##### 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, 2007
 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




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##### 



PLATO LEARNING, INC.
Form 10-Q
Quarterly Period Ended January 31, 2007
 TABLE OF CONTENTS
 PagePART I.FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements:Condensed Consolidated Statements of Operations for the
Three Months Ended January 31, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of
January 31, 2007 and October 31, 2006 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Three Months Ended January 31, 2007 and 2006 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20ITEM 4.
    
    Controls and Procedures
    
    
    20PART II.OTHER INFORMATIONITEM 1A.
    
    Risk Factors
    
    
    21ITEM 6.
    
    Exhibits
    
    
    21SIGNATURES
    
    
    22Certification of Chief Executive OfficerCertification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
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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 31,2007
    
    
    2006REVENUESLicense fees
    
    $
    4,642
    
    
    $
    9,049Subscriptions
    
    
    5,153
    
    
    
    4,356Services
    
    
    7,231
    
    
    
    10,081Total revenues
    
    
    17,026
    
    
    
    23,486COST OF REVENUESLicense fees
    
    
    2,282
    
    
    
    2,973Subscriptions
    
    
    3,198
    
    
    
    2,241Services
    
    
    3,182
    
    
    
    4,782Total cost of revenues
    
    
    8,662
    
    
    
    9,996GROSS PROFIT
    
    
    8,364
    
    
    
    13,490OPERATING EXPENSESSales and marketing
    
    
    7,721
    
    
    
    9,734General and administrative
    
    
    3,214
    
    
    
    4,648Product maintenance and development
    
    
    1,768
    
    
    
    1,539Amortization of intangibles
    
    
    457
    
    
    
    969Restructuring and other charges
    
    
    
    
    
    
    80Total operating expenses
    
    
    13,160
    
    
    
    16,970OPERATING LOSS
    
    
    (4,796
    )
    
    
    (3,480
    )Other income, net
    
    
    420
    
    
    
    433LOSS BEFORE INCOME TAXES
    
    
    (4,376
    )
    
    
    (3,047
    )Income tax expense
    
    
    150
    
    
    
    150NET LOSS
    
    $
    (4,526
    )
    
    $
    (3,197
    )LOSS PER SHAREBasic and diluted
    
    $
    (0.19
    )
    
    $
    (0.14
    )WEIGHTED AVERAGE COMMON SHARES
OUTSTANDINGBasic and diluted
    
    
    23,729
    
    
    
    23,629
 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 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,637
    
    
    $
    33,094Accounts receivable, net
    
    
    12,605
    
    
    
    18,529Inventories
    
    
    1,469
    
    
    
    1,832Other current assets
    
    
    5,644
    
    
    
    6,346Total current assets
    
    
    44,355
    
    
    
    59,801Equipment and leasehold improvements, net
    
    
    6,413
    
    
    
    6,308Product development costs, net
    
    
    26,808
    
    
    
    25,363Goodwill
    
    
    71,865
    
    
    
    71,865Identified intangible assets, net
    
    
    9,882
    
    
    
    10,545Other long-term assets
    
    
    2,273
    
    
    
    2,348Total assets
    
    $
    161,596
    
    
    $
    176,230LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,882
    
    
    $
    4,685Accrued compensation
    
    
    3,928
    
    
    
    5,990Other accrued liabilities
    
    
    5,305
    
    
    
    6,622Deferred revenue
    
    
    29,691
    
    
    
    33,736Total current liabilities
    
    
    40,806
    
    
    
    51,033Long-term deferred revenue
    
    
    8,090
    
    
    
    8,110Deferred income taxes
    
    
    2,681
    
    
    
    2,531Other long-term liabilities
    
    
    
    
    
    
    106Total liabilities
    
    
    51,577
    
    
    
    61,780Stockholders equity:Common stock, $.01 par value, 50,000 shares authorized;
23,777 shares issued and 23,757 shares outstanding at
at January 31, 2007; 23,761 shares issued and 23,741
shares outstanding at October 31, 2006
    
    
    238
    
    
    
    237Additional paid-in capital
    
    
    168,749
    
    
    
    168,597Treasury stock at cost
    
    
    (205
    )
    
    
    (205
    )Accumulated deficit
    
    
    (57,536
    )
    
    
    (53,017
    )Accumulated other comprehensive loss
    
    
    (1,227
    )
    
    
    (1,162
    )Total stockholders equity
    
    
    110,019
    
    
    
    114,450Total liabilities and stockholders equity
    
    $
    161,596
    
    
    $
    176,230
 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 31,2007
    
    
    2006OPERATING ACTIVITIES:Net loss
    
    $
    (4,526
    )
    
    $
    (3,197
    )Adjustments to reconcile net loss to net cash used in operating activities:Deferred income taxes
    
    
    150
    
    
    
    150Amortization of capitalized product development costs
    
    
    2,480
    
    
    
    1,600Amortization of identified intangible and other long-term assets
    
    
    746
    
    
    
    1,354Depreciation and amortization of equipment and leasehold improvements
    
    
    577
    
    
    
    638Provision for doubtful accounts
    
    
    
    
    
    
    227Stock-based compensation
    
    
    102
    
    
    
    322Loss on disposal of equipment
    
    
    7
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    5,924
    
    
    
    8,023Inventories
    
    
    363
    
    
    
    496Other current and long-term assets
    
    
    694
    
    
    
    484Accounts payable
    
    
    (2,803
    )
    
    
    (1,554
    )Other current and long-term liabilities
    
    
    (3,492
    )
    
    
    (3,760
    )Deferred revenue
    
    
    (4,065
    )
    
    
    (7,379
    )Total adjustments
    
    
    683
    
    
    
    601Net cash used in operating activities
    
    
    (3,843
    )
    
    
    (2,596
    )INVESTING ACTIVITIES:Capitalized internal product development costs
    
    
    (3,925
    )
    
    
    (2,996
    )Purchases of equipment and leasehold improvements
    
    
    (688
    )
    
    
    (248
    )Net cash used in investing activities
    
    
    (4,613
    )
    
    
    (3,244
    )FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    66
    
    
    
    355Repayments of capital lease obligations
    
    
    (10
    )
    
    
    (30
    )Net cash provided by financing activities
    
    
    56
    
    
    
    325EFFECT OF CURRENCY EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
    
    
    (57
    )
    
    
    (24
    )Net decrease in cash and cash equivalents
    
    
    (8,457
    )
    
    
    (5,539
    )Cash and cash equivalents at beginning of period
    
    
    33,094
    
    
    
    46,901CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    24,637
    
    
    $
    41,362
 See Notes to Condensed Consolidated Financial Statements.
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PLATO LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Note 1. General
 Basis of Presentation
  Consolidation
  Fiscal Periods
  Note 2. Summary of Significant Accounting Policies
 General
  
    
    Revenue recognition
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  6




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License agreements
  Loss Per Share
  As of January 31,2007
    
    
    2006Net loss
    
    $
    (4,526
    )
    
    $
    (3,197
    )Basic and diluted weighted average common
shares outstanding
    
    
    23,729
    
    
    
    23,629Basic and diluted loss per share
    
    $
    (0.19
    )
    
    $
    (0.14
    )
  New Accounting Pronouncements
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
  Fair Value Measurements
 Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109.
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Accounting for Income Taxes.
 Note 3. Stock-Based Compensation
 Share-Based Payment
   Note 4. Accounts Receivable
  January 31,
    
    
    October 31,2007
    
    
    2006Trade accounts receivable
    
    $
    12,987
    
    
    $
    18,450Installment accounts receivable
    
    
    492
    
    
    
    1,007Allowance for doubtful accounts
    
    
    (874
    )
    
    
    (928
    )$
    12,605
    
    
    $
    18,529
   2007
    
    
    2006Balance, beginning of fiscal year
    
    $
    928
    
    
    $
    1,647Provision for doubtful accounts, net of other
reserve adjustments
    
    
    
    
    
    
    227Write-offs net of recoveries
    
    
    (54
    )
    
    
    84Balance, January 31
    
    $
    874
    
    
    $
    1,958
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Note 5. Inventories
  January 31,
    
    
    October 31,2007
    
    
    2006Third-party hardware
    
    $
    842
    
    
    $
    1,027Media, documentation, and packaging materials
    
    
    627
    
    
    
    805$
    1,469
    
    
    $
    1,832
 Note 6. Product Development Costs
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortization
    
    
    ValueBalance, October 31, 2006
    
    $
    40,577
    
    
    $
    (15,214
    )
    
    $
    25,363Capitalized product development costs
    
    
    3,925
    
    
    
    
    
    
    
    3,925Write-off of fully amortized costs
    
    
    (4,843
    )
    
    
    4,843
    
    
    
    Amortization of product development costs
    
    
    
    
    
    
    (2,480
    )
    
    
    (2,480
    )Balance, January 31, 2007
    
    $
    39,659
    
    
    $
    (12,851
    )
    
    $
    26,808
 Note 7. Goodwill and Identified Intangible Assets
   January 31, 2007
    
    
    October 31, 2006Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortzation
    
    
    Value
    
    
    Value
    
    
    Amortzation
    
    
    ValueAcquired technology
    
    $
    13,563
    
    
    $
    (9,679
    )
    
    $
    3,884
    
    
    $
    21,940
    
    
    $
    (17,850
    )
    
    $
    4,090Trademarks and
tradenames
    
    
    1,380
    
    
    
    (1,282
    )
    
    
    98
    
    
    
    2,892
    
    
    
    (2,744
    )
    
    
    148Customer relationships
and lists
    
    
    20,200
    
    
    
    (14,300
    )
    
    
    5,900
    
    
    
    21,100
    
    
    
    (14,793
    )
    
    
    6,307Noncompete agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    $
    35,143
    
    
    $
    (25,261
    )
    
    $
    9,882
    
    
    $
    46,932
    
    
    $
    (36,387
    )
    
    $
    10,545
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Cost of
    
    
    OperatingRevenues
    
    
    Expense
    
    
    TotalRemainder of 2007
    
    $
    616
    
    
    $
    1,283
    
    
    $
    1,8992008
    
    
    821
    
    
    
    1,550
    
    
    
    2,3712009
    
    
    749
    
    
    
    1,550
    
    
    
    2,2992010
    
    
    647
    
    
    
    1,550
    
    
    
    2,1972011
    
    
    526
    
    
    
    65
    
    
    
    591Thereafter
    
    
    525
    
    
    
    
    
    
    
    525$
    3,884
    
    
    $
    5,998
    
    
    $
    9,882
  Note 8. Deferred Revenue
  January 31,
    
    
    October 31,2007
    
    
    2006License fees
    
    $
    1,885
    
    
    $
    2,282Subscriptions
    
    
    19,727
    
    
    
    20,192Services
    
    
    16,169
    
    
    
    19,372Total
    
    
    37,781
    
    
    
    41,846Less: long-term amounts
    
    
    (8,090
    )
    
    
    (8,110
    )Current portion
    
    $
    29,691
    
    
    $
    33,736
 Note 9. Restructuring and Other Charges
  Three Months EndedJanuary 31,2007
    
    
    2006Restructuring charges:Severance and related benefits for U.S. headcount reduction
    
    $
    
    
    
    $
    80$
    
    
    
    $
    80
  10




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Severanceand related
    
    
    Facilitybenefits
    
    
    closings
    
    
    Other
    
    
    TotalReserve balance at October 31, 2006
    
    $
    1,232
    
    
    $
    1,526
    
    
    $
    316
    
    
    $
    3,074Provision for restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (446
    )
    
    
    (119
    )
    
    
    (28
    )
    
    
    (593
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reserve balance at January 31, 2007
    
    $
    786
    
    
    $
    1,407
    
    
    $
    288
    
    
    $
    2,481
 Note 10. Comprehensive Loss
  Three Months EndedJanuary 31,2007
    
    
    2006Net loss
    
    $
    (4,526
    )
    
    $
    (3,197
    )Unrealized gains on available for sale securities
    
    
    
    
    
    
    7Foreign currency translation adjustments
    
    
    (57
    )
    
    
    (24
    )Total comprehensive loss
    
    $
    (4,583
    )
    
    $
    (3,214
    )
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Description
    Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  General Factors Affecting our Financial Results
  Revenue
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Gross Profit
 Operating Expenses
    13




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Overview of Financial Results
     14




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Results of Operations
 Revenues
  U.S. Sales Order Information (in thousands)
 Three Months Ended
    
    
    PercentJanuary 31,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Order Value:License fees
    
    $
    4,239
    
    
    $
    7,551
    
    
    
    (43.9
    %)SubscriptionsCourseware
    
    
    3,558
    
    
    
    1,362
    
    
    
    161.2
    %Assessment and other
    
    
    718
    
    
    
    1,227
    
    
    
    (41.5
    %)Total subscriptions
    
    
    4,276
    
    
    
    2,589
    
    
    
    65.2
    %Services
    
    
    4,282
    
    
    
    6,164
    
    
    
    (30.5
    %)$
    12,797
    
    
    $
    16,304
    
    
    
    (21.5
    %)Percent of Total Order Value:License fees
    
    
    33.1
    %
    
    
    46.3
    %SubscriptionsCourseware
    
    
    27.8
    %
    
    
    8.4
    %Assessment and other
    
    
    5.6
    %
    
    
    7.5
    %Total subscriptions
    
    
    33.4
    %
    
    
    15.9
    %Services
    
    
    33.5
    %
    
    
    37.8
    %100.0
    %
    
    
    100.0
    %
 Orders Greater Than $100,000
 Three Months EndedJanuary 31,2007
    
    2006
    
    % ChangeNumber
    
    
    17
    
    
    
    26
    
    
    
    (34.6
    %)Value ($000)
    
    $
    3,008
    
    
    $
    5,325
    
    
    
    (43.5
    %)Average Value ($000)
    
    $
    177
    
    
    $
    205
    
    
    
    (13.7
    %)
 Revenue By Category (in thousands):
 Three Months EndedJanuary 31,2007
    
    
    2006
    
    
    % ChangeLicense fees
    
    $
    4,642
    
    
    $
    9,049
    
    
    
    (48.7
    %)Subscriptions
    
    
    5,153
    
    
    
    4,356
    
    
    
    18.3
    %Services
    
    
    7,231
    
    
    
    10,081
    
    
    
    (28.3
    %)$
    17,026
    
    
    $
    23,486
    
    
    
    (27.5
    %)
 15




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Gross Margin
  Percentage ofTotal Revenue
    
    Gross MarginThree Months Ended
    
    Three Months EndedJanuary 31,
    
    January 31,Revenue Category
    
    2007
    
    2006
    
    2007
    
    2006License fees
    
    
    27.3
    %
    
    
    38.5
    %
    
    
    50.8
    %
    
    
    67.1
    %Subscriptions
    
    
    30.3
    %
    
    
    18.5
    %
    
    
    37.9
    %
    
    
    48.6
    %Services
    
    
    42.4
    %
    
    
    43.0
    %
    
    
    56.0
    %
    
    
    52.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    49.1
    %
    
    
    57.4
    %
    Operating Expenses
  16




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Percentage ofTotal Revenue
    
    PercentThree Months Ended
    
    IncreaseJanuary 31,
    
    (Decrease)2007
    
    2006
    
    in AmountSales and marketing
    
    
    45.3
    %
    
    
    41.4
    %
    
    
    (20.7
    %)General and administrative
    
    
    18.9
    %
    
    
    19.8
    %
    
    
    (30.9
    %)Product maintenance and development
    
    
    10.4
    %
    
    
    6.6
    %
    
    
    14.9
    %Amortization of intangibles
    
    
    2.7
    %
    
    
    4.1
    %
    
    
    (52.8
    %)Subtotal
    
    
    77.3
    %
    
    
    71.9
    %
    
    
    (22.1
    %)Restructuring and other charges
    
    
    0.0
    %
    
    
    0.3
    %
    
    
    (100.0
    %)Total operating expenses
    
    
    77.3
    %
    
    
    72.2
    %
    
    
    (22.5
    %)
      Other Income, Net
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  17




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Working Capital and Liquidity
    Contractual Obligations and Commercial Commitments
   Disclosures about Off-Balance Sheet Arrangements
  Fiscal Year 2007 Outlook
  18




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Forward-Looking Statements
  Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  19




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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
  20




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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.
 21




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SIGNATURES
  PLATO LEARNING, INC.
    
    
    By

    /s/ MICHAEL A. MORACHEMarch 12, 2007
    
    
    
    Michael A. MorachePresident and Chief Executive Officer(principal executive officer)/s/ ROBERT J. RUECKLRobert J. RuecklVice President and Chief Financial Officer(principal financial officer)
 22