##### 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, 2008
 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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
    
    Smaller Reporting Company o
 o þ




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##### 



PLATO LEARNING, INC.
Form 10-Q
Quarterly Period Ended January 31, 2008
 TABLE OF CONTENTS
 PagePART I.
FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements:Condensed Consolidated Statements of Operations for the
Three Months Ended January 31, 2008 and 2007 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of
January 31, 2008 and October 31, 2007 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Three Months Ended January 31, 2008 and 2007 (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
    
    
    19ITEM 4.
    
    Controls and Procedures
    
    
    19PART II.
OTHER INFORMATIONITEM 1A.
    
    Risk Factors
    
    
    21ITEM 6.
    
    Exhibits
    
    
    21SIGNATURES
    
    
    
    
    22302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  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 31,2008
    
    
    2007REVENUESSubscriptions
    
    $
    7,969
    
    
    $
    5,153License fees
    
    
    2,251
    
    
    
    4,642Services
    
    
    5,915
    
    
    
    7,231Total revenues
    
    
    16,135
    
    
    
    17,026COST OF REVENUESSubscriptions
    
    
    4,649
    
    
    
    3,198License fees
    
    
    1,423
    
    
    
    2,282Services
    
    
    2,595
    
    
    
    3,182Total cost of revenues
    
    
    8,667
    
    
    
    8,662GROSS PROFIT
    
    
    7,468
    
    
    
    8,364OPERATING EXPENSESSales and marketing
    
    
    7,005
    
    
    
    7,721General and administrative
    
    
    2,950
    
    
    
    3,214Product maintenance and development
    
    
    1,076
    
    
    
    1,768Amortization of intangibles
    
    
    388
    
    
    
    457Total operating expenses
    
    
    11,419
    
    
    
    13,160OPERATING LOSS
    
    
    (3,951
    )
    
    
    (4,796
    )Other income, net
    
    
    192
    
    
    
    420LOSS BEFORE INCOME TAXES
    
    
    (3,759
    )
    
    
    (4,376
    )Income tax expense
    
    
    152
    
    
    
    150NET LOSS
    
    $
    (3,911
    )
    
    $
    (4,526
    )NET LOSS PER SHAREBasic and diluted
    
    $
    (0.16
    )
    
    $
    (0.19
    )WEIGHTED AVERAGE COMMON
SHARES OUTSTANDINGBasic and diluted
    
    
    23,790
    
    
    
    23,729
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share amounts)
 January 31,
    
    
    October 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,093
    
    
    $
    24,297Accounts receivable, net
    
    
    9,292
    
    
    
    14,479Other current assets
    
    
    7,385
    
    
    
    7,759Total current assets
    
    
    35,770
    
    
    
    46,535Equipment and leasehold improvements, net
    
    
    5,191
    
    
    
    5,615Product development costs, net
    
    
    30,344
    
    
    
    30,266Goodwill
    
    
    71,865
    
    
    
    71,865Identified intangible assets, net
    
    
    7,391
    
    
    
    7,983Other long-term assets
    
    
    5,450
    
    
    
    5,039Total assets
    
    $
    156,011
    
    
    $
    167,303LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,201
    
    
    $
    4,608Accrued compensation
    
    
    3,601
    
    
    
    5,453Other accrued liabilities
    
    
    3,790
    
    
    
    4,245Deferred revenue
    
    
    34,443
    
    
    
    38,821Total current liabilities
    
    
    46,035
    
    
    
    53,127Long-term deferred revenue
    
    
    9,939
    
    
    
    10,302Deferred income taxes
    
    
    3,291
    
    
    
    3,139Total liabilities
    
    
    59,265
    
    
    
    66,568Stockholders equity:Common stock, $.01 par value, 50,000 shares authorized;
23,861 shares issued and 23,841 shares outstanding at
at January 31, 2008; 23,824 shares issued and 23,804
shares outstanding at October 31, 2007
    
    
    238
    
    
    
    238Additional paid-in capital
    
    
    169,818
    
    
    
    169,927Treasury stock at cost
    
    
    (205
    )
    
    
    (205
    )Accumulated deficit
    
    
    (71,804
    )
    
    
    (67,893
    )Accumulated other comprehensive loss
    
    
    (1,301
    )
    
    
    (1,332
    )Total stockholders equity
    
    
    96,746
    
    
    
    100,735Total liabilities and stockholders equity
    
    $
    156,011
    
    
    $
    167,303
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 Three Months EndedJanuary 31,2008
    
    
    2007OPERATING ACTIVITIES:Net loss
    
    $
    (3,911
    )
    
    $
    (4,526
    )Adjustments to reconcile net loss to net cash used in operating activities:Deferred income taxes
    
    
    152
    
    
    
    150Depreciation and amortization
    
    
    4,360
    
    
    
    3,803Stock-based compensation
    
    
    (162
    )
    
    
    102Loss on disposal of equipment
    
    
    3
    
    
    
    7Changes in operating assets and liabilities:Accounts receivable
    
    
    4,636
    
    
    
    5,924Other current and long-term assets
    
    
    386
    
    
    
    1,057Accounts payable
    
    
    (407
    )
    
    
    (2,803
    )Other current and long-term liabilities
    
    
    (2,301
    )
    
    
    (3,492
    )Deferred revenue
    
    
    (4,741
    )
    
    
    (4,065
    )Total adjustments
    
    
    1,926
    
    
    
    683Net cash used in operating activities
    
    
    (1,985
    )
    
    
    (3,843
    )INVESTING ACTIVITIES:Capitalized internal product development costs
    
    
    (3,170
    )
    
    
    (3,925
    )Purchases of equipment and leasehold improvements
    
    
    (127
    )
    
    
    (688
    )Net cash used in investing activities
    
    
    (3,297
    )
    
    
    (4,613
    )FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    59
    
    
    
    66Repayments of capital lease obligations
    
    
    (11
    )
    
    
    (10
    )Net cash provided by financing activities
    
    
    48
    
    
    
    56EFFECT OF CURRENCY EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
    
    
    30
    
    
    
    (57
    )Net decrease in cash and cash equivalents
    
    
    (5,204
    )
    
    
    (8,457
    )Cash and cash equivalents at beginning of period
    
    
    24,297
    
    
    
    33,094CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    19,093
    
    
    $
    24,637
 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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Loss per Share
  As of January 31,2008
    
    
    2007Net loss
    
    $
    (3,911
    )
    
    $
    (4,526
    )Basic and diluted weighted average common
shares outstanding
    
    
    23,790
    
    
    
    23,729Basic and diluted loss per share
    
    $
    (0.16
    )
    
    $
    (0.19
    )
  New Accounting Pronouncements
 Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 (FIN 48). Accounting for Income Taxes.
  Note 3. Stock-Based Compensation
 Share-Based Payment
   7




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##### Table of Contents



Note 4. Accounts Receivable
  January 31,
    
    
    October 31,2008
    
    
    2007Total trade accounts receivable
    
    $
    11,946
    
    
    $
    16,594Long-term installment accounts receivable
    
    
    (2,347
    )
    
    
    (1,796
    )Allowance for doubtful accounts
    
    
    (307
    )
    
    
    (319
    )$
    9,292
    
    
    $
    14,479
   2008
    
    
    2007Balance, October 31
    
    $
    319
    
    
    $
    928Provision for doubtful accounts, net of other
reserve adjustments
    
    
    
    
    
    
    Write-offs, net of recoveries
    
    
    (12
    )
    
    
    (54
    )Balance, January 31
    
    $
    307
    
    
    $
    874
  Note 5. Deferred Commissions
  8




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##### Table of Contents



Note 6. Product Development Costs
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortization
    
    
    ValueBalance, October 31, 2007
    
    $
    51,376
    
    
    $
    (21,110
    )
    
    $
    30,266Capitalized internal product development costs
    
    
    3,170
    
    
    
    
    
    
    
    3,170Amortization
    
    
    
    
    
    
    (3,092
    )
    
    
    (3,092
    )Write-off of fully amortized costs
    
    
    (1,068
    )
    
    
    1,068Balance, January 31, 2008
    
    $
    53,478
    
    
    $
    (23,134
    )
    
    $
    30,344
  Note 7. Goodwill and Identified Intangible Assets
   January 31, 2008
    
    
    October 31, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortzation
    
    
    Value
    
    
    Value
    
    
    Amortzation
    
    
    ValueAcquired technology
    
    $
    13,563
    
    
    $
    (10,500
    )
    
    $
    3,063
    
    
    $
    13,563
    
    
    $
    (10,295
    )
    
    $
    3,268Trademarks and
tradenames
    
    
    1,380
    
    
    
    (1,380
    )
    
    
    
    
    
    
    1,380
    
    
    
    (1,380
    )
    
    
    Customer relationships
and lists
    
    
    19,800
    
    
    
    (15,472
    )
    
    
    4,328
    
    
    
    20,200
    
    
    
    (15,485
    )
    
    
    4,715$
    34,743
    
    
    $
    (27,352
    )
    
    $
    7,391
    
    
    $
    35,143
    
    
    $
    (27,160
    )
    
    $
    7,983
  Three Months EndedJanuary 31,2008
    
    
    2007Amortization
of intangible assets included in:Cost of revenues
    
    $
    205
    
    
    $
    205Operating expenses
    
    
    387
    
    
    
    458$
    592
    
    
    $
    663
  9




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Cost of
    
    
    OperatingRevenues
    
    
    Expense
    
    
    TotalRemainder of 2008
    
    $
    616
    
    
    $
    1,163
    
    
    $
    1,7792009
    
    
    749
    
    
    
    1,550
    
    
    
    2,2992010
    
    
    647
    
    
    
    1,550
    
    
    
    2,1972011
    
    
    526
    
    
    
    65
    
    
    
    5912012
    
    
    485
    
    
    
    
    
    
    
    485Thereafter
    
    
    40
    
    
    
    
    
    
    
    40$
    3,063
    
    
    $
    4,328
    
    
    $
    7,391
  Note 8. Deferred Revenue
  January 31,
    
    
    October 31,2008
    
    
    2007Subscriptions
    
    $
    30,661
    
    
    $
    32,938License fees
    
    
    600
    
    
    
    622Services
    
    
    13,121
    
    
    
    15,563Total
    
    
    44,382
    
    
    
    49,123Less: long-term portion
    
    
    (9,939
    )
    
    
    (10,302
    )Current portion
    
    $
    34,443
    
    
    $
    38,821
  Note 9. Restructuring and Other Charges
  Severanceand related
    
    
    Facilitycosts
    
    
    closings
    
    
    TotalReserve balance at October 31, 2007
    
    $
    424
    
    
    $
    616
    
    
    $
    1,040Cash payments
    
    
    (295
    )
    
    
    (9
    )
    
    
    (304
    )Translation adjustment
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Reserve balance at January 31, 2008
    
    $
    129
    
    
    $
    581
    
    
    $
    710
  10




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Note 10. Comprehensive Loss
  Three Months EndedJanuary 31,2008
    
    
    2007Net loss
    
    $
    (3,911
    )
    
    $
    (4,526
    )Foreign currency translation adjustments
    
    
    30
    
    
    
    (57
    )Total comprehensive loss
    
    $
    (3,881
    )
    
    $
    (4,583
    )
  Note 11. Income Taxes
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN
48).
  11




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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
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  12




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General Factors Affecting our Financial Results
  Revenue
  Gross Profit
 Operating Expenses
   13




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Cash Balances and Cash Flow.
 14




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##### Table of Contents



Results of Operations
 Revenues
  Sales Order Information (in thousands)
 January 31,PercentIncrease2008
    
    
    2007*
    
    
    (Decrease)Order Value:SubscriptionsCourseware
    
    $
    5,043
    
    
    $
    3,639
    
    
    
    38.6
    %Assessment and other
    
    
    596
    
    
    
    637
    
    
    
    (6.4
    %)Total subscriptions
    
    
    5,639
    
    
    
    4,276
    
    
    
    31.9
    %License fees
    
    
    1,483
    
    
    
    4,239
    
    
    
    (65.0
    %)Services
    
    
    3,480
    
    
    
    4,282
    
    
    
    (18.7
    %)$
    10,602
    
    
    $
    12,797
    
    
    
    (17.2
    %)Percent of Total Order Value:SubscriptionsCourseware
    
    
    47.6
    %
    
    
    28.4
    %Assessment and other
    
    
    5.6
    %
    
    
    5.0
    %Total subscriptions
    
    
    53.2
    %
    
    
    33.4
    %License fees
    
    
    14.0
    %
    
    
    33.1
    %Services
    
    
    32.8
    %
    
    
    33.5
    %100.0
    %
    
    
    100.0
    %
  *
    
    Certain 2007 amounts previously reported as assessment orders have been
reclassified to courseware orders to conform to the current period
presentation. Orders Greater Than $100,000
 Three Months EndedJanuary 31,2008
    
    2007
    
    % ChangeNumber
    
    
    12
    
    
    
    17
    
    
    
    (29.4
    %)Value ($000)
    
    $
    1,952
    
    
    $
    3,008
    
    
    
    (35.1
    %)Average Value ($000)
    
    $
    163
    
    
    $
    177
    
    
    
    (7.9
    %)
 15




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##### Table of Contents



Revenue by Category (in thousands):
 Three Months EndedJanuary 31,2008
    
    
    2007
    
    
    % ChangeSubscriptions
    
    $
    7,969
    
    
    $
    5,153
    
    
    
    54.6
    %License fees
    
    
    2,251
    
    
    
    4,642
    
    
    
    (51.5
    %)Services
    
    
    5,915
    
    
    
    7,231
    
    
    
    (18.2
    %)$
    16,135
    
    
    $
    17,026
    
    
    
    (5.2
    %)
   Gross Margin
 Revenue Mix  Percentage of Total Revenue
 Three Months EndedJanuary 31,Revenue Category
    
    2008
    
    
    2007Subscription
    
    
    49.4
    %
    
    
    30.3
    %License fee
    
    
    13.9
    %
    
    
    27.3
    %Services
    
    
    36.7
    %
    
    
    42.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Gross Margin Percentage
 Three Months Ended January 31,IncreaseRevenue Category
    
    2008
    
    
    2007
    
    
    (Decrease)Subscriptions
    
    
    41.7
    %
    
    
    37.9
    %
    
    
    3.8
    %License fees
    
    
    36.8
    %
    
    
    50.8
    %
    
    
    (14.0
    %)Services
    
    
    56.1
    %
    
    
    56.0
    %
    
    
    .1
    %Total
    
    
    46.3
    %
    
    
    49.1
    %
    
    
    (2.8
    %)
  16




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Operating Expenses
  Percentage ofTotal Revenue
    
    PercentThree Months Ended
    
    IncreaseJanuary 31,
    
    (Decrease)2008
    
    2007
    
    in AmountSales and marketing
    
    
    43.4
    %
    
    
    45.3
    %
    
    
    (9.3
    %)General and administrative
    
    
    18.3
    %
    
    
    18.9
    %
    
    
    (8.2
    %)Product maintenance and development
    
    
    6.7
    %
    
    
    10.4
    %
    
    
    (39.1
    %)Amortization of intangibles
    
    
    2.4
    %
    
    
    2.7
    %
    
    
    (15.1
    %)Total operating expenses
    
    
    70.8
    %
    
    
    77.3
    %
    
    
    (13.2
    %)
  Other Income, Net
  17




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Liquidity and Capital Resources
 Cash and Cash Equivalents
  Working Capital and Liquidity
    Contractual Obligations and Commercial Commitments
  18




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Disclosures about Off-Balance Sheet Arrangements
  Forward-Looking Statements
  Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  
 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
  19




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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
 10.1
    
    Fiscal 2008 Executive Annual Cash Incentive Plan, as filed as exhibit
10.28 to our Current Report on Form 8-K (filed January 24, 2008) and incorporated
herein by reference.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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##### Table of Contents



SIGNATURES
  PLATO LEARNING, INC.
    
    By
    
    /s/ MICHAEL A. MORACHEMarch 11, 2008
    
    
    
    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