-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JJ3MI719G8DODY9/rcrOqAu2eGQiJodQffwZCX1rrb/JfPe6cZx2np3nb6UbzDxS xtJOA9N4qpqM4yv9ZvZiuA== 0000950152-03-007719.txt : 20030814 0000950152-03-007719.hdr.sgml : 20030814 20030814134814 ACCESSION NUMBER: 0000950152-03-007719 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS & REYNOLDS CO CENTRAL INDEX KEY: 0000083588 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 310421120 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10147 FILM NUMBER: 03845776 BUSINESS ADDRESS: STREET 1: 115 S LUDLOW ST CITY: DAYTON STATE: OH ZIP: 45402 BUSINESS PHONE: 9374852000 MAIL ADDRESS: STREET 1: P.O. BOX 2608 CITY: DAYTON STATE: OH ZIP: 45401 10-Q 1 l02032ae10vq.txt THE REYNOLDS & REYNOLDS COMPANY 10-Q/6-30-2003 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 QUARTER ENDED JUNE 30, 2003 COMMISSION FILE NO. 1-10147 THE REYNOLDS AND REYNOLDS COMPANY OHIO 31-0421120 (State of incorporation) (IRS Employer Identification No.) ONE REYNOLDS WAY KETTERING, OHIO 45430 (Address of principal executive offices) (937) 485-2000 (Telephone No.) 115 SOUTH LUDLOW STREET DAYTON, OHIO 45402 (Former address of principal executive offices) 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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No ---- ----- On June 30, 2003, 67,249,866 Class A common shares and 16,000,000 Class B common shares were outstanding. THE REYNOLDS AND REYNOLDS COMPANY TABLE OF CONTENTS
PAGE NUMBER ------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income For the Three and Nine Months Ended June 30, 2003 and 2002 3 Condensed Consolidated Balance Sheets As of June 30, 2003 and September 30, 2002 4 Condensed Statements of Consolidated Cash Flows For the Nine Months Ended June 30, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the Three and Nine Months Ended June 30, 2003 and 2002 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk (See the caption entitled "Market Risks" included in the Management's Discussion and Analysis of Financial Condition and Results of Operations) 17 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002 (In thousands except per share data)
Three Months Nine Months ----------------------- ---------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net Sales and Revenues Services $157,708 $153,807 $465,519 $452,661 Products 83,823 86,065 258,704 251,397 Financial services 8,874 10,696 27,929 31,621 -------- -------- -------- -------- Total net sales and revenues 250,405 250,568 752,152 735,679 -------- -------- -------- -------- Cost of Sales Services 58,036 52,767 174,523 156,723 Products 50,181 46,833 149,257 140,393 Financial services 2,119 2,760 6,914 8,051 -------- -------- -------- -------- Total cost of sales 110,336 102,360 330,694 305,167 -------- -------- -------- -------- Gross Profit 140,069 148,208 421,458 430,512 Selling, General and Administrative Expenses 91,647 99,200 280,755 301,446 -------- -------- -------- -------- Operating Income 48,422 49,008 140,703 129,066 -------- -------- -------- -------- Other Charges (Income) Interest expense 1,155 1,137 3,855 2,698 Interest income (944) (862) (2,277) (2,975) Equity in net losses (income) of affiliated companies (668) (514) (1,752) 13,731 Other (489) 171 (2,690) 107 -------- -------- -------- -------- Total other charges (income) (946) (68) (2,864) 13,561 -------- -------- -------- -------- Income Before Income Taxes 49,368 49,076 143,567 115,505 Provision for Income Taxes 21,119 18,843 57,543 30,805 -------- -------- -------- -------- Income Before Cumulative Effect of Accounting Change 28,249 30,233 86,024 84,700 Cumulative Effect of Accounting Change 0 0 0 (36,563) -------- -------- -------- -------- Net Income $ 28,249 $ 30,233 $ 86,024 $ 48,137 ======== ======== ======== ======== Basic Earnings Per Common Share Income Before Cumulative Effect of Accounting Change $ 0.41 $ 0.43 $ 1.26 $ 1.19 Cumulative Effect of Accounting Change $ 0.00 $ 0.00 $ 0.00 $ (0.52) Net Income $ 0.41 $ 0.43 $ 1.26 $ 0.68 Average Number of Common Shares Outstanding 68,220 71,000 68,504 70,903 Diluted Earnings Per Common Share Income Before Cumulative Effect of Accounting Change $ 0.40 $ 0.41 $ 1.22 $ 1.15 Cumulative Effect of Accounting Change $ 0.00 $ 0.00 $ 0.00 $ (0.50) Net Income $ 0.40 $ 0.41 $ 1.22 $ 0.65 Average Number of Common Shares Outstanding 70,823 74,191 70,652 73,805 Cash Dividends Declared Per Common Share $ 0.11 $ 0.11 $ 0.33 $ 0.33
See Notes to Condensed Consolidated Financial Statements. 3 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 AND SEPTEMBER 30, 2002 (In thousands)
6/30/03 9/30/02 ------------ ------------ AUTOMOTIVE SOLUTIONS ASSETS Current Assets Cash and equivalents $115,550 $155,295 Accounts receivable 108,933 117,471 Inventories 15,372 13,067 Other current assets 31,863 31,970 ---------- ---------- Total current assets 271,718 317,803 Property, Plant and Equipment, less accumulated depreciation of $166,568 at 6/30/03 and $159,558 at 9/30/02 163,021 161,073 Goodwill 40,649 28,999 Software Licensed to Customers 95,386 81,557 Acquired Intangible Assets 39,558 44,366 Other Assets 94,191 95,762 ---------- ---------- Total Automotive Solutions Assets 704,523 729,560 ---------- ---------- FINANCIAL SERVICES ASSETS Cash 1,870 635 Finance Receivables 396,980 406,160 Other Assets 564 810 ---------- ---------- Total Financial Services Assets 399,414 407,605 ---------- ---------- TOTAL ASSETS $1,103,937 $1,137,165 ========== ========== AUTOMOTIVE SOLUTIONS LIABILITIES Current Liabilities Current portion of long-term debt $0 $6,061 Notes payable 560 0 Accounts payable 37,600 45,144 Accrued liabilities 60,915 81,860 Deferred revenues 30,422 24,404 ---------- ---------- Total current liabilities 129,497 157,469 Long-Term Debt 108,281 107,408 Other Liabilities 94,531 96,488 ---------- ---------- Total Automotive Solutions Liabilities 332,309 361,365 ---------- ---------- FINANCIAL SERVICES LIABILITIES Notes Payable 192,348 217,252 Other Liabilities 101,222 103,522 ---------- ---------- Total Financial Services Liabilities 293,570 320,774 ---------- ---------- SHAREHOLDERS' EQUITY Capital Stock 248,104 217,018 Other Comprehensive Losses (10,121) (14,234) Retained Earnings 240,075 252,242 ---------- ---------- Total Shareholders' Equity 478,058 455,026 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,103,937 $1,137,165 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2002 (In thousands)
2003 2002 --------- --------- AUTOMOTIVE SOLUTIONS Cash Flows Provided By Operating Activities $92,629 $115,444 --------- --------- Cash Flows Provided By (Used For) Investing Activities Business combinations (11,714) 0 Capital expenditures (20,681) (30,503) Net proceeds from asset sales 31 9,183 Capitalization of software licensed to customers (14,685) (15,831) Repayments from (advances to) financial services (9,957) 31,116 --------- --------- Net cash flows used for investing activities (57,006) (6,035) --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 560 0 Principal payments on debt (6,061) (346) Cash dividends paid (22,508) (23,404) Capital stock issued 35,003 48,158 Capital stock repurchased (86,013) (96,343) --------- --------- Net cash flows used for financing activities (79,019) (71,935) --------- --------- Effect of Exchange Rate Changes on Cash 3,651 981 --------- --------- Increase (Decrease) in Cash and Equivalents (39,745) 38,455 Cash and Equivalents, Beginning of Period 155,295 110,511 --------- --------- Cash and Equivalents, End of Period $115,550 $148,966 ========= ========= FINANCIAL SERVICES Cash Flows Provided By Operating Activities $9,760 $18,163 --------- --------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (106,637) (124,185) Collections on finance receivables 113,059 134,131 --------- --------- Net cash flows provided by investing activities 6,422 9,946 --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 0 80,000 Principal payments on debt (24,904) (77,165) Advances from (repayments to) automotive solutions 9,957 (31,116) --------- --------- Net cash flows used for financing activities (14,947) (28,281) --------- --------- Increase (Decrease) in Cash and Equivalents 1,235 (172) Cash and Equivalents, Beginning of Period 635 441 --------- --------- Cash and Equivalents, End of Period $1,870 $269 ========= =========
See Notes to Condensed Consolidated Financial Statements. 5 THE REYNOLDS AND REYNOLDS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The balance sheet as of September 30, 2002 is condensed financial information taken from the annual audited financial statements. The interim financial statements are unaudited. In the opinion of management, the accompanying interim financial statements contain all significant adjustments (which consist only of normal recurring adjustments) necessary to present fairly the company's financial position, results of operations and cash flows for the periods presented. (2) INVENTORIES
6/30/03 9/30/02 ----------- ----------- Finished products $14,641 $12,539 Work in process 364 365 Raw materials 367 163 ------- ------- Total inventories $15,372 $13,067 ======= =======
(3) BUSINESS COMBINATIONS In November 2002, the company purchased all outstanding shares of Networkcar, Inc., the provider of a telematics device which monitors a car's diagnostic information, locates stolen cars through a satellite-based Global Positioning System and performs remote emissions testing. The company purchased Networkcar to enable the rollout to North American automotive retailers as a component of the company's integrated suite of customer relationship management solutions. The purchase price of $11,714 was paid with cash from existing balances. The results of Networkcar's operations have been included in the company's financial statements since the November 29, 2002, purchase date. As of March 31, 2003, the company had recorded goodwill of $12,550 based on the preliminary allocation of the purchase price. The company engaged an independent appraisal firm to determine fair values of intangible assets, such as patents. During the third quarter of fiscal year 2003, a preliminary valuation of the net assets was completed by the independent appraisal firm and the company adjusted its purchase price allocation to increase fixed assets by $600, increase intangible assets for patents by $2,800, reduce non-compete agreements by $400 and reduce goodwill by $3,000. Because the company purchased stock, goodwill would be tax deductible only if the company disposes of the stock of Networkcar. In August 2002, the company purchased BoatVentures.com Corporation, a provider of Web-based applications and education processes to boat, power sports and recreational vehicle retailers and manufacturers. The company preliminarily allocated the purchase price to the net assets at that time. During fiscal year 2003, the valuation of the net assets was completed by an independent appraisal firm and the company adjusted the purchase price allocation to increase computer equipment by $200, increase capitalized software by $100, reduce non-compete agreement intangible assets by $2,400 and increase goodwill by $2,100. (4) GOODWILL AND INTANGIBLE ASSETS In 2002, the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized, but instead tested for impairment at least annually. During fiscal year 2002, the company completed the initial goodwill impairment test and recorded impairment losses of $36,563 ($60,938 net of income tax benefits of $24,375). These impairment losses were recorded effective October 1, 2001, as the cumulative effect of accounting change in the statements of consolidated income. GOODWILL
Software Transform. Solutions Solutions Documents Totals ----------- ------------ ------------- ----------- Balances as of September 30, 2002 $10,412 $15,710 $2,877 $28,999 Business Combinations 11,650 11,650 ------- ------- ------ ------- Balances as of June 30, 2003 $10,412 $27,360 $2,877 $40,649 ======= ======= ====== =======
6 ACQUIRED INTANGIBLE ASSETS
Gross Accumulated Useful Life Amount Amortization (years) -------------- -------------- -------------- AS OF JUNE 30, 2003 Amortized intangible assets Contractual customer relationship $33,100 $ 5,241 20 Customer contract 17,700 15,286 3.67 Trademarks 5,900 934 20 Other 6,450 2,131 2-15 ------- ------- Total $63,150 $23,592 ======= ======= AS OF SEPTEMBER 30, 2002 Amortized intangible assets Contractual customer relationship $33,100 $ 4,000 20 Customer contract 17,700 11,666 3.67 Trademarks 5,900 713 20 Other 6,889 2,844 3-10 ------- ------- Total $63,589 $19,223 ======= =======
Aggregate amortization expense was $1,822 and $5,406 for the three and nine months ended June 30, 2003, respectively. Estimated amortization expense for the years ended September 30, is $7,100 in 2003, $3,567 in 2004, $2,300 in 2005, $2,300 in 2006 and $2,300 in 2007. (5) FINANCING ARRANGEMENTS AUTOMOTIVE SOLUTIONS As of June 30, 2003, the company had outstanding interest rate swap agreements with notional amounts of $100,000. These interest rate swap agreements were designated as fair value hedges. The fair value of the company's fair value derivative instruments was $8,450 at June 30, 2003 and $7,614 at September 30, 2002 and was included in Automotive Solutions' other assets on the condensed consolidated balance sheet. The adjustments to record the net change in the fair value of fair value hedges and related debt during the periods presented were recorded in income. All existing fair value hedges were 100% effective. As a result, there was no current impact to earnings because of hedge ineffectiveness. FINANCIAL SERVICES On January 24, 2003, Reyna Funding, L.L.C., a consolidated affiliate of the company, renewed a loan funding agreement, whereby Reyna Funding, L.L.C. may borrow up to $100,000 using finance receivables purchased from Reyna Capital Corporation, also a consolidated affiliate of the company, as security for the loan. The securitization allows borrowings, up to the $100,000 limit, through January 23, 2004. This loan funding agreement is renewable annually through January 23, 2006. Any borrowings will be repaid as collections on finance receivables balances are received. As of June 30, 2003, Reyna Funding, L.L.C. had outstanding borrowings of $100,000 under this arrangement. As of June 30, 2003, Reyna Funding, L.L.C. had outstanding interest rate swap agreements with notional amounts of $100,000 and Reyna Capital Corporation had outstanding interest rate swap agreements with notional amounts of $20,000. These interest rate swap agreements were designated as cash flow hedges. The fair value of the company's cash flow derivative instruments was a $3,286 liability at June 30, 2003, and a $4,035 liability at September 30, 2002, and was included in Financial Services' other liabilities on the condensed consolidated balance sheets. The adjustments to record the net change in the fair value of cash flow hedges during the periods presented were recorded, net of income taxes, in other comprehensive income. Fluctuations in the fair value of the derivative instruments are generally offset by changes in the value of cash flows of the underlying exposure being hedged because of the high degree of effectiveness of these cash flow hedges. In fiscal year 2003, the company expects the amounts to be reclassified from other comprehensive income into earnings to be immaterial to the financial statements. 7 (6) COMPREHENSIVE INCOME
THREE MONTHS NINE MONTHS ---------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ----------- Net income $28,249 $30,233 $86,024 $48,137 Foreign currency translation adjustment 2,161 1,214 3,651 981 Net unrealized gains (losses) on derivative contracts 101 (924) 462 1 ------- ------- ------- ------- Comprehensive income $30,511 $30,523 $90,137 $49,119 ======= ======= ======= =======
(7) STOCK OPTIONS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement amends the disclosure requirements of Statement 123, "Accounting for Stock-Based Compensation," to require disclosure in interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. This statement was effective for interim financial statements beginning after December 15, 2002. The company accounts for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees". The company follows the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, which requires the valuation of stock options using option valuation models and the disclosure of the pro forma effect on earnings. The company valued its stock options using the Black-Scholes option valuation model which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, such as expected stock price volatility, which can materially affect the fair value estimate. Because the company's stock options have characteristics significantly different from traded options, the fair value determined may not reflect the actual value of the company's stock options.
THREE MONTHS NINE MONTHS ---------------------------- ------------------------ 2003 2002 2003 2002 ------------ ------------ ---------- ---------- Net income as reported $28,249 $30,233 $86,024 $48,137 Stock-based compensation employee expense, net of taxes 2,472 2,662 7,761 9,090 ------- ------- ------- ------- Pro forma net income $25,777 $27,571 $78,263 $39,047 ======= ======= ======= ======= Basic Earnings Per Common Share Net income as reported $0.41 $0.43 $1.26 $0.68 Pro forma net income $0.38 $0.39 $1.14 $0.55 Diluted Earnings Per Common Share Net income as reported $0.40 $0.41 $1.22 $0.65 Pro forma net income $0.36 $0.37 $1.11 $0.52
8 (8) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities.
NINE MONTHS ------------------------------ 2003 2002 ------------ ----------- AUTOMOTIVE SOLUTIONS Net Income $76,350 $37,659 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Cumulative effect of accounting change 0 36,563 Depreciation and amortization 25,093 22,723 Deferred income taxes 2,554 19,991 Deferred income taxes transferred to (from) Financial Services 1,529 (2,980) Losses on sales of assets 885 1,050 Changes in operating assets and liabilities Accounts receivable 7,512 3,381 Inventories (2,007) (2,368) Prepaid expenses and other current assets (16) 5,082 Intangible and other assets (651) 12,757 Accounts payable (7,842) (833) Accrued liabilities (8,376) (3,410) Other liabilities (2,402) (14,171) ------- -------- Net Cash Provided by Operating Activities $92,629 $115,444 ======= ======== FINANCIAL SERVICES Net Income $ 9,674 $ 10,478 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Deferred income taxes 989 (9,524) Deferred income taxes transferred to (from) Automotive Solutions (1,529) 2,980 Changes in receivables, other assets and other liabilities 626 14,229 ------- -------- Net Cash Provided by Operating Activities $ 9,760 $ 18,163 ======= ========
(9) BUSINESS SEGMENTS Reclassifications were made to the prior year's segment information to conform to the presentation used in fiscal year 2003. The results of operations for a consulting business unit were transferred from the Software Solutions segment to the Transformation Solutions segment. This presentation reflects the current organizational structure of the company. 9
THREE MONTHS NINE MONTHS --------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ NET SALES AND REVENUES Software Solutions $167,373 $155,219 $496,541 $453,452 Transformation Solutions 30,660 39,985 99,377 114,530 Documents 43,498 44,668 128,305 136,076 Financial Services 8,874 10,696 27,929 31,621 -------- -------- -------- -------- Total Net Sales and Revenues $250,405 $250,568 $752,152 $735,679 ======== ======== ======== ======== OPERATING INCOME (LOSS) Software Solutions $ 42,460 $ 33,910 $121,363 $ 89,334 Transformation Solutions (6,947) 822 (19,941) (4,378) Documents 8,122 8,341 23,417 26,931 Financial Services 4,787 5,935 15,864 17,179 -------- -------- -------- -------- Total Operating Income $48,422 $49,008 $140,703 $129,066 ======== ======== ======== ========
6/30/03 9/30/02 ------------ ----------- ASSETS Automotive Solutions $ 704,523 $ 729,560 Financial Services 399,414 407,605 ---------- ---------- Total Assets $1,103,937 $1,137,165 ========== ==========
(10) CONTINGENCIES The U.S. Environmental Protection Agency (EPA) had designated the company as one of a number of potentially responsible parties (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at an environmental remediation site. The EPA contended that any company linked to a CERCLA site is potentially liable for all response costs under the legal doctrine of joint and several liability. This environmental remediation site involved a municipal waste disposal facility owned and operated by four municipalities. The company joined a PRP coalition and shared remedial investigation and feasibility study costs with other PRPs. On May 7, 2003, a consent decree was entered in the United States District Court for the District of Connecticut (U.S. v. Regional Refuse Disposal District, et al) pursuant to which the company paid $244 on May 14, 2003. The company believes that any further involvement in the remediation will be minimal and will not have a material adverse effect on the financial statements. In 2000, the company was named a defendant in a cost recovery lawsuit filed by PRP coalition in the United States District Court for Southern District of Ohio regarding an environmental remediation site in Dayton, Ohio. The court has ordered the parties to participate in non-bonding mediation. The company believes that the reasonably foreseeable resolution of this matter will not have a material adverse effect on the financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation requires the company to disclose contingent obligations under certain guarantees in both interim and annual financial statements. In fiscal year 2000, the company sold the net assets of its Information Solutions segment to The Carlyle Group. The Carlyle Group renamed the business Relizon Corporation. The company became secondarily liable under new real estate leases after being released as primary obligor for facilities leased and paid by Relizon. As of June 30, 2003, this contingent liability totaled $3,408. The majority of these leases expire during 2003 and 2004. Also in connection with the sale of these operations to The Carlyle Group, the company secured a standby letter of credit which expires in 2007. The company is contingently liable for a portion of long-term debt secured by a Relizon facility in Canada. As of June 30, 2003, the unamortized balance on this letter of credit was $1,605. In August 1997, the company entered into an agreement with a trust for the construction and lease of an office building near Dayton, Ohio. The trust was formed by a consortium of institutional investors who purchased equity interest in the trust and provided loans to the trust for the construction of the 10 building. This building was completed in 1999 at a cost of $28,800. This lease was accounted for as an operating lease for financial reporting purposes. Accordingly, neither the asset nor the related liability is reported on the company's balance sheets. The company guaranteed 80% of the trust's debt related to the construction of the building. The original five-year term was extended two years through August 2004. At the end of the lease term, the company had the option to purchase the building for $28,800 or sell the building on behalf of the lessor. If the building was sold and the proceeds from the sale were insufficient to repay investors, the company might have been required to make a payment to the lessor of up to 80% of the building's cost. On July 1, 2003, the company purchased the office building for cash of $28,800 and terminated the lease agreement. (11) ACCOUNTING STANDARDS In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies to the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. On July 1, 2003, the company purchased an office building, leased from a nonconsolidated trust discussed in Note 10 to the Consolidated Financial Statements, for cash of $28,800 and terminated the lease agreement. The company has no other variable interest entities. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement requires that certain financial instruments be classified as either a liability or an asset, instead of equity, on the balance sheet. The provisions of this statement are effective for the first interim period beginning after June 15, 2003. The adoption of this pronouncement will not have a material impact on the company's financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002 (In thousands except per share data) 2002 SPECIAL ITEMS During the second quarter of fiscal year 2002, the company recorded several items that when combined added $742 or $.01 per share to earnings. The company settled a state income tax audit that covered fiscal years 1992 through 1998. Based on the settlement, the company reduced interest and income tax accruals for fiscal years 1999 through 2001. The company also filed amended returns in a number of states to correct the apportionment and allocation of taxable income among the states. The combination of audit settlements, accrual adjustments and amended returns added $5,890 or $.08 per share of earnings in the second quarter of fiscal year 2002. The income tax adjustments were recorded as follows: $2,310 in selling, general and administrative (SG&A) expenses, primarily for professional fees associated with obtaining the income tax benefits, $1,709 for the reversal of previously recorded interest expense, $819 of interest income on tax refunds, $200 of other charges and $5,872 of income tax benefits. During the second quarter of fiscal year 2002, the company also recorded $8,552 of expenses ($5,251 or $.07 per share after income taxes) for the following items: employee termination benefits of $4,492 for 114 employees, communications software distributed to customers of $2,500 and real estate costs of $1,560. These items were recorded as follows: $2,000 in cost of sales, $6,552 in SG&A expenses and related income tax benefits of $3,301. During March 2002, the company also sold its shares of Kalamazoo Computer Group plc of the United Kingdom for cash of $1,636 and recorded a net gain of $103. The company recorded a loss of $12,274, included with equity in net losses of affiliated companies on the statement of consolidated income and income tax benefits of $12,377 related to the sale of these shares, included with the provision for income taxes on the statement of consolidated income. 11 RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
Three Months Nine Months ---------------------------------------- ---------------------------------------- 2003 2002 Change % Change 2003 2002 Change % Change --------- --------- --------- ---------- --------- --------- --------- ---------- Net sales and revenues $250,405 $250,568 $ (163) 0% $752,152 $735,679 $ 16,473 2% Gross profit $140,069 $148,208 $(8,139) -5% $421,458 $430,512 $ (9,054) -2% % of revenues 55.9% 59.1% 56.0% 58.5% SG&A expenses $ 91,647 $ 99,200 $(7,553) -8% $280,755 $301,446 $(20,691) -7% % of revenues 36.6% 39.5% 37.3% 41.0% Operating income $ 48,422 $ 49,008 $ (586) -1% $140,703 $129,066 $ 11,637 9% % of revenues 19.3% 19.6% 18.7% 17.5% Income Before Cumulative Effect of Accounting Change $ 28,249 $ 30,233 $(1,984) -7% $ 86,024 $ 84,700 $ 1,324 2% Basic earnings per share $ 0.41 $ 0.43 $ (0.02) -5% $ 1.26 $ 1.19 $ 0.07 6% Diluted earnings per share $ 0.40 $ 0.41 $ (0.01) -2% $ 1.22 $ 1.15 $ 0.07 6%
Consolidated revenues were essentially flat in the third quarter and up 2% year-to-date. For both the third quarter and nine months, consolidated revenues reflected growth in Software Solutions segment revenues, the company's largest segment, and revenue declines in the three smaller segments. Gross profit and gross margins declined from last year for both the quarter and nine months reflecting lower Transformation Solutions revenues and Documents sales. Gross margin was also negatively affected by a shift in the Software Solutions sales mix, with lower margin systems sales growing faster than higher margin recurring service revenues. Gross margin also reflected a change in the allocation of certain expenses previously reported as SG&A expenses to cost of sales. This improved allocation of expenses was made possible by a new general ledger system, however, it was not practicable to restate the prior year. Third quarter and year-to-date SG&A expenses declined from last year, both in total dollars and as a percentage of revenues. SG&A expenses declined because of lower selling expenses and the change in cost allocation methodology. Last year's SG&A expenses for the nine month period also included special items previously discussed. Research and development (R&D) expenses were approximately $17,000 in the quarter and $53,000 year-to-date, compared to $18,000 and $50,000 last year, respectively. Operating income also included combined losses for Reydiance(TM) (acquired as BoatVentures.com in August 2002), Networkcar (acquired in November 2002) and Dealerpoint (software license acquired in January 2003) of $3,100 for the quarter and $8,300 year-to-date. Year-to-date, other income and expenses improved from last year primarily because last year included the previously mentioned pretax losses on the sale of Kalamazoo Computer Group shares. Also, in the second quarter of 2003, the company sold its investment in Credit Online and recorded a pretax gain of $1,369. The effective income tax rate was 42.8% for the quarter compared to 38.4% last year. The 2003 tax rate reflected $3,400 of higher state income tax expense ($2,210 net of federal income tax benefits) related to Ohio tax legislation enacted in late June 2003. This tax law resulted in increased taxable income apportioned to the state of Ohio and did not reduce taxable income apportioned to other states. Excluding this tax law change, the third quarter tax rate was 38.3%. Year-to-date the effective income tax rate was 40.1% (38.5% excluding the tax law change), compared to 26.7% last year. Last year included many special items previously discussed. Excluding the 2002 special items, last year's tax rate for nine months was 38.4%. SOFTWARE SOLUTIONS
Three Months Nine Months ---------------------------------------- ---------------------------------------- 2003 2002 Change % Change 2003 2002 Change % Change --------- --------- --------- ---------- --------- --------- --------- ---------- Net sales and revenues $167,373 $155,219 $12,154 8% $496,541 $453,452 $ 43,089 10% Gross profit $101,713 $98,641 $3,072 3% $300,758 $286,980 $ 13,778 5% % of revenues 60.8% 63.5% 60.6% 63.3% SG&A expenses $59,253 $64,731 $(5,478) -8% $179,395 $197,646 $(18,251) -9% % of revenues 35.4% 41.7% 36.2% 43.6% Operating income $42,460 $33,910 $8,550 25% $121,363 $89,334 $ 32,029 36% % of revenues 25.4% 21.8% 24.4% 19.7%
12 Software Solutions revenues grew over last year for both the third quarter and nine months as both computer systems products sales and computer service revenues increased over last year. For the third quarter computer systems products sales increased as more Electronic Document Management systems and personal computers were sold. Year-to-date, computer systems products sales grew primarily as a result of higher sales of ERA(R) retail management systems and personal computers. Computer services revenues, comprised predominately of recurring software support and equipment maintenance revenues, grew for both the three and nine months because of the increased number of ERA retail management software applications supported, growth in Network Services revenues and the addition of Internet Lead Management (formerly Dealerpoint) sales which resulted from a license agreement between the company and Microsoft Corporation. The backlog of new orders for computer systems products and deferred revenues (orders shipped, but not yet recognized in revenues) was approximately $54,000 at June 30, 2003, compared to $60,000 at September 30, 2002. Gross profit increased over last year for the quarter and year-to-date because of the sales increase. Gross margins, however, declined from last year, primarily because of the strong growth in product sales, which have lower margins than service revenues, and the allocation of certain expenses previously reported as SG&A expenses to cost of sales. The new allocation methodology reduced gross margin by about one percentage point in both the third quarter and nine months. This improved allocation of expenses was made possible by a new general ledger system. It was not practicable, however, to restate the prior year. Gross margins also reflected the ramp up of costs to support Internet Lead Management. SG&A expenses declined from last year, as a percentage of revenues, for the quarter primarily because of lower selling expenses and the change in cost allocation methodology. Year-to-date, SG&A expenses declined from last year, as a percentage of revenues, primarily because of lower selling expenses, the change in cost allocation methodology and last year's special items previously discussed. Operating margins exceeded last year for both the three and nine month periods, primarily because of the sales growth. TRANSFORMATION SOLUTIONS
Three Months Nine Months -------------------------------------- ---------------------------------------- 2003 2002 Change % Change 2003 2002 Change % Change -------- -------- --------- ---------- --------- --------- --------- ---------- Net sales and revenues $30,660 $39,985 $(9,325) -23% $ 99,377 $114,530 $(15,153) -13% Gross profit $8,351 $16,475 $(8,124) -49% $ 29,459 $ 41,486 $(12,027) -29% % of revenues 27.2% 41.2% 29.6% 36.2% SG&A expenses $15,298 $15,653 ($355) -2% $ 49,400 $ 45,864 $ 3,536 8% % of revenues 49.9% 39.1% 49.7% 40.0% Operating income (loss) $(6,947) $822 $(7,769) $(19,941) $ (4,378) $(15,563) % of revenues -22.7% 2.1% -20.1% -3.8%
Transformation Solutions revenues were less than last year for both the three and nine months as growth of credit applications revenues was more than offset by declines in Reynolds Consulting Services, Campaign Management Services, and Automark(R) Web Services revenues. Reynolds Consulting Services revenues reflected a decline in the number of consulting days delivered and Campaign Management Services lower revenues resulted from a decrease in the number of service reminders mailed. Automark Web Services revenues declined as the company began recording revenues over the contract service period instead of upon delivery of the software license. Automark Web Services historically included a mixture of one-time and recurring revenues based on contract terms which have allowed customers the option to host their Web sites. As part of the Reynolds Generation Series(TM), the company has launched additional hosted services and will release more in the future. As many of these hosted services integrate into the Web services offerings, the company is transitioning Automark Web Services to the company's standard contract terms, which do not contain the hosting option. Automark Web Services also delivered fewer web sites than last year's very strong third quarter. Gross profit and gross profit margins declined from last year for both the three and nine months because of the decline in revenues which resulted in lower utilization of consultants and lower fixed cost coverage for Campaign Management Services and Automark Web Services. Third quarter and year-to-date operating losses reflect the revenue driven decline in gross profit and the purchases of Networkcar in November 2002 and BoatVentures.com in August 2002. These businesses lost a combined $1,900 in the third quarter and $6,100 year-to-date. See Note 3 to the Consolidated Financial Statements for additional disclosures regarding these business combinations. 13 DOCUMENTS
Three Months Nine Months -------------------------------------- ---------------------------------------- 2003 2002 Change % Change 2003 2002 Change % Change -------- -------- -------- ----------- --------- --------- -------- ----------- Net sales and revenues $43,498 $44,668 $(1,170) -3% $128,305 $136,076 $(7,771) -6% Gross profit $23,250 $25,156 $(1,906) -8% $ 70,226 $ 78,476 $(8,250) -11% % of revenues 53.5% 56.3% 54.7% 57.7% SG&A expenses $15,128 $16,815 $(1,687) -10% $ 46,809 $ 51,545 $(4,736) -9% % of revenues 34.8% 37.6% 36.4% 37.9% Operating income $8,122 $8,341 $ (219) -3% $ 23,417 $ 26,931 $(3,514) -13% % of revenues 18.7% 18.7% 18.3% 19.8%
Documents sales decreased for both the three and nine months ended June 30, 2003, as a result of the continued decline in the number of business forms sold. In the third quarter, revenues declined 3%, compared to a 7% decline for the first six months of the fiscal year. Laser and continuous forms revenues increased for both the three and nine months; however, this increase was more than offset by lower volume in other product lines. Gross profit and gross profit margins were less than last year for both the third quarter and year-to-date primarily because of the sales decline, which reduced fixed cost coverage and contributed to manufacturing inefficiencies. Gross profit was also negatively impacted by the change in allocation methodology, which shifted certain expenses from SG&A expenses to cost of sales. It was not practicable to restate last year. SG&A expenses declined from last year for both periods, reflecting both lower sales and the cost allocation change. Operating margins were the same as last year in the third quarter as revenues shrank at a slower rate than earlier in the year. Year-to-date operating margins declined because of lower revenues and the effect on gross profit margins. FINANCIAL SERVICES
Three Months Nine Months -------------------------------------- -------------------------------------- 2003 2002 Change % Change 2003 2002 Change % Change ------- -------- --------- ----------- -------- -------- -------- ----------- Net sales and revenues $8,874 $10,696 ($1,822) -17% $27,929 $31,621 ($3,692) -12% Gross profit $6,755 $7,936 ($1,181) -15% $21,015 $23,570 ($2,555) -11% % of revenues 76.1% 74.2% 75.2% 74.5% SG&A expenses $1,968 $2,001 ($33) -2% $5,151 $6,391 ($1,240) -19% % of revenues 22.2% 18.7% 18.4% 20.2% Operating income $4,787 $5,935 ($1,148) -19% $15,864 $17,179 ($1,315) -8% % of revenues 53.9% 55.5% 56.8% 54.3%
Financial Services revenues decreased from last year for both the three and nine months because of lower interest rates and a decline in receivable balances from a year ago. Gross profit decreased from last year's third quarter and nine months because of the revenue decline, but gross profit margins increased as interest rate spreads were strong. Interest rate spreads were 5.2% for both the third quarter and nine months, compared to 4.8% and 4.9% for the third quarter and nine months last year. These interest rate spreads represent relatively high levels for this segment as reduced interest rates decreased borrowing costs. SG&A expenses were down slightly for the quarter and declined from last year through nine months because of lower bad debt expenses. Bad debt expenses were $1,150 in the third quarter of 2003, the same as last year, and $2,565 year-to-date, compared to $3,750 last year. Reduced bad debt expenses reflect lower write-offs and a decline in past due accounts. Overall, operating margins remained strong for this segment. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The company's balance of cash and equivalents was $115,550 as of June 30, 2003. Cash flows from operating activities were $92,629 for the nine months ended June 30, 2003, and resulted primarily from net income adjusted for non cash depreciation and amortization expenses. Cash flows used for investing activities included the company's purchase of Networkcar for $11,714, capital expenditures of $20,681 for normal operations and the capitalization of $14,685 of software licensed to customers. As of June 30, 2003, the balance of software licensed to customers was $95,386. Most of the capitalized software development costs relate to Reynolds Generations Series solutions. In the fourth quarter of fiscal year 2003, the company will begin amortizing these costs. Fiscal year 2003 capital expenditures and capitalized software in the ordinary course of business are anticipated to be about $45,000 excluding real estate transactions. On July 1, 2003, the company purchased an office building for $28,800 of cash and terminated a lease agreement. See related disclosure in Notes 10 and 11 to the Consolidated Financial Statements. 14 Financial services operating cash flows and collections on finance receivables were invested in new finance receivables for the company's automotive systems and used to make scheduled debt repayments. CAPITALIZATION The company's ratio of total debt (total automotive solutions debt) to capitalization (total automotive solutions debt plus shareholders' equity) was 18.5% as of June 30, 2003 and 20.0% as of September 30, 2002. During the first nine months of fiscal year 2003, the company repaid $6,061 of long-term debt. Remaining credit available under committed revolving credit agreements was $100,000 at June 30, 2003. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. The company anticipates that cash balances, cash flow from operations and cash available from committed credit agreements will be sufficient to fund normal operations over the next year. Cash balances are placed in short-term investments until such time as needed. In August 1997, the company entered into an agreement with a trust for the construction and lease of an office building near Dayton, Ohio. The trust was formed by a consortium of institutional investors who purchased equity interests in the trust and provided loans to the trust for the construction of the building. This building was completed in 1999 at a cost of $28,800. This lease was accounted for as an operating lease for financial reporting purposes. Accordingly, neither the asset nor the related liability is reported on the company's balance sheets. The company guaranteed 80% of the trust's debt related to the construction of the building. The company made quarterly lease payments based on the outstanding lease balance of $28,800. The original five-year term was extended two years through August 2004. At the end of the lease term, the company had the option to purchase the building for $28,800 or sell the building on behalf of the lessor. If the building was sold and the proceeds from the sale were insufficient to repay the investors, the company might have been required to make a payment to the lessor of up to 80% of the building's cost. On July 1, 2003, the company purchased the aforementioned office building from the trust for cash of $28,800 and terminated the lease agreement. On January 24, 2003, Reyna Funding, L.L.C., a consolidated affiliate of the company, renewed a loan funding agreement, whereby Reyna Funding, L.L.C. borrowed $100,000 secured by finance receivables purchased from Reyna Capital Corporation, also an affiliate of the company. The securitization allows borrowings, up to the $100,000 limit, through January 23, 2004. This loan funding agreement is renewable annually through January 23, 2006. Any borrowings will be repaid as collections on finance receivables balances are received. The outstanding borrowings under this arrangement were included with Financial Services' notes payable on the Consolidated Balance Sheet. The company has consistently produced strong operating cash flows sufficient to fund normal operations. Strong operating cash flows are the result of stable operating margins and a high percentage of recurring service revenues, which require relatively low capital investment. Debt instruments have been used primarily to fund business combinations and Financial Services receivables. As of June 30, 2003, the company can issue an additional $130,000 of notes under a shelf registration statement on file with the Securities and Exchange Commission. Management believes that its strong balance sheet and cash flows should help maintain an investment grade credit rating that should provide access to capital sufficient to meet the company's cash requirements beyond the next year. SHAREHOLDERS' EQUITY The company lists its Class A common shares on the New York Stock Exchange. There is no principal market for the Class B common shares. The company also has an authorized class of 60,000 preferred shares with no par value. As of June 30, 2003, no preferred shares were outstanding and there were no agreements or commitments with respect to the sale or issuance of these shares, except for preferred share purchase rights described in the company's annual report on Form 10-K for the fiscal year ended September 30, 2002. Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. The company has paid dividends every year since the company's initial public offering in 1961. During the three months ended June 30, 2003, the company repurchased 989 Class A common shares for $28,215 ($28.53 per share). Year-to-date, the company repurchased 3,270 Class A common shares for $86,013 ($26.31 per share). As of June 30, 2003, the company could repurchase an additional 1,634 Class A common shares under existing board of directors' authorizations. On August 12, 2003, the board of directors authorized an additional 8,000 Class A common shares for repurchase. 15 APPLICATION OF CRITICAL ACCOUNTING POLICIES The company's consolidated financial statements and notes to consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements and applying accounting policies require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Critical accounting policies for the company include revenue recognition, accounting for software licensed to customers, accounting for long-lived assets and accounting for income taxes. REVENUE RECOGNITION Sales of computer hardware and business forms products are recorded when title passes upon shipment to customers. Revenues from software license fees are accounted for in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition." The company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectibility is reasonably assured. Service revenues, which include computer hardware maintenance, software support, training, consulting and Web hosting are recorded ratably over the contract period or as services are performed. The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence of fair value exists for those elements. Software revenues which do not meet the criteria set forth in Emerging Issues Task Force (EITF) Issue No. 00-3, "Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware," are recorded ratably over the contract period as services are provided. SOFTWARE LICENSED TO CUSTOMERS The company capitalizes certain costs of developing its software products in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." SFAS No. 86 specifies that costs incurred in creating a computer software product should be charged to expense when incurred, as research and development, until technological feasibility has been established for the product. Technological feasibility is established either by creating a detail program design or a tested working model. Judgment is required in determining when technological feasibility of a product is established. The company follows a standard process for developing software products. This process has five phases; selection, definition, development, delivery and general customer acceptability (GCA). When using proven technology, management believes that technological feasibility is established upon the completion of the definition phase (i.e. detail program design). When using newer technology, management believes that technological feasibility is established upon completion of the delivery phase (tested working model). Once technological feasibility has been established, software development costs are capitalized until the product is available for general release to customers (GCA). Software development costs consist primarily of payroll and benefits for both employees and outside contractors. Upon general release of a software product, amortization is determined based on the larger of the amounts computed using (a) the ratio that current gross revenues for each product bears to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product, ranging from three to seven years. LONG-LIVED ASSETS The company has completed numerous business combinations over the years. These business combinations result in the acquisition of intangible assets and the recognition of goodwill on the company's consolidated balance sheet. The company accounts for these assets under the provisions of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill not be amortized, but instead tested for impairment at least annually. The statement also requires recognized intangible assets with finite useful lives to be amortized over their useful lives. Long-lived assets, goodwill and intangible assets are reviewed for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable from future cash flows. Future cash flows are forecasted based on management's estimates of future events and could be materially different from actual cash flows. If the carrying value of an asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. INCOME TAXES The company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the company's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the company's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the company's financial position or its results of operations. 16 MARKET RISKS INTEREST RATES The Automotive Solutions portion of the business borrows money, as needed, primarily to fund business combinations. Generally the company borrows under fixed rate agreements with terms of ten years or less. During fiscal year 2002, the company entered into $100,000 of interest rate swaps to reduce the effective interest expense on outstanding long-term debt. In this transaction the company effectively converted 7% fixed rate debt into variable rate debt. The company does not use financial instruments for trading purposes. See Note 5 to the Consolidated Financial Statements for additional discussion of interest rate management agreements. The Financial Services segment of the business, including Reyna Funding L.L.C., an affiliate of the company, obtains borrowings to fund the investment in finance receivables. These fixed rate receivables generally have repayment terms of five years. The company funds finance receivables with debt that has repayment terms consistent with the maturities of the finance receivables. Generally the company attempts to lock in the interest spread on the fixed rate finance receivables by borrowing under fixed rate agreements or using interest rate management agreements to manage variable interest rate exposure. Management believes that over time it has reduced interest expense by using interest rate management agreements and variable rate debt instead of directly obtaining fixed rate debt. During the nine months ended June 30, 2002, Reyna Funding, L.L.C., an affiliate of the company, entered into interest rate swaps of $25,085 to replace maturing interest rate swaps. The company does not use financial instruments for trading purposes. See Note 5 to the Consolidated Financial Statements for additional discussion of interest rate management agreements. Because the company's borrowings are generally under fixed rate debt arrangements or its equivalent (variable rate debt that has been fixed with interest rate swaps), management believes that a one percentage point move in interest rates would not have a material effect on the company's financial statements. FOREIGN CURRENCY EXCHANGE RATES The company has foreign-based operations, located primarily in Canada, which accounted for 7% of net sales and revenues for the nine months ended June 30, 2003. In the conduct of its foreign operations the company has intercompany sales, charges and loans between the U.S. and its foreign subsidiaries and may receive dividends denominated in different currencies. These transactions expose the company to changes in foreign currency exchange rates. At June 30, 2003, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at June 30, 2003, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. ENVIRONMENTAL MATTER See Note 10 to the Consolidated Financial Statements for a discussion of the company's environmental contingencies. ACCOUNTING STANDARDS See Note 11 to the Consolidated Financial Statements for a discussion of the effect of accounting standards that the company has not yet adopted. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Management's Discussion and Analysis of the Financial Condition and Results of Operations constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on current expectations, estimates, forecasts and projections of future company or industry performance based on management's judgment, beliefs, current trends and market conditions. Forward-looking statements made by the company may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in any forward-looking statement. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. See also the discussion of factors that may affect future results contained in the company's Current Report on Form 8-K filed with the SEC on August 11, 2000, which we incorporate herein by reference. 17 CONTROLS AND PROCEDURES The company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures as required by paragraph (b) of Exchange Act Rule 13a-15 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There has been no change in the company's internal control over financial reporting that occurred during the fiscal period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31 Certifications 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On April 23,2003, the company filed a report on Form 8-K that included the company's April 23, 2003, press release announcing financial results for the quarter ended March 31,2003. On July 9, 2003, the company filed a report on Form 8-K that included the company's July 8, 2003, press release announcing that a retroactive Ohio tax law change would increase tax expense and reduce earnings. On July 23, 2003, the company filed a report on Form 8-K that included the company's July 23, 2003, press release announcing financial results for the quarter ended June 30, 2003. 19 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. THE REYNOLDS AND REYNOLDS COMPANY Date August 14, 2003 /s/ Lloyd G. Waterhouse ----------------- -------------------------------- Lloyd G. Waterhouse Chief Executive Officer, Chairman and President Date August 14, 2003 /s/ Dale L. Medford ----------------- -------------------------------- Dale L. Medford Executive Vice President and Chief Financial Officer 20 EX-31 3 l02032aexv31.txt EX-31 SECTION 302 CERTIFICATIONS FOR CEO & CFO EXHIBIT 31 CERTIFICATIONS I, Lloyd G. Waterhouse, principal executive officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Reynolds and Reynolds Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date August 14, 2003 /s/Lloyd G. Waterhouse --------------- -------------------------------- Lloyd G. Waterhouse Chief Executive Officer, Chairman and President 21 I, Dale L. Medford, principal financial officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Reynolds and Reynolds Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date August 14, 2003 /s/Dale L. Medford --------------- -------------------------------- Dale L. Medford Executive Vice President and Chief Financial Officer 22 EX-32.1 4 l02032aexv32w1.txt EX-32.1 SECTION 906 CERTIFICATION FOR CEO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act, I, Lloyd G. Waterhouse, certify that: To the best of my knowledge and belief, the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2003 by The Reynolds and Reynolds Company and to which this certification is appended fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of The Reynolds and Reynolds Company. /s/ Lloyd G. Waterhouse -------------------------------- Lloyd G. Waterhouse Chief Executive Officer, Chairman and President A signed original of this written statement required by Section 906 has been provided to The Reynolds and Reynolds Company and will be retained by The Reynolds and Reynolds Company and furnished to the Securities and Exchange Commission or its staff upon request. 23 EX-32.2 5 l02032aexv32w2.txt EX-32.2 SECTION 906 CERTIFICATION FOR CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act, I, Dale L. Medford, certify that: To the best of my knowledge and belief, the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2003 by The Reynolds and Reynolds Company and to which this certification is appended, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of The Reynolds and Reynolds Company. /s/ Dale L. Medford -------------------------------- Dale L. Medford Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to The Reynolds and Reynolds Company and will be retained by The Reynolds and Reynolds Company and furnished to the Securities and Exchange Commission or its staff upon request. 24 -----END PRIVACY-ENHANCED MESSAGE-----