-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JxEvpqVF7QRjUshq5fsOe2wahL2Atu9aCPZoOuQxpanQcMNo4TikFTkRxisabrSl EokVuhNpR5h7OrbnE3YpaQ== 0000950152-04-008935.txt : 20041213 0000950152-04-008935.hdr.sgml : 20041213 20041213172032 ACCESSION NUMBER: 0000950152-04-008935 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041213 DATE AS OF CHANGE: 20041213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS & REYNOLDS CO CENTRAL INDEX KEY: 0000083588 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 310421120 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10147 FILM NUMBER: 041199570 BUSINESS ADDRESS: STREET 1: ONE REYNOLDS WAY CITY: DAYTON STATE: OH ZIP: 45430 BUSINESS PHONE: 9374852000 MAIL ADDRESS: STREET 1: P.O. BOX 2608 CITY: DAYTON STATE: OH ZIP: 45401 10-K 1 l10970ae10vk.txt REYNOLDS & REYNOLDS 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, 2004 [ ] 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. [ ] Indicate 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 March 31, 2004, was $1,831920,125. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 1, 2004: Class A Common Shares: 63,993,592 (exclusive of 28,071,016 Treasury shares) Class B Common Shares: 14,000,000 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III of this report to the extent described herein. 1 PART I (Dollars in thousands) ITEM 1. DESCRIPTION OF BUSINESS GENERAL The Reynolds and Reynolds Company (NYSE: REY) was founded in 1866 and became an Ohio corporation in 1889. Reynolds was one of the first printing companies to produce standardized business forms. In 1927, the company began producing standard business forms and paper-based accounting systems for Chevrolet retailers nationwide. This led to the establishment of an automotive division as the company expanded its market to additional automotive retailers. In the 1960s, Reynolds began offering computer services to automotive retailers throughout the United States and expanded its operations into Canada. Today, the company is one of the leading providers of integrated solutions to automotive retailers. The company's software and services solutions include a full range of retail and enterprise management systems. Anchored by the company's dealer management system, ERA(R), Reynolds also offers Web and Customer Relationship Management (CRM) solutions; support, training and professional services; documents; data management and integration services; networking; and financial services. A new retail management solution, the Reynolds Generation Series(R) Suite was launched in 2002. Reynolds customers comprise most automotive retailers and a majority of car companies doing business in North America. In October 2003, the company expanded its international operations through the acquisition of Incadea GmbH, a provider of automotive retailing solutions. SEGMENTS The company is organized into four segments for financial reporting purposes: Software Solutions, Services, Documents and Financial Services. Software Solutions The Software Solutions segment is the company's largest segment and provides computer solutions including computer hardware, integrated software packages, software enhancements and related support. The company's Software Solutions segment also includes Incadea. The company sells and supports three core platforms to automotive retailers: - ERA DEALER MANAGEMENT SYSTEM . The ERA dealer management system is comprised of software applications to serve all areas of an automotive retailer's business. The ERA platform is used by more than 10,000 dealerships and 350,000 dealership personnel in the United States and Canada today. Since its introduction, the platform has evolved to meet the changing needs of the company's customers and advancements in technology. - REYNOLDS GENERATIONS SERIES SUITE (RGS SUITE). RGS Suite is a new family of software solutions with applications relating to virtually all aspects of a dealership's operations, including client management, sales management, finance and insurance, service and parts operations, and business and employee management. It is the company's next generation platform with embedded CRM tools. - INCADEA(R). The Incadea platform is based on a standard Enterprise Resource Planning (ERP) system developed by Microsoft and combines the proven commercial management options with special extensions designed for the vehicle sector. Acquired by the company in October 2003, Incadea provides solutions to automotive retailers and car companies outside the United States and Canada, primarily in Western Europe. 2 The Incadea platform currently supports more than 20 languages and is serving customers in over two dozen countries. The company provides an extensive portfolio of high-value added applications designed for the business office, sales, and service departments of the automobile dealership. These solutions help automotive retailers manage their customer relationships and improve the retailers' productivity. The primary offerings are Contact Management, WebmakerX(R), Electronic Parts Catalog, and Electronic Document Management. Most of the company's software products are developed internally. The company also purchases technology, licenses intellectual property rights, and oversees customization of its products. The company believes it is not materially dependent upon licenses and other agreements with third parties relating to the development or support of its products. The company has key relationships with IBM, Microsoft and LexisNexis, a division of Reed Elsevier Group. Computer hardware and peripherals are essential to the company's Software Solutions segment. The company purchases these products from a variety of suppliers. IBM, however, supplies the hardware platform for the RGS Suite and ERA systems. LexisNexis hosts certain applications that are provided to Reynolds customers through remote access. If these relationships were to be terminated or interrupted, some delay would occur in converting to new vendors. The company historically has not experienced these difficulties, nor does it reasonably foresee difficulty in replacing them in the future on competitive terms and conditions. Services The Services segment includes the installation and maintenance of computer hardware, software training and professional services. The company's technical support and training resources are extensive. Reynolds University provides online education and live training delivered on site or in classrooms. Reynolds consultants deliver advanced process consulting tailored to the specific business needs of the customer. Documents The Documents segment manufactures and distributes printed business forms primarily to automotive retailers. Financial Services The Financial Services segment provides financing, principally for sales of the company's computer solutions and services, through the company's wholly-owned affiliates, Reyna Capital Corporation, Reyna Funding L.L.C. and a similar operation in Canada. See Note 12 to the Consolidated Financial Statements on page 55 for additional information on reporting segments. 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 PRODUCT DEVELOPMENT During fiscal year 2004, 2003 and 2002, research and development expense was $93,000, $72,000 and $ 68,000, respectively. The company expects to incur research and development expense of approximately $90,000 in 2005. SALES CHANNELS The company sells its solutions through a direct field sales force and Business Development Centers (inside sales). The company's subsidiaries license and support the company's products in their local countries as well as within other foreign countries where it does not operate through a direct sales subsidiary. In some countries, the company employs independent consultants to sell its products. The company sells or licenses its products and services under a master contractual arrangement that allows the end-user customer to acquire multiple products and services over an extended period of time. COMPETITION The company is one of the leading providers of integrated software solutions and services to automotive retailers in North America. In the Software Solutions and Services segments, the company and its main competitor, the Dealer Services division of Automatic Data Processing, Inc, provide a significant share of the dealer management systems for automotive retailers in the United States and Canada. Outside of North America, our international operations compete in a fragmented market with many dealer management systems providers. The company's Documents segment has a leading market share position, but experiences competition from local printing brokers and regional printers throughout the United States and Canada. The Financial Services segment provides financing to the majority of the company's software solutions customers, but does compete with local, regional and national lending institutions. The company believes it competes by providing value-added solutions and services that satisfy customer needs. By focusing exclusively on the automotive retailing market, the company is able to effectively leverage its technological expertise, broad industry knowledge, and long-term customer relationships to deliver value to its customers. 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, 2004, the dollar value of the backlog was $51,000 compared to $62,000 last year. The company anticipates that substantially all of the backlog will be recognized as revenue during fiscal year 2005. EMPLOYEES As of September 30, 2004, the company and its subsidiaries had 4,380 employees. 4 AVAILABLE INFORMATION The company's 2004 Annual Report to Shareholders, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other SEC filings are available, without charge, on its Web site, www.reyrey.com, as soon as reasonably practicable after such reports are electronically filed with the SEC. The company also makes available its Corporate Governance Guidelines, Business Principles, Code of Ethics, and the Charters of its Audit, Compensation and Nominating and Governance Committees on its Web Site. The company will also provide a free copy of any of the referred documents upon written request to: Douglas M. Ventura, 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, 2004, the company owned and operated a manufacturing plant in Celina, Ohio encompassing approximately 316,000 square feet, which produces the company's Documents segment products and services. Corporate headquarters are located in the Dayton, Ohio area in several buildings owned or leased by the company which contain approximately 882,000 square feet. In December, 2003, the company began construction on phase three (133,000 square feet) at its principal facility near Dayton, Ohio. In addition, the company leases approximately 35 offices throughout the United States and Internationally. All of the company's business segments use these facilities.. 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 39. ITEM 3. LEGAL PROCEEDINGS Relevant information appears in Note 13 to the Consolidated Financial Statements on page 56. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 5 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (In thousands except per share data and holders of record) 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 60,000,000 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 8 to the Consolidated Financial Statements, page 48. 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 58. As of November 30, 2004, there were approximately 2.875 holders of record of Class A Common Shares and one holder of record of Class B Common Shares. On August 12, 2003, the company's board of directors authorized the repurchase of 8,000 additional Class A common shares. This authorization has no fixed expiration date and was in addition to previously approved authorizations. As of September 30, 2004, the company could repurchase an additional 2,445 Class A common shares under this board of directors' authorization. No other authorizations for share repurchase were outstanding as of September 30, 2004. During the three months ended September 30, 2004, the company repurchased 925 shares of Class A Common Shares for $21,934 as follows:
Total Shares Maximum Number Shares Average Purchased During of Shares Remaining Program Purchased Price the Period as for Purchase as Approval During Paid Part of a Publicly Part of a Publicly Date Month Period (per Share) Announced Program Announced Program ---- ----- ------ ----------- ----------------- ----------------- 8/12/03 July 2004 100 $21.92 100 3,270 8/12/03 August 2004 475 $23.33 475 2,795 8/12/03 September 2004 350 $24.74 350 2,445 --- --- 8/12/03 Total Quarter 925 $23.71 925 === ===
6 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SELECTED FINANCIAL DATA (Dollars in thousands except per share data)
For The Years Ended September 30 2004 2003 2002 (2) 2001 2000 - -------------------------------- ---------- ---------- ---------- ---------- ---------- CONSOLIDATED Net Sales and Revenues (1) $ 982,241 $1,008,245 $ 992,383 $1,004,012 $ 954,687 Income from Continuing Operations (1) $ 92,643 $ 109,800 $ 104,012 $ 97,934 $ 88,440 Basic earnings per common share $ 1.40 $ 1.61 $ 1.47 $ 1.34 $ 1.14 Diluted earnings per common share $ 1.37 $ 1.56 $ 1.42 $ 1.31 $ 1.11 Net Income (1) $ 92,643 $ 109,800 $ 67,449 $ 99,557 $ 116,596 Basic earnings per common share $ 1.40 $ 1.61 $ .95 $ 1.36 $ 1.50 Diluted earnings per common share $ 1.37 $ 1.56 $ .92 $ 1.33 $ 1.47 Return on Equity (1) 19.6% 23.2% 14.2% 20.4% 24.2% Cash Dividends Per Class A Common Share $ .44 $ .44 $ .44 $ .44 $ .44 Book Value Per Outstanding Common Share (1) $ 7.25 $ 7.05 $ 6.82 $ 6.69 $ 6.68 Assets (1) Automotive solutions $ 708,055 $ 746,342 $ 747,553 $ 732,073 $ 808,527 Financial services 352,812 395,494 407,605 422,334 421,129 ---------- ---------- ---------- ---------- ---------- Total assets $1,060,867 $1,141,836 $1,155,158 $1,154,407 $1,229,656 ========== ========== ========== ========== ========== Long-Term Debt Automotive solutions $ 103,512 $ 106,912 $ 107,408 $ 105,805 $ 111,124 Financial services 176,731 169,293 180,519 147,429 126,868 ---------- ---------- ---------- ---------- ---------- Total long-term debt $ 280,243 $ 276,205 $ 287,927 $ 253,234 $ 237,992 ========== ========== ========== ========== ========== Number of Employees 4,380 4,518 4,602 4,763 4,945 AUTOMOTIVE SOLUTIONS (excluding Financial Services) Current Ratio 1.98 2.01 2.02 1.80 1.90 Net Property, Plant and Equipment $ 178,447 $ 184,691 $ 161,073 $ 159,051 $ 138,108 Total Debt $ 103,512 $ 106,912 $ 113,469 $ 111,866 $ 116,838 Total Debt to Capitalization (1) 18.1% 18.4% 19.3% 19.0% 19.0%
(1) Financial information for 2003 and 2002 was restated to reflect the retroactive adoption of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Financial information for 2001 and 2000 was not restated per SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure and Amendment of FASB Statement No. 123." (2) Effective October 1, 2001, the company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," and reduced income by $36,563 for the cumulative effect of the accounting change. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands except employee and per share data) COMPANY OVERVIEW INTRODUCTION The company provides integrated computer systems products and related services, documents and financial services primarily to automotive retailers. Computer systems products include integrated software packages and computer hardware. Computer services include installation and maintenance of computer hardware, software training, ongoing support of software applications and professional services. Typically hardware, hardware installation and software training revenues (i.e. one-time revenues) are billed upon shipment and recognized over the implementation period. Depending on their nature, software license fees may be billed upon shipment or bundled with monthly software support services. 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" and related pronouncements. Service revenues are recorded ratably over the contract period or as services are performed. Software support and hardware maintenance revenues (i.e. recurring revenues) are invoiced monthly and recognized ratably over the term of the contract as services are provided. Professional services may be purchased separately or bundled with the initial sale of software. Professional services revenues are recognized as services are provided. Documents revenues are recorded when title passes upon shipment to customers. The company also offers financial services through Reyna Capital Corporation, Reyna Funding L.L.C. and a similar operation in Canada. Financial services revenues consist primarily of interest earned on financing the company's computer systems sales and are recognized over the lives of financing contracts, generally five years, using the interest method. See Note 1 to the Consolidated Financial Statements for more information of the company's revenue recognition policies. Although the company's primary customers are automotive retailers in the United States and Canada, the company's financial performance is not necessarily correlated with the number of new vehicles sold by these retailers. Automotive retailers have other profit centers such as used vehicles, service and parts which provide a more consistent revenue stream and a greater proportion of a typical automotive retailer's income than provided by new vehicle sales. This allows automotive retailers to invest in products and services that improve customer satisfaction and increase productivity. The company earns most of its income from recurring software and hardware maintenance revenues. About 80% of the company's revenues are recurring in nature when documents and financial services are included. Additionally, much of professional services revenues tend to be recurring in nature as programs are continued each year. This provides a measure of stability and limits the effect of economic downturns on the company's financial performance. KEY ISSUES On July 7, 2004, the company announced the resignation of its former Chief Executive Officer, Chairman and President. Philip A. Odeen, who had been serving as Lead Director, became Chairman and Acting Chief Executive Officer. A search committee was formed, comprised of the Acting Chief Executive Officer and certain outside directors, to permanently fill this position. This committee has engaged an executive search firm to help identify qualified candidates for this position. Numerous candidates have been interviewed and the company anticipates filling this position sometime during the first calendar quarter of 2005. The company is in the process of implementing several actions to improve its sales and marketing execution. The company has added new sales leadership to drive strategic initiatives, initiated a more focused and rigorous sales management system and implemented a simpler and more effective sales compensation plan. The company has also increased the number of sales specialists focused on customer relationship management applications and expanded its inside sales effort. The marketing department is gathering competitive intelligence, obtaining customer references and testimonials, and developing strengthened return on investment and value propositions. As a provider of software and related services, the company must continually develop new software offerings and upgrade existing solutions to meet customer requirements and increase revenues. The company has invested in research and development during recent years to develop new software solutions. As a result, the company currently 8 has several software solutions which are relatively new and in the early stages of their lifecycle. In August 2003, the company launched RGS Suite, the company's next generation dealer management system. The company has significantly slowed the rate of RGS Suite installations scheduled in 2005 to focus on necessary software enhancements and improvements, system usability and implementation improvements. The company has also taken a series of actions to improve product development and ensure the readiness of software solutions. The company has consolidated profit and loss responsibility for all software solutions and related services under one management, devoted additional senior management resources to focus on product development and created a Solutions Readiness Council to improve solution readiness standards and processes. RESULTS OF OPERATIONS The following summaries of accounting changes, reorganization costs and special items, business combinations and segment reporting and reclassifications have been provided to facilitate an understanding of management's discussion and analysis. Additional disclosures for these items have been provided in the Notes to the Consolidated Financial Statements. ACCOUNTING CHANGES 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 began recognizing stock-based compensation expense in the Statements of Consolidated Income. Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. SFAS No. 148, "Accounting for Stock-Based Compensation - - Transition and Disclosure" provides three alternative methods for reporting this change in accounting principle. The company elected the retroactive restatement method which required 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, prior year financial statements have been restated to reflect the adoption of SFAS No. 123. See Note 14 to the Consolidated Financial Statements for additional disclosures about this 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 4 to the Consolidated Financial Statements for additional discussion of this accounting change. REORGANIZATION COSTS AND SPECIAL ITEMS On October 2, 2003, the company announced the consolidation of its automotive Documents printing plant, located in Grand Prairie, Texas, into the company's Celina, Ohio manufacturing facility. All employees located in Texas were offered the opportunity to accept a position in the Ohio facility. Those not accepting a position in Ohio were offered severance and outplacement services. Grand Prairie document production operations ceased in December 2003 and 72 positions were eliminated. The company added about 65 positions at the Celina, Ohio manufacturing facility as production was transferred from Grand Prairie. During 2004, the company also reorganized the Documents sales force, eliminating 37 positions, and eliminated 121 additional positions in Software Solutions development, Services and administration. Through September 30, 2004, the company incurred expense of $7,054 before taxes or $.06 per share after taxes for severance, outplacement, relocation and other plant consolidation efforts and eliminated 230 positions. The company does not anticipate incurring additional expenses related to these efforts in 2005. See Note 2 to the Consolidated Financial Statements for additional disclosures about these reorganization costs. 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 9 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 pretax 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. BUSINESS COMBINATIONS In October 2003, the company purchased the outstanding shares of Incadea GmbH, a provider of global automotive retailing software solutions. At the time of the acquisition, privately-held Incadea, based in Raubling, Germany, had annualized revenues of about $6,000. 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. At the time of the acquisition, Third Coast Media, headquartered in Richardson, Texas, had annualized revenues of about $5,000. 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 annual revenues of about $1,000 in 2002. 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.com Corporation had revenues of about $1,000 in 2001. In September 2004, the company sold the net assets of BoatVentures.com for $2,100 and recorded a gain of $1,300. See Note 3 to the Consolidated Financial Statements for more information on business combinations. SEGMENT REPORTING AND RECLASSIFICATIONS During the first quarter of 2004, the company changed its reporting segments to reflect the revised organizational structure of the company and began reporting financial information for the Software Solutions, Services, Documents and Financial Services segments. Prior year financial statements were restated to reflect financial statements consistent with the current year. In executing this realignment, the company also changed its method of allocating certain revenues and expenses. Prior year financial statements were restated, to the extent possible, to reflect financial statements consistent with 2004. It was not practical to restate financial statements for all changes. The estimated effect of these non-restated items was to increase Software Solutions 2004 revenues by $9,600 and operating income by $7,200. The offsetting unfavorable effect of these changes was included in the Services segment. In 2003, the company changed its allocation methodology for certain expenses, the effect of which was to report certain expenses as costs 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 2002. In was not practical to restate 2002 financial statements. In 2005, the company's segment reporting will consist of three reporting segments; Software Solutions, Documents and Financial Services. Software Solutions will be comprised of the former Software Solutions segment and the former Services segment. This reporting will reflect the most recent management reorganization which places all software solutions and related services under common leadership. This reporting will benefit investors, providing a truer economic picture of the company's solutions by combining the operating results of products and related services that are sold together. For example, software licenses and related software training will be included in a single segment. In 2004, these items were separated, with software licenses reported in the Software Solutions 10 segment and the related software training reported in the Services segment. Management will review the financial results of Software Solutions, Documents and Financial Services to measure performance and allocate resources. There will be no changes in the reporting of the Documents and Financial Services segments. See Note 12 to the Consolidated Financial Statements for additional disclosures regarding business segments. CONSOLIDATED SUMMARY
2004 vs. 2003 2003 vs. 2002 2004 2003 2002 Change Change -------- ---------- -------- ---------------- -------------- Net sales and revenues $982,241 $1,008,245 $992,383 ($26,004) -3% $15,862 2% Gross profit $543,754 $ 559,400 $572,934 ($15,646) -3% ($13,534) -2% % of revenues 55.4% 55.5% 57.7% SG&A expenses $399,776 $ 383,762 $411,681 $16,014 4% ($27,919) -7% % of revenues 40.7% 38.1% 41.5% Operating income $143,978 $ 175,638 $161,253 ($31,660) -18% $14,385 9% % of revenues 14.7% 17.4% 16.2% Income before cumulative effect of accounting change $ 92,643 $ 109,800 $104,012 ($17,157) -16% $ 5,788 6% Cumulative effect of accounting change $ 0 $ 0 ($36,563) $ 0 $36,563 Net income $ 92,643 $ 109,800 $ 67,449 ($17,157) -16% $42,351 63% Basic earnings per common share Income before cumulative effect of accounting change $ 1.40 $ 1.61 $ 1.47 ($ 0.21) -13% $ 0.14 10% Net income $ 1.40 $ 1.61 $ 0.95 ($ 0.21) -13% $ 0.66 69% Diluted earnings per common share Income before cumulative effect of accounting change $ 1.37 $ 1.56 $ 1.42 ($ 0.19) -12% $ 0.14 10% Net income $ 1.37 $ 1.56 $ 0.92 ($ 0.19) -12% $ 0.64 70%
In 2004, consolidated net sales and revenues declined 3% as growth in Software Solutions recurring software revenues was more than offset by a decline in Software Solutions one-time hardware and software sales and revenue declines in Services, Documents and Financial Services. The backlog of new orders for Software Solutions and Services computer systems products and deferred revenues (orders shipped, but not yet recognized in revenues) was approximately $44,000 at September 30, 2004 compared to $65,000 at September 30, 2003. In 2003, revenues increased slightly over 2002 as Software Solutions segment revenues grew 9% while revenues declined in the other three segments. In 2004, gross profit declined primarily because of the decline in revenues. Growth in Software Solutions recurring software revenues was offset by higher software amortization costs related to RGS Suite. See the Software Solutions caption of this analysis for additional information regarding software amortization expenses. Other costs affecting gross profit in 2004 were plant consolidation costs, fourth quarter software costs and the impact of a fourth quarter adjustment to record a non-income tax liability. This fourth quarter adjustment was offset by lower income taxes. In 2003, gross profit reflected lower Services and Documents revenues than in 2002. In 2003, gross profit 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. It was not practical to restate 2002 financial results. In 2004, SG&A expenses increased over 2003, both in dollars and as a percentage of revenues, primarily because of higher research and development (R&D) expenses as no software development costs were capitalized. In 2004, SG&A expenses also included $5,422 of reorganization expenses (see Note 2 to the Consolidated Financial Statements), $4,825 of fourth quarter employee separation costs and $3,330 of consulting costs to reengineer the company's order-to-cash process. In 2003, SG&A expenses declined from 2002, both in total dollars and as a percentage of revenues, primarily because of the change in cost allocation methodology which shifted certain expenses to cost of sales. Also contributing to lower SG&A expenses in 2003 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 11 Reorganization Costs and Special Items caption of this analysis. Research and development expenses were approximately $93,000 in 2004, $72,000 in 2003 and $68,000 in 2002. The 2004 increase in R&D expenses occurred primarily because no software development costs were capitalized, compared to capitalization of $16,270 in 2003 and $20,370 in 2002. See the Software Solutions caption of this analysis for additional information regarding R&D expenses and software capitalization. Operating margins were 14.7% in 2004, compared to 17.4% in 2003 and 16.2% in 2002. In 2004, operating margins were negatively affected by higher R&D expenses, many of the other costs previously discussed and the October 2003 acquisition of Incadea GmbH which had revenues of $6,036 and operating losses of $5,996 in 2004. In 2003, operating margins were higher than in 2002, because 2002 included the effect of special items previously discussed. In 2003, operating income included losses of $11,000 from the acquisitions of BoatVentures.com (acquired in August 2002), Networkcar (acquired in November 2002) and Internet Lead Management (formerly Microsoft's DealerPoint, a software license acquired in January 2003). In 2004, other income declined from 2003, primarily because less interest expense was capitalized in 2004. In 2003 and 2002, interest was capitalized in connection with capitalized software development costs. In 2003, interest expense declined from 2002, primarily because of the full year effect of an interest rate swap entered into in February 2002. This interest rate swap effectively converted 7% fixed rate debt into variable rate debt, which averaged 4.1% in 2004, 3.3% in 2003 and 4.3% in 2002. The 2003 benefit of this swap was partially offset by lower capitalized interest than in 2002 because of the completion of a building construction project. Equity in net income of affiliated companies increased in 2004 because of higher income from the company's investment in ChoiceParts, which was profitable in 2004 as compared to losses in 2003 and 2002. Fiscal year 2002 also included a loss of $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. In 2004 other charges included a $1,612 pretax gain on the sale of the company's shares of Carsales.com, an affiliate of Reynolds and Reynolds (Australia). Also included in 2004, was a $1,301 pretax gain on the sale of the net assets of Boatventures.com. In 2003, the company sold its investment in Credit Online and recorded a pretax gain of $1,369. The effective income tax rate was 37.3% in 2004, compared to 39.0% in 2003 and 29.6% in 2002. The effective income tax rate was impacted by a number of items during the last three years. In 2004, the tax rate reflected a $1,859 reduction of income taxes, primarily related to Ohio income tax legislation enacted during the quarter ended December 31, 2003. The 2004 tax rate was also lowered in the fourth quarter as an income tax reserve was reversed while the appropriate pretax reserve was recorded. Additionally, an adjustment was made during the fourth quarter to recognize the deductibility of all chief executive officer compensation in 2004. In the third quarter of 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 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. Fiscal year 2002 included the tax benefits described in the Reorganization and Special Items caption of this analysis. The increase in the adjusted 2004 effective income tax rate, compared to 2003 and 2002 adjusted effective income tax rates, resulted primarily from the effect of international tax rates related to the October 2003 purchase of Incadea GmbH. In 2005, the effective income tax rate is expected to increase to 42% because of the greater impact of international operations and estimated reduced benefits from stock option exercises. The following table has been presented to illustrate the effect of the items previously discussed on the company's effective income tax rates for 2004, 2003 and 2002 and to reconcile the adjusted effective income tax rates to the effective income tax rates. 12
Income Income Effective Before Tax Income Income Provision Tax Taxes (Benefit) Rate -------- -------- ------ 2004 Adjusted amounts $149,690 $59,313 39.6% Ohio income tax legislation (1,859) Record non-income tax liability (1,524) (596) Record interest on non-income tax liability (297) (115) Reverse reserve previously included in income tax liability (1,110) CEO compensation deduction adjustment (407) -------- ------- Reported amounts $147,869 $55,226 37.3% ======== ======= 2003 Adjusted amounts $180,028 $69,469 38.6% Ohio income tax legislation 2,210 State deferred income tax adjustment for federal bonus depreciation (1,451) -------- ------- Reported amounts $180,028 $70,228 39.0% ======== ======= 2002 Adjusted amounts $159,931 $61,912 38.7% State income tax audit settlements & related accrual adjustments and adjustments for amended tax returns 18 (5,872) Sale of equity interest in Kalamazoo Computer Group plc (12,274) (12,377) -------- ------- Reported amounts $147,675 $43,663 29.6% ======== =======
SOFTWARE SOLUTIONS
2004 vs. 2003 2003 vs. 2002 2004 2003 2002 Change Change -------- -------- -------- --------------- ---------------- Net sales and revenues $539,763 $540,572 $497,874 ($ 809) 0% $42,698 9% Gross profit $364,497 $361,385 $345,627 $ 3,112 1% $15,758 5% % of revenues 67.5% 66.9% 69.4% SG&A expenses $237,198 $224,563 $238,236 $12,635 6% ($13,673) -6% % of revenues 43.9% 41.6% 47.8% Operating income $127,299 $136,822 $107,391 ($ 9,523) -7% $29,431 27% % of revenues 23.6% 25.3% 21.6%
During the first quarter of 2004, the company changed its reporting segments to reflect the revised organizational structure of the company. In executing this realignment, the company changed its method of allocating certain revenues and expenses. It was not practical to restate financial statements for all changes. The estimated effect of these non-restated items was to increase Software Solutions revenues by $9,600 and operating income by $7,200 in 2004. The offsetting unfavorable effect of these changes was included in the Services segment. See Note 12 to the Consolidated Financial Statements for additional disclosures about segment reporting. 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. Once technological feasibility is established, software development costs are capitalized until the product is available for general release to customers. Upon general release of a software product, the capitalized software development costs are amortized to expense over the estimated economic life of the product. The following table summarized the impact of software capitalization and amortization. 13
2004 vs. 2003 2003 vs. 2002 2004 2003 2002 Change Change -------- ------- ------- --------------- ------------- Total R&D cash expenditures $ 93,000 $88,270 $88,370 $ 4,730 5% ($ 100) 0% Less capitalized software development costs 0 (16,270) (20,370) 16,270 -100% 4,100 -20% -------- ------- ------- ------- ------ Total R&D expenses (SG&A expenses) 93,000 72,000 68,000 21,000 29% 4,000 6% Software amortization expenses (cost of sales) 18,823 3,455 403 15,368 445% 3,052 757% -------- ------- ------- ------- ------ Total expenses $111,823 $75,455 $68,403 $36,368 48% $7,052 10% ======== ======= ======= ======= ======
Total R&D expenditures increased 5% in 2004 because of the acquisition of Incadea GmbH. However, as illustrated in the table, the overall impact of software development was much greater. In August 2003, RGS Suite, the company's next generation dealer management system was available for general release to customers. At this time the company stopped capitalizing software development costs related to RGS Suite and began amortizing these costs over seven years. Software amortization expenses related to RGS Suite were $13,094 in 2004 and $2,182 in 2003 and were recorded in cost of sales. As of September 30, 2004, the unamortized balance of software development costs related to RGS Suite was $76,378. The company believes that the capitalized costs will be recovered from cash flow from future product revenues. In 2004, net sales and revenues were essentially flat with 2003. Recurring software revenues increased 9% while one-time hardware and software sales declined 25%. Recurring revenues grew primarily because of growth in Reynolds Web Solutions revenues (which is converting to a recurring revenue model), higher ERA software support revenues primarily because of additional applications supported, growth of Contact Management revenues because of greater volume and the October 2003 acquisition of Third Coast Media. Recurring revenues also reflected the favorable benefit of the non-restated items previously mentioned. The company also implemented an annual price increase effective March 1, 2004 to offset inflation. One-time hardware and software sales declined from 2003 primarily as a result of fewer sales of ERA dealer management systems and related peripherals. One-time software sales also declined as a result of the transition of Reynolds Web Solutions to a recurring revenue model (the first half of 2003 was still predominately a one-time sales recognition model). One-time sales included $5,257 of revenues from Incadea GmbH, acquired in October 2003. Gross profit increased in 2004, because of the growth in higher margin recurring software revenues, which more than offset the decline in lower margin one-time hardware and software sales. Gross profit benefited in 2004, from the previously mentioned change in method of allocating certain revenues and expenses. Cost of sales also included the previously mentioned software amortization costs related to RGS Suite. In the fourth quarter of 2004, cost of sales also reflected $1,855 of additional software costs to write-off other capitalized software which will not be recovered by estimated future cash flows. SG&A expenses increased over last year primarily because of higher research and development expenses as the company did not capitalize any software development costs during fiscal year 2004. SG&A expenses benefited from lower selling expenses, primarily the result of the change in allocation methodology among reporting segments. SG&A expenses also included $2,292 of reorganization costs and about $2,700 of fourth quarter employee separation costs in 2004. See Note 2 to the Consolidated Financial Statements for a discussion of these reorganization costs. Operating income and operating margin declined in 2004, primarily because of higher R&D expenses and the effect of consolidation costs. In 2003, net sales and revenues increased 9% over 2002. Recurring software revenues increased 10% while one-time hardware and software sales increased 6%. Recurring revenues grew principally because of higher ERA software support revenues which increased primarily because of additional applications supported, growth in Network Services revenues and the addition of Internet Lead Management sales. Internet Lead Management resulted from a license agreement between the company and Microsoft in January 2003. The company also implemented an annual price increase effective March 1, 2003 to offset inflation. One-time hardware and software sales increased from 2002 primarily because of the higher sales of ERA dealer management systems and related peripherals. Partially offsetting this growth was a decline in one-time Reynolds Web Solutions revenues as a result of the transition to a recurring revenue model. Gross profit increased in 2003, because of the growth in higher margin recurring software revenues, which more than offset the decline in lower margin one-time hardware and 14 software sales. In 2003, cost of sales included higher costs from the 2003 revised allocation methodology which shifted certain costs from SG&A expenses to cost of sales. The new allocation methodology reduced gross margin by about one to two percentage points in 2003. The improved allocation of expenses was made possible by a new general ledger system. It was not practical to restate 2002 financial results. Cost of sales also included the ramp-up costs to transition support of Internet Lead Management to the company from Microsoft and software amortization costs related to RGS Suite. SG&A expenses declined in 2003 because of the 2003 change in cost allocation methodology, the reduced number of employees and 2002's special items previously discussed. Operating income and operating margin increased in 2003, primarily because of the increase in revenues. SERVICES
2004 vs. 2003 2003 vs. 2002 2004 2003 2002 Change Change -------- -------- -------- ------------------ ----------------- Net sales and revenues $244,410 $256,902 $269,277 ($12,492) -5% ($12,375) -5% Gross profit $ 65,769 $ 76,093 $ 90,934 ($10,324) -14% ($14,841) -16% % of revenues 26.9% 29.6% 33.8% SG&A expenses $ 93,087 $ 87,783 $ 94,132 $ 5,304 6% ($ 6,349) -7% % of revenues 38.1% 34.2% 35.0% Operating loss ($ 27,318) ($ 11,690) ($ 3,198) ($15,628) ($ 8,492) % of revenues -11.2% -4.6% -1.2%
During the first quarter of 2004, the company changed its reporting segments to reflect the revised organizational structure of the company. In executing this realignment, the company changed its method of allocating certain revenues and expenses. It was not practical to restate financial statements for all changes. The estimated effect of these non-restated items was to reduce Services revenues by $9,600 and operating income by $7,200 in 2004. The offsetting favorable benefit of these changes was included in the Software Solutions segment. See Note 12 to the Consolidated Financial Statements for additional disclosures about segment reporting. In 2004, Services revenues declined from 2003 primarily because of the aforementioned effect of non-restated items and lower Campaign Management Services revenues which resulted from the loss of a customer in April 2003. Partially offsetting this revenue decline was growth of professional services revenues. Gross profit declined from 2003, primarily because of the decline in revenues. Additionally, the company has incurred higher implementation costs associated with RGS Suite. Cost of sales included a $1,524 expense to record a non-income tax liability. This expense was offset by lower income taxes. Cost of sales also included $805 of software license costs as sales were discontinued. SG&A expenses included $1,535 of reorganization costs and about $1,200 of fourth quarter employee separation costs in 2004. The remainder of the increase in SG&A expenses over 2003 resulted primarily from a higher allocation of selling expenses in 2004. Operating income and operating margins reflected the decline in revenues and the aforementioned cost items. In 2003, Services revenues declined from 2002 as growth of credit applications revenues was more than offset by declines in Reynolds Consulting Services and Campaign Management Services. Reynolds Consulting Services revenues reflected a decline in the number of consulting days delivered and Campaign Management Services lower revenues resulted from the loss of a customer in April 2003. Gross profit and operating income declined in 2003, primarily because of the decline in revenues which resulting in lower utilization of consultants and lower fixed cost coverage for Campaign Management Services. In 2003, cost of sales also included higher costs from the 2003 revised allocation methodology which shifted certain costs from SG&A expenses to cost of sales. The new allocation methodology reduced gross margin by between one and two percentage points in 2003. The improved allocation of expenses was made possible by a new general ledger system. It was not practical to restate 2002 financial results. Also reflected in operating income were operating losses from the Networkcar, acquired in November 2002. 15 DOCUMENTS
2004 vs. 2003 2003 vs. 2002 2004 2003 2002 Change Change -------- -------- -------- ----------------- ------------------ Net sales and revenues $166,254 $174,239 $183,523 ($7,985) -5% ($ 9,284) -5% Gross profit $ 88,938 $ 94,233 $105,308 ($5,295) -6% ($11,075) -11% % of revenues 53.5% 54.1% 57.4% SG&A expenses $ 62,940 $ 64,266 $ 71,172 ($1,326) -2% ($ 6,906) -10% % of revenues 37.9% 36.9% 38.8% Operating income $ 25,998 $ 29,967 $ 34,136 ($3,969) -13% ($ 4,169) -12% % of revenues 15.6% 17.2% 18.6%
Documents sales declined in both 2004 and 2003 because of a decrease in the volume of business forms sold which more than offset the effect of annual price increases to offset inflation. Sales also declined about $2,229 in 2004 because of the company's decision to stop selling low-margin stock continuous and copy paper products in the second half of 2004. Excluding the impact of stock continuous and copy paper, sales declined 3% in 2004. The company expects the sales of certain documents to continue to decline as advances in technology continue. Gross profit declined in 2004 and 2003 because of the decline in sales. Gross margin declined in 2004 because of $1,596 of plant consolidation costs, partially offset by a $605 gain on the sale of the closed facility. These plant items reflected the consolidation of the Grand Prairie, Texas printing plant into the Celina, Ohio manufacturing facility and the subsequent sale of the Grand Prairie plant. See Note 2 to the Consolidated Financial Statements for a discussion of these reorganization costs. In 2003, gross margins declined primarily because of lower sales, which reduced fixed cost coverage and contributed to manufacturing inefficiencies. Gross margin 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 practical to restate 2002 results. SG&A expenses declined in 2004 and 2003 as a result of lower sales and the 2003 change in allocation methodology. SG&A expenses also included $1,625 of costs in 2004 to close the Grand Prairie manufacturing facility and reorganize the documents sales force. Operating income declined in 2004 and 2003 primarily because of the lower sales. In 2004, operating margin declined primarily because of $3,221 of plant consolidation and sales force reorganization costs. These costs were partially offset by a $605 gain on the sale of the Grand Prairie plant. In 2003, the decline in operating margin resulted primarily from the sales decline. FINANCIAL SERVICES
2004 vs. 2003 2003 vs. 2002 2004 2003 2002 Change Change ------- ------- ------- ----------------- ------------------ Net sales and revenues $31,814 $36,532 $41,709 ($4,718) -13% ($5,177) -12% Gross profit $24,550 $27,689 $31,065 ($3,139) -11% ($3,376) -11% % of revenues 77.2% 75.8% 74.5% SG&A expenses $ 6,551 $ 7,150 $ 8,141 ($ 599) -8% ($ 991) -12% % of revenues 20.6% 19.6% 19.5% Operating income $17,999 $20,539 $22,924 ($2,540) -12% ($2,385) -10% % of revenues 56.6% 56.2% 55.0%
Financial Services revenues declined in each of the past two years primarily because of lower average interest rates. Average receivable balances declined as a result of lower one-time sales in Software Solutions and Services and also contributed to the revenue decline in 2004 and 2003. Gross profit also declined in each of the past two years because of the declines in revenues. Interest rate spreads were 4.4% in 2004, 5.1% in 2003 and 4.9% in 2002. In 2004, the tax treatment for the majority of financing agreements changed from true leases to installment sales contracts. The impact of this change was to lower deferred income tax benefits. Assuming no change in the finance receivable balance, additional debt would be required in the future to finance the portfolio because of the reduced tax benefits. SG&A expenses declined each of the past two years primarily because of lower bad debt expenses. Bad debt expenses were $3,064 in 2004, $3,765 in 2003 and $4,450 in 2002. Operating income declined each year because of the declines in revenues. Operating margins remained fairly consistent over the three years. 16 LIQUIDITY AND CAPITAL RESOURCES AUTOMOTIVE SOLUTIONS CASH FLOWS (EXCLUDING FINANCIAL SERVICES) The company's balance of cash and equivalents was $116,792 at September 30, 2004. Cash flows from operating activities were $161,782 during 2004 and resulted primarily from net income, adjusted for non cash charges such as depreciation and amortization. Collections of both trade accounts receivable and other accounts receivable also contributed significantly to cash flow from operations. The reduction in trade receivable balances resulted from the implementation of new systems and processes. Cash flows used for investing activities included the company's purchases of Third Coast Media and Incadea GmbH for a combined $12,145. An additional $5,046 of Incadea debt repayments is included in financing activities. Cash flows used for investing activities also included capital expenditures of $33,783, partially offset by proceeds from asset sales of $16,052. Fiscal year 2005 capital expenditures (net of proceeds from asset sales) in the ordinary course of business are anticipated to be about $25,000, including about $15,000 for buildings. See the Shareholders' Equity caption 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 used to make 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 18.1% at September 30, 2004 and 18.4% at September 30, 2003. During the first quarter of 2004, the company repaid $5,046 of debt assumed in the purchase of Incadea GmbH. Remaining credit available under a committed revolving credit agreement was $138,000 at September 30, 2004. 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. On January 22, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the company, renewed a loan funding agreement, whereby Reyna Funding, L.L.C. may borrow funds using finance receivables purchased from Reyna Capital Corporation, also a consolidated affiliate of the company, as security for the loan. On May 19, 2004, the loan funding agreement was modified to increase the borrowing limit from $100,000 to $150,000. Interest is 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 Sheets. As of September 30, 2004, the balance outstanding on this facility was $100,000. The company has consistently produced operating cash flows sufficient to fund normal operations. These operating cash flows result from stable operating margins and a high percentage of recurring 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, 2004, 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. During the quarter ended March 31, 2004, Moody's Investors Service lowered the company's senior unsecured rating to Baa2 from Baa1. Standard and Poors maintained a rating of BBB. The company does not expect this action to have a material effect on the company's financial statements or its ability to access capital markets. On April 8, 2004, the company obtained a new $200,000 revolving credit agreement and terminated the old agreement. The new revolving credit agreement has a five-year term. As of September 30, 2004, the balance outstanding on this facility was $62,000. See Note 7 to the Consolidated Financial Statements for additional disclosures regarding the company's debt instruments. 17 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, 2004, 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 8 to the Consolidated Financial Statements. The company paid cash dividends of $28,961 in 2004, $30,024 in 2003 and $31,089 in 2002. Dividends per Class A common share were $.44 per share in each of 2004, 2003 and 2002. Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. The company has paid dividends every year since the company's initial public offering in 1961. The company repurchased $156,419 of Class A common shares in 2004, $127,871 in 2003 and $125,381 in 2002. Average prices paid per share were $27.35 in 2004, $26.99 in 2003 and $26.23 in 2002. As of September 30, 2004, the company could repurchase an additional 2,445 Class A common shares under existing board of directors' authorizations. 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 requires 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) 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 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 18 revenues for each product bears to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated economic life of the product, ranging from three to seven years. LONG-LIVED ASSETS The company has completed numerous business combinations over the years. These business combinations result in the acquisition of intangible assets and the recognition of goodwill on the company's Consolidated Balance Sheet. The company accounts for these assets under the provisions of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill not be amortized, but instead tested for impairment at least annually. The Statement also requires recognized intangible assets with finite useful lives to be amortized over their useful lives. Long-lived assets, goodwill and intangible assets are reviewed for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable from future cash flows. Future cash flows are forecasted based on management's estimates of future events and could be materially different from actual cash flows. If the carrying value of an asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. INCOME TAXES The company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the company's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the company's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the company's financial position or its results of operations. 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. The company's postretirement plans are described in the company's annual report on Form 10-K for the fiscal year ended September 30, 2004. 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, increasing the discount rate from 6.0% in fiscal year 2004 to 6.25% in fiscal year 2005. The expected long-term rate of return on plan assets was estimated at 8.25% for both 2004 and 2005. The company is not required to make minimum contributions to its postretirement plans in 2005, although the company may elect to make contributions. See Note 10 to the Consolidated Financial Statements for more detail disclosures regarding postretirement benefits, including relevant assumptions used to determine expense and future obligations. The company's net periodic pension expense was $26,161 in 2004, $21,405 in 2003 and $21,104 in 2002. The company's net periodic postretirement medical and life insurance expense was $4,750 in 2004, $5,118 in 2003 and $4,679 in 2002. As of the June 30, 2004 measurement date, a one percentage point increase in the assumed healthcare cost trend rate would increase net periodic postretirement medical and life insurance expense by $2,322 and a one percentage point decrease in the assumed healthcare cost trend rate would decrease net periodic postretirement medical and life insurance expense by $2,032. 19 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 192,131 $ 77,400 63,509 $51,222 Interest payments Automotive Solutions 9,065 4,110 4,955 Financial Services 13,466 5,824 5,873 1,769 Operating leases 31,029 7,420 9,268 5,443 $8,898 Computer services agreement 96,025 19,205 38,410 38,410 0 -------- -------- -------- ------- ------ Total contractual obligations $441,716 $113,959 $222,015 $96,844 $8,898 ======== ======== ======== ======= ======
Interest payments were estimated using interest rates in effect as of September 30, 2004. The net effect of interest rate swaps outstanding as of September 30, 2004, was considered in determining estimated interest payments. 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 3.6% in 2004. These interest rate swap agreements were designated as fair value hedges. The company does not use financial instruments for trading purposes. 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 2004, Reyna Funding, L.L.C. entered into $36,609 of interest rate swaps to replace maturing interest rate swaps. As of September 30, 2004, a one percentage point increase in interest rates would increase consolidated interest expense by $1,620 while a one percentage point decline in interest rates would reduce consolidated interest expense by $1,620. See Note 7 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 8% of net sales and revenues in 2004. In the conduct of its foreign operations, the company has intercompany sales, expenses and loans between the U.S. and its foreign operations and may receive dividends denominated in different currencies. These transactions expose the company to changes in foreign currency exchange rates. At September 30, 2004, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at September 30, 2004, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. CONTINGENCIES See Note 13 to the Consolidated Financial Statements for a discussion of the company's contingencies. ACCOUNTING STANDARDS See Note 15 to the Consolidated Financial Statements for a discussion of the effect of accounting standards that the company has not yet adopted. 20 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 November 3, 2004, 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 20). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 is contained in Item 15 of Part IV (page 25) 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 Acting 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 Acting 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 Acting Chief Executive Officer and Chief Financial Officer completed their evaluation. 21 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 2005 Annual Meeting of Shareholders captioned "PROPOSAL I - ELECTION OF DIRECTORS." 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, 2004, are:
NAME AGE POSITION - ------- --- -------- Philip A. Odeen 69 Chairman of the Board and Acting Chief Executive Officer Dale L. Medford 54 Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Director Douglas M. Ventura 44 Executive Vice President Operations, General Counsel and Secretary Michael J. Gapinski 54 Treasurer and Assistant Secretary Michael J. Berry 41 Senior Vice President, Solutions Management
A description of prior positions held by executive officers of the company within the past 5 years is as follows: Mr. Odeen has been Chairman of the Board and Acting Chief Executive Officer since July 2004; prior thereto, Chairman of TRW Inc. from 2001 until he retired in December 2002; prior thereto, Executive Vice President, TRW Inc., a technology manufacturing and services company, from 1998 to 2001. Mr. Medford has been Executive Vice President, Chief Financial Officer and Chief Administrative Officer since July 2004; prior thereto, Executive Vice President and Chief Financial Officer from January 2001 to July 2004; prior thereto, Vice President, Finance, and Chief Financial Officer. Mr. Ventura has been Executive Vice President Operations, General Counsel and Secretary since July 2004; prior thereto, Vice President Corporate and Business Development, General Counsel and Secretary from October 2003 to July 2004; 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. Gapinski has been Treasurer and Assistant Secretary with the company for more than five years. Mr. Berry has been Senior Vice President, Solutions Management since August 2004; prior thereto, Senior Vice President Reynolds' Services Group since 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. 22 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 2005 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 Officer, 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 2005 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, 2004 is incorporated herein by reference to the section of the company's Proxy Statement for its 2005 Annual Meeting of Shareholders captioned "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The following table sets forth certain information as of September 30, 2004, 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)
Number of securities Weighted-average Number of securities remaining to be issued upon exercise price of available for future issuance exercise of outstanding outstanding options, under equity compensation options, warrants and warrants and rights plans (excluding securities Plan Category rights (a) (b) reflected in column (a)). - --------------------------- ----------------------- -------------------- ------------------------------ Equity compensation plans approved by shareholders 6,113 $22.02 4,006(1) Equity compensation plans not approved by shareholders 3,399 $21.13 (2) ----- ----- TOTAL 9,512 $21.35 4,006 ===== =====
(1) The total number of Class A Common Shares ("Shares") authorized for issuance under the company's 2004 Executive Stock Incentive Plan and the 2004 REYShare Plus Plan (which were approved by the company's shareholders) is 3,300 and 1,100 Shares, respectively. See Note 9 to the Consolidated Financial Statements on page 50 for additional information regarding the company's equity compensation plans. (2) Effective with the shareholder approval of the 2004 REYShare Plus Plan, no additional shares will be awarded from non-shareholder approved plans. 23 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 2001 Shares 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. Effective with the approval of the 2004 REYShare Plus Plan at the 2004 Annual Meeting of Shareholders, no further grants will be made under the 2001 Shares Plan. 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. 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 2005 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 2005 Annual Meeting of Shareholders captioned "REPORT OF THE AUDIT COMMITTEE." 24 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 34-58. Statements of Consolidated Income - For The Years Ended September 30, 2004, 2003 and 2002 Consolidated Balance Sheets - September 30, 2004 and 2003 Statements of Consolidated Shareholders' Equity and Comprehensive Income - For The Years Ended September 30, 2004, 2003 and 2002 Statements of Condensed Consolidated Cash Flows - For the Years Ended September 30, 2004, 2003 and 2002 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, 2004 ARE ATTACHED HERETO: Schedule II Valuation Accounts Page 59 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.
25
Exhibit No. Item - ----------- ---- (4)(c) Appointment of Wells Fargo Bank, N.A. dated October 26, 2004 as successor Rights Agent to the Amended and Restated Rights Agreement dated December 1, 2001. (9) Not applicable. (10)(a)* Amended and Restated Employment Agreement with Lloyd G. Waterhouse, as of September 2, 2003; incorporated by reference to Exhibit (10)(a) to Form 10-K for the fiscal year ended September 30, 2003. (10)(b)* Agreement with Lloyd G. Waterhouse, Former Chief Executive Officer, Chairman and President, dated July 29, 2004; incorporated by reference to Exhibit 10.1 to the company's Form 10-Q dated August 13, 2004 filed with Securities and Exchange Commission. (10)(c)* 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)(d)* 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)(e)* Amended and Restated Change in Control Agreement dated as of November 11, 2003 between the company and Douglas M. Ventura; incorporated by reference to Exhibit 10(iii)(a) to the company's Form 10-Q dated February 13, 2004 filed with the Securities and Exchange Commission. (10)(f)* Amended and Restated Change in Control Agreement dated as of November 11, 2003 between the company and Dale L. Medford; incorporated by reference to Exhibit 10(iii)(b) to the company's Form 10-Q dated February 13, 2004 filed with the Securities and Exchange Commission. (10)(g)* Form of Retention Agreement, effective August 16, 2004, between the company and each of Messrs. Medford, Ventura, Berry and eleven other officers. (10)(h)* Form of Change in Control Agreement, effective October 1, 2004, between the company and each of Messrs. Medford, Ventura, Gapinski, Berry, and four other officers; incorporated by reference to Exhibit 10.1 to the company's Form 8-K dated October 6, 2004 filed with the Securities and Exchange Commission. (10)(i)* 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)(j)* 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)(k)* 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)(l)* 1996 Shares Plan, adopted August 6, 1996; incorporated by reference to Exhibit 4(e) to Form S-8 filed on August 13, 1999. (10)(m)* Amended and Restated 2004 Executive Stock Incentive Plan effective November 8, 2004. (10)(n) Forms of Stock Incentive Agreements to be issued by the company to executive officers and other participants under the Amended and Restated 2004 Executive Stock Incentive Plan effective November 8, 2004 and its predecessor effective February 12, 2004. (10)(o)* 2001 Shares Plan, adopted August 7, 2001; incorporated by reference to Exhibit 4(g) to Form S-8 filed on October 1, 2001. (10)(p)* 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)(q)* 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.
26
Exhibit No. Item - ----------- ---- (10)(r)* The Reynolds and Reynolds Company Retirement Plan Revised and Restated effective October 1, 1997; incorporated by reference to (10)(bb) to Form 10-K for the fiscal year ended September 30, 2003 . (10)(s)* The Reynolds and Reynolds Company Supplemental Retirement Plan Restatement dated October 1, 2002. (10)(t)* 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)(u)* Resolution of the Board of Directors and General Form of Amendment dated December 1, 1989 to the Deferred Compensation Agreements between the company and Dale L. Medford; incorporated by reference to Exhibit (10)(fff) to Form 10-K for the fiscal year ended September 30, 1989. (10)(v)* 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. (10)(w)* 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)(x)* Amendment No. 3 to Loan Funding Agreement dated May 19, 2004 among Reyna Funding, L.L.C., Jupiter Securitization Corporation and Bank One, N.A.; incorporated by reference to Exhibit 10.2 to the company's Form 10-Q dated August 13, 2004 filed with the Securities and Exchange Commission. (10)(y)* Credit Agreement dated April 4, 2004 among the company, Reyna Capital Corporation, Credit Lyonnais New York Branch and JPMorgan Chase Bank; incorporated by reference to Exhibit 10.3 to the company's Form 10-Q dated August 13, 2004 filed with the Securities and Exchange Commission. (10)(z) 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)(aa) 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 Registered Public Accounting Firm (24) Not Applicable
27
Exhibit No. Item - ----------- ---- (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, 2004, and first quarter to date, the following reports were filed: On July 7, 2004, the company filed a report on Form 8-K that included the company's July 7, 2004 press release announcing changes to its executive management. On July 21, 2004, the company filed a report on Form 8-K that included the company's July 7, 2004 press release announcing financial results for the quarter ended June 30, 2004. On October 6, 2004, the company filed a report on Form 8-K disclosing that effective October 1, 2004, the Company entered into a Change in Control Agreement (the 'Agreement') with each of its executive officers (except for Mr.Philip A. Odeen, Chairman and Acting CEO) and certain other officers of the Company in substantially the form of Exhibit 10.1 to the form. On November 3, 2004, the company filed a report on Form 8-K to update previously filed cautionary statements identifying important factors that could cause the company's actual results to differ materially from those projected in forward-looking statements that may be or have been made by or on behalf of the company from time to time in the company's SEC filings, press releases, and other oral or written announcements. On November 3, 2004, the company filed a report on Form 8-K that included the company's November 3, 2004 press release announcing financial results for the quarter and year ended September 30, 2004. On November 30, 2004, the company filed a report on Form 8-K disclosing the forms of incentive stock agreements awards granted to certain executives and members of the board of directors pursuant to the 2004 Executive Stock Incentive Plan. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. Please refer to Part IV, Item 15(a)(3) beginning on page 25. (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. 28 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 Executive Vice President Operations, General Counsel and Secretary Date: December 13, 2004 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 13, 2004 By /s/ PHILIP A. ODEEN -------------------------------- PHILIP A. ODEEN Chairman and Acting Chief Executive Officer (Principal Executive Officer) Date: December 13, 2004 By /s/ DALE L. MEDFORD -------------------------------- DALE L. MEDFORD Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer), Chief Administrative Officer and Director Date: December 13, 2004 By /s/ STEPHANIE W. BERGERON -------------------------------- STEPHANIE W. BERGERON, Director Date: December 13, 2004 By /s/ DR. DAVID E. FRY ----------------------------------- DR. DAVID E. FRY, Director Date: December 13, 2004 By /s/ RICHARD H. GRANT, III ----------------------------------- RICHARD H. GRANT, III, Director Date: December 13, 2004 By /s/ IRA D. HALL ----------------------------------- IRA D. HALL, Director 29 Date: December 13, 2004 By /s/ CLEVE L. KILLINGSWORTH, JR. ----------------------------------- CLEVE L. KILLINGSWORTH, JR. Director Date: December 13, 2004 By /s/ EUSTACE W. MITA ----------------------------------- EUSTACE W. MITA, Director Date: December 13, 2004 By /s/ DONALD K. PETERSON ----------------------------------- DONALD K. PETERSON, Director Date: December 13, 2004 By /s/ RENATO ZAMBONINI ----------------------------------- RENATO ZAMBONINI, Director 30 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, 2004 The Reynolds and Reynolds Company Dayton, Ohio 31 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 upon 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, and 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 registered public accounting firm, 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 standards of the Public Company Accounting Oversight Board (United States) 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 registered public accounting firm. They discuss the overall audit scope and the specific audit plans with the independent registered public accounting firm and the internal auditors. This committee also meets regularly (separately and jointly) with the independent registered public accounting firm, 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/ PHILIP A. ODEEN /s/ DALE L. MEDFORD - ------------------- ------------------- Acting Chief Executive Officer and Chairman Executive Vice President, Chief Financial Officer and Chief Administrative Officer 32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004 and 2003, 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, 2004. 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 standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004, 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 4 to the 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. As discussed in Note 9 to the financial statements in 2004, the Company elected to change its method of accounting for stock based compensation to conform to Statement of Financial Accounting Standards No. 123. DELOITTE & TOUCHE LLP Dayton, Ohio December 8, 2004 33 STATEMENTS OF CONSOLIDATED INCOME (In thousands except per share data)
For The Years Ended September 30 2004 2003 2002 - -------------------------------- -------- ----------- -------- Net Sales and Revenues Software $539,763 $ 540,572 $497,874 Services 244,410 256,902 269,277 Documents 166,254 174,239 183,523 Financial services 31,814 36,532 41,709 -------- ----------- -------- Total net sales and revenues 982,241 1,008,245 992,383 -------- ----------- -------- Cost of sales Software 175,266 179,187 152,247 Services 178,641 180,809 178,343 Documents 77,316 80,006 78,215 Financial services 7,264 8,843 10,644 -------- ----------- -------- Total cost of sales 438,487 448,845 419,449 -------- ----------- -------- Gross profit 543,754 559,400 572,934 Selling, general and administrative expenses 399,776 383,762 411,681 -------- ----------- -------- Operating Income 143,978 175,638 161,253 -------- ----------- -------- Other Charges (Income) Interest expense 4,935 3,842 4,126 Interest income (2,005) (2,705) (3,848) Equity in net (income) losses of affiliated companies (3,148) (2,306) 13,201 Other - net (3,673) (3,221) 99 -------- ----------- -------- Total other charges (income) (3,891) (4,390) 13,578 -------- ----------- -------- Income Before Income Taxes 147,869 180,028 147,675 Income Taxes 55,226 70,228 43,663 -------- ----------- -------- Income Before Cumulative Effect of Accounting Change 92,643 109,800 104,012 Cumulative Effect of Accounting Change (36,563) -------- ----------- -------- Net Income $ 92,643 $ 109,800 $ 67,449 ======== =========== ======== Basic Earnings Per Common Share Income before cumulative effect of accounting change $ 1.40 $ 1.61 $ 1.47 Cumulative effect of accounting change ($ .52) Net income $ 1.40 $ 1.61 $ .95 Average number of common shares outstanding 66,040 68,407 70,692 Diluted Earnings Per Common Share Income before cumulative effect of accounting change $ 1.37 $ 1.56 $ 1.42 Cumulative effect of accounting change ($ .50) Net income $ 1.37 $ 1.56 $ .92 Average number of common shares and equivalents outstanding 67,815 70,583 73,112
See Notes to Consolidated Financial Statements. 34 CONSOLIDATED BALANCE SHEETS (In thousands)
September 30 2004 2003 - ------------ ----------- ---------- AUTOMOTIVE SOLUTIONS ASSETS Current Assets Cash and equivalents $ 116,792 $ 105,829 ----------- ---------- Trade accounts receivable (less allowance for doubtful accounts: 2004--$6,404; 2003--$5,253) 102,293 118,694 ----------- ---------- Other accounts receivables 3,637 21,063 ----------- ---------- Inventories Finished products 12,420 11,921 Work in process 314 295 Raw materials and supplies 109 216 ----------- ---------- Total inventories 12,843 12,432 ----------- ---------- Deferred income taxes 14,650 11,910 ----------- ---------- Prepaid expenses and other assets 25,039 19,763 ----------- ---------- Total current assets 275,254 289,691 ----------- ---------- Property, Plant and Equipment Land and improvements 9,527 11,447 Buildings and improvements 89,397 119,168 Computer equipment 125,230 123,383 Machinery and equipment 41,714 41,435 Furniture and other 40,541 44,124 Construction in progress 7,994 1,808 ----------- ---------- Total property, plant and equipment 314,403 341,365 Less accumulated depreciation 135,956 156,674 ----------- ---------- Net property, plant and equipment 178,447 184,691 ----------- ---------- Intangible Assets Goodwill 48,366 41,728 Software licensed to customers 83,757 94,472 Acquired intangible assets 35,315 37,731 Other 7,490 8,531 ----------- ---------- Total intangible assets 174,928 182,462 ----------- ---------- Other Assets 79,426 89,498 ----------- ---------- Total Automotive Solutions Assets 708,055 746,342 ----------- ---------- FINANCIAL SERVICES ASSETS Cash 901 722 Net Finance Receivables 351,649 394,292 Other Assets 262 480 ----------- ---------- Total Financial Services Assets 352,812 395,494 ----------- ---------- TOTAL ASSETS $ 1,060,867 $1,141,836 =========== ==========
35 CONSOLIDATED BALANCE SHEETS (In thousands)
September 30 2004 2003 - ------------ ----------- ---------- AUTOMOTIVE SOLUTIONS LIABILITIES Current Liabilities Current portion of long-term debt Accounts payable Trade $ 35,191 $ 38,212 Other 6,122 7,705 Accrued liabilities Compensation and related items 28,230 32,195 Income taxes 14,838 10,926 Other 27,093 21,041 Deferred revenues 27,871 33,704 ----------- ---------- Total current liabilities 139,345 143,783 ----------- ---------- Long-Term Debt 103,512 106,912 ----------- ---------- Other Liabilities Pensions 32,232 71,709 Postretirement medical 43,614 44,095 Other 6,137 2,648 ----------- ---------- Total other liabilities 81,983 118,452 ----------- ---------- Total Automotive Solutions Liabilities 324,840 369,147 ----------- ---------- FINANCIAL SERVICES LIABILITIES Notes Payable 192,131 198,768 Deferred Income Taxes 68,530 90,503 Other Liabilities 5,549 8,507 ----------- ---------- Total Financial Services Liabilities 266,210 297,778 ----------- ---------- SHAREHOLDERS' EQUITY Capital Stock Preferred Class A common - shares issued and outstanding: 64,126 in 2004, 66,658 in 2003 345,914 299,310 Class B common - convertible to Class A common; shares issued and outstanding: 14,000 in 2004, 15,000 in 2003 438 469 Accumulated Other Comprehensive Losses (13,739) (32,446) Retained Earnings 137,204 207,578 ----------- ---------- Total Shareholders' Equity 469,817 474,911 ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,060,867 $1,141,836 =========== ==========
See Notes to Consolidated Financial Statements. 35 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands except per share data)
For The Years Ended September 30 2004 2003 2002 - -------------------------------- --------- --------- -------- Capital Stock Class A common Balance, beginning of year $ 299,310 $ 246,052 $ 167,356 Transition effect from expensing stock-based compensation 17,033 Capital stock issued 53,589 49,692 50,368 Converted from Class B common 31 31 125 Capital stock repurchased (22,363) (14,971) (11,374) Capital stock retired (664) (291) (951) Stock-based compensation 11,584 14,833 18,011 Tax benefits from stock-based compensation 4,427 3,964 5,484 --------- --------- --------- Balance, end of year 345,914 299,310 246,052 --------- --------- --------- Class B common Balance, beginning of year 469 500 625 Converted to Class A common (31) (31) (125) --------- --------- --------- Balance, end of year 438 469 500 --------- --------- --------- Accumulated Other Comprehensive Income (Losses) Balance, beginning of year (32,446) (14,234) (9,547) Foreign currency translation 1,599 3,757 (186) Minimum pension liability, 15,751 (23,002) (3,679) Net unrealized income (losses) on derivative contracts 1,357 1,033 (822) --------- --------- --------- Balance, end of year (13,739) (32,446) (14,234) --------- --------- --------- Retained Earnings Balance, beginning of year 207,578 240,702 318,349 Net income 92,643 109,800 67,449 Cash dividends Class A common (2004--$.44 PER SHARE; 2003--$.44 per share; 2002--$.44 per share) (28,647) (29,672) (30,715) Class B common (2004--$.022 PER SHARE; 2003--$.022 per share; 2002--$.022 per share) (314) (352) (374) Capital stock repurchased (134,056) (112,900) (114,007) --------- --------- --------- Balance, end of year 137,204 207,578 240,702 --------- --------- --------- Total Shareholders' Equity $ 469,817 $ 474,911 $ 473,020 ========= ========= ========= Comprehensive Income (Losses) Net income $ 92,643 $ 109,800 $ 67,449 Foreign currency translation 1,599 3,757 (186) Minimum pension liability, net of income tax provision (benefit) of $10,580 in 2004, ($15,072) in 2003 and ($2,349) in 2002 15,751 (23,002) (3,679) Net unrealized income (losses) on derivative contracts, net of income tax provision (benefit) of $915 in 2004, $581 in 2003 and ($490) in 2002 1,357 1,033 (822) --------- --------- --------- Total comprehensive income $ 111,350 $ 91,588 $ 62,762 ========= ========= =========
See Notes to Consolidated Financial Statements. 36 STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (In thousands)
For The Years Ended September 30 2004 2003 2002 - -------------------------------- --------- --------- --------- AUTOMOTIVE SOLUTIONS Cash Flows Provided by Operating Activities $ 161,782 $ 131,972 $ 158,809 --------- --------- --------- Cash Flows Provided by (Used for) Investing Activities Business combinations (12,145) (11,714) (5,971) Capital expenditures (33,783) (57,810) (37,067) Net proceeds from sales of assets 16,052 9,570 9,674 Capitalization of software licensed to customers (16,270) (20,370) Repayments from financial services 15,188 5,584 53,817 --------- --------- --------- Net cash provided by (used for) investing activities (14,688) (70,640) 83 --------- --------- --------- Cash Flows Provided by (Used for) Financing Activities Principal payments on debt (5,275) (6,061) (6,869) Cash dividends paid (28,961) (30,024) (31,089) Capital stock issued 52,925 49,401 49,417 Capital stock repurchased (156,419) (127,871) (125,381) --------- --------- --------- Net cash used for financing activities (137,730) (114,555) (113,922) --------- --------- --------- Effect of Exchange Rate Changes on Cash 1,599 3,757 (186) --------- --------- --------- Increase (Decrease) in Cash and Equivalents 10,963 (49,466) 44,784 Cash and Equivalents, Beginning of Year 105,829 155,295 110,511 --------- --------- --------- Cash and Equivalents, End of Year $ 116,792 $ 105,829 $ 155,295 ========= ========= ========= FINANCIAL SERVICES Cash Flows Provided by Operating Activities $ 3,844 $ 18,710 $ 19,457 --------- --------- --------- Cash Flows Provided by (Used for) Investing Activities Finance receivables originated (131,275) (145,043) (154,250) Collections on finance receivables 149,435 150,488 175,064 --------- --------- --------- Net cash provided by investing activities 18,160 5,445 20,814 --------- --------- --------- Cash Flows Provided by (Used for) Financing Activities Additional borrowings 12,550 100,000 Principal payments on debt (19,187) (18,484) (86,260) Repayments to automotive solutions (15,188) (5,584) (53,817) --------- --------- --------- Net cash used for financing activities (21,825) (24,068) (40,077) --------- --------- --------- Increase in Cash and Equivalents 179 87 194 Cash and Equivalents, Beginning of Year 722 635 441 --------- --------- --------- Cash and Equivalents, End of Year $ 901 $ 722 $ 635 ========= ========= =========
See Notes to Consolidated Financial Statements. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars and shares in thousands, except for 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, Services 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 documents inventories are determined by the last-in, first-out (LIFO) method. At September 30, 2004 and 2003, LIFO inventories were $4,587 and $4,305, respectively. These inventories, if determined by the first-in, first-out (FIFO) method, would increase by $3,536 in 2004 and $3,617 in 2003. 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. 38 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
In August 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. On July 1, 2003, the company purchased the aforementioned office building from the trust for cash of $28,800 and terminated the lease agreement. 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. 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. Amortization expense for software licensed to customers was $18,823 in 2004, $3,455 in 2003 and $403 in 2002. As of September 30, 2004 and 2003, accumulated amortization was $55,455 and $37,748, respectively. 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. SALE OF 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 39 of $12,377 related to the sale of these shares, included in the provision for income taxes on the statement of consolidated income. REVENUE RECOGNITION AUTOMOTIVE SOLUTIONS Sales of computer hardware and documents 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 and installation, 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. 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, 2004, future minimum lease payments relating to operating lease agreements were $31,029 with annual payments of, $7,420 in 2005, $5,223 in 2006, $4,045 in 2007, $2,944 in 2008 and $2,499 in 2009. Rental expenses were $19,896 in 2004, $19,630 in 2003 and $21,814 in 2002. COMMITMENTS 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. Research and development consist primarily of software development associated with new products, enhanced features and functionality, and compliance updates to existing products. Research and development costs were $93,000 in 2004, $72,000 in 2003 and $68,000 in 2002. 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. The company anticipates that any potential U.S. income tax cost from foreign earnings not permanently reinvested would be offset by foreign tax credits. Undistributed earnings of the foreign subsidiaries at September 30, 2004, were $21,013. 40 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 and restricted stock awards.
2004 2003 2002 ------ ------ ------ Average number of common shares outstanding (used to determine basic earnings per common share) 66,040 68,407 70,692 Effect of employee stock options and restricted stock awards 1,775 2,176 2,420 ------ ------ ------ Average number of common shares and equivalents outstanding (used to determine diluted earnings per common share) 67,815 70,583 73,112 ====== ====== ======
Employee stock options outstanding and restricted stock awards to acquire 1,244 shares in 2004, 608 shares in 2003 and 614 shares in 2002 were not included in the computation of diluted earnings per common share because the effect of either the options' exercise price or the unamortized expense of restricted stock awards, in relation to the average market price of the common shares would be antidilutive. RECLASSIFICATIONS Certain reclassifications were made to prior years' consolidated financial statements to conform with the presentation used in 2004. In 2003, the company changed its allocation methodology for certain expenses, the effect of which was to report certain expenses as costs 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 2002. It was not practical to restate 2002 financial statements. 2. REORGANIZATION COSTS On October 2, 2003, the company announced the consolidation of its automotive Documents printing plant, located in Grand Prairie, Texas, into the company's Celina, Ohio manufacturing facility. All employees located in Texas were offered the opportunity to accept a position in the Ohio facility. Those not accepting positions in Ohio were offered severance and outplacement services. Grand Prairie document production ceased in December 2003 and 72 positions were eliminated. During the first six months of fiscal year 2004, the company also reorganized the Documents sales force, eliminating 37 positions, and eliminated 121 additional positions in Software Solutions development, Services and administration. Through September 30, 2004, the company has incurred expense of $7,054 before taxes or $.06 per share after taxes for severance, outplacement, relocation and other plant consolidation efforts and eliminated 230 positions. The following table summarizes reorganization costs recognized and payments made by the company through September 30, 2004. 41
Software Solutions Services Documents Total --------- -------- --------- ------ Cost of Sales Employee termination benefits $ 14 $ 15 $ 817 $ 846 Other direct expenses 786 786 ------- ------- ------ ------ Total cost of sales 14 15 1,603 1,632 ------- ------- ------ ------ SG&A Expenses Employee termination benefits 1,714 1,164 1,070 3,948 Lease obligations 379 244 9 632 Other direct expenses 185 127 530 842 ------- ------- ------ ------ Total SG&A expenses 2,278 1,535 1,609 5,422 ------- ------- ------ ------ Total Reorganization Expenses 2,292 1,550 3,212 7,054 Payments (2,037) (1,350) (3,088) (6,475) ------- ------- ------ ------ Balance as of September 30, 2004 $ 255 $ 200 $ 124 $ 579 ======= ======= ====== ======
The company has completed all actions associated with this reorganization. The September 30, 2004 liability represents scheduled future payments to be paid over the remaining severance or lease period. The remaining lease obligation will expire in December 2005. 3. BUSINESS COMBINATIONS On October 1, 2003, the company purchased the outstanding shares of Incadea GmbH, a provider of global automotive retailing software solutions. Privately-held Incadea, based in Raubling, Germany, had annual revenues of about $6,000. The purchase price of $6,181 was paid with cash from existing balances. During the first quarter of fiscal year 2004, the company also repaid $5,046 of debt assumed in the purchase of Incadea GmbH. The results of Incadea's operations have been included in the company's financial statements since the acquisition. At September 30, 2004, the company has recorded goodwill of $6,124 based on the allocation of the purchase price. An independent appraisal firm was used to assist the company in determining the fair values of intangible assets. On October 1, 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, had annual revenues of about $5,000. The purchase price of $5,464 was paid with cash from existing balances. In April 2004, the company paid an additional $500 of purchase price based on achievement of specified operating results. Under terms of the purchase agreement, the company may be required to make additional payments of up to $1,800 through 2006, contingent on the achievement of certain operating results of the business purchased. The results of Third Coast Media's operations have been included in the company's financial statements since the acquisition. At September 30, 2004 the company has recorded tax deductible goodwill of $3,149 based on the allocation of the purchase price. An independent appraisal firm was used to assist the company in determining the fair values of intangible assets. 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 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. An independent appraisal firm was used to assist the company in determining the fair values of intangible assets. During fiscal year 2004, the company adjusted tax benefits and recorded a deferred tax asset of $2,585 and decreased goodwill by $2,585. 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.com 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.com 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 management with the assistance of an independent appraisal firm. Based on this valuation, the company adjusted the purchase price allocation to increase computer equipment by $200, increase capitalized software by $100, reduce non-compete 42 agreement intangible assets by $2,400, decrease deferred tax assets by $765 and increase goodwill by $2,865. BoatVentures.com 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 September 2004, the company sold the net assets of BoatVentures.com for $2,100 and recorded a gain of $1,300. COMPONENTS OF PURCHASE PRICES
2004 2003 2002 ------- ------- ------ Cash (net of cash and equivalents acquired) $11,645 $11,714 $5,971 Contingent cash payments 500 ------- ------- ------ Totals $12,145 $11,714 $5,971 ======= ======= ======
4. GOODWILL AND ACQUIRED INTANGIBLE ASSETS 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 estimated useful lives and reviewed for impairment in accordance with SFAS 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 periods after October 1, 2001. This statement also required certain intangible assets that did not meet the criteria for recognition apart from goodwill, to be subsumed into goodwill. During fiscal year 2002, 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. In 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 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 assist the company in determining the fair value and allocate this fair value among assets and liabilities. Based on this analysis, two reporting units within the Services 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. The company performs its annual goodwill impairment tests as of July 31 each year, using a consistent methodology. In 2003, the company identified and recorded an impairment loss of $302 within the Software 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. In 2004, the company adjusted tax benefits related to Networkcar and recorded a deferred tax asset of $2,585 and decreased goodwill by $2,585. In September 2004, the company decreased goodwill by $50 in connection with the sale of the net assets of BoatVentures.com. The value of the goodwill write-off was based on the fair value of BoatVentures.com compared to the fair value of the Software Solutions segment. 43 ACQUIRED INTANGIBLE ASSETS
Weighted Average Gross Accumulated Life Amount Amortization (years) ------- ------------ -------- AS OF SEPTEMBER 30, 2004 Contractual customer relationship $33,100 $ 7,310 20 Trademarks 6,263 1,364 19 Other 7,006 2,380 10 ------- ------- Total $46,369 $11,054 18 ======= ======= AS OF SEPTEMBER 30, 2003 Contractual customer relationship $33,100 $ 5,655 20 Customer contract 17,700 16,493 4 Trademarks 5,900 1,008 20 Other 6,449 2,262 11 ------- ------- Total $63,149 $25,418 14 ======= =======
Aggregate amortization expense was $3,845 in 2004, $7,233 in 2003 and $7,021 in 2002. As of September 30, 2004, estimated annual amortization expenses were $2,620 in 2005, $2,620 in 2006, $2,470 in 2007, $2,470 in 2008 and $2,470 in 2009. GOODWILL
Software Solutions Services Documents Totals --------- -------- --------- ------ Balance as of September 30, 2002 $19,654 $ 6,468 $2,877 $28,999 Business combinations 2,865 10,166 13,031 Impairment loss (302) (302) ------- ------- ------ ------- Balance as of September 30, 2003 22,217 16,634 2,877 41,728 Business combinations 9,273 9,273 Divestiture (50) (50) Adjustment (2,585) (2,585) ------- ------- ------ ------- Balance as of September 30, 2004 $31,440 $14,049 $2,877 $48,366 ======= ======= ====== =======
At September 30, 2004 and 2003, accumulated amortization was $53,837 and $53,812, respectively. 5. INCOME TAXES PROVISION FOR INCOME TAXES
2004 2003 2002 ---- ---- ---- Current Federal $59,242 $34,706 $24,728 State and local 10,803 9,067 (3,449) Foreign 2,086 3,103 1,600 Deferred (16,905) 23,352 20,784 ------- ------- ------- Provision for income taxes $55,226 $70,228 $43,663 ======= ======= ======= Income taxes paid (net of refunds) $63,700 $54,000 $22,321 ======= ======= =======
44 RECONCILIATION OF INCOME TAX RATES
2004 2003 2002 Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Statutory federal income taxes $51,754 35.0% $63,010 35.0% $51,686 35.0% State and local taxes less federal income tax effect 3,341 2.3 7,318 4.1 6,234 4.2 State tax benefits less federal income tax effect (5,872) (4.0) Sale of Kalamazoo shares (7,746) (5.2) Other 131 (100) (.1) (639) (0.4) ------- ---- ------- ---- ------- ---- Provision for income taxes $55,226 37.3% $70,228 39.0% $43,663 29.6% ======= ==== ======= ==== ======= ====
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 2004 2003 - ------------ ------- ------- Deferred income tax assets Postretirement medical $18,298 $18,811 Pensions 10,170 25,721 Stock-based compensation 17,127 17,781 Receivables allowances 7,425 5,344 Non deductible state provision 4,096 3,818 Other 6,813 5,740 Deferred income tax liabilities Depreciation and amortization (28,707) (26,677) Other (1,112) (1,355) ------- ------- Totals 34,110 49,183 Current 14,650 11,910 ------- ------- Noncurrent $19,460 $37,273 ======= =======
FINANCIAL SERVICES DEFERRED INCOME TAX LIABILITIES Financial Services deferred income tax liabilities resulted from temporary differences from financing the company's computer systems sales. 6. FINANCIAL SERVICES INCOME SUMMARY
2004 2003 2002 ------- ------- ------- Revenues $31,814 $36,532 $41,709 Cost of sales - interest expense 7,264 8,843 10,644 ------- ------- ------ Gross profit 24,550 27,689 31,065 Selling, general and administrative expenses 6,551 7,150 8,141 ------- ------- ------- Operating income $17,999 $20,539 $22,924 ======= ======= =======
NET FINANCE RECEIVABLES
September 30 2004 2003 - ------------ ---- ---- Product financing receivables $372,648 $423,770 Unguaranteed residual values 29,687 36,552 Allowance for doubtful accounts (6,701) (6,705) Unearned interest income (47,064) (62,414) Other 3,079 3,089 -------- -------- Totals $351,649 $394,292 ======== ========
As of September 30, 2004, product financing receivables due for each of the next five years were $143,326 in 2005, $104,332 in 2006, $69,865 in 2007, $40,423 in 2008 and $14,205 in 2009. 45 ALLOWANCE FOR DOUBTFUL ACCOUNTS
2004 2003 ------ ------ Balance, beginning of year $6,705 $6,184 Provisions Financial services 3,064 3,765 Automotive solutions 540 540 Net losses (3,608) (3,784) ------ ------ Balance, end of year $6,701 $6,705 ====== ======
7. 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 $3,621 at September 30, 2004, and $7,069 at September 30, 2003, and was included in Automotive Solutions' other assets on the consolidated balance sheets. The adjustments to record the net change in the fair value of fair value hedges and related debt during the periods presented were recorded in interest expense. All existing fair value hedges were 100% effective. As a result, there was no current impact to earnings because of hedge ineffectiveness.
Notional Amounts September 30, 2004 Notes Swaps - ------------------ -------- -------- Fixed rate notes, $100,000 face value, maturing in 2007 $103,512 $100,000 Weighted average interest rate 7.0% Weighted average pay rate 3.6% Weighted average receive rate 7.0% -------- -------- Totals 103,512 100,000 Current portion -------- -------- Long-term portion $103,512 $100,000 ======== ======== September 30, 2003 - ------------------ 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 ======== ========
Loan agreements require minimum interest coverage and consolidated leverage ratios. At September 30, 2004, the company was in compliance with these loan covenants. The fair values of Automotive Solutions' financing arrangements were $103,512 at September 30, 2004, and $106,912 at September 30, 2003. At September 30, 2004, debt maturities were $100,000 in 2007. Interest paid was $4,529 in 2004, $4,076 in 2003 and $5,622 in 2002. Interest capitalized was $31 in 2004, $1,000 in 2003 and $1,806 in 2002. At September 30, 2004, $100,000 of 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 46 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. On January 22, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the company, renewed a loan funding agreement whereby Reyna Funding, L.L.C. may borrow funds using finance receivables purchased from Reyna Capital Corporation, also a consolidated affiliate of the company, as security for the loan. On May 19, 2004, the loan funding agreement was modified to increase the borrowing limit from $100,000 to $150,000. Interest is payable on a variable rate basis. This loan funding agreement is renewable annually through January 23, 2006. As of September 30, 2004, Reyna Funding, L.L.C. had outstanding borrowings of $100,000 under this arrangement. The fair value of the company's cash flow derivative instruments was a $128 liability at September 30, 2004 and a $2,422 liability at September 30, 2003 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 2005, the company does not expect any amounts to be reclassified out of other comprehensive income into earnings to be material to the financial statements.
Notional Amounts September 30, 2004 Notes Swaps - ------------------ -------- -------- Variable rate instruments, maturing through 2009 $165,125 $103,125 Weighted average interest rate 2.0% Weighted average pay rate 3.1% Weighted average receive rate 1.7% Fixed rate notes, maturing through 2007 27,006 Weighted average interest rate 4.2% -------- -------- Totals $192,131 $103,125 ======== ======== September 30, 2003 - ------------------ Variable rate instruments, maturing through 2006 $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 ======== ========
Loan agreements require minimum interest coverage and consolidated leverage ratios. At September 30, 2004, the company was in compliance with these loan covenants. The fair value of Financial Services debt was $192,299 and $199,404 at September 30, 2004 and 2003, respectively. At September 30, 2004, maturities of notes were $77,400 in 2005, $32,275 in 2006, $31,234 in 2007 $26,222 in 2008 and $25,000 in 2009. Interest paid was $6,997 in 2004, $9,010 in 2003 and $11,155 in 2002. At September 30, 2004, notional amount maturities of swap agreements were $45,633 in 2005, $36,758 in 2006, $14,866 in 2007 and $5,868 in 2008. 47 REVOLVING CREDIT AGREEMENT On April 8, 2004, the company obtained a new $200,000 revolving credit agreement and terminated the old agreement. The new revolving credit agreement has a five year term. Automotive Solutions and Financial Services share this revolving credit agreement. As of September 30, 2004, the balance outstanding on this facility was $62,000 and was included in Financial Services notes payable. 8. CAPITAL STOCK
September 30 2004 2003 2002 - ----------------------------------------- ------- ------- ------- 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 66,658 68,595 70,230 Issued 3,234 2,761 2,978 Restricted stock canceled & returned (73) Converted from Class B common 50 50 200 Repurchased (5,720) (4,737) (4,779) Retired (23) (11) (34) ------- ------- ------- Balance, end of year 64,126 66,658 68,595 ======= ======= ======= Class B common No par value Authorized shares 40,000 40,000 40,000 Issued and outstanding shares Balance, beginning of year 15,000 16,000 20,000 Converted to Class A common (1,000) (1,000) (4,000) ------- ------- ------- Balance, end of year 14,000 15,000 16,000 ======= ======= =======
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. The company has reserved sufficient authorized Class A common shares for Class B conversions and stock-based compensation 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 $27.35 in 2004, $26.99 in 2003 and $26.23 in 2002. The remaining balance of shares authorized for repurchase by the board of directors was 2,445 at September 30, 2004. Treasury shares at September 30 were 27,939 in 2004, 25,430 in 2003 and 23,503 in 2002. 48 9. EMPLOYEE STOCK PLANS Effective October 1, 2003, the company elected to adopt the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and began recognizing stock-based compensation expense in the statements of consolidated income. Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" provides three alternative methods for reporting this change in accounting principle. The company elected the retroactive restatement method which required 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. Financial statements have been restated for 2002 and 2003, to reflect the adoption of SFAS No. 123. The company valued its stock options using the Black-Scholes option valuation model. The company recognized compensation expense of $11,639 in 2004, $14,833 in 2003 and $18,011 in 2002. Prior to 2004, the company awarded incentive stock options and/or nonqualified stock options to purchase Class A common shares to substantially all employees. Stock options were generally granted at a price equal to fair market value of the common stock on the date of grant. In February 2004, the shareholders approved the 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive Plan. The REYShare Plus Plan provides for restricted stock awards to substantially all employees in which the restrictions lapse based on service achievement. The Executive Stock Incentive Plan provides for restricted stock awards and other stock-based incentives to eligible recipients. Under the Executive Stock Incentive Plan, restrictions on restricted stock awards lapse based, in part, on service achievement and, in part, on company performance. Restricted stock awards may consist of either restricted stock or restricted stock units. Restricted stock units, which become shares when restrictions lapse, are awarded in countries where it is not beneficial to award restricted stock. STOCK OPTION PLANS
Weighted Average Shares Under Option Option Prices Per Share 2004 2003 2002 2004 2003 2002 ------ ------ ------ ------ ------ ------ Outstanding Beginning of year 12,147 13,075 13,941 $20.94 $20.02 $18.88 Granted 527 2,480 2,833 27.10 22.60 22.68 Exercised (2,783) (2,751) (2,970) 19.26 18.06 16.96 Canceled (533) (657) (729) 22.26 21.11 20.69 ------ ------ ------ End of year 9,358 12,147 13,075 21.70 20.94 20.02 ====== ====== ====== Exercisable at September 30 5,905 6,287 5,206 20.79 19.85 19.85 ====== ====== ======
Outstanding, September 30, 2004 Exercisable, September 30, 2004 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 - $19.50 2,607 5.0 $17.95 2,604 $17.95 $19.60 - $22.53 3,050 5.6 21.87 1,811 21.45 $22.56 - $24.32 2,416 5.0 22.73 645 22.89 $24.43 - $30.27 1,285 3.8 26.99 845 26.56 ----- ----- Totals 9,358 5.0 21.70 5,905 20.79 ===== =====
OPTION VALUATION ASSUMPTIONS
2004 2003 2002 ---- ---- ---- Expected life in years 3 3 4 Dividend yield 1.8% 1.9% 1.9% Risk free interest rate 2.0% 2.1% 3.7% Volatility 24% 31% 29% Weighted average fair value $4.22 $4.52 $5.34
49 RESTRICTED STOCK AWARDS
Weighted Average Shares or Units Fair Value 2004 2004 --------------- ---------------- Outstanding Restricted Stock Granted 442 $27.53 Canceled (72) 28.04 Returned (1) 28.04 Released (1) 28.04 Restricted Stock Units Granted 25 27.52 Canceled (1) 28.04 --- Balance, end of year 392 27.43 ===
The weighted average remaining vesting for restricted stock awards is 2 years as of September 30, 2004. 10. POSTRETIREMENT BENEFITS PENSION EXPENSE In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits an amendment of FASB Statements No. 87, 88, and 106." This statement revised employers' disclosures about pension plans and other postretirement plans. The revised disclosures are reflected in the following.
2004 2003 2002 ----------- ----------- ----------- NET PERIODIC COST Service cost $11,280 $ 8,546 $ 8,839 Plan administration 880 774 Interest cost 16,857 17,038 15,915 Expected return on plan assets (12,730) (12,471) (13,277) Amortization of prior service cost 786 598 431 Amortization of net actuarial loss 3,930 1,293 65 Amortization of transition obligation 259 139 145 ----------- ----------- ----------- Net periodic benefit cost 20,382 16,023 12,892 Settlement 1,684 Special termination benefits 130 120 Defined Contribution Plan 5,642 5,249 6,503 Multi-employer Plan 7 13 25 ----------- ----------- ----------- Total $26,161 $21,405 $21,104 =========== =========== =========== Actuarial Assumptions Discount rate 6.0% 6.5% - 7.25% 7.0% - 7.5% Rate of compensation increase 3.25% - 4.5% 3.75% - 4.5% 3.75% - 5.0% Expected return on plan assets 8.25% 9.0% 9.0% Actuarial cost method PROJECTED UNIT CREDIT Measurement period JULY 1 - JUNE 30
The expected rate of return on plan assets was determined through a combination of long term historical returns and expected future returns, weighted to reflect the plan's target asset allocation. 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. 50 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 non vested discretionary contributions were used to reduce contributions required by the company. FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
Funded Pension Unfunded Pension Benefits Benefits Total 2004 2003 2004 2003 2004 2003 ---------- ---------- ---------- ---------- ---------- ---------- Change in benefit obligation Benefit obligation, beginning of year $ 221,825 $ 182,488 $ 53,966 $ 46,265 $ 275,791 $ 228,753 Service cost 10,099 7,682 1,181 923 11,280 8,605 Interest cost 13,675 13,747 3,182 3,341 16,857 17,088 Actuarial loss (gain) 115 23,635 (4,978) 7,819 (4,863) 31,454 Benefits paid (8,094) (7,161) (4,287) (4,382) (12,381) (11,543) Foreign currency translation 959 1,434 959 1,434 ---------- ---------- ---------- ---------- ---------- ---------- Benefit obligation, end of year $ 238,579 $ 221,825 $ 49,064 $ 53,966 $ 287,643 $ 275,791 ========== ========== ========== ========== ========== ========== Change in Plan Assets Fair value of plan assets, beginning of year $ 133,997 $ 127,477 $ 133,997 $ 127,477 Actual return on plan assets 22,699 1,922 22,699 1,922 Employer contribution 36,683 12,037 36,683 12,037 Benefits paid (8,094) (7,161) (8,094) (7,161) Plan administration (1,279) (1,367) (1,279) (1,367) Foreign currency translation 512 1,089 512 1,089 ---------- ---------- ---------- ---------- Fair value of plan assets, end of year $ 184,518 $ 133,997 $ 184,518 $ 133,997 ========== ========== ========== ========== Net amount recognized Fair value of plan assets $ 184,518 $ 133,997 $ 184,518 $ 133,997 Benefit obligation (238,579) (221,824) $ (49,064) $ (53,966) (287,643) (275,790) ---------- ---------- ---------- ---------- ---------- ---------- Funded status (54,061) (87,827) (49,064) (53,966) (103,125) (141,793) Contributions or benefit payments made after measurement date 14,636 26,945 5,153 1,087 19,789 28,032 Unrecognized net loss 63,234 74,821 5,819 11,391 69,053 86,212 Unrecognized prior service cost 5,850 6,349 1,641 1,923 7,491 8,272 Unrecognized net transition obligation 259 259 Multi-employer Liability (31) (39) (31) (39) Minimum Pension Liability (24,461) (44,731) (4,655) (11,756) (29,116) (56,487) ---------- ---------- ---------- ---------- ---------- ---------- Net asset (liability) recognized $ 5,198 $ (24,443) $ (41,137) $ (51,101) $ (35,939) $ (75,544) ========== ========== ========== ========== ========== ========== Minimum Pension Liability Intangible Asset $ 5,850 $ 6,349 $ 1,641 $ 2,182 $ 7,491 $ 8,531 Deferred Income Tax Benefit 7,309 15,162 1,170 3,805 8,479 18,967 Accumulated Other Comprehensive Income 11,302 23,220 1,844 5,769 13,146 28,989 ---------- ---------- ---------- ---------- ---------- ---------- Total $ 24,461 $ 44,731 $ 4,655 $ 11,756 $ 29,116 $ 56,487 ========== ========== ========== ========== ========== ==========
2004 2003 ---------- ----------- Actuarial Assumptions Discount rate 6.25% 6.0% Rate of compensation increase 4.0% 3.25% - 4.5%
51
Asset Allocation at Target Allocation Measurement Date Asset Allocation 2005 2004 2003 - ---------------- ---- ---- ---- Equity securities 80% 78% 75% Debt securities 20% 20% 17% Cash 2% 8% --- --- --- Total 100% 100% 100% === === ===
The assets above include the company's stock only to the extent that it is represented in the Wilshire 5000 index. The plans' investment strategy is to achieve the highest level of investment performance that is compatible with prudent levels of risk and best practices in the management of investments. Asset allocations are based on the expected duration of the plans' liabilities, expected asset returns, correlation and diversification of asset classes and the actuarial discount rate.
Funded Unfunded Total 2004 2003 2004 2003 2004 2003 ---------- ---------- ---------- ---------- ---------- ---------- PLANS WITH PROJECTED BENEFIT OBLIGATION GREATER THAN THE FAIR VALUE OF PLAN ASSETS Projected benefit obligation $ 238,579 $ 221,825 $ 49,064 $ 53,966 $ 287,643 $ 275,791 Accumulated benefit obligation $ 193,956 $ 185,385 $ 46,143 $ 50,973 $ 240,099 $ 236,358 Fair value of plan assets $ 184,519 $ 133,997 $ 184,519 $ 133,997 PLANS WITH ACCUMULATED BENEFIT OBLIGATION GREATER THAN THE FAIR VALUE OF PLAN ASSETS Projected benefit obligation $ 238,579 $ 221,825 $ 49,064 $ 53,966 $ 287,643 $ 275,791 Accumulated benefit obligation $ 193,956 $ 185,385 $ 46,143 $ 50,973 $ 240,099 $ 236,358 Fair value of plan assets $ 184,519 $ 133,997 $ 184,519 $ 133,997
EXPECTED CASH FLOWS
Funded Pension Benefits Unfunded Pension Benefits ----------------------- ------------------------- Employer Contributions 2005 (expected) to plan trusts $ 5,000 2005 (expected) to plan participants $ 5,000 Expected Benefit Payments 2005 $ 8,300 $ 5,000 2006 $ 8,500 $ 5,000 2007 $ 8,900 $ 5,000 2008 $ 9,300 $ 5,000 2009 $ 9,800 $ 5,000 2010 - 2014 $ 180,500 $ 25,000
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
2004 2003 2002 ---------- ---------- ---------- Net Periodic Cost Service cost $ 664 $ 481 $ 547 Interest cost 3,708 4,291 4,027 Amortization of prior service cost (benefit) (742) (742) (532) Amortization of net actuarial loss (gain) 1,120 1,088 637 ---------- ---------- ---------- Net periodic benefit cost $ 4,750 $ 5,118 $ 4,679 ========== ========== ========== 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%
52 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
2004 2003 ---------- ---------- Change in benefit obligation Benefit obligation, beginning of year $ 63,762 $ 60,769 Service cost 664 482 Interest cost 3,708 4,292 Plan participants' contributions 741 402 Actuarial loss (gain) (1,190) 2,308 Benefits paid (3,680) (4,531) Foreign currency translation 20 40 ---------- ---------- Benefit obligation, end of year $ 64,025 $ 63,762 ========== ========== Net amount recognized Funded status $ (64,025) $ (63,762) Unrecognized net (gain) loss 22,175 22,533 Unrecognized prior service cost (benefit) (5,664) (6,406) ---------- ---------- Net liability recognized $ (47,514) $ (47,635) ========== ========== Actuarial Assumptions Discount rate 6.25% 6.0% Healthcare cost trend rate Through 2007 10.0% 2005 9.0% 2006 8.0% 2007 7.0% 2008 6.0% Thereafter 5.0% 5.0%
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect:
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- Effect on postretirement benefit obligation $ 2,322 $ (2,032) Effect on total of service cost and interest cost 145 (127)
PLANS WITH ACCUMULATED BENEFIT OBLIGATION GREATER THAN PLAN ASSETS The accumulated postretirement benefit obligation was $64,025 in 2004 and $63,762 in 2003. There were no plan assets in 2004 or 2003. 53 EXPECTED CASH FLOWS Employer Contributions 2005 (expected) to plan participants $ 3,700 Expected Benefit Payments 2005 $ 3,900 2006 $ 4,300 2007 $ 4,600 2008 $ 4,900 2009 $ 5,200 2010 - 2014 $28,700
11. CASH FLOW STATEMENTS
2004 2003 2002 ---------- ---------- ---------- AUTOMOTIVE SOLUTIONS Cash flows provided by (used for) operating activities Net income $ 80,620 $ 97,683 $ 53,393 Adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of accounting change 36,563 Depreciation and amortization 48,393 36,237 31,395 Stock-based compensation 11,513 14,650 17,944 Deferred income taxes 6,608 29,237 23,687 Deferred income taxes transferred from financial services (11,567) (5,514) (2,866) Losses (gains) on sales of assets (2,636) 289 1,605 Changes in operating assets and liabilities, excluding those acquired in business combinations Accounts receivable 57,111 (20,485) (2,358) Inventories (411) 933 (2,221) Prepaid expenses and other assets (12,190) 4,599 11,538 Accounts payable (6,541) 475 506 Accrued and other liabilities (9,118) (26,132) (10,377) ---------- ---------- ---------- Net cash provided by operating activities $ 161,782 $ 131,972 $ 158,809 ========== ========== ========== FINANCIAL SERVICES Cash flows provided by (used for) operating activities Net income $ 12,023 $ 12,117 $ 14,056 Adjustments to reconcile net income to net cash provided by operating activities Stock-based compensation 126 183 67 Deferred income taxes (21,973) (4,040) (2,269) Deferred income taxes transferred to automotive solutions 11,567 5,514 2,866 Changes in receivables, other assets and other liabilities 2,101 4,936 4,737 ---------- ---------- ---------- Net cash provided by operating activities $ 3,844 $ 18,710 $ 19,457 ========== ========== ==========
54 12. SEGMENT REPORTING During the first quarter of 2004, the company changed its reporting segments to reflect the revised organizational structure of the company. In executing this realignment, the company changed its method of allocating certain revenues and expenses. Prior year financial results were restated, to the extent possible, to reflect financial results consistent with the current year. It was not practical to restate financial statements for all changes. The estimated effect of these non restated items was to increase Software Solutions 2004 revenues by $9,600 and operating income by $7,200. The offsetting unfavorable effect of these changes was included in the Services segment. The Software Solutions segment provides computer solutions including computer hardware, integrated software packages, software enhancements and related support. The Software Solutions segment includes the operating results of Incadea GmbH which had revenues of $6,036 and an operating loss of $5,996 in 2004. The Services segment includes installation and maintenance of computer hardware, software training and consulting services. 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 solutions and services, through the company's wholly-owned affiliates, Reyna Capital Corporation, Reyna Funding L.L.C. and a similar operation in Canada. In 2005, the company's segment reporting will consist of three reporting segments; Software Solutions, Documents and Financial Services. Software Solutions will be comprised of the former Software Solutions segment and the former Services segment. This reporting will reflect the most recent management reorganization which places all software solutions and related services under common leadership. This reporting will benefit investors, providing a truer economic picture of the company's solutions by combining the operating results of products and related services that are sold together. For example, software licenses and related software training will be included in a single segment. In 2004, these items were separated, with software licenses reported in the Software Solutions segment and the related software training reported in the Services segment. Management will review the financial results of Software Solutions, Documents and Financial Services to measure performance and allocate resources. There will be no changes in the reporting of the Documents and Financial Services segments. REPORTING SEGMENTS
2004 2003 2002 ------------ ------------ ------------ Net sales and revenues Software solutions $ 539,763 $ 540,572 $ 497,874 Services 244,410 256,902 269,277 Documents 166,254 174,239 183,523 Financial services 31,814 36,532 41,709 ------------ ------------ ------------ Total net sales and revenues $ 982,241 $ 1,008,245 $ 992,383 ============ ============ ============ Operating income (loss) Software solutions $ 127,299 $ 136,822 $ 107,391 Services (27,318) (11,690) (3,198) Documents 25,998 29,967 34,136 Financial services 17,999 20,539 22,924 ------------ ------------ ------------ Total operating income $ 143,978 $ 175,638 $ 161,253 ============ ============ ============ Assets Automotive solutions $ 708,055 $ 746,342 $ 747,553 Financial services 352,812 395,494 407,605 ------------ ------------ ------------ Total assets $ 1,060,867 $ 1,141,836 $ 1,155,158 ============ ============ ============
55 Investments in equity method investees $ 7,325 $ 5,376 $ 8,270 Capital expenditures 33,783 57,810 37,067 Depreciation and amortization 48,393 36,237 31,395
GEOGRAPHIC AREAS The company provides integrated computer systems products and services and manufactures and distributes printed business forms primarily in the United States.
2004 2003 2002 ------------ ------------ ------------ United States Net sales and revenues $ 911,992 $ 943,769 $ 930,144 Long-lived assets $ 396,149 $ 414,520 $ 377,168 Canada Net sales and revenues $ 58,868 $ 59,828 $ 55,624 Long-lived assets $ 4,118 $ 4,763 $ 3,089 Other International Net sales and revenues $ 18,517 $ 13,051 $ 12,868 Long-lived assets $ 13,077 $ 94 $ 29 Elimination of intersegment sales $ (7,136) $ (8,403) $ (6,253) Totals Net sales and revenues $ 982,241 $ 1,008,245 $ 992,383 Long-lived assets $ 413,344 $ 419,377 $ 380,286
13. CONTINGENCIES 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; however, the mediation did not result in resolution of the matter. The company continues to negotiate with the PRP coalition and the company believes that this matter can still be resolved by settlement. The company believes that the reasonably foreseeable resolution of this matter will not have a material adverse effect on the financial statements. In 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. This contingent liability, which matures in January 2006, was $882 as of September 30, 2004. Also in connection with the sale of these operations to the Carlyle Group, the company remained contingently liable for a portion of long-term debt, which is collateralized by a Relizon facility in Canada and matures in 2007. In connection with this contingent liability, the company secured a standby letter of credit which expires in 2007. As of September 30, 2004, the unamortized balance on this letter of credit was $1,580. Subsequent to the company's announcement on June 24, 2004, regarding third quarter earnings, two shareholder class action complaints and one shareholder derivative claim were filed in the United States District Court for the Southern District of Ohio. A second shareholder derivative claim was filed in the Court of Common Pleas in Montgomery County, Ohio. The class action complaints allege that the company, a current officer and a former officer violated provisions of the Securities Exchange Act of 1934. On October 19, 2004, the plaintiffs in one of the shareholder class actions voluntarily moved to dismiss the action, without prejudice. The shareholder derivative claims were filed against the company, as nominal defendant, members of the Board of Directors and certain executive officers and allege breach of fiduciary duty, and other violations of law. The company denies that these allegations have any merit and will vigorously defend against these actions. 56 The company is also subject to other claims and lawsuits that arise in the ordinary course of business. The company believes that the reasonably foreseeable resolution of these matters will not have a material adverse effect on the financial statements. 14. ACCOUNTING CHANGE Effective October 1, 2003, the company elected to adopt the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and began recognizing stock option expense in the Statements of Consolidated Income. Under the fair value recognition provisions of SFAS No. 123, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" provides three alternative methods for reporting this change in accounting principle. The company elected the retroactive restatement method which required 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, prior year financial statements have been restated to reflect the adoption of SFAS No. 123. For the twelve months ended September 30, 2003 and September 30, 2002, income before income taxes was reduced by $14,441 and $17,274, the provision for income taxes was decreased by $5,224 and $5,734 and net income was reduced by $9,217 (or $.13 per share) and $11,540 (or $.16 per share), respectively. As of September 30, 2003, deferred income tax assets were increased by $17,781, capital stock was increased by $38,538 and retained earnings was reduced by $20,757. 15. ACCOUNTING STANDARDS In May 2004, the FASB staff issued FASB Staff Position SFAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). This statement prescribes accounting for the Act and is effective for interim periods beginning after June 15, 2004. The company has determined that the benefits provided to retirees under the company's prescription drug plan are not actuarially equivalent to the benefits provided under the Act. Therefore, the company will not qualify for the subsidy provided by the Act and the adoption of SFAS 106-2 did not have a material effect on the financial statements. 57 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ------------- ------------- ------------- ------------- 2004 Net sales and revenues $ 248,403 $ 249,492 $ 242,830 $ 241,516 Gross profit $ 138,587 $ 140,957 $ 134,350 $ 129,860 Net income $ 23,822 $ 26,357 $ 22,019 $ 20,445 Basic earnings per common share $ .35 $ .40 $ .34 $ .31 Diluted earnings per common share $ .34 $ .38 $ .33 $ .31 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 $ 29.35 $ 29.71 $ 30.58 $ 25.10 Low $ 26.42 $ 26.51 $ 22.70 $ 21.21 2003 Net sales and revenues $ 246,648 $ 255,099 $ 250,405 $ 256,093 Gross profit $ 137,854 $ 140,700 $ 138,762 $ 142,084 Net income $ 25,573 $ 26,990 $ 26,205 $ 31,032 Basic earnings per common share $ .37 $ .40 $ .38 $ .46 Diluted earnings per common share $ .36 $ .39 $ .37 $ .44 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
58 VALUATION ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002 (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, 2004 $ 5,253 $ 7,485 $ 9 $ 6,343 $ 6,404 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 Reserves for credit memos: Year ended September 30, 2004 $ 11,691 $ 25,514 $ 71 $ 26,167 $11,109 Year ended September 30, 2003 $ 10,321 $ 31,153 $ 173 $ 29,956 $11,691 Year ended September 30, 2002 $ 6,724 $ 32,021 ($ 7) $ 28,417 $10,321 Reserves for inventories: Year ended September 30, 2004 $ 1,665 $ 1,164 $ 7 $ 2,203 $ 633 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 FINANCIAL SERVICES Reserves for finance receivables: Year ended September 30, 2004 $ 6,705 $ 3,064 $ 557 $ 3,625 $ 6,701 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
(a) Includes adjustments from translation of foreign currency to United States dollars, the effects of acquisitions of businesses and transfers between reserves. 59 EX-4.C 2 l10970aexv4wc.txt RIGHTS AGENT APPOINTMENT LETTER EXHIBIT (4)(c) October 26, 2004 Ms. Suzanne Swits Wells Fargo Bank, N.A. Vice President Account Management Shareowner Services 161 North Concord Exchange South St. Paul, MN 55075-1139 Subject: Appointment of Wells Fargo as Rights Agent Ms. Swits: By this letter, I, Douglas M. Ventura, Executive Vice President Operations, General Counsel and Secretary, appoint Wells Fargo Bank, N.A., as Rights Agent for The Reynolds and Reynolds Company Amended and Restated Shareholder Rights Agreement (the"Rights Agreement"), effective as of the date of your acceptance on page 2 of this letter. This appointment is made pursuant to Section 21 of the Rights Agreement. The appointment is being made following the termination of Mellon Investor Services, LLC as Rights Agent under the same Rights Agreement. We appreciate your agreeing to serve as our Rights Agent, and we look forward to continuing to do business with you in your capacity as Rights Agent and Transfer Agent. Please acknowledge your acceptance of this appointment by signature below, and return one original of this letter to me at the address above. Sincerely, Douglas M. Ventura DMV/ksb Suzanne Swits Page 2 October 26, 2004 I hereby acknowledge and accept this appointment on behalf of Wells Fargo Bank, N.A.: Name: _______________________________ Signature: ___________________________ Title:_________________________________________ Date:___________________________ EX-10.G 3 l10970aexv10wg.txt FORM OF RETENTION LETTER AGREEMENTS EXHIBIT (10)(g) [Form of Retention Letter Agreements] July 20, 2004 [Dale Medford] [Douglas M. Ventura] [Michael J. Berry] [Eleven Other Officers] Mailstop: OHA2 03-80 Dear _______: It is my pleasure to notify you that as of July 14, 2004 the Board of Directors of Reynolds & Reynolds has included you with a select group of key executives who will participate in the newly approved Retention Plan. The reason you are included in this Retention Plan is that the Board and I feel the Reynolds executive team is strong and will be a key factor in moving us through the transition. Your contribution to this team is critical. We need you engaged in the business problems at hand and comfortable that your employment status is secure. This Plan, as described below, will provide that security to you so you can help set the stage for our future growth and accomplishments. This Plan consists of two components, the retention award and the enhanced severance benefit. The retention award is a combination of cash and restricted shares that will be delivered to you on the date six months subsequent to our new CEO's first day of work. This award is contingent on your continued employment with Reynolds throughout the selection period for the new CEO and the following six month transition period. Your award will be: Cash - [$125,000 in the case of Medford, Ventura and Berry] Restricted Stock Award - [6,000 shares in the case of Medford, Ventura and Berry] In addition, your severance benefit has been increased to provide you with additional benefits in case business conditions require you to be released, a change to your base pay, bonus potential (different than others at your current level), or geographic location. This increased benefit will begin now and be in effect through one year after the new CEO is hired and will provide you with 1 month/year of service with a one year minimum and a two year maximum. Again, let me emphasize, your commitment to Reynolds and our commitment to you is mutual. As a team we can drive Reynolds to become the premier company we have the potential to be. Thank you in advance for your dedication to getting it done. Sincerely, Phil Odeen August 16, 2004 [To _______] Mailstop: Dear____: This letter provides further details regarding the terms of your retention award and benefit described in my letter of July 20, 2004 [IN THE CASE OF MEDFORD, VENTURA AND BERRY: (the "retention letter"). Please note that a description of the benefits under this letter and the retention letter will be disclosed in the Company's 10-K for the fiscal year ended September 30, 2004, but your individual letter will not be filed. Your award will be further described in the 2005 proxy statement, including the amount of cash and restricted stock to be awarded to you.] [IN THE CASE OF MEDFORD, VENTURA AND BERRY: Under the securities laws, a grant of restricted stock, even though not vested, is considered an acquisition of stock. Therefore, you will also be required to file a Form 4 by the end of the business day on August 18th. Stock Plan Administration will file the Form 4 on your behalf.] As you know, the Plan consists of two components, the retention award and the enhanced severance benefit. The effective date of both is August 16, 2004. The retention award is a combination of cash and restricted stock. The restricted stock award will be issued pursuant to The Reynolds and Reynolds Company 2004 Executive Stock Incentive Plan. As a point of clarification, for purposes of the enhanced severance benefit, the following applies: - - A "change in control" will not, in and of itself, be deemed a "business condition" that entitles you to the enhanced severance benefit. [IN THE CASE OF MEDFORD, VENTURA, BERRY AND TWO OTHER OFFICERS: Moreover, if you are a party to a change of control agreement or other arrangement with the company and a change of control occurs after the company's hiring of a new CEO and, as a result of the change in control, you are released, you will be entitled to receive only that benefit, if any, under the change of control agreement or arrangement and will not be entitled to receive the enhanced severance benefit.] - - In determining whether a "change to your base pay" or "bonus potential" has occurred, the company will look to the amount of your base pay or potential bonus in effect immediately preceding August 16, 2004. - - A change in "geographic location" will not be deemed to occur for purposes of receiving the enhanced severance benefit if the change results from your request. - - You will not be entitled to the enhanced severance benefit upon your death, disability (unless short-term disability), voluntary termination, or, in any case, as a result of a termination for cause. As a team we can drive Reynolds to become the premier company we have the potential to be. Thank you in advance for your dedication to getting it done. Sincerely, Phil Odeen EX-10.M 4 l10970aexv10wm.txt AMENDED & RESTATED 2004 EXEC. STOCK INCENTIVE PLAN EXHIBIT (10)(m) THE REYNOLDS AND REYNOLDS COMPANY AMENDED AND RESTATED 2004 EXECUTIVE STOCK INCENTIVE PLAN SECTION 1. PURPOSE The purpose of this Amended and Restated Plan is to continue to promote the growth and prosperity of the Company and its Subsidiaries by providing Eligible Recipients with an additional incentive to contribute to the Company's success, by assisting the Company in attracting and retaining the best available personnel for positions of substantial responsibility and by increasing the identity of interests of Eligible Recipients with those of the Company's shareholders. The Plan provides for the grant of Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock Awards, Restricted Stock Units and Stock Appreciation Rights to aid the Company in obtaining these goals and is a restatement and amendment in its entirety of the Plan approved by the shareholders on February 12, 2004. SECTION 2. DEFINITIONS As used in this Plan and any Stock Incentive Agreement, the following terms shall have the following meanings: 2.1 BOARD means the Board of Directors of the Company. 2.2 CAUSE shall mean, with respect to any Participant who is a member of the Board who is not an employee of the Company, a termination of employment or service on the Board (by removal or failure of the Board to nominate the Participant) whenever occasioned by (a) the willful and continued failure by the Participant to substantially perform the Participant's duties with the Company or a Subsidiary (other than any such failure resulting from the Participant's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Board, which demand specifically identifies the manner in which the Board believes the Participant has not substantially performed the Participant's duties, or (b) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company or its Subsidiaries, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's act, or failure to act, was in the best interest of the Company. 2.3 CHANGE OF CONTROL means any of the following: (a) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than Richard H. Grant, Jr., his children or his grandchildren, the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years (not including any period prior to the effective date of this Plan); individuals who at the beginning of such period constitute the Board, and any new member of the Board (other than a member of the Board designated by a person who has entered 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 1 Revised 11/3/04 into an agreement with the Company to effect a transaction described in subsections (a), (b) or (c) of this Section) whose election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the members of the Board at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (c) the shareholders of the Company approve a merger or consolidation of the Company with any other Company, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as herein defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the shareholders of the Company approve a plan of liquidation, dissolution or winding up of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 2.4 CODE means the Internal Revenue Code of 1986, as amended. 2.5 COMMITTEE means the Compensation Committee of the Board or any other committee appointed by the Board to administer the Plan, as specified in Section 5 hereof. Any such committee must be comprised entirely of Outside Directors who are "independent" as that term is defined in the rules of the New York Stock Exchange. 2.6 COMMON STOCK means the Class A common shares of the Company. 2.7 COMPANY means The Reynolds and Reynolds Company, an Ohio corporation, and any successor to such organization. 2.8 DISABILITY shall mean disability as determined by the Committee in its sole and absolute discretion. 2.9 ELIGIBLE RECIPIENT means a Key Employee and/or a Key Person. 2.10 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.11 EXERCISE PRICE means the price that shall be paid to purchase one (1) Share upon the exercise of an Option granted under this Plan. 2.12 FAIR MARKET VALUE of a Share on any date means the mean between the highest and lowest reported selling prices on a national securities exchange of a Share as reported in the appropriate composite listing for said exchange on such date, or, if no such sales occurred on such date, then on the next preceding date on which a sale is made. In the event the Shares are traded in the over-the-counter market, Fair Market Value of a Share means the mean between the "high" and "low" quotations in the over-the-counter market on such date, as reported by the National Association of Securities Dealers through NASDAQ or, if no quotations are available on such date, then on the next preceding date on which such quotations are available. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 2 Revised 11/3/04 2.13 INSIDER means an individual who is, on the relevant date, an officer, member of the Board or ten percent (10%) beneficial owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act. 2.14 INDEPENDENT DIRECTOR means a director who is determined to be "independent" as that term is defined by the listing standards of the New York Stock Exchange, as the same may be amended from time to time (this amendment is effective September 27, 2004). 2.15 ISO means an option granted under this Plan to purchase Shares that is intended by the Company to satisfy the requirements of Code Section 422 as an incentive stock option. 2.16 KEY EMPLOYEE means any key employee of the Company or any Subsidiary, holding positions at or above the director level and such other key employees, regardless of title or designation, as shall, in the determination of the Committee, be responsible in the future for the duties presently being discharged by employees at or above the director level. 2.17 KEY PERSON means (1) a member of the Board who is not a Key Employee, or (2) a consultant or advisor who is eligible to receive shares which are registered on SEC Form S-8 (this amendment is effective September 27, 2004). 2.18 NQSO means an option granted under this Plan to purchase Shares which is not intended by the Company to satisfy the requirements of Code Section 422. 2.19 OPTION means an ISO or a NQSO. 2.20 OUTSIDE DIRECTOR means a member of the Board who is not an Key Employee and who qualifies as (1) a "non-employee director" under Rule 16b-3(b)(3) under the 1934 Act, as amended from time to time, and (2) an "outside director" under Code Section 162(m) and the regulations promulgated thereunder. 2.21 PARTICIPANT means an individual who receives a Stock Incentive hereunder. 2.22 PERFORMANCE-BASED EXCEPTION means the performance-based exception from the tax deductibility limitations of Code Section162(m). 2.23 PERFORMANCE PERIOD shall mean the period during which a performance goal must be attained with respect to a Stock Incentive which is performance based, as determined by the Committee pursuant to Section 14.3 hereof. 2.24 PLAN means this plan, The Reynolds and Reynolds Company Amended and Restated 2004 Executive Stock Incentive Plan, as it may be further amended from time to time. 2.25 QUALIFYING EVENT shall mean, with respect to a Participant, such Participant's death, Disability or Retirement. 2.26 RESTRICTED STOCK AWARD means an award of Shares granted to a Participant under this Plan which is subject to restrictions in accordance with the terms and provisions of this Plan and the applicable Stock Incentive Agreement. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 3 Revised 11/3/04 2.27 RESTRICTED STOCK UNIT means a contractual right granted to a Participant under this Plan to receive a Share (or cash equivalent) which is subject to restrictions of this Plan and the applicable Stock Incentive Agreement. 2.28 RETIREMENT shall mean, with respect to an Eligible Recipient, such Eligible Recipient's (i) termination of employment or cessation of performing services after attainment of age 55 and completion of at least fifteen (15) years of service with the Company or Subsidiary, or (ii) termination of employment or cessation of performing services after attainment of age 65 and completion of at least five (5) years of service with the Company or Subsidiary. 2.29 SHARE means a share of Common Stock. 2.30 STOCK APPRECIATION RIGHT means a right granted to a Participant pursuant to the terms and provisions of this Plan whereby the individual, without payment to the Company (except for any applicable withholding or other taxes), receives Shares, or such other consideration as the Committee may determine, in an amount equal to the excess of the Fair Market Value per Share on the date on which the Stock Appreciation Right is exercised over the exercise price per Share noted in the Stock Appreciation Right, for each Share subject to the Stock Appreciation Right. 2.31 STOCK INCENTIVE means an ISO, a NQSO, a Restricted Stock Award, a Restricted Stock Unit or a Stock Appreciation Right. 2.32 STOCK INCENTIVE AGREEMENT means a document issued by the Company or a Subsidiary to a Participant evidencing an award of a Stock Incentive. 2.33 SUBSIDIARY means any corporation in which more than fifty percent (50%) of the voting stock is owned or controlled, directly or indirectly, by the Company. 2.34 TEN PERCENT SHAREHOLDER means a person who owns (after taking into account the attribution rules of Code Section 424(d)) more than ten percent (10%) of the total combined voting power of all classes of shares of stock of either the Company or a Subsidiary. SECTION 3. SHARES SUBJECT TO STOCK INCENTIVES The total number of Shares that may be issued pursuant to Stock Incentives under this Plan shall not exceed Three Million, Three Hundred Thousand (3,300,000), of which not more than Two Million, Nine Hundred Thousand (2,900,000) may be used for Restricted Stock Awards and Restricted Stock Units, each as adjusted pursuant to Section 10. Such Shares shall be reserved, to the extent that the Company deems appropriate, from authorized but unissued Shares, and from Shares which have been reacquired by the Company. To the extent permitted by applicable law or regulation, if a Stock Incentive is canceled, forfeited, exchanged or otherwise expires the Shares with respect to such Stock Incentive may become available for reissuance under this Plan. Notwithstanding the preceding sentence, no Participant may be granted any Stock Incentive covering an aggregate number of Shares in excess of Five Hundred Thousand (500,000) in any calendar year as adjusted pursuant to Section 10. SECTION 4. EFFECTIVE DATE 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 4 Revised 11/3/04 The effective date of this Plan shall continue to be February 12, 2004, which is the date on which the shareholders of the Company originally approved the Plan. However, the effective dates of certain amendments to this Plan are as set forth herein. SECTION 5. ADMINISTRATION 5.1 GENERAL ADMINISTRATION. This Plan shall be administered by the Committee. The Committee, acting in its absolute discretion, shall exercise such powers and take such action as expressly called for under this Plan. The Committee shall have the power to interpret this Plan and, subject to the terms and provisions of this Plan, to take such other action in the administration and operation of the Plan as it deems equitable under the circumstances. The Committee's actions shall be binding on the Company, on each affected Eligible Recipient, and on each other person directly or indirectly affected by such actions. 5.2 AUTHORITY OF THE COMMITTEE. Except as limited by law or by the Articles of Incorporation or Code of Regulations of the Company, and subject to the provisions herein, the Committee shall have full power to select Eligible Recipients who shall participate in the Plan, to determine the sizes and types of Stock Incentives in a manner consistent with the Plan, to determine the terms and conditions of Stock Incentives in a manner consistent with the Plan, to construe and interpret the Plan and any agreement or instrument entered into under the Plan, to establish, amend or waive rules and regulations for the Plan's administration, and to amend the terms and conditions of any outstanding Stock Incentives as allowed under the Plan and such Stock Incentives. Further, the Committee may make all other determinations which may be necessary or advisable for the administration of the Plan. The Committee may seek the assistance of such persons as it may see fit in carrying out its routine administrative functions concerning the Plan. 5.3 DELEGATION OF AUTHORITY. The members of the Committee and any other persons to whom authority has been delegated shall be appointed from time to time by, and shall serve at the discretion of, the Board. The Committee may appoint one or more separate committees (any such committee, a "Subcommittee") composed of two or more Outside Directors of the Company (who may but need not be members of the Committee) and may delegate to any such Subcommittee the authority to grant Stock Incentives, and/or to administer the Plan or any aspect of it. Notwithstanding any provision of this Plan to the contrary, the Board may assume the powers and responsibilities granted to the Committee or other delegate at any time, in whole or in part. Moreover, only the Committee may grant Stock Incentives that may meet the Performance-Based Exception, and only the Committee may grant Stock Incentives to Insiders that may be exempt from Section 16(b) of the Exchange Act. 5.4 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of this Plan and all related orders and resolutions of the Committee shall be final, conclusive and binding on all persons, including the Company, its shareholders, members of the Board, Eligible Recipients, Participants, and their estates and beneficiaries. SECTION 6. ELIGIBILITY Eligible Recipients selected by the Committee shall be eligible for the grant of Stock Incentives under this Plan, but no Eligible Recipient shall have the right to be granted a Stock Incentive under this Plan merely as a result of his or her status as an Eligible Recipient. Only Key Employees shall be eligible to receive a grant of ISOs. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 5 Revised 11/3/04 SECTION 7 TERMS OF STOCK INCENTIVES 7.1 TERMS AND CONDITIONS OF ALL STOCK INCENTIVES. (a) Grants of Stock Incentives. Subject to subsection (e) below, the Committee, in its absolute discretion, shall grant Stock Incentives under this Plan from time to time and shall have the right to grant new Stock Incentives in exchange for outstanding Stock Incentives; provided, however, the Committee shall not have the right to (1) lower the Exercise Price of an existing Option, (2) any action which would be treated as a "repricing" under generally accepted accounting principles, or (3) canceling of an existing Option at a time when its Exercise Price exceeds the fair market value of the underlying stock subject to such Option in exchange for another Option, a Restricted Stock Award, or other equity in the Company (except as provided in Sections 10 and 11). Stock Incentives shall be granted to Eligible Recipients selected by the Committee, and the Committee shall be under no obligation whatsoever to grant any Stock Incentives, or to grant Stock Incentives to all Eligible Recipients, or to grant all Stock Incentives subject to the same terms and conditions. (b) Shares Subject to Stock Incentives. The number of Shares as to which a Stock Incentive shall be granted shall be determined by the Committee in its sole discretion, subject to the provisions of Section 3 as to the total number of Shares available for grants under the Plan, and to any other restrictions contained in this Plan. (c) Stock Incentive Agreements. Each Stock Incentive shall be evidenced by a Stock Incentive Agreement executed by the Company or a Subsidiary, and may also be executed by the Participant or accepted by the Participant by electronic transmission, which shall be in such form and contain such terms and conditions as the Committee in its discretion may, subject to the provisions of the Plan, from time to time determine. (d) Date of Grant. The date a Stock Incentive is granted shall be the date on which the Committee (1) has approved the terms and conditions of the Stock Incentive Agreement, (2) has determined the recipient of the Stock Incentive and the number of Shares covered by the Stock Incentive and (3) has taken all such other action necessary to direct the grant of the Stock Incentive. (e) Dividend Equivalents. The Committee may grant dividend equivalents to any Participant. The Committee shall establish the terms and conditions to which the dividend equivalents are subject. Dividend equivalents may be granted only in connection with a Stock Incentive. Under a dividend equivalent, a Participant shall be entitled to receive currently or in the future payments equivalent to the amount of dividends paid by the Company to holders of Common Stock with respect to the number of dividend equivalents held by the Participant. The dividend equivalent may provide for payment in Common Stock or in cash, or a fixed combination of Common Stock or cash, or the Committee may reserve the right to determine the manner of payment at the time the dividend equivalent is payable. (f) Deferral Elections. The Committee may permit or require Participants to elect to defer the issuance of Common Stock or the settlement of awards in cash under this Plan pursuant to such rules, procedures, or programs as it may establish from time to time. However, notwithstanding the preceding sentence, the Committee shall not, in establishing the terms and provisions of any Stock Incentive, or in exercising its powers under this Article, create any arrangement which would constitute an employee pension benefit plan as defined in ERISA Section 3(3) unless the arrangement provides benefits solely to one or more individuals who constitute members of a select group of management or highly compensated employees. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 6 Revised 11/3/04 7.2 TERMS AND CONDITIONS OF OPTIONS. (a) Grants of Options. Each grant of an Option shall be evidenced by a Stock Incentive Agreement that shall specify whether the Option is an ISO or NQSO, and incorporate such other terms as the Committee deems consistent with the terms of this Plan and, in the case of an ISO, necessary or desirable to permit such Option to qualify as an ISO. The Committee and/or the Company may modify the terms and provisions of an Option in accordance with Section 12 of this Plan even though such modification may change the Option from an ISO to a NQSO. (b) Determining Optionees. In determining Eligible Recipient(s) to whom an Option shall be granted and the number of Shares to be covered by such Option, the Committee may take into account the duties of the Eligible Recipient, the contributions of the Eligible Recipient to the success of the Company, and other factors deemed relevant by the Committee, in connection with accomplishing the purpose of this Plan. An Eligible Recipient who has been granted an Option to purchase Shares, whether under this Plan or otherwise, may be granted one or more additional Options. If the Committee grants an ISO and a NQSO to an Eligible Recipient on the same date, the right of the Eligible Recipient to exercise one such Option shall not be conditioned on the Eligible Recipient's failure to exercise the other such Option. (c) Exercise Price. Subject to adjustment in accordance with Section 10 and the other provisions of this Section, the Exercise Price shall be specified in the applicable Stock Incentive Agreement. With respect to each grant of an ISO to a Participant who is not a Ten Percent Shareholder, the Exercise Price shall not be less than the Fair Market Value of a Share on the date the ISO is granted. With respect to each grant of an ISO to a Participant who is a Ten Percent Shareholder, the Exercise Price shall not be less than one hundred ten percent (110%) of the Fair Market Value of a Share on the date the ISO is granted. If a Stock Incentive is a NQSO, the Exercise Price for each Share shall be no less than (1) the minimum price required by applicable state law, or (2) the minimum price required by the Company's governing instrument, or (3) $0.01, whichever price is greatest. Any Stock Incentive intended to meet the Performance-Based Exception must be granted with an Exercise Price not less than the Fair Market Value of a Share determined as of the date of such grant. (d) Option Term. Each Option granted under this Plan shall be exercisable in whole or in part at such time or times as set forth in the related Stock Incentive Agreement, but no Stock Incentive Agreement shall: (i) make an Option exercisable prior to the date such Option is granted or after it has been exercised in full; or (ii) make an Option exercisable after the date that is (A) the seventh (7th) anniversary of the date such Option is granted, if such Option is a NQSO or an ISO granted to a non-Ten Percent Shareholder, or (B) the date that is the fifth (5th) anniversary of the date such Option is granted, if such Option is an ISO granted to a Ten Percent Shareholder. Options issued under the Plan may become exercisable based on the service of a Participant, or based upon the attainment (as determined by the Committee) of performance goals established pursuant to one or more of the performance criteria listed in Section 14. Any Option which becomes exercisable based on the attainment of performance goals must have its performance goals determined by the Committee based upon one or more of the performance criteria listed in Section 14, and must have the attainment of such performance goals certified in writing by the Committee in order to meet the Performance-Based Exception. A Stock Incentive Agreement may provide for the exercise of an Option after the employment of a Key Employee has terminated for any reason whatsoever, including the occurrence of a Qualifying 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 7 Revised 11/3/04 Event. The Key Employee's rights, if any, upon termination of employment will be set forth in the applicable Stock Incentive Agreement. (e) Payment. Options shall be exercised by the delivery of a written notice of exercise to the Company, specifying the number of Shares with respect to which the Option is to be exercised accompanied by full payment for the Shares. Payment for shares of Stock shall be made in cash or, unless the Stock Incentive Agreement provides otherwise, by delivery to the Company of a number of Shares that have been owned and completely paid for by the holder for at least six (6) months prior to the date of exercise (i.e., "mature shares" for accounting purposes) having an aggregate Fair Market Value equal to the amount to be tendered, or a combination thereof. In addition, unless the Stock Incentive Agreement provides otherwise, the Option may be exercised through a brokerage transaction as permitted under the provisions of Regulation T applicable to cashless exercises promulgated by the Federal Reserve Board so long as the Company's equity securities are registered under Section 12 of the Exchange Act, unless prohibited by Section 402 of the Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, with respect to any Option recipient who is an Insider, a tender of shares or, if permitted by applicable law, a cashless exercise must (1) have met the requirements of an exemption under Rule 16b-3 promulgated under the Exchange Act, or (2) be a subsequent transaction the terms of which were provided for in a transaction initially meeting the requirements of an exemption under Rule 16b-3 promulgated under the Exchange Act. Unless the Stock Incentive Agreement provides otherwise, the foregoing exercise payment methods shall be subsequent transactions approved by the original grant of an Option. Except as provided in subparagraph (f) below, payment shall be made at the time that the Option or any part thereof is exercised, and no Shares shall be issued or delivered upon exercise of an Option until full payment has been made by the Participant. The holder of an Option, as such, shall have none of the rights of a shareholder. (f) Conditions to Exercise of an Option. Each Option granted under the Plan shall vest and shall be exercisable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Committee shall specify in the Stock Incentive Agreement; provided, however, that subsequent to the grant of an Option, the Committee, at any time before complete termination of such Option, may accelerate the time or times at which such Option may vest or be exercised in whole or in part. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option as it may deem advisable. Unless otherwise provided in the applicable Stock Incentive Agreement, any vested option must be exercised within sixty (60) days of the Qualifying Event or other termination of employment of the Participant. (g) Transferability of Options. Except as otherwise provided in a Participant's Stock Incentive Agreement, no Option granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except upon the death of the holder Participant by will or by the laws of descent and distribution. Except as otherwise provided in a Participant's Stock Incentive Agreement, during the Participant's lifetime, only the Participant may exercise his Option unless the Participant is incapacitated in which case the Option may be exercised by the Participant's legal guardian, legal representative, or other representative whom the Committee deems appropriate based on applicable facts and circumstances. The determination of incapacity of a Participant and the identity of appropriate representative of the Participant to exercise the Option if the Participant is incapacitated shall be determined by the Committee. (h) ISO Tax Treatment Requirements. With respect to any Option that purports to be an ISO, to the extent that the aggregate Fair Market Value (determined as of the date of grant of such Option) of stock with respect to which such Option is exercisable for the first time by any individual during any calendar year exceeds one hundred thousand dollars ($100,000.00), to the extent of such excess, such Option shall not be treated as an ISO in accordance with Code Section 422(d). The rule of 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 8 Revised 11/3/04 the preceding sentence is applied as set forth in Treas. Reg. Section 1.422-4 and any additional guidance issued by the Treasury thereunder. Also, with respect to any Option that purports to be an ISO, such Option shall not be treated as an ISO if the Participant disposes of shares acquired thereunder within two (2) years from the date of the granting of the Option or within one (1) year of the exercise of the Option, or if the Participant has not met the requirements of Code Section 422(a)(2). 7.3 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS. (a) Grants of Restricted Stock Awards. Shares awarded pursuant to Restricted Stock Awards shall be subject to such restrictions as determined by the Committee for periods determined by the Committee. Restricted Stock Awards issued under the Plan may have restrictions which lapse based upon the service of a Participant, or based upon other criteria that the Committee may determine appropriate. The Committee may require a cash payment from the Participant in exchange for the grant of a Restricted Stock Award or may grant a Restricted Stock Award without the requirement of a cash payment. The Committee may grant Restricted Stock Awards that vest on the attainment of performance goals determined by the Committee based upon one or more of the performance criteria listed in Section 14, and must have the attainment of such performance goals certified in writing by the Committee in order to meet the Performance-Based Exception. (b) Vesting of Restricted Stock Awards. The Committee shall establish the vesting schedule applicable to Restricted Stock Awards and shall specify the times, vesting and performance goal requirements. Until the end of the period(s) of time specified in the vesting schedule and/or the satisfaction of any performance criteria, the Shares subject to such Stock Incentive Award shall remain subject to forfeiture. (c) Termination of Employment. If the Participant's employment (or in the case of a non-employee, such Participant's service) with the Company and/or a Subsidiary ends before the Restricted Stock Awards vest, the Participant shall forfeit all unvested Restricted Stock Awards, unless the termination is a result of the occurrence of a Qualifying Event or the Committee determines that the Participant's unvested Restricted Stock Awards shall vest as of the date of such event; provided, however, the Committee may grant Restricted Stock Awards precluding such accelerated vesting in order to qualify the Restricted Stock Awards for the Performance-Based Exception. (d) Death, Disability and Retirement. In the event a Qualifying Event occurs before the date or dates on which Restricted Stock Awards vest, the expiration of the applicable restrictions (other than restrictions based on performance criteria set forth in Section 14) shall be accelerated and the Participant shall be entitled to receive the Shares free of all such restrictions. In the case of Restricted Stock Awards which are based on performance criteria set forth in Section 14, then as of the date on which such Qualifying Event occurs, the Participant shall be entitled to receive a number of Shares that is determined by measuring the selected performance criteria from the Company's most recent publicly available quarterly results that are available as of the date the Qualifying Event occurs; provided, however, the Committee may grant Restricted Stock Awards precluding such partial awards when a Qualifying Event occurs in order to qualify the Restricted Stock Awards for the Performance-Based Exception. All other Shares subject to such Restricted Stock Award shall be forfeited and returned to the Company as of the date on which such Qualifying Event occurs. (e) Acceleration of Award. Notwithstanding anything to the contrary in this Plan, the Committee shall have the power to permit, in its sole discretion, an acceleration of the expiration of the applicable restrictions or the applicable period of such restrictions with respect to any part or all of the Shares awarded to a Participant; provided, however, the Committee may grant Restricted Stock Awards 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 9 Revised 11/3/04 precluding such accelerated vesting on order to qualify the Restricted Stock Awards for the Performance-Based Exception. (f) Necessity of Stock Incentive Agreement. Each grant of a Restricted Stock Award shall be evidenced by a Stock Incentive Agreement that shall specify the terms, conditions and restrictions regarding the Shares awarded to a Participant, and shall incorporate such other terms and conditions as the Committee, acting in its sole discretion, deems consistent with the terms of this Plan. The Committee shall have sole discretion to modify the terms and provisions of Restricted Stock Awards in accordance with Section 12 of this Plan. (g) Transferability of Restricted Stock Awards. Except as otherwise provided in a Participant's Restricted Stock Award, no Restricted Stock Award granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except upon the death of the holder Participant by will or by the laws of descent and distribution. (h) Voting, Dividend & Other Rights. Unless the applicable Stock Incentive Agreement provides otherwise, holders of Restricted Stock Awards shall be entitled to vote and to receive dividends during the periods of restriction of their Shares to the same extent as such holders would have been entitled if the Shares were unrestricted Shares. 7.4 TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS. (a) Grants of Restricted Stock Units. A Restricted Stock Unit shall entitle the Participant to receive one Share at such future time and upon such terms as specified by the Committee in the Stock Incentive Agreement evidencing such award. Restricted Stock Units issued under the Plan may have restrictions which lapse based upon the service of a Participant, or based upon other criteria that the Committee may determine appropriate. The Committee may require a cash payment from the Participant in exchange for the grant of Restricted Stock Units or may grant Restricted Stock Units without the requirement of a cash payment. The Committee may grant Restricted Stock Units that vest on the attainment of performance goals determined by the Committee based upon one or more of the performance criteria listed in Section 14, and must have the attainment of such performance goals certified in writing by the Committee in order to meet the Performance-Based Exception. (b) Vesting of Restricted Stock Units. The Committee shall establish the vesting schedule applicable to Restricted Stock Units and shall specify the times, vesting and performance goal requirements. Until the end of the period(s) of time specified in the vesting schedule and/or the satisfaction of any performance criteria, the Restricted Stock Units subject to such Stock Incentive Award shall remain subject to forfeiture. (c) Termination of Employment. If the Participant's employment with the Company and/or a Subsidiary ends before the Restricted Stock Units vest, the Participant shall forfeit all unvested Restricted Stock Units, unless the termination is a result of the occurrence of a Qualifying Event or the Committee determines that the Participant's unvested Restricted Stock Units shall vest as of the date of such event; provided, however, the Committee may grant Restricted Stock Units precluding such accelerated vesting on order to qualify the Restricted Stock Units for the Performance-Based Exception. (d) Death, Disability and Retirement. In the event a Qualifying Event occurs before the date or dates on which Restricted Stock Units vest, the expiration of the applicable restrictions (other than restrictions based on performance criteria set forth in Section 14) shall be accelerated and the Participant shall be entitled to receive the Shares free of all such restrictions. In the case of Restricted Stock Units which are based on performance criteria set forth in Section 14, then as of the date on which 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 10 Revised 11/3/04 such Qualifying Event occurs, the Participant shall be entitled to receive a number of Shares that is determined by measuring the selected performance criteria from the Company's most recent publicly available quarterly results that are available as of the date the Qualifying Event occurs; provided, however, the Committee may grant Restricted Stock Units precluding such partial awards when a Qualifying Event occurs in order to qualify the Restricted Stock Units for the Performance-Based Exception. All other Shares subject to such Restricted Stock Units shall be forfeited and returned to the Company as of the date on which such Qualifying Event occurs. (e) Acceleration of Award. Notwithstanding anything to the contrary in this Plan, the Committee shall have the power to permit, in its sole discretion, an acceleration of the applicable restrictions or the applicable period of such restrictions with respect to any part or all of the Restricted Stock Units awarded to a Participant; provided, however, the Committee may grant Restricted Stock Units precluding such accelerated vesting on order to qualify the Restricted Stock Units for the Performance-Based Exception. (f) Necessity of Stock Incentive Agreement. Each grant of Restricted Stock Unit(s) shall be evidenced by a Stock Incentive Agreement that shall specify the terms, conditions and restrictions regarding the Participant's right to receive Share(s) in the future, and shall incorporate such other terms and conditions as the Committee, acting in its sole discretion, deems consistent with the terms of this Plan. The Committee shall have sole discretion to modify the terms and provisions of Restricted Stock Unit(s) in accordance with Section 12 of this Plan. (g) Transferability of Restricted Stock Units. Except as otherwise provided in a Participant's Restricted Stock Unit Award, no Restricted Stock Unit granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated by the holder Participant, except upon the death of the holder Participant by will or by the laws of descent and distribution. (h) Voting, Dividend & Other Rights. Unless the applicable Stock Incentive Agreement provides otherwise, holders of Restricted Stock Units shall not be entitled to vote or to receive dividends until they become owners of the Shares pursuant to their Restricted Stock Units, and, unless the applicable Stock Incentive Agreement provides otherwise, the holder of a Restricted Stock Unit shall not be entitled to any dividend equivalents (as described in Section 7.1(e)). 7.5 TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS. (a) Grants of Stock Appreciation Rights. A Stock Appreciation Right shall entitle the Participant to receive upon exercise or payment the excess of the Fair Market Value of a specified number of Shares at the time of exercise, over a specified price. The specified price for a Stock Appreciation Right granted in connection with a previously or contemporaneously granted Option, shall not be less than the Exercise Price for Shares that are the subject of the Option. In the case of any other Stock Appreciation Right, the specified price shall not be less than one hundred percent (100%) of the Fair Market Value of the Shares at the time the Stock Appreciation Right was granted. If related to an Option, the exercise of a Stock Appreciation Right shall result in a pro rata surrender of the related Option to the extent the Stock Appreciation Right has been exercised. (b) Payment. Upon exercise or payment of a Stock Appreciation Right, the Company shall pay to the Participant the appreciation with Shares (computed using the aggregate Fair Market Value of Shares on the date of payment or exercise) as specified in the Stock Incentive Agreement or, if not specified, as the Committee determines. To the extent that a Stock Appreciation Right is paid with consideration other than Shares, it shall be treated as paid in Shares for purposes of Section 3. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 11 Revised 11/3/04 (c) Vesting of Stock Appreciation Rights. The Committee shall establish the vesting schedule applicable to Stock Appreciation Rights and shall specify the times, vesting and performance goal requirements. Until the end of the period(s) of time specified in the vesting schedule and/or the satisfaction of any performance criteria, the Stock Appreciation Rights subject to such Stock Incentive Award shall remain subject to forfeiture. (d) Death, Disability and Retirement. In the event a Qualifying Event occurs before the date or dates on which Stock Appreciation Rights vest, the expiration of the applicable restrictions (other than restrictions based on performance criteria set forth in Section 14) shall be accelerated and the Participant shall be entitled to receive the full value of the Stock Appreciation Right free of all such restrictions. In the case of Stock Appreciation Rights which are based on performance criteria set forth in Section 14, then as of the date on which such Qualifying Event occurs, the Participant shall be entitled to receive a value determined by measuring the selected performance criteria from the Company's most recent publicly available quarterly results that are available as of the date the Qualifying Event occurs. All other benefits under the Stock Appreciation Rights shall thereupon be forfeited and returned to the Company as of the date on which such Qualifying Event occurs. (e) Transferability of Stock Appreciation Rights. Except as otherwise provided in a Participant's Stock Incentive Agreement, no Stock Appreciation Right granted under the Plan may be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except upon the death of the holder Participant by will or by the laws of descent and distribution. (f) Special Provisions for Tandem Stock Appreciation Rights. A Stock Appreciation Right granted in connection with an Option may only be exercised to the extent that the related Option has not been exercised. A Stock Appreciation Right granted in connection with an ISO (1) will expire no later than the expiration of the underlying ISO, (2) may be for no more than the difference between the exercise price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Stock Appreciation Right is exercised, (3) may be transferable only when, and under the same conditions as, the underlying ISO is transferable, and (4) may be exercised only (i) when the underlying ISO could be exercised and (ii) when the Fair Market Value of the Shares subject to the ISO exceeds the exercise price of the ISO. 7.6 INDEPENDENT DIRECTOR AUTOMATIC GRANTS. Notwithstanding any other provisions of this Plan, Independent Directors shall only receive grants of Restricted Stock Awards or Restricted Stock Units as follows: an initial grant made on March 1, 2004, and, thereafter, grants shall be made on December 1 (or the first business day of December, if December 1 is not a business day) of each calendar year during the term of this Plan (an "December Grant Date"). Such grants shall automatically be made in accordance with the provisions outlined herein, and no other grants shall be made to Independent Directors pursuant to this Plan (changes set forth in section 7.6 are effective September 27, 2004): (a) Automatic Grant of Restricted Stock Awards. On March 1, 2004, and on each December Grant Date thereafter, each Independent Director shall automatically be granted (without any required action on the part of the Committee) a number of Restricted Stock Awards or Restricted Stock Units equal to $10,000.00 divided by the Fair Market Value (as determined on such grant date) of a Share (with any resulting fractional share less than 0.5 disregarded, and any resulting fractional share greater than or equal to 0.5 rounded up to the next whole number). Each such Restricted Stock Award or Restricted Stock Unit of an Independent Director shall provide that such Restricted Stock Award or Restricted Stock Unit shall vest on the third anniversary of the date of grant of such Restricted Stock Award or Restricted Stock Unit, except for the March 1, 2004 grant that shall vest thirty-three (33) months after the date of such grant. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 12 Revised 11/3/04 (b) Automatic Increase in Automatic Grants. For each December Grant Date occurring after the fiscal year 2004, the $10,000.00 amount in the preceding paragraphs shall be adjusted for annual increases (but not decreases) using the U. S. Consumer Price Index, all urban Consumers, all items (or equivalent successor index), published by the Bureau of Labor Statistics of the U.S. Department of Labor, and using October 1, 2003 as the base date for such adjustments. (c) Non-availability of Shares. If the grants provided for under the preceding paragraphs are not possible on a given December Grant Date because of limitations contained in this Plan with respect to Shares available for issuance, the grants determined under the preceding paragraphs to the extent possible shall be prorated among all Independent Directors as of such December Grant Date. (d) Retirement or Resignation. In the event an Independent Director retires, resigns or otherwise does not continue to serve on the Board for any reason (other than pursuant to a Termination for Cause), each Restricted Stock Award or Restricted Stock Unit previously granted shall vest immediately and all restrictions shall lapse. (e) Restricted Stock Units. Any grant of Restricted Stock Units made to a Canadian resident Independent Director shall also be made in accordance with the provisions of Section 15 hereof. SECTION 8. SECURITIES REGULATION 8.1 LEGALITY OF ISSUANCE. No Share shall be issued under this Plan unless and until the Committee has determined that all required actions have been taken to register such Share under the Securities Act of 1933 or the Company has determined that an exemption therefrom is available, any applicable listing requirement of any stock exchange on which the Share is listed has been satisfied, and any other applicable provision of state, federal or foreign law, including foreign securities laws where applicable, has been satisfied. 8.2 RESTRICTIONS ON TRANSFER; REPRESENTATIONS; LEGENDS. Regardless of whether the offering and sale of Shares under the Plan have been registered under the Securities Act of 1933 or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge, or other transfer of such Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable to achieve compliance with the provisions of the Securities Act of 1933, the securities laws of any state, the United States or any other applicable foreign law. If the offering and/or sale of Shares under the Plan is not registered under the Securities Act of 1933 and the Company determines that the registration requirements of the Securities Act of 1933 apply but an exemption is available which requires an investment representation or other representation, the participant shall be required, as a condition to acquiring such Shares, to represent that such Shares are being acquired for investment, and not with a view too the sale or distribution thereof, except in compliance with the Securities Act of 1933, and to make such other representations as are deemed necessary or appropriate by the Company and its counsel. All Stock Incentive Agreements shall contain a provision stating that any restrictions under any applicable securities laws will apply. 8.3 REGISTRATION OF SHARES. The Company may, and intends to, but is not obligated to, register or qualify the offering or sale of Shares under the Securities Act of 1933 or any other applicable state, federal or foreign law. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 13 Revised 11/3/04 SECTION 9. LIFE OF PLAN No Stock Incentive shall be granted under this Plan on or after the earlier of: (a) the fifth (5th) anniversary of the effective date of this Plan (as determined under Section 4 of this Plan), or (b) the date on which all of the Shares reserved under Section 3 of this Plan have (as a result of the exercise of Stock Incentives granted under this Plan or lapse of all restrictions under a Restricted Stock Award or Restricted Stock Unit) been issued or are no longer available for use under this Plan. This Plan shall continue in effect until all outstanding Stock Incentives have been exercised in full or are no longer exercisable and all Restricted Stock Awards or Restricted Stock Units have vested or been forfeited. SECTION 10. ADJUSTMENT Notwithstanding anything in Section 12 to the contrary, (i) the number of Shares reserved under Section 3 of this Plan, (ii) the limit on the number of Shares that may be granted subject to Stock Incentives during a calendar year to any individual under Section 3 of this Plan, (iii) the number of Shares subject to Stock Incentives granted under this Plan, and (iv) the Exercise Price of any Options and the specified exercise price of any Stock Appreciation Rights, shall be adjusted by the Committee in an equitable manner to reflect any change in the capitalization of the Company, including, but not limited to, such changes as stock dividends or stock splits. Furthermore, the Committee shall have the right to adjust (in a manner that satisfies the requirements of Code Section 424(a)) (x) the number of Shares reserved under Section 3, (y) the number of Shares subject to Stock Incentives granted under this Plan, and (z) the Exercise Price of any Options and the specified exercise price of any Stock Appreciation Rights in the event of any corporate transaction described in Code Section 424(a) that provides for the substitution or assumption of such Stock Incentives. If any adjustment under this Section creates a fractional Share or a right to acquire a fractional Share, such fractional Share shall be disregarded, and the number of Shares reserved under this Plan and the number subject to any Stock Incentives granted under this Plan shall be the next lower number of Shares, rounding all fractions downward. An adjustment made under this Section by the Committee shall be conclusive and binding on all affected persons and, further, shall not constitute an increase in the number of Shares reserved under Section 3 or an increase in any limitation imposed by the Plan. SECTION 11. CHANGE OF CONTROL OF THE COMPANY 11.1 GENERAL RULE FOR CHANGE OF CONTROL. Except as otherwise provided in a Stock Incentive Agreement, if a Change of Control occurs, and if the agreements effectuating the Change of Control do not provide for the assumption or substitution of all Stock Incentives granted under this Plan, with respect to any Stock Incentive granted under this Plan that is not so assumed or substituted (a "Non-Assumed Stock Incentive"), the Committee, in its sole and absolute discretion, may, with respect to any or all of such Non-Assumed Stock Incentives, take any or all of the following actions to be effective as of the date of the Change of Control (or as of any other date fixed by the Committee occurring within the thirty (30) day period immediately preceding the date of the Change of Control, but only if such action remains 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 14 Revised 11/3/04 contingent upon the effectuation of the Change of Control) (such date referred to as the "Action Effective Date"): (a) Accelerate the vesting and/or exercisability of such Non-Assumed Stock Incentive; and/or (b) Unilaterally cancel such Non-Assumed Stock Incentive in exchange for: (i) whole and/or fractional Shares (or for whole Shares and cash in lieu of any fractional Share) or whole and/or fractional shares of a successor (or for whole shares of a successor and cash in lieu of any fractional share) that, in the aggregate, are equal in value to the excess of the Fair Market Value of: (I) in the case of Options, the Shares that could be purchased subject to such Non-Assumed Stock Incentive less the aggregate Exercise Price for the Options with respect to such Shares; (II) in the case of Restricted Stock Units or Stock Appreciation Rights, Shares subject to such Stock Incentive determined as of the Action Effective Date (taking into account vesting), less the value of any consideration payable on exercise. (ii) cash or other property equal in value to the excess of the Fair Market Value of (I) in the case of Options, the Shares that could be purchased subject to such Non-Assumed Stock Incentive less the aggregate Exercise Price for the Options with respect to such Shares or (II) in the case of Restricted Stock Units or Stock Appreciation Rights, Shares subject to such Stock Incentive determined as of the Action Effective Date (taking into account vesting) less the value of any consideration payable on exercise. (c) In the case of Options, unilaterally cancel such Non-Assumed Option after providing the holder of such Option with (1) an opportunity to exercise such Non-Assumed Option to the extent vested within a specified period prior to the date of the Change of Control, and (2) notice of such opportunity to exercise prior to the commencement of such specified period. However, notwithstanding the foregoing, to the extent that the recipient of a Non-Assumed Stock Incentive is an Insider, payment of cash in lieu of whole or fractional Shares or shares of a successor may only be made to the extent that such payment (1) has met the requirements of an exemption under Rule 16b-3 promulgated under the Exchange Act, or (2) is a subsequent transaction the terms of which were provided for in a transaction initially meeting the requirements of an exemption under Rule 16b-3 promulgated under the Exchange Act. Unless a Stock Incentive Agreement provides otherwise, the payment of cash in lieu of whole or fractional Shares or in lieu of whole or fractional shares of a successor shall be considered a subsequent transaction approved by the original grant of an Option. 11.2 GENERAL RULE FOR OTHER STOCK INCENTIVE AGREEMENTS. If a Change of Control occurs, then, except to the extent otherwise provided in the Stock Incentive Agreement pertaining to a particular Stock Incentive or as otherwise provided in this Plan, each Stock Incentive shall be governed by applicable law and the documents effectuating the Change of Control. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 15 Revised 11/3/04 SECTION 12. AMENDMENT OR TERMINATION This Plan may be amended by the Committee from time to time to the extent that the Committee deems necessary or appropriate; provided, however, no such amendment shall be made absent the approval of the shareholders of the Company if such amendment (a) increases the number of Shares reserved under Section 3, except as set forth in Section 10, (b) extends the maximum life of the Plan under Section 9 or the maximum exercise period under Section 7, (c) decreases the minimum Exercise Price under Section 7, or (d) changes the designation of Eligible Recipients eligible for Stock Incentives under Section 6. Shareholder approval of other material amendments (such as an expansion of the types of awards available under the Plan, an extension of the term of the Plan, or a change to the method of determining the Exercise Price of Options issued under the Plan) may also be required pursuant to rules promulgated by an established stock exchange or a national market system. An exchange of a later granted Option for an earlier granted Option for any purpose, including, but not limited to, the purpose of lowering the Exercise Price of such Option, and an exchange of a later granted Stock Incentive for an earlier granted Stock Incentive for any purpose, shall not be deemed to be an amendment to this Plan. The Board also may suspend the granting of Stock Incentives under this Plan at any time and may terminate this Plan at any time. The Company shall have the right to modify, amend or cancel any Stock Incentive after it has been granted if (I) the modification, amendment or cancellation does not diminish the rights or benefits of the Stock Incentive recipient under the Stock Incentive (provided, however, that a modification, amendment or cancellation that results solely in a change in the tax consequences with respect to a Stock Incentive shall not be deemed as a diminishment of rights or benefits of such Stock Incentive), (II) the Participant consents in writing to such modification, amendment or cancellation, (III) there is a dissolution or liquidation of the Company, (IV) this Plan and/or the Stock Incentive Agreement expressly provides for such modification, amendment or cancellation, or (V) the Company would otherwise have the right to make such modification, amendment or cancellation by applicable law. SECTION 13. MISCELLANEOUS 13.1 SHAREHOLDER RIGHTS. Except as provided in Section 7. 3 with respect to Restricted Stock Awards, or in a Stock Incentive Agreement, no Participant shall have any rights as a shareholder of the Company as a result of the grant of a Stock Incentive pending the actual delivery of Shares subject to such Stock Incentive to such Participant. 13.2 NO GUARANTEE OF CONTINUED RELATIONSHIP. The grant of a Stock Incentive to a Participant under this Plan shall not constitute a contract of employment or other relationship with the Company and shall not confer on a Participant any rights upon his or her termination of employment or relationship with the Company in addition to those rights, if any, expressly set forth in the Stock Incentive Agreement that evidences his or her Stock Incentive. 13.3 WITHHOLDING. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company as a condition precedent for the grant or fulfillment of any Stock Incentive, an amount in Shares or cash sufficient to satisfy federal, state and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan and/or any action taken by a Participant with respect to a Stock Incentive. Whenever Shares are to be issued to a Participant upon exercise of an Option or Stock Appreciation Right, or satisfaction of conditions under a Restricted Stock Unit, the Company shall have the right to require the Participant to remit to the Company, as a condition of exercise of the Option or Stock Appreciation Right, or as a condition to the fulfillment of the Restricted Stock Unit, an amount in cash (or, unless the Stock Incentive Agreement provides otherwise, in Shares) sufficient to satisfy federal, state and local 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 16 Revised 11/3/04 withholding tax requirements at the time of exercise. However, notwithstanding the foregoing, to the extent that a Participant is an Insider, satisfaction of withholding requirements by having the Company withhold Shares may only be made to the extent that such withholding of Shares (1) has met the requirements of an exemption under Rule 16b-3 promulgated under the Exchange Act, or (2) is a subsequent transaction the terms of which were provided for in a transaction initially meeting the requirements of an exemption under Rule 16b-3 promulgated under the Exchange Act. Unless the Stock Incentive Agreement provides otherwise, the withholding of shares to satisfy federal, state and local withholding tax requirements shall be a subsequent transaction approved by the original grant of a Stock Incentive. Notwithstanding the foregoing, in no event shall payment of withholding taxes be made by a retention of Shares by the Company unless the Company retains only Shares with a Fair Market Value equal to the minimum amount of taxes required to be withheld. 13.4 NOTIFICATION OF DISQUALIFYING DISPOSITIONS OF ISO OPTIONS. If a Participant sells or otherwise disposes of any of the Shares acquired pursuant to an Option that is an ISO on or before the later of (1) the date two (2) years after the date of grant of such Option, or (2) the date one (1) year after the exercise of such Option, then the Participant shall immediately notify the Company in writing of such sale or disposition and shall cooperate with the Company in providing sufficient information to the Company for the Company to properly report such sale or disposition to the Internal Revenue Service. The Participant acknowledges and agrees that he or she may be subject to federal, state and/or local tax withholding by the Company on the compensation income recognized by Participant from any such early disposition, and agrees that he or she shall include the compensation from such early disposition in his gross income for federal tax purposes. Participant also acknowledges that the Company may condition the exercise of any Option that is an ISO on the Participant's express written agreement with these provisions of this Plan. 13.5 TRANSFERS & RESTRUCTURINGS. The transfer of a Participant's employment between or among the Company or a Subsidiary (including the merger of a Subsidiary into the Company) shall not be treated as a termination of his or her employment under this Plan. Likewise, the continuation of employment by a Participant with a corporation which is a Subsidiary shall be deemed to be a termination of employment when such corporation ceases to be a Subsidiary. 13.6 GOVERNING LAW/CONSENT TO JURISDICTION. This Plan shall be construed under the laws of the State of Ohio without regard to principles of conflicts of law. Each Participant consents to the exclusive jurisdiction in the United States District Court for the Southern District of Ohio (Western Division - Dayton) or the Montgomery County (Ohio) Court of Common Pleas for the determination of all disputes arising from this Plan and waives any rights to remove or transfer the case to another court. 13.7 ESCROW OF SHARES. To facilitate the Company's rights and obligations under this Plan, the Company reserves the right to appoint an escrow agent, who shall hold the Shares owned by a Participant pursuant to this Plan. SECTION 14. PERFORMANCE CRITERIA 14.1 PERFORMANCE GOAL BUSINESS CRITERIA. Unless and until the Board proposes for shareholder vote and shareholders approve a change in the general performance measures set forth in this Section, the attainment of which may determine the degree of payout and/or vesting with respect to Stock Incentives to Key Employees and Key Persons pursuant to this Plan which are designed to qualify for the Performance-Based Exception, the performance measure(s) to be used by the Committee for purposes of such grants shall be chosen from among the following: (a) earnings per share; (b) net income (before or after taxes); (c) return measures (including, but not limited to, return on assets, equity or sales); (d) cash 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 17 Revised 11/3/04 flow return on investments which equals net cash flows divided by owners equity; (e) earnings before or after taxes, depreciation and/or amortization; (f) gross revenues; (g) operating income (before or after taxes); (h) total shareholder return; (i) corporate performance indicators (indices based on the level of certain services provided to customers); (j) cash generation, profit and/or revenue targets; (k) growth measures, including revenue growth, as compared with a peer group or other benchmark; and/or (l) share price (including, but not limited to, growth measures and total shareholder return). In setting performance goals using these performance measures, the Committee may exclude the effect of changes in accounting standards and non-recurring unusual events specified by the Committee, such as write-offs, capital gains and losses and acquisitions and dispositions of businesses. 14.2 DISCRETION IN FORMULATION OF PERFORMANCE GOALS. The Committee shall have the discretion to adjust the determinations of the degree of attainment of the pre-established performance goals; provided, however, that Stock Incentives which are to qualify for the Performance-Based Exception may not be adjusted upward (although the Committee shall retain the discretion to adjust such Stock Incentives downward). 14.3 PERFORMANCE PERIODS. The Committee shall have the discretion to determine the period during which any performance goal must be attained with respect to a Stock Incentive. Such period may be of any length, and must be established prior to the start of such period or within the first ninety (90) days of such period (provided that the performance criteria are not in any event set after 25% or more of such period has elapsed). 14.4 MODIFICATIONS TO PERFORMANCE GOAL CRITERIA. In the event that the applicable tax and/or securities laws and regulatory rules and regulations change to permit Committee discretion to alter the governing performance measures noted above without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Committee determines that it is advisable to grant Stock Incentives which shall not qualify for the Performance-Based Exception, the Committee may make such grants without satisfying the requirements under Code Section 162(m) to qualify for the Performance-Based Exception. SECTION 15. SPECIAL CANADIAN PROVISIONS 15.1 APPLICATION. The provisions of this Section 15 shall apply with respect to any Participant who is a resident of Canada, and with respect to any Stock Incentive which is granted under this Plan to any such Participant, but shall not apply with respect to any other Participant or with respect to any Stock Incentive which is granted under this Plan to any such other Participant. No purchase or delivery of Shares pursuant to a Stock Incentive shall occur until applicable restrictions imposed pursuant to this Plan or the applicable Stock Incentive have terminated. In case of any conflict with provisions contained elsewhere in this Plan, the provisions of this Section 15 will apply. Canadian resident participants may only receive Restricted Stock Units. 15.2 CANADA TAX TREATMENT. The grant of a Restricted Stock Unit represents a contingent entitlement of the Participant to whom it has been granted to receive shares of Company common stock on the date of vesting. Upon vesting, the Participant will be entitled to exchange the Restricted Stock Unit for a share of Reynolds common stock. The Plan is not a "salary deferral arrangement" as defined in the Income Tax Act (Canada), and no provision of this Plan shall be applied, interpreted or administered in a manner inconsistent with such determination. 15.3 VOTING, DIVIDENDS AND OTHER RIGHTS. Canadian resident holders shall not be entitled to vote or to receive dividends until such time as they become owners of the Shares pursuant to their 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 18 Revised 11/3/04 Restricted Stock Units, and, unless the applicable Stock Incentive Agreement provides otherwise, the holder of a Restricted Stock Unit shall not be entitled to any dividend equivalents (as described in Section 7.1(e)). 15.4 SHARES DELIVERED UNDER PLAN. All Shares delivered to a Participant under the Plan shall be purchased by an independent broker who shall acquire Shares on the open market on behalf of the Participant. The Company or its Canadian affiliate shall notify the independent broker of the number of Shares of the Company to be purchased by the broker on the Participant's behalf and the broker will purchase such Shares as soon as practical thereafter and, for greater certainty, the broker shall effect such purchase no later than the earlier of: (a) the last day of the first calendar month commencing after the Participant's Restricted Stock Units' vesting date and (b) the last day of the year in which the Participant's vesting date occurs. The broker will deliver such Shares directly to the Participant. The Company or its Canadian affiliate will pay all brokerage fees arising in connection with the acquisition of such Shares. 15.5 VESTING. Notwithstanding the provisions of Sections 7.3(a) and (b), the vesting period for Canadian resident participants shall not extend beyond December 31 of the third year following the end of the year in which the Restricted Stock Unit is granted. SECTION 16. OTHER NON-US PROVISIONS 16.1 The Committee shall have the authority to require that any Stock Incentive Agreement relating to a Stock Incentive in a jurisdiction outside of the United States contain such terms as are required by local law in order to constitute a valid grant under the laws of such jurisdiction. Such authority shall be notwithstanding the fact that the requirements of the local jurisdiction may be different from or more restrictive than the terms set forth in this Plan. No purchase or delivery of Shares pursuant to a Stock Incentive shall occur until applicable restrictions imposed pursuant to this Plan or the applicable Stock Incentive have terminated. 2004 Executive Stock Incentive Plan Amended and Restated November 8, 2004 19 Revised 11/3/04 EX-10.N 5 l10970aexv10wn.txt 2004 ESIP PERFORMANCE BASED RESTRICTED STOCK AWARD EXHIBIT (10)(n) 2004 EXECUTIVE STOCK INCENTIVE PLAN PERFORMANCE-BASED RESTRICTED STOCK AWARD The Reynolds and Reynolds Company, an Ohio corporation (the "Company"), hereby grants to the Recipient this Performance-Based Restricted Stock Award effective as of the Award Date. This award is subject to all of the terms and conditions of this Performance-Based Restricted Stock Award and The Reynolds and Reynolds Company 2004 Executive Stock Incentive Plan (the "Plan"). Unless otherwise specified, capitalized terms shall have the meanings specified in the Plan. The terms and conditions of the Plan are incorporated by reference and govern except to the extent that this Performance-Based Restricted Stock Award provides otherwise. RECIPIENT NAME: AWARD DATE: VEST DATE: AWARD NUMBER: AWARD SHARES: SHARES OF THE REYNOLDS AND REYNOLDS COMPANY SUBJECT TO CURRENT PERFORMANCE-BASED RESTRICTED STOCK AWARD ("AWARD SHARES") FUTURE AWARD SHARES: SHARES OF THE REYNOLDS AND REYNOLDS COMPANY SUBJECT TO FUTURE PERFORMANCE-BASED RESTRICTED STOCK AWARD ("FUTURE AWARD SHARES") By accepting this Performance-Based Stock Award and any shares of common stock of the Company ("Common Stock") issued pursuant to this Performance-Based Restricted Stock Award, Recipient acknowledges receipt of a copy of the Plan. Recipient represents that Recipient has read and understands the terms of the Plan and this Performance-Based Restricted Stock Award, and accepts this Performance-Based Restricted Stock Award subject to all such terms and conditions, provided, however, if you are a key employee as defined in Section 416(i) of the Internal Revenue Code of 1986, as amended (the "Code"), the payment of the award shall be deferred to the date that is six months after the date of separation from service (or, if earlier, the date of death of the employee) in order to avoid inclusion in gross income and imposition of tax under Section 409A(a) of the Code. Recipient also acknowledges that he or she should consult a tax advisor regarding the tax aspects of this Performance-Based Restricted Stock Award and that Recipient is not relying on the Company for any opinion or advice as to personal tax implications of this Performance-Based Restricted Stock Award. For all purposes of this Performance-Based Stock Award, the Performance Period shall mean the period beginning on October 1, 200_, and ending on September 30, 200_. By the acceptance of this Performance-Based Restricted Stock Award, and as consideration for the receipt of the Award Shares, recipient agrees to appoint a company nominee[s] as his/her irrevocable proxy to vote, in the nominee[s]' discretion, all Award Shares at the annual meeting of shareholders and at any other meetings at which shareholders are entitled to vote. The Company will provide appropriate means to effect this appointment. If Recipient fails to so appoint a proxy within a reasonable time as specified by the Company, this Performance-Based Restricted Stock Award shall become null and void. IN WITNESS WHEREOF, this Performance-Based Restricted Stock Award has been executed by the Company to be effective as of the Award Date specified hereon. THE REYNOLDS AND REYNOLDS COMPANY BY: /s/ PHIL ODEEN ----------------------------- [REYNOLDS & REYNOLDS. LOGO] Terms and Conditions 1. Terms and Provisions of Performance-Based Restricted Stock Award. Under the authority of the Plan, as of the Award Date, the Company has awarded to the Recipient the Award Shares. In addition, the Company may award additional Shares as Future Award Shares as provided below. All such awards are subject to the following terms and conditions and are based upon the performance of the Recipient and the Company during the Performance Period. a. Immediate Award of Shares Subject to Performance. The Recipient is awarded the Award Shares as of the Award Date subject to the following forfeiture restrictions: i. Service for Entire Performance Period. If the Recipient remains employed by the Company and/or a Subsidiary through the Vest Date, then, as of the Vest Date, a percentage of the Award Shares that is determined based upon a comparison of the Revenue Growth of the Standard & Poor's MidCap 400 companies during the Performance Period with the Revenue Growth of the Company during the Performance Period (as described in Section 5) shall cease to be subject to forfeiture, shall vest and the Recipient shall be entitled to receive such Shares free of such restrictions. All other Award Shares awarded pursuant to this subsection shall be forfeited and returned to the Company. ii. Performance Criteria. If for the Performance Period the Revenue Growth of the Company expressed as a percentage of increase places it at or below the 25th percentile of revenue growth of the companies as reflected on the Index, then none of the Award Shares will be earned and all Award Shares will be forfeited. If the Revenue Growth places it above the 25th percentile, then the number of Award Shares earned by Recipient will be equal to the product of (a) four percent (4%) multiplied by (b) the nearest whole number of percentage points by which Revenue Growth places the Company above the 25th percentile multiplied by (c) the number of Award Shares, up to a maximum payout of 100% of the Award Shares. The foregoing is illustrated by the following example: Assume that for the Performance Period, the Revenue Growth of the Company when compared to revenue growth of other companies on the Index, places the Company at the 40% percentile. In such circumstances, the Recipient would be entitled to receive 60% of the Award Shares determined as follows: (1) Number of percentage points in excess of the 25th percentile = 15 [40th - 25th = 15] (2) 15 x 4% = 60% iii. Intervening Qualifying Events. If the Recipient ceases to be employed by the Company and/or a Subsidiary prior to the Vest Date because of a Qualifying Event, then, as of the date on which the Qualifying Event occurs, the Recipient shall be entitled to receive the number of Shares based upon a payout that is determined by using the same formula described in the preceding section, but comparing the Revenue Growth of the Company using the Company's most recently available quarterly results compared to the revenue growth of companies on the Index for the same period. The foregoing is illustrated by the following example: Assume that two years into the Performance Period the Recipient dies. On the date of Recipient's death, the most recently published quarterly figures for the Company place its Revenue Growth in the 30th percentile of companies on the Index for the same period. Therefore, the Recipient's estate will be entitled to receive twenty percent (20%) of the Award Shares determined as follows: (1) Number of percentage points in excess of 25th percentile = 5 [30th - 25th = 5] (2) 5 x 4% = 20% iv. Other Termination of Employment. If the Recipient ceases to be employed by the Company and/or a Subsidiary prior to the Vest Date for any reason other than a Qualifying Event then, as of the date on which the Recipient's employment terminates, all Award Shares shall immediately be forfeited and returned to the Company. [REYNOLDS & REYNOLDS. LOGO] b. Future Award of Shares Subject to Performance. The Recipient may be awarded additional Shares following the end of the Performance Period in accordance with the following terms and provisions: i. Service. If the Recipient remains employed by the Company and/or a Subsidiary through the Vest Date, then as of the Vest Date, the Recipient may be issued additional Shares based upon a comparison of the Revenue Growth of the Standard & Poor's MidCap 400 companies during the Performance Period with the Revenue Growth of the Company during the Performance Period (as described in Section 5). ii. Performance Criteria. If the Revenue Growth of the Company expressed as a percentage of increase places it at or below the 50th percentile of revenue growth of the companies as reflected on the Index, then none of the Future Award Shares will be earned. If the Revenue Growth places it above the 50th percentile, then the number of Future Award Shares earned by Recipient will be equal to the product of (a) four percent (4%) multiplied by (b) the nearest whole number of percentage points by which Revenue Growth places the Company above the 50th percentile multiplied by (c) the number of Award Shares, up to a maximum payout of 100% of the Future Award Shares. The foregoing is illustrated by the following example: Assume that as of the last day of the Performance Period, the Revenue Growth of the Company when compared to revenue growth of other companies on the Index, places the Company at the 70th percentile. In such circumstances, the recipient would be entitled to receive 80% of the number of Future Award Shares determined as follows: (1) Number of percentage points in excess of the 50th percentile = 20 [70th - 50th = 20] (2) 20 x 4% = 80% iii. Termination of Employment within Performance Period. If the Recipient ceases to be employed by the Company and/or a Subsidiary during the Performance Period for any reason (including by reason of a Qualifying Event with respect to such Recipient), then the Recipient shall not be issued or receive any Future Award Shares. c. Voting, Dividend and Other Rights, Restrictions and Limitations. By acceptance of this Performance-Based Restricted Stock Award and as consideration for the receipt of the Award Shares, recipient agrees to appoint a company nominee[s] as his/her irrevocable proxy to vote, in the nominee[s]' discretion, all Award Shares at the annual meeting of shareholders and at any other meetings at which shareholders are entitled to vote. Except as otherwise provided in this Performance-Based Stock Award, the terms of the Plan shall control as to voting, dividends and other rights, restrictions and limitations. Recipient acknowledges and agrees that the Company will pay dividends on the Award Shares and that such payment will be received in the Recipient's next succeeding paycheck following the dividend payment date. 2. Tax Consequences. RECIPIENT UNDERSTANDS THAT THE AWARD OF RESTRICTED STOCK, THE SALE OF RESTRICTED STOCK, AND THE ISSUANCE OF COMMON STOCK, MAY HAVE TAX IMPLICATIONS THAT COULD RESULT IN ADVERSE TAX CONSEQUENCES TO RECIPIENT. RECIPIENT REPRESENTS THAT RECIPIENT SHOULD CONSULT A TAX ADVISOR. RECIPIENT FURTHER ACKNOWLEDGES THAT HE OR SHE IS NOT RELYING ON THE COMPANY FOR ANY TAX, FINANCIAL OR LEGAL ADVICE; AND IT IS SPECIFICALLY UNDERSTOOD BY THE RECIPIENT THAT NO REPRESENTATIONS ARE MADE AS TO ANY PARTICULAR TAX TREATMENT WITH RESPECT TO THIS AWARD. 3. Interpretation. Any dispute regarding the interpretation of this Performance-Based Stock Award shall be submitted to the Board or the Committee, which shall review such dispute in accordance with the Plan. The resolution of such a dispute by the Board or Committee shall be final and binding on the Company and Recipient. 4. Entire Agreement and Other Matters. The Plan is incorporated herein by this reference. This Performance-Based Stock Award and the Plan constitute the entire agreement of the parties hereto. This Performance-Based Stock Award and all rights and awards hereunder are void ab initio unless the Recipient agrees to be bound by all terms and provisions of this Award and the Plan. 5. Revenue Growth and Percentile of Peer Group. For purposes of this Performance-Based Restricted Stock Award, the term "Revenue Growth" as to the Company means the cumulative annual revenue growth for the Company during the Performance Period as determined by the Company's accountants or other advisors in good faith in their sole and absolute discretion consistent with the methodology used in computing revenue [REYNOLDS & REYNOLDS. LOGO] growth for companies on the Index. As to companies on the "Index", Revenue Growth shall be the cumulative annual revenue growth of companies in the Standard & Poor's MidCap 400 index during the Performance Period or, if the Index is discontinued, such other index or comparison group of companies as the Board or Committee shall specify. In determining the percentile of revenue growth of the companies as reflected on the index, a fraction of a percentile between .1 and .4 will be rounded downwards and a fraction of a percentile between .5 and .9 will be rounded upwards. For example, a percentile of 25.2 will be rounded downwards to 25. 6. Fractional Shares. If any calculation of Common Stock to be awarded or to be forfeited or to be released from restrictions or limitations would result in a fraction, any fraction of 0.5 or greater will be rounded to one, and any fraction of less than 0.5 will be rounded to zero. [REYNOLDS & REYNOLDS. LOGO] 2004 EXECUTIVE STOCK INCENTIVE PLAN TIME-BASED RETENTION RESTRICTED STOCK AWARD The Reynolds and Reynolds Company, an Ohio corporation (the "Company"), hereby grants to the Recipient this Retention Restricted Stock Award effective as of the Award Date. This award is subject to all of the terms and conditions of this Retention Restricted Stock Award and The Reynolds and Reynolds Company 2004 Executive Stock Incentive Plan (the "Plan"). Unless otherwise specified, capitalized terms shall have the meanings specified in the Plan. The terms and conditions of the Plan are incorporated by reference and govern except to the extent that this Retention Restricted Stock Award provides otherwise. RECIPIENT NAME: AWARD DATE: VEST DATE: AWARD NUMBER: AWARD SHARES: SHARES SUBJECT TO RETENTION RESTRICTED STOCK AWARD ("AWARD SHARES") By accepting this Retention Restricted Stock Award and any shares of common stock of the Company (the "Common Stock") issued pursuant to this Retention Restricted Stock Award, Recipient acknowledges receipt of a copy of the Plan. Recipient represents that Recipient has read and understands the terms of the Plan and this Retention Restricted Stock Award, and accepts this Retention Restricted Stock Award subject to all such terms and conditions. Recipient also acknowledges that he or she should consult a tax advisor regarding the tax aspects of this Retention Restricted Stock Award and that recipient is not relying on the Company for any opinion or advice as to personal tax implications of this Retention Restricted Stock Award. For all purposes of this Retention Restricted Stock Award, the Restriction Period shall mean the period beginning on the Award Date and ending on the date that is six months after the effective date of employment as set forth in the employment agreement between the Company's next Chief Executive Officer and the Company. By the acceptance of this Retention Restricted Stock Award, and as consideration for the receipt of the Award Shares, recipient agrees to appoint a company nominee[s] as his/her irrevocable proxy to vote, in the nominee[s]' discretion, all Award Shares at the annual meeting of shareholders and at any other [REYNOLDS & REYNOLDS. LOGO] meetings at which shareholders are entitled to vote. The Company will provide appropriate means to effect this appointment. If Recipient fails to so appoint a proxy within a reasonable time as specified by the Company, this Retention Restricted Stock Award shall become null and void. IN WITNESS WHEREOF, this Retention Restricted Stock Award has been executed by the Company to be effective as of the Award Date specified hereon. THE REYNOLDS AND REYNOLDS COMPANY BY: PHIL ODEEN ---------------------- TERMS AND CONDITIONS 1. Terms and Provisions of Retention Restricted Stock Award. Under the authority of the Plan, as of the Award Date, the Company has awarded to the Recipient the Award Shares subject to the following forfeiture restrictions based upon the continuous service of the Recipient during the Restriction Period. a. Immediate Award of Shares Subject to Service. As of the Award, the Recipient is hereby awarded the Award Shares subject to the following forfeiture restrictions: i. Service. If the Recipient remains in service with the Company and/or a Subsidiary during the Restriction Period, six months after the effective date of employment as set forth in the employment agreement between the Company's next Chief Executive Officer and the Company, then all of the Award Shares shall vest and shall be released from any possibility of forfeiture following the end of the Restriction Period and Recipient shall receive such Shares free of such restrictions. ii. Cessation of Service. If the Recipient does not remain in service with the Company and/or a Subsidiary during the Restriction Period for any reason, then, as of the date on which the Recipient's service with the Company and/or Subsidiary ceases, all Award Shares shall immediately be forfeited and returned to the Company. Notwithstanding Section 7.4(d) of the Plan, you (or your estate) will not receive any Award Shares upon your death, disability (other than short-term disability) or retirement. b. By acceptance of this Retention Restricted Stock Award and as consideration for the receipt of the Award Shares, Recipient agrees to appoint a company nominee[s] as his/her irrevocable proxy to vote, in the nominee[s]' discretion, all Award Shares at the annual meeting of shareholders and at any other meetings at which shareholders are entitled to vote. Except as otherwise provided in this Retention Restricted Stock Award, the terms of the Plan [REYNOLDS & REYNOLDS. LOGO] shall control as to voting, dividends and other rights, restrictions and limitations. Recipient acknowledges and agrees that the Company will pay dividends on the Award Shares and that such payment will be received in the Recipient's next succeeding paycheck following the dividend payment date. 2. Tax Consequences. RECIPIENT UNDERSTANDS THAT THE AWARD OF RESTRICTED STOCK, THE SALE OF RESTRICTED STOCK, AND THE ISSUANCE OF COMMON STOCK, MAY HAVE TAX IMPLICATIONS THAT COULD RESULT IN ADVERSE TAX CONSEQUENCES TO RECIPIENT. RECIPIENT REPRESENTS THAT RECIPIENT SHOULD CONSULT A TAX ADVISOR; RECIPIENT FURTHER ACKNOWLEDGES THAT HE OR SHE IS NOT RELYING ON THE COMPANY FOR ANY TAX, FINANCIAL OR LEGAL ADVICE; AND IT IS SPECIFICALLY UNDERSTOOD BY THE RECIPIENT THAT NO REPRESENTATIONS ARE MADE AS TO ANY PARTICULAR TAX TREATMENT WITH RESPECT TO THIS AWARD. 3. Interpretation. Any dispute regarding the interpretation of this Retention Restricted Stock Award shall be submitted to the Board or the Committee, which shall review such dispute in accordance with the Plan. The resolution of such a dispute by the Board or Committee shall be final and binding on the Company and the Recipient. 4. Entire Agreement and Other Matters. The Plan is incorporated herein by this reference. This Retention Restricted Stock Award and the Plan constitute the entire agreement of the parties hereto. This Retention Restricted Stock Award and all rights and awards hereunder are void ab initio unless the Recipient agrees to be bound by all terms and provisions of this Award and the Plan. 5. Fractional Shares. If any calculation of Common Stock to be awarded or to be forfeited or to be released from restrictions or limitations would result in a fraction, any fraction of 0.5 or greater will be rounded to one, and any fraction of less than 0.5 will be rounded to zero. [REYNOLDS & REYNOLDS. LOGO] 2004 EXECUTIVE STOCK INCENTIVE PLAN PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD Reynolds and Reynolds (Canada) Limited (the "Company"), hereby awards to Recipient this Performance-Based Restricted Stock Unit effective as of the Award Date. This award is subject to all of the terms and conditions of this Performance-Based Restricted Stock Unit and The Reynolds and Reynolds Company 2004 Executive Stock Incentive Plan (the "Plan"). Unless otherwise specified, capitalized terms have the meanings specified in the Plan. The terms and conditions of the Plan are incorporated by reference and govern except to the extent that this Performance-Based Restricted Stock Unit provides otherwise. RECIPIENT NAME: AWARD DATE: VEST DATE: AWARD NUMBER: AWARD SHARES: SHARES OF THE REYNOLDS AND REYNOLDS COMPANY SUBJECT TO CURRENT PERFORMANCE-BASED RESTRICTED STOCK UNIT ("AWARD SHARES") FUTURE AWARD SHARES: SHARES OF THE REYNOLDS AND REYNOLDS COMPANY SUBJECT TO FUTURE PERFORMANCE-BASED RESTRICTED STOCK UNIT ("FUTURE AWARD SHARES") By accepting this Performance-Based Restricted Stock Unit, Recipient acknowledges receipt of a copy of the Plan. Recipient represents that Recipient has read and understands the terms of the Plan and this Performance-Based Restricted Stock Unit, and accepts this Performance-Based Restricted Stock Unit subject to all such terms and conditions. Recipient also acknowledges that he or she should consult a tax advisor regarding the tax aspects of this Performance-Based Restricted Stock Unit and that Recipient is not relying on the Company for any opinion or advice as to personal tax implications of this Performance-Based Restricted Stock Unit Award. For all purposes of this Performance-Based Restricted Stock Unit Award, the Performance Period shall mean the period beginning on OCTOBER 1, 200_ and ending on SEPTEMBER 30, 200_. Recipient acknowledges that the Award Shares and Future Award Shares are subject to tax and that the number of Award Shares and Future Award Shares actually received by Recipient will be reduced on account of the Recipient's tax liability. IN WITNESS WHEREOF, this Performance-Based Restricted Stock Unit has been executed by the Company to be effective as of the Award Date specified hereon. REYNOLDS AND REYNOLDS (CANADA) LIMITED BY: /s/ DALE L. MEDFORD --------------------------- [REYNOLDS & REYNOLDS. LOGO] Terms and Conditions 1. Terms and Provisions of Performance-Based Restricted Stock Unit. Under the authority of the Plan, as of the Award Date, the Company has awarded to the Recipient the Performance-Based Restricted Stock Unit, which represents a contingent entitlement of the Recipient to the Award Shares and Future Award Shares subject to the following conditions: a. Award of Units Subject to Performance. i. Service for Entire Performance Period. If the Recipient remains employed by The Reynolds and Reynolds Company and/or a Subsidiary through the vest date, then, as of the vest date, a percentage of the Performance-Based Restricted Stock Units that is determined based upon a comparison of the Revenue Growth of the Standard & Poor's MidCap 400 companies during the Performance Period with the Revenue Growth of The Reynolds and Reynolds Company during the Performance Period (as described in Section 4) shall vest and the Recipient shall be entitled to receive such Performance-Based Restricted Stock Units. All other Performance-Based Restricted Stock Units awarded pursuant to this subsection shall be forfeited. ii. Performance Criteria. If for the Performance Period the Revenue Growth of the The Reynolds and Reynolds Company expressed as a percentage of increase places it at or below the 25th percentile of revenue growth of the companies as reflected on the Index, then none of the Performance-Based Restricted Stock Units will vest and all shall be forfeited. If the Revenue Growth places it above the 25th percentile, then the number of Performance-Based Restricted Stock Units earned by Recipient will be equal to the product of (a) four percent (4%) multiplied by (b) the nearest whole number of percentage points by which Revenue Growth places The Reynolds and Reynolds Company above the 25th percentile multiplied by (c) the number of Performance-Based Restricted Stock Units, up to a maximum payout of 100% of the Performance-Based Restricted Stock Units. The foregoing is illustrated by the following example: Assume that for the Performance Period, the Revenue Growth of The Reynolds and Reynolds Company when compared to revenue growth of other companies on the Index, places The Reynolds and Reynolds Company at the 40% percentile. In such circumstances, the Recipient would be entitled to receive 60% of the number of Performance-Based Restricted Stock Units determined as follows: 1. Number of percentage points in excess of the 25th percentile = 15 [40th - 25th = 15] 2. 15 x 4% = 60% iii. Intervening Qualifying Events. If the Recipient ceases to be employed by The Reynolds and Reynolds Company and/or a Subsidiary prior to the vest date because of a Qualifying Event, then, as of the date on which the Qualifying Event occurs, the Recipient shall be entitled to receive the number of Units based upon a payout that is determined by using the same formula described in the preceding section, but comparing the Revenue Growth of The Reynolds and Reynolds Company using The Reynolds and Reynolds Company's most recently available quarterly results compared to the revenue growth of companies on the Index for the same period. The foregoing is illustrated by the following example: Assume that two years into the Performance Period the Recipient dies. On the date of Recipient's death, the most recently published quarterly figures for The Reynolds and Reynolds Company place its Revenue Growth in the 30th percentile of companies on the Index for the same period. Therefore, the Recipient's estate will be entitled to receive twenty percent (20%) of Performance-Based Restricted Stock Units determined as follows: 1. Number of percentage points in excess of 25th percentile = 5 [30th-25th = 5] 2. 5x4%= 20% iv. Other Termination of Employment. If the Recipient ceases to be employed by The Reynolds and Reynolds Company and/or a Subsidiary prior to the vest date for any reason other than a Qualifying Event, then, as of the date on which the Recipient's employment terminates, all Performance-Based Restricted Stock Units shall immediately be forfeited. [REYNOLDS & REYNOLDS. LOGO] b. Future Award of Units Subject to Performance. The Recipient may be awarded additional Performance-Based Restricted Stock Units following the end of the Performance Period in accordance with the following terms and provisions: i. Service. If the Recipient remains employed by The Reynolds and Reynolds Company and/or a Subsidiary through the vest date, then as of the vest date, the Recipient may be issued additional Performance-Based Restricted Stock Units determined based upon a comparison of the Revenue Growth of the Standard & Poor's MidCap 400 companies during the Performance Period with the Revenue Growth of The Reynolds and Reynolds Company during the Performance Period (as described in Section 4). ii. Performance Criteria. If the Revenue Growth of the The Reynolds and Reynolds Company expressed as a percentage of increase places it at or below the 50th percentile of revenue growth of the companies as reflected on the Index, then none of future Performance-Based Restricted Stock Units will be issued. If the Revenue Growth places it above the 50th percentile, then the number of future Performance-Based Restricted Stock Units issued to Recipient will be equal to the product of (a) four percent (4%) multiplied by (b) the nearest whole number of percentage points by which Revenue Growth places The Reynolds and Reynolds Company above the 50th percentile multiplied by (c) the number of Performance-Based Restricted Stock Units, up to a maximum payout of 100% of the future Performance-Based Restricted Stock Units. The foregoing is illustrated by the following example: Assume that as of the last day of the Performance Period, the revenue Growth of The Reynolds and Reynolds Company when compared to revenue growth of other companies of the Index, places The Reynolds and Reynolds Company at the 70th percentile. In such circumstances, the Recipient would be entitled to receive 80% of the number of Future Award Units determined as follows: 1. Number of percentage points in excess of the 50th percentile = 20 [70th - 50th = 20] 2. 20 x 4% = 80% iii. Termination of Employment within Performance Period. If the Recipient ceases to be employed by The Reynolds and Reynolds Company and/or a Subsidiary during the Performance Period for any reason (including by reason of a Qualifying Event with respect to such Recipient), then the Recipient shall not be issued or receive any future Performance-Based Restricted Stock Units. c. Voting, Dividend and Other Rights, Restrictions and Limitations. Except as otherwise provided in this Performance-Based Restricted Stock Unit, the terms of the Plan shall control as to voting, dividends and other rights, restrictions and limitations. Recipient will not entitled to voting rights, but will receive a cash payment equivalent to any declared dividend on the common stock of The Reynolds and Reynolds Company. 2. Tax Consequences. Upon exchange and receipt of Award Shares and Future Award Shares, the full fair market value of the Award Shares and Future Award Shares will be reported by the Company as employment income to the Recipient. The Company will withhold tax and other amounts required by law to be withheld in respect of this income. Such withholding will reduce the number of Award Shares and Future Award Shares received by the Recipient. Recipients should consult a tax advisor with respect to the tax treatment of holding and disposing of Award Shares and Future Award Shares. 3. Interpretation. Any dispute regarding the interpretation of this Performance-Based Restricted Stock Unit shall be submitted to the Board or the Committee, which shall review such dispute in accordance with the Plan. The resolution of such a dispute by the Board or Committee shall be final and binding on the Company and Recipient. 4. Revenue Growth and Percentile of Peer Group. For purposes of this Performance-Based Restricted Stock Unit, the term "Revenue Growth" as to The Reynolds and Reynolds Company means the cumulative annual revenue growth for The Reynolds and Reynolds Company during the Performance Period as determined by The Reynolds and Reynolds Company's accountants or other advisors in good faith in their sole and absolute discretion consistently with the methodology used in computing revenue growth for companies on the Index. As to companies on the "Index", Revenue Growth shall be the cumulative annual revenue growth of companies in the Standard & Poor's MidCap 400 index during the Performance Period or, if the Index is discontinued, such other index or comparison group of companies as the Board or Committee shall specify. In determining the percentile of revenue growth of the companies as reflected on the Index, a fraction of a percentile between .1 and .4 will be rounded downwards and a fraction of a percentile between .5 and .9 will be rounded upwards. For example, a percentile of 25.2 will be rounded downwards to 25. [REYNOLDS & REYNOLDS. LOGO] 5. Entire Agreement and Other Matters. The Plan is incorporated herein by this reference. This Performance-Based Restricted Stock Unit and the Plan constitute the entire agreement of the parties hereto. This Performance-Based Restricted Stock Unit and all rights and awards hereunder are void ab initio unless the Recipient agrees to be bound by all terms and provisions of this award and the Plan. [REYNOLDS & REYNOLDS. LOGO] EX-10.S 6 l10970aexv10ws.txt SUPPLEMENTAL RETIREMENT PLAN EXHIBIT (10)(s) THE REYNOLDS AND REYNOLDS COMPANY SUPPLEMENTAL RETIREMENT PLAN (October 1, 2002 Restatement) THE REYNOLDS AND REYNOLDS COMPANY SUPPLEMENTAL RETIREMENT PLAN The Reynolds and Reynolds Company (the "COMPANY") established The Reynolds and Reynolds Company Supplemental Retirement Plan (the "PLAN") effective October 1, 1978. The Plan has been amended from time to time. In addition to the Plan, the Company previously provided non-qualified deferred compensation benefits to eligible employees pursuant to a salary continuation program for officers, the terms of which were set forth in individual agreements between those employees and the Company (collectively, the "OFFICERS SALARY CONTINUATION PLAN"). The Company now desires to amend and restate the Plan, and combine it with the Officers Salary Continuation Plan. As such, the benefits provided under this restated Plan replace those previously provided under the Plan and the Officers Salary Continuation Plan. THEREFORE, effective as of October 1, 2002, the Plan is amended and restated, as set forth below. The provisions of this amended and restated Plan shall apply only to covered employees (including officers) who retire, die, or terminate employment with the Company and all Related Companies on or after that date. 1. DEFINITIONS. Unless a different meaning clearly is required by the context, for purposes of the Plan, words and phrases defined in this document shall have the meanings indicated, and all other words and phrases used as capitalized defined terms shall have the meanings given them in The Reynolds and Reynolds Company Retirement Plan, as in effect at the time the meaning is to be determined (the "QUALIFIED PENSION PLAN"). As used in this Plan, the terms set forth below shall have the following meanings: (a) "BOARD" shall mean the Compensation Committee appointed by the board of directors of the Company, as constituted from time to time, or any other individual member or committee of that board to which it has delegated authority with respect to the Plan. (b) "CHANGE IN CONTROL" shall mean the occurrence of any of the following: (i) Any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") (other than Richard H. Grant, Jr., his children or his grandchildren, Reynolds, any trustee or other fiduciary holding securities under an employee benefit plan of Reynolds or any company owned, directly or indirectly, by the shareholders of Reynolds in substantially the same proportions as their ownership of stock of Reynolds), who is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Reynolds representing twenty percent (20%) or more of the combined voting power of Reynolds' then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the effective date of this restatement of the Plan), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with Reynolds to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by Reynolds' shareholders was approved by a vote of at least two-thirds (2/3) of the directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; (iii) the consummation of a merger or consolidation of Reynolds or any direct or indirect subsidiary of Reynolds with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of Reynolds outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) more than fifty percent (50%) of the combined voting power of the voting securities of Reynolds or such surviving entity or parent thereof outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of Reynolds (or similar transaction) in which no "person" (as hereinabove defined) is or becomes the beneficial owner, directly or indirectly, of securities of Reynolds (not including in the securities beneficially owned by such person any securities acquired directly from Reynolds or its affiliates other than in connection with the securities acquired directly from Reynolds or its affiliates other than in connection with the acquisition by Reynolds or its affiliates of a business) representing twenty percent (20%) or more of the combined voting power of Reynolds' then outstanding securities; or (iv) the shareholders of Reynolds approve a plan of liquidation, dissolution or winding up of Reynolds or an agreement for the sale or disposition by Reynolds of all or substantially all of Reynolds' assets. (c) "CLAIMANT" means a Participant, or any beneficiary of a Participant, as determined under the provisions of this Plan, as amended from time to time. (d) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. Reference to a section of the Code shall include the then current 2 section of the Code, and any comparable section or sections of any future legislation that amends, supplements, or supersedes that section. (e) "DISABILITY" and/or "DISABLED" means any of the following conditions which first occur after the date an associate becomes a Participant: (i) the total and irrevocable loss by a Participant of: (A) sight of both eyes; (B) the use of both hands or both feet; (C) the use of one hand and one foot; regardless of whether the Participant is able to perform the duties of, or is working at, any occupation; OR (ii) the inability of a Participant to perform all of the substantial and material duties of his regular occupation as a result of an injury or sickness. If a disability described in the preceding part of this clause (ii) continues for a period of sixty (60) months, then for purposes of this clause (ii), disability means the inability of a Participant to perform all of the substantial and material duties of any occupation for which he is reasonably qualified by education, training or experience. (f) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (g) "GOOD REASON" means the occurrence of any of the following events: (i) Reynolds reduces a Participant's base salary below the amount of such base salary in effect immediately preceding a Change in Control without the Participant's written consent; (ii) Reynolds fails to continue to provide a Participant with fringe benefits (including bonuses, vacation, health and disability insurance, etc.) at least equivalent to those of other similarly situated associates employed by Reynolds; (iii) the Participant is required by Reynolds to perform duties or services which differ significantly from those performed by him prior to the Change in Control, or which are not ordinarily and generally performed by a similarly situated executive of a corporation; or (iv) the nature of the duties or services which Reynolds requires a Participant to perform necessitates absence overnight from his place of residence, because of travel involving the business affairs of Reynolds, for more than ninety (90) days during any period of six (6) consecutive months. 3 (h) "PARTICIPANT" means an associate of Reynolds or a Related Company who: (i) is a member of a "select group of management or highly compensated employees", as that phrase is defined for purposes of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, (ii) has been notified by the Committee of his or her eligibility to participate in the Plan, (iii) has furnished (within a reasonable time established by the Committee) such applications, consents, proofs of date of birth, elections, beneficiary designations and other documents and information as the Committee reasonably shall require, AND (iv) has been designated an eligible officer by the Chief Human Resources Officer of Reynolds ("CHRO"), OR (v) has been designated by the Board as eligible to participate in the Plan Provided, however, that the Board may at any time designate any associate or group of associates (including officers and active Participants) as being ineligible to participate (or to continue to participate) in the Plan. Upon becoming a Participant, each associate shall be deemed conclusively, for all purposes, to have assented to and to be bound by the terms and provisions of the Plan. (i) "PAYMENT DATE" means, with respect to any Participant, the first to occur of the following: (i) the date the Participant dies, but only if he satisfied the Service Requirement at the time of his death; or (ii) the date the Participant terminates employment with Reynolds after attaining age fifty-five (55), but only if he has satisfied the Service Requirement as of his termination date and, with respect to Part 2 of his Aggregate Non-qualified Deferred Compensation Benefit (as defined in Section 2, below), he has satisfied the requirements for Early or Normal Retirement under the Qualified Pension Plan; or 4 (iii) the date, after the termination of his employment with Reynolds, on which the Participant attains age fifty-five (55), but only if the Participant has satisfied the Service Requirement as of the date he attains age fifty-five (55) and, with respect to Part 2 of his Aggregate Non-qualified Deferred Compensation Benefit (as defined in Section 2, below), he has satisfied the requirements for Early Retirement under the Qualified Pension Plan; or (iv) the date the Participant satisfies the requirements for Normal Retirement (as defined in the Qualified Pension Plan), but, with respect to Part 1 of his Aggregate Non-qualified Deferred Compensation Benefit (as defined in Section 2), only if the Participant has satisfied the Service Requirement as of that date. The following provisions relate only to Part 1 of the Aggregate Non-qualified Deferred Compensation Benefit (as defined in Section 2), and are in addition to the dates described in (i) through (iv), next above. (v) the date the Participant dies, but only if: (A) he was employed by Reynolds on that date; or (B) he previously terminated employment with Reynolds because he was Disabled, and he remained continuously Disabled until his death. (vi) the date the Participant terminates employment with Reynolds after attaining age fifty-five (55), but only if the Participant is Disabled as of his termination date. (vii) the date, after the termination of his employment with Reynolds, on which the Participant attains age fifty-five (55), but only if he was Disabled when his employment by Reynolds terminated, and he remained Disabled continuously until he attained age fifty-five (55). (j) "PLAN YEAR" means each twelve-month period commencing on October 1 and ending on September 30. (k) "RELATED COMPANY(IES)" means any corporation which is a member of the same controlled group of corporations, within the meaning of Section 1563(a) of the Code, determined without regard to sections 1563(a)(4) and l563(e)(3) (C) of the Code, with the Company, and other entity designated by the company as a Related Company. 5 (l) "SERVICE REQUIREMENT" means at least three (3) years of employment as an eligible officer, and: (i) with respect to Part 1 of a Participant's benefit (as defined in clause 2(a)(i), below), either: (A) the completion by the Participant of at least fifteen (15) years of employment by the Company or a Related Company, whether or not continuous, taking into account employment before and after he becomes a Plan Participant, OR 1) for Participants who retire from the Company or a Related Company on or after attaining age sixty-five (65) and prior to completing fifteen (15) years of service with the Company or a Related Company, service with the Company and Related Companies sufficient to entitle the Participant to a Normal Retirement benefit under the Qualified Pension Plan; (ii) with respect to Part 2 of a Participant's benefit (as defined in clause 2(a)(ii), below), either: (A) service with the Company and Related Companies sufficient to entitle the Participant to an Early Retirement or Normal Retirement benefit under the Qualified Pension Plan, or (B) five (5) Years of Service (as defined in the Qualified Pension Plan) as an officer of the Company as of the date of his termination of employment. A Participant shall be considered employed by Reynolds during an authorized leave of absence, as described in Section 12, below. (m) "TERMINATION FOR CAUSE" means a termination of a Participant's employment whenever occasioned by (i) the willful and continued failure by a Participant to substantially perform duties with Reynolds (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Board, which demand specifically identifies the manner in which the Board believes the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by a Participant in conduct which is demonstrably and materially injurious to Reynolds or its subsidiaries, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on a Participant's part shall be deemed "willful" unless done, or omitted 6 to be done, by Participant not in good faith and without reasonable belief that Participant's act, or failure to act, was in the best interest of Reynolds. 2. DEFERRED COMPENSATION PAYMENTS. Benefit payments shall begin on the relevant Payment Date, provided that the Participant or Beneficiary, as appropriate, has properly completed and returned to the Committee or its delegate all required payment forms. (a) AMOUNT OF PAYMENT. An amount, expressed as a annual single-life annuity payable at Participant's retirement from Reynolds or a Related Company on or after his Normal or Early Retirement Date (both as defined in the Qualified Pension Plan)) equal to the sum of: PART 1: six and one half percent (6.5%) of his Final Average Pay, as defined in the Qualified Pension Plan, reduced by four tenths of one percent (.4%) per month for each month by which the first payment precedes the date the Participant attains age sixty (60), and increased by four tenths of one percent (.4%) per month for each month by which the first payment follows the date the Participant attains age sixty (60), or for a Participant described in paragraph 1(l)(i)(B), above, six and one half percent (6.5%) of his Final Average Pay, as defined in the Qualified Pension Plan, multiplied by a fraction, the numerator of which is his months of service with Company and Related Companies, determined as of the date he retires from the Company or a Related Company, and the denominator of which is one hundred eighty (180), and PART 2: the difference between Participant's actual Qualified Pension Plan benefit and the Qualified Pension Plan benefit Participant would have received if it had been calculated without regard to Code Sections 401(a)(17) and 415. To receive payment of Part 1 or Part 2, the Participant must satisfy service and other Plan requirements applicable to that part of the benefit. At any Payment Date, the AACCRUED SUPPLEMENTAL PENSION BENEFIT@ of a Participant is the portion, if any, of Part 1 and Part 2 for which the 7 Participant has satisfied all of the conditions for payment. (b) FORM OF PAYMENT. (i) NORMAL FORM OF PAYMENT. Unless the Participant elects otherwise under Section 2(b)(ii), or the Committee decides otherwise pursuant to Section 2(b)(iv), the Participant shall receive payment as follows: (A) An initial payment equal to the Lump Sum Amount (as defined in 2(b)(iii), below); plus (B) A life annuity which is actuarially equivalent to the difference, if any, between: (1) the present value of the Accrued Supplemental Pension Benefit; and (2) the Lump Sum Amount; The present value referred to in 2(b)(i)(B)(1) shall be determined based on the actuarial assumptions set forth in 2(b)(iii)(2), below. (ii) WAIVER OF RIGHT TO LUMP SUM. The Participant may elect not to receive the lump sum payment described in 2(b)(i)(A), and to have his entire Accrued Supplemental Pension Benefit paid as a single-life annuity. Any such election must be made at least twelve (12) months prior to his Payment Date, in writing, on a form acceptable to the CHRO, and, to be effective, must be received timely by the office of the CHRO. (iii) The LUMP SUM AMOUNT shall be determined as follows: (A) First, subtract: (1) the annual single life annuity payable to the Participant from the Qualified Pension Plan (the "QUALIFIED PLAN BENEFIT"); FROM (2) an amount equal to $75,000 increased for inflation by one fourth of one percent (.25%) for each month of employment after October 1, 1999. 8 One (1) day of employment during a month is sufficient to earn the inflation adjustment for that month. No adjustment for inflation will be made after the month of termination, however. The result of subtracting the Participant's Qualified Plan Benefit from the Annual Amount, as determined above, is the amount of a hypothetical, annual, single-life annuity payable for the life of the Participant. The amount of this hypothetical annuity is referred to below as the ATARGET BENEFIT@. (B) Next, convert the lesser of the Target Benefit and the Accrued Supplemental Pension Benefit to a lump sum, using the following actuarial assumptions: (1) Fifty-four percent (54%) of the sum of: (1) the discount rate used in preparing the Financial Accounting Standard 87 report for the Pension Plan for Reynolds' fiscal year in which the lump sum distribution is paid; and (2) two percent (2%). (2) The length of the payment is twenty and five-tenths (20.5) years increased by six-tenths (.6) of a year for each year (or portion thereof) that the Payment Date precedes age sixty-two (62) or decreased by six-tenths (.6) of a year for each year (or portion thereof) that the Payment Date follows age sixty-two (62). (3) The annual annuity amount is payable in equal monthly installments, as of the first day of each month. (C) The result of the calculations described in (B), next above, is the Lump Sum Amount. (iv) OTHER PAYMENT OPTIONS. Any part of the Aggregate Non-qualified benefit which otherwise would be paid as a life annuity may, at the option of the Committee and after appropriate adjustment for actuarial equivalence, be paid in the same form as elected by Participant under the Qualified Pension Plan. (v) CASH-OUTS. Notwithstanding the preceding provisions of this Section 2, if, as of his Payment Date, the present value of a Participant's Accrued Supplemental Pension Benefit is equal to or less than ten thousand dollars ($10,000), the Committee may distribute it in a lump 9 sum payment. Any such distribution will fully discharge the Plan's liability to the Participant and his Beneficiary. (vi) ACTUARIAL EQUIVALENCE. Except as expressly provided in this Plan, actuarial equivalence calculations shall be determined using the actuarial assumptions and methods used in calculating Qualified Pension Plan benefits, determined as of the date of the calculation. (vii) FICA TAX ADJUSTMENTS. The law generally requires that Participants pay their share of certain employment taxes on Plan benefits at the time Plan benefits become definitely determinable. Under certain circumstances, those taxes become due before Plan benefits are payable. Any contrary Plan provision notwithstanding, if any Participant fails to pay his share of any such taxes when they become due, the Committee is authorized to make the payment on his behalf, and to make an appropriate actuarial reduction in his benefit to reflect the payment of taxes on his behalf. (c) DEATH BENEFITS. If a Participant dies after payments have begun under this Plan, and before receiving all of the payments to which he is entitled under this Plan, the beneficiary designated under Section 3 shall receive the balance of the payments, in the same form and at the same time as they would have been paid to Participant. If Participant dies while this Plan is in effect, and before payments have begun under this Plan, the beneficiary designated under Section 3 shall receive an amount determined as follows: (i) If a Participant: (A) dies while employed by the Company, (B) has satisfied the Service Requirement on his date of death, or (C) previously terminated employment with the Company because he was Disabled, and he remained continuously Disabled until his death, then PART 1 OF THE ACCRUED SUPPLEMENTAL PENSION BENEFIT shall be paid to the beneficiary or beneficiaries in accordance with 2(b)(i), but taking into account only Part 1 of the Accrued Supplemental Pension Benefit. If there are multiple surviving beneficiaries, the death benefit will be divided between or among them: 10 (D) as specified on the beneficiary designation, or (E) if the beneficiary designation does not specify how the benefit is to be divided, as the Committee shall determine, based on rules and procedures it establishes. (ii) If and only if the Participant satisfied the Service Requirement as of his date of death, PART 2 OF THE ACCRUED SUPPLEMENTAL PENSION BENEFIT shall be paid as follows. (A) If the Participant is married at the time of his death and his spouse survives him, his spouse shall be entitled to a life annuity, determined as though the Participant had separated from service on his date of death, survived until the earliest retirement age provided for in the Plan, retired, and elected payment of Part 2 of his Accrued Supplemental Pension Benefit as an immediate joint and fifty percent (50%) survivor annuity on the day before his death. (B) If the Participant is not survived by a spouse, then his beneficiary or beneficiaries shall be entitled to a monthly benefit, payable for a period of sixty (60) months, equal to fifty percent (50%) of the monthly benefit which would have been payable to the Participant if he had terminated employment on his date of death, survived to his Qualified Pension Plan Normal Retirement Date, and elected payment of Part 2 of his Accrued Supplemental Pension Benefit in the form of a single-life annuity, with payments beginning on his Qualified Pension Plan Normal Retirement Date. Any such death benefit payments shall begin as of the first day of the month next following the Participant's date of death. If there are multiple surviving Beneficiaries, the death benefit will be divided between or among them: (1) as specified on the Beneficiary designation, or (2) if the Beneficiary designation does not specify how the benefit is to be divided, as the Committee shall determine, based on rules and procedures it establishes. (d) LIMITATION ON DEATH BENEFITS. Notwithstanding any contrary provision of the Plan, no payment shall be made under this Plan by reason of the death of 11 Participant as a result of suicide which occurs within two (2) years of the date of the associate becomes a Plan Participant. The provisions of the preceding sentence shall apply whether or not Participant is sane at the time the suicide occurs. (e) DIVISION OF BENEFIT RESULTING FROM DIVORCE. A Participant may have his accrued benefit divided by order of a court of competent jurisdiction in a divorce or child support proceeding, subject to the following rules and limitations. The Participant is responsible for advising the Company and the Committee of any such order. Any such division shall be based on the benefit determined as of the date specified in the order. The amount of benefits paid to a Participant will be reduced to reflect any amounts payable to another party under such an order. Unless authorized by the Committee, in its sole discretion, no payment shall be made under any such order before the earliest date on which the Participant is entitled to payment of his or her accrued Plan benefit. No such order shall require the Plan to provide any type or form of benefit, or any payment or other option, not otherwise provided under the Plan. 3. DESIGNATING A BENEFICIARY. Subject to the provisions of this Section, each Participant may, from time to time, designate a beneficiary or beneficiaries to receive any payments under this Plan which remain due and payable at the time of his death. A Participant must designate each beneficiary on a written beneficiary designation form, which must be received by the Committee or the CHRO prior to his death. A Participant may change his designated beneficiary or beneficiaries by submitting an appropriately completed, written beneficiary designation form to the Committee or the CHRO prior to his death. If Participant fails properly to designate a beneficiary, any payment otherwise due and payable under this Plan will be made to Participant's surviving spouse, if any, and otherwise to one or more Beneficiaries (in such proportions as the Committee decides) selected by the Committee, who shall be either: (a) one or more of the Participant's relatives by blood, adoption or marriage; or (b) the estate of the last to die of the Participant and his Beneficiary. 4. LOSS OF ELIGIBILITY/TRANSFER TO AN INELIGIBLE GROUP. Notwithstanding any contrary Plan provision, a Participant shall cease to accrue Plan benefits as of the first date on which the Participant: (a) ceases to be a member of a "select group of management or highly compensated employees", as that phrase is defined for purposes of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, 12 (b) is demoted or reclassified, so that he remains employed by Reynolds, but is no longer eligible to continue to accrue Plan benefits, or (c) is no longer eligible to participate as the result of an action by the Board. The Accrued Supplemental Pension Benefit of any such Participant shall be determined as of the date he ceased accruing benefits. In order to be eligible for payments under this Plan, the Participant must satisfy all applicable Service Requirements or qualify for the payment under Section 9. 5. ADMINISTRATION. The authority to control and manage the operation and administration of the benefits provided pursuant to this Plan is vested in a Committee which has the rights, duties and obligations set forth in this Section 5. This Plan, and any related documents, shall be retained by the CHRO on behalf of the Committee, and made available for examination by the Committee upon reasonable request. (a) MEMBERSHIP AND MANNER OF ACTING. The Committee shall consist of three (3) or more persons selected by the Board of Directors of Reynolds or by any committee or member of the Board of Directors of Reynolds to whom authority to appoint the Committee has been delegated. The Committee shall act by the concurrence of a majority of its then members by meeting or by writing without a meeting. The Committee, by unanimous written consent, may authorize any one of its members to execute any document, instrument or direction on its behalf. A written statement by a majority of the Committee members or by an authorized Committee member shall be conclusive in favor of any person reasonably acting in reliance on it. (b) RIGHTS, POWERS AND DUTIES. The Committee shall have such authority as may be necessary to discharge its responsibilities, including the following powers, rights and duties: (i) to interpret and construe, in its sole discretion, in a nondiscriminatory manner, the provisions of this Plan, as amended from time to time, and to adopt such rules of procedure and regulations as are consistent with those provisions and as it deems necessary and proper; (ii) to determine, in its sole discretion, in a nondiscriminatory manner, all questions relating to the eligibility, benefits and other rights of all persons under this Plan; 13 (iii) to direct all payments and distributions required or permitted under this Plan; (iv) to maintain and keep adequate records concerning its proceedings and acts in such form and detail as the Committee may decide; (v) except as otherwise expressly provided in this Plan, to establish actuarial assumptions and procedures for determining actuarial equivalence and for any other purpose required to implement this Plan; and (vi) to delegate its powers and duties to others as it sees fit. (c) APPLICATION OF RULES. The Committee shall apply all rules of procedure and regulations adopted by it in a uniform and non-discriminatory manner. Any act of the Committee based on an interpretation of this Plan which is made in good faith shall be binding and conclusive upon all persons or entities claiming under it. (d) REMUNERATION AND EXPENSES. No remuneration shall be paid to any Committee member as such. The reasonable expenses of a Committee member incurred in the performance of a Committee function shall be reimbursed by Reynolds, however. (e) RESIGNATION OR REMOVAL OF COMMITTEE MEMBER AND APPOINTMENT OF SUCCESSOR. A Committee member may resign at any time by advance written notice to the other Committee members. Reynolds, acting through the Board, may remove a Committee member by giving advance notice to him and the other Committee members. Reynolds, acting through the Board, may fill any vacancy in the membership of the Committee and shall give prompt notice thereof to the other Committee members. (f) RELIANCE ON INFORMATION PROVIDED BY REYNOLDS. The Committee may rely on any oral or written statement made by an authorized representative of Reynolds. If the Committee so requests, the Reynolds shall certify any such statement. (g) INDEMNIFICATION. Reynolds shall indemnify the Committee, each of its members and any employee or director of Reynolds to whom authority or responsibility have been delegated under this Section 5 (collectively, the "INDEMNIFIED GROUP") with respect to any liability actually and reasonably incurred (including reasonable attorneys fees, expenses, judgments, fines and amounts paid in settlement) in connection with any threatened or 14 pending action, suit or other proceeding relating to any act or failure to act in connection with the discharge of their responsibilities, but only if: (i) the member of the Indemnified Group acted (or failed to act) in good faith and based on a reasonable belief that the conduct was consistent with the best interest of the Plan; and (ii) with respect to any criminal action or proceeding, they had no reasonable cause to believe that their conduct was unlawful. (h) NOTICES. Any notice or document required to be filed with any person under this Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to such person, in care of Reynolds, at the address where it maintains its corporate headquarters, or at such other place as Reynolds designate from time to time in a written notice to Participants. Any notice required under the Plan may be waived by the person entitled to notice. 6. GENERAL CLAIM PROCEDURES. If a Claimant fails to receive a payment to which he believes he is entitled under this Plan, he may file a written claim for the payment with the CHRO. If the claim is wholly or partially denied, written notice of the denial will be furnished to the Claimant within a reasonable time after the claim is filed. Each notice denying a claim shall include the following information: (a) the reason or reasons the claim was denied; (b) a specific reference to the provision of the Plan upon which the denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect the claim; and (d) an explanation of the claim appeal procedures described in Section 7, below. 7. APPEAL PROCEDURES. Subject to the requirements of the Section, a Claimant may appeal the denial of a claim. Appeals must be filed in writing with the Committee not later than sixty (60) days after the Claimant receives written notice that the claim has been denied. As a part of the appeal process, the Claimant may review pertinent documents, submit written comments and request that a hearing be held to consider the appeal. The decision to hold a hearing to consider the appeal shall be within the sole discretion of the Committee, whether or not the Claimant requests a hearing. 15 Except as provided below, each appeal will be decided not later than sixty (60) days after the Committee receives the written appeal. If, however, special circumstances require an extension of time for deciding an appeal, a decision shall be rendered within a reasonable period of time, but not later than one hundred twenty (120) days after the Committee receives the written appeal and any additional information submitted by the Claimant in accordance with this Section. Appeal decisions shall be written and shall include the specific reason(s) for the decision and the specific reference(s) to the pertinent provisions of this Plan on which the decision is based. 8. SOURCE OF PAYMENTS. All payments under this Plan shall be made solely from the general assets of Reynolds. No such assets shall be segregated or placed in trust to secure the performance of the obligations of Reynolds under this Plan. Reynolds may, however, in its sole discretion, purchase one or more policies of insurance with respect to Participant, the proceeds of which may, but need not, be used by Reynolds to satisfy part or all of its obligations under this Plan. Reynolds will be the owner of any such policy. Neither Participant nor any other person or entity claiming through Participant shall have any rights with respect to any such policy or to the proceeds of any such policy. As a condition of receiving any benefits under this Plan, Participant, on behalf of himself and any person or entity claiming through him, agrees to cooperate with Reynolds in obtaining any insurance policy that Reynolds chooses to purchase with respect to Participant by submitting to such physical examinations, completing such forms, and making such records available as may be required from time to time. The rights under this Plan of Participant and any person or entity claiming through him shall be solely those of an unsecured, general creditor of Reynolds. No insurance policy or other asset of Reynolds shall be held by Reynolds for or on behalf of Participant, or any other person, or constitute security for the performance of any obligations of Reynolds under this Plan. 9. SPECIAL PAYMENT PROVISIONS RELATING TO CHANGE IN CONTROL. Notwithstanding any other provision of this Plan to the contrary, if within twenty-four (24) months following a Change in Control of Reynolds a Participant's employment is terminated by Reynolds (other than a "Termination for Cause" (as defined above)), or a Participant terminates his employment for Good Reason, and Participant has attained at least one year of service as an eligible officer of Reynolds (as determined by the CHRO) as of the date of such Change in Control, the Participant shall be entitled to a lump sum payment equal to the present value of the benefit he would have received pursuant to Section 2 of the Plan as if the requirements of the Participant's Payment Date had been satisfied, multiplied by the lesser of one (1), or a fraction: (a) the numerator of which is the sum of: 16 (i) the Participant's whole and fractional years of service with Reynolds as of such date of termination, and (ii) the number of whole and fractional years during which the Participant receives severance benefits pursuant to any employment or severance agreement entered into with Reynolds, and (b) the denominator of which is fifteen (15). If a Participant has commenced receiving benefits under Section 2 of the Plan as of the date of such Change in Control, the Participant shall be entitled to receive a lump sum payment equal to the present value of the remaining payments he would have been entitled to receive pursuant to Section 2. For purposes of the preceding sentence, the present value of the payments made pursuant to Section 2 shall be calculated using the interest rate applied by the Pension Benefit Guaranty Corporation in valuing lump sum distributions that is in effect on the date of the Participant's termination of employment or the date of the Change in Control, whichever applies. 10. INDEPENDENCE OF AGREEMENT. Except as otherwise expressly provided, this Plan is independent of, and in addition to, any other employment agreement, employee benefit plan or agreement, or other right that a Participant may have as a result of his employment by Reynolds. This Plan is not a contract of employment between any Participant and Reynolds. No provision of this Plan shall be construed to limit or restrict: (a) the right of Reynolds to discharge any Participant, with or without cause; or (b) the right of any Participant to terminate his employment with Reynolds. 11. ACCELERATION OF PAYMENTS. Reynolds reserves the right to accelerate the payment of any benefits payable under this Plan without the consent of a Participant, his estate, his designated beneficiaries, or any other person claiming through the Participant. 12. LEAVES OF ABSENCE. Reynolds may, in its sole discretion, permit a Participant to take one or more leaves of absence. No such leave of absence shall exceed one year, however. For purposes of the Plan, including the provisions relating to the Service Requirement, a Participant will be considered employed by Reynolds during an authorized leave of absence. 13. LEGAL EFFECT. Neither Reynolds nor the Committee makes any representations or warranties, express or implied, or assumes any responsibility concerning the legal, tax, or other implications or effects of this Plan. Reynolds may take all actions required by law with respect to any payments due under this Plan, or any other 17 compensation or benefits due to any Participant, including withholding of tax from such payments, compensation or benefits. 14. FACILITY OF PAYMENT. If, for any reason, the identity or legal capacity of any person to whom payments are to be made under this Plan is in doubt, Reynolds may withhold payment until instructed by a final order of a court of competent jurisdiction. If a Participant or any designated beneficiary of a Participant is declared legally incompetent, Reynolds may make payment of any amounts due under this Plan to the person legally charged with his or her care. Any payment made by Reynolds in good faith shall fully discharge Reynolds from its obligation with respect to that payment. 15. ASSIGNMENT OF RIGHTS. Except as expressly permitted by this Plan: (a) neither a Participant nor anyone claiming through him may sell, assign, transfer or pledge the right to receive any payments to which he is or may become entitled under this Plan, and (b) benefit payments shall not be subject to the claims of creditors of any Participant or anyone claiming through him, or to any legal, equitable, or other proceeding or process for the enforcement of such claims. 16. CORPORATE REORGANIZATION. Reynolds shall not merge or consolidate with any other entity unless and until such other entity expressly assumes the obligations of Reynolds under this Plan. 17. SECTION HEADINGS. The Section headings used in this Plan are for convenience of reference only, and shall not be considered in construing this Plan. 18. AMENDMENT AND TERMINATION. Notwithstanding any contrary Plan provision: (a) the Company reserves the right at any time, by action of the Board, to amend or terminate this Plan; provided, however, that no such amendment or termination shall reduce the benefit payable to any Participant whose employment with the Company and all related Companies terminated under circumstances entitling him or his Beneficiary to a Plan benefit prior to the amendment or termination date; and (b) if the Plan is terminated, the Committee may elect, in its sole discretion, to pay any benefit then payable under the Plan in the form of a single lump-sum payment of actuarially equivalent value. 19. SPECIAL PROVISIONS RELATING TO INDIVIDUAL PARTICIPANTS. Special provisions relating to individual Participants may from time to time be added to the 18 Plan by a schedule which shall be attached to and become a part of this Plan. To the extent that any such schedule conflicts with any other Plan provision, the terms of the schedule shall control. 20. MISCONDUCT. If the Committee determines, based upon evidence satisfactory to it, that any Participant: (a) has engaged in misconduct involving dishonesty which results in financial loss to the Company or a Related Company or malicious destruction of the property of the Company or a Related Company, or (b) has been convicted of a felony committed and arising out of his employment by the Company or a Related Company, AND (c) as a result of conduct describe in (a) or (b), above, the Participant's employment with the Company or a Related Company has been terminated, the Participant, and any person claiming through the Participant, shall forfeit all rights to any Plan benefits. Any such determination by the Committee shall be final and conclusive. 21. NON-COMPETITION PROVISION. If the Committee determines that a Participant: (a) is employed by a competitor of the Company or a Related Company, or (b) is engaged, directly or indirectly, in competition with or in an occupation detrimental to the interests of the Company or a Related Company, AND (c) if, after due notice, the Participant continues such activity, the Committee shall suspend payments to or on behalf of the Participant, and the Participant, and any person claiming through the Participant, shall forfeit all rights to any Plan benefit. Any such determination shall be based on evidence satisfactory to the Committee and shall be final. Any written statement of an elected officer of the Company that employment with another employer is not in competition with the Company or a Related Company or detrimental to their respective interests, shall be conclusive and binding, except as applied to a claim by the officer making the statement. 19 22. BINDING EFFECT. Except as otherwise provided in Section 15, this Plan shall be binding upon Participant and his heirs, executors, administrators, assigns and upon anyone claiming through him, and upon Reynolds and its successors and assigns. 23. GOVERNING LAW. The laws of the State of Ohio shall, to the extent not preempted by applicable Federal law, govern the construction of this Plan. 24. SEVERABILITY. If any provision of the Plan is held invalid or unenforceable by a court of competent jurisdiction, the determination of invalidity or unenforceability of that provision shall not affect any other Plan provision, and the Plan shall be construed and enforced as if the invalid or unenforceable provision had not been included. 25. EFFECT ON INDIVIDUAL SALARY CONTINUATION AGREEMENTS. The Company previously provided non-qualified deferred compensation benefits to eligible employees pursuant to individual agreements which, collectively, comprised the Officers Salary Continuation Plan. The benefits provided under this Plan replace those previously provided under the Officers Salary Continuation Plan. By accepting any payment provided pursuant to this Plan, the recipient irrevocably waives, on his own behalf and on behalf of each of his beneficiaries, any right to payment under any individual agreement comprising a part of the Officers Salary Continuation Plan. Notwithstanding any contrary Plan provision, the Company reserves the right to require that any person, as a condition to receiving any Plan benefit, execute such documents as it reasonably shall request waiving any rights he or she may have pursuant to any individual agreement comprising a part of the Officers Salary Continuation Plan. TO EVIDENCE THE TERMS OF THIS PLAN, Reynolds, by a duly authorized officer, has executed this document on the day and year first above written. THE REYNOLDS AND REYNOLDS COMPANY By: ------------------------------ Timothy Bailey VP Corporate Human Resources 20 SCHEDULE I SPECIAL PROVISIONS RELATING TO INDIVIDUAL PARTICIPANTS WITH WHOM THE COMPANY HAS EMPLOYMENT AGREEMENTS This Schedule I is a part of The Reynolds and Reynolds Company Supplemental Retirement Plan (the "PLAN") and specifies special provisions applicable to one or more individual Participants with whom the Company has employment agreements. To the extent that any such employment agreement provides for Plan benefits greater than those provided under the regular Plan provisions, the provisions of the employment agreement shall govern the Plan benefits provided with respect to that Participant. If the regular Plan provisions provide benefits greater than those required under any such employment agreement, the regular Plan provisions shall govern the benefits provided with respect to that Participant. Notwithstanding any contrary provision of the Plan, including this Schedule, there shall be no duplication of benefits provided with respect to a Participant under the regular Plan provisions and the Plan benefits specified in his or her employment agreement. Section I - Special Provisions Which Apply To TERRY D. CARDER The special provisions relating to Mr. Carder are set forth in the EMPLOYMENT AGREEMENT made and entered into as of the 6th day of November, 1984 by and between The Reynolds and Reynolds Company and Terry D. Carder, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section II - Special Provisions Which Apply To BUDD L. TIPPLE The special provisions relating to Mr. Tipple are set forth in the EMPLOYMENT AGREEMENT made and entered into as of the 1st day of January, 1985 by and between The Reynolds and Reynolds Company and Budd L. Tipple, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section III - Special Provisions Which Apply To GEORGE D. MOLINSKY The special provisions relating to Mr. Molinsky set forth in the EMPLOYMENT AGREEMENT made and entered into as of the 1st day of January, 1985 by and between The Reynolds and Reynolds Company and George D. Molinsky, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section IV - Special Provisions Which Apply To WAYNE C. JIRA The special provisions relating to Mr. Jira are set forth in the EMPLOYMENT AGREEMENT made and entered into as of the 1st day of January, 1985 by and 21 between The Reynolds and Reynolds Company and Wayne C. Jira, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section V - Special Provisions Which Apply To ROBERT C. NEVIN The special provisions relating to Mr. Nevin are set forth in the EMPLOYMENT AGREEMENT made and entered into as of the 1st day of October, 1986 by and between The Reynolds and Reynolds Company and Robert C. Nevin, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section VI - Special Provisions Which Apply To DAVID R. HOLMES The special provisions relating to Mr. Holmes are set forth in the EMPLOYMENT AGREEMENT made and entered into as of the 1st day of January, 1985 by and between The Reynolds and Reynolds Company and David R. Holmes, which is on file with the Secretary of the Company and which may be amended from time-to-time. 22 SCHEDULE II SPECIAL PROVISIONS RELATING TO INDIVIDUAL PARTICIPANTS WITH WHOM THE COMPANY DOES NOT HAVE EMPLOYMENT AGREEMENTS This Schedule II is a part of The Reynolds and Reynolds Company Supplemental Retirement Plan (the "PLAN") and specifies special provisions that apply to one or more individual Participants with whom the Company does not have employment agreements. Section I - Special Provisions Which Apply To EUGENE WEFLER Eugene Wefler, who retired from the Company's employ on December 1, 1986 under circumstances not entitling him to any benefit under the Plan, shall receive a Pension under the Plan of Four Hundred Dollars ($400.00) per month payable monthly (as of the first day of each calendar month) for his lifetime only. Such Pension shall be subject to all generally applicable provisions of the Plan; provided, however, that for purposes of Section 18, Eugene Wefler shall be treated as having terminated employment under circumstances entitling him to a Pension under the Plan. Section II - Special Provisions Which Apply To LEE C. LEWIS Lee C. Lewis shall be entitled to receive "Social Security bridge" payments under the Plan of Seven Hundred Twenty-Two Dollars and Forty Cents ($722.40) per month, payable monthly beginning December 1, 1987 and ending with the final payment on November 1, 1994. Such payments shall be subject to all generally applicable provisions of the Plan; provided, however, that for purposes of Section 18, Lee C. Lewis shall be treated with respect to such payments as having terminated employment under circumstances entitling him to a Pension under the Plan. Section III - Special Provisions Which Apply To RODNEY D. BROWN Rodney D. Brown shall be entitled to benefits under the Plan as set forth in the Settlement Agreement made and entered into as of the 9th day of August, 1990 by and between The Reynolds and Reynolds Company and Rodney D. Brown, which is on file with the Secretary of the Company and which may be amended from time-to-time. 23 Section IV - Special Provisions Which Apply To ROBERT COPENHEFER Robert Copenhefer shall be entitled to retire under the Plan as of January 1, 1991 and receive a pension under the Plan of Two Thousand Eight Hundred Seventy Nine-Dollars and Ninety Cents ($2,879.90) per month payable monthly (as of the first day of each calendar month) for his lifetime only. Such pension shall be subject to all generally applicable provisions of the Plan, including any generally applicable right to elect an alternate form of payment under the Plan as then in effect; provided, however, that for purposes of Section 18, Robert Copenhefer shall be treated as having terminated employment under circumstances entitling him to a Pension under the Plan. Agreement effective as of December, 1990 24 SCHEDULE III SPECIAL PROVISIONS RELATING TO INDIVIDUAL PARTICIPANTS WITH WHOM THE COMPANY HAS RETIREMENT AGREEMENTS This Schedule III is a part of The Reynolds and Reynolds Company Supplemental Retirement Plan (the "PLAN") and specifies special provisions that apply to one or more individual Participants with whom the Company has retirement agreements. The provisions of each such Participant's retirement agreement shall govern the amount and form of benefits provided under the Plan with respect to that Participant, and no benefits shall be payable under the regular Plan provisions with respect to that Participant. However, be subject to all generally applicable provisions of the Plan, except that such benefits shall not be subject to Section 20 and Section 21, that for purposes of Section 18, each such Participant shall be treated with respect to such benefits as having terminated employment under circumstances entitling him to a Pension under the Plan, and that Section 8 shall not restrict the establishment of the trust contemplated by such retirement agreements. Section I - Special Provisions Which Apply To LEWIS CLEMMER The special provisions relating to Mr. Clemmer are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and Lewis Clemmer, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section II - Special Provisions Which Apply To JOE CRIST The special provisions relating to Mr. Crist are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and Joe Crist, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section III - Special Provisions Which Apply To ROBERT E. GORDON The special provisions relating to Mr. Gordon are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and Robert E. Gordon, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section IV - Special Provisions Which Apply To C. EUGENE HAYDEN The special provisions relating to Mr. Hayden are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and C. Eugene Hayden, which is on file with the Secretary of the Company and which may be amended from time-to-time. 25 Section V - Special Provisions Which Apply To RALPH JOHNSON The special provisions relating to Mr. Johnson are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and Ralph Johnson, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section VI - Special Provisions Which Apply To FRANK LABOSCO The special provisions relating to Mr. Labosco are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and Frank Labosco, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section VII - Special Provisions Which Apply To WILLIAM R. NEWCOMB The special provisions relating to Mr. Newcomb are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and William R. Newcomb, which is on file with the Secretary of the Company and which may be amended from time-to-time. Section VIII - Special Provisions Which Apply To ISAAC E. PATRICK The special provisions relating to Mr. Patrick are set forth in the Retirement Agreement made and entered into as of the 1st day of July, 1987 by and between The Reynolds and Reynolds Company and Isaac E. Patrick, which is on file with the Secretary of the Company and which may be amended from time-to-time. 26 SCHEDULE IV: SPECIAL PROVISIONS RELATING TO INDIVIDUALS WITH WHOM THE COMPANY HAS RETIREMENT AGREEMENTS This Schedule IV is a part of The Reynolds and Reynolds Company Supplemental Retirement Plan (the "PLAN") and specifies special provisions applicable only to David Holmes, Lloyd Waterhouse and Dale Medford (the "ELIGIBLE GROUP") regarding payment of certain benefits in the form of an optional lump sum. SECOND OPTIONAL LUMP SUM PAYMENT By written notice received by the Chief Human Resources Officer of the Corporation at least twelve (12) months prior to becoming eligible for payment of Plan benefits, any member of the Eligible Group may elect to receive payment as follows: (A) An initial payment equal to the Lump Sum Amount (as defined below); plus (B) A single-life annuity, which has a present value which is actuarially equivalent to the difference, if any, between: (i) the present value of the Participant's Plan benefit (reduced actuarially to reflect any amounts payable as a lump sum pursuant to paragraph 2(B)(i)(a) of the Plan), if paid as a single life annuity for the life of the Participant (the "ADJUSTED PLAN BENEFIT"); and (ii) the Lump Sum Amount; payable according to the generally applicable Plan provisions. Any present values shall be determined based on the actuarial assumptions set forth below. (C) The LUMP SUM AMOUNT shall be determined as follows: (i) First, determine the applicable Target Safety Net Amount from the table in Schedule V. Next, increase the Target Safety Net Amount for each month of employment after October 1, 2000 by one-twelfth (1/12) of an inflation assumption which shall be equal to the greater of: (1) three percent (3%); or (2) the inflation assumption used for purposes of Financial Accounting Standard 87 to project the maximum compensation and benefits 27 limits for that fiscal year for the Qualified Pension Plan, reduced by one and one-half percent (1.5%). One (1) day of employment during a month is sufficient to earn the inflation adjustment for that month. No adjustment for inflation will be made after the month of termination, however. The result is the amount of a hypothetical, annual, single-life annuity payable for the life of the Participant. The amount of this hypothetical annuity is referred to below as the "SUPPLEMENTAL PLAN TARGET BENEFIT". (ii) Next, convert the lesser of the Supplemental Plan Target Benefit and the Adjusted Plan Benefit to a lump sum, using the following actuarial assumptions: (1) An interest rate equal to the sum of: (a) the discount rate used in preparing the Financial Accounting Standard 87 report for the Qualified Pension Plan for the Company's fiscal year in which the lump sum distribution is paid; and (b) two percent (2%). (2) The length of the payment is twenty and five-tenths (20.5) years increased by six-tenths (.6) of a year for each year (or portion thereof) that the payment date precedes age sixty-two (62) or decreased by six-tenths (.6) of a year for each year (or portion thereof) that the payment date follows age sixty-two (62). (3) The annual annuity amount is payable in equal monthly installments, as of the first day of each month. (iii) The result of the calculations described in (ii), next above, is the Lump Sum Amount. 28 SCHEDULE V GRANDFATHERED PAYMENT AMOUNTS AND OPTIONS FOR CERTAIN INDIVIDUALS COVERED BY INDIVIDUAL SALARY CONTINUATION AGREEMENTS PRIOR TO THE OCTOBER 1, 2002 PLAN RESTATEMENT Prior to October 1, 2002, the individuals listed below (the "PROTECTED GROUP") participated in the Officers Salary Continuation Plan pursuant to individual agreements which provided: (a) a benefit expressed as a multiple of annual compensation, payable in ten annual installments (the "OLD SALARY CONTINUATION BENEFIT"), and (b) a different method of determining the dollar amount used in the calculation described in 2(b)(iii)(A)(2) (the "TARGET SAFETY NET AMOUNT"). Effective October 1, 2002, the Salary Continuation Benefit was replaced by Part 1 of the benefit described in clause 2(a)(i) of the Plan (the "NEW BENEFIT"), and a uniform dollar amount established for purposes of the calculation described in 2(b)(iii)(A)(2) (the "NEW DOLLAR AMOUNT"). Notwithstanding any contrary Plan provision, the Protected Group shall retain the right to elect to receive the Old Salary Continuation Benefit in lieu of the New Benefit, and to have the Lump Sum Amount in 2(b)(iii) calculated using the Old Salary Continuation Benefit and the Target Safety Net Amount. Any such elections shall be made in accordance with procedures similar to those applicable to the election described in 2(b)(ii), as established by the Committee. For purposes of the preceding calculations, annual compensation, the applicable multiple and the Target Safety Net Amount shall be determined based on the following table.
Target Safety Net Amount Name Multiple in Thousands Annual Salary - ------------------ --------- ------------------------- --------------- Almoney, Jeffery 1.0 75 248,000.07 Alten, Jim 1.0 75 251,200.36 Bailey, Tim 1.5 75 296,000.22 Behm, Mike 1.0 75 196,800.03 Berry, Michael 1.0 75 Bolka, Ed 1.0 75 267,200.13
29 Boyer, Rick 1.0 75 220,800.36 Brown, Mark 1.5 100 305,600.26 Collins, Scott 1.0 75 256,000.16 Corrao, Bill 1.0 75 264,000.00 Delong, Steve 1.0 75 243,200.26 Dittman, Dan 1.5 100 328,000.00 Dutch, Dave 1.0 75 288,000.00 Falknor, Debra 1.0 75 232,000.10 Gapinski, Mike 1.0 75 272,000.36 Gerhard, Stephen 1.0 75 256,000.10 Grassman, Raymond 1.0 75 208,000.00 Guthrie, Paul 1.0 75 225,600.13 Hangen, Steve 1.0 75 248,000.03 Harvey, Randy 1.0 75 360,000.00 Kirwan, Jerry 1.0 75 190,400.29 Medford, Dale 2.0 250 520,000.00 Mulcaney, Teri 1.0 75 176,000.03 Rollins, David (Mick) 1.0 75 220,800.32 Shave, John 1.0 75 240,000.39 Suttmiller, Tom 1.5 100 324,800.32 Swann, Richard 1.0 75 208,000.00 Urs, Anil 1.0 75 187,200.00
30 Ventura, Doug 1.5 75 320,000.10 Von Pusch, Rick 1.0 75 176,000.03 Wall, Carolyn 1.0 75 184,000.13 Waterhouse, Lloyd 2.0 250 1,069,668.32 Wells, Kevin 1.0 75 193,600.16 West, Gillis 1.0 75 232,000.22 Wrona, Rick 1.0 75 248,000.00
31 EX-21 7 l10970aexv21.txt LIST OF SUBSIDIARIES EXHIBIT (21) THE REYNOLDS AND REYNOLDS COMPANY* LIST OF SUBSIDIARIES AS OF OCTOBER 1, 2004 Formcraft Holdings, Inc. Incadea, GmbH Networkcar, Inc. Reyna Capital Corporation - Reyna Funding, L.L.C. Reynolds and Reynolds (Canada) Limited Reynolds and Reynolds Holdings, Inc. Reynolds and Reynolds International Corporation Reynolds Partsco Holdings, Inc. Reynolds Transformation Services, Inc. - Automark, LLC - L.S.I., LLC Reynolds Transformation Solutions Limited Reynolds Vehicle Registration, Inc. *Denotes a publicly-traded company EX-23 8 l10970aexv23.txt CONSENT OF IND. REGISTERED PUB ACCTG FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in The Reynolds and Reynolds Company (1) Registration Statement No. 33-56045 on Form S-8, (2) Post-Effective Amendment No. 1 to Registration Statement No. 333-12681 on Form S-8, (3) Registration Statement No. 333-16583 on Form S-3, (4) Registration Statement No. 333-18585 on Form S-3, (5) Registration Statement No. 333-41983 on Form S-3, (6) Registration Statement No. 333-41985 on Form S-3, (7) Post-Effective Amendment No. 1 to Registration Statement No. 33-51895 on Form S-3, (8) Post-Effective Amendment No. 1 to Registration Statement No. 33-58877 on Form S-3, (9) Pre-Effective Amendment No. 1 to Registration Statement No. 33-61725 on Form S-3, (10) Registration Statement No. 33-59615 on Form S-3, (11) Registration Statement No. 33-59617 on Form S-3, (12) Registration Statement No. 333-12967 on Form S-3, (13) Registration Statement No. 333-72639 on Form S-3, (14) Registration Statement No. 333-85177 on Form S-8, (15) Registration Statement No. 333-85179 on Form S-8, (16) Registration Statement No. 333-85551 on Form S-8, (17) Registration Statement No. 333-94687 on Form S-3, (18) Registration Statement No. 333-30090 on Form S-8, (19) Registration Statement No. 333-53798 on Form S-3, (20) Registration Statement No. 333-57272 on Form S-8, (21) Registration Statement No. 333-70630 on Form S-8, and (22) Registration Statement No. 333-86780 on Form S-8 of our report dated December 8, 2004, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's change in methods of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142 and the Company's change in method of accounting for stock-based compensation to conform to SFAS No. 123), appearing in this Annual Report on Form 10-K of The Reynolds and Reynolds Company for the year ended September 30, 2004 and to the reference to Deloitte & Touche, LLP under the heading of "Experts" in respective Prospectuses, which is part of each of the above Registration Statements.. DELOITTE & TOUCHE LLP Dayton, Ohio December 10, 2004 EX-31.1 9 l10970aexv31w1.txt 302 CERTIFICATION OF ACTING CEO EXHIBIT 31.1 CERTIFICATION I, Philip A. Odeen, principal executive officer, certify that: 1. I have reviewed this annual report on Form 10-K of The Reynolds and Reynolds Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this annual report any change in the registrants internal controls over financial reporting that occurred during the fourth quarter that has materially affected or is reasonable likely to materially affect, the registrants internal control over financial reporting; and 5. I have disclosed to the registrant's auditors and the audit committee of registrant's board of director or person performing the equivalent function: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information, and; b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 13, 2004 /s/ PHILIP A. ODEEN ------------------- Philip A. Odeen Chairman and Acting Chief Executive Officer EX-31.2 10 l10970aexv31w2.txt 302 CERTIFICATION OF ACTING CFO EXHIBIT 31.2 CERTIFICATION I, Dale L. Medford, principal financial officer, certify that: 1. I have reviewed this annual report on Form 10-K of The Reynolds and Reynolds Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and c. disclosed in this annual report any change in the registrants internal controls over financial reporting that occurred during the fourth quarter that has materially affected or is reasonable likely to materially affect, the registrants internal control over financial reporting; and 5. I have disclosed to the registrant's auditors and the audit committee of registrant's board of director or person performing the equivalent function: a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to affect the registrant's ability to record, process, summarize and report financial information, and; b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 13, 2004 /s/ DALE L. MEDFORD ------------------- Dale L. Medford Executive Vice President, Chief Financial Officer, and Chief Administrative Officer EX-32.1 11 l10970aexv32w1.txt 906 CERTIFICATION OF ACTING CEO EXHIBIT 32.1 CERTIFICATION I, Philip A. Odeen, certify that: To the best of my knowledge and belief, the Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 13, 2004 by The Reynolds and Reynolds Company and to which this certification is appended fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of The Reynolds and Reynolds Company. /s/ PHILIP A. ODEEN ------------------- Philip A. Odeen Chairman and Acting Chief Executive Officer EX-32.2 12 l10970aexv32w2.txt 906 CERTIFICATION OF ACTING CFO EXHIBIT 32.2 CERTIFICATION I, Dale L. Medford, certify that: To the best of my knowledge and belief, the Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 13, 2004 by The Reynolds and Reynolds Company and to which this certification is appended fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of The Reynolds and Reynolds Company. /s/ DALE L. MEDFORD ------------------- Dale L. Medford Executive Vice President, Chief Financial Officer, and Chief Administrative Officer -----END PRIVACY-ENHANCED MESSAGE-----