##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 31, 2006
 Commission File Number 0-20842
 PLATO LEARNING, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    36-3660532(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)
 10801 Nesbitt Avenue South, Bloomington, MN 55437  (Address of principal executive offices)
 (952) 832-1000  (Registrants telephone number, including area code)
 Not Applicable  (Former name, former address and former fiscal year, if changed since last report)
 þ o
  o þ o
 o þ
    1




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##### Table of Contents



PLATO LEARNING, INC.
Form 10-Q
Quarterly Period Ended January 31, 2006
 TABLE OF CONTENTS
 PagePART I.FINANCIAL
INFORMATIONITEM 1.
    
    Financial Statements:Condensed Consolidated Statements of Operations for the
Three Months Ended January 31, 2006 and 2005 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of
January 31, 2006 and October 31, 2005 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Three Months Ended January 31, 2006 and 2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    15ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23ITEM 4.
    
    Controls and Procedures
    
    
    23PART II.OTHER
INFORMATIONITEM 1A.
    
    Risk Factors
    
    
    24ITEM 6.
    
    Exhibits
    
    
    24SIGNATURES
    
    
    
    
    25Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated
Statements of Operations (Unaudited)
(In thousands, except per share amounts)
 Three Months EndedJanuary 31,2006
    
    
    2005Revenues:License fees
    
    $
    9,049
    
    
    $
    12,002Subscriptions
    
    
    4,356
    
    
    
    4,533Services
    
    
    10,081
    
    
    
    8,920Total revenues
    
    
    23,486
    
    
    
    25,455Cost of revenues:License fees
    
    
    2,973
    
    
    
    4,404Subscriptions
    
    
    2,241
    
    
    
    2,313Services
    
    
    4,782
    
    
    
    6,854Total cost of revenues
    
    
    9,996
    
    
    
    13,571Gross profit
    
    
    13,490
    
    
    
    11,884Operating expenses:Sales and marketing
    
    
    9,734
    
    
    
    13,326General and administrative
    
    
    4,648
    
    
    
    4,210Product development
    
    
    1,539
    
    
    
    1,471Amortization of intangibles
    
    
    969
    
    
    
    1,092Restructuring and other charges
    
    
    80
    
    
    
    2,289Total operating expenses
    
    
    16,970
    
    
    
    22,388Operating loss
    
    
    (3,480
    )
    
    
    (10,504
    )Other income (expense):Interest income
    
    
    465
    
    
    
    212Interest expense
    
    
    (21
    )
    
    
    (15
    )Other expense, net
    
    
    (11
    )
    
    
    (70
    )Loss before income taxes
    
    
    (3,047
    )
    
    
    (10,377
    )Income tax expense
    
    
    150
    
    
    
    150Net loss
    
    $
    (3,197
    )
    
    $
    (10,527
    )Loss per share:Basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.46
    )Weighted average common shares outstanding:Basic and diluted
    
    
    23,629
    
    
    
    23,110
 See Notes to Condensed Consolidated Financial Statements.
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PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets (Unaudited)
 (In thousands, except per share amounts)
 January 31,
    
    
    October 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,362
    
    
    $
    46,901Marketable securities
    
    
    221
    
    
    
    213Accounts receivable, net
    
    
    14,518
    
    
    
    22,768Inventories
    
    
    3,530
    
    
    
    4,026Other current assets
    
    
    6,012
    
    
    
    6,351Total current assets
    
    
    65,643
    
    
    
    80,259Equipment and leasehold improvements, net
    
    
    5,320
    
    
    
    5,711Product development costs, net
    
    
    16,149
    
    
    
    14,753Goodwill
    
    
    71,865
    
    
    
    71,865Identified intangible assets, net
    
    
    21,235
    
    
    
    22,505Other long-term assets
    
    
    2,006
    
    
    
    2,235Total assets
    
    $
    182,218
    
    
    $
    197,328LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,384
    
    
    $
    2,938Accrued compensation
    
    
    6,768
    
    
    
    7,772Accrued liabilities
    
    
    6,275
    
    
    
    8,933Deferred revenue
    
    
    28,752
    
    
    
    35,218Total current liabilities
    
    
    43,179
    
    
    
    54,861Long-term deferred revenue
    
    
    4,300
    
    
    
    5,213Deferred income taxes
    
    
    2,081
    
    
    
    1,931Other long-term liabilities
    
    
    404
    
    
    
    496Total liabilities
    
    
    49,964
    
    
    
    62,501Stockholders equity:Common stock, $.01 par value, 50,000 shares authorized;
23,691 shares issued and 23,671 shares outstanding at January
31, 2006; 23,637 shares issued and 23,617 shares outstanding
at October 31, 2005
    
    
    237
    
    
    
    236Additional paid in capital
    
    
    166,935
    
    
    
    166,295Treasury stock at cost
    
    
    (205
    )
    
    
    (205
    )Accumulated deficit
    
    
    (33,734
    )
    
    
    (30,537
    )Accumulated other comprehensive loss
    
    
    (979
    )
    
    
    (962
    )Total stockholders equity
    
    
    132,254
    
    
    
    134,827Total liabilities and stockholders equity
    
    $
    182,218
    
    
    $
    197,328
 See Notes to Condensed Consolidated Financial Statements.
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PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Three Months EndedJanuary 31,2006
    
    
    2005Operating activities:Net loss
    
    $
    (3,197
    )
    
    $
    (10,527
    )Adjustments to reconcile net loss to net cash used in operating activities:Deferred income taxes
    
    
    150
    
    
    
    150Amortization of capitalized product development costs
    
    
    1,600
    
    
    
    1,868Amortization of identified intangible and other noncurrent assets
    
    
    1,354
    
    
    
    2,243Depreciation and amortization of equipment and leasehold improvements
    
    
    638
    
    
    
    873Provision for doubtful accounts
    
    
    227
    
    
    
    305Stock-based compensation
    
    
    322
    
    
    
    Loss on disposal of equipment
    
    
    
    
    
    
    14Changes in assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    8,023
    
    
    
    12,875Inventories
    
    
    496
    
    
    
    (696
    )Other current and long-term assets
    
    
    484
    
    
    
    (243
    )Accounts payable
    
    
    (1,554
    )
    
    
    (2,197
    )Other current and long-term liabilities
    
    
    (3,760
    )
    
    
    (1,449
    )Deferred revenue
    
    
    (7,379
    )
    
    
    (4,916
    )Total adjustments
    
    
    601
    
    
    
    8,827Net cash used in operating activities
    
    
    (2,596
    )
    
    
    (1,700
    )Investing activities:Capitalized product development costs
    
    
    (2,996
    )
    
    
    (2,876
    )Purchases of equipment and leasehold improvements
    
    
    (248
    )
    
    
    (748
    )Purchases of marketable securities
    
    
    
    
    
    
    (2,985
    )Sales and maturities of marketable securities
    
    
    
    
    
    
    16,251Net cash (used in) provided by investing activities
    
    
    (3,244
    )
    
    
    9,642Financing activities:Net proceeds from issuance of common stock
    
    
    355
    
    
    
    1,400Repayments of capital lease obligations
    
    
    (30
    )
    
    
    (26
    )Net cash provided by financing activities
    
    
    325
    
    
    
    1,374Effect of currency exchange rate changes on cash and cash equivalents
    
    
    (24
    )
    
    
    308Net (decrease) increase in cash and cash equivalents
    
    
    (5,539
    )
    
    
    9,624Cash and cash equivalents at beginning of period
    
    
    46,901
    
    
    
    29,235Cash and cash equivalents at end of period
    
    $
    41,362
    
    
    $
    38,859
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Note 1. General
 Basis of Presentation
  Consolidation
  Fiscal Periods
  Reclassifications
  6




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In thousands
    
    Revenue
    
    
    Cost of RevenueLicense
    
    
    Service
    
    
    Other
    
    
    License
    
    
    Service
    
    
    OtherQuarter Ended January 31, 2005:As previously classified
    
    $
    11,095
    
    
    $
    8,196
    
    
    $
    1,631
    
    
    $
    3,432
    
    
    $
    6,126
    
    
    $
    1,700Reclassifications
    
    
    907
    
    
    
    724
    
    
    
    (1,631
    )
    
    
    972
    
    
    
    728
    
    
    
    (1,700
    )As reclassfied
    
    $
    12,002
    
    
    $
    8,920
    
    
    $
    
    
    
    $
    4,404
    
    
    $
    6,854
    
    
    $
    Quarter Ended April 30, 2005:As previously classified
    
    $
    14,233
    
    
    $
    10,908
    
    
    $
    1,771
    
    
    $
    2,869
    
    
    $
    6,108
    
    
    $
    1,985Reclassifications
    
    
    1,066
    
    
    
    705
    
    
    
    (1,771
    )
    
    
    1,374
    
    
    
    611
    
    
    
    (1,985
    )As reclassfied
    
    $
    15,299
    
    
    $
    11,613
    
    
    $
    
    
    
    $
    4,243
    
    
    $
    6,719
    
    
    $
    Quarter Ended July 31, 2005:As previously classified
    
    $
    16,747
    
    
    $
    7,440
    
    
    $
    2,652
    
    
    $
    3,001
    
    
    $
    4,892
    
    
    $
    2,560Reclassifications
    
    
    1,857
    
    
    
    795
    
    
    
    (2,652
    )
    
    
    1,857
    
    
    
    703
    
    
    
    (2,560
    )As reclassfied
    
    $
    18,604
    
    
    $
    8,235
    
    
    $
    
    
    
    $
    4,858
    
    
    $
    5,595
    
    
    $
    Year Ended October 31, 2005:As previously classified
    
    $
    57,803
    
    
    $
    38,342
    
    
    $
    7,662
    
    
    $
    12,353
    
    
    $
    21,809
    
    
    $
    7,876Reclassifications
    
    
    4,724
    
    
    
    2,938
    
    
    
    (7,662
    )
    
    
    5,327
    
    
    
    2,549
    
    
    
    (7,876
    )As reclassfied
    
    $
    62,527
    
    
    $
    41,280
    
    
    $
    
    
    
    $
    17,680
    
    
    $
    24,358
    
    
    $
    
 Note 2. Summary of Significant Accounting Policies
 General
  
    
    Revenue recognition
    
    Allowance for doubtful accounts
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  Stock-Based Compensation
 Share-Based Payment,
 7




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Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
  Loss Per Share
  New Accounting Pronouncements
  
    
    Financial Accounting Standards Board (FASB) Staff Position FAS 13-1, Accounting
for Rental Costs Incurred during a Construction Period (October 2005);
    
    FASB Staff Position FAS 115-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments (November 2005);
    
    FASB Staff Position FIN 45-3, Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners (November 2005); and,
    
    FASB SFAS No. 155, Accounting for Certain Hybrid Financial Instruments  an
amendment of FASB Statements No. 133 and 140 (February 2006).
  Note 3. Stock-Based Compensation
  8




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Share-Based Payment
 Expected life
    
    

4.3 yearsRisk-free rate of return
    
    
    4.4% - 4.5
    %Volatility
    
    
    49.0
    %Dividend yield
    
    
    0.0
    %
   9




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##### Table of Contents



Net loss, as reported
    
    $
    (10,527
    )Stock-based compensation expense included in
reported net loss
    
    
    Stock-based compensation expense determined using
the fair value based method for all awards
    
    
    (730
    )Pro forma net loss
    
    $
    (11,257
    )Basic and diluted loss per share:As reported
    
    $
    (0.46
    )Pro forma
    
    $
    (0.49
    )
   WeightedWeighted
    
    
    AverageAverage
    
    
    Contractual
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Term (in
    
    
    IntrinsicOutstanding
    
    
    per Share
    
    
    years)
    
    
    ValueOptions outstanding at October 31, 2005
    
    
    2,652
    
    
    $
    9.51Options granted
    
    
    708
    
    
    
    7.60Options exercised
    
    
    (53
    )
    
    
    6.47Options forfeited or cancelled
    
    
    (158
    )
    
    
    11.95Options outstanding at January 31, 2006
    
    
    3,149
    
    
    
    9.00
    
    
    
    6.3
    
    
    $
    2,317Options exercisable at January 31, 2006
    
    
    2,190
    
    
    
    9.69
    
    
    
    5.9
    
    
    
    1,553
  10




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##### Table of Contents



Note 4. Supplemental Financial Statement Information
  January 31,
    
    
    October 31,2006
    
    
    2005Third-party hardware
    
    $
    1,511
    
    
    $
    1,779Media, documentation, and packaging materials
    
    
    2,019
    
    
    
    2,247$
    3,530
    
    
    $
    4,026
 Note 5. Accounts Receivable
  January 31,
    
    
    October 31,2006
    
    
    2005Trade accounts receivable
    
    $
    14,146
    
    
    $
    21,930Installment accounts receivable
    
    
    2,330
    
    
    
    2,485Allowance for doubtful accounts
    
    
    (1,958
    )
    
    
    (1,647
    )$
    14,518
    
    
    $
    22,768
   Note 6. Goodwill and Identified Intangible Assets
  11




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##### Table of Contents



January 31, 2006
    
    
    October 31, 2005Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortzation
    
    
    Value
    
    
    Value
    
    
    Amortzation
    
    
    ValueAcquired technology
    
    $
    23,029
    
    
    $
    (16,946
    )
    
    $
    6,083
    
    
    $
    23,029
    
    
    $
    (16,645
    )
    
    $
    6,384Trademarks and
tradenames
    
    
    3,680
    
    
    
    (2,213
    )
    
    
    1,467
    
    
    
    3,680
    
    
    
    (2,036
    )
    
    
    1,644Customer relationships
and lists
    
    
    21,100
    
    
    
    (7,415
    )
    
    
    13,685
    
    
    
    21,100
    
    
    
    (6,644
    )
    
    
    14,456Noncompete agreements
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    
    
    
    
    1,000
    
    
    
    (979
    )
    
    
    21$
    48,809
    
    
    $
    (27,574
    )
    
    $
    21,235
    
    
    $
    48,809
    
    
    $
    (26,304
    )
    
    $
    22,505
   Cost of
    
    
    OperatingRevenues
    
    
    Expense
    
    
    TotalRemainder of 2006
    
    $
    904
    
    
    $
    2,742
    
    
    $
    3,6462007
    
    
    1,206
    
    
    
    3,529
    
    
    
    4,7352008
    
    
    1,206
    
    
    
    3,105
    
    
    
    4,3112009
    
    
    1,069
    
    
    
    2,829
    
    
    
    3,8982010
    
    
    647
    
    
    
    2,829
    
    
    
    3,476Thereafter
    
    
    1,051
    
    
    
    118
    
    
    
    1,169$
    6,083
    
    
    $
    15,152
    
    
    $
    21,235
  Note 7. Debt
    12




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Note 8. Deferred Revenue
  January 31,
    
    
    October 31,2006
    
    
    2005License fees
    
    $
    1,963
    
    
    $
    4,476Subscriptions
    
    
    11,042
    
    
    
    12,546Services
    
    
    20,047
    
    
    
    23,409Total
    
    
    33,052
    
    
    
    40,431Less: long-term amounts
    
    
    (4,300
    )
    
    
    (5,213
    )Current portion
    
    $
    28,752
    
    
    $
    35,218
 Note 9. Restructuring and Other Charges
  Three Months EndedJanuary 31,2006
    
    
    2005Restructuring charges:Severance and related benefits for U.K. headcount reduction
    
    $
    
    
    
    $
    430Severance and related benefits for U.S. headcount reduction
    
    
    80
    
    
    
    27380
    
    
    
    703Other charges:Executive officer changes
    
    
    
    
    
    
    1,586$
    80
    
    
    $
    2,289
  13




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Severanceand related
    
    
    Facilitybenefits
    
    
    closings
    
    
    Other
    
    
    TotalReserve balance at October 31, 2005
    
    $
    1,598
    
    
    $
    177
    
    
    $
    401
    
    
    $
    2,176Provision for restructuring
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    80Cash payments
    
    
    (1,378
    )
    
    
    (77
    )
    
    
    (5
    )
    
    
    (1,460
    )Other
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Reserve balance at January 31, 2006
    
    $
    300
    
    
    $
    100
    
    
    $
    375
    
    
    $
    775
 Note 10.Comprehensive Loss
  Three Months EndedJanuary 31,2006
    
    
    2005Net loss
    
    $
    (3,197
    )
    
    $
    (10,527
    )Unrealized gains on available for sale securities
    
    
    8
    
    
    
    42Foreign currency translation adjustments
    
    
    (25
    )
    
    
    217Total comprehensive loss
    
    $
    (3,214
    )
    
    $
    (10,268
    )
  Note 11. Subsequent Event  Commitment
  14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Business Description
    Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Allowance for doubtful accounts
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
   15




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Share-Based Payment,
 General Factors Affecting our Financial Results
  Revenue
 Gross Margin
 Operating Expenses
   16




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Overview of Financial Results
      Results of Operations
 Revenues
  17




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Orders Greater Than $100,000
 Three Months EndedJanuary 31,2006
    
    
    2005
    
    
    % ChangeNumber
    
    
    26
    
    
    
    29
    
    
    
    -10.3
    %Value ($000)
    
    $
    5,325
    
    
    $
    7,453
    
    
    
    -28.6
    %Average Value ($000)
    
    $
    205
    
    
    $
    257
    
    
    
    -20.2
    %
 Revenue By Category (in thousands):
 Three Months EndedJanuary 31,2006
    
    
    2005
    
    
    % ChangeLicense fees
    
    $
    9,049
    
    
    $
    12,002
    
    
    
    -24.6
    %Subscriptions
    
    
    4,356
    
    
    
    4,533
    
    
    
    -3.9
    %Services
    
    
    10,081
    
    
    
    8,920
    
    
    
    13.0
    %$
    23,486
    
    
    $
    25,455
    
    
    
    -7.7
    %
   Gross Margin
  18




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Percentage ofTotal Revenue
    
    
    Gross MarginThree Months Ended
    
    
    Three Months EndedJanuary 31,
    
    
    January 31,Revenue Category
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005License fees
    
    
    38.5
    %
    
    
    47.1
    %
    
    
    67.1
    %
    
    
    63.3
    %Subscriptions
    
    
    18.5
    %
    
    
    17.8
    %
    
    
    48.6
    %
    
    
    49.0
    %Services
    
    
    43.0
    %
    
    
    35.1
    %
    
    
    52.6
    %
    
    
    23.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    57.4
    %
    
    
    46.7
    %
    Operating Expenses
  Percentage ofTotal Revenue
    
    
    PercentThree Months Ended
    
    
    IncreaseJanuary 31,
    
    
    (Decrease)2006
    
    
    2005
    
    
    in AmountSales and marketing
    
    
    41.4
    %
    
    
    52.4
    %
    
    
    (27.0
    %)General and administrative
    
    
    19.8
    %
    
    
    16.5
    %
    
    
    10.4
    %Product development
    
    
    6.6
    %
    
    
    5.8
    %
    
    
    4.6
    %Amortization of intangibles
    
    
    4.1
    %
    
    
    4.3
    %
    
    
    (11.3
    %)Subtotal
    
    
    71.9
    %
    
    
    79.0
    %
    
    
    (16.0
    %)Restructuring and other charges
    
    
    0.3
    %
    
    
    9.0
    %
    
    
    (96.5
    %)Total operating expenses
    
    
    72.2
    %
    
    
    88.0
    %
    
    
    (24.2
    %)
 19




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##### Table of Contents



Interest Income
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Working Capital and Liquidity
  20




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##### Table of Contents



Contractual Obligations and Commercial Commitments
   Disclosures about Off-Balance Sheet Arrangements
  21




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##### Table of Contents



Fiscal Year 2006 Outlook
  Forward-Looking Statements
  Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  22




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk Foreign Currency
Exchange Rate Risk
 
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  23




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##### Table of Contents



PART II.
 
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
 Exhibit Number
and Description
 31.01
    
    Certification of Chief Executive Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.02
    
    Certification of Chief Financial Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.01
    
    Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.02
    
    Certification of Chief Financial Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES
  PLATO LEARNING, INC.
March 13, 2006
    
    By
    
    /s/ MICHAEL A. MORACHE

Michael A. MorachePresident and Chief Executive Officer(principal executive officer)/s/ LAURENCE L. BETTERLEY

Laurence L. BetterleySenior Vice President and Chief Financial Officer(principal financial officer)
 25