-----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, PpzGfH9Di66eQ5dl8splpziyooUDyIPBzeCeDNUuqaVjUWj7lt3A+CuKfIDhMxjK wNVlJO2zC20CICP+Pyw62A== 0000950152-05-004160.txt : 20050509 0000950152-05-004160.hdr.sgml : 20050509 20050509162248 ACCESSION NUMBER: 0000950152-05-004160 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050509 DATE AS OF CHANGE: 20050509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS & REYNOLDS CO CENTRAL INDEX KEY: 0000083588 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 310421120 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10147 FILM NUMBER: 05812023 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-Q 1 l13351ae10vq.txt THE REYNOLDS AND REYNOLDS COMPANY FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2005 COMMISSION FILE NO. 1-10147 THE REYNOLDS AND REYNOLDS COMPANY OHIO 31-0421120 (State of incorporation) (IRS Employer Identification No.) ONE REYNOLDS WAY DAYTON, OHIO 45430 (Address of principal executive offices) (937)485-2000 (Telephone No.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] On March 31, 2005, 63,332,414 Class A common shares and 14,000,000 Class B common shares were outstanding. THE REYNOLDS AND REYNOLDS COMPANY TABLE OF CONTENTS
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income (unaudited) For the Three and Six Months Ended March 31, 2005 and 2004 3 Condensed Consolidated Balance Sheets As of March 31, 2005 (unaudited) and September 30, 2004 4 Statements of Consolidated Cash Flows (unaudited) For the Six Months Ended March 31, 2005 and 2004 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the Three and Six Months Ended March 31, 2005 and 2004 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 (See the caption entitled "Market Risks" included in the Management's Discussion and Analysis of Financial Condition and Results of Operations) Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits 22 SIGNATURES 23
2 THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2005 AND 2004 (In thousands except per share data)
Three Months Six Months 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net Sales and Revenues Products $ 174,262 $ 174,595 $ 339,459 $ 351,274 Services 69,651 66,546 136,927 129,870 Financial services 6,702 8,351 13,551 16,751 --------- --------- --------- --------- Total net sales and revenues 250,615 249,492 489,937 497,895 --------- --------- --------- --------- Cost of Sales Products 65,142 60,487 125,891 123,211 Services 44,158 46,185 91,399 91,360 Financial services 1,878 1,863 3,629 3,780 --------- --------- --------- --------- Total cost of sales 111,178 108,535 220,919 218,351 --------- --------- --------- --------- Gross Profit 139,437 140,957 269,018 279,544 Selling, General and Administrative Expenses 102,285 98,233 196,262 200,861 --------- --------- --------- --------- Operating Income 37,152 42,724 72,756 78,683 --------- --------- --------- --------- Other Charges (Income) Interest expense 1,631 1,230 3,076 2,570 Interest income (780) (403) (1,364) (1,060) Other - net (530) (1,204) (2,485) (2,152) --------- --------- --------- --------- Total other charges (income) 321 (377) (773) (642) --------- --------- --------- --------- Income Before Income Taxes 36,831 43,101 73,529 79,325 Income Taxes 14,261 16,744 29,605 29,146 --------- --------- --------- --------- Net Income $ 22,570 $ 26,357 $ 43,924 $ 50,179 ========= ========= ========= ========= Basic Earnings Per Common Share Net income $ 0.35 $ 0.40 $ 0.69 $ 0.75 Average number of common shares outstanding 63,838 66,604 64,105 66,925 Diluted Earnings Per Common Share Net income $ 0.34 $ 0.38 $ 0.67 $ 0.73 Average number of common shares outstanding 65,646 68,642 65,509 69,045 Cash Dividends Declared Per Common Share $ 0.11 $ 0.11 $ 0.22 $ 0.22
See Notes to Condensed Consolidated Financial Statements. 3 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF MARCH 31, 2005 AND SEPTEMBER 30, 2004 (In thousands)
3/31/05 9/30/04 ------------ ------------ AUTOMOTIVE SOLUTIONS ASSETS Current Assets Cash and equivalents $ 153,081 $ 79,772 Marketable securities 37,020 Trade accounts receivable 98,181 102,293 Other accounts receivables 2,779 3,637 Inventories 10,346 12,843 Prepaid and other assets 39,817 39,689 ----------- ----------- Total current assets 304,204 275,254 Property, Plant and Equipment, less accumulated depreciation of $142,166 at 3/31/05 and $135,956 at 9/30/04 175,070 178,447 Goodwill 49,078 48,366 Software Licensed to Customers 76,147 83,757 Acquired Intangible Assets 34,039 35,315 Other Assets 87,384 86,916 ----------- ----------- Total Automotive Solutions Assets 725,922 708,055 ----------- ----------- FINANCIAL SERVICES ASSETS Cash 705 901 Finance Receivables 341,652 351,649 Other Assets 1,394 262 ----------- ----------- Total Financial Services Assets 343,751 352,812 ----------- ----------- TOTAL ASSETS $ 1,069,673 $ 1,060,867 =========== =========== AUTOMOTIVE SOLUTIONS LIABILITIES Current Liabilities Accounts payable $ 40,606 $ 41,313 Accrued liabilities 52,699 55,323 Deferred revenues 30,677 27,871 Income taxes 28,386 14,838 ----------- ----------- Total current liabilities 152,368 139,345 Long-Term Debt 100,975 103,512 Other Liabilities 84,227 81,983 ----------- ----------- Total Automotive Solutions Liabilities 337,570 324,840 ----------- ----------- FINANCIAL SERVICES LIABILITIES Notes Payable 198,134 192,131 Other Liabilities 68,544 74,079 ----------- ----------- Total Financial Services Liabilities 266,678 266,210 ----------- ----------- SHAREHOLDERS' EQUITY Capital Stock 369,969 346,352 Accumulated Other Comprehensive Losses (11,864) (13,739) Retained Earnings 107,320 137,204 ----------- ----------- Total Shareholders' Equity 465,425 469,817 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,069,673 $ 1,060,867 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 4 THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 2005 AND 2004 (In thousands)
2005 2004 ---------- ---------- Cash Flows Provided by (Used for) Operating Activities: Net Income $ 43,924 $ 50,179 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,352 23,685 Provision for doubtful accounts 3,880 4,429 Stock-based compensation 5,525 5,603 Deferred income taxes (14,697) (3,609) Net (gains) losses from sales of assets (173) 684 Changes in operating assets and liabilities: Accounts receivable 3,115 19,354 Finance receivables originated (45,491) (65,005) Collections on finance receivables 63,526 91,093 Inventories 2,497 (1,668) Prepaid expenses (382) (3,967) Other assets (1,937) 3,323 Accounts payable (707) (5,311) Accrued liabilities 6,807 2,272 Other liabilities 9,296 7,689 --------- --------- Net cash provided by operating activities 100,535 128,751 --------- --------- Cash Flows Provided by (Used for) Investing Activities: Business Combinations (500) (11,645) Capital expenditures (13,793) (21,788) Net proceeds from sales of assets 1,912 10,318 Marketable securities purchased (35,000) (27,100) Marketable securities sold 72,020 7,180 Finance receivables originated (13,725) (10,285) Collections on finance receivables 3,663 5,815 --------- --------- Net cash provided by (used for) investing activities 14,577 (47,505) --------- --------- Cash Flows Provided by (Used for) Financing Activities: Additional borrowings 27,000 12,339 Principal payments on debt (20,997) (23,206) Cash dividends paid (7,109) (7,371) Capital stock issued 32,804 27,689 Capital stock repurchased (74,736) (94,010) --------- --------- Net cash used for financing activities (43,038) (84,559) --------- --------- Effect of Exchange Rate Changes on Cash 1,039 1,195 --------- --------- Increase (Decrease) in Cash and Equivalents 73,113 (2,118) Cash and Equivalents - Beginning of Period 80,673 77,450 --------- --------- Cash and Equivalents - End of Period $ 153,786 $ 75,332 ========= =========
See Notes to Condensed Consolidated Financial Statements. 5 THE REYNOLDS AND REYNOLDS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The balance sheet as of September 30, 2004 is condensed financial information taken from the annual audited financial statements. The interim financial statements are unaudited. In the opinion of management, the accompanying interim financial statements contain all significant adjustments necessary to present fairly the company's financial position, results of operations and cash flows for the periods presented. These interim financial statements should be read in conjunction with the audited financial statements included in the company's 2004 Annual Report on Form 10-K. 2. RECLASSIFICATIONS During the quarter ended March 31, 2005, the company changed its presentation of cash flows to present a Statement of Consolidated Cash Flows. The company previously had presented separate statements of cash flows for Automotive Solutions and Financial Services. The prior year's statement of cash flows has been revised to conform to the new presentation. In 2005, the company changed its classification of auction rate securities from cash and equivalents to marketable securities, according to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of this revision was to reduce cash and equivalents and increase marketable securities by $37,020 as of September 30, 2004. The company purchased marketable securities of $35,000 in 2005 and $27,100 in 2004 and sold marketable securities of $72,020 in 2005 and $7,180 in 2004. Purchases and sales of marketable securities were considered investing activities for purposes of reporting cash flows. In February 2005, the Securities and Exchange Commission (SEC) published a letter related to the Statement of Cash Flows. This letter clarified that cash flows for finance receivables related to sales of the company's products and services should be considered operating activities in the statement of cash flows. The company historically reported cash flows from finance receivables as investing activities in the statement of cash flows. Additionally, cash flows from intercompany receivables, which were included in trade receivables, were historically included in operating activities, even though no cash was received by the company on a consolidated basis when the sale was made to the customer. The company revised its Statements of Consolidated Cash Flows to comply with the new SEC guidance to reflect the fact that no cash is received upon the initial sale and to properly classify cash receipts from the sales of products and services as operating activities. Cash flows for finance receivables representing financing of customers' purchases from other vendors will continue to be considered investing activities in the Statements of Consolidated Cash Flows. This reclassification did not change total cash flow. The following table summarizes the previously discussed revisions to cash flows from operating activities, investing activities and financing activities for the six months ended March 31, 2004.
Operating Investing Financing Activities Activities Activities ---------- ---------- ---------- Previously reported cash flows Automotive solutions $ 109,852 ($ 14,124) ($ 78,967) Financial services 11,876 2,552 (14,583) --------- --------- --------- Totals 121,728 (11,572) (93,550) Finance receivables originated (65,281) 65,281 0 Finance receivables collected 90,408 (90,408) 0 Prepaid expenses and other assets 1 0 0 Marketable securities purchased 0 (27,100) 0 Marketable securities sold 0 7,180 0 Intercompany receivables (18,105) 18,105 0 Intercompany payments 0 (8,991) 8,991 --------- --------- --------- Revised cash flows $ 128,751 ($ 47,505) ($ 84,559) ========= ========= =========
6 3. INVENTORIES
3/31/05 9/30/04 ------- ------- Finished products $ 9,891 $12,420 Work in process 333 314 Raw materials 122 109 ------- ------- Total inventories $10,346 $12,843 ======= =======
4. 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. In 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 March 31, 2005, the company has recorded goodwill of $6,382 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. During December 2004, the company paid an additional $500 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 $1,300 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 March 31, 2005, the company has recorded tax deductible goodwill of $3,649 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. 5. GOODWILL AND ACQUIRED INTANGIBLE ASSETS GOODWILL
Software Solutions Documents Totals --------- --------- -------- Balances as of September 30, 2004 $45,489 $2,877 $48,366 Business Combinations 500 500 Divestiture (46) (46) Translation 258 258 ------- ------ ------- Balances as of March 31, 2005 $46,201 $2,877 $49,078 ======= ====== =======
ACQUIRED INTANGIBLE ASSETS
Weighted Gross Accumulated Average Amount Amortization Life (years) ------- ------------ ------------ AS OF MARCH 31, 2005 Amortized intangible assets Contractual customer relationship $33,100 $ 8,137 20 Trademarks 6,278 1,545 19 Other 6,055 1,712 10 ------- ------- Total $45,433 $11,394 18 ======= ======= AS OF SEPTEMBER 30, 2004 Amortized intangible assets 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 ======= =======
7 Aggregate amortization expense was $1,314 for the six months ended March 31, 2005. Estimated amortization expense for the years ended September 30, is $2,627 in 2005, $2,627 in 2006, $2,477 in 2007, $2,477 in 2008 and $2,477 in 2009. 6. FINANCING ARRANGEMENTS AUTOMOTIVE SOLUTIONS During February 2002, the company entered into $100,000 of interest rate swap agreements that effectively converted 7% fixed rate debt into variable rate debt. These interest rate swap agreements were designated as fair value hedges. The fair value of these derivative instruments was an asset of $1,058 at March 31, 2005, and $3,621 at September 30, 2004, and was included in Automotive Solutions' other assets on the condensed 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. FINANCIAL SERVICES On May 19, 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 up to $150,000 using finance receivables purchased from Reyna Capital Corporation, also a consolidated affiliate of the company, as security for the loan. Interest is payable on a variable rate basis. This loan funding agreement is renewable through January 23, 2006. As of March 31, 2005, Reyna Funding, L.L.C. had outstanding borrowings of $127,000 under this arrangement. The fair value of the company's cash flow derivative instruments was a $1,146 asset at March 31, 2005 and a $128 liability at September 30, 2004 and was included in Financial Services' other assets and other liabilities, respectively, on the condensed consolidated balance sheets. The adjustments to record the net change in the fair value of cash flow hedges during the periods presented 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 expects the amounts to be reclassified out of other comprehensive income into earnings to be immaterial to the financial statements. REVOLVING CREDIT AGREEMENT The company has a $200,000 revolving credit agreement. The revolving credit agreement has a five year term expiring on April 8, 2009. Automotive Solutions and Financial Services share this revolving credit agreement. As of March 31, 2005, the balance outstanding on this facility was $50,000. 7. COMPREHENSIVE INCOME
THREE MONTHS SIX MONTHS 2005 2004 2005 2004 --------- --------- -------- -------- Net income $ 22,570 $ 26,357 $ 43,924 $ 50,179 Foreign currency translation adjustment (374) (929) 1,039 1,195 Net unrealized gains on derivative contracts (1) 477 (13) 836 465 -------- -------- -------- -------- Comprehensive income $ 22,673 $ 25,415 $ 45,799 $ 51,839 ======== ======== ======== ========
(1) Net of income tax provision of $316 and income tax benefit of $24 for the three months ended March 31, 2005 and 2004, respectively and income tax provisions of $555 and $310 for the six months ended March 31, 2005 and 2004, respectively. 8. BUSINESS SEGMENTS Effective October 1, 2004, the company changed its segment reporting for consistency with the current organizational structure and how management views the company's financial results. In fiscal year 2005, the company is reporting financial information for 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. Management reviews the financial results of Software Solutions, Documents and Financial Services to measure performance and allocate resources. This reporting will provide a better 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 fiscal year 2004, these items were separated, with software licenses reported in the Software Solutions segment and the related software training reported in the Services segment. There were no changes in 8 the reporting of the Documents and Financial Services segments. Prior year financial results were restated to report financial results on a consistent basis with the current year. The Software Solutions segment provides computer solutions including computer hardware, integrated software packages, software enhancements and related support. This segment also includes the 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.
THREE MONTHS SIX MONTHS 2005 2004 2005 2004 -------- -------- ---------- ---------- NET SALES AND REVENUES Software Solutions Products Hardware $ 15,245 $ 12,251 $ 29,514 $ 27,705 Software 116,860 118,086 230,182 239,623 Services 69,651 66,546 136,927 129,870 -------- -------- ---------- --------- Total Software Solutions 201,756 196,883 396,623 397,198 Documents 42,157 44,258 79,763 83,946 Financial Services 6,702 8,351 13,551 16,751 -------- -------- ---------- --------- Total Net Sales and Revenues $250,615 $249,492 $ 489,937 $ 497,895 ======== ======== ========== ========== OPERATING INCOME (LOSS) Software Solutions $ 25,932 $ 30,370 $ 50,865 $ 58,178 Documents 8,215 7,400 15,677 10,666 Financial Services 3,005 4,954 6,214 9,839 -------- -------- ---------- ---------- Total Operating Income $ 37,152 $ 42,724 $ 72,756 $ 78,683 ======== ======== ========== ==========
3/31/2005 9/30/04 ---------- ---------- ASSETS Automotive Solutions $ 725,922 $ 708,055 Financial Services 343,751 352,812 ---------- ---------- Total Assets $1,069,673 $1,060,867 ========== ==========
9. CONTINGENCIES In 2000, the company was named one of many defendants in a cost recovery lawsuit filed by a potential responsible party (PRP) coalition in the United States District Court for Southern District of Ohio regarding an environmental remediation site in Dayton, Ohio. The court had 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 $712 as of March 31, 2005. 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. As of March 31, 2005, the unamortized balance on this letter of credit was $1,526. 9 Subsequent to the company's announcement on June 24, 2004, regarding third quarter earnings, two shareholder class action complaints and two shareholder derivative claims, subsequently consolidated, were filed in the United States District Court for the Southern District of Ohio. A third 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. On January 26, 2005, the second shareholder class action was voluntarily dismissed, 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. On April 18, 2005, the plaintiffs in the federal consolidated derivative claims voluntarily moved to dismiss the action, without prejudice. Only the shareholder derivative claim in the Court of Common Pleas in Montgomery County, Ohio remains. The company denies that these allegations have any merit and is vigorously defending against this remaining action. 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. 10. POSTRETIREMENT BENEFITS
THREE MONTHS SIX MONTHS 2005 2004 2005 2004 --------- --------- --------- --------- PENSION BENEFITS Service cost $ 2,904 $ 2,822 $ 5,805 $ 5,642 Interest cost 4,580 4,217 9,148 8,431 Estimated return on plan assets (3,895) (3,184) (7,549) (6,367) Amortization of unrecognized transitional asset 0 64 0 129 Amortization of prior service cost 192 195 383 391 Recognized net actuarial losses 895 984 1,792 1,970 Termination Benefits 472 0 472 0 Settlements 0 0 935 0 -------- -------- -------- -------- Net periodic pension cost $ 5,148 $ 5,098 $ 10,986 $ 10,196 ======== ======== ======== ======== POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS Service cost $ 112 $ 166 $ 224 $ 166 Interest cost 865 924 1,730 924 Amortization of prior service cost (353) (186) (706) (186) Recognized net actuarial losses 248 280 496 280 -------- -------- -------- -------- Net periodic postretirement medical and life insurance cost $ 872 $ 1,184 $ 1,744 $ 1,184 ======== ======== ======== ========
As of March 31, 2005, the company has made $5,637 of contributions to the pension plan. The company anticipates contributing an additional $663 to fund its pension plan in fiscal 2005 for a total of $6,300. 11. ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), "Share-Based Payment." In March 2005, the Securities Exchange Commission issued Staff Accounting Bulletin 107, "Share-Based Payment," to assist companies in the adoption of SFAS No. 123 (revised). SFAS 123 requires that the cost resulting from all share-based payment transactions are recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. 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. On April 14, 2005, the Securities Exchange Commission announced the adoption of a rule that defers the required effective date of SFAS 123(revised). It will now become effective for fiscal years 10 beginning after June 15, 2005, effective for the company October 1, 2005. The company is currently evaluating this pronouncement and does not anticipate a material impact on the company's results of operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2005 AND 2004 (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 automobile dealers. Computer systems products include integrated software packages, software enhancements and computer hardware. Computer services include installation and maintenance of computer hardware, software training 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 (typically when a perpetual software license is sold) or billed monthly over the term of the software license agreement. 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 term licenses and hardware maintenance revenues (i.e. recurring revenues) are invoiced monthly and recognized ratably over the term of the contract as the software is used or 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. Although the company's primary customers are automobile dealers 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. Automobile dealers 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 automobile dealer's income than provided by new vehicle sales. This allows automobile dealers 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 which comprise about 60% of the company's revenues. When documents and financial services revenues are included, about 80% of the company's revenues are recurring in nature. 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 January 17, 2005, Finbarr J. O'Neill joined the company as President and Chief Executive Officer. Mr. O'Neill had previously been President and Chief Executive Officer of Mitsubishi Motors North America and prior thereto held the same position at Hyundai Motor America. Mr. O'Neill also joined the company's board of directors. Philip A. Odeen, who had served as Chairman and Acting Chief Executive Officer since July 2004, remained the company's Chairman. 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 has several software solutions which are relatively new and in the early stages of their lifecycle. In August 2003, the company launched Reynolds Generations Series(R) (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 review and 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. 11 Over the past year, three of the largest automobile dealership groups selected a single vendor to provide dealer management software (DMS) solutions for all their dealerships. One dealership group selected the company to be its exclusive provider of both DMS and Web solutions. The other two dealership groups chose a competitive DMS solution for their dealerships. In each case, the company remains the exclusive provider of the dealerships' Web solutions and continues to provide substantial document solutions to these other groups. The company believes that it is too early to conclude that there is a trend towards single sourcing as certain other large automobile dealership groups have indicated a preference for two or more vendors or have a decentralized operating model which permits more local autonomy in DMS decision making. In any event, if the company is not able to continue to replace the net reduction in DMS-related revenue from these three decisions with revenues from other solutions or net gains from subsequent decisions in favor of the company by other large dealership groups, the company's future revenues may be adversely impacted, albeit over time as the transition to a single source typically takes two to three years. RESULTS OF OPERATIONS The following summaries of segment reporting, reorganization costs and special items and business combinations 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 Condensed Consolidated Financial Statements. SEGMENT REPORTING Effective October 1, 2004, the company changed its segment reporting for consistency with the current organizational structure and how management views the company's financial results. In fiscal year 2005, the company is reporting financial information for 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. Management reviews the financial results of Software Solutions, Documents and Financial Services to measure performance and allocate resources. This reporting will provide a better 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 fiscal year 2004, these items were separated, with software licenses reported in the Software Solutions segment and the related software training reported in the Services segment. There were no changes in the reporting of the Documents and Financial Services segments. Prior year segment financial information was restated to report financial results on a consistent basis with the current year. See Note 8 to the Condensed Consolidated Financial Statements for more information on segment reporting. 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 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. The company incurred expenses of $1,267 before taxes or $.01 per share after taxes during the quarter ended March 31, 2004 and $7,513 before taxes or $.07 per share after taxes for the six months ended March 31, 2004, for severance, outplacement, relocation and other plant consolidation efforts. For the twelve months ended September 30, 2004, the company incurred expenses 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 did not incur any expenses related to this reorganization in 2005 and does not anticipate incurring additional expenses related to these efforts in 2005. 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. See Note 4 to the Condensed Consolidated Financial Statements for more information on business combinations. 12 CONSOLIDATED SUMMARY
Three Months Six Months -------------------------------------------- -------------------------------------------- 2005 2004 Change % Change 2005 2004 Change % Change --------- --------- ---------- -------- --------- --------- --------- -------- Net sales and revenues $250,615 $249,492 $ 1,123 0% $489,937 $497,895 ($ 7,958) -2% Gross profit $139,437 $140,957 ($ 1,520) -1% $269,018 $279,544 ($10,526) -4% % of revenues 55.6% 56.5% 54.9% 56.1% SG&A expenses $102,285 $ 98,233 $ 4,052 4% $196,262 $200,861 ($ 4,599) -2% % of revenues 40.8% 39.4% 40.0% 40.3% Operating income $ 37,152 $ 42,724 ($ 5,572) -13% $ 72,756 $ 78,683 ($ 5,927) -8% % of revenues 14.8% 17.1% 14.9% 15.8% Net income $ 22,570 $ 26,357 ($ 3,787) -14% $ 43,924 $ 50,179 ($ 6,255) -12% Basic earnings per share $ 0.35 $ 0.40 ($ 0.05) -13% $ 0.69 $ 0.75 ($ 0.06) -8% Diluted earnings per share $ 0.34 $ 0.38 ($ 0.04) -11% $ 0.67 $ 0.73 ($ 0.06) -8%
Consolidated net sales and revenues increased slightly during the three months ended March 31, 2005, the first quarterly increase in five quarters. Second quarter revenues increased 2% in Software Solutions and declined in Documents and Financial Services. Software Solutions revenues increased primarily because of an 8% increase in one-time revenues resulting from greater professional services (consulting) sales. Through six months, consolidated net sales and revenues declined 2% with revenues declining in all three segments. The backlog of new orders for Software Solutions computer systems products and services and deferred revenues (orders shipped, but not yet recognized in revenues) was approximately $45,000 at March 31, 2005, compared to $44,000 as of September 30, 2004. Last year the order backlog was reduced to $45,000 at March 31, 2004 from $65,000 at September 30, 2003. Documents sales reflected the exit from low margin products during the second half of last year. Financial Services revenues reflect both lower average interest rates and lower average finance receivable balances. See also the Key Issues caption of this analysis for additional information which could impact future revenues. Gross profit declined from last year for both the second quarter and six months. The second quarter gross profit was negatively impacted by consolidation costs related to a software service center and lower recurring revenue margins. Year-to-date, gross profit declined because of lower revenues, the software service center consolidation costs and $2,345 of costs to write off software assets that will not be recovered by estimated future cash flows. Documents gross margins increased as compared to a year ago because of the productivity gains resulting from last year's plant consolidation and the elimination of last year's plant consolidation costs. Selling General & Administrative (SG&A) expenses increased over last year for the quarter primarily as a result of $3,810 of retirement and other employee separation costs, primarily related to the senior leadership team. In the third quarter of 2005, the company anticipates incurring about $3,000 of employment, retirement and other employee separation costs as new employees are hired and existing employees provide services through retirement. Year-to-date, SG&A expenses declined from last year because of lower costs as a result of last year's sales reorganization and plant consolidation, as well as the elimination of last year's consolidation costs of $5,830 and lower amortization expenses. Research and development expenses were approximately $22,000 for the second quarter and $44,000 for the six months compared to $23,000 and $44,000 for the same periods, respectively, a year ago. No software development costs were capitalized in either year. See the Software Solutions caption of this analysis for additional information regarding R&D expenses and software capitalization. Operating margins declined to 14.8% in the second quarter of fiscal year 2005, compared to 17.1% last year as a result of the 2005 retirement and other employee separation costs. Year-to-date, operating margins declined to 14.9% from 15.8% last year, primarily as a result of lower revenues which reduced operating income. Other income reflected $1,044 of increased exchange losses over last year in the second quarter resulting from movements in foreign currency. The effective income tax rate was 40.3% for the six months ended March 31, 2005, compared to 36.7% for the comparable period last year. During the second quarter of 2005, the company recorded a $1,067 tax benefit related to higher Ohio jobs credits for 2002 - 2004. Last year 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 current year effective income tax rate also reflects the greater impact of international operations and estimated reduced benefits from stock option exercises. 13 SOFTWARE SOLUTIONS
Three Months Six Months -------------------------------------------- -------------------------------------------- 2005 2004 Change % Change 2005 2004 Change % Change --------- --------- --------- -------- --------- --------- --------- -------- Net sales and revenues Recurring revenues $152,622 $151,341 $ 1,281 1% $302,064 $301,464 $ 600 0% One-time sales $ 49,134 $ 45,542 $ 3,592 8% $ 94,559 $ 95,734 ($ 1,175) -1% Total net sales and revenues $201,756 $196,883 $ 4,873 2% $396,623 $397,198 ($ 575) 0% Gross profit Recurring revenues $ 95,904 $ 97,486 ($ 1,582) -2% $187,764 $195,234 ($ 7,470) -4% One-time sales $ 14,942 $ 13,606 $ 1,336 10% $ 25,507 $ 28,082 ($ 2,575) -9% Total gross profit $110,846 $111,092 ($ 246) 0% $213,271 $223,316 ($10,045) -4% Gross Margin Recurring revenues 62.8% 64.4% 62.2% 64.8% One-time sales 30.4% 29.9% 27.0% 29.3% Total gross margin 54.9% 56.4% 53.8% 56.2% SG&A expenses $ 84,914 $ 80,722 $ 4,192 5% $162,406 $165,138 ($ 2,732) -2% % of revenues 42.0% 41.0% 41.0% 41.6% Operating income $ 25,932 $ 30,370 ($ 4,438) -15% $ 50,865 $ 58,178 ($ 7,313) -13% % of revenues 12.9% 15.4% 12.8% 14.6%
Net sales and revenues increased 2% during the quarter ended March 31, 2005, with one-time sales growing 8% and recurring revenues increasing 1%. Year-to-date, net sales and revenues declined slightly with recurring revenues up slightly and one-time sales down 1% from last year. The effect of divested businesses (Boatventures.com and Web classifieds) reduced revenues about $900 in the quarter and $2,700 through six months. See also the Key Issues caption of this analysis for additional information which could impact future revenues. Recurring revenues consist primarily of monthly revenues from software licenses, software enhancements, telephone support, hardware maintenance, credit services and network services. Recurring revenues increased slightly for both the three and six months ended March 31, 2005 as a result of revenue growth in credit services, customer relationship management solutions and Web solutions, all as a result of greater volume. This growth was partially offset by lower ERA(R) dealer management system recurring revenues, a decline in network services revenues and as a result of divested businesses. ERA recurring revenues declined from last year for both the quarter and six months because of a slight decrease in market share, but increased slightly over the first quarter of 2005 as additional applications such as ERA XT advanced reporting were installed and an annual price increase of about 3% became effective March 1, 2005. Network services recurring revenues declined for both the quarter and six months because the company ceased being a reseller of network circuits. Network services profitability improved as a result of this action. One-time sales include revenues from hardware, software license fees, implementation services (installation and training) and professional services. During the second quarter, one-time sales increased because of growth in professional services as a result of delivering more consulting days. This growth was partially offset by a decline in ERA dealer management system revenues. Through six months, one-time sales declined 1% as growth in professional services was more than offset by lower ERA revenues. The actual number of ERA systems shipped increased year-to-year for both the quarter and six months. ERA one-time sales declined, however, because average sales prices declined, primarily as a result of greater sales of ERA ES, the company's lower priced solution for smaller automobile dealers. The six month comparisons were also affected by last year's reduction in the order backlog. Last year the order backlog was reduced $20,000, primarily in the first quarter of 2004, as strong shipments of ERA occurred early in the quarter and allowed revenue recognition as implementations were completed. This year the order backlog increased slightly to $45,000 as of March 31, 2005, compared to $44,000 as of September 30, 2004. Overall gross profit declined slightly in the second quarter as one-time gross profit increased, because of professional services sales growth, and recurring gross profit declined. Recurring gross profit declined primarily as a result of costs incurred in the consolidation of a service center. These consolidation costs included both termination costs and costs to ramp up the new location to provide continued customer support. These costs will continue at a reduced level in the third quarter. The mix of recurring revenues also contributed to the recurring gross profit decline as lower margin credit services revenues increased and higher margin ERA recurring revenues declined. The growth in one-time sales, which have a lower margin than recurring revenues, also caused the overall gross margin to decline. Year-to-date gross margins declined as a result of lower ERA one-time and recurring revenues. The one-time revenues decline was partially offset by higher gross margins from professional services as consultant utilization increased. Recurring gross margins were also negatively 14 affected by costs incurred in the consolidation of a service center and $2,345 of costs to write-off software assets that would not be recovered by estimated future cash flows. 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 company did not capitalize any software development costs during the six month periods ended March 31, 2005 and 2004. Software amortization expenses (included in cost of sales) related to RGS Suite were $6,547 in the six months ended March 31, 2005, the same as a year ago. As of March 31, 2005, the unamortized balance of software development costs related to RGS Suite was $69,832. The company believes that the capitalized costs will be recovered from cash flow from future product revenues. SG&A expenses increased $4,192 over last year in the second quarter, primarily as a result of retirement and other employee separation costs, primarily related to the senior leadership team. . In the third quarter of 2005, the company anticipates incurring about $3,000 of employment, retirement and other employee separation costs as new employees are hired and existing employees provide services through retirement. Year-to-date SG&A expenses declined $2,732 because of a decline related to consolidation costs incurred last year, productivity gains from the consolidation and reduced amortization expenses. These declines were partially offset by the second quarter's retirement and other employee separation costs. Operating income declined from last year in the second quarter primarily because of the retirement and other employee separation costs and costs incurred to consolidate a service center. Year-to-date operating income declined primarily as a result of the decline in gross profit as compared to last year. DOCUMENTS
Three Months Six Months ---------------------------------------- ------------------------------------------ 2005 2004 Change % Change 2005 2004 Change % Change ------- ------- --------- -------- -------- -------- --------- -------- Net sales and revenues $42,157 $44,258 ($ 2,101) -5% $79,763 $83,946 ($ 4,183) -5% Gross profit $23,767 $23,377 $ 390 2% $45,825 $43,257 $ 2,568 6% % of revenues 56.4% 52.8% 57.5% 51.5% SG&A expenses $15,552 $15,977 ($ 425) -3% $30,148 $32,591 ($ 2,443) -7% % of revenues 36.9% 36.1% 37.8% 38.8% Operating income $ 8,215 $ 7,400 $ 815 11% $15,677 $10,666 $ 5,011 47% % of revenues 19.5% 16.7% 19.7% 12.7%
Documents sales declined 5% from last year for both the second quarter and six months because of a decrease in the volume of business forms. About half of the sales decline resulted from the company's decision to stop selling low-margin stock continuous and copy paper products in the second half of 2004. The company expects the sales of certain documents to continue to decline as advances in technology continue. Gross profit increased over last year for both the quarter and six months primarily because of productivity gains from last year's consolidation of the Grand Prairie, Texas manufacturing facility into the Celina, Ohio facility. Last year also included consolidation costs of $318 in the quarter and $1,622 year-to-date related to closing the Grand Prairie location as well as costs to set up production capabilities in Celina. No such costs were incurred in 2005. SG&A expenses declined in the second quarter primarily as a result of lower selling expenses because of last year's sales reorganization. Through six months, SG&A expenses declined $2,443 with $1,675 related to costs incurred in last year's sales reorganization and plant consolidation. The remainder of the year-to-date reduction in SG&A expenses related to lower ongoing selling costs as a result of last year's actions. Operating income increased over last year for both the three and six months because of productivity gains resulting from last year's consolidation activities and because last year included the costs of the consolidation. The company has also eliminated some lower margin products which helped improve operating margin. 15 FINANCIAL SERVICES
Three Months Six Months ---------------------------------------- ------------------------------------------ 2005 2004 Change % Change 2005 2004 Change % Change ------- ------- -------- -------- -------- -------- --------- -------- Net sales and revenues $6,702 $8,351 ($ 1,649) -20% $13,551 $16,751 ($ 3,200) -19% Gross profit $4,824 $6,488 ($ 1,664) -26% $ 9,922 $12,971 ($ 3,049) -24% % of revenues 72.0% 77.7% 73.2% 77.4% SG&A expenses $1,819 $1,534 $ 285 19% $ 3,708 $ 3,132 $ 576 18% % of revenues 27.2% 18.4% 27.3% 18.7% Operating income $3,005 $4,954 ($ 1,949) -39% $ 6,214 $ 9,839 ($ 3,625) -37% % of revenues 44.8% 59.3% 45.9% 58.7%
About 75% of the three and six month declines in Financial Services revenues resulted almost equally from lower average interest rates and a decrease in average finance receivable balances. Average finance receivable balances declined as a result of lower ERA one-time sales in Software Solutions. The remaining decline in revenues is related to a reduction in other income, primarily related to lease buyouts. Gross profit also declined because of the declines in revenues. Interest rate spreads were 3.4% in the quarter and 3.7% through six months, compared to 4.5% and 4.6% respectively last year. In fiscal year 2004, the tax treatment for the majority of new 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 will be required in the future to finance the portfolio because of the reduced tax benefits. Debt balances are actually lower than last year because of the decline in finance receivable balances. SG&A expenses increased over last year because of higher bad debt expenses. Bad debt expenses were $975 in the quarter and $2,025 year-to-date compared to $675 and $1,425 respectively last year. Bad debt expenses increased because of higher net write-offs and an increase in inactive accounts as compared to last year. Operating income declined primarily as a result of the decline in revenues. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS During the quarter ended March 31, 2005, the company reclassified its Statements of Consolidated Cash Flows as described in Note 2 to the Condensed Consolidated Financial Statements. These reclassifications adjusted cash flows to reflect investments in auction rate securities as marketable securities instead of cash. Purchases and sales of marketable securities were considered investing activities for purposes of reporting cash flows. The company also adjusted its Statements of Consolidated Cash Flows to reflect cash flows for finance receivables related to sales of the company's products and services as operating activities in the Statements of Consolidated Cash Flows. The company historically reported cash flows from finance receivables as investing activities in the statement of cash flows. Additionally, cash flows from intercompany receivables, which were included in trade receivables, were historically included in operating activities, even though no cash was received by the company on a consolidated basis when the sale was made to the customer. The company revised its Statements of Consolidated Cash Flows to comply with the new SEC guidance to reflect the fact that no cash is received upon the initial sale and to properly classify cash receipts from the sales of products and services as operating activities. Cash flows for finance receivables representing financing of customers' purchases from other vendors will continue to be considered investing activities in the Statements of Consolidated Cash Flows. This reclassification did not change total cash flow. The company's balance of cash and equivalents was $153,786 at March 31, 2005. Cash flows from operating activities were $100,535 during the first six months of 2005 and resulted primarily from net income, adjusted for non cash charges such as depreciation and amortization, and a reduction in finance receivables related to the sales of the company's products and services. Cash flows provided by investing activities reflected the net sale of marketable securities of $37,020, partially offset by net capital expenditures of $11,881 and growth in finance receivables related to financing non-company equipment of $10,062. Fiscal year 2005 capital expenditures (net of proceeds from asset sales) in the ordinary course of business are anticipated to be about $20,000, including about $10,000 for buildings. Cash flows used for investing activities also included an additional payment related to the fiscal year 2004 purchase of Third Coast Media. This payment had been contingent upon meeting certain operating criteria established at the purchase date. See the Shareholders' Equity caption of this analysis regarding the payment of dividends and share repurchases. 16 CAPITALIZATION The company's ratio of total debt (total Automotive Solutions debt) to capitalization (total Automotive Solutions debt plus shareholders' equity) was 17.8% at March 31, 2005 and 18.1% at September 30, 2004. Remaining credit available under a committed revolving credit agreement was $150,000 at March 31, 2005. 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 May 19, 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 up to $150,000 using finance receivables purchased from Reyna Capital Corporation, also a consolidated affiliate of the company, as security for the loan. Interest is payable on a variable rate basis. This loan funding agreement is renewable through January 23, 2006. The outstanding borrowings under this arrangement were included with Financial Services notes payable on the Consolidated Balance Sheets. As of March 31, 2005, the balance outstanding on this facility was $127,000. 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 March 31, 2005, 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 to provide access to capital sufficient to meet the company's cash requirements beyond the next year. See Note 6 to the Condensed Consolidated Financial Statements for additional disclosures regarding the company's debt instruments. SHAREHOLDERS' EQUITY The company lists its Class A common shares on the New York Stock Exchange. There is no principal market for the Class B common shares. The company also has an authorized class of 60,000 preferred shares with no par value. As of March 31, 2005, 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 as described in the company's annual report on form 10-K for the fiscal year ended September 30, 2004. Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. The company has paid dividends every year since the company's initial public offering in 1961. During the quarter ended March 31, 2005, the company repurchased 1,945 Class A common shares for $53,993 (an average price of $27.76 per share). Year-to-date, the company repurchased 2,800 Class A common shares for $74,736 (an average price of $26.69 per share). As of March 31, 2005, the company could repurchase an additional 4,645 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 17 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. Software development costs consist primarily of payroll and benefits for both employees and outside contractors. Upon general release of a software product, amortization is determined based on the larger of the amounts computed using (a) the ratio that current gross revenues for each product bears to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated economic life of the product, ranging from three to seven years. LONG-LIVED ASSETS The company has completed numerous business combinations over the years. These business combinations result in the acquisition of intangible assets and the recognition of goodwill on the company's Consolidated Balance Sheet. The company accounts for these assets under the provisions of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill not be amortized, but instead tested for impairment at least annually. The Statement also requires recognized intangible assets with finite useful lives to be amortized over their useful lives. Long-lived assets, goodwill and intangible assets are reviewed for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable from future cash flows. Future cash flows are forecasted based on management's estimates of future events and could be materially different from actual cash flows. If the carrying value of an asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. INCOME TAXES The company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the company's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the company's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the company's financial position or its results of operations. 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 18 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. The company made contributions to its pension plans of $5,320 in the three months and $5,637 in the six months ended March 31, 2005. The company anticipates making additional contributions of $663 during the remaining six months of fiscal year 2005. See Note 10 to the Consolidated Financial Statements included in Form 10-K for the fiscal year ended September 30, 2004, for more detailed disclosures regarding postretirement benefits, including relevant assumptions used to determine expense and future obligations. The company's net periodic pension expense was $5,148 for the three months and $10,986 for the six months ended March 31, 2005, and compared to $5,098 and $10,196, respectively, a year ago. The company's net periodic postretirement medical and life insurance expense was $872 for the three months and $1,744 for the six months ended March 31, 2005, compared to $1,185 and $2,369, respectively, a year ago. 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 4.9% during the second quarter and 4.6% for the six months ended March 31, 2005. 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 the six months ended March 31, 2005, Reyna Funding, L.L.C. entered into $48,919 of interest rate swaps associated with new debt issues and to replace maturing interest rate swaps. As of March 31, 2005, a one percentage point increase in interest rates would increase annual consolidated interest expense by $1,500 while a one percentage point decline in interest rates would reduce annual consolidated interest expense by $1,500. See Note 6 to the Condensed 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 9% of net sales and revenues during the six months ended March 31, 2005. 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. During the second quarter of 2005, the company did sell foreign currency forward contracts to limit foreign currency risk on intercompany balances. The foreign currency positions were closed as of March 31, 2005, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at March 31, 2005, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. CONTINGENCIES See Note 9 to the Condensed Consolidated Financial Statements for a discussion of the company's contingencies. ACCOUNTING STANDARDS See Note 11 to the Condensed Consolidated Financial Statements for a discussion of the effect of accounting standards that the company has not yet adopted. 19 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. CONTROLS AND PROCEDURES The company is currently undergoing a comprehensive effort to document and test its significant business and financial processes and procedures to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for the fiscal year ended September 30, 2005. This effort includes documentation and testing of internal controls. During the course of these activities, the company has identified opportunities to improve internal controls and is in the process of implementing these improvements. The company also identified segregation of duties concerns at its relatively small European operations. As a result of these findings, the company is changing its internal controls to properly segregate duties at its European operations. Based upon the foregoing, management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures, after implementing the aforementioned actions, are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. Except as mentioned above, there have been no changes in the company's internal controls over financial reporting that occurred during the fiscal period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the company's internal controls over financial reporting. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information included in Note 9 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES (IN THOUSANDS EXCEPT PER SHARE DATA) As of December 31, 2004, the company could repurchase an additional 1,590 Class A common shares under an existing board of directors' authorization. On February 15, 2005, the company's board of directors authorized the repurchase of an additional 5,000 Class A common shares. This authorization has no fixed expiration date and was in addition to previously approved authorizations. As of March 31, 2005, the company could repurchase an additional 4,645 Class A common shares under this board of directors' authorization. No other authorizations for share repurchase were outstanding as of March 31, 2005. During the three months ended March 31, 2005, the company repurchased 1,945 Class A common shares for $53,993 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 January 2005 75 $27.04 75 1,515 8/12/03 February 2005 740 $27.58 740 775 8/12/03 March 2005 775 $27.99 775 0 2/15/05 New Authorization 5,000 2/15/05 March 2005 355 $27.78 355 4,645 ----- ----- Total Quarter 1,945 $27.76 1,945 ===== =====
21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders on February 17, 2005, the shareholders of the company voted on and approved the following issues:
Shares Shares For Withheld ---------- --------- Issue 1 Election of Directors Three-year terms Expiring in 2008 Stephanie W. Bergeron 65,386,662 8,356,581 Dr. David E. Fry 71,315,991 2,427,252 Richard H. Grant, III 71,504,509 2,238,734 Ira D. Hall 65,389,800 8,353,443
Shares Shares Shares Broker For Against Abstain Nonvote ---------- ---------- ------- --------- Issue 2 Approval of Non-Employee Director Stock 60,039,236 7,539,438 906,879 5,257,690 Compensation Plan Issue 3 Approval of Material Terms of a Performance- 70,196,046 2,639,008 908,189 0 based Compensation Plan Issue 4 Appointment of Deloitte & Touche LLP as 61,929,704 11,773,026 40,513 0 Independent Registered Public Accounting Firm
ITEM 6. EXHIBITS 31.1 Certification 31.2 Certification 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.
22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE REYNOLDS AND REYNOLDS COMPANY Date May 9, 2005 /s/ FINBARR J. O'NEILL ------------------------------------- Finbarr J. O'Neill President and Chief Executive Officer Date May 9, 2005 /s/ DALE L. MEDFORD ------------------------------------- Dale L. Medford Executive Vice President, Chief Financial Officer and Chief Administrative Officer 23 EX-31.1 2 l13351aexv31w1.txt EX-31.1 CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION I, Finbarr J. O'Neill, principal executive officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Reynolds and Reynolds Company; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal controls over financial reporting that occurred during the second quarter that has materially affected or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing the equivalent function: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information, and; b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 9, 2005 /s/ FINBARR J. O'NEILL ---------------------- Finbarr J. O'Neill President and Chief Executive Officer 24 EX-31.2 3 l13351aexv31w2.txt EX-31.2 CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION I, Dale L. Medford, principal financial officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Reynolds and Reynolds Company; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly 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 quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and c. disclosed in this quarterly report any change in the registrant's internal controls over financial reporting that occurred during the second quarter that has materially affected or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing the equivalent function: a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information, and; b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 9, 2005 /s/ DALE L. MEDFORD ------------------- Dale L. Medford Executive Vice President, Chief Financial Officer, and Chief Administrative Officer 25 EX-32.1 4 l13351aexv32w1.txt EX-32.1 CERTIFICATION OF CEO EXHIBIT 32.1 CERTIFICATION I, Finbarr J. O'Neill, certify that: To the best of my knowledge and belief, the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2005 by The Reynolds and Reynolds Company and to which this certification is appended fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of The Reynolds and Reynolds Company. /s/ FINBARR J. O'NEILL ---------------------- Finbarr J. O'Neill President and Chief Executive Officer 26 EX-32.2 5 l13351aexv32w2.txt EX-32.2 CERTIFICATION OF CFO EXHIBIT 32.2 CERTIFICATION I, Dale L. Medford, certify that: To the best of my knowledge and belief, the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2005 by The Reynolds and Reynolds Company and to which this certification is appended fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of The Reynolds and Reynolds Company. /s/ DALE L. MEDFORD ------------------- Dale L. Medford Executive Vice President, Chief Financial Officer and Chief Administrative Officer 27 -----END PRIVACY-ENHANCED MESSAGE-----