
    
    
    696Share-based compensation expense
    
    
    687
    
    
    
    53
    
    
    
    Deferred income taxes
    
    
    2,719
    
    
    
    1,437
    
    
    
    118Excess tax benefits from share based payment arrangements
    
    
    (393
    )
    
    
    (112
    )
    
    
    (1,156
    )Gain on sale of property
    
    
    (4
    )
    
    
    (1,798
    )
    
    
    9Change in assets and liabilities, excluding the effects
of acquisitions and divestituresAccounts receivable
    
    
    938
    
    
    
    1,903
    
    
    
    4,090Inventories
    
    
    (334
    )
    
    
    568
    
    
    
    (94
    )Prepaid expenses
    
    
    (291
    )
    
    
    (369
    )
    
    
    107Income taxes
    
    
    (975
    )
    
    
    (937
    )
    
    
    (214
    )Accounts payable and other liabilities
    
    
    (1,405
    )
    
    
    (483
    )
    
    
    650Deferred revenue
    
    
    5,711
    
    
    
    1,821
    
    
    
    6,034Other current assets
    
    
    293
    
    
    
    1,460
    
    
    
    437Other
    
    
    (375
    )
    
    
    128
    
    
    
    (33
    )Cash provided by continuing operating activities
    
    
    22,268
    
    
    
    31,413
    
    
    
    39,520Cash used by discontinued operations
    
    
    
    
    
    
    (116
    )
    
    
    (3,437
    )Net cash provided by operating activities
    
    
    22,268
    
    
    
    31,297
    
    
    
    36,083Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (2,819
    )
    
    
    (2,419
    )
    
    
    (1,046
    )Purchase of investment securities
    
    
    (20,040
    )
    
    
    (36,866
    )
    
    
    (83,289
    )Maturities/sales of investment securities
    
    
    23,220
    
    
    
    71,481
    
    
    
    101,730Capitalized software development costs
    
    
    (689
    )
    
    
    (279
    )
    
    
    (563
    )Proceeds from mortgage note
    
    
    5,909
    
    
    
    
    
    
    
    Net proceeds from sale of property
    
    
    23
    
    
    
    3,166
    
    
    
    1Net proceeds from sale of subsidiary
    
    
    
    
    
    
    75
    
    
    
    Acquisitions of business, net of cash acquired
    
    
    
    
    
    
    (33,970
    )
    
    
    Cash provided (used) by investing activities
    
    
    5,604
    
    
    
    1,188
    
    
    
    16,833Cash used by discontinued operations
    
    
    
    
    
    
    
    
    
    
    (365
    )Net cash provided (used) by investing activities
    
    
    5,604
    
    
    
    1,188
    
    
    
    16,468Cash flows from financing activities:Return of capital to minority interest
    
    
    
    
    
    
    (98
    )
    
    
    (54
    )Proceeds from exercise of stock options
    
    
    16
    
    
    
    2,105
    
    
    
    4,331Payment for cancellation of stock options
    
    
    (1,001
    )
    
    
    
    
    
    
    Excess tax benefits from share based payment arrangements
    
    
    393
    
    
    
    112
    
    
    
    1,156Dividends paid
    
    
    (5,936
    )
    
    
    (6,207
    )
    
    
    (71,609
    )Purchase of treasury stock
    
    
    (22,474
    )
    
    
    (32,374
    )
    
    
    (5,539
    )Net cash used by financing activities
    
    
    (29,002
    )
    
    
    (36,462
    )
    
    
    (71,715
    )Net (decrease) in cash and cash equivalents
    
    
    (1,130
    )
    
    
    (3,977
    )
    
    
    (19,164
    )Cash and cash equivalents, beginning of period
    
    
    7,083
    
    
    
    11,060
    
    
    
    30,224Cash and cash equivalents, end of period
    
    $
    5,953
    
    
    $
    7,083
    
    
    $
    11,060Supplemental cash flow informationCash paid during the year for -
Income taxes (net of refunds)
    
    $
    5,281
    
    
    $
    11,121
    
    
    $
    13,054
  31




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Consolidation
  (2) Basis of presentation
  (3) Nature of operations
  Accelerated
Reader STAR Reading, STAR Early Literacy, Read Now Power Up!, Accelerated Math, STAR Math,
MathFacts in a Flash, and English in a Flash.
 AlphaSmart 2Know! AccelScan Accelerated Math
  32




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (4) Acquisition
    Twelve Months Ended December 31,2005
    
    2004(In Thousands, except per share amounts)Net sales
    
    $
    131,576
    
    
    $
    147,151Income from continuing operations
    
    
    24,104
    
    
    
    26,971Earnings per share from
continuing operationsBasic earnings per share
    
    $
    0.75
    
    
    $
    0.83Diluted earnings per share
    
    
    0.75
    
    
    
    0.82
 (5) Significant accounting policies
 (a) Use of estimates
  33




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (b) Revenue recognition
     (c) Impairment or Disposal of Long-Lived Assets.
   (d) Cash and cash equivalents
  34




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (e) Investment securities
      2006
    
    
    2005Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(In Thousands)Current:Corporate bonds
    
    $
    
    
    
    $
    
    
    
    $
    3,000
    
    
    $
    2,976Auction rate securities
    
    
    20,025
    
    
    $
    20,025
    
    
    
    
    
    
    
    Municipal bonds due in less than 1 year
    
    
    2,500
    
    
    
    2,496
    
    
    
    20,363
    
    
    
    20,270Current investment securities
    
    
    22,525
    
    
    
    22,521
    
    
    
    23,363
    
    
    
    23,246Debt securities due in 1 to 2 years:Municipal bonds
    
    
    
    
    
    
    
    
    
    
    2,529
    
    
    
    2,513Equity securities:Mutual fund investments
    
    
    1,625
    
    
    
    1,626
    
    
    
    1,603
    
    
    
    1,603Non-current investment securities
    
    
    1,625
    
    
    
    1,626
    
    
    
    4,132
    
    
    
    4,116Total investment securities
    
    $
    24,150
    
    
    $
    24,147
    
    
    $
    27,495
    
    
    $
    27,362
 (f) Inventories
  35




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (g) Advertising costs
  (h) Property, plant and equipment
    2006
    
    
    2005(In Thousands)Land and improvements
    
    $
    1,219
    
    
    $
    1,219Buildings
    
    
    9,967
    
    
    
    9,991Furniture, fixtures and office equipment
    
    
    4,694
    
    
    
    4,729Computer and production equipment
    
    
    11,474
    
    
    
    11,274Other
    
    
    1,713
    
    
    
    1,667Total property, plant and equipment
    
    
    29,067
    
    
    
    28,880Less  accumulated depreciation and amortization
    
    
    17,256
    
    
    
    17,405Property, plant and equipment, net
    
    $
    11,811
    
    
    $
    11,475
 (i) Software development costs
  (j) Sales and concentration of credit risks
  36




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (k) Share-based compensation
      (In Thousands, Except Per Share Amounts)
    
    2005
    
    2004Net Income, as reported
    
    $
    24,751
    
    
    $
    22,702Add: share based compensation included in reported net income, net of tax
    
    
    33
    
    
    
    Deduct: total share-based compensation expense determined
under fair-value based method for all awards, net of tax
    
    
    2,518
    
    
    
    1,681Pro forma net income
    
    $
    22,266
    
    
    $
    21,021Basic earnings per share:As reported
    
    $
    0.80
    
    
    $
    0.73Pro forma
    
    
    0.72
    
    
    
    0.68Diluted earnings per share:As reported
    
    $
    0.80
    
    
    $
    0.73Pro forma
    
    
    0.72
    
    
    
    0.67The per share weighted average fair value of options
granted under the plan during the year is:
    
    $
    10.06
    
    
    $
    14.08
 37




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  2006
    
    2005
    
    2004Dividend yield
    
    
    1.39
    %
    
    
    1.01
    %
    
    
    0.64
    %Expected volatility
    
    
    55.00
    %
    
    
    57.08
    %
    
    
    62.48
    %Risk-free interest rate
    
    
    4.66
    %
    
    
    4.00
    %
    
    
    3.39
    %Expected life (in years)
    
    
    5
    
    
    
    5
    
    
    
    6
  (l) Earnings per common share
     2006
    
    2005
    
    2004Basic weighted average shares outstanding
    
    
    29,551,309
    
    
    
    30,966,501
    
    
    
    31,046,200Dilutive effect of outstanding stock options
    
    
    7,626
    
    
    
    63,151
    
    
    
    153,611Dilutive effect of restricted shares
    
    
    10,325
    
    
    
    20
    
    
    
    Diluted weighted average shares outstanding
    
    
    29,569,260
    
    
    
    31,029,672
    
    
    
    31,199,811
 38




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (m) Income taxes
  (n) Comprehensive income (loss)
  (o) Shipping and handling revenues and costs
  (p) Other receivable
  (6)
    
    Goodwill and other intangible assets
   (In Thousands)Balance at December 31, 2004
    
    $
    2,757Acquisition
    
    
    43,134Translation
    
    
    15Balance at December 31, 2005
    
    
    45,906Acquisition  final allocation adjustment
    
    
    1,066Translation
    
    
    1Balance at December 31, 2006
    
    $
    46,973
 39




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
   December 31, 2006
    
    
    December 31, 2005Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    Net(In Thousands)Tradename
    
    $
    3,000
    
    
    
    
    
    
    $
    3,000
    
    
    $
    3,000
    
    
    
    
    
    
    $
    3,000Customer relationships
    
    
    4,150
    
    
    $
    1,026
    
    
    
    3,124
    
    
    
    4,150
    
    
    $
    363
    
    
    
    3,787Other intangibles
    
    $
    7,150
    
    
    $
    1,026
    
    
    $
    6,124
    
    
    $
    7,150
    
    
    $
    363
    
    
    $
    6,787
 (7)
    
    Income taxes
  2006
    
    
    2005
    
    
    2004(In Thousands)Current tax provision:U.S. federal
    
    $
    3,783
    
    
    $
    9,840
    
    
    $
    12,341State and local
    
    
    518
    
    
    
    1,850
    
    
    
    2,497Foreign
    
    
    23
    
    
    
    84
    
    
    
    56Total current tax provision
    
    
    4,324
    
    
    
    11,774
    
    
    
    14,894Deferred tax provision:U.S. federal
    
    
    2,571
    
    
    
    1,329
    
    
    
    113State and local
    
    
    148
    
    
    
    108
    
    
    
    5Total deferred tax provision
    
    
    2,719
    
    
    
    1,437
    
    
    
    118Provision for income taxes
    
    $
    7,043
    
    
    $
    13,211
    
    
    $
    15,012
  2006
    
    2005
    
    2004(In Thousands)Income tax provision at statutory
tax rate
    
    $
    6,663
    
    
    
    35.0
    %
    
    $
    13,083
    
    
    
    35.0
    %
    
    $
    14,201
    
    
    
    35.0
    %State and local taxes, net of
federal tax benefit
    
    
    433
    
    
    
    2.3
    %
    
    
    1,273
    
    
    
    3.4
    %
    
    
    1,640
    
    
    
    4.0
    %Federal tax credits and exclusions
    
    
    (82
    )
    
    
    (0.4
    %)
    
    
    (327
    )
    
    
    (0.8
    %)
    
    
    (262
    )
    
    
    (0.6
    %)Resolution of prior period tax matters
    
    
    
    
    
    
    0.0
    %
    
    
    (779
    )
    
    
    (2.1
    %)
    
    
    
    
    
    
    0.0
    %Other
    
    
    29
    
    
    
    0.1
    %
    
    
    (39
    )
    
    
    (0.2
    %)
    
    
    (567
    )
    
    
    (1.4
    %)Provision for income taxes
    
    $
    7,043
    
    
    
    37.0
    %
    
    $
    13,211
    
    
    
    35.3
    %
    
    $
    15,012
    
    
    
    37.0
    %
 40




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  2006
    
    
    2005(In Thousands)Current deferred tax assets:Deferred revenue
    
    $
    1,062
    
    
    $
    854Expenses not currently deductible
    
    
    2,534
    
    
    
    2,839Net current deferred tax assets
    
    
    3,596
    
    
    
    3,693Noncurrent deferred tax assets (liabilities):Deferred revenue
    
    
    32
    
    
    
    100Expenses not currently deductible
    
    
    86
    
    
    
    1,676Depreciation and amortization
    
    
    388
    
    
    
    255Intangibles
    
    
    (1,384
    )
    
    
    (1,293
    )Net noncurrent deferred tax asset (liability)
    
    
    (878
    )
    
    
    738Total deferred tax assets
    
    $
    2,718
    
    
    $
    4,431
 (8)
    
    Lines of credit
  (9) Lease commitments
   (In Thousands)2007
    
    $
    1,9692008
    
    
    1,6592009
    
    
    1,1272010
    
    
    9142011
    
    
    653After 2011
    
    
    786$
    7,108
 (10) Litigation
  41




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (11) Retirement plans
       2006
    
    
    2005
    
    
    2004(In Thousands)Employer matching contribution  401(k) Plan
    
    $
    1,318
    
    
    $
    1,027
    
    
    $
    1,124Employer matching contribution  SERP
    
    
    15
    
    
    
    16
    
    
    
    24Loss related to unfunded SERP liability
    
    
    
    
    
    
    
    
    
    
    16Total
    
    $
    1,333
    
    
    $
    1,043
    
    
    $
    1,164
 (12) Stock incentive plan
  (a) Stock option awards
 42




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning of year
    
    
    1,519,820
    
    
    $
    22.42
    
    
    
    1,625,038
    
    
    $
    22.85
    
    
    
    1,989,383
    
    
    $
    21.82Granted
    
    
    9,616
    
    
    
    14.86
    
    
    
    223,044
    
    
    
    20.58
    
    
    
    122,067
    
    
    
    24.73Exercised*
    
    
    (241,149
    )
    
    
    13.54
    
    
    
    (135,880
    )
    
    
    15.49
    
    
    
    (285,522
    )
    
    
    15.17Forfeitures
    
    
    (392,771
    )
    
    
    26.47
    
    
    
    (192,382
    )
    
    
    28.82
    
    
    
    (200,890
    )
    
    
    24.68Outstanding at end of year
    
    
    895,516
    
    
    
    22.96
    
    
    
    1,519,820
    
    
    
    22.42
    
    
    
    1,625,038
    
    
    
    22.85Options exercisable at end of year
    
    
    893,297
    
    
    $
    22.98
    
    
    
    1,515,381
    
    
    $
    22.44
    
    
    
    1,074,182
    
    
    $
    23.12
 
 *
    
    Includes 240,119 of shares related to payment of $1,000,501 to cancel in-the-money options, primarily of the companys
former chief executive officer  Outstanding Options
    
    Exercisable OptionsWeighted Average
    
    
    
    
    
    
    
    
    
    Weighted AverageRange of
    
    Options
    
    Remaining
    
    Weighted Average
    
    Options
    
    Exercise Price ofExercise price
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercisable Options$8.00 to $16.00
    
    
    67,442
    
    
    
    3.10
    
    
    $
    12.55
    
    
    
    67,442
    
    
    $
    12.55$16.01 to $22.00
    
    
    434,372
    
    
    
    5.10
    
    
    
    17.81
    
    
    
    432,153
    
    
    
    17.82$22.01 to $29.00
    
    
    95,927
    
    
    
    7.40
    
    
    
    24.48
    
    
    
    95,927
    
    
    
    24.48$29.01 to $34.00
    
    
    194,303
    
    
    
    4.43
    
    
    
    30.65
    
    
    
    194,303
    
    
    
    30.65$34.01 to $40.00
    
    
    102,938
    
    
    
    3.93
    
    
    
    35.45
    
    
    
    102,938
    
    
    
    35.45$40.01 to $52.00
    
    
    534
    
    
    
    4.55
    
    
    
    51.49
    
    
    
    534
    
    
    
    51.49$8.00 to $51.58
    
    
    895,516
    
    
    
    4.91
    
    
    $
    22.96
    
    
    
    893,297
    
    
    $
    22.98
 Restricted stock awards 
  (13) Shareholders equity
  43




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Weighted average
    
    Aggregate annualNumber of shares
    
    repurchased price
    
    cost of repurchasedrepurchased
    
    per share*
    
    stock*2006
    
    
    1,461,216
    
    
    $
    15.38
    
    
    $
    22,474,6282005
    
    
    1,837,231
    
    
    $
    18.00
    
    
    $
    32,373,7192004
    
    
    290,000
    
    
    $
    18.19
    
    
    $
    5,539,329
 
 *
    
    Includes broker commission  (14) Segment reporting
  44




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (15) Quarterly results of operations (unaudited)
  Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 312006
    
    (In Thousands, Except Per Share Amounts)Net sales
    
    $
    31,117
    
    
    $
    29,319
    
    
    $
    25,167
    
    
    $
    25,925Gross profit
    
    
    23,983
    
    
    
    22,462
    
    
    
    18,768
    
    
    
    19,849Operating income
    
    
    5,240
    
    
    
    7,076
    
    
    
    2,987
    
    
    
    2,499Income  continuing operations before income taxes
    
    
    5,522
    
    
    
    7,419
    
    
    
    3,303
    
    
    
    2,792Income taxes  continuing operations
    
    
    2,043
    
    
    
    2,745
    
    
    
    1,222
    
    
    
    1,033Income  continuing operations
    
    
    3,479
    
    
    
    4,674
    
    
    
    2,081
    
    
    
    1,759Income  discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    3,479
    
    
    
    4,674
    
    
    
    2,081
    
    
    
    1,759Earnings per share:Basic and diluted:Continuing operations
    
    
    0.12
    
    
    
    0.16
    
    
    
    0.07
    
    
    
    0.06Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    0.12
    
    
    
    0.16
    
    
    
    0.07
    
    
    
    0.06Common stock price per share:High
    
    
    19.96
    
    
    
    17.21
    
    
    
    15.19
    
    
    
    18.76Low
    
    
    15.98
    
    
    
    12.64
    
    
    
    10.61
    
    
    
    13.712005
    
    (In Thousands, Except Per Share Amounts)Net sales
    
    $
    27,557
    
    
    $
    28,346
    
    
    $
    31,389
    
    
    $
    28,991Gross profit
    
    
    23,608
    
    
    
    24,210
    
    
    
    23,992
    
    
    
    22,887Operating income
    
    
    8,876
    
    
    
    11,150
    
    
    
    7,399
    
    
    
    6,459Income  continuing operations before income taxes
    
    
    9,332
    
    
    
    11,652
    
    
    
    7,803
    
    
    
    8,591Income taxes  continuing operations
    
    
    3,453
    
    
    
    4,311
    
    
    
    2,887
    
    
    
    2,560Income  continuing operations
    
    
    5,879
    
    
    
    7,341
    
    
    
    4,916
    
    
    
    6,031Income  discontinued operations
    
    
    584
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    6,463
    
    
    
    7,341
    
    
    
    4,916
    
    
    
    6,031Earnings per share:Basic and diluted:Continuing operations
    
    
    0.19
    
    
    
    0.24
    
    
    
    0.16
    
    
    
    0.20Discontinued operations
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    0.21
    
    
    
    0.24
    
    
    
    0.16
    
    
    
    0.20Common stock price per share:High
    
    
    18.39
    
    
    
    20.30
    
    
    
    24.16
    
    
    
    20.29Low
    
    
    15.25
    
    
    
    15.67
    
    
    
    16.09
    
    
    
    13.69
 Earnings per share amounts for each quarter are required to be calculated independently and
therefore may not total to the amount calculated for the year.
 Generation21 was divested during the first quarter of 2005 and, therefore, its results for all
periods presented in the consolidated financial statements are reflected as discontinued operations.
 45




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 (16) Recent accounting pronouncements
  (17) Discontinued operations
   (In Thousands)
    
    2005
    
    
    2004Operating (loss)
    
    $
    (192
    )
    
    $
    (4,538
    )Income tax benefit
    
    
    76
    
    
    
    1,679Loss from operations, net
    
    
    (116
    )
    
    
    (2,859
    )(Loss) on disposal
    
    
    (642
    )
    
    
    Tax benefit on disposal
    
    
    1,342
    
    
    
    Gain on disposal, net
    
    
    700
    
    
    
    Gain (loss) from discontinued operations, net
    
    $
    584
    
    
    $
    (2,859
    )
 (18) Subsequent event
  (19) Restatement of Financial Statements
   46




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 2006
    
    2005
    
    2004As previously
    
    As
    
    As previously
    
    As
    
    As previously
    
    Asreported
    
    Restated
    
    reported
    
    Restated
    
    reported
    
    RestatedCash flows from investing activities:Purchase of investment securities
    
    $
    (517
    )
    
    $
    (20,040
    )
    
    $
    (6,834
    )
    
    $
    (36,866
    )
    
    $
    (46,408
    )
    
    $
    (83,289
    )Maturities/sales of investment securities
    
    
    23,722
    
    
    
    23,220
    
    
    
    25,049
    
    
    
    71,481
    
    
    
    48,949
    
    
    
    101,730Net cash provided by (used) investing activities
    
    
    25,629
    
    
    
    5,604
    
    
    
    (15,212
    )
    
    
    1,188
    
    
    
    568
    
    
    
    16,468Net increase (decrease) in cash & cash equivalents
    
    
    18,895
    
    
    
    (1,130
    )
    
    
    (20,377
    )
    
    
    (3,977
    )
    
    
    (35,064
    )
    
    
    (19,164
    )Cash and cash equivalents, beginning of period
    
    
    7,083
    
    
    
    7,083
    
    
    
    27,460
    
    
    
    11,060
    
    
    
    62,524
    
    
    
    30,224Cash and cash equivalents, end of period
    
    
    25,978
    
    
    
    5,953
    
    
    
    7,083
    
    
    
    7,083
    
    
    
    27,460
    
    
    
    11,060
  December 31, 2006As previouslyBalance sheet
    
    reported
    
    As RestatedCash and cash equivalents
    
    $
    25,978
    
    
    $
    5,953Short-term investments
    
    
    2,500
    
    
    
    22,525
 47




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##### Table of Contents



Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
    Managements Report on Internal Control Over Financial Reporting
 Internal Control -
Integrated Framework Internal Control  Integrated
Framework
  48




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Shareholders of  Renaissance Learning, Inc. and Subsidiaries
 Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework Internal ControlIntegrated Framework
  
  49




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##### Table of Contents



Item 9B. Other Information
 Not applicable.
 
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
 (a)
    
    Executive Officers.Reference is made to Executive Officers of the
Registrant in Part I hereof.(b)
    
    Directors.The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 18, 2007 under the
caption Proposal One: Election of Directors, which information is incorporated by
reference herein.(c)
    
    Section 16 Compliance.The information required by this Item is set forth in
our Proxy Statement for the Annual Meeting of Shareholders to be held on April 18, 2007
under the caption Section 16(a) Beneficial Ownership Reporting Compliance, which
information is incorporated by reference herein.(d)
    
    Code of Ethics.We have adopted a code of ethics pursuant to Item 406 of
Regulation S-K. A copy of our code of ethics is incorporated by reference herein (see
Exhibit 14.1 of Exhibit Index).(e)
    
    Audit Committee.The information required by this Item is set forth in our
Proxy Statement for the Annual Meeting of Shareholders to be held on April 18, 2007
under the caption Proposal One: Election of Directors  Audit Committee, which
information is incorporated by reference herein.
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  50




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##### Table of Contents



EQUITY COMPENSATION PLAN INFORMATION
  Number of securitiesavailable for futureNumber of Securities to
    
    
    Weighted-average
    
    
    issuance under equitybe issued upon exercise of
    
    
    exercise price of
    
    
    compensation plansoutstanding options,
    
    
    outstanding options,
    
    
    (excluding securitiesPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in first column)Equity compensation plans approved by
security holders
    
    
    893,297
    
    
    $
    22.98
    
    
    
    2,740,014
    (1)Equity compensation plans not approved
by security holders(2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    893,297
    
    
    $
    22.98
    
    
    
    2,740,014
 
 (1)
    
    Of the 6,000,000 shares currently authorized for issuance under our 1997 stock
incentive plan, 2,500,620 remain available for future issuance. Under our 1998 employee stock
purchase plan (ESPP), 239,394 shares remain available for future issuance. We did not offer the
ESPP to employees in 2006 and do not intend to offer the plan to the employees in 2007.(2)
    
    Both of the companys equity compensation plans have been approved by shareholders. 
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  51




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)(1)
    
    Financial Statements.Consolidated Financial StatementsReport of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2006 (Restated) and 2005Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005
and 2004Consolidated Statements of Cash Flows for the years ended December 31, 2006 (Restated), 2005
(Restated) and 2004 (Restated)Notes to Consolidated Financial Statements(a)(2)
    
    Financial Statement Schedules.See the Exhibit Index, which is incorporated by reference herein.(a)(3)
    
    Exhibits.See (b) below.(b)
    
    Exhibits.See the Exhibit Index, which is incorporated by reference herein.(c)
    
    Financial Statements Excluded from Annual Report to Shareholders.Not applicable.
 52




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##### Table of Contents



SIGNATURES
  RENAISSANCE LEARNING, INC.By:
    /s/ Terrance D. PaulTerrance D. PaulChief Executive Officer and a DirectorDate:
    August 8, 2007  Name
    
    Title
    
    Date/s/ Terrance D. Paul

Terrance D. Paul
    
    Chief Executive Officer
(Principal Executive Officer)
and a Director
    
    August 8, 2007/s/ Mary T. Minch

Mary T. Minch
    
    Senior Vice President-Finance,
Chief Financial Officer and
Secretary (Principal Financial
and Accounting Officer)
    
    August 8, 2007
  By:
    
    /s/ Mary T. Minch
    
    
    
    August 8, 2007Mary T. MinchAttorney-In-Fact*
 
 *
    
    Pursuant to authority granted by powers of attorney, copies of which are filed herewith. 53




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##### Table of Contents



ExhibitNumber
    
    Exhibit2.1
    
    LLC Interest purchase Agreement dated as of February 28, 2005 among Registrant, Generation21
Learning Systems, LLC and John Stearns (pursuant to Item 601(b)(2) of Regulation S-K, the
schedules and exhibits to the LLC Interest Purchase Agreement have been omitted; a copy of
such schedules and exhibits will be supplementally provided to the SEC upon
request).(17)2.2
    
    Agreement and Plan of Merger and Reorganization by and among Registrant, RLI Acquisition
Corp., Inc., RLI Acquisition Sub, LLC and AlphaSmart, Inc. dated as of January 24, 2005, as
amended on April 20, 2005 (pursuant to Item 601(b)(2) of Regulation S-K, the annex, exhibits
and schedules to the Agreement and Plan of Merger and Reorganization have been omitted; a copy
of such annex, exhibits and schedules will be supplementally provided to the SEC upon
request). (18)2.3
    
    Purchase Agreement dated as of November 1, 2005 among Renaissance Learning, Inc. and
DezCon, LLC (pursuant to Item 601(b)(2) of regulation S-K, the exhibits to the Purchase Agreement have been omitted;
a copy of such exhibits will be supplementally provided to the Securities and Exchange Commission upon request).
(19)3.1
    
    Amended and Restated Articles of Incorporation of Registrant, as amended. (10)3.2
    
    Amended and Restated By-laws of Registrant, as amended. (7)4.1
    
    Form of Stock Certificate. (2)10.1
    
    1997 Stock Incentive Plan (as amended and restated). (3)*10.2
    
    Credit Agreement dated as of December 1, 2003, by and between Wells Fargo Bank, National
Association and Registrant. (16)10.3
    
    First Amendment to Credit Agreement dated as of September 1, 2004 by and between Wells
Fargo Bank, National Association and Registrant. (15)10.4
    
    Second Amendment to Credit Agreement dated as of May 31, 2005 by and between Wells Fargo
Bank, National Association and Registrant. (23)10.5
    
    Third Amendment to Credit Agreement dated as of October 1, 2005 by and between Wells
Fargo Bank, National Association and Registrant. (23)10.6
    
    Fourth Amendment to Credit Agreement dated as of June 30, 2006 by and
between Wells Fargo Bank, National Association and Registrant .(24)10.7
    
    Amended and Restated Employee Stock Purchase Plan. (9)*10.8
    
    Severance Agreement between Registrant and Michael H. Baum dated June 27, 2003. (13)*10.9
    
    Severance Agreement between Registrant and John R. Hickey dated February 15, 2006. (22)*10.10
    
    Incentive Bonus Plan. (13)*10.11
    
    Transfer Agreement dated as of June 16, 2004 between Registrant and Terrance D. Paul. (14)*10.12
    
    Assignment and Assumption of Transfer Agreement dated as of June 16, 2004 between Registrant
and Terrance D. Paul. (14)*
 54




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.13
    
    Executive Officer Compensation Summary. (25)*10.14
    
    Offer to Purchase effective as of November 1, 2005 among Registrant and Planning Design
Build, Inc. (19)10.15
    
    Form of Restricted Stock Agreement. (20)*10.16
    
    Form of Restricted Stock Unit Agreement between Registrant and certain non-employee
directors. (2410.17
    
    Form of Nonstatutory Stock Option Agreement between Registrant and certain employees and
consultants. (21)*10.18
    
    Form of Nonstatutory Stock Option Agreement between Registrant and certain non-employee
directors. (21)*10.19
    
    Form of Non-Employee Director Indemnification Agreement.(26)14.1
    
    Code of Business Conduct and Ethics. (16)21.1
    
    Subsidiaries of Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm.24.1
    
    Directors Powers of Attorney.31.1
    
    Section 302 Certification by Terrance D. Paul, Chief Executive Officer.31.2
    
    Section 302 Certification by Mary T. Minch, Chief Financial Officer.32.1
    
    Section 906 Certification by Terrance D. Paul, Chief Executive Officer.32.2
    
    Section 906 Certification by Mary T. Minch, Chief Financial Officer.99.1
    
    Schedule II  Valuation and Qualifying Accounts.
 
 (1)
    
    [Reserved].(2)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended September 30, 1997
(SEC File No. 0-22187).(3)
    
    Incorporated by reference to Registrants Form S-8 filed on April 18, 2003 (Registration No.
333-104622).(4)
    
    Incorporated by reference to Registrants Form 10-K for the fiscal year ended December 31,
1997 (SEC File No. 0-22187).(5)
    
    Incorporated by reference to Registrants Form 10-K for the fiscal year ended December 31,
1998 (SEC File No. 0-22187).(6)
    
    Incorporated by reference to Registrants Form 10-K for the fiscal year ended December 31,
1999 (SEC File No. 0-22187).(7)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended March 31, 2000 (SEC
File No. 0-22187).(8)
    
    [Reserved].(9)
    
    Incorporated by reference to Registrants Form 10-K for the fiscal year ended December 31,
2000 (SEC File No. 0-22187). 55




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##### Table of Contents



(10)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended March 31, 2001 (SEC
File No. 0-22187).(11)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended March 31, 2002 (SEC
File No. 0-22187).(12)
    
    Incorporated by reference to Registrants Form 8-K dated May 22, 2002 (SEC File No. 0-22187).(13)
    
    [Reserved].(14)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended June 30, 2004 (SEC
File No. 0-22187).(15)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended September 30, 2004
(SEC File No. 0-22187).(16)
    
    Incorporated by reference to Registrants Form 10-K for the fiscal year ended December 31,
2003 (SEC File No. 0-22187).(17)
    
    Incorporated by reference to Registrants Form 8-K filed on March 4, 2005 (SEC File No. 0-22187).(18)
    
    Incorporated by reference to Registrants Form 8-K filed on April 26, 2005 (SEC File No. 0-22187).(19)
    
    Incorporated by reference to Registrants Form 8-K filed on November 4, 2005 (SEC File No. 0-22187).(20)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended June 30, 2005 (SEC File No. 0-22187).(21)
    
    Incorporated by reference to Registrants Form 8-K filed on March 7, 2005 (SEC File No. 0-22187).(22)
    
    Incorporated by reference to Registrants Form 8-K filed on February 21, 2006 (SEC File No. 0-22187).(23)
    
    Incorporated by reference to Registrants Form 10-K for the fiscal year ended December 31,
2005 (SEC File No. 0-22187).(24)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended September 30, 2006
(SEC File No. 0-22187).(25)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended June 30, 2006 (SEC
File No. 0-22187).(26)
    
    Incorporated by reference to Registrants Form 8-K filed on January 29, 2006 (SEC File No.
0-22187).*
    
    Management contracts or compensatory plans or arrangements.THE REGISTRANT WILL FURNISH A COPY OF ANY OF THE FOREGOING EXHIBITS UPON THE REQUEST OF A
SHAREHOLDER AFTER THE PAYMENT OF A FEE BY SUCH SHAREHOLDER WHICH SHALL REPRESENT REGISTRANTS
REASONABLE EXPENSES INCURRED IN FURNISHING ANY SUCH EXHIBIT. REQUESTS SHOULD BE SENT TO
RENAISSANCE LEARNING, INC., 2911 PEACH STREET, P.O. BOX 8036, WISCONSIN RAPIDS, WISCONSIN
54495-8036, ATTENTION: CORPORATE SECRETARY. 56