10-K 1 l04360ae10vk.txt REYNOLDS AND REYNOLDS COMPANY 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _________ TO __________. COMMISSION FILE NO. 1-10147 THE REYNOLDS AND REYNOLDS COMPANY (Exact name of registrant as specified in its charter) OHIO 31-0421120 (State of Incorporation) (IRS Employer Identification No.) ONE REYNOLDS WAY DAYTON, OHIO 45430 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 485-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: CLASS A COMMON SHARES (NO PAR VALUE) NEW YORK STOCK EXCHANGE ------------------------------------- ------------------------------ (Title of class ) (Exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ---- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [ ] Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]. The aggregate market value of the Class A Common Shares held by non-affiliates of the registrant, as of December 1, 2003, was $1,854,041,610. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 1, 2003: Class A Common Shares: 66,274,855 (exclusive of 25,812,905 Treasury shares) Class B Common Shares: 15,000,000 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this report to the extent described herein. PART I (Dollars in thousands) ITEM 1. DESCRIPTION OF BUSINESS The Reynolds and Reynolds Company (the "company" or "Reynolds") was founded in 1866 and has been an Ohio corporation since 1889. The company's services include a full range of retail and enterprise management systems, networking and support, e-business applications, Web services, learning and consulting services, customer relationship management solutions, document management and financing services primarily for automotive retailers and manufacturers. The company is organized into four segments for reporting purposes. The Software Solutions segment provides integrated computer systems products and related services. Products include integrated software packages, computer hardware and installation of hardware and software. Services include customer training, hardware maintenance and software support as well as consulting services. The Transformation Solutions segment provides specialized training, Web services and customer relationship management solutions. The Documents segment manufactures and distributes printed business forms primarily to automotive retailers. The Financial Services segment provides financing, principally for sales of the company's computer systems, through the company's wholly-owned affiliates, Reyna Capital Corporation, Reyna Funding, L.L.C. and a similar operation in Canada. FINANCIAL INFORMATION ABOUT SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONS See Note 11 to the Consolidated Financial Statements on page 49 for financial and descriptive information about the business segments described above. NEW SOLUTIONS AND BUSINESS EVENTS IN 2003 In fiscal year 2003, the company continued its mission to lead the transformation of automotive retailing, investing in people, processes, and new products that will deliver solutions and services to automotive retailers and car companies. - In fiscal year 2003, Reynolds introduced the Reynolds Generations Series(R) Suite, a sophisticated customer-centric automotive retail management solution. Designed from the ground up and based on extensive market research, the Reynolds Generations Series Suite is a total retail management solution consisting of seamlessly integrated dealership applications that include Web Brand Management, Customer Management, Finance and Insurance Management, Fixed Operations Management, Business Management, and Employee Management. - Reynolds acquired MSN Autos' Dealerpoint automotive lead management service, the leading provider of these services for the automotive industry. - Reynolds Web Solutions played an integral role in designing and developing Web sites for Scion retailers during the year as Toyota U.S.A. launched the Scion brand in the U.S. Scion vehicles, which are sold through most existing Toyota stores, are being rolled out in phases from mid-2003 through mid-2004. - Reynolds acquired Networkcar, Inc. ("Networkcar"), an advanced telematics solution. The acquisition built on a minority stake the company took in Networkcar in January 2001. During the year, the company also introduced Networkcar for Business, a fleet management technology that gives fleet managers on-line access to 2 detailed vehicle performance indicators such as mileage, speed, speed history, malfunction indicator lamp status, fuel efficiency, and diagnostic trouble code descriptions. RECENT EVENTS In October 2003, the company purchased the outstanding shares of Incadea AG, a provider of global automotive retailing software solutions. Privately-held Incadea, based in Raubling, Germany, has annual revenues of about $6,000. The purchase price of about $7,000 was paid with cash from existing balances. In October 2003, the company purchased the net assets of Third Coast Media, a provider of Web and customer relationship management software to automotive retailers. Third Coast Media, headquartered in Richardson, Texas, has annual revenues of about $5,000. The purchase price of about $8,000 was paid with cash from existing balances. Effective October 1, 2003, the company elected to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" and will begin recognizing stock option expense in the Statements of Consolidated Income. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" provides three alternative methods for reporting this change in accounting principle. The company has elected the retroactive restatement method which requires that all periods presented be restated to reflect stock-based compensation cost under the fair value based accounting method of SFAS No. 123 for all awards granted, modified or settled in fiscal years beginning after December 31, 1994. Accordingly, the company is currently assessing the impact this will have on the company's Consolidated Financial Statements and will restate all periods beginning in fiscal 2004. See pro forma earnings effect in Note 1 to the Consolidated Financial Statements. On October 2, 2003, the company announced the consolidation of its automotive forms manufacturing facility located in Grand Prairie, Texas, into the company's Celina, Ohio facility. The company also eliminated additional positions in technology, administration and documents sales bringing the total number of reductions to about 200. The company estimates that costs for severance, outplacement, relocation and other plant consolidation efforts will total about $8,000 or $.07 per share in the first quarter of fiscal year 2004. RAW MATERIALS Computer hardware and peripherals are essential to the company. It purchases these products from a variety of suppliers. International Business Machines Corporation supplies the hardware platform for the Reynolds Generations Series and the ERA(R) system. If this source of supply were to be interrupted, some delay would occur in converting to a new platform. The company historically has not experienced difficulties in obtaining hardware and peripherals, nor does it reasonably foresee difficulty in obtaining them in the future on competitive terms and conditions. PATENTS, TRADEMARKS AND RELATED RIGHTS Except as described below, the company does not have any patents, trademarks, licenses, franchises or concessions which are material to an understanding of its business. The company's trademark REYNOLDS & REYNOLDS(R) is associated with many goods and services provided by the company. In the automotive systems market, the company has a number of direct and indirect distribution and licensing arrangements with equipment vendors and software providers relating to certain components of the company's products, including the principal operating systems. These arrangements are in the aggregate, but not individually (except for the operating systems), material to the company's business. 3 COMPETITION The company is North America's leading provider of integrated software solutions and services to automotive retailers. The company's main competitor in the Software Solutions segment is the Dealer Services division of Automatic Data Processing, Inc. ("ADP"). ADP's assets and financial resources substantially exceed those of the company. Together, the company and ADP provide a significant share of the information management systems for automotive retailers in the United States and Canada. The company is expanding and supplementing its solutions in the Transformation Solutions segment. This segment experiences competition from hundreds of providers, ranging from local to regional and national firms. The company's Documents segment has a leading market share position but experiences energetic competition from local printing brokers and regional printers across the United States and Canada and those competitors using advances in technology. The company believes it competes by providing value-added products, services and solutions that satisfy market needs and uses current technology to provide additional value and to improve price and performance. By specializing in a particular niche market, the company has emphasized reliable and responsive service, broad industry knowledge and long-term relationships to meet customer needs more effectively. No single customer accounts for five percent or more of the company's revenues. BACKLOG The backlog represents orders for computer systems or documents which have not yet been shipped to customers, and deferred revenues (orders which have been shipped but not yet recognized in revenues). At October 31, 2003, the dollar value of the backlog including software license fees was $62,000 compared to $61,000 last year. The company anticipates substantially all of the backlog to be recognized as revenue during fiscal year 2004. RESEARCH AND DEVELOPMENT During fiscal 2003, the company continued its substantial investment in research and development to deliver new and enhanced solutions for customers. Expenditures for those activities were $72,000 in 2003, $68,000 in 2002 and $71,000 in 2001. ENVIRONMENTAL PROTECTION The company believes that it is in substantial compliance with all applicable federal, state and local statutes concerning environmental protection. The company has not experienced any material costs in this regard. The U.S. Environmental Protection Agency had designated the company as one of a number of potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act at one environmental remediation site, but a consent decree was entered on May 7, 2003 pursuant to which the company paid $244. The company has also been named as a defendant in a cost recovery lawsuit in Dayton, Ohio, regarding another environmental remediation site. (See Note 12 to the Consolidated Financial Statements, page 50.) EMPLOYEES On September 30, 2003, the company and its subsidiaries employed 4,518 persons. 4 AVAILABLE INFORMATION The Company provides free of charge access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other SEC filings, through its Web site, www.reyrey.com, as soon as reasonably practicable after such reports are electronically filed with the SEC. The Company will also provide free of charge a copy of its 2004 Annual Report to Shareholders upon written request to: Douglas M. Ventura, Vice President Corporate and Business Development, General Counsel and Secretary The Reynolds and Reynolds Company One Reynolds Way Dayton, Ohio 45430 Or by calling: 1-888-4REYREY (473-9739) ITEM 2. PROPERTIES As of September 30, 2003, the company owned and operated two manufacturing plants in the United States, one in Celina, Ohio, and one in Grand Prairie, Texas, encompassing approximately 427,000 square feet, which produce the company's Documents segment products and services. Corporate headquarters are located in the Dayton, Ohio area in several buildings owned by the company which contain approximately 1,232,000 square feet. In addition, the company leases approximately 35 offices throughout the United States and Canada. All of the company's business segments use these offices. On October 2, 2003, the company announced that it would consolidate its automotive forms manufacturing facility located in Grand Prairie, Texas, into the company's Celina, Ohio facility effective December 31, 2003. On October 8, 2003, the company sold properties which encompassed approximately 350,000 square feet. Management believes that the company's facilities are adequate to support the business efficiently. See also "Property, Plant and Equipment" under Note 1 to the Consolidated Financial Statements on page 35. ITEM 3. LEGAL PROCEEDINGS Relevant information appears in Note 12 to the Consolidated Financial Statements on page 50. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II (Dollars in thousands except per share data) ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The company's Class A Common Shares are listed 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 million preferred shares with no par value. As of the filing of this report, the company currently has no agreements or commitments with respect to the sale or issuance of the preferred shares except as described in Note 7 to the Consolidated Financial Statements, page 43. Information on market prices of the company's common stock and dividends paid on such stock is set forth in Note 16 to the Consolidated Financial Statements on page 55. 5 As of December 1, 2003, there were approximately 3,040 holders of record of Class A Common Shares and one holder of record of Class B Common Shares. ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SELECTED FINANCIAL DATA (Dollars in thousands except per share data)
For The Years Ended September 30 2003 2002 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------- CONSOLIDATED Net Sales and Revenues $1,008,245 $ 992,383 $1,004,012 $ 954,687 $ 868,028 Income from Continuing Operations $ 119,017 $ 115,552 $ 97,934 $ 88,440 $ 87,891 Basic earnings per common share $ 1.74 $ 1.63 $ 1.34 $ 1.14 $ 1.12 Diluted earnings per common share $ 1.69 $ 1.58 $ 1.31 $ 1.11 $ 1.09 Net Income $ 119,017 $ 78,989 $ 99,557 $ 116,596 $ 122,721 Basic earnings per common share $ 1.74 $ 1.12 $ 1.36 $ 1.50 $ 1.57 Diluted earnings per common share $ 1.69 $ 1.08 $ 1.33 $ 1.47 $ 1.53 Return on Equity 26.1% 17.0% 20.4% 24.2% 28.3% Cash Dividends Per Class A Common Share $ .44 $ .44 $ .44 $ .44 $ .40 Book Value Per Outstanding Common Share $ 6.78 $ 6.56 $ 6.69 $ 6.68 $ 5.98 Assets Automotive solutions $ 728,560 $ 729,560 $ 732,073 $ 808,527 $ 761,686 Financial services 395,495 407,605 422,334 421,129 427,591 ---------- ---------- ---------- ---------- ---------- Total assets $1,124,055 $1,137,165 $1,154,407 $1,229,656 $1,189,277 ========== ========== ========== ========== ========== Long-Term Debt Automotive solutions $ 106,912 $ 107,408 $ 105,805 $ 111,124 $ 163,111 Financial services 169,293 180,519 147,429 126,868 154,040 ---------- ---------- ---------- ---------- ---------- Total long-term debt $ 276,205 $ 287,927 $ 253,234 $ 237,992 $ 317,151 ========== ========== ========== ========== ========== Number of Employees 4,518 4,602 4,763 4,945 9,083 AUTOMOTIVE SOLUTIONS (excluding Financial Services) Current Ratio 2.01 2.02 1.80 1.90 1.75 Net Property, Plant and Equipment $ 184,691 $ 161,073 $ 159,051 $ 138,108 $ 104,106 Total Debt $ 106,912 $ 113,469 $ 111,866 $ 116,838 $ 168,825 Total Debt to Capitalization 19.0% 20.0% 19.0% 19.0% 26.7%
(1) Effective October 1, 2001, the company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and reduced income by $36,563 for the cumulative effect of the accounting change. (2) Certain reclassifications were made to prior years' Consolidated Financial Statements to conform with the presentation used in 2003. The company also changed its allocation methodology for certain expenses in fiscal year 2003, the effect of which was to report certain expenses as cost of sales instead of SG&A expenses. This improved allocation of expenses was made possible by a new general ledger system. Management believes the new allocation methodology reduced gross margin by between one and two percentage points as compared to fiscal year 2002. It was not practicable, however, to restate prior years. 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (In thousands except per share data) SIGNIFICANT EVENTS SUBSEQUENT EVENTS In October 2003, the company purchased the outstanding shares of Incadea AG, a provider of global automotive retailing software solutions. Privately-held Incadea, based in Raubling, Germany, has annual revenues of about $6,000. The purchase price of about $7,000 was paid with cash from existing balances. In October 2003, the company purchased the net assets of Third Coast Media, a provider of Web and customer relationship management software to automotive retailers. Third Coast Media, headquartered in Richardson, Texas, has annual revenues of about $5,000. The purchase price of about $8,000 was paid with cash from existing balances. Effective October 1, 2003, the company elected to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" and will begin recognizing stock option expense in the Statements of Consolidated Income. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" provides three alternative methods for reporting this change in accounting principle. The company has elected the retroactive restatement method which requires that all periods presented be restated to reflect stock-based compensation cost under the fair value based accounting method of SFAS No. 123 for all awards granted, modified or settled in fiscal years beginning after December 15, 1994. Accordingly, the company is currently assessing the impact this will have on the company's Consolidated Financial Statements and will restate all periods beginning in fiscal year 2004. See pro forma earnings effects in Note 1 to the Consolidated Financial Statements on page 34. On October 2, 2003, the company announced the consolidation of its automotive forms manufacturing facility located in Grand Prairie, Texas, into the company's Celina, Ohio facility. The 76 employees located in Texas will be offered the opportunity to accept a position in the Ohio facility. Those not accepting positions in Ohio will be offered severance and outplacement services. The company also eliminated additional positions in technology, administration and documents sales bringing the total number of reductions to about 200. The company estimates that costs for severance, outplacement, relocation and other plant consolidation efforts will total about $8,000 or $.07 per share in the first quarter of fiscal year 2004. 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, Inc. to enable the rollout to North American automotive retailers as a component of the company's integrated suite of customer relationship management solutions. Networkcar had annual revenues of about $1,000 in 2002. See Note 3 to the Consolidated Financial Statements on page 38 for more information on business combinations. In August 2002, the company purchased BoatVentures.com Corporation, a provider of Web based applications and process training to boat, power sports and recreational vehicle retailers and manufacturers. Privately-held BoatVentures.com Corporation had revenues of about $1,000 in 2001. In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a. DealerKid, a provider of electronic customer marketing and relationship management software and services for automotive retailers in the United States and Canada. Privately-held DealerKid had revenues of about $2,000 in 2000. ACCOUNTING CHANGE During fiscal year 2002, the company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," and recorded a cumulative effect of accounting change of $36,563 ($60,938 net of income tax benefits of $24,375) effective October 1, 2001. See Note 13 to the Consolidated Financial Statements on page 51 for additional discussion of this accounting change. 7 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 gain, after tax benefit, 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 in the provision for income taxes on the Statement of Consolidated Income. RECLASSIFICATIONS Certain reclassifications were made to prior years' financial information to conform to the presentation used in fiscal year 2003. The company also changed its allocation methodology for certain expenses in fiscal year 2003, the effect of which was to report certain expenses as cost of sales instead of SG&A expenses. This improved allocation of expenses was made possible by a new general ledger system. Management believes the new allocation methodology reduced gross margin by between one and two percentage points as compared to fiscal year 2002. It was not practicable, however, to restate prior years. RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
2003 vs. 2002 2002 vs. 2001 2003 2002 2001 Change Change ---------------------------------------------------------------------------------------------------------------------------------- Net sales and revenues $1,008,245 $992,383 $1,004,012 $15,862 2% ($11,629) -1% Gross profit $ 564,664 $578,647 $ 566,100 ($13,983) -2% $12,547 2% % of revenues 56.0% 58.3% 56.4% SG&A expenses $ 374,585 $400,120 $ 394,368 ($25,535) -6% $ 5,752 1% % of revenues 37.1% 40.3% 39.3% Operating income $ 190,079 $178,527 $ 171,732 $11,552 6% $ 6,795 4% % of revenues 18.9% 18.0% 17.1% Income from continuing operations $ 119,017 $115,552 $ 97,934 $ 3,465 3% $17,618 18% Discontinued operations $ 0 $ 0 $ 1,623 $ 0 ($ 1,623) Income before accounting change $ 119,017 $115,552 $ 99,557 $ 3,465 3% $15,995 16% Effect of accounting change $ 0 ($ 36,563) $ 0 $36,563 ($36,563) Net income $ 119,017 $ 78,989 $ 99,557 $40,028 51% ($20,568) -21% Basic earnings per share Income from continuing operations $ 1.74 $ 1.63 $ 1.34 $ 0.11 7% $ 0.29 22% Income before accounting change $ 1.74 $ 1.63 $ 1.36 $ 0.11 7% $ 0.27 20% Net income $ 1.74 $ 1.12 $ 1.36 $ 0.62 55% ($ 0.24) -18% Diluted earnings per share Income from continuing operations $ 1.69 $ 1.58 $ 1.31 $ 0.11 7% $ 0.27 21% Income before accounting change $ 1.69 $ 1.58 $ 1.33 $ 0.11 7% $ 0.25 19% Net income $ 1.69 $ 1.08 $ 1.33 $ 0.61 56% ($ 0.25) -19%
8 Consolidated net sales and revenues grew slightly in fiscal year 2003 with growth in Software Solutions segment revenues, the company's largest segment, and revenue declines in the three smaller segments. In fiscal year 2002, consolidated revenues declined slightly, primarily because of the continued decline in MSN Autos (formerly named CarPoint) revenues that began in June 2001. See the Transformation Solutions segment section for more information on MSN Autos. In fiscal year 2003, gross profit and gross margins declined from last year 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 prior years. In fiscal year 2002, consolidated gross profit and gross margins increased primarily as a result of growth in Software Solutions' computer services revenues. SG&A expenses declined from last year, both in total dollars and as a percentage of revenues in fiscal year 2003, primarily because of the change in cost allocation methodology which shifted certain expenses to cost of sales. Also contributing to lower SG&A expenses was a decline in the number of employees. Fiscal year 2002 SG&A expenses also included $8,862 of special items previously discussed under the Special Items caption on page 8 of this analysis. Excluding the $8,862 of special items, fiscal year 2002 SG&A expenses were $391,258 or 39.4% of revenues compared to 39.3% of revenues in fiscal year 2001. Research and development (R&D) expenses were approximately $72,000 in fiscal year 2003, $68,000 in fiscal year 2002 and $71,000 in fiscal year 2001. Operating margins were 18.9% in fiscal year 2003, compared to 18.0% in fiscal year 2002 and 17.1% in fiscal year 2001. Excluding fiscal year 2002 special items, operating margins were 19.1% in 2002. In fiscal year 2003, operating income reflected combined losses of $11,000 or $.09 per share from Reydiance(TM) (acquired as BoatVentures.com in August 2002), Networkcar (acquired in November 2002) and Internet Lead Management (formerly Microsoft's Dealerpoint, a software license acquired in January 2003). In fiscal year 2002, operating margins increased because of higher gross profit margins. Interest expense declined over the last three years primarily because of lower effective interest rates. During February 2002, the company entered into $100,000 of interest rate swap agreements that effectively converted 7% fixed rate debt into variable rate debt, which averaged 3.3% in fiscal year 2003 and 4.3% in fiscal year 2002. These interest rate swap agreements were designated as fair value hedges. Interest income also declined during the last three years because of lower interest rates. In fiscal year 2002, equity in net losses of affiliated companies was $13,201, of which $12,274 related to the sale of the company's shares of Kalamazoo Computer Group plc. This loss was offset by income tax benefits of $12,377. Equity in net losses of affiliated companies was $13,019 in fiscal year 2001 and included losses from the company's investments in Kalamazoo Computer Group plc (subsequently sold) and ChoiceParts LLC, and the May 2001 $3,200 write-off of the company's investment in Consumer Car Club. See Note 1 to the Consolidated Financial Statements on page 34 for additional disclosures about the company's investment in Kalamazoo. In fiscal year 2003, the company sold its investment in Credit Online and recorded a pretax gain of $1,369 in other income. The effective income tax rate was 38.8% in fiscal year 2003, compared to 29.9% in fiscal year 2002 and 39.7% in fiscal year 2001. The effective tax rate was impacted by two separate events in fiscal year 2003, which essentially offset one another. In the third quarter of fiscal year 2003, the 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. In the fourth quarter of fiscal year 2003, the tax rate included a $2,233 reduction of state income tax expense ($1,451 net of federal income tax benefits). This reduction of state income tax expense represented the recognition of deferred state income taxes as states clarified the deductibility of federal bonus depreciation. Excluding these two items, the effective tax rate was 38.4% in fiscal year 2003. Fiscal year 2002 included the tax benefits described in the Special Items caption on page 8 of this analysis. Excluding these special items, the effective income tax rate was 38.2% in fiscal year 2002. The fiscal year 2002 effective tax rate, excluding the special items, declined from the prior year, primarily because of reduced goodwill amortization for which there was no tax deduction. 9 SOFTWARE SOLUTIONS
2003 vs. 2002 2002 vs. 2001 2003 2002 2001 Change Change ----------------------------------------------------------------------------------------------------------------------------- Net sales and revenues Computer services $501,562 $468,584 $431,370 $32,978 7% $37,214 9% Computer systems products $164,624 $145,299 $169,125 $19,325 13% ($23,826) -14% -------- -------- -------- ------- ------- Total net sales and revenues $666,186 $613,883 $600,495 $52,303 9% $13,388 2% Gross profit $403,155 $387,231 $363,571 $15,924 4% $23,660 7% % of revenues 60.5% 63.1% 60.5% SG&A expenses $241,114 $260,906 $243,938 ($19,792) -8% $16,968 7% % of revenues 36.2% 42.5% 40.6% Operating income $162,041 $126,325 $119,633 $35,716 28% $ 6,692 6% % of revenues 24.3% 20.6% 19.9%
In fiscal year 2003, Software Solutions revenues grew over last year as both computer systems products sales and computer service revenues increased over last year. Computer systems products sales increased as more ERA retail management systems, Electronic Document Management systems and personal computers were sold. The company also launched its Reynolds Generations Series(R) Suite retail management solution in the fourth quarter of fiscal year 2003. Computer services revenues, comprised predominately of recurring software support and equipment maintenance revenues, grew in fiscal year 2003, because of the increased number of ERA retail management software applications supported and growth in Network Services revenues. Also contributing to revenue growth was the addition of Internet Lead Management sales which resulted from a license agreement between the company and Microsoft Corporation. The company also increased sales prices to offset inflation. The backlog of new orders for computer systems products and deferred revenues (orders shipped, but not yet recognized in revenues) was approximately $65,000 at September 30, 2003, compared to $60,000 at September 30, 2002. In fiscal year 2003, gross profit increased over last year 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 recurring service and support 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 to two percentage points in fiscal year 2003. This improved allocation of expenses was made possible by a new general ledger system. It was not practicable, however, to restate prior years. Gross margins also reflected the ramp up of costs to transition support of Internet Lead Management to the company from Microsoft. SG&A expenses declined from last year, as a percentage of revenues, primarily because of the change in cost allocation methodology, the reduced number of employees and last year's special items previously discussed. Operating margins reflected both the change in sales mix and lower SG&A expenses. In fiscal year 2002, Software Solutions revenues increased as growth in computer services revenues more than offset declines in computer systems products sales. Computer services revenues increased primarily because of the increased number of ERA retail management software applications supported. Also contributing to the fiscal year 2002 revenue increase was growth in Network Services revenues. The company also increased sales prices to offset inflation. Sales of computer systems products declined in fiscal year 2002 for several products as spending on technology was generally soft. The fiscal year 2002 computer systems products sales decline also reflects the cancellation of a software development contract in fiscal year 2001. In fiscal year 2002, gross profit and gross margins increased over 2001 because of growth in higher margin computer service revenues. In fiscal year 2002, SG&A expenses were 41.4% of revenues excluding $6,682 of special items recorded in the second quarter. In fiscal year 2002, SG&A expenses also included higher bad debt and severance expenses which were partially offset by the elimination of $3,862 of goodwill amortization. Operating margins were strong and increased over the prior year, primarily as a result of the higher gross margins. 10 TRANSFORMATION SOLUTIONS
2003 vs. 2002 2002 vs. 2001 2003 2002 2001 Change Change ---------------------------------------------------------------------------------------------------------------------- Net sales and revenues $131,288 $153,268 $174,546 ($21,980) -14% ($21,278) -12% Gross profit $ 38,939 $ 54,391 $ 63,201 ($15,452) -28% ($ 8,810) -14% % of revenues 29.7% 35.5% 36.2% SG&A expenses $ 64,173 $ 62,457 $ 74,548 $ 1,716 3% ($12,091) -16% % of revenues 48.9% 40.8% 42.7% Operating loss ($ 25,234) ($ 8,066) ($ 11,347) ($17,168) $ 3,281 % of revenues -19.2% -5.3% -6.5%
In fiscal year 2003, Transformation Solutions revenues declined 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 allowed customers the option to host their Web sites. As part of the Reynolds Generations Series family of solutions 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. In fiscal year 2003, gross profit and gross margins declined 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. Fiscal year 2003 operating losses reflected 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 $8,800 in fiscal year 2003. See Note 3 to the Consolidated Financial Statements on page 38 for additional disclosures regarding these business combinations. Transformation Solutions revenues declined in fiscal year 2002, primarily because of the continued decline in MSN Autos revenues that began in June 2001. MSN Autos revenues declined over $20,000 in fiscal year 2002 because of a change in the MSN Autos business model. In fiscal year 2002, this segment also experienced strong growth in credit applications and Automark Web Services revenues. This growth was essentially offset by declines in revenues from Reynolds Consulting Services and Campaign Management Services. Gross profit margins were essentially flat in fiscal year 2002 as compared to fiscal year 2001. Fiscal year 2002 gross profit margins included a fourth quarter adjustment to accrue an additional $1,923 of support costs related to non cancelable contracts for Automark Web hosting services. This accrual became necessary as a result of increased integration and functionality which added support costs. SG&A expenses declined in fiscal year 2002, in part because of the elimination of $6,175 of goodwill amortization expenses. Fiscal year 2002 SG&A expenses also reflect lower selling and marketing expenses. Operating losses declined in fiscal year 2002 as a result of the elimination of goodwill amortization, partially offset by higher Automark Web Services support costs. DOCUMENTS
2003 vs. 2002 2002 vs. 2001 2003 2002 2001 Change Change ------------------------------ ------------ --------------- ------------- ----------------------- --------------------- Net sales and revenues $174,239 $183,523 $187,053 ($ 9,284) -5% ($3,530) -2% Gross profit $ 94,881 $105,961 $110,668 ($11,080) -10% ($4,707) -4% % of revenues 54.5% 57.7% 59.2% SG&A expenses $ 62,330 $ 68,684 $ 70,877 ($ 6,354) -9% ($2,193) -3% % of revenues 35.8% 37.4% 37.9% Operating income $ 32,551 $ 37,277 $ 39,791 ($ 4,726) -13% ($2,514) -6% % of revenues 18.7% 20.3% 21.3%
Documents sales declined in both fiscal years 2003 and 2002, primarily because of a decrease in the volume of business forms sold. The company expects the volume of documents sold to continue to decline as advances in technology continue. Laser forms revenues increased in both fiscal years 2003 and 2002; however, this increase was more than offset by lower volumes in other product lines. Gross profit and gross margins declined in both fiscal years 2003 and 2002, primarily because of lower sales, which reduced fixed cost coverage and contributed to 11 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 prior years. SG&A expenses declined each year, both in absolute dollars and as a percentage of revenues. In fiscal year 2003, lower SG&A expenses reflected both the impact of lower sales and the cost allocation change. In fiscal year 2002, the elimination of $1,279 of goodwill amortization accounted for about half of the reduction. Operating income declined in each of the past two years, reflecting the sales decrease, partially offset by the SG&A expense reductions. FINANCIAL SERVICES
2003 vs. 2002 2002 vs. 2001 2003 2002 2001 Change Change ------------------------------ ------------ --------------- ----------- ------------------------ ---------------------- Net sales and revenues $36,532 $41,709 $41,918 ($5,177) -12% ($ 209) 0% Gross profit $27,689 $31,064 $28,660 ($3,375) -11% $2,404 8% % of revenues 75.8% 74.5% 68.4% SG&A expenses $ 6,968 $ 8,073 $ 5,005 ($1,105) -14% $3,068 61% % of revenues 19.1% 19.4% 12.0% Operating income $20,721 $22,991 $23,655 ($2,270) -10% ($ 664) -3% % of revenues 56.7% 55.1% 56.4%
In fiscal year 2003, Financial Services revenues declined from last year because of lower average interest rates and a decrease in average receivable balances from a year ago. In fiscal year 2002, revenues were essentially flat with fiscal year 2001 as average interest rates and average receivable balances were about the same as in fiscal year 2001. Gross profit declined in fiscal year 2003 from the prior year because of the revenue decline. In fiscal year 2002, gross profit improved because of lower borrowing costs. Interest rate spreads were 5.1% in fiscal year 2003, 4.9% in fiscal year 2002 and 3.4% in fiscal year 2001. In fiscal year 2003, SG&A expenses declined from fiscal year 2002, primarily because of lower bad debt expenses. In fiscal year 2002, SG&A expenses increased over fiscal year 2001, primarily because of higher bad debt expenses. Bad debt expenses were $3,765 in fiscal year 2003, $4,450 in fiscal year 2002 and $2,500 in fiscal year 2001. Bad debt expenses reflected the relative level of write-offs over the last three years. Overall, operating margins remained strong for this segment. LIQUIDITY AND CAPITAL RESOURCES AUTOMOTIVE SOLUTIONS CASH FLOWS (EXCLUDING FINANCIAL SERVICES) The company's balance of cash and equivalents was $105,829 as of September 30, 2003. Cash flows from operating activities were $131,580 during the fiscal year and resulted primarily from net income, adjusted for non cash charges, primarily depreciation and amortization. Cash flows from operating activities were lower than fiscal year 2002, primarily because of additional voluntary contributions to the company's qualified pension plans in fiscal year 2003. Cash flows used for investing activities included the company's purchase of Networkcar for $11,714, capital expenditures of $57,810 and the capitalization of $16,270 of software licensed to customers. Capital expenditures included $28,800 for the purchase of an office building that was previously leased. See related disclosures regarding this office building in Notes 1 and 14 to the Consolidated Financial Statements on pages 36 and 53, respectively. As of September 30, 2003, the balance of software licensed to customers was $94,472. Most of the capitalized software development costs relate to the Reynolds Generations Series (RGS) Suite solution. In the fourth quarter of fiscal year 2003, RGS Suite became available for general release to customers and the company stopped capitalizing software development costs and began amortizing previously capitalized costs to expense. Fiscal year 2004 capital expenditures and capitalized software in the ordinary course of business are anticipated to be about $40,000, including about $20,000 for construction of an office building in Kettering, Ohio. See the Shareholders' Equity caption on page 13 of this analysis regarding the payment of dividends and share repurchases. FINANCIAL SERVICES CASH FLOWS Financial Services operating cash flows, collections on finance receivables and additional borrowings were invested in new finance receivables primarily for the company's computer systems, used to make scheduled debt repayments and dividend payments to Automotive Solutions. CAPITALIZATION The company's ratio of total debt (total Automotive Solutions debt) to capitalization (total Automotive Solutions debt plus shareholders' equity) was 19.0% as of September 30, 2003 and 20.0% as of September 30, 2002. During fiscal year 2003, the company repaid $6,061 of long-term debt. Remaining credit available under committed 12 revolving credit agreements was $100,000 at September 30, 2003. In addition to this committed credit agreement, the company also has a variety of other short-term credit lines available. Management estimates that cash balances, cash flow from operations and cash available from existing credit agreements will be sufficient to fund normal operations over the next year. Cash balances are placed in short-term investments until needed. See Note 1 to the Consolidated Financial Statements on page 34 for a description of cash investments. 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 was 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. 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, with interest payable on a variable rate basis. This loan funding agreement is renewable annually through January 23, 2006. The outstanding borrowings under this arrangement were included with Financial Services notes payable on the Consolidated Balance Sheet. As of September 30, 2003, the balance outstanding on this facility was $100,000. 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 September 30, 2003, the company could 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. See Note 6 to the Consolidated Financial Statements on page 41 for additional disclosures regarding the company's debt instruments. 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 September 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 Note 7 to the Consolidated Financial Statements on page 43. The company paid cash dividends of $30,024 in 2003, $31,089 in 2002 and $32,121 in 2001. Dividends per Class A common share were $.44 in each of 2003, 2002 and 2001. 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 each year since its initial public offering in 1961. The company repurchased $127,872 of Class A common shares in fiscal year 2003, $125,381 in fiscal year 2002 and $140,816 in fiscal year 2001. Average prices paid per share were $26.99 in fiscal year 2003, $26.23 in fiscal year 2002 and $21.70 in fiscal year 2001. As of September 30, 2003, the company could repurchase an additional 8,165 Class A common shares under existing board of directors' authorizations. 13 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, accounting for income taxes and accounting for retirement benefits. 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) pervasive 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 (as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"), 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 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 (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 is 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. 14 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. POSTRETIREMENT BENEFITS The company sponsors defined benefit pension plans for most employees. The company also sponsors a defined benefit medical plan and a defined benefit life insurance plan for certain employees. See Note 9 to the Consolidated Financial Statements on page 45 for additional descriptions of the company's plans. The company accounts for its postretirement benefit plans according to SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." These statements require the use of actuarial models that allocate the cost of an employee's benefits to individual periods of service. The accounting under SFAS No. 87 and SFAS No. 106 therefore requires the company to recognize costs before the payment of benefits. Certain assumptions must be made concerning future events that will determine the amount and timing of the benefit payments. Such assumptions include the discount rate, the expected long-term rate of return on plan assets, the rate of future compensation increases and the healthcare cost trend rate. In addition, the actuarial calculation includes subjective factors such as withdrawal and mortality rates to estimate the projected benefit obligation. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of postretirement benefit expense recorded in future periods. The company annually evaluates the assumptions used to determine postretirement benefit expense for its qualified and non-qualified defined benefit plans. The company adjusted assumptions used to measure the amount of postretirement benefit expense, reducing the discount rate from 7.25% in fiscal year 2003 to 6.0% in fiscal year 2004 and reducing the expected long-term rate of return on plan assets from 9.0% in fiscal year 2003 to 8.25% in fiscal year 2004. The company is not required to make minimum contributions to its postretirement plans in fiscal year 2004, although the company may elect to make contributions. In fiscal year 2003, the company made voluntary contributions of $38,982 to its qualified pension plans. See Note 9 to the Consolidated Financial Statements for more detail disclosures regarding postretirement benefits, including relevant assumptions used to determine expense and future obligations. PRINCIPAL CONTRACTUAL OBLIGATIONS
Less Than More Than Total 1 Year 1-3 Years 4-5 Years 5 Years -------------------------------------------------------------- Long-term debt Automotive Solutions $100,000 $100,000 Financial Services 198,768 $ 79,475 $ 41,219 28,074 $ 50,000 Operating leases 34,565 7,023 11,116 5,888 10,538 Computer services agreement 115,230 19,205 38,410 38,410 19,205 -------- -------- -------- -------- -------- Total contractual obligations $448,563 $105,703 $ 90,745 $172,372 $ 79,743 ======== ======== ======== ======== ========
15 PRINCIPAL COMMERCIAL COMMITMENTS
Amount of Commitment Expiration Per Period Total ----------------------------------------------- Amounts Less Than More Than Committed 1 Year 1-3 Years 4-5 Years 5 Years ------------------------------------------------------------- Line of credit $150,000 $150,000 Secondary liability for leases 2,651 1,770 $ 881 Letter of credit 1,678 201 466 $1,011 ------------------------------------------------------------- Total commercial commitments $154,329 $151,971 $1,347 $1,011 $0 =============================================================
The secondary liability for leases and the letter of credit relate to real estate leases of Relizon Corporation, sold by the company in August 2000. See Note 12 to the Consolidated Financial Statements on page 50 for additional disclosures regarding these contingent obligations. 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, which averaged 3.3% in fiscal year 2003. These interest rate swap agreements were designated as fair value hedges. The company does not use financial instruments for trading purposes. See Note 6 to the Consolidated Financial Statements on page 41 for additional discussion of interest rate management agreements. The Financial Services segment of the business, including Reyna Funding L.L.C., a consolidated 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. The company does not use financial instruments for trading purposes. During fiscal year 2003, Reyna Funding, L.L.C. entered into $32,932 of interest rate swaps to replace maturing interest rate swaps. See Note 6 to the Consolidated Financial Statements for additional discussion of interest rate management agreements. Because fixed rate finance receivables are primarily funded with fixed rate debt 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. See Note 6 to the Consolidated Financial Statements for additional disclosures regarding the company's debt instruments and interest rate management agreements. FOREIGN CURRENCY EXCHANGE RATES The company has foreign-based operations, primarily in Canada, which accounted for 7% of net sales and revenues in fiscal year 2003. In the conduct of its foreign operations, the company has intercompany sales, expenses and loans between the U.S. and Canada and may receive dividends denominated in different currencies. These transactions expose the company to changes in foreign currency exchange rates. At September 30, 2003, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at September 30, 2003, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. 16 ENVIRONMENTAL MATTERS See Note 12 to the Consolidated Financial Statements on page 50 for a discussion of the company's environmental contingencies. ACCOUNTING STANDARDS See Note 14 to the Consolidated Financial Statements on page 53 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 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Market Risks" section in Management Discussion and Analysis (Part II, Item 7 of this report on page 16). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 is contained in Item 15 of Part IV (page 21) of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, Reynolds management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. 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 annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The name, age, background information and business experience for each of the company's directors and nominees are incorporated herein by reference to the section of the company's Proxy Statement for its 2004 Annual Meeting of Shareholders captioned "PROPOSAL I - ELECTION OF DIRECTORS." 17 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the company are elected by the Board of Directors at its meeting immediately following the Annual Meeting of Shareholders to serve generally for a term of one year. The executive officers of the company, as of December 1, 2003, are:
NAME AGE POSITION ------- --- -------- Lloyd G. Waterhouse 52 Chief Executive Officer, Chairman and President Dale L. Medford 53 Executive Vice President and Chief Financial Officer, and Director Douglas M. Ventura 43 Vice President Corporate and Business Development, General Counsel and Secretary Michael J. Gapinski 53 Treasurer and Assistant Secretary Michael J. Berry 40 Senior Vice President, Reynolds Services Group Randall P. Harvey 50 Senior Vice President, Reynolds Software Solutions Thomas E. Suttmiller 57 Senior Vice President, Sales and Marketing
A description of prior positions held by executive officers of the company within the past 5 years, to the extent applicable, is as follows: Mr. Waterhouse has been Chief Executive Officer, Chairman and President since January 2002; prior thereto President and Chief Executive Officer from November 2000 to January 2002; prior thereto President and Chief Operating Officer from May 1999 to November 2000; and prior thereto General Manager of E-Business Services for IBM Corporation from July 1998 to May 1999. Mr. Ventura has been Vice President Corporate and Business Development, General Counsel and Secretary since October 2003; prior thereto Vice President Business Development, General Counsel and Secretary from June 2002 to October 2003; prior thereto Vice President Alliances and Acquisitions, General Counsel and Secretary from January 2002 to June 2002; prior thereto, General Counsel and Secretary from September 2000 to January 2002; prior thereto was Associate General Counsel and Assistant Secretary from September 1996 to September 2000. Mr. Berry joined the company as Senior Vice President, Reynolds Services Group in November 2003; prior thereto, held the position of Executive Vice President, Customer Support and General Manager, Retail Services of Comdata Corporation since June 2001; prior thereto, served in several different roles from December 1993 to June 2001 including Vice President and General Manager, Retail Payments Products and Vice President, Planning and Acquisitions, for Travelers Express Co., Inc. Mr. Harvey has been Senior Vice President, Reynolds Software Solutions since February 2002; prior thereto, Managing Director of Enoventure Group 2001-2002; prior thereto, Executive Vice President, Firepond from 2000-2001; prior thereto, Senior Vice President, Product Development of OnDisplay in 2000; and prior thereto, from 1993 to 2000 was Vice President, Product Development for Sterling Commerce. Mr. Suttmiller has been Senior Vice President, Sales and Marketing since October 2003; prior thereto was Senior Vice President, Integrated Document Solutions, for the company from October 2001 to October 2003; prior thereto, since October 1990, held various Senior Vice President positions with the company. Mr. Gapinski and Mr. Medford have held their positions with the company for at least 5 years. 18 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Compliance with the filings required under Section 16(a) of the Securities Exchange Act of 1934 is herein incorporated by reference to the section of the company's Proxy Statement for its 2004 Annual Meeting of Shareholders captioned "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE." The company has adopted a Code of Ethics for Principal Executives and Senior Financial Officers that applies to its Chief Executive Office, Chief Financial Officer and its Controller. The Company has posted this Code of Ethics to its Web site, www.reyrey.com, and will provide a copy to any person without charge upon request in the manner set forth under Available Information on page 5 of this annual report. ITEM 11. EXECUTIVE COMPENSATION Information on compensation of the company's executive officers and directors is incorporated herein by reference to the section of the company's Proxy Statement for its 2004 Annual Meeting of Shareholders captioned "EXECUTIVE COMPENSATION." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The number of Class A and Class B Common Shares of the company beneficially owned by each five percent shareholder and by all executive officers and directors as a group as of December 1, 2003 is incorporated herein by reference to the section of the company's Proxy Statement for its 2004 Annual Meeting of Shareholders captioned "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The following table sets forth certain information regarding compensation plans under which the company's equity securities have been authorized for issuance. EQUITY COMPENSATION PLAN INFORMATION (In thousands except per share data)
(a) (b) (c) ------------------------------------------------------------------------------------------------------------------- Plan Category Number of securities to Weighted-average Number of securities remaining be issued upon exercise exercise price of available for future issuance of outstanding options, outstanding options, under equity compensation plans warrants and rights warrants and rights (excluding securities reflected in column [a]) ------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by shareholders 7,328 $21.17 3,541(1) ------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by shareholders 4,819 $20.60 (2) ------------------------------------------------------------------------------------------------------------------- TOTAL 12,147 $20.94 3,541 -------------------------------------------------------------------------------------------------------------------
(1) The total number of Class A Common Shares ("Shares") authorized for issuance under the company's Stock Option Plan - 1995 (which was approved by the company's shareholders) is 1,000 Shares plus an amount each year equal to the lesser of (i) two percent of the company's total issued and outstanding Shares as of October 1 of each full or partial company fiscal year during which the plan is in effect beginning October 1, 1995 or (ii) 834. (2) The number of Class A Common Shares authorized for issuance under the company's 2001 Shares Plan (which was not approved by the company's shareholders) is determined on or about October 1 of each year by the company's board of directors in its sole discretion. 19 Following are the features of the equity compensation plans not approved by shareholders: 2001 SHARES PLAN On August 7, 2001, the company's board of directors approved the 2001 Shares Plan. The plan was not approved by our shareholders. The purpose of the plan is to provide employees with an additional incentive to contribute to the company's success and to assist it in attracting and retaining the best personnel. The plan provides for the granting of non-qualified stock options to full-time employees and part-time, benefits-eligible employees who are not eligible to participate in any other stock option plans. (The directors and key employees of the company participate in the Stock Option Plan - 1995, which was approved by our shareholders, and, therefore, they do not participate in this plan.) Pursuant to the plan, each year the Board of Directors determines the number of shares which may be issued upon the exercise of options to be granted on October 1 (or such other date determined by the Board) for the fiscal year under consideration. The 2001 Shares Committee, which consists of persons appointed by the Board who are not eligible to participate in the plan, has the authority to select the employees to receive stock options under the plan, determine the number of shares to be subject to the options granted, and determine the terms and conditions of the options granted including, without limitation, the option price. Each option is evidenced by an option certificate which sets forth the terms and conditions of the particular option as determined by the Committee. Unless the Committee determines otherwise, the exercise price per share subject to the option is the fair market value of our common stock on the date of grant, and the option is exercisable on and after the third anniversary of the date of grant provided that the employee has been continuously employed by us since the date of grant. Certain exceptions may be made by the Committee in the event the employee dies, retires or is terminated for reasons other than for cause. No option may have a term of more than ten years. The Committee has determined that for options granted on or after October 1, 2002, such options will be exercisable on and after the second anniversary (rather than the third anniversary) of the date of grant and that the term of such options will be seven years (rather than ten years). The plan expires on September 30, 2006 but may be earlier terminated or modified by the Committee or the Board of Directors, but no termination or modification of the plan or any option granted may adversely affect any stock option previously granted under the plan without the consent of the plan participant. 1996 SHARES PLAN On August 6, 1996, the board of directors adopted the 1996 Shares Plan. This plan was not approved by the company's shareholders. The terms of the plan are substantially similar to the terms of the 2001 Shares Plan described above. The plan expired on September 30, 2001 and was succeeded by the 2001 Shares Plan. Accordingly, no new stock options may be granted under the plan. The options granted under the plan had a term of ten years. Therefore, options issued under the plan remain outstanding. The company intends to terminate the 2001 Shares Plan and the 1996 Shares Plan if and when the plans described in the company's Proxy Statement for its 2004 Annual Meeting of Shareholders are approved. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning transactions with management, certain business relationships and indebtedness of management is incorporated herein by reference to the section of the company's Proxy Statement for its 2004 Annual Meeting of Shareholders captioned "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICE Information as to the company's principal accountant's fees and services is herein incorporated by reference to the section of the company's Proxy Statement for its 2004 Annual Meeting of Shareholders captioned "REPORT OF THE AUDIT COMMITTEE." 20 PART IV (Dollars in thousands) ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The following Consolidated Financial Statements of the company are set forth on pages 30-55. Statements of Consolidated Income - For The Years Ended September 30, 2003, 2002 and 2001 Consolidated Balance Sheets - September 30, 2003 and 2002 Statements of Consolidated Shareholders' Equity and Comprehensive Income - For The Years Ended September 30, 2003, 2002 and 2001 Statements of Condensed Consolidated Cash Flows - For the Years Ended September 30, 2003, 2002 and 2001 Notes to Consolidated Financial Statements (Including Supplementary Data) (a) (2) FINANCIAL STATEMENT SCHEDULES FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 2003 ARE ATTACHED HERETO: Schedule II Valuation Accounts Page 56 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a) (3) EXHIBITS Exhibit No. Item (3)(a) Amended Articles of Incorporation, Restatement effective February 9, 1995; incorporated by reference to Exhibit A of the company's definitive proxy statement dated January 5, 1995 filed with the Securities and Exchange Commission. (3)(b) Amendment to Amended and Restated Articles of Incorporation, effective April 25, 1997; incorporated by reference to Exhibit 2 of the company's Form 8A/A dated October 20, 1998 filed with the Securities and Exchange Commission. (3)(c) Amendment to Amended and Restated Articles of Incorporation, effective April 18, 2001; incorporated by reference to Exhibit (3)(c) to Form 10-K for the fiscal year ended September 30, 2001. (3)(d) Amended and Restated Consolidated Code of Regulations; incorporated by reference to Exhibit A to the company's definitive proxy statement dated January 8, 2001 filed with the Securities and Exchange Commission. (4)(a) Copies of the agreements relating to long-term debt, which are not required as exhibits to this Form 10-K, will be provided to the Securities and Exchange Commission upon request. (4)(b) Amended and Restated Rights Agreement between The Reynolds and Reynolds Company and Mellon Investor Services, L.L.C. as Rights Agent dated as of December 1, 2001; incorporated by reference to Exhibit (4)(b) to Form 10-K for the fiscal year ended September 30, 2001. (9) Not applicable. 21 Exhibit No. Item (10)(a)* Amended and Restated Employment Agreement with Lloyd G. Waterhouse, as of September 2, 2003. (10)(b)* Employment Agreement with Dale L. Medford dated as of May 7, 2001; incorporated by reference to Exhibit (10)(d) to Form 10-K for the fiscal year ended September 30, 2001. (10)(c)* Employment Agreement with Douglas M. Ventura dated as of December 1, 2001; incorporated by reference to Exhibit (10)(f) to Form 10-K for the fiscal year ended September 30, 2001. (10)(d)* General form of Indemnification Agreement between the company and each of its directors dated as of August, 6, 2002; incorporated by reference to Exhibit (10)(j) to form 10-K for the fiscal year ended September 30, 2002. (10)(e)* Amended and Restated Stock Option Plan -- 1989, effective November 13, 2001; incorporated by reference to Exhibit (10)(k) to Form 10-K for the fiscal year ended September 30, 2001. (10)(f)* Restated Stock Option Plan - 1995, effective November 13, 2001; incorporated by reference to Exhibit (10)(k) to Form 10-K for the fiscal year ended September 30, 2001. (10)(g)* 1996 Shares Plan, adopted August 6, 1996; incorporated by reference to Exhibit 4(e) to Form S-8 filed on August 13, 1999. (10)(h)* 2001 Shares Plan, adopted August 7, 2001; incorporated by reference to Exhibit 4(g) to Form S-8 filed on October 1, 2001. (10)(i)* The Reynolds and Reynolds Company Supplemental Retirement Plan; incorporated by reference to Exhibit (10)(G) to Form 10-K for the fiscal year ended September 30, 1980. (10)(j)* The Reynolds and Reynolds Company Supplemental Retirement Plan; Amendment No. 2, adopted on August 17, 1982; incorporated by reference to Exhibit (10)(j) to Form 10-K for the fiscal year ended September 30, 1982. (10)(k)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 3, adopted on August 16, 1983; incorporated by reference to Exhibit (10)(j) to Form 10-K for the fiscal year ended September 30, 1983. (10)(l)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 4, adopted on November 6, 1984; incorporated by reference to Exhibit (10)(l) to Form 10-K for the fiscal year ended September 30, 1984. (10)(m)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 5, adopted on May 13, 1985; incorporated by reference to Exhibit (10)(s) to Form 10-K for the fiscal year ended September 30, 1985. (10)(n)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 6, adopted on February 11, 1986; incorporated by reference to Exhibit (10)(r) to Form 10-K for the fiscal year ended September 30, 1986. (10)(o)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 7, adopted on August 12, 1986; incorporated by reference to Exhibit (10)(s) to Form 10-K for the fiscal year ended September 30, 1986. (10)(p)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 8, adopted on February 10, 1987; incorporated by reference to Exhibit (10)(s) to Form 10-K for the fiscal year ended September 30, 1987. (10)(q)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 9, adopted on August 11, 1987; incorporated by reference to Exhibit (10)(t) to Form 10-K for the fiscal year ended September 30, 1987. (10)(r)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 10, adopted on May 8, 1989; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1989. (10)(s)* The Reynolds and Reynolds Company Restated Supplemental Retirement Plan adopted November 9, 1988; incorporated by reference to Exhibit (10)(ee) to Form 10-K for the fiscal year ended September 30, 1989. (10)(t)* Resolution of the Board of Directors amending The Reynolds and Reynolds Company Supplemental Retirement Plan dated as of December 1, 1989; incorporated by reference to Exhibit (10)(ff) to Form 10-K for the fiscal year ended September 30, 1989. 22 Exhibit No. Item (10)(u)* Resolution of the Board of Directors amending The Reynolds and Reynolds Company Supplemental Retirement Plan (Amendment No. 1), dated as of November 13, 1990; incorporated by reference to Exhibit (10)(ff) to Form 10-K for the fiscal year ended September 30, 1990. (10)(v)* Resolution of the Board of Directors amending The Reynolds and Reynolds Company Supplemental Retirement Plan (Amendment No. 2), dated as of July 23, 1991; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1991. (10)(w)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 3, adopted August 8, 1995; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1995. (10)(x)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 4, adopted March 14, 1997; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1997. (10)(y)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 5, adopted November 12, 2001; incorporated by reference to Exhibit (10)(cc) to Form 10-K for the fiscal year ended September 30, 2001. (10)(z)* Description of The Reynolds and Reynolds Company Annual Incentive Compensation Plan adopted as of October 1, 1986; incorporated by reference to Exhibit (10)(t) to Form 10-K for the fiscal year ended September 30, 1987. (10)(aa)* Description of The Reynolds and Reynolds Company Amended and Restated Annual Incentive Compensation Plan effective October 1, 1995; incorporated by reference to (10)(ff) to Form 10-K for the fiscal year ended September 30, 1995. (10)(bb)* The Reynolds and Reynolds Company Retirement Plan Revised and Restated effective October 1, 1997. (10)(cc)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the fiscal year ended September 30, 1995. (10)(dd)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 1, adopted December 19, 1996; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the fiscal year ended September 30, 1997. (10)(ee)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 2, adopted August 11, 1997; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the fiscal year ended September 30, 1997. (10)(ff)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 3, adopted September 22, 1998, as filed herewith; incorporated by reference to Exhibit (10)(oo) to Form 10-K for the fiscal year ended September 30, 1998. (10)(gg)* General Form of Deferred Compensation Agreement between the company and each of the following officers: R. H. Grant, III, and Dale L. Medford; incorporated by reference to Exhibit (10)(p) to Form 10-K for the fiscal year ended September 30, 1983. (10)(hh)* Resolution of the Board of Directors and General Form of Amendment dated December 1, 1989 to the Deferred Compensation Agreements between the company and each of the following officers: Dale L. Medford and Daniel W. Dittman; incorporated by reference to Exhibit (10)(fff) to Form 10-K for the fiscal year ended September 30, 1989. (10)(ii)* General Form of Collateral Assignment Split-Dollar Insurance Agreement and Policy and Non-Qualified Compensation and Disability Benefit Agreement between the company and each of the following officers: Michael J. Gapinski and Dale L. Medford; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1985. 23 Exhibit No. Item (10)(jj)* Resolution of the Board of Directors and General Form of Amendment dated December 1, 1989 to the Non-Qualified Compensation and Disability Benefit between the company and each of the following officers: Michael J. Gapinski and Dale L. Medford; incorporated by reference to Exhibit (10)(hhh) to Form 10-K for the fiscal year ended September 30, 1989. (10)(kk)* General Form of Non-Qualified Deferred Compensation and Disability Agreement between the Company and each of its officers effective December 1, 2001; incorporated by reference to Exhibit (10)(qq) of Form 10-K for fiscal year ended September 30, 2001. (10)(ll)* General Form of Non-Qualified Deferred Compensation Agreement between the Company and each of its officers effective January 1, 2003. (10)(mm) Agreement dated March 11, 1963, between the company and Richard H. Grant, Jr., restricting transfer of Class B Common Stock of the company; incorporated by reference to Exhibit 9 to Registration Statement No. 2-40237 on Form S-7. (10)(nn) Amendment dated February 14, 1984 to Richard H. Grant, Jr.'s Agreement restricting transfer of Class B Common Stock of the company dated March 11, 1963; incorporated by reference to Exhibit (10)(u) to Form 10-K for the fiscal year ended September 30, 1984. (11) Not applicable (12) Not applicable (13) Not applicable (18) Not applicable (21) List of subsidiaries (22) Not applicable (23) Consent of Independent Auditors (24) Not Applicable (31.1) Certification of Chief Executive Officer. (31.2) Certification of Chief Financial Officer. (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. * Contracts or compensatory plans or arrangements required to be filed as an exhibit to this form pursuant to Item 15(a) (3) of this report. (b) REPORTS ON FORM 8-K. During the fourth quarter ended September 30, 2003, and first quarter to date, the following reports were filed: 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. 24 On October 2, 2003, the company filed a report on Form 8-K that included the company's October 2, 3003 press release announcing a series of actions to accelerate growth and strengthen the company as a leader in providing software and services to automotive retailers and car companies globally. On November 5, 2003, the company filed a report on Form 8-K that included the financial results for the fourth quarter and fiscal year ended September 30, 2003. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. Please refer to Part IV, Item 15(a)(3) beginning on page 21. (d) CONSOLIDATED FINANCIAL STATEMENTS Individual financial statements and schedules of the company's consolidated subsidiaries are omitted from this Annual Report on Form 10-K because Consolidated Financial Statements and schedules are submitted and because the registrant is primarily an operating company and all subsidiaries included in the Consolidated Financial Statements are wholly owned. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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 By /s/ DOUGLAS M. VENTURA ---------------------------------------------- DOUGLAS M. VENTURA Vice President, Corporate and Business Development, General Counsel and Secretary Date: December 12, 2003 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Date: December 12, 2003 By /s/ LLOYD G. WATERHOUSE ---------------------------------------------- LLOYD G. WATERHOUSE Chief Executive Officer, Chairman and President (Principal Executive Officer) Date: December 12, 2003 By /s/ DALE L. MEDFORD ---------------------------------------------- DALE L. MEDFORD Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) and Director 25 Date: December 12, 2003 By /s/ STEPHANIE W. BERGERON ---------------------------------------------- STEPHANIE W. BERGERON, Director Date: December 12, 2003 By /s/ DR. DAVID E. FRY ---------------------------------------------- DR. DAVID E. FRY, Director Date: December 12, 2003 By /s/ RICHARD H. GRANT, III ---------------------------------------------- RICHARD H. GRANT, III, Director Date: December 12, 2003 By /s/ IRA D. HALL ---------------------------------------------- IRA D. HALL, Director Date: December 12, 2003 By /s/ CLEVE L. KILLINGSWORTH, JR. ---------------------------------------------- CLEVE L. KILLINGSWORTH, JR. Director Date: December 12, 2003 By /s/ EUSTACE W. MITA ---------------------------------------------- EUSTACE W. MITA, Director Date: December 12, 2003 By /s/ PHILIP A. ODEEN ---------------------------------------------- PHILIP A. ODEEN, Director Date: December 12, 2003 By /s/ DONALD K. PETERSON ---------------------------------------------- DONALD K. PETERSON, Director Date: December 12, 2003 By /s/ RENATO ZAMBONINI ---------------------------------------------- RENATO ZAMBONINI, Director 26 ANNUAL REPORT ON FORM 10-K ITEM 15(a)(1) and (2); 15(c) and (d) Financial Statements, Schedules and Exhibits Year Ended September 30, 2003 The Reynolds and Reynolds Company Dayton, Ohio 27 MANAGEMENT'S STATEMENT OF RESPONSIBILITY To Our Shareholders: The management of The Reynolds and Reynolds Company is responsible for accurately and objectively preparing the company's Consolidated Financial Statements. These statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. Management believes that the financial information in this annual report is free from material misstatement. The company's management maintains an environment of multilevel controls. The Company Business Principles, for example, is signed by all employees on hiring and annually thereafter and communicates high standards of integrity that are expected in the company's day-to-day business activities. The Company Business Principles addresses a broad range of issues including potential conflicts of interest, business relationships, accurate and timely reporting of financial information, confidentiality of proprietary information, insider trading and social responsibility. The company also maintains and monitors a system of internal controls designed to provide reasonable assurances regarding the safeguarding of company assets and the integrity and reliability of financial records. These internal controls include the appropriate segregation of duties and the application of formal policies and procedures. Furthermore, an internal audit department, which has access to all financial and other corporate records, regularly performs tests to evaluate the system of internal controls to ensure the system is adequate and operating effectively. At the date of these financial statements, management believes the company has an effective internal control system. The company has formed a Disclosure Committee comprised of senior officers of the company for the purpose of assuring adequacy and timeliness of public disclosure of material information. The company's independent auditors, Deloitte & Touche LLP, perform an independent audit of the company's Consolidated Financial Statements. They have access to minutes of board meetings, all financial information and other corporate records. Their audit is conducted in accordance with auditing standards generally accepted in the United States of America and includes consideration of the system of internal controls. Their report is included in this annual report. Another level of control resides with the audit committee of the company's board of directors. The committee, comprised of four directors who are not members of management, oversees the company's financial reporting process. They recommend to the board, subject to shareholder approval, the selection of the company's independent auditors. They discuss the overall audit scope and the specific audit plans with the independent auditors and the internal auditors. This committee also meets regularly (separately and jointly) with the independent auditors, the internal auditors and management to discuss the results of those audits, the evaluation of internal controls, the quality of financial reporting and specific accounting and reporting issues. /s/ LLOYD G. WATERHOUSE /s/ DALE L.MEDFORD ----------------------- ----------------- Lloyd G. Waterhouse Dale L. Medford Chief Executive Officer, Chairman and President Executive Vice President and Chief Financial Officer 28 INDEPENDENT AUDITORS' REPORT The Shareholders of The Reynolds and Reynolds Company: We have audited the accompanying consolidated balance sheets of The Reynolds and Reynolds Company and its subsidiaries as of September 30, 2003 and 2002, and the related statements of consolidated income, shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended September 30, 2003. Our audits also included the financial statement schedule included as Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Reynolds and Reynolds Company and its subsidiaries at September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 13 to the consolidated financial statements in 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142. DELOITTE & TOUCHE LLP Dayton, Ohio November 12, 2003 29 Statements of Consolidated Income (In thousands except per share data)
For The Years Ended September 30 2003 2002 2001 ------------------------------------------------------------------------------------------------------------ Net Sales and Revenues Services $ 624,795 $604,191 $ 600,681 Products 346,918 346,483 361,413 Financial services 36,532 41,709 41,918 --------- -------- --------- Total net sales and revenues 1,008,245 992,383 1,004,012 --------- -------- --------- Cost of sales Services 233,097 211,014 220,721 Products 201,641 192,077 203,933 Financial services 8,843 10,645 13,258 --------- -------- --------- Total cost of sales 443,581 413,736 437,912 --------- -------- --------- Gross profit 564,664 578,647 566,100 Selling, general and administrative expenses 374,585 400,120 394,368 --------- -------- --------- Operating Income 190,079 178,527 171,732 --------- -------- --------- Other Charges (Income) Interest expense 3,842 4,126 5,303 Interest income (2,705) (3,848) (7,818) Equity in net (income) losses of affiliated companies (2,306) 13,201 13,019 Other - net (3,221) 100 (1,296) --------- -------- --------- Total other charges (income) (4,390) 13,579 9,208 --------- -------- --------- Income Before Income Taxes 194,469 164,948 162,524 Income Taxes 75,452 49,396 64,590 --------- -------- --------- Income from Continuing Operations 119,017 115,552 97,934 Income from Discontinued Operations 1,623 --------- -------- --------- Income Before Cumulative Effect of Accounting Change 119,017 115,552 99,557 Cumulative Effect of Accounting Change (36,563) --------- -------- --------- Net Income $ 119,017 $ 78,989 $ 99,557 ========= ======== ========= Basic Earnings Per Common Share Income from continuing operations $ 1.74 $ 1.63 $ 1.34 Income from discontinued operations $ .02 Income before cumulative effect of accounting change $ 1.74 $ 1.63 $ 1.36 Cumulative effect of accounting change $ (.52) Net income $ 1.74 $ 1.12 $ 1.36 Average number of common shares outstanding 68,407 70,692 73,183 Diluted Earnings Per Common Share Income from continuing operations $ 1.69 $ 1.58 $ 1.31 Income from discontinued operations $ .02 Income before cumulative effect of accounting change $ 1.69 $ 1.58 $ 1.33 Cumulative effect of accounting change ($ .50) Net income $ 1.69 $ 1.08 $ 1.33 Average number of common shares and equivalents outstanding 70,606 73,357 74,919
See Notes to Consolidated Financial Statements. 30 CONSOLIDATED BALANCE SHEETS (In thousands)
September 30 2003 2002 ----------------------------------------------------------------------------------- AUTOMOTIVE SOLUTIONS ASSETS Current Assets Cash and equivalents $ 105,829 $ 155,295 ---------- ---------- Trade accounts receivable (less allowance for doubtful accounts: 2003-- $5,253; 2002--$4,902) 118,694 113,262 ---------- ---------- Other accounts receivables 21,063 4,209 ---------- ---------- Inventories Finished products 11,921 12,539 Work in process 295 365 Raw materials and supplies 216 163 ---------- ---------- Total inventories 12,432 13,067 ---------- ---------- Deferred income taxes 11,910 15,575 ---------- ---------- Prepaid expenses and other assets 19,763 16,395 ---------- ---------- Total current assets 289,691 317,803 ---------- ---------- Property, Plant and Equipment Land and improvements 11,447 15,641 Buildings and improvements 119,168 109,809 Computer equipment 123,383 105,255 Machinery and equipment 41,435 40,666 Furniture and other 44,124 42,883 Construction in progress 1,808 6,377 ---------- ---------- Total property, plant and equipment 341,365 320,631 Less accumulated depreciation 156,674 159,558 ---------- ---------- Net property, plant and equipment 184,691 161,073 ---------- ---------- Intangible Assets Goodwill 41,728 28,999 Software licensed to customers 94,472 81,557 Acquired intangible assets 37,731 44,366 Other 8,531 3,382 ---------- ---------- Total intangible assets 182,462 158,304 ---------- ---------- Other Assets 71,716 92,380 ---------- ---------- Total Automotive Solutions Assets 728,560 729,560 ---------- ---------- FINANCIAL SERVICES ASSETS Cash 722 635 Finance Receivables 394,292 406,160 Other Assets 481 810 ---------- ---------- Total Financial Services Assets 395,495 407,605 ---------- ---------- TOTAL ASSETS $1,124,055 $1,137,165 ========== ==========
September 30 2003 2002 ----------------------------------------------------------------------- AUTOMOTIVE SOLUTIONS LIABILITIES Current Liabilities Current portion of long-term debt $ 6,061 Accounts payable Trade $ 38,212 41,186 Other 7,705 3,958 Accrued liabilities Compensation and related items 32,195 52,599 Income taxes 10,926 316 Other 21,041 28,945 Deferred revenues 33,704 24,404 ----------- ----------- Total current liabilities 143,783 157,469 ----------- ----------- Long-Term Debt 106,912 107,408 ----------- ----------- Other Liabilities Pensions 71,709 49,932 Postretirement medical 44,095 43,471 Other 2,648 3,085 ----------- ----------- Total other liabilities 118,452 96,488 ----------- ----------- Total Automotive Solutions Liabilities 369,147 361,365 ----------- ----------- FINANCIAL SERVICES LIABILITIES Notes Payable 198,768 217,252 Deferred Income Taxes 90,503 94,543 Other Liabilities 8,508 8,979 ----------- ----------- Total Financial Services Liabilities 297,779 320,774 ----------- ----------- SHAREHOLDERS' EQUITY Capital Stock Preferred Class A common 260,772 216,518 Class B common 469 500 Accumulated Other Comprehensive Losses (32,446) (14,234) Retained Earnings 228,334 252,242 ----------- ----------- Total Shareholders' Equity 457,129 455,026 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,124,055 $ 1,137,165 =========== ===========
31 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands except per share data)
For The Years Ended September 30 2003 2002 2001 ----------------------------------------------------------------------------------------------- Capital Stock Class A common Balance, beginning of year $ 216,518 $ 167,356 $ 124,247 Capital stock issued 50,085 51,106 44,455 Converted from Class B common 31 125 Capital stock repurchased (14,971) (11,374) (10,968) Capital stock retired (291) (951) (459) Tax benefits from stock options 9,400 10,256 10,081 --------- --------- --------- Balance, end of year 260,772 216,518 167,356 --------- --------- --------- Class B common Balance, beginning of year 500 625 625 Converted to Class A common (31) (125) --------- --------- --------- Balance, end of year 469 500 625 --------- --------- --------- Accumulated Other Comprehensive Income (Losses) Balance, beginning of year (14,234) (9,547) (7,139) Foreign currency translation 3,757 (186) (1,591) Minimum pension liability (23,002) (3,679) 847 Cumulative effect of accounting change 15 Net unrealized income (losses) on derivative contracts 1,033 (822) (1,679) --------- --------- --------- Balance, end of year (32,446) (14,234) (9,547) --------- --------- --------- Retained Earnings Balance, beginning of year 252,242 318,349 380,761 Net income 119,017 78,989 99,557 Cash dividends Class A common (2003--$.44 PER SHARE; 2002--$.44 per share; 2001--$.44 per share) (29,672) (30,715) (31,681) Class B common (2003--$.022 PER SHARE; 2002--$.022 per share; 2001--$.022 per share) (352) (374) (440) Capital stock repurchased (112,901) (114,007) (129,848) --------- --------- --------- Balance, end of year 228,334 252,242 318,349 --------- --------- --------- Total Shareholders' Equity $ 457,129 $ 455,026 $ 476,783 ========= ========= ========= Comprehensive Income (Losses) Net income $ 119,017 $ 78,989 $ 99,557 Foreign currency translation 3,757 (186) (1,591) Minimum pension liability (23,002) (3,679) 847 Cumulative effect of accounting change 15 Net unrealized income (losses) on derivative contracts 1,033 (822) (1,679) --------- --------- --------- Total comprehensive income $ 100,805 $ 74,302 $ 97,149 ========= ========= =========
See Notes to Consolidated Financial Statements. 32 STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (In thousands)
For The Years Ended September 30 2003 2002 2001 --------------------------------------------------------------------------------------------- AUTOMOTIVE SOLUTIONS Cash Flows Provided by Operating Activities $ 131,580 $ 158,071 $ 165,548 --------- --------- --------- Cash Flows Provided by (Used for) Investing Activities Business combinations (11,714) (5,971) (12,008) Capital expenditures (57,810) (37,067) (51,383) Net proceeds from sales of assets 9,570 9,674 3,770 Capitalization of software licensed to customers (16,270) (20,370) (20,310) Repayments from (advances to) financial services 5,584 53,817 (4,321) --------- --------- --------- Net cash provided by (used for) investing activities (70,640) 83 (84,252) --------- --------- --------- Cash Flows Provided by (Used for) Financing Activities Principal payments on debt (6,061) (6,869) (7,930) Cash dividends paid (30,024) (31,089) (32,121) Capital stock issued 49,794 50,155 43,996 Capital stock repurchased (127,872) (125,381) (140,816) --------- --------- --------- Net cash used for financing activities (114,163) (113,184) (136,871) --------- --------- --------- Effect of Exchange Rate Changes on Cash 3,757 (186) (1,591) --------- --------- --------- Net Cash Used for Discontinued Operations (37,778) --------- --------- --------- Increase (Decrease) in Cash and Equivalents (49,466) 44,784 (94,944) Cash and Equivalents, Beginning of Year 155,295 110,511 205,455 --------- --------- --------- Cash and Equivalents, End of Year $ 105,829 $ 155,295 $ 110,511 ========= ========= ========= FINANCIAL SERVICES Cash Flows Provided by Operating Activities $ 18,710 $ 19,457 $ 14,019 --------- --------- --------- Cash Flows Provided by (Used for) Investing Activities Finance receivables originated (145,043) (154,250) (178,268) Collections on finance receivables 150,488 175,064 168,577 --------- --------- --------- Net cash provided (used for) investing activities 5,445 20,814 (9,691) --------- --------- --------- Cash Flows Provided by (Used for) Financing Activities Additional borrowings 100,000 78,813 Principal payments on debt (18,484) (86,260) (87,477) Advances from (repayments to) automotive solutions (5,584) (53,817) 4,321 --------- --------- --------- Net cash used for financing activities (24,068) (40,077) (4,343) --------- --------- --------- Increase (Decrease) in Cash and Equivalents 87 194 (15) Cash and Equivalents, Beginning of Year 635 441 456 --------- --------- --------- Cash and Equivalents, End of Year $ 722 $ 635 $ 441 ========= ========= =========
See Notes to Consolidated Financial Statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The Consolidated Financial Statements include the accounts of the parent company and its domestic and foreign subsidiaries and present details of revenues, expenses, assets, liabilities and cash flows for both Automotive Solutions and Financial Services. Automotive Solutions is comprised of the company's Software Solutions, Transformation Solutions and Documents segments. Financial Services is comprised of Reyna Capital Corporation, Reyna Funding L.L.C. and a similar operation in Canada. In accordance with industry practice, the assets and liabilities of Automotive Solutions are classified as current or noncurrent and those of Financial Services are unclassified. Intercompany balances and transactions are eliminated. USE OF ESTIMATES The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgments. The use of estimates and judgments may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. CASH AND EQUIVALENTS For purposes of reporting cash flows, cash and equivalents includes cash on hand, cash deposits and investments with maturities of three months or less at the time of purchase. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, cash equivalents and accounts receivable approximate fair value because of the relatively short maturity of these financial instruments. Fair values of debt and interest rate management agreements are based on quoted prices for financial instruments with the same remaining maturities. CONCENTRATIONS OF CREDIT RISK The company is a leading provider of information management systems and services to automotive retailers. Substantially all finance receivables and accounts receivable are from automotive retailers. ALLOWANCE FOR DOUBTFUL ACCOUNTS An allowance for doubtful accounts on accounts receivable and finance receivables is established based on historical loss experience, aging of accounts and current customer and economic conditions. Receivables are charged to the allowance for doubtful accounts when an account is deemed to be uncollectible, taking into consideration the financial condition of the customer and the value of any collateral. Recoveries of receivables, previously charged off as uncollectible, are credited to the allowance for doubtful accounts. INVENTORIES Inventories are stated at the lower of cost or market. Costs of business forms inventories are determined by the last-in, first-out (LIFO) method. At September 30, 2003 and 2002, LIFO inventories were $4,305 and $4,439, respectively. These inventories determined by the first-in, first-out (FIFO) method would increase by $3,617 in 2003 and $3,539 in 2002. For other inventories, comprised primarily of computer equipment, cost is determined by specific identification or the FIFO method. Market is based on net realizable value. 34 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are provided over the estimated useful service lives of the assets or asset groups, principally on the straight-line method for financial reporting purposes. Estimated asset lives are:
Years ----- Land improvements 10 Buildings and improvements 3--33 Computer equipment 3-- 5 Machinery and equipment 3--20 Furniture and other 3--15
SOFTWARE LICENSED TO CUSTOMERS The company capitalizes certain costs of developing its software products in accordance with Statement of Financial Accounting Standards (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. Once technological feasibility is established, all software development costs should be capitalized until the product is available for general release to customers. Upon general release of a software product to customers, 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. Amortization expense for software licensed to customers was $3,455 in 2003, $403 in 2002 and $1,967 in 2001. September 30, 2003 and 2002, accumulated amortization was $37,748 and $33,933, respectively. During 2002, the company disposed of $14,502 of fully amortized software. LONG-LIVED ASSETS 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 undiscounted future 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. EQUITY INVESTMENT During March 2002, the company sold its shares of Kalamazoo Computer Group plc of the United Kingdom for cash of $1,636 and recorded a gain, after tax benefit, 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 in the provision for income taxes on the statement of consolidated income. The company recorded a loss of $7,718 in 2001, representing amortization of the intangible assets and its share of Kalamazoo's net losses. REVENUE RECOGNITION AUTOMOTIVE SOLUTIONS 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 (as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"), and if so, whether 35 vendor-specific objective evidence of fair value exists for those elements. Software revenues which do not meet the criteria set forth in 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. FINANCIAL SERVICES Financial Services revenues consist primarily of interest earned on financing the company's computer systems sales. Revenues are recognized over the lives of financing contracts, generally five years, using the interest method. LEASE OBLIGATIONS The company leases premises and equipment under operating lease agreements. As of September 30, 2003, future minimum lease payments relating to operating lease agreements were $34,565 with annual payments of $7,023 in 2004, $6,595 in 2005, $4,521 in 2006, $3,491 in 2007 and $2,397 in 2008. Rental expenses were $19,630 in 2003, $21,814 in 2002 and $24,939 in 2001. COMMITMENTS In 1997, the company entered into an agreement with a trust for the construction and lease of an office building near Dayton, Ohio. This lease was accounted for as an operating lease for financial reporting purposes. Accordingly, neither the asset nor the related liability were reported on the company's balance sheets. The company guaranteed 80% of the trust's debt related to the construction of the building. At the end of the lease term in August 2004, 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 office building for cash of $28,800 and terminated the lease agreement. During 2001, the company entered into an agreement to outsource certain computer services such as desktop and network services through fiscal year 2009. This agreement requires annual payments of about $20,000. RESEARCH AND DEVELOPMENT COSTS The company expenses research and development costs as incurred. These costs, primarily representing software development costs, were $72,000 in 2003, $68,000 in 2002 and $71,000 in 2001. INCOME TAXES The parent company and its domestic subsidiaries file a consolidated U.S. federal income tax return. No deferred income tax liabilities are recorded on undistributed earnings of the foreign subsidiaries because, for the most part, those earnings are permanently reinvested. Undistributed earnings of the foreign subsidiaries at September 30, 2003, were $19,727. The calculation of the unrecognized deferred income tax liability on these earnings is not practicable. 36 EARNINGS PER COMMON SHARE Basic earnings per common share (EPS) is computed by dividing income by the weighted average number of common shares outstanding during the year. Diluted EPS is computed by dividing income by the weighted average number of common shares and common share equivalents outstanding during each year. The weighted average number of common shares outstanding assumed that Class B common shares were converted into Class A common shares. The company's common share equivalents represent the effect of employee stock options.
2003 2002 2001 ------ ------ ------ Average number of common shares outstanding (used to determine basic EPS) 68,407 70,692 73,183 Effect of employee stock options 2,199 2,665 1,736 ------ ------ ------ Average number of common shares and equivalents outstanding (used to determine diluted EPS) 70,606 73,357 74,919 ====== ====== ======
Employee stock options outstanding to purchase 608 shares in 2003, 614 shares in 2002 and 3,705 shares in 2001 were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. STOCK COMPENSATION The company has stock based compensation plans, which are described more fully in Note 8 to the Consolidated Financial Statements. The company accounts for those plans under the recognition and measurement principals of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. The company recognized compensation expense of $168 in 2003, $512 in 2002 and $1,009 in 2001. The following table illustrates the effect on net income and earnings per share as if the company had applied the fair value recognition provisions of the Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation."
2003 2002 2001 -------- ------- ------- Net income as reported $119,017 $78,989 $99,557 Stock-based employee compensation expense, net of taxes 9,970 11,780 11,948 -------- ------- ------- Pro forma net income $109,047 $67,209 $87,609 ======== ======= ======= Basic earnings per common share Net income as reported $ 1.74 $ 1.12 $ 1.36 Pro forma net income $ 1.59 $ 0.95 $ 1.20 Diluted earnings per common share Net income as reported $ 1.69 $ 1.08 $ 1.33 Pro forma net income $ 1.54 $ 0.92 $ 1.17
RECLASSIFICATIONS Certain reclassifications were made to prior years' Consolidated Financial Statements to conform with the presentation used in fiscal year 2003. The company also changed its allocation methodology for certain expenses in fiscal year 2003, the effect of which was to report certain expenses as cost of sales instead of SG&A expenses. This improved allocation of expenses was made possible by a new general ledger system. Management believes the new allocation methodology reduced gross margin by between one and two percentage points as compared to fiscal year 37 2002. It was not practicable, however, to restate prior years. 2. DISCONTINUED OPERATIONS During the second quarter of fiscal year 2001, the company recorded income from discontinued operations of $1,623 or $.02 per share. Income from discontinued operations included about $.01 per share from the collection of notes receivable obtained in the October 1998 sale of the Healthcare Systems segment and about $.01 per share from tax benefits related to the August 2000 sale of the Information Solutions segment. 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. Networkcar had revenues of about $1,000 in 2002. 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. In connection with this business combination, the company recorded goodwill of $10,166. 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. Privately-held BoatVentures had revenues of about $1,000 in 2001. The purchase price of $5,971 was paid with cash from existing balances. This business combination was accounted for as a purchase and the accounts of BoatVentures were included in the company's financial statements since the acquisition date. In connection with this business combination, the company recorded goodwill of $743 based on the 2002 preliminary allocation of the purchase price. In 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, decrease deferred tax assets by $765 and increase goodwill by $2,865. BoatVentures was previously partially owned by a member of the company's board of directors and an officer of the company. The company obtained an independent fairness opinion on the purchase price and approval of the company's board of directors prior to consummating this transaction. In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a. DealerKid, a provider of electronic customer marketing and relationship management software and services for automotive retailers in the United States and Canada. Privately-held DealerKid had revenues of about $2,000 in 2000. The purchase price of $10,452 was paid with $9,758 of cash from existing balances and the issuance of a $694 note payable. This business combination was accounted for as a purchase and the accounts of DealerKid were included in the company's financial statements since the acquisition date. In connection with this business combination, the company recorded goodwill of $11,307. COMPONENTS OF PURCHASE PRICES
2003 2002 2001 ------- ------ ------- Cash (net of cash and equivalents acquired) $11,714 $5,971 $12,008 Note payable issued 694 ------- ------ ------- Totals $11,714 $5,971 $12,702 ======= ====== =======
38 4. INCOME TAXES PROVISION FOR INCOME TAXES
2003 2002 2001 -------------------------------------------------------------------- Current Federal $ 39,143 $ 28,677 $ 50,055 State and local 10,066 (2,626) 8,543 Foreign 3,103 1,600 1,502 Deferred 23,140 21,745 4,490 -------- -------- -------- Provision for income taxes $ 75,452 $ 49,396 $ 64,590 ======== ======== ======== Income taxes paid (net of refunds) $ 54,000 $ 22,321 $ 56,404 ======== ======== ========
RECONCILIATION OF INCOME TAX RATES
2003 2002 2001 AMOUNT PERCENT Amount Percent Amount Percent -------------------------------------------------------------------------------------------------------------------- Statutory federal income taxes $68,064 35.0% $57,732 35.0% $56,884 35.0% State and local taxes less federal income tax effect 8,072 4.1 6,584 4.0 6,611 4.1 State tax benefits less federal income tax effect (5,872) (3.6) Sale of Kalamazoo shares (7,746) (4.7) Goodwill amortization 1,199 0.7 Other (684) (.3) (1,302) (0.8) (104) (0.1) ------- ---- ------- ---- ------- ---- Provision for income taxes $75,452 38.8% $49,396 29.9% $64,590 39.7% ======= ==== ======= ==== ======= ====
In fiscal year 2002, the company settled a state income tax audit and filed amended returns in a number of states to correct the apportionment and allocation of taxable income. AUTOMOTIVE SOLUTIONS DEFERRED INCOME TAX ASSETS (LIABILITIES)
September 30 2003 2002 -------------------------------------------------------- Deferred income tax assets Postretirement medical $ 18,811 $ 18,290 Pensions 25,721 22,107 Receivables allowances 5,344 5,825 Other 9,558 13,628 Deferred income tax liabilities Depreciation and amortization (26,677) (9,296) Other (1,355) (3,508) -------- -------- Totals 31,402 47,046 Current 11,910 15,575 -------- -------- Noncurrent $ 19,492 $ 31,471 ======== ========
FINANCIAL SERVICES DEFERRED INCOME TAX LIABILITIES Financial Services deferred income tax liabilities resulted from temporary differences from financing the company's computer systems sales. 39 5. FINANCIAL SERVICES INCOME SUMMARY
2003 2002 2001 --------------------------------------------------------------------------------------------------- Revenues $36,532 $41,709 $41,918 Cost of sales - interest expense 8,843 10,645 13,258 ------- ------- ------- Gross profit 27,689 31,064 28,660 Selling, general and administrative expenses 6,968 8,073 5,005 ------- ------- ------- Operating income $20,721 $22,991 $23,655 ======= ======= =======
FINANCE RECEIVABLES
September 30 2003 2002 -------------------------------------------------------- Product financing receivables $ 423,770 $ 442,069 Unguaranteed residual values 36,552 38,370 Allowance for doubtful accounts (6,705) (6,184) Unearned interest income (62,414) (70,659) Other 3,089 2,564 --------- --------- Totals $ 394,292 $ 406,160 ========= =========
As of September 30, 2003, product financing receivables due for each of the next five years were $161,574 in 2004, $116,312 in 2005, $76,715 in 2006, $47,164 in 2007 and $21,673 in 2008. ALLOWANCE FOR DOUBTFUL ACCOUNTS
2003 2002 ------------------------------------------------ Balance, beginning of year $ 6,184 $ 5,956 Provisions Financial services 3,765 4,450 Automotive solutions 540 540 Net losses (3,784) (4,762) ------- ------- Balance, end of year $ 6,705 $ 6,184 ======= =======
40 6. FINANCING ARRANGEMENTS AUTOMOTIVE SOLUTIONS During February 2002, the company entered into $100,000 of interest rate swap agreements that effectively converted 7% fixed rate debt into variable rate debt. These interest rate swap agreements were designated as fair value hedges. The fair value of these derivative instruments was an asset of $7,069 at September 30, 2003 and $7,614 at September 30, 2002 and was included in Automotive Solutions' other assets on the consolidated balance sheets. These 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.
National Amounts September 30, 2003 Notes Swaps ------------------------------------------------------------------------------- Fixed rate notes, $100,000 face value, maturing in 2007 $106,912 $100,000 Weighted average interest rate 7.0% Weighted average pay rate 3.3% Weighted average receive rate 7.0% -------- -------- Totals 106,912 100,000 Current portion -------- -------- Long-term portion $106,912 $100,000 ======== ========
September 30, 2002 ------------------------------------------------------------------------------ Fixed rate notes, $100,000 face value, maturing in 2007 $107,408 $100,000 Weighted average interest rate 7.0% Weighted average pay rate 4.3% Weighted average receive rate 7.0% Fixed rate note, maturing in 2003 6,061 -------- -------- Totals 113,469 100,000 Current portion 6,061 -------- -------- Long-term portion $107,408 $100,000 ======== ========
Loan agreements limit consolidated indebtedness and require a minimum interest coverage ratio. The fair values of Automotive Solutions' financing arrangements were $106,912 at September 30, 2003 and $113,691 at September 30, 2002. At September 30, 2003, debt maturities were $100,000 in 2007. Interest paid was $4,076 in 2003 and $5,622 in 2002. Interest capitalized was $1,000 in 2003, $1,806 in 2002 and $4,016 in 2001. At September 30, 2003, the $100,000 notional amount of swap agreements mature in 2007. FINANCIAL SERVICES In the ordinary course of business, the company borrows cash to fund investments in finance receivables from the sale of the company's products. The company attempts to limit its interest rate exposure between the interest earned on fixed rate finance receivables and the interest paid on variable rate financing agreements through the use of interest rate management agreements. Interest rate swaps provide for interest to be received on notional amounts at variable rates and provide for interest to be paid on the same notional amounts at fixed rates. Fixed interest rates do not change over the life of the agreements. Variable interest rates are reset at least every ninety days and are based on LIBOR or commercial paper indices and are settled with counterparties at that time. Net interest expense or income on these contracts is reflected in interest expense. The company is exposed to credit related losses in the event of nonperformance by counterparties to the interest rate management agreements. The company attempts to minimize this credit risk by entering into agreements only with counterparties that have a Standard & Poor's rating of "A" or higher. The company also diversifies its interest rate management agreements among several financial institutions. Interest rate management agreements are accounted for using settlement accounting. 41 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, with interest payable on a variable rate basis. This loan funding agreement is renewable annually through January 23, 2006. As of September 30, 2003, the balance outstanding on this facility was $100,000. The fair value of the company's cash flow derivative instruments was a $2,422 liability at September 30, 2003 and a $4,035 liability at September 30, 2002 and was included in Financial Services' other liabilities on the consolidated balance sheets. The adjustments to record the net change in the fair value of cash flow hedges during the periods presented was 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 or cash flows of the underlying exposure being hedged because of the high degree of effectiveness of these cash flow hedges. In fiscal year 2004, the company expects the amounts to be reclassified out of other comprehensive income into earnings to be immaterial to the financial statements.
Notional Amounts SEPTEMBER 30, 2003 Notes Swaps ------------------------------------------------------------------------- Variable rate instruments, maturing through 2009 $ 169,340 $116,375 Weighted average interest rate 1.5% Weighted average pay rate 3.7% Weighted average receive rate 1.1% Fixed rate notes, maturing through 2007 29,428 Weighted average interest rate 4.9% ---------- -------- Totals $ 198,768 $116,375 ========== ========
September 30, 2002 -------------------------------------------------------------------------- Variable rate instruments, maturing through 2006 $ 189,033 $136,500 Weighted average interest rate 2.2% Weighted average pay rate 4.4% Weighted average receive rate 1.8% Fixed rate notes, maturing through 2005 28,219 Weighted average interest rate 6.4% ---------- -------- Totals $ 217,252 $136,500 ========== ========
Loan agreements limit consolidated indebtedness and require a minimum interest coverage ratio. The fair value of Financial Services debt was $199,404 and $218,366 at September 30, 2003 and 2002, respectively. At September 30, 2003, maturities of notes were $79,475 in 2004, $12,172 in 2005, $29,047 in 2006, $28,074 in 2007 and $25,000 in 2008. Interest paid was $9,010 in 2003, $11,155 in 2002 and $13,476 in 2001. At September 30, 2003, notional amount maturities of swap agreements were $46,598 in 2004, $36,473 in 2005, $27,598 in 2006 and $5,706 in 2007. REVOLVING CREDIT AGREEMENTS Automotive Solutions and Financial Services share variable rate revolving credit agreements, which total $150,000 and require commitment fees on unused credit. At September 30, 2003, available balances under these agreements were $100,000. The facility expires in August 2004. 42 7. CAPITAL STOCK
September 30 2003 2002 2001 ------------------------------------------------------------------- Preferred No par value Authorized shares 60,000 60,000 60,000 Class A common No par value Authorized shares 240,000 240,000 240,000 ======= ======= ======= Issued and outstanding shares Balance, beginning of year 68,595 70,230 73,622 Issued 2,761 2,978 3,119 Converted from Class B common 50 200 Repurchased (4,737) (4,779) (6,490) Retired (11) (34) (21) ------- ------- ------- Balance, end of year 66,658 68,595 70,230 ======= ======= ======= Class B common No par value Authorized shares 40,000 40,000 40,000 Issued and outstanding shares 15,000 16,000 20,000
Dividends on Class A common shares must be twenty times the dividends on Class B common shares and must be paid simultaneously. Each share of Class A common and Class B common is entitled to one vote. The Class B common shareholder may convert twenty Class B common shares to one share of Class A common. During September 2003 and February 2002, 1,000 and 4,000 Class B common shares were converted into 50 and 200 Class A common shares, respectively. The company has reserved sufficient authorized Class A common shares for Class B conversions and stock option plans. Each outstanding Class A common share has one preferred share purchase right. Each outstanding Class B common share has one-twentieth of a right. Rights become exercisable if a person or group acquires or seeks to acquire, through a tender or exchange offer, 15% or more of the company's Class A common shares. In that event, all holders of Class A common shares and Class B common shares, other than the acquirer, could exercise their rights and purchase preferred shares at a specified amount. At the date of these financial statements, except for the preferred share purchase rights, the company had no agreements or commitments with respect to the sale or issuance of the preferred shares and no preferred shares were outstanding. The company repurchased Class A common shares for treasury at average prices of $26.99 in 2003, $26.23 in 2002 and $21.70 in 2001. The remaining balance of shares authorized for repurchase by the board of directors was 8,165 at September 30, 2003. Treasury shares at September 30 were 25,430 in 2003, 23,503 in 2002 and 21,903 in 2001. 43 8. EMPLOYEE STOCK OPTION PLANS The company's stock option plans award incentive stock options and/or nonqualified stock options to purchase Class A common shares to substantially all employees. Stock options are generally granted at a price equal to fair market value of the common stock on the date of grant. At September 30, 2003, options to purchase 3,541 additional Class A common shares were available for future awards to certain key employees. Under a broad-based stock option plan, the board of directors may award options at its discretion.
Weighted Average Shares Under Option Option Prices Per Share 2003 2002 2001 2003 2002 2001 -------------------------------------------------------------------------------------- Outstanding Beginning of year 13,075 13,941 17,620 $20.02 $18.88 $18.04 Granted 2,480 2,833 281 22.60 22.68 19.99 Exercised (2,751) (2,970) (3,090) 18.06 16.96 13.89 Canceled (657) (729) (870) 21.11 20.69 19.96 ------ ------ ------ End of year 12,147 13,075 13,941 20.94 20.02 18.88 ====== ====== ====== Exercisable at September 30 6,287 5,206 5,090 19.85 19.85 18.96 ====== ====== ======
Outstanding, September 30, 2003 Exercisable, September 30, 2003 Weighted Weighted Average Average Weighted Option Number of Remaining Option Number of Average Price Range Options Life in Years Price Options Option Price ------------------------------------------------------------------------------------------------------------- $12.50 - $17.44 3,047 5.8 $16.93 2,689 $16.92 $17.69 - $21.94 3,174 5.4 20.33 2,040 19.79 $22.01 - $22.56 4,517 6.5 22.55 475 22.53 $23.07 - $30.27 1,409 4.3 25.87 1,083 26.09 ------ ----- TOTALS 12,147 5.8 20.94 6,287 19.85 ====== =====
The company accounts for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees" and follows the disclosure requirements of SFAS No. 123. SFAS No. 123 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. The weighted average fair value of the company's stock options granted at fair market value was $4.52 in 2003, $5.34 in 2002 and $6.47 in 2001.
OPTION VALUATION ASSUMPTIONS 2003 2002 2001 --------------------------------------------------- Expected life in years 3 4 5 Dividend yield 1.9% 1.9% 1.9% Risk free interest rate 2.1% 3.7% 5.9% Volatility 31% 29% 33%
44 9. POSTRETIREMENT BENEFITS PENSION EXPENSE
2003 2002 2001 ------------------------------------------------------------------------------------------------------------- Net periodic pension cost Service cost $ 8,546 $ 8,839 $ 8,794 Interest cost 17,038 15,915 15,918 Estimated return on plan assets (12,471) (13,277) (12,893) Amortization of unrecognized transitional asset 139 145 147 Amortization of prior service cost 598 431 427 Recognized net actuarial losses 1,293 65 153 Plan administration 880 774 767 Settlements 120 1,684 -------- -------- -------- Net periodic pension cost 16,143 14,576 13,313 Defined contribution plans 5,249 6,503 6,258 Multi-employer plans 13 25 37 -------- -------- -------- Totals $ 21,405 $ 21,104 $ 19,608 ======== ======== ======== Actuarial assumptions Discount rate 6.5% - 7.25% 7.0% - 7.5% 6.5% - 7.75% Rate of compensation increase 3.75% - 4.50% 3.75% - 5.0% 3.75% - 5.0% Expected long-term rate of return on assets 9.0% 9.0% 9.0% Actuarial cost method PROJECTED UNIT CREDIT Measurement period JULY 1 - JUNE 30
The company sponsors contributory and noncontributory, defined benefit pension plans for most employees. Pension benefits are primarily based on years of service and compensation. The company's funding policy is to make annual contributions to the plans sufficient to meet or exceed the minimum statutory requirements. The company and its actuaries review the pension plans each year. The actuarial assumptions are intended to reflect expected experience over the life of the pension liability. The company expensed payments of $1,684 in 2002 in connection with the early settlement of certain pension benefits for former executives. These payments reduce the future company obligations for those individuals. The company sponsors defined contribution savings plans covering most domestic employees. Effective January 1, 2003, the company increased its contribution to 50% of the first 6% of compensation contributed to the plan by participating employees from 40% of the first 3% of compensation. Prior to fiscal year 2003, the company also funded a discretionary contribution. Forfeitures of nonvested discretionary contributions were used to reduce contributions required by the company. 45 FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
Funded Unfunded Total ------------------------------------------------------------------------------------------------------------------------------ 2003 2002 2003 2002 2003 2002 ---------------------- ---------------------- ---------------------- Change in projected benefit obligation Projected benefit obligation, beginning of year $ 182,488 $ 168,979 $ 46,265 $ 52,528 $ 228,753 $ 221,507 Service cost 7,682 8,039 923 796 8,605 8,835 Interest cost 13,747 12,432 3,341 3,479 17,088 15,911 Actuarial losses (gains) 23,635 (94) 7,819 1,674 31,454 1,580 Benefits paid (7,161) (7,453) (4,382) (11,924) (11,543) (19,377) Change in plan provisions 618 (288) 330 Foreign currency translation 1,434 (33) 1,434 (33) --------- --------- --------- --------- --------- --------- Projected benefit obligation, end of year $ 221,825 $ 182,488 $ 53,966 $ 46,265 $ 275,791 $ 228,753 ========= ========= ========= ========= ========= ========= Change in plan assets Fair value of plan assets, beginning of year $ 127,477 $ 135,882 $ 127,477 $ 135,882 Actual income (losses) on plan assets 1,922 (12,810) 1,922 (12,810) Administrative expenses paid (1,367) (942) (1,367) (942) Employer contributions 38,982 12,833 38,982 12,833 Benefits paid (7,161) (7,453) (7,161) (7,453) Foreign currency translation 1,089 (33) 1,089 (33) --------- --------- --------- --------- Fair value of plan assets, end of year $ 160,942 $ 127,477 $ 160,942 $ 127,477 ========= ========= ========= ========= Net amount recognized Funded status $ 60,882 $ 55,011 $ 53,966 $ 46,265 $ 114,848 $ 101,276 Unrecognized transition obligation 113 (259) (518) (259) (405) Unrecognized prior service cost (6,349) (770) (1,923) (2,174) (8,272) (2,944) Unrecognized net losses (74,821) (46,596) (12,478) (4,951) (87,299) (51,547) Multi-employer liability 39 66 39 66 Minimum pension liability 44,731 7,392 11,756 5,872 56,487 13,264 --------- --------- --------- --------- --------- --------- Net amount recognized $ 24,443 $ 15,150 $ 51,101 $ 44,560 $ 75,544 $ 59,710 ========= ========= ========= ========= ========= ========= Minimum pension liability Intangible asset $ 6,349 $ 690 $ 2,182 $ 2,692 $ 8,531 $ 3,382 Deferred income tax benefit 15,162 2,642 3,805 1,253 18,967 3,895 Accumulated other comprehensive income 23,220 4,060 5,769 1,927 28,989 5,987 --------- --------- --------- --------- --------- --------- Totals $ 44,731 $ 7,392 $ 11,756 $ 5,872 $ 56,487 $ 13,264 ========= ========= ========= ========= ========= =========
2003 2002 ---------------------------- Actuarial assumptions Projected benefit obligation discount rate 6.0% 6.5% - 7.25% Rate of compensation increase 3.25% - 4.5% 3.75% - 4.5%
At September 30, 2003 and 2002, respectively, about 27% and 26% of the plans' assets were invested in cash and equivalents, government bonds and investment grade corporate bonds. The balance of the plans' assets were invested in equities. PLANS WITH ACCUMULATED BENEFIT OBLIGATION GREATER THAN PLAN ASSETS
Funded Unfunded Total ------------------------------------------------------------------------------------------------- 2003 2002 2003 2002 2003 2002 --------------------- ------------------- ------------------- PBO $221,825 $174,349 $53,966 $46,265 $275,791 $220,614 ABO $185,385 $136,958 $50,973 $44,164 $236,358 $181,122 FMV Plan Assets $160,942 $120,727 $160,942 $120,727
46 POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
2003 2002 2001 ---------------------------------------------------------------------------- Service cost $ 481 $ 547 $ 752 Interest cost 4,291 4,027 3,773 Amortization of prior service cost (742) (532) (337) Recognized net actuarial losses 1,088 637 260 ------- ------- ------- Totals $ 5,118 $ 4,679 $ 4,448 ======= ======= ======= Actuarial assumptions Discount rate 6.0% 7.25% 7.75% Healthcare cost trend rate through 2007 10.0% 6.0% 6.0% Healthcare cost trend rate thereafter 5.0% 5.0% 5.0%
The company sponsors a defined benefit medical plan for employees who retired before October 1, 1993. Future retirees may purchase postretirement medical insurance from the company. Discounts from the market price of postretirement medical insurance will be provided to certain retirees based on age and length of remaining service as of October 1, 1993. These discounts are included in the determination of the accumulated benefit obligation. The company also sponsors a defined benefit life insurance plan for substantially all employees. The company funds medical and life insurance benefits on a pay-as-you-go basis. POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION
2003 2002 -------------------------------------------------------------------------- Change in projected benefit obligation Projected benefit obligation, beginning of year $ 60,769 $ 55,394 Service cost 482 546 Interest cost 4,292 4,026 Plan participant contributions 402 200 Actuarial losses 2,308 6,863 Benefits paid (4,531) (3,943) Change in plan provisions 40 (2,317) -------- -------- Projected benefit obligation, end of year $ 63,762 $ 60,769 ======== ======== Net amount recognized Projected benefit obligation, end of year $ 63,762 $ 60,769 Unrecognized prior service cost 6,406 7,148 Unrecognized net losses (22,533) (21,347) -------- -------- Net amount recognized $ 47,635 $ 46,570 ======== ======== Actuarial assumptions Discount rate 6.0% 7.25% Healthcare cost trend rate through 2007 10.0% 6.0% Healthcare cost trend rate thereafter 5.0% 5.0%
The effect of a 1% increase in the assumed healthcare cost trend rate would have increased fiscal year 2003 service and interest costs by $135 and the September 30, 2003 accumulated benefit obligation by $2,261. Similarly, a 1% decrease would have decreased fiscal year 2003 service and interest costs by $116 and the September 30, 2003 accumulated benefit obligation by $1,943. 47 10. CASH FLOW STATEMENTS
2003 2002 2001 -------------------------------------------------------------------------------------------- AUTOMOTIVE SOLUTIONS Cash flows provided by (used for) operating activities Net income $ 106,717 $ 64,866 $ 85,019 Adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting change 36,563 Depreciation and amortization 36,237 31,395 49,901 Deferred income taxes 28,572 23,256 8,135 Deferred income taxes transferred from financial services (5,514) (2,866) (2,647) Income from discontinued operations (1,623) Losses (gains) on sales of assets 289 1,605 (337) Changes in operating assets and liabilities Accounts receivable (20,485) (2,358) 9,249 Inventories 933 (2,221) 4,441 Prepaid expenses, intangible and other assets 4,599 11,538 (1,249) Accounts payable 475 506 (2,792) Accrued and other liabilities (20,243) (4,213) 17,451 --------- --------- --------- Net cash provided by operating activities $ 131,580 $ 158,071 $ 165,548 ========= ========= ========= FINANCIAL SERVICES Cash flows provided by (used for) operating activities Net income $ 12,300 $ 14,123 $ 14,538 Adjustments to reconcile net income to net cash provided by operating activities Deferred income taxes (4,040) (2,269) (6,422) Deferred income taxes transferred to automotive solutions 5,514 2,866 2,647 Changes in receivables, other assets and other liabilities 4,936 4,737 3,256 --------- --------- --------- Net cash provided by operating activities $ 18,710 $ 19,457 $ 14,019 ========= ========= =========
48 11. SEGMENT REPORTING The company is organized into four segments for reporting purposes. The Software Solutions segment provides integrated computer systems products and related services. Products include integrated software packages, computer hardware and installation of hardware and software. Services include customer training, hardware maintenance and software support. The Transformation Solutions segment provides specialized training, Web services and customer relationship management products and services as well as consulting services. The Documents segment manufactures and distributes printed business forms to automotive retailers. The Financial Services segment provides financing services, principally for sales of the company's computer systems. Total assets were not allocated by segment except for Financial Services' assets. Investments in equity method investees and capital expenditures were not allocated by segment. Depreciation and amortization were reflected in determining segment operating income; however, it is not practicable to present this information by segment. OPERATING SEGMENTS
2003 2002 2001 ---------------------------------------------------------------------------------- Net sales and revenues Software solutions Computer services $ 501,562 $ 468,584 $ 431,370 Computer systems products 164,624 145,299 169,125 ----------- ----------- ----------- Total software solutions 666,186 613,883 600,495 Transformation solutions 131,288 153,268 174,546 Documents 174,239 183,523 187,053 Financial services 36,532 41,709 41,918 ----------- ----------- ----------- Total net sales and revenues $ 1,008,245 $ 992,383 $ 1,004,012 =========== =========== =========== Operating income (loss) Software solutions $ 162,041 $ 126,325 $ 119,633 Transformation solutions (25,234) (8,066) (11,347) Documents 32,551 37,277 39,791 Financial services 20,721 22,991 23,655 ----------- ----------- ----------- Total operating income $ 190,079 $ 178,527 $ 171,732 =========== =========== =========== Assets Automotive solutions $ 728,560 $ 729,560 $ 732,073 Financial services 395,495 407,605 422,334 ----------- ----------- ----------- Total assets $ 1,124,055 $ 1,137,165 $ 1,154,407 =========== =========== =========== Investments in equity method investees $ 5,376 $ 8,270 $ 20,531 Capital expenditures 57,810 37,067 51,383 Depreciation and amortization 36,237 31,395 49,901
49 GEOGRAPHIC AREAS The company provides integrated computer systems products and services and manufactures and distributes printed business forms primarily in the United States.
2003 2002 2001 ----------------------------------------------------------------------------- United States Net sales and revenues 943,769 $ 937,275 $ 937,956 Long-lived assets 414,464 377,168 420,906 International Net sales and revenues 72,879 61,361 75,352 Long-lived assets 4,913 3,118 3,424 Elimination of intersegment sales (8,403) (6,253) (9,296) Totals Net sales and revenues 1,008,245 992,383 1,004,012 Long-lived assets 419,377 380,286 424,330
12. 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 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 a 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-binding 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 September 30, 2003, this contingent liability totaled $2,651. 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 September 30, 2003, the unamortized balance on this letter of credit was $1,678. 50 13. ACCOUNTING CHANGE In 2001, the Financial Accounting Standards Board (FASB) issued 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. The statement also requires recognized intangible assets with finite useful lives to be amortized over their useful lives and reviewed for impairment in accordance with SFAS Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The company elected to adopt the provisions of SFAS No. 142 effective October 1, 2001. Accordingly, goodwill has not been amortized in the financial statements for the periods ended September 30, 2003 and September 30, 2002. This statement also required certain intangible assets that did not meet the criteria for recognition apart from goodwill, to be subsumed into goodwill. During the quarter ended December 31, 2001, the company subsumed into goodwill $54,531 of intangible assets representing assembled workforce and a noncontractual customer relationship, that did not meet the separability criteria under SFAS No. 141, "Business Combinations." SFAS No. 142 also requires that goodwill be tested for impairment, initially upon adoption (as of October 1, 2001), and thereafter at least annually. During the second quarter of fiscal year 2002, the company completed the 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 the accounting change on the consolidated statements of income. The company divided its four reporting segments into eight reporting units for purposes of applying the provisions of this pronouncement. For each reporting unit a fair value was determined based primarily on the present value of discounted future cash flows. Other methods were considered to validate this valuation method. Where initial impairment was indicated, the company hired an outside appraisal firm to determine the fair value and allocate this fair value among assets and liabilities. Based on this analysis, two reporting units within the Transformation Solutions reporting segment incurred impairment losses. Reynolds Consulting Services, acquired in fiscal year 2000 as part of the HAC Group business combination, recorded an impairment loss of $33,515 ($55,858 net of income tax benefits of $22,343). The company also recorded an impairment loss of $3,048 ($5,080 net of income tax benefits of $2,032) related to its Campaign Management Services reporting unit. These impairment losses occurred because of discounting future cash flows to determine the fair value of the reporting units. Under previous accounting standards, future cash flows were not discounted in determining if impairment existed. The company performed its annual goodwill impairment test as of July 31, 2002 and 2003, using a consistent methodology with the initial impairment tests. In 2003, the company identified and recorded an impairment loss of $302 within the Transformation Solutions reporting segment, related to BoatVentures.com. This impairment loss resulted from a decline in estimated future discounted cash flows from those originally forecasted at the time of acquisition. 51 ACQUIRED INTANGIBLE ASSETS
Useful Gross Accumulated Life Amount Amortization (years) ---------------------------------- AS OF SEPTEMBER 30, 2003 Amortized intangible assets Contractual customer relationship $33,100 $ 5,655 20 Customer contract 17,700 16,493 3.67 Trademarks 5,900 1,008 20 Other 6,449 2,262 2-15 ------- ------- Total $63,149 $25,418 ======= ======= 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 $7,233 in 2003, $7,021 in 2002 and $11,142 in 2001. As of September 30, 2003, estimated annual amortization expense was $3,537 in 2004, $2,300 in 2005, $2,300 in 2006, $2,300 in 2007 and $2,300 in 2008. GOODWILL
Software Transformation Solutions Solutions Documents Totals --------- --------- --------- ------ Balances as of September 30, 2001 $ 10,412 $ 21,374 $ 2,877 $ 34,663 Intangible assets subsumed Noncontractual customer relationship 47,376 47,376 Assembled workforce 7,155 7,155 Cumulative effect of accounting change (60,938) (60,938) Business combinations 743 743 -------- -------- -------- -------- Balances as of September 30, 2002 10,412 15,710 2,877 28,999 Business combinations 13,031 13,031 Impairment loss (302) (302) -------- -------- -------- -------- Balance as of September 30, 2003 $ 10,412 $ 28,439 $ 2,877 $ 41,728 ======== ======== ======== ========
Prior to the adoption of SFAS No. 142, the excess of cost over net assets of companies acquired was recorded as goodwill and had been amortized on a straight-line basis over five to twenty years. Amortization expense was $7,122 in 2001. At September 30, 2003 and 2002, accumulated amortization was $53,812 and $53,760, respectively. 52 PRO FORMA INCOME FROM CONTINUING OPERATIONS The table below presents the pro forma effect on net income and earnings per share from the adoption of SFAS No. 142.
2003 2002 2001 -------------------------------------------------------------------------------------- Income from continuing operations, as reported $119,017 $115,552 $ 97,934 Goodwill amortization, net of taxes 8,359 Subsumed intangible assets amortization, net of taxes 2,619 -------- -------- -------- Pro forma income from continuing operations $119,017 $115,552 $108,912 ======== ========= ======== Basic Earnings per Common Share Income from continuing operations, as reported $ 1.74 $ 1.63 $ 1.34 Pro forma income from continuing operations $ 1.74 $ 1.63 $ 1.49 Diluted Earnings per Common Share Income from continuing operations, as reported $ 1.69 $ 1.58 $ 1.31 Pro forma income from continuing operations $ 1.69 $ 1.58 $ 1.45
14. 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 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 1 to the Consolidated Financial Statements, for cash of $28,800 and terminated the lease agreement. The company has no other variable interest entities. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amended and clarified financial accounting and reporting for derivative instruments and hedging activities. The provisions of this statement were effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this pronouncement did not have a material effect on the company's financial statements. 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 were effective for the first interim period beginning after June 15, 2003. The adoption of this pronouncement did not have a material effect on the company's financial statements. 15. SUBSEQUENT EVENTS In October 2003, the company purchased the outstanding shares of Incadea AG, a provider of global automotive retailing software solutions. Privately-held Incadea, based in Raubling, Germany, has annual revenues of about $6,000. The purchase price of about $7,000 was paid with cash from existing balances. In October 2003, the company purchased the net assets of Third Coast Media, a provider of Web and customer relationship management software to automotive retailers. Third Coast Media, headquartered in Richardson, Texas, has annual revenues of about $5,000. The purchase price of about $8,000 was paid with cash from existing balances. 53 Effective October 1, 2003, the company elected to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" and begin recognizing stock option expense in the Statements of Consolidated Income. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" provides three alternative methods for reporting this change in accounting principle. The company has elected the retroactive restatement method which requires that all periods presented be restated to reflect stock-based compensation cost under the fair value based accounting method of SFAS No. 123 for all awards granted, modified or settled in fiscal years beginning after December 31, 1994. Accordingly, the company is currently assessing the impact this will have on the company's Consolidated Financial Statements and will restate all periods beginning in fiscal year 2004. See pro forma earnings effects in Note 1 to the Consolidated Financial Statements. On October 2, 2003, the company announced the consolidation of its automotive forms manufacturing facility located in Grand Prairie, Texas, into the company's Celina, Ohio facility. The 76 employees located in Texas will be offered the opportunity to accept a position in the Ohio facility. Those not accepting positions in Ohio will be offered severance and outplacement services. The company also eliminated additional positions in technology, administration and forms sales bringing the total number of reductions to about 200. The company estimates that costs for severance, outplacement, relocation and other plant consolidation efforts will total about $8,000 or $.07 per share in the first quarter of fiscal year 2004. 54 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------- 2003 Net sales and revenues $246,648 $255,099 $ 250,405 $256,093 Gross profit $139,311 $142,078 $ 140,069 $143,206 Income from continuing operations $ 28,248 $ 29,527 $ 28,249 $ 32,993 Basic earnings per common share $ .41 $ .43 $ .41 $ .48 Diluted earnings per common share $ .40 $ .42 $ .40 $ .47 Net income (loss) $ 28,248 $ 29,527 $ 28,249 $ 32,993 Basic earnings (loss) per common share $ .41 $ .43 $ .41 $ .48 Diluted earnings per common share $ .40 $ .42 $ .40 $ .47 Cash dividends declared per share Class A common $ .11 $ .11 $ .11 $ .11 Class B common $ .0055 $ .0055 $ .0055 $ .0055 Closing market prices of Class A common shares High $ 27.27 $ 26.90 $ 29.90 $ 29.88 Low $ 19.90 $ 22.99 $ 25.41 $ 26.87 2002 Net sales and revenues $240,109 $245,002 $ 250,568 $256,704 Gross profit $140,603 $141,701 $ 148,208 $148,135 Income from continuing operations $ 25,400 $ 29,067 $ 30,233 $ 30,852 Basic earnings per common share $ .36 $ .41 $ .43 $ .44 Diluted earnings per common share $ .35 $ .39 $ .41 $ .43 Net income (loss) ($ 11,163) $ 29,067 $ 30,233 $ 30,852 Basic earnings (loss) per common share ($ .16) $ .41 $ .43 $ .44 Diluted earnings (loss) per common share ($ .15) $ .39 $ .41 $ .43 Cash dividends declared per share Class A common $ .11 $ .11 $ .11 $ .11 Class B common $ .0055 $ .0055 $ .0055 $ .0055 Closing market prices of Class A common shares High $ 25.94 $ 31.55 $ 30.57 $ 27.33 Low $ 22.55 $ 24.03 $ 27.95 $ 22.30
(1) Effective October 1, 2001, the company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and reduced income by $36,563 for the cumulative effect of the accounting change. 55 VALUATION ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001 (Dollars in Thousands)
Column A Column B Column C Column D Column E -----Additions---- -----Deductions--- Balance Charged at to Costs Write-offs Balance Beginning and Other Net of At End Description of Year Expenses (a) Recoveries of Year Valuation Accounts - Deducted From Assets to Which They Apply AUTOMOTIVE SOLUTIONS Reserves for accounts receivable: Year ended September 30, 2003 $ 4,902 $ 4,399 $ 213 $ 4,261 $ 5,253 Year ended September 30, 2002 $ 3,662 $ 6,363 ($ 538) $ 4,585 $ 4,902 Year ended September 30, 2001 $ 2,324 $ 5,340 ($ 978) $ 3,024 $ 3,662 Reserves for credit memos: Year ended September 30, 2003 $10,321 $ 1,362 $ 173 $ 165 $11,691 Year ended September 30, 2002 $ 6,724 $ 3,814 ($ 7) $ 210 $10,321 Year ended September 30, 2001 $ 6,850 $ 300 ($ 26) $ 400 $ 6,724 Reserves for inventory: Year ended September 30, 2003 $ 1,320 $ 1,222 $ 19 $ 896 $ 1,665 Year ended September 30, 2002 $ 970 $ 1,965 $ 110 $ 1,725 $ 1,320 Year ended September 30, 2001 $ 1,644 $ 77 ($ 8) $ 743 $ 970 FINANCIAL SERVICES Reserves for finance receivables: Year ended September 30, 2003 $ 6,184 $ 3,765 $ 566 $ 3,810 $ 6,705 Year ended September 30, 2002 $ 5,956 $ 4,450 $ 533 $ 4,755 $ 6,184 Year ended September 30, 2001 $ 5,846 $ 2,500 $ 493 $ 2,883 $ 5,956
(a) Includes adjustments from translation of foreign currency to United States dollars, the effects of acquisitions of businesses and transfers between reserves. 56