| We derive a substantial portion of our revenues from public school funding, which is heavily dependent on support from federal, state, and local governments |
| Government budget deficits may adversely affect the availability of this funding |
| In addition, the government appropriations process is often slow, unpredictable, and subject to factors outside of our control |
| Curtailments, delays, or reductions in the funding of schools or colleges, for example a reduction of funds allocated to schools under Title I of the Elementary and Secondary Education Act, could delay or reduce our revenues, in part because schools may not have sufficient capital to purchase our products or services |
| Funding difficulties experienced by schools or colleges could also cause those institutions to be more resistant to price increases in our products, compared to other businesses that might better be able to pass on price increases to their customers |
| The growth of our business depends on continued investment by public school systems in interactive educational technology and products |
| Changes to funding of public school systems could slow this type of investment |
| We may not be able to achieve profitability in the future |
| In 2002 through 2005 we incurred net losses and we may not be able to achieve profitability in the future |
| Future revenues and profits, if any, will depend upon various factors, including continued market acceptance of our products and services |
| We expect to continue to incur significant costs and expenses associated with the operation and development of an expanding business |
| These costs and expenses include, but are not limited to, sales and marketing, personnel, and product development and enhancement |
| As a result of these expenses, we will need to generate significant revenues to achieve and sustain our profitability |
| Our curriculum-based educational software may be unable to achieve or maintain broader market acceptance, which would cause our future revenue growth and profitability to be adversely affected |
| Accordingly, new customers must be found or new or additional products or licenses must be sold to existing customers in order to maintain and expand our revenue stream and sustain profitability |
| We expect to continue to generate a substantial portion of our revenues from curriculum-based educational software products and will need to increase these revenues in order to more effectively grow other 11 _________________________________________________________________ [66]Table of Contents areas of our business |
| Revenues from licenses will depend principally on broadening market acceptance of that software, which may not occur due to a number of factors, including: • teacher, parent, and student preferences for interactive educational technology are subject to changes in popular entertainment and educational theory; • some teachers may be reluctant to use interactive educational technology to supplement their customary teaching practices; • we may be unable to continue to demonstrate improvements in academic performance at schools or colleges that use our educational software; and, • our failure to detect bugs in our software could result in product failures or poor product performance |
| If market acceptance of curriculum-based educational software is not broadened, our future revenue growth will be adversely impacted and we may never become profitable |
| The success of our business model is dependent on our ability to successfully complete the significant transitions implemented in fiscal year 2005 related to our sales and development organizations, retain and enhance our services organization, and requires us to increase our revenues from our fee-based online subscription business |
| We may never become profitable if we are unable to do so |
| In 2005, we implemented significant changes to our sales organization |
| These changes negatively affected sales productivity in the second half of the year |
| While we believe these changes were necessary to the long-term success of our sales efforts, there can be no assurances that these changes will not continue to negatively affect our sales performance in 2006 |
| We must also continue to retain and enhance the effectiveness of our professional services organization, which is dependent on our ability to recruit, train, and retain skilled educational consultants to deliver our services |
| In 2005, we also made significant changes to our product development strategy by placing a larger emphasis on off-shore development resources |
| While we believe this strategy provides us greater flexibility, cost savings, and a greater return on our development investments, it also introduces risks common to most outsourcing relationships |
| These risks include the supplier’s ability to maintain sufficient capacity, control costs, and hire, train, and retain qualified resources, as well as limited direct control and physical access to these resources |
| Our supplier agreement contains provisions intended to limit some of these risks; however, there can be no assurance that they will be effective at doing so |
| To achieve our long-term operating goals and objectives, we will need to derive an increasing portion of our revenues from our fee-based online subscription business |
| In addition, the transition to this model may limit our revenue growth in the near term as one-time license fee revenues are replaced with recurring, subscription-based license fee revenues |
| Our ability to increase revenues from our fee-based online subscription business depends on: • our ability to increase the subscriber base of our fee-based online subscription products while maintaining a subscription fee; and, • the accessibility and ease of use of our web sites |
| The future success of our fee-based online subscription business is highly dependent on an increase in the number of users who are willing to license our subscription products |
| The number of users willing to pay for online educational products may not continue to increase and can be negatively affected by customers’ confidentiality concerns and their existing investments in courseware, technology infrastructure, and personnel |
| If the market for subscription-based online educational products develops more slowly than we expect, or if our efforts to attract new subscribers are not successful or cost effective, our operating results and financial condition may be materially and adversely affected |
| If we are unable to substantially increase revenues from our online subscription products, we will be unable to execute our current business model |
| 12 _________________________________________________________________ [67]Table of Contents Fluctuations in our quarterly results may adversely affect our operating results, our stock price, and the implementation of our strategy |
| Our actual revenues in a quarter could fall below expectations, which could lead to a decline in our stock price |
| Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter-to-quarter as a result of many factors, including the size, timing, and product mix of orders, the capital and operating spending patterns of our customers, and the timing of new releases |
| Revenues from license fees in any quarter depend substantially upon our licensing activity and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies |
| Our quarterly license and services revenue may fluctuate and may be difficult to forecast for a variety of reasons, including the following: • a significant number of our existing and prospective customers’ decisions regarding whether to enter into license agreements with us are made within the last few weeks or days of each quarter; • the size of license transactions can vary significantly; • a decrease in license fee revenue may likely result in a decrease in services revenue in the same or subsequent quarters; • customers may unexpectedly postpone or cancel projects due to changes in their priorities, project objectives, budget, or personnel; • evaluations and purchasing processes vary significantly from customer to customer, and a customer’s internal approval and expenditure authorization process can be difficult and time consuming to complete, even after selection of a vendor; • the number, timing, and significance of software product enhancements and new software product announcements; • existing clients may decline to renew support for our products, and market pressures may limit our ability to increase support fees or require clients to upgrade from older versions of our products; and, • we may have to defer revenues under our revenue recognition policies |
| Historically, customer purchases are more concentrated in the last two quarters of our fiscal year |
| This seasonality increases the risk of not achieving our results for the full year if operational performance factors such as sales productivity and new product introductions do not align with these seasonal purchasing patterns |
| If such annual results are not achieved we may have to delay or adjust components of our strategy implementation |
| Competition in our industry is intense and could adversely affect our performance |
| Our industry is intensely competitive, rapidly evolving, and subject to technological change |
| Demand for particular products and services may be adversely affected by the increasing number of competitive products from which a prospective customer may choose |
| We compete primarily against other organizations offering educational and training software and services |
| Our competitors include several large companies with substantially greater financial, technical, and marketing resources than ours |
| We compete with comprehensive curriculum software publishers, companies providing single-title retail products, and Internet content and service providers |
| Existing competitors may broaden their product lines and potential competitors may enter the market and/or increase their focus on e-learning, resulting in greater competition for us |
| Increased competition in our industry could result in price reductions, reduced operating margins, or loss of market share, which could seriously harm our business, cash flows, and operating results |
| Failure to retain our key executives or attract and retain qualified personnel could harm our business and operating results |
| The loss of one or more of our executive officers or other key personnel could inhibit the development of our business and, accordingly, harm our business and operating results |
| Our future success depends in large part on the continued service of our key technical, 13 _________________________________________________________________ [68]Table of Contents marketing, and sales personnel and on our ability to continue to attract, motivate, and retain highly qualified employees |
| Our key employees may terminate their employment with us at any time |
| There is competition within the industry for such employees, and the process of locating personnel with suitable skills may be difficult |
| We rely on statistical studies to demonstrate the effectiveness of our products |
| We rely on statistical studies to demonstrate that our curriculum-based educational software improves student achievement |
| We believe that these studies accurately reflect the performance of our products |
| However, these studies involve the following risks: • the limited sample sizes used in our studies may yield results that are not representative of the general population of students who use our products; • the methods used to gather the information upon which these studies are based depend on cooperation from students and other participants, and inaccurate or incomplete responses could distort results; • schools studying the effectiveness of our products apply different methodologies and data collection techniques, making results difficult to aggregate and compare; and, • the results of these studies could be viewed as biased or unreliable since, in some cases, we facilitate the collection and analysis of data, and we select and pay researchers to conduct, aggregate, and/or present the results of some of these studies |
| There is growing demand from NCLB and other sources for research and studies to demonstrate the effectiveness of educational programs and products |
| Our sales and marketing efforts, as well as our reputation, could be adversely impacted if the public, including our existing and potential customers, perceives these studies to be biased due to our involvement, or if the results of these studies are not representative or favorable, which could lead to lower than expected revenues |
| Our future success is dependent on continued internet technology developments, our ability to adapt to these and other technological changes and to meet evolving industry standards |
| A core element of our business strategy is the migration of our courseware solutions to an online, subscription-based service |
| Our ability to execute this strategy and generate the related expected revenues is dependent on the continued development and maintenance of Internet technology as well as our ability to adapt our solutions to this technology |
| We may encounter difficulties responding to these and other technological changes that could delay our introduction of products and services |
| Our industry is characterized by rapid technological change and obsolescence, frequent product introduction, and evolving industry standards |
| Our future success will depend, to a significant extent, on our ability to enhance our existing products, develop and introduce new products, satisfy an expanded range of customer needs, and achieve market acceptance |
| We may not have sufficient resources to make the necessary investments to develop and implement the technological advances required to maintain our competitive position |
| Unless we maintain a strong brand identity, our business may not grow and our financial results may be adversely impacted |
| We believe that maintaining and enhancing the value of the PLATO Learning brand is important to attracting purchasers for our products and services |
| Our success in maintaining brand awareness will depend on our ability to continuously provide educational technology that students enjoy using, and teachers and parents consider beneficial to the learning process |
| In addition, to attract and retain subscribers and users and to promote and maintain the PLATO Learning brand, we have spent, and may need to continue spending, significant resources enhancing our brand, which may include promotional programs and efforts by our field sales team and professional development staffs |
| Our revenues may not be sufficient to offset costs from these activities |
| 14 _________________________________________________________________ [69]Table of Contents Misuse or misappropriation of our proprietary rights could adversely affect our results of operations |
| Our success depends in part on our intellectual property rights to the products and services that we develop |
| We rely primarily on a combination of the laws of copyrights, trademarks, and trade secrets |
| We also utilize license agreements, employment and employment termination agreements, third-party non-disclosure agreements, and other methods to protect our proprietary rights |
| We regard many of our intellectual property rights as essential to our business |
| We enforce our intellectual property rights when we become aware of any infringements or potential infringements and believe they warrant such action |
| We own and maintain numerous federal registrations of various trademarks and service marks, including, but not limited to, the PLATO, CyberEd, NetSchools, Lightspan, Academic Systems, and eduTest marks in the United States and in other countries that are important to our business |
| We have not applied for trademark registrations at the state level and rely on our federal registrations and common-law rights to protect our trademarks, service marks, trade names, domain names, and trade dress |
| We do not include any technological mechanisms to prevent or inhibit unauthorized copying of our software products but generally require the execution of a written license agreement, which restricts use and copying of our courseware and software products |
| If such copying or misuse were to occur to any substantial degree, our operating results could be adversely affected |
| Although we believe our products and services have been independently developed and that none of our products or services infringes on the rights of others, third parties may assert infringement claims against us in the future |
| We may be required to modify our products, services or technologies or obtain a license to permit our continued use of those rights |
| We may not be able to do so in a timely manner or upon reasonable terms and conditions |
| Claims relating to data collection from our user base and content available on or accessible from our web sites may subject us to liabilities and additional expense |
| We currently utilize the names of teachers and students who are registering for our online subscription products for purposes of accessing our web sites, and may in the future collect other personal information relating to students, teachers, and parents |
| We could be subject to liability claims for misuses of information collected from our users, such as for unauthorized marketing purposes, and could face additional expenses to analyze and comply with increasing regulation in this area |
| The Federal Trade Commission, for example, has enacted regulations governing collection of personal information from children under the age of thirteen and is expected to issue and enforce additional regulations in this area |
| We could also be subject to liability based on claims relating to content that is published on our web sites or that is accessible from our network through links to other web sites |
| In addition to subjecting us to potential liability, claims of this type could require us to change our web sites in a manner that could be less attractive to our customers and divert our financial and development resources |
| Failure to raise additional capital to fund future operations could harm our business and results of operations |
| We may not be able to raise capital in the future to meet our liquidity needs and finance our operations and future growth |
| We believe that our existing cash resources, the amounts available under our credit facility, and cash generated from our operations will be sufficient to satisfy our operating cash needs for the foreseeable future |
| Any future decreases in our operating profit, cash flow, or stockholders’ equity may impair our future ability to raise additional funds to finance operations |
| As a result, we may not be able to maintain adequate liquidity to support our operations or maintain our future growth |
| Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price |
| As discussed in Item 9A of this Annual Report on Form 10-K, management has concluded that we are in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 |
| Failure to maintain 15 _________________________________________________________________ [70]Table of Contents compliance in the future could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements |