UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-Q


(Mark One)


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended January 31, 2010


or


  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _________________to__________________.





Commission File Number: 0-20842





PLATO LEARNING, INC.


(Exact name of Registrant as specified in its charter)





Delaware
36-3660532(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)





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)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes x  No 





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)


Yes   No 





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):


Large accelerated filer    Accelerated filer x     Non-accelerated filer      Smaller reporting company





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No x





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  24,410,861 shares of common stock, $.01 par value, outstanding as of February 26, 2010.





PLATO LEARNING, INC.


Form 10-Q


Quarterly Period Ended January 31, 2010








TABLE OF CONTENTS





PART I.FINANCIAL INFORMATIONPageITEM 1.
Financial Statements:Condensed Consolidated Statements of Operations for theThree Months Ended January 31, 2010 and 2009 (Unaudited)
3Condensed Consolidated Balance Sheets as ofJanuary 31, 2010 (Unaudited) and October 31, 2009
4Condensed Consolidated Statements of Cash Flows for theThree Months Ended January 31, 2010 and 2009 (Unaudited)
5Notes to Condensed Consolidated Financial Statements (Unaudited)
6ITEM 2.
Management’s Discussion and Analysis of FinancialCondition and Results of Operations
14ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
23ITEM 4.
Controls and Procedures
23PART II.OTHER INFORMATIONITEM 1A.
Risk Factors
24ITEM 6.
Exhibits
24SIGNATURES

25


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 Table of Contents


PART I.  FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS





PLATO Learning, Inc. and SubsidiariesCondensed Consolidated Statements of Operations (Unaudited)(In thousands, except per share amounts)Three Months EndedJanuary 31,2010


2009REVENUESSubscriptions

$
10,968


$
9,868License fees


549



1,004Services


4,070



5,165Total revenues


15,587



16,037COST OF REVENUESSubscriptions


4,064



3,888License fees


234



439Services


2,186



2,428Total cost of revenues


6,484



6,755GROSS PROFIT


9,103



9,282OPERATING EXPENSESSales and marketing


5,382



5,887General and administrative


1,948



2,424Software maintenance and development


495



567Amortization of intangibles


213



213Total operating expenses


8,038



9,091OPERATING INCOME


1,065



191Other (expense) income, net


(63
)


68INCOME BEFORE INCOME TAXES


1,002



259Income tax expense


-



-NET INCOME

$
1,002


$
259NET INCOME PER SHAREBasic

$
0.04


$
0.01Diluted

$
0.04


$
0.01WEIGHTED AVERAGE COMMONSHARES OUTSTANDINGBasic


24,298



23,983Diluted


25,247



24,260See Notes to Condensed Consolidated Financial Statements.


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PLATO Learning, Inc. and SubsidiariesCondensed Consolidated Balance Sheets(In thousands, except per share amounts)January 31,


October 31,2010


2009(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
27,653


$
28,164Accounts receivable, net


7,995



10,710Other current assets


5,828



6,539Total current assets


41,476



45,413Equipment and leasehold improvements, net


2,352



2,472Software development costs, net


19,051



19,904Identified intangible assets, net


2,050



2,384Other long-term assets


3,231



3,279Total assets

$
68,160


$
73,452LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
1,918


$
1,070Accrued compensation


2,102



3,805Other accrued liabilities


1,405



2,457Deferred revenue


33,700



38,020Total current liabilities


39,125



45,352Long-term deferred revenue


15,783



15,678Total liabilities


54,908



61,030Stockholders' equity:Common stock, $.01 par value, 50,000 shares authorized;24,442 shares issued and 24,382 shares outstanding atat January 31, 2010; 24,342 shares issued and 24,282shares outstanding at October 31, 2009


244



243Additional paid-in capital


172,381



172,560Treasury stock at cost


(319
)


(319
)Accumulated deficit


(157,831
)


(158,833
)Accumulated other comprehensive loss


(1,223
)


(1,229
)Total stockholders' equity


13,252



12,422Total liabilities and stockholders' equity

$
68,160


$
73,452See Notes to Condensed Consolidated Financial Statements.





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PLATO Learning, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)Three Months EndedJanuary 31,2010


2009OPERATING ACTIVITIES:Net income

$
1,002


$
259Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization


3,170



2,840Stock-based compensation


(71
)


264Other adjustments


-



14Changes in operating assets and liabilities:Accounts receivable


2,715



2,132Other current and long-term assets


715



994Accounts payable


848



(1,506
)Other current liabilities


(2,752
)


(5,366
)Deferred revenue


(4,215
)


(5,706
)Total adjustments


410



(6,334
)Net cash provided by (used in) operating activities


1,412



(6,075
)INVESTING ACTIVITIES:Capitalized software development costs


(1,564
)


(1,648
)Purchases of equipment and leasehold improvements


(255
)


(98
)Net cash used in investing activities


(1,819
)


(1,746
)FINANCING ACTIVITIES:Net proceeds from issuance of common stock, net of repurchases


(107
)


37Repayments of capital lease obligations


(3
)


(3
)Net cash (used in) provided by financing activities


(110
)


34EFFECT OF CURRENCY EXCHANGE RATE CHANGESON CASH AND CASH EQUIVALENTS


6



43Net decrease in cash and cash equivalents


(511
)


(7,744
)Cash and cash equivalents at beginning of period


28,164



20,018CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
27,653


$
12,274See Notes to Condensed Consolidated Financial Statements.


5
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PLATO LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)





Note 1.  General





Basis of Presentation





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  The October 31, 2009 condensed consolidated balance sheet data was derived from our audited financial statements at that date.  Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.  We have included all normal recurring and other adjustments considered necessary to give a fair statement of our operating results for the interim periods shown.  Operating results for these interim periods are not necessarily indicative of the results to be expected for the full fiscal year.  For further information, refer to the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009.





Consolidation





The accompanying unaudited condensed consolidated financial statements include the accounts of PLATO Learning, Inc. and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated.





Fiscal Periods





Our fiscal year is from November 1 to October 31.  Unless otherwise stated, references herein to our first quarter relate to the three month period ended January 31.





Note 2.  Summary of Significant Accounting Policies





General





The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses.  We continually evaluate our critical accounting policies and estimates, and have identified the policies relating to the following areas as those that are significant to our financial statement presentation as they involve subjective or complex judgments:





·
Revenue recognition


·
Capitalized software development costs


·
Valuation of deferred income taxes


·
Impairment analysis of identified intangible assets





In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” The standard permits the use of estimated selling price to determine the value of separate units of accounting in multiple element arrangements if vendor-specific objective evidence (VSOE) or third-party evidence of selling price does not exist. The use of the residual method is no longer allowed.


6
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We adopted ASU 2009-13 in the first quarter of 2010 on a prospective basis.  We use VSOE to determine the fair value of the majority of our products.  In a few cases, we use third party evidence (TPE) to determine the fair value.   When VSOE or TPE exists for the products in multiple element arrangements, the amount billed to the customer for the entire order is allocated to the products in the arrangement based on these values. With the adoption of ASU 2009-13, when we do not have VSOE or TPE on a product, the estimated selling price will be used as the basis for the allocation.





We use stand alone sales of each type of product to determine VSOE.  Standard volume and term discounts are taken into consideration when performing the analysis.  In order to establish VSOE, we follow the guideline that 80% of the standalone transactions fall within plus or minus 15% of the median price. Other factors taken into consideration that affect pricing of our products include the type of customer and their geographical location.  Under ASU 2009-13, estimated selling price will be used when VSOE or TPE do not exist. We consider a number of factors in the determination of estimated selling price, including, but not limited to, pricing practices, similar products and customer’s geographic location.





Prior to the adoption of ASU 2009-13, there were two types of arrangements for which we were not able to establish VSOE for all products in the arrangement. In these circumstances, revenue on products and services included in the arrangement that otherwise would have been recognized on delivery was deferred and recognized ratably over the term of the arrangement. Because ASU 2009-13 provides for the use of estimated selling price when VSOE (or TPE) does not exist, these arrangements will now be allocated on the basis of estimated selling price and revenue previously deferred will now be recognized on delivery.





The adoption of ASU 2009-13 in our first quarter fiscal year 2010 did not have a material effect on our consolidated financial statements.





There have been no other significant new accounting principles applied during the first three months of 2010.  For a more complete discussion of our accounting policies refer to Note 2 to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2009.


7
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Net Income per Share





Basic net income per share is computed on the basis of the weighted average number of common shares outstanding during the period.  Diluted net income per share is computed on the basis of the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period.  Components of basic and diluted net income per share were as follows (in thousands, except per share amounts):








Three Months Ended January 31,2010


2009Net income available for common shareholders

$
1,002


$
259Weighted average common shares outstanding


24,298



23,983Dilutive effect of employee stock options and awards


949



277Common shares and common share equivalents


25,247



24,260Net income per share:Basic

$
0.04


$
0.01Diluted

$
0.04


$
0.01








Approximately 1,628,000 and 2,622,000 stock options with exercise prices greater than the average market price of our common stock for the three months ended January 31, 2010 and 2009, respectively, were excluded from the calculations of diluted income per share because they were anti-dilutive.





Recent Accounting Pronouncements





In January 2010, the FASB issued authoritative guidance which adds and clarifies certain disclosures about the use of fair value measurements in financial statements.  The provisions are effective for our second quarter of fiscal year 2010 and are not expected to have a material effect on our consolidated financial statements.





In October 2009, the FASB’s Emerging Issues Task Force (EITF) issued authoritative guidance addressing revenue arrangements with multiple deliverables.  The guidance eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services.  Instead, revenue arrangements with multiple deliverables should be divided into separate units provided the deliverables meet certain criteria.  This guidance also eliminates the use of the residual method of allocation and requires that the arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price.  The guidance also provides a hierarchy for estimating the selling price of each of the deliverables.  The guidance is effective prospectively for revenue arrangements entered into or materially modified at the beginning of our fiscal year 2011; however, earlier application is permitted.  We adopted this guidance during our first quarter of fiscal year 2010, and it did not have a material effect on our consolidated financial statements.  See our “Summary of Significant Accounting Policies - General” section for more detailed information.





In October 2009, the FASB’s EITF issued authoritative guidance that updated software revenue arrangements that also include tangible products.  The amendments exclude tangible products and software essential to the tangible product’s functionality from the software revenue guidance.  The guidance required we adopt ASU 2009-14 simultaneously to our adoption of ASU 2009-13.  The provisions did not have a material effect on our consolidated financial statements.


8
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In April 2008, the FASB issued authoritative guidance amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset.  The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset as provided for under separate accounting guidance topics.  The provisions were effective for our first quarter fiscal year 2010 and did not have a material effect on our consolidated financial statements.





In December 2007, the FASB issued authoritative guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired.  The guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination.  The provisions were adopted by us in the first quarter of fiscal 2010 and did not have a material effect on our consolidated financial statements.





In December 2007, the FASB issued a new accounting pronouncement regarding noncontrolling interests and the deconsolidation of a subsidiary.  This will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity.  This new consolidation method will significantly change the accounting for transactions with minority interest holders.  The provisions were adopted by us in the first quarter of fiscal year 2010 and did not have a material effect on our consolidated financial statements.





Note 3.  Stock-Based Compensation





We use the straight-line method to recognize stock-based compensation expense over the requisite service period of the award.





Stock option activity for the three months ended January 31, 2010 is as follows (in thousands):





Options OutstandingOptions outstanding at October 31, 2009


2,946Options granted


317Options exercised


(5
)Options forfeited or cancelled


(40
)Options outstanding at January 31, 2010


3,218Options exercisable at January 31, 2010


2,371
 
  9
 Table of Contents


Three Months EndedJanuary 31,2010


2009Stock-based compensation (benefit) expensebefore adjustment

$
240


$
348Adjustment for forfeitures


310



84Total stock-based compensation (benefit) expense

$
(70
)

$
264








Authoritative guidance provides that differences between actual and estimated stock option forfeitures are not recognized until the first vesting date following the actual forfeiture of an option.  Generally, our stock options are granted during the first quarter of each fiscal year, and therefore recorded stock option forfeitures are typically greatest during that quarter.Stock option forfeitures reduced stock-based compensation expense by $310,000 and $84,000 in the first three months of 2010 and 2009, respectively.





Note 4. Deferred Commissions





Employee commissions on the sale of our products and services are earned at the time of invoicing and paid monthly.  The related expense is deferred and amortized over the non-cancellable terms of the related customer contracts on the basis that the commission charges are so closely related to the revenue from such contracts that they should be recorded as an asset and charged to expense over the same period that the revenue is recognized.  Total deferred commissions at January 31, 2010 and October 31, 2009 were $4,205,000 and $4,568,000, of which $1,342,000 and $1,333,000, respectively, were recorded as long-term deferred commissions and included in other long-term assets on our balance sheet.





Note 5.  Software Development Costs





A reconciliation of capitalized software development costs is as follows (in thousands):








Gross Carrying Value


Accumulated Amortization


Net Carrying ValueBalance, October 31, 2009

$
47,129


$
(27,225
)

$
19,904Capitalized software development costs


1,564



-



1,564Amortization


-



(2,417
)


(2,417
)Balance, January 31, 2010

$
48,693


$
(29,642
)

$
19,051








Note 6.  Identified Intangible Assets





Identified intangible assets subject to amortization were as follows (in thousands):


10
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As of January 31, 2010


As of October 31, 2009Gross Carrying Value


Accumulated Amortzation


Net Carrying Value


Gross Carrying Value


Accumulated Amortzation


Net Carrying ValueAcquired technology

$
7,300


$
(5,926
)

$
1,374


$
7,300


$
(5,805
)

$
1,495Customer relationshipsand lists


19,800



(19,124
)


676



19,800



(18,911
)


889$
27,100


$
(25,050
)

$
2,050


$
27,100


$
(24,716
)

$
2,384








Amortization expense for the identified intangible assets presented above was as follows (in thousands):








Three Months EndedJanuary 31,2010


2009Amortization of intangible assets included in:Cost of revenues

$
121


$
121Operating expenses


213



214$
334


$
335








Estimated future annual amortization expense for identified intangible assets is as follows (in thousands):








Cost of


OperatingRevenues


Expenses


TotalRemainder of 2010

$
364


$
641


$
1,0052011


485



35



5202012


485



-



4852013


40



-



40$
1,374


$
676


$
2,050








The future annual amortization amounts presented above are estimates.  Actual amortization expense may be different due to the acquisition, impairment, or accelerated amortization of identified intangible assets.





Note 7.  Deferred Revenue





Deferred revenue consists of billings made in advance of delivery of subscription and other services and is recognized when revenue recognition criteria are met.  We generally invoice our customers in full upon receipt of their subscription order. In circumstances where we do not bill the full subscription upon order, we do not include these unbilled amounts in deferred revenue.  Accordingly, the deferred revenue balance does not represent the total remaining contract value of all non-cancelable subscription agreements. The components of deferred revenue were as follows (in thousands):


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As of


As ofJanuary 31,


October 31,2010


2009Total deferred revenue

$
49,483


$
53,698Less: Long-term portion


(15,783
)


(15,678
)Current deferred revenue

$
33,700


$
38,020








Note 8.  Restructuring and Other Charges





At various times over the past several years we have incurred restructuring costs related to our transition to a subscription-based business model during this period.  These costs primarily include severance and facility closings in the U.S. and U.K.





The restructuring reserve activity (included in other accrued liabilities) from October 31, 2009 through January 31, 2010 was as follows (in thousands):








Severanceand related


Facilitycosts


closings


TotalReserve balance at October 31, 2009

$
204


$
367


$
571Cash payments


(134
)


(35
)


(169
)Foreign currency translation adjustment


-



(10
)


(10
)Reserve balance at January 31, 2010

$
70


$
322


$
392








There were no restructuring charges during the first three months of 2010 or 2009.





Note 9. Comprehensive Income





Total comprehensive income was as follows (in thousands):








Three Months EndedJanuary 31,2010


2009Net income

$
1,002


$
259Foreign currency translation adjustments


6



43Total comprehensive income

$
1,008


$
302








Income tax effects for the components of other comprehensive income were not significant because our deferred tax assets are fully reserved.  Accumulated other comprehensive loss was $1,223,000 and $1,229,000 at January 31, 2010 and October 31, 2009, respectively.


12
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Note 10. Income Taxes





We have not expensed, and do not maintain any accrual balances related to, interest and penalties related to unrecognized tax benefits.  For future periods in which we may incur unrecognized tax benefits or uncertainties, we would classify any associated interest and penalties as a component of the income tax provision.





The majority of our deferred tax assets represent net operating loss carryforwards which are available to offset future taxable income.  Our deferred tax assets are fully reserved and will remain fully reserved until the related tax benefits are realized through the generation of taxable income in a particular year, or until we can demonstrate a history of generating taxable income.





With our history of net operating losses and significant taxable losses over the past several years, we have not had the need to perform an extensive evaluation of the impact of the provisions of Section 382 of the Internal Revenue Code on potential limitations on the usability of those net operating losses.  As we approach the possibility of taxable income in upcoming years, we are currently undergoing a more extensive Section 382 study to determine the limitations, if any, on the availability of our historical net operating losses to offset future taxable income.  We expect this study to be completed by the end of fiscal 2010.





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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Business Description





PLATO Learning, Inc. is a Delaware corporation that was incorporated in 1989 and is headquartered in Bloomington, Minnesota.  We are a leading provider of on-line instruction, curriculum management, assessment, and related professional development services to K–12 schools, community colleges and other educational institutions across the country. Our products are used by customers principally to provide alternative instruction to students performing below their grade level in order to help those students return to the classroom, recover course credits, pass high school exit exams or prepare for college and other post-secondary studies.  In addition to the value provided to students, our solutions allow school districts to retain state and federal funding tied to student enrollment, and help educators meet the demands of state and federal student achievement initiatives for intervention, dropout prevention and college readiness. We also offer online and onsite staff professional development services to ensure optimal use of our products and to help schools meet their accountability requirements and school improvement plans.





Our research-based courseware library includes thousands of hours of mastery-based instruction covering discrete learning objectives in the subject areas of reading, writing, language arts, mathematics, science, and social studies. Our web-based assessment and alignment tools allow instruction to be personalized to each student’s unique needs with curriculum that is aligned to local, state, and national standards. Using our web-based products, educators are able to identify each student’s instructional needs and prescribe an individual learning program of PLATO Learning courseware, educational web sites, the school’s textbooks and other core and supplemental instructional materials. A variety of reports are available to help educators identify gaps in student understanding, monitor student progress and ensure that standard learning objectives are being addressed.





Beginning in late fiscal year 2005, we implemented a strategy to deliver our products and solutions on a subscription basis using a new internet-based learning management platform we market as the PLATO Learning Environment, or PLE. As of January 31, 2010, approximately 1,400 school districts, community colleges and other educational institutions across 50 states subscribed to our instructional solutions delivered on PLE, and over 1.8 million students, teachers and administrators at these institutions were registered to use PLE.





Critical Accounting Policies and Estimates





Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses.  We continually evaluate our critical accounting policies and estimates, and have identified the policies relating to the following areas as those that are significant to our financial statement presentation, and require difficult, subjective, or complex judgments:





·
Revenue recognition


·
Capitalized software development costs


14
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·
Valuation of deferred income taxes


·
Impairment analysis of identified intangible assets





In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” The standard permits the use of estimated selling price to determine the value of separate units of accounting in multiple element arrangements if vendor-specific objective evidence (VSOE) or third-party evidence of selling price does not exist. The use of the residual method is no longer allowed.  We adopted ASU 2009-13 in the first quarter of 2010.





In October 2009, the FASB’s EITF issued authoritative guidance that updated software revenue arrangements that also include tangible products.  The amendments exclude tangible products and software essential to the tangible product’s functionality from the software revenue guidance.  The guidance required we adopt ASU 2009-14 simultaneously to our adoption of ASU 2009-13.  The provisions did not have a material effect on our consolidated financial statements.





There have been no other significant new accounting principles applied during the first three months of 2010.  For a more complete discussion of our accounting policies refer to Note 2 to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2009.





General Factors Affecting our Financial Results





There are a number of general factors that affect our results from period to period. These factors are discussed below.





Revenue. In 2008, we completed a transition of our business model from one that sells one-time perpetual licenses to software, for which revenue is generally recognized up-front upon delivery, to one that sells subscription-based products, for which revenue is recognized over the subscription period. In 2009, a meaningful, but declining portion of our revenues continued to be derived from sales of perpetual licenses and related maintenance. These revenues are reported as license fees and software maintenance (included in services revenue) in our consolidated statement of operations. As these revenues decline and subscription revenues grow as a percentage of total revenues, we expect our period to period revenues to become more comparable and predictable.





Cost of Revenues and Gross Profit. Our cost of revenues and gross profit during a period is dependent on a number of factors. License fee and software maintenance revenues historically have had high gross profit due to the low direct cost of delivering these products and services. As a result, the mix of these revenues to total revenues in a given period significantly influences reported total gross profit. In addition, a large portion of our costs of revenue are fixed in nature. These costs include amortization of capitalized software development and purchased technology, depreciation and other infrastructure costs to support our hosted subscription services, customer support operations, and full-time professional services personnel who deliver our training services. Accordingly, increases in revenues allow us to leverage these costs resulting in higher gross profit, while decreases in revenues have the opposite effect.


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Operating Expenses.  Incentive compensation is a significant variable component of our sales and marketing expenses, approximating 8% to 9% of total revenues in any given period. Sales and marketing expenses also include costs such as travel, tradeshows, and conferences that can vary with revenue activity or individual events that occur during the period.





General and administrative expenses are substantially fixed in nature. However, certain components may vary based on business results, individual events, or initiatives we may be pursuing at various times throughout the year.





Software maintenance and development expense in our consolidated statements of operations does not reflect our total level of software product spending. Costs to enhance or maintain existing products, or to develop products prior to the application development stage, are charged to software maintenance and development expense as incurred. Costs incurred to develop new products after the preliminary project stage is completed, which represent the majority of our total development spending, are capitalized and amortized to cost of revenues. Accordingly, software maintenance and development expense in our consolidated statement of operations can fluctuate from period to period, in terms of both total dollars and as a percentage of revenue, based on the nature and timing of activities occurring during the period.





Amortization of intangibles represents the amortization of certain identified intangible assets acquired through various acquisitions. While these expenses are generally predictable from period to period because they are fixed over the course of their individual useful lives, they can be affected by events and other factors that result in impairment of these assets and a corresponding reduction in future amortization.





Cash Balances and Cash Flow.  Our business is seasonal, with the largest portion of orders coming in our third and fourth fiscal quarters.  These periods are when our customers’ budget spending typically peaks as they end their current budget period, begin a new budget period, and begin to plan their needs for the upcoming school year. As a result, cash balances generally decline during the first half of the fiscal year, and increase from those levels as order activity increases in the third and fourth quarter.





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Results of Operations





Revenues





The following table summarizes certain key information to aid in the understanding of our discussion and analysis of revenues and should be read in conjunction with Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2009, which discusses our accounting policies regarding revenue recognition:





Order Information (in thousands)








Three Months EndedJanuary 31,2010


2009


Percent Increase (Decrease)Subscriptions & related services:Subscriptions

$
8,545


$
6,674



28.0
%Professional services


1,389



1,196



16.1
%Other


652



758



(14.0
%)Subtotal


10,586



8,628



22.7
%Legacy products and services:License fees


239



1,031



(76.8
%)Software maintenance


673



1,180



(43.0
%)Subtotal


912



2,211



(58.8
%)Total orders

$
11,498


$
10,839



6.1
%








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Revenue by Category (in thousands):








Three Months EndedJanuary 31,2010


2009


Percent Increase (Decrease)Subscriptions & related services:Subscriptions

$
10,968


$
9,868



11.1
%Professional services


1,972



1,951



1.1
%Other


652



747



(12.7
%)Subtotal


13,592



12,566



8.2
%Legacy products and services:License fees


549



1,004



(45.3
%)Software maintenance


1,446



2,467



(41.4
%)Subtotal


1,995



3,471



(42.5
%)Total revenues

$
15,587


$
16,037



(2.8
%)








Total revenues for the first quarter of 2010 declined 2.8% to $15.6 million, from $16.0 million for the same period in 2009.





Subscription revenues grew $1.1 million, or 11.1%, from $9.9 million in the first quarter of 2009 to $11.0 million for the same period this year. The increase in subscription revenue reflects continued growth in our base of subscription customers.  As of January 31, 2010, approximately 1,400 educational institutions were subscribed to our PLE platform, up from approximately 1,190 institutions as of January 31, 2009.





Revenues from license fees on the sale of legacy perpetual license products and related software maintenance revenue totaled $2.0 million, a decline of 42.5% from the same period last year. The decline in license fees and software maintenance revenue reflects our de-emphasis on sales of non-strategic products licensed on a perpetual basis.





Professional services revenues totaled $2.0 million for the quarter, consistent with the same period last year.





Cost of Revenue




Total cost of revenue for the first quarter decreased $0.2 million to $6.5 million, or 4.0%, from the same period in 2009.  Subscription cost of revenue increased $0.2 million, or 4.5%, on increased software development amortization associated with the release of PLE version 1.3 earlier in fiscal 2009, and the release of PLE version 2.0 in the first quarter of this year.


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License fee cost of revenue in the first quarter declined $0.2 million compared to the first quarter of 2009 on lower license fee revenue as discussed above. Services cost of revenue decreased 10.0% to $2.2 million from $2.4 million for the same period last year due to lower support costs resulting from our declining base of customers using our legacy perpetual products.





Operating Expenses





The following table summarizes the amounts and percentage change in amounts from the corresponding period during the previous year for certain operating expense line items.








Three Months Ended


PercentJanuary 31,


Increase2010


2009


(Decrease)Sales and marketing

$
5,382


$
5,887



(8.6
%)General and administrative


1,948



2,424



(19.6
%)Software maintenance and development


495



567



(12.7
%)Amortization of intangibles


213



213



0.0
%Total operating expenses

$
8,038


$
9,091



(11.6
%)







Total operating expenses were $8.0 million for the first quarter of 2010, a decrease of 11.6%, or $1.1 million, from the same period in 2009.  As discussed further below, the decline generally reflects continued efficiencies of the software-as-a-service business model.





Sales and marketing expenses declined $0.5 million for the first quarter of 2010, on reduced travel costs and professional fees from the same period in 2009.  None of these declines were due to a reduction in our field direct sales force, which has remained consistent from the same period last year.





General and administrative costs declined 19.6% to $1.9 million for the first quarter of 2010 from the same period in 2009 due primarily to reductions in headcount and stock compensation expense.





Software maintenance and development expenses in the first quarter of 2010 remained consistent with the same period in 2009, reflecting the increasing stability of our PLE platform, the quality of new product releases and reduced maintenance on legacy products.





Other (Expense) Income, Net





Other (expense) income consists primarily of interest income on our cash and cash equivalent balances, net of the costs of maintaining availability on our line of credit.  The deterioration in other (expense) income from the first quarter 2009 to the same period of 2010 is primarily due to lower interest income from declining interest rates offset by higher average cash balances.


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Revenue Backlog





We define revenue backlog as the total of deferred revenue reported on our balance sheet plus unbilled amounts due under non-cancelable subscription agreements, which are not included in the balance sheet.  Following is a reconciliation of deferred revenue to revenue backlog, and the components of revenue backlog, as of January 31, 2010 and 2009 (in thousands):








As of January 31,2010


2009


Percent Increase (Decrease)Reconciliation:Total deferred revenue

$
49,483


$
39,215



26.2
%Add: Unbilled amounts due undernon-cancelable subscription agreements


14,592



9,329



56.4
%Revenue Backlog

$
64,075


$
48,544



32.0
%Components of Revenue Backlog:Subscriptions and related services:Subscriptions

$
53,688


$
38,360



40.0
%Professional services


6,829



4,366



56.4
%Subtotal


60,517



42,726



41.6
%Legacy products and services:License fees


85



488



(82.6
%)Software maintenance


3,473



5,330



(34.8
%)Subtotal


3,558



5,818



(38.8
%)Total Revenue Backlog

$
64,075


$
48,544



32.0
%








At January 31, 2010, we expect approximately $29.0 million of our deferred revenue to be recognized subsequent to fiscal year 2010.





Liquidity and Capital Resources





Cash and Cash Equivalents





At January 31, 2010, cash and cash equivalents were $27.7 million, a decrease of $0.5 million from October 31, 2009.  This decrease primarily represents cash used for investments in capitalized software development and capital equipment of $1.8 million, offset by cash provided by operating activities of $1.4 million.


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Working Capital and Liquidity





At January 31, 2010, our principal sources of liquidity included cash and cash equivalents totaling $27.7 million, net billed accounts receivable of $8.0 million, and unbilled commitments under non-cancelable subscription contracts totaling $14.6 million, of which $7.4 million is expected to be billed in 2010.  We also have a three-year senior secured credit facility that provides us with a revolving line of credit up to the lesser of $20 million or the amount of our trailing twelve months subscription and software maintenance revenues.  Under this agreement, which expires in June 2010, we have the option of selecting an interest rate for any drawdown under the facility equal to the applicable Prime or LIBOR Rate plus a sliding margin that is based on the amount of borrowings outstanding.  Borrowings under the agreement are secured by all of our assets.  Financial covenants apply only when the unused portion of the line of credit, plus cash and cash equivalents on hand, is less than $12.5 million, and are limited to minimum quarterly thresholds of earnings before interest, taxes, depreciation and amortization (EBITDA).  At January 31, 2010 and October 31, 2009, availability under the line was $20 million and there were no borrowings outstanding.





Cash provided by operations in the first three months of 2010 increased to $1.4 million in 2010, from cash used in operations of $6.1 million in the first three months of 2009, due to increased orders over the prior year combined with reductions in overall spending. Included in the $6.1 million of cash used by operations in the first three months of 2009, was approximately $3.0 million of non-recurring cash payments, including $1.7 million in severance paid to terminated employees and $1.3 million in non-recurring royalty payments. Cash used in investing activities increased slightly to $1.8 million for the first three months of 2010, from $1.7 million for the same period last year due to increased investments associated with the release of PLE version 2.0 during the first quarter of 2010.





Our future liquidity needs will depend on, among other factors, the timing and extent of software development expenditures, order volume, the timing and collection of receivables, and expenditures in connection with possible acquisitions or stock repurchases. From time to time, we may evaluate potential acquisitions of products or businesses that complement our core business. We may consider and acquire other complementary businesses, products, or technologies in the future. We believe our existing cash, cash equivalents, anticipated cash provided by operating activities, and availability under our line of credit through June 2010, will be sufficient to meet our working capital and capital expenditure needs over the next 12 months.





Contractual Obligations and Commercial Commitments





Our contractual obligations and commercial commitments consist primarily of future minimum payments due under operating leases and royalty and software license agreements.  Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended October 31, 2009 for a table showing our contractual obligations.





On February 16, 2010, we entered into an eleven year agreement to lease approximately 27,000 square feet of office space for our corporate headquarters in Bloomington, Minnesota.  The new lease expires on July 1, 2021.  In conjunction with signing our new lease, we also entered into a $1.3 million commercial letter of credit with Wells Fargo Foothill, Inc.


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There were no other significant changes to our contractual obligations during the three months ended January 31, 2010.





At January 31, 2010, we had no significant commitments for capital expenditures.





Recent Accounting Pronouncements





See Note 2 of the Condensed Consolidated Financial Statements for a summary of the recent accounting pronouncements.





Disclosures about Off-Balance Sheet Arrangements





We did not have any off-balance sheet arrangements as of January 31, 2010.





Forward-Looking Statements





In addition to historical information, this Form 10-Q contains forward-looking statements. These forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (“the Act”).  The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Act. Forward-looking statements include, among others, statements about our future performance, the sufficiency of our sources of capital for future needs, and the expected impact of recently issued accounting pronouncements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part II Item 1A of this Form 10-Q and Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2009. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release any revision to these forward-looking statements based on circumstances or events, which occur in the future. Readers should carefully review the risk factors described in this report on Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission.





Interest Rate Risk





Our borrowing capacity primarily consists of a revolving line of credit with interest rates that fluctuate based upon the Prime Rate and LIBOR market indexes.  At January 31, 2010, we did not have any outstanding borrowings under this revolving credit facility. As a result, risk relating to interest fluctuation is considered minimal.





Foreign Currency Exchange Rate Risk





Our foreign operations are not a significant component of our business, and as a result, risks relating to foreign currency fluctuation are considered minimal.


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ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





See the information set forth under the captions, “Interest Rate Risk” and “Foreign Currency Exchange Rate Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.




ITEM 4.                      CONTROLS AND PROCEDURES




Evaluation of Disclosure Controls and Procedures





Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.





Changes in Internal Control over Financial Reporting




There was no change in our internal control over financial reporting during the first quarter of fiscal 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.







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PART II.





ITEM 1A.                      RISK FACTORS





Our business is subject to a number of risks and uncertainties which we discussed in detail in Part I, Item 1A of our 2009 Annual Report on Form 10-K.





ITEM 6.                EXHIBITS





Exhibit Number and Description31.1
Certification of Chief Executive Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification of Chief Financial Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
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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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





PLATO LEARNING, INC.
By /s/ Vincent P. RieraMarch 12, 2010
Vincent P. RieraPresident and Chief Executive Officer(principal executive officer)/s/ Robert J. RuecklRobert J. RuecklVice President and Chief Financial Officer(principal financial officer)








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