| RENAISSANCE LEARNING INC Item 1A Risk Factors Reliance on Single Product Line |
| Our Accelerated Reader software and supplemental Accelerated Reader quizzes accounted for approximately 37prca, 40prca, and 36prca of our net sales in 2005, 2004, and 2003, respectively |
| An overall decline in sales of Accelerated Reader and supplemental quizzes would have a material adverse effect on our business, financial condition, and results of operations |
| Dependence on Continued Product Development |
| The educational technology and services markets in which we compete are characterized by evolving industry standards, frequent product introductions, and sudden technological change |
| Our future success depends, to a significant extent, on a number of factors, including our ability to enhance our existing products, develop and successfully introduce new products in a timely fashion, and respond quickly and cost effectively to technological change, including: shifts in operating systems, hardware platforms, programming languages, alternative delivery systems, the internet and other uncertainties |
| There can be no assurance that new products will be as well received as our established products, particularly since they may require technology and/or resources not generally available in all 8 _________________________________________________________________ [75]Table of Contents schools |
| We attempt to maintain high standards for the demonstrated academic effectiveness of our products |
| Our adherence to these standards could delay or inhibit the introduction of new products |
| Moreover, there can be no assurance that our products will not be rendered obsolete or that we will have sufficient resources to make the necessary investments or be able to develop and market the products required to maintain our competitive position |
| Reliance on statistical studies to demonstrate effectiveness of our products and services |
| We rely on statistical studies to demonstrate that our products and related services improve student achievement |
| We believe that these studies accurately reflect the performance of our products |
| These studies, however, involve the following risks: (i) the sample sizes used in our studies may yield results that are not representative of the general population of students who use our products; (ii) 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; (iii) schools studying the effectiveness of our products may apply different methodologies and data collection techniques, making results difficult to aggregate and compare; (iv) we facilitate the collection and analysis of data for some of these studies; and (v) we hire researchers to aggregate and present the results of some of these studies and, in some cases, to conduct the studies |
| There is growing demand from the No Child Left Behind Act (NCLB) and other sources for research and studies to demonstrate the effectiveness of educational programs and products |
| Our selling and marketing efforts, as well as our reputation, could be adversely impacted if the public, including our existing and potential customers, is not convinced that the product effectiveness is proven by the studies |
| Management of Growth |
| We have experienced periods of rapid growth in the past and anticipate continued growth in the future |
| Rapid growth may place a strain on our financial, management, systems, and other resources |
| Our ability to manage our growth effectively will require us to attract, train, motivate, manage, and retain key employees and to improve our operational, financial, and management information systems |
| If we are unable to maintain and manage growth effectively, our business, financial condition, and results of operations could be adversely affected |
| Selling and Marketing Strategy and Product Acceptance |
| Our business strategy includes the introduction of new products and services directed at new markets as well as the development of new sales and distribution channels |
| There can be no assurance that we will be successful in offering new products and services, entering new markets and developing new sales and distribution channels or that any such products or services, if introduced, will achieve acceptance in the marketplace |
| Risks of International Expansion |
| A component of our growth strategy is the expansion of our operations in international markets |
| Doing business in international markets is subject to a number of risks, including, among others: acceptance by foreign educational systems of our approach to educational products; lack of existing customer base; unexpected changes in regulatory requirements; potentially adverse tax consequences; tariffs and other trade barriers; difficulties in staffing and managing foreign operations; changing economic conditions; exposure to different legal standards (particularly with respect to intellectual property); burdens of complying with a variety of foreign laws; and fluctuations in currency exchange rates |
| If any of these risks were to materialize, our business, financial condition, and results of operations could be adversely affected |
| Educational Philosophies |
| Our products support all teaching methods and curricula by focusing on continuous feedback, increased student practice of essential skills, and demonstrated product effectiveness through measurable results |
| Certain educators, academics, politicians, and theorists, however, declaim strong philosophies of instruction that can lead them to oppose educational products or services that fall outside a very narrow definition |
| These philosophies can include, but are not limited to opposition to standardized testing or over-reliance on the same; opposition to computers or motivational techniques; exclusive focus on particular types of direct instruction; and highly technical definitions of acceptable research |
| Some of these philosophical stances have the capacity to negatively influence the market for our products and services, and such influence could have a material adverse impact on demand and thus on our business, financial condition, and results of operations |
| Substantially all of our revenue is derived from sales to educational institutions, individual educators, and suppliers thereto |
| There can be no assurance that educational institutions and/or individual educators will continue to invest in technology-based products and professional development for reading and other curricula or continue to respond favorably to our marketing |
| Our inability to increase the number of products sold or number of schools served would adversely affect our business, financial condition, and results of operations |
| Because of our dependence on educational institutions, the funding of which is largely dependent on government support, a substantial decrease in government budgets or funding for educational software or technology would have a material adverse effect on our business, financial condition, and results of operations |
| Any economic slow downs, which negatively affect school funding, adversely impact the sale of our products and services to schools |
| In addition, certain aspects of government sponsored education initiatives may not endorse, or be complementary to, the principles and methodologies underlying and associated with our products and services, which could adversely affect our business, financial condition, and results of operations |
| Geographic Concentration of Sales |
| A substantial portion of our sales is concentrated in several states, including California, Texas, Florida, Michigan, and Georgia, which accounted for approximately dlra14dtta8 million, dlra13dtta2 million, dlra6dtta6 million, dlra4dtta3 million, and dlra4dtta3 million, respectively, of our net sales in 2005 |
| If large numbers of schools or a district or districts controlling a large number of schools in such states were to discontinue purchasing our products and services, our business, financial condition, and results of operations would be materially adversely affected |
| The educational technology and professional development markets in which we operate are very competitive and fragmented |
| We compete with other companies offering educational software products, computing devices, interactive response systems, professional development, and technology consulting services to schools |
| Education continues to emerge as a major global industry and potential competitors, including large hardware manufacturers, software developers, educational publishers, and consulting firms, may enter or increase their focus on the schools market, resulting in greater competition for us |
| In addition, we compete against more traditional methods of education, training and testing, including pencil and paper testing |
| As we enter into new markets, existing competitors could increase the barriers to entering this market by driving prices lower or making modifications to enhance their products |
| Success in selling our established products and services may cause competitors to focus on us in their marketing efforts thereby increasing direct competition |
| There can be no assurance that we will continue to be able to market our products successfully or compete effectively in the educational marketplace |
| Dependence on Key Personnel |
| Our success depends to a significant extent upon the continued active participation of certain key members of management |
| We do not have employment agreements with these individuals and have no current intention of entering into any such employment agreements |
| The loss of the services of key personnel could have a material adverse effect on our business, financial condition, and results of operations |
| Ability to Attract and Retain Qualified Personnel |
| Our future success will depend, in part, upon our continuing ability to retain the employees, including senior management personnel, who have assisted in the development and marketing of our products and to attract and retain qualified additional employees trained in computer technology, sales, marketing, finance, and other disciplines to enhance our product offerings and broaden our operations |
| There can be no assurance that we will continue to be able to attract and retain such personnel |
| The failure to attract or retain the necessary personnel would have a material adverse effect on our business, financial condition, and results of operations |
| Fluctuations in Quarterly Performance |
| We generally ship products as orders are received, and therefore, we have historically operated without a significant backlog of products |
| The quantity of product orders in any quarter can be affected by a variety of factors, including: • delays in the development and/or shipment of new products; • the closing of large contract sales, such as those to school districts; 10 _________________________________________________________________ [77]Table of Contents • the shipment of new products for which orders have been building for a period of time; and • seasonal variations due to, among other things, the budget and school year cycles of our school customers |
| In addition, our quarterly results can also be affected by: • charges related to acquisitions and divestitures, including related expenses, the write-off of in-process research and development, the amortization of intangible assets, asset impairments and similar items; • charges related to obsolete or impaired assets; • supply-chain issues such as manufacturing problems, delivery delays, or quality issues; • expenses related to product development and marketing initiatives; and • expenses for product support costs |
| Our overall gross margins also fluctuate based upon the mix of software, hardware and service sales |
| We realize higher margins on our software product sales than our hardware and service sales |
| Some of our revenues tend to be seasonal due to customer preferences as to when products and services are delivered and due to the timing of our National School Renaissance Conference, resulting in seasonal variations in margins |
| Share Price Volatility |
| Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly |
| These factors include announcements of technological innovations and/or new products by us and our competitors, earnings releases and earnings warnings by us and our competitors, expectations regarding government funding levels for education, market conditions in the industry, announcements by us of significant acquisitions and/or divestitures, and the general state of the securities markets |
| The market price of our common stock may decline significantly if we fail to meet the published earnings estimates of analysts and others |
| In addition, quarterly fluctuations of our results of operations as described above may cause a significant variation in the market price of our common stock |
| We regard certain of our technologies as proprietary and rely primarily on a combination of patent, copyright, trademark and trade secret laws and employee non-disclosure agreements to establish and protect our intellectual property rights |
| We also employ serialization techniques to prevent unauthorized installation of our software products and related content |
| There can be no assurance that the steps taken by us to protect our rights will be adequate to prevent or deter misappropriation |
| In addition, while we do not believe that our products, trademarks or other proprietary rights infringe upon the proprietary rights of third parties, there can be no assurance that a third party will not make a contrary assertion |
| The cost of responding to such assertions can be material, regardless of whether an assertion is validated |
| The software publishing industry has traditionally experienced widespread unauthorized reproduction of products in violation of intellectual property rights |
| Such activity is difficult to detect and legal proceedings to enforce intellectual property rights are often burdensome and involve a high degree of uncertainty and costs |
| There can be no assurance that our software products will not experience unauthorized reproduction, which would have a material adverse effect on our business, financial condition, and results of operations |
| War, Acts of War and Terrorism |
| Delays and reductions in purchases of our products and services may occur as a result of war, acts of war and terrorism, and the related impacts, including: a reduction of funds available to our customers to purchase our products and services and disruptions in our ability to develop, produce and distribute products and services to our customers |
| These events would have a material adverse effect on our business, financial condition and results of operations |
| Concentration of Share Ownership; Control by Principal Shareholders/ Management |
| As of February 17, 2006, our principal shareholders, Judith Paul and Terrance Paul, co-chairmen and co-founders of the company, beneficially owned approximately 74prca of our outstanding common stock |
| As a result, these principal shareholders have the ability to control and direct our business and affairs |
| Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of the common stock |
| As of February 17, 2006, approximately 22dtta4 million shares of our common stock were held by “affiliates” and may be publicly sold only if registered under the Securities Act of 1933 or sold in accordance with an applicable exemption from registration, such as Rule 144 |
| In addition, we have filed registration statements under the Securities Act of 1933 to register an aggregate of 6cmam000cmam000 shares of common stock reserved for issuance under our 1997 Stock Incentive Plan and an aggregate of 500cmam000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan (“ESPP”), which will, when issued in accordance with such plans, be eligible for immediate sale in the public market, subject to the Rule 144 resale limitations for affiliates |
| We did not offer the ESPP to our employees in 2003, 2004 or 2005 and have no intention of offering it in 2006 |
| Cash Dividends |
| We declared quarterly cash dividends of $ |
| 05 per share for each of the four quarters of 2005 |
| We intend to continue to pay quarterly cash dividends, subject to capital availability and a determination that cash dividends continue to be in the best interests of the company and our shareholders |
| However, our dividend policy may be affected by, among other things, our views on potential future capital requirements, including those related to research and development, creation and expansion of sales distribution channels, acquisitions, legal risks, and stock repurchases |
| Our dividend policy may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts |
| A change in our dividend policy could have a negative effect on the market price of our common stock |
| Possible Antitakeover Effects of Certain Articles and By-Laws Provisions and Provisions of Wisconsin Law |
| Our Amended and Restated Articles of Incorporation and Amended and Restated By-Laws, along with Wisconsin statutory law, contain provisions that could discourage potential acquisition proposals and might delay or prevent a change in control of Renaissance Learning, Inc |
| Such provisions could result in our being less attractive to a potential acquirer and could result in the shareholders receiving less for their common stock than otherwise might be available in the event of a takeover attempt |
| Acquisitions |
| In order to strengthen our business, we continually evaluate strategic opportunities, including acquisitions |
| Acquisitions involve a number of difficulties and risks, including, among others: the failure to integrate personnel, technology, research and development, marketing and sales operations of the acquired company; the diversion of management time and resources and the resulting disruption to our ongoing business; the potential loss of the acquired company’s customers, as well as our own; and unanticipated costs and liabilities |
| If we fail to integrate an acquired company or business successfully, our business, financial condition, and results of operations could be adversely affected |
| Any integration process will require significant time and resources, and we may not be able to manage the process successfully |
| If customers of the acquired company, or our customers, are uncertain about our ability to operate on a combined basis with the acquired company, they could delay or cancel orders for products and services |
| Moreover, we may not successfully evaluate or utilize the acquired technology or accurately forecast the financial impact of an acquisition transaction |
| Divestitures |
| From time to time, we may, for any number of reasons, determine it is in our best interests and in the interests of our shareholders to dispose of a business or product line |
| Divestitures involve a number of difficulties and risks, including, among others, the diversion of management time and resources and the resulting disruption to our ongoing business, and unanticipated costs and liabilities |
| If we are unable to manage the divestiture process successfully or if we are incorrect in our assumptions regarding the costs associated with a disposition, our business, financial condition and results of operations could be adversely affected |