10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-10147

THE REYNOLDS AND REYNOLDS COMPANY

(Exact Name of Registrant as Specified in Its Charter)

Ohio
(State of incorporation) 31-0421120
(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 o No þ

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On April 30, 2006, 63,728,502 Class A common shares and 13,500,000 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 Months Ended December 31, 2005 and 2004 (Restated)		1
	Condensed Consolidated Balance Sheets (unaudited) As of December 31, 2005 and September 30, 2005		2
	Statements of Consolidated Cash Flows (unaudited) For the Three Months Ended December 31, 2005 and 2004 (Restated)		3
	Notes to Condensed Consolidated Financial Statements (unaudited)		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations For the Three Months Ended December 31, 2005 and 2004		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk (See the caption entitled “Market Risks” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations)		26
Item 4.	Controls and Procedures		26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		28
Item 1A.	Risk Factors		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 6.	Exhibits		29
SIGNATURES			29

i

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The Reynolds and Reynolds Company
Statements of Consolidated Income (unaudited)
For the Three Months Ended December 31, 2005 and 2004
(In thousands except per share data)

				2004
				As Restated
	2005			See Note 1
Net Sales and Revenues
Products	$	158,455		$	157,490
Services		75,421			74,983
Financial services		5,939			6,849
Total net sales and revenues		239,815			239,322
Cost of sales
Products		53,197			55,216
Services		50,472			52,774
Financial services		2,431			1,751
Total cost of sales		106,100			109,741
Gross Profit		133,715			129,581
Selling, general and administrative expenses		94,064			93,977
Operating Income		39,651			35,604
Other Income (Expense)
Interest expense		(2,024	)		(1,445	)
Interest income		1,478			584
Other — net		(49	)		1,293
Total other income (expense)		(595	)		432
Income Before Income Taxes		39,056			36,036
Provision for Income Taxes		(15,626	)		(15,102	)
Equity in Net Income of Affiliated Companies		469			420
Income Before Cumulative Effect of Accounting Change		23,899			21,354
Cumulative Effect of Accounting Change		1,047			0
Net Income	$	24,946		$	21,354
Earnings per Common Share
Class A common
Basic earnings per common share
Income Before Cumulative Effect of Accounting Change	$	0.38		$	0.33
Cumulative Effect of Accounting Change	$	0.02		$	0.00
Net income	$	0.40		$	0.33
Average number of common shares outstanding		61,469			63,666
Diluted earnings per common share
Income Before Cumulative Effect of Accounting Change	$	0.38		$	0.33
Cumulative Effect of Accounting Change	$	0.02		$	0.00
Net income	$	0.39		$	0.33
Average number of common shares outstanding		63,515			65,366
Class B common
Basic and Diluted earnings per common share
Income Before Cumulative Effect of Accounting Change	$	0.02		$	0.02
Cumulative Effect of Accounting Change	$	0.00		$	0.00
Net income	$	0.02		$	0.02
Average number of common shares outstanding		13,500			14,000
Cash Dividends Declared Per Common Share
Class A common	$	.11		$	.11
Class B common	$	.0055		$	.0055

See Notes to Condensed Consolidated Financial Statements.

1

The Reynolds and Reynolds Company
Condensed Consolidated Balance Sheets (unaudited)
December 31, 2005 and September 30, 2005
(In thousands)

	12/31/05			9/30/05
Assets
Current Assets
Cash and equivalents	$	170,983		$	133,403
Trade accounts receivable (less allowance for doubtful accounts: 12/31/05—$5,571; 9/30/05—$5,071)		94,951			97,026
Other accounts receivables		2,295			2,521
Net finance receivables		125,025			129,032
Inventories		12,050			11,923
Deferred income taxes		11,784			9,522
Prepaid and other assets		38,537			39,859
Total current assets		455,625			423,286
Property, Plant and Equipment, less accumulated depreciation of $144,215 at 12/31/05 and $138,974 at 9/30/05		172,587			175,155
Goodwill		43,996			43,996
Software Licensed to Customers		4,444			4,966
Acquired Intangible Assets		32,008			32,671
Other Intangible Assets		6,677			6,677
Net Finance Receivables		195,552			201,342
Deferred Income Taxes		23,881			20,419
Other Assets		47,584			47,584
Total Assets	$	982,354		$	956,096
Liabilities
Current Liabilities
Current portion of long-term debt — Automotive Solutions	$	99,746		$	0
Current portion of long-term debt — Financial Services		39,260			39,261
Accounts payable		34,292			41,424
Accrued compensation and related items		27,026			40,038
Deferred revenues		40,117			40,571
Income taxes		24,928			8,242
Other accrued liabilities		47,546			46,188
Total current liabilities		312,915			215,724
Long-Term Debt — Automotive Solutions		0			100,237
Long-Term Debt — Financial Services		151,005			152,883
Total Long-Term Debt		151,005			253,120
Pensions		55,639			51,324
Postretirement Medical		42,694			42,365
Other Liabilities		9,706			9,077
Total Liabilities		571,959			571,610
Shareholders’ Equity
Capital Stock		398,048			390,441
Accumulated Other Comprehensive Losses		(27,237	)		(27,537	)
Retained Earnings		39,584			21,582
Total Shareholders’ Equity		410,395			384,486
Total Liabilities and Shareholders’ Equity	$	982,354		$	956,096

See Notes to Condensed Consolidated Financial Statements.

2

The Reynolds and Reynolds Company
Statements of Consolidated Cash Flows (unaudited)
For the Three Months Ended December 31, 2005 and 2004
(In thousands)

				2004
				As Restated
	2005			See Note 1
Cash Flows Provided by (Used for) Operating Activities:
Net Income	$	24,946		$	21,354
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change		(1,047	)		0
Depreciation and amortization		7,756			12,214
Provision for doubtful accounts		3,029			1,540
Stock-based compensation expense		2,814			1,903
Interest rate swap income		(143	)		0
Deferred income taxes		(6,314	)		(5,490	)
Net (gains) losses from sales of assets		11			(88	)
Changes in operating assets and liabilities:
Accounts receivable		556			2,215
Finance receivables originated		(20,731	)		(26,472	)
Collections on finance receivables		31,907			36,402
Inventories		(127	)		(305	)
Prepaid expenses		1,322			(2,686	)
Other assets		(537	)		520
Accounts payable		(6,035	)		(2,800	)
Accrued liabilities		(2,787	)		9,985
Other liabilities		5,284			3,751
Net cash provided by operating activities		39,904			52,043
Cash Flows Provided by (Used for) Investing Activities:
Business combinations		0			(500	)
Capital expenditures		(4,850	)		(5,668	)
Net proceeds from sales of assets		133			1,702
Marketable securities purchased		0			(28,000	)
Marketable securities sold		0			8,080
Finance receivables originated		(6,875	)		(8,146	)
Collections on finance receivables		4,212			1,506
Net cash used for investing activities		(7,380	)		(31,026	)
Cash Flows Provided by (Used for) Financing Activities:
Additional borrowings		0			12,000
Principal payments on debt		(1,879	)		(16,586	)
Capital stock issued		6,769			4,960
Capital stock repurchased		(128	)		(20,744	)
Net cash provided by (used for) financing activities		4,762			(20,370	)
Effect of Exchange Rate Changes on Cash		294			1,413
Increase in Cash and Equivalents		37,580			2,060
Cash and Equivalents — Beginning of Period		133,403			80,673
Cash and Equivalents — End of Period	$	170,983		$	82,733

See Notes to Condensed Consolidated Financial Statements.

3

The Reynolds and Reynolds Company
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands except per share data)

1. Basis of Presentation

The balance sheet as of September 30, 2005 is condensed financial information 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 have been prepared on the basis of accounting principles and practices generally accepted in the United States of America (GAAP) applied consistently with those used in the preparation of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005, except for the accounting change described in Note 3 to the Condensed Consolidated Financial Statements.

Certain information and footnote disclosures normally included in the annual financial statements presented in accordance with GAAP have been condensed or omitted. The consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005.

Certain prior period amounts have been reclassified in these condensed consolidated financial statements to conform to the 2006 financial statement presentation.

Restatements

In 2005, the Company corrected its classification of auction rate securities from cash and equivalents to marketable securities, according to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The effect of this restatement was to reduce cash and equivalents and increase marketable securities by $56,940 as of December 31, 2004, and $37,020 as of September 30, 2004. The Company purchased marketable securities of $28,000 and sold marketable securities of $8,080 during the three months ended December 31, 2004. Purchases and sales of marketable securities were considered investing activities for purposes of reporting cash flows.

The Company also restated its prior financial statements to report basic and diluted earnings per share for all classes of common stock. Previously, the Company had not reported earnings per Class B common share. There was no change to earnings per Class A common share.

Revisions

As of March 31, 2005, the Company revised its presentation of cash flows to present a Statement of Consolidated Cash Flows. Previously, the Company had presented a separate statement of cash flows for Automotive Solutions and Financial Services. The statement of consolidated cash flows for the three months ended December 31, 2004, was revised to conform to the new presentation.

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. Cash flows for finance receivables representing financing of customers’ purchases from other suppliers will continue to be considered investing activities in the Statements of Consolidated Cash Flows. Additionally, cash flows from intercompany receivables, which were included in trade accounts 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 SEC interpretation and 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. This reclassification did not change total cash flow.

The following table summarizes the effects of revisions and restatements on the statement of consolidated cash flows for the three months ended December 31, 2004.

4

	As									As Restated
	Reported			Revisions			Restatements			and Revised
Statements of Consolidated Cash Flows
For the Three Months Ended December 31, 2004
Cash flows provided by (used for) operating activities
Depreciation and amortization	$	12,209		$	5					$	12,214
Provision for doubtful accounts		0			1,540						1,540
Deferred income taxes		(5,285	)		(205	)					(5,490	)
Accounts receivable		2,298			(83	)					2,215
Finance receivables originated		0			(26,472	)					(26,472	)
Collections of finance receivables		0			36,402						36,402
Prepaid expenses and other assets		(2,591	)		(95	)					(2,686	)
Other assets		453			67						520
Accounts payable		(2,947	)		147						(2,800	)
Accrued liabilities		7,080			2,905						9,985
Other liabilities		3,703			48						3,751
Changes in receivables, other assets and other liabilities		3,972			(3,972	)					0
Cash flows provided by (used for) investing activities
Capital expenditures		(5,666	)		(2	)					(5,668	)
Marketable securities purchased		0						($28,000	)		(28,000	)
Marketable securities sold		0						8,080			8,080
Finance receivables originated		(33,613	)		25,467						(8,146	)
Collections of finance receivables		37,258			(35,752	)					1,506
Cash and equivalents — beginning of period		117,693						(37,020	)		80,673
Cash and equivalents — end of period		139,673						(56,940	)		82,733

Revenue Recognition Policy

Automotive Solutions

Revenues from the Company’s multiple element arrangements are primarily accounted for in accordance with the general revenue recognition provisions of Staff Accounting Bulletin Topic 13. 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. The Company’s multiple element arrangements include computer hardware, software licenses, hardware installation services, software training services and recurring maintenance services (which consist of hardware maintenance and software support). The Company applies the guidance of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” to determine its units of accounting and to allocate revenue among those units of accounting.

In a transaction containing a sales-type lease, hardware revenues are recognized at the present value of the payments allocated to the hardware lease element upon the commencement of the lease (when software training services have been performed). Revenues for software, hardware installation services and software training services are recognized, as a combined unit of accounting, as software training services are performed. Software training is typically completed between one and five months after shipment of the hardware.

In a transaction that does not contain a lease, revenues for hardware, software, hardware installation services and software training services are recognized, as a combined unit of accounting, as software training services are performed. Software training is typically completed between one and five months after shipment of the hardware.

Recurring maintenance services are recognized ratably over the contract period as services are performed.

Software revenues which do not meet the criteria set forth in EITF Issue No. 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” are considered service revenues and are recorded ratably over the contract period as services are provided.

Consulting revenues are recorded over the period that services are performed. The Company also provides certain transaction-based services for which it records revenues once services have been performed. Sales of documents products are recorded upon shipment, as title passes to customers.

5

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 effective interest method.

2. Earnings Per Common Share

Net income is allocated to each class of common stock, with the distributed income allocated based on dividends paid and undistributed income allocated based on contractual rights of the common shareholders. Basic earnings per common share (EPS) is computed by dividing income by the weighted average number of common shares outstanding during the period for each class of common stock. Diluted EPS is computed by dividing income by the weighted average number of common shares and potential common shares outstanding during each period for each class of common stock. The Company’s Class A potential undistributed common shares represent the effect of employee stock options, restricted stock awards and conversion of Class B common shares. There are no Class B potential common shares.

	2005		2004
Allocation of Basic Net Income
Income before accounting change	$	23,899	$	21,354
Less distributed earnings (dividends)
Class A common		0		0
Class B common		0		0
Undistributed earnings before accounting change		23,899		21,354
Cumulative effect of accounting change		1,047		0
Undistributed earnings	$	24,946	$	21,354

	Class A		Class B		Class A		Class B
Distributed earnings	$	0	$	0	$	0	$	0
Undistributed earnings		23,639		260		21,122		232
Income before accounting change		23,639		260		21,122		232
Cumulative effect of accounting change		1,036		11		0		0
Net Income	$	24,675	$	271	$	21,122	$	232
Allocation of Diluted Income
Income before accounting change
Numerator used for basic EPS	$	23,639	$	260	$	21,122	$	232
Add back: earnings allocated to Class B common shareholder		260				232
Numerator used for diluted EPS	$	23,899	$	260	$	21,354	$	232
Cumulative effect of accounting change
Numerator used for basic EPS	$	1,036	$	11
Add back: earnings allocated to Class B common shareholder		11
Numerator used for diluted EPS	$	1,047	$	11
Net Income
Numerator used for basic EPS	$	24,675	$	271	$	21,122	$	232
Add back: earnings allocated to Class B common shareholder		271				232
Numerator used for diluted EPS	$	24,946	$	271	$	21,354	$	232

6

	Class A		Class B		Class A		Class B
Average Number of Common Shares and Potential Common Shares Outstanding
Denominator used for basic EPS		61,469		13,500		63,666		14,000
Effect of employee stock options and restricted stock awards		1,371				1,000
Shares issuable upon conversion of Class B common shares		675				700
Denominator used for diluted EPS		63,515		13,500		65,366		14,000

Employee stock options outstanding and restricted stock awards to acquire 838 shares and 1,757 shares in three months ended December 31, 2005 and 2004, respectively, were not included in the computation of diluted earnings per common share because the effect of the options’ exercise price plus unamortized stock compensation expense, in relation to the average market price of the common shares would be anti-dilutive.

3. Employee Stock Plans

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” In March 2005, the SEC issued Staff Accounting Bulletin 107, “Share-Based Payment,” to assist companies in the adoption of SFAS No. 123 (revised). SFAS No. 123 (revised) requires that the cost resulting from all share-based payment transactions be 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. Effective October 1, 2005, the Company adopted SFAS No. 123 (revised) using the modified prospective transition method and recorded income of $1,047, net of income tax benefits of $586, or $.02 per diluted Class A common share, as a cumulative effect of accounting change in the three months ended December 31, 2005, to reflect estimated forfeitures of unvested equity compensation. The Company was already in substantial compliance with SFAS No. 123 (revised) at the adoption date as the standard closely parallels SFAS No. 123. The adoption of SFAS No. 123 (revised) did not have a material impact on stock compensation expense for the period ended December 31, 2005.

Prior to 2004, the Company awarded incentive stock options and/or nonqualified stock options to purchase Class A common shares to substantially all employees. In February 2004, the shareholders approved the 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive Plan. Since the inception of the 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive Plan, the Company issues fewer stock options than previously.

There are an aggregate of 2,300 Class A common shares reserved for future awards under the incentive stock options and/or nonqualified stock option plans, 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive Plan. Grants of stock options and other stock-based compensation awards are approved by the Compensation Committee of the Company’s Board of Directors.

Net income for the three months ended December 31, 2005 includes $2,814 of compensation expense and $1,079 of income tax benefits related to our stock-based compensation arrangements. Net income for the three months ended December 31, 2004 includes $1,903 of compensation expense and $797 of income tax benefits related to our stock-based compensation arrangements.

Stock Option Plans

The Company valued its stock options granted after October 1, 2005, using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock over the immediately prior period equal in length to the expected life of the option. The expected life of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. Dividend yield is based on current dividends because the Company has not changed its dividend rate in recent years. The risk-free rate is based on the U.S. Treasury rate in effect at the time of the grant for a term equal in length to the expected life of the option. Stock options are generally granted at a price equal to fair market value of the common stock on the date of grant and are exercisable after a period of one to four years and expire between seven and ten years after the date of grant.

7

Option Valuation Assumptions

	2006			2005
Expected life in years		2.8			3.6
Dividend yield		1.6	%		1.7	%
Risk free interest rate		4.4	%		3.7	%
Volatility		22	%		24	%
Weighted average fair value	$	4.92		$	5.37

The total intrinsic value of options exercised during the three months ended December 31, 2005 and 2004 was approximately $1,876 and $846, respectively. The following table summarizes stock option activity of the plans.

				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Shares			Price		Life in Years		Value
Outstanding at September 30, 2005		6,430		$	22.28
Granted		100		$	27.24
Exercised		(314	)	$	21.54
Canceled		(34	)	$	27.35
Outstanding at December 31, 2005		6,182		$	22.37		3.8	$	34,688
Exercisable at December 31, 2005		5,426		$	21.73		3.5	$	33,826

As of December 31, 2005, there was approximately $2,345 of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.3 years.

Cash received from options exercised for the three months ended December 31, 2005 was $6,769. The actual tax benefit realized for the tax deductions from options exercised totaled $614 for the three months ended December 31, 2005.

Restricted Stock and Restricted Stock Units

The REYShare Plus Plan provides for restricted stock awards to substantially all employees in which the restrictions lapse based on service achievement. Generally these awards are granted with a cliff-vesting period of three years. 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 on service and/or Company performance. These awards vest over one to three years. Performance-based awards require achievement of certain financial targets and may incorporate a performance condition (i.e. revenue growth) or a market condition (i.e. total shareholder return) and may be measured against either predetermined goals or relative performance against a peer group (i.e. S&P Mid-Cap 400).

If a participant of either plan is not employed by the Company on the vesting date, or if the performance condition or market condition is not satisfied, the restricted stock award is forfeited, except potentially in the case of death, attainment of retirement eligibility age, or total permanent disability. 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. The following table summarizes restricted stock award activity of the plans.

	Shares or			Average Grant
	Units			Date Fair Value
Outstanding — Service Achievement Awards
Balance at September 30, 2005		501		$	25.85
Restricted Stock
Granted		179		$	27.65
Canceled		(17	)	$	25.56
Returned		(4	)	$	25.86
Released		(10	)	$	25.86
Restricted Stock Units
Granted		22		$	27.70
Released		(1	)	$	24.74

8

	Shares or			Average Grant
	Units			Date Fair Value
Canceled		(1	)	$	26.10
Balance at December 31, 2005		669		$	26.40
Outstanding — Performance/Market Condition Awards
Beginning at September 30, 2005		193		$	26.16
Restricted Stock
Granted		414		$	27.67
Canceled		(18	)	$	25.80
Restricted Stock Units
Granted		21		$	27.70
Canceled
Balance at December 31, 2005		610		$	27.25

As of December 31, 2005, there was approximately $19,740 of unrecognized compensation cost related to nonvested restricted stock and restricted stock units, which is expected to be recognized over a weighted-average period of 1.8 years. Total fair value of awards vested was $415 and $7 during the three months ended December 31, 2005 and 2004.

The fair value of each share of restricted stock and restricted stock unit subject to a service or performance condition is the market price of the Company’s stock on the date of grant. The fair value of each share of restricted stock and restricted stock unit subject to a market condition is determined based on a Monte Carlo simulation. Service-based restricted stock awards are included in compensation expense over the vesting period. Performance-based restricted stock awards, that are dependent upon achievement of a performance condition, are included in compensation expense based on estimated achievement of the performance condition as of the date of the financial statements. Performance-based restricted stock awards, that are dependent upon the achievement of a market condition, are included in compensation expense based on estimated achievement of the market condition as of the date on which the award was issued.

Upon exercise of stock options, Class A common shares are issued to employees from treasury shares. Class A common shares are issued from treasury at the date of the restricted stock award. Upon vesting of the restricted stock award, the employee will return restricted shares to the Company to meet minimum statutory income tax withholding requirements and the Company will release the remaining shares to employees. Shares withheld by the Company may either be sold on the open market or placed into treasury. Generally, the Company does not sell the withheld shares on the open market. Restricted stock units are handled in the same manner as restricted shares, except that Class A common shares are not issued to employees at the date of the award, but when the vesting requirement has been satisfied.

The Company does repurchase Class A common shares on the open market from time to time. One of the purposes of repurchasing Class A common shares is to offset potential dilution from the Company’s stock compensation plans. However, the Company is under no obligation to repurchase Class A common shares based on activity of stock compensation plans.

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4. Comprehensive Income

	2005		2004
Net income	$	24,946	$	21,354
Foreign currency translation adjustment		294		1,413
Net unrealized gains on derivative contracts, net of income tax provisions of $4 at 12/31/05 and $239 at 12/31/04		6		359
Comprehensive income	$	25,246	$	23,126

5. Reynolds Generations Series^® Suite

On July 19, 2005, the Company’s board of directors decided to stop marketing, selling and installing the Reynolds Generations Series Suite (Suite) dealer management system for automobile dealers. For further information regarding this decision, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 21, 2005. During the quarter ended September 30, 2005, as a result of the decision to stop selling Suite, the Company wrote-off capitalized software development costs of $66,558 ($42,191 or $.65 per diluted Class A common share after income taxes) and recorded additional pre-tax expenses of $24,225 ($15,062 or $.23 per diluted Class A common share after income taxes) of which $22,728 remained payable as of September 30, 2005. These additional expenses included estimated future support obligations in excess of estimated revenues, migration costs, sales concessions and associate severance and outplacement benefits. Future support costs represent the costs of the Technical Assistance Center and product development in excess of expected revenues. Sales concessions represent concessions made to Suite customers, primarily in the form of credits issued to reverse training revenues previously recorded and not paid by customers. There were also some cash payments to customers. Migration costs represent the costs to install and train Suite customers on the Company’s core dealer management system, ERA, including data conversion from Suite to ERA. The following table summarizes the activity related to Suite for the three months ended December 31, 2005.

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Balance as of September 30, 2005	$	22,728
Payments		(5,025	)
Adjustments		598
Balance as of December 31, 2005	$	18,301

The adjustment of $598 for the three months ended December 31, 2005, related primarily to additional sales concessions for Suite.

6. Inventories

	12/31/05		9/30/05
Finished products	$	11,613	$	11,452
Work in process		288		317
Raw materials		149		154
Total inventories	$	12,050	$	11,923

7. Goodwill and Acquired Intangible Assets

Goodwill

	Software
	Solutions		Documents		Totals
Balances as of September 30, 2005	$	41,119	$	2,877	$	43,996
Balances as of December 31, 2005	$	41,119	$	2,877	$	43,996

Acquired Intangible Assets

	Gross		Accumulated
	Amount		Amortization
As of December 31, 2005
Contractual customer relationship	$	33,100	$	9,378
Trademarks		6,246		1,802
Other		5,737		1,895
Total	$	45,083	$	13,075
As of September 30, 2005
Contractual customer relationship	$	33,100	$	8,965
Trademarks		6,251		1,715
Other		5,747		1,747
Total	$	45,098	$	12,427

Aggregate amortization expense was $648 and $675 for the three months ended December 31, 2005 and 2004, respectively. Estimated amortization expense for the years ended September 30, is $2,614 in 2006, $2,464 in 2007, $2,464 in 2008, $2,464 in 2009 and $2,290 in 2010.

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8. Financing Arrangements

Automotive Solutions

During February 2002, the Company entered into $100,000 notional amount 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 a liability of $114 at December 31, 2005, and an asset of $296 at September 30, 2005, and was included in accrued liabilities and other assets, respectively, 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.

The Company has $100,000 principal amount outstanding of 7% Notes due December 15, 2006 (the “Notes”) under an Indenture (the “Indenture”), dated as of December 15, 1996 between the Company and Wells Fargo Bank, N.A., as successor trustee (the “Trustee”). On February 24, 2006, the Trustee sent the Company a notice of default relating to the Company’s failure to timely file its Annual Report on Form 10-K for the year ended September 30, 2005 with the SEC and the Trustee. The default would have created an Event of Default (as defined under the Indenture) and resulted in the acceleration of the principal and interest of the Notes unless the Event of Default was cured by May 25, 2006. On May 15, 2006, the Company filed its Annual Report on Form 10-K for the year ended September 30, 2005 and cured the Event of Default. On May 25, 2006, the Company purchased approximately $104,000 of U.S. Treasury Securities and deposited these securities in a trust which amount is sufficient to pay and discharge all remaining payments, aggregating approximately $107,000 of principal and interest under the Notes. Future interest and principal payments will be made from this trust. The Company will include this trust in current assets on its consolidated balance sheet and the debt will also remain the Company’s obligation until it is paid on December 15, 2006.

Financial Services

On May 19, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the Company, renewed a loan funding agreement (the “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. On April 25, 2006, the Loan Funding Agreement was extended through December 31, 2006 and the requirement to file financial statements was waived through September 30, 2006. The outstanding borrowings under this arrangement were included with Financial Services long-term debt on the condensed consolidated balance sheets. As of December 31, 2005, the balance outstanding on this facility was $127,000.

The fair value of the Company’s cash flow derivative instruments was an asset of $1,469 at December 31, 2005 and $1,316 at September 30, 2005 and was included in other assets, 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 2006, 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. As of December 31, 2005, the balance outstanding on this facility was $50,000.

The Company’s failure to timely file its Annual Report on Form 10-K for the year ended September 30, 2005, and its Quarterly Report on Form 10-Q for the quarters ended December 31, 2005 and March 31, 2006 (the “Delayed Reports”), and the default under the Indenture was also a default under the credit agreement. Pursuant to an amendment to the credit agreement, on March 16, 2006, the Company extended the date on which it is required to deliver the Delayed Reports and any other periodic reports required to be filed from March 31, 2006 to the earlier of (i) September 30, 2006 or (ii) the date such financial statements are filed with the SEC. On May 15, 2006, the Company filed its Annual Report on Form 10-K for the year ended September 30, 2005. With the filing of the Quarterly Report on Form 10-Q for the quarters ended December 31, 2005 and March 31, 2006, the Company has filed all required periodic financial reports and is now no longer in default. The amendment to the credit agreement also includes a financial covenant which provides that the Company must reach certain liquidity thresholds before it is permitted to enter into certain acquisitions and investments in partnerships and alliances.

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9. Postretirement Benefits

	2005			2004
Pension Benefits
Service cost	$	3,175		$	2,901
Interest cost		4,577			4,568
Estimated return on plan assets		(4,309	)		(3,654	)
Amortization of prior service cost		191			191
Recognized net actuarial losses		1,319			897
Settlements		0			935
Net periodic pension cost	$	4,953		$	5,838

In 2006, the Company is not required to make a contribution to its pension plan and does not anticipate making such a contribution.

	2005		2004
Postretirement Medical and Life Insurance Benefits
Service cost	$	122	$	112
Interest cost		993		865
Amortization of prior service cost		80		(353	)
Recognized net actuarial losses		322		248
Net periodic postretirement medical and life insurance cost	$	1,517	$	872

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a Medicare prescription drug benefit beginning in 2006, as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit at least actuarially equivalent to the Medicare benefit. As a result of the new Medicare part D benefit, during 2005, the Company decided to discontinue offering prescription drug benefits as of January 1, 2006 to its retirees eligible for Medicare. During 2006, the Company reversed that decision and, to qualify for the federal subsidy, continued to provide prescription drug coverage to retirees eligible for Medicare. During 2006, the federal subsidy included as an offset in determining net periodic postretirement medical and life insurance expense was $ 545 for the three months ended December 31, 2005. The benefit obligation was increased $15,526 as of October 1, 2005 as a result of the Company’s decision to offer prescription drug coverage to retirees eligible for Medicare.

10. Business Segments

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. Revenues classified as a product include computer hardware and software. Revenues classified as service consist of computer, transaction-based, hosting and rental services. Computer services are comprised of installation, training, consulting and hardware maintenance. Transaction-based services are primarily comprised of credit inquiries made by the Company’s customers. Hosting services represent software applications delivered via remote servers and related services. Rental services consist of operating lease arrangements. During the quarter ended December 31, 2005, the Company reclassified certain amounts between products and services. The primary change was to reclassify hosting services from products to services.

The Documents segment manufactures and distributes printed business forms primarily to automotive retailers. The Company monitors legislative, regulatory, original equipment manufacturer and business environment changes so that contracts and lease documents keep pace with new developments. The Company provides an online portal for automotive retailers to order documents. The portal also provides automotive retailers the opportunity to order promotional merchandise, apparel, event displays and advertising for 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.

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	2005		2004
Net Sales and Revenues
Software Solutions
Products
Hardware	$	13,035	$	14,822
Software		109,483		105,062
Services
Computer services		47,375		51,604
Transaction-based services		14,168		14,652
Hosting services		12,638		8,311
Rentals		1,240		416
Total		197,939		194,867
Documents		35,937		37,606
Financial Services		5,939		6,849
Total Net Sales and Revenues	$	239,815	$	239,322
Operating Income
Software Solutions	$	32,234	$	24,933
Documents		5,994		7,462
Financial Services		1,423		3,209
Total Operating Income	$	39,651	$	35,604

	12/31/05		9/30/05
Assets
Automotive Solutions	$	695,797	$	666,099
Financial Services		286,557		289,997
Total Assets	$	982,354	$	956,096

11. Contingencies

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 expired in January 2006, was $40 as of December 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 expires in 2007. As of December 31, 2005, the unamortized balance on this letter of credit was $1,388. In October 2005, Relizon was acquired by Workflow Management, Inc.

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.

12. Accounting Standard

In June 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and Error Corrections.” The statement applies to all voluntary changes in accounting principle and changes the requirement for accounting for and reporting a change in accounting principle. This statement is a replacement for Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after May 31, 2005. The Company does not anticipate a material impact on the results of operations from the adoption of this pronouncement.

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13. Subsequent Events

On February 1, 2006, the Company purchased net assets of Kodata Solutions, a provider of data archiving solutions used by automobile dealers throughout the U.S. Kodata, based in Little Rock, Arkansas, had annual revenues of approximately $3,000 in 2005. The purchase price of $6,013 was paid with cash from existing balances. The results of Kodata’s operations will be included in the Company’s financial statements from the acquisition date. In connection with this business combination, the Company will record tax deductible goodwill of $4,469 based on a preliminary allocation of the purchase price. An independent appraisal firm will be utilized to assist the Company in determining the fair values of the intangible assets.

On May 24, 2006, the Company announced that it reached agreement with the board of DCS Group PLC on the terms of a recommended proposal for the cash acquisition of DCS, a provider of software and services to the European automotive retailing market. DCS had revenues of £35,100 (approximately $65,000 U.S.) for the year ended December 31, 2005. Included in 2005 results were discontinued operations revenues of £8,300 (approximately $15,000 U.S.). The transaction is valued at £21,700 (approximately $41,000 U.S.), including debt of £13,100 and cash of £2,300 (net debt of £10,800 or approximately $20,000 U.S.) as of December 31, 2005. The acquisition is to be implemented by means of a court approved process and requires the approval of DCS shareholders and court sanction in the UK. If approved, it is expected to become effective July 27, 2006.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended December 31, 2005 and 2004
(In thousands except employee and per share data and where otherwise indicated)

COMPANY OVERVIEW

Introduction

How the Company does business

The Company’s primary business is providing integrated software solutions and services to automobile dealers. The Company has provided products and services to automobile dealerships since 1927. The Company’s principal software solution is its ERA^® dealer management system. This established software application is used by approximately 10,000 automotive dealerships, or approximately 40% of the automobile dealerships in the United States and Canada, to operate the sales, service, parts and administrative areas of their dealerships.

The Company’s primary customers are automobile dealers in the United States and Canada and thus the Company’s profitability could be adversely affected by negative developments in the automobile market. However, the Company’s financial performance is not necessarily correlated with the number of new vehicles sold by these retailers or the financial performance of the U.S. automobile manufacturers. Automobile dealers have other profit centers such as used vehicles, finance and insurance, 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 approximately 60% of the Company’s total revenues. When documents and financial services revenues are included, approximately 80% of the Company’s revenues are recurring in nature. Additionally, much of consulting services revenues tend to be recurring in nature as programs are continued each year. This generally provides a measure of stability and limits the effect of economic downturns on the Company’s financial performance.

The Company’s growth plans, strategy and market opportunities

The Company believes that it can grow its business in the North American market by increasing penetration in the dealer management systems (“DMS”) market, providing a full range of value added solutions and services to help dealers to manage their operations more efficiently and effectively and to comply with applicable legal requirements. The Company believes that it can grow its business in the international market by growing its DMS footprint in Europe to achieve scale and to offer value added applications (particularly customer relationship management (“CRM”) solutions) and services, and by expanding into high growth markets such as China. The Company believes that while automotive retail markets globally are competitive, retailers consistently seek DMS systems and value-added solutions which help them operate more

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efficiently, and capture more revenue in all facets of their operations. The Company believes that it will facilitate its growth globally by realigning its internal resources to improve efficiency and execution thereby reducing costs, creating a more performance driven culture and by investing in more efficient internal management systems. The Company estimates the addressable market in the U.S. is $4.6 billion.

The Company views its DMS business as a cornerstone for growth due to its strong cash generation and its ability to integrate with and build penetration in other value-added applications essential for running its customers’ business operations. The types of opportunities for value added applications sought by the Company’s customers include CRM tools, financing and insurance (“F&I”) applications, fixed operations and inventory management solutions and networking.

The Company also offers solutions in the form of services. Opportunities for growth include consulting services, information management and security and CRM services. These types of services include data extraction services and security tools.

The international front, with its fragmented markets, provides multiple opportunities as well. Europe, Asia and Latin America are primary areas of opportunity with estimates of over one hundred thousand retailers and over one million users. The Company believes that these markets will offer opportunities similar in scale to the market in North America. To achieve revenue growth, the Company is examining opportunities in Europe to acquire scale and to deploy new pricing and service models, along with entry into China. The Company believes it is ideally suited to grow in international markets because of its strong position in Canada, its DMS footprint in Europe and its plans for expansion in Asia.

The Company views its documents business as part of its total customer offering and is working on closer alignment with its DMS and systems businesses and the Saturn business opportunity. See “Consolidated Summary.” Plans include a selective expansion of the product offerings and selectively adding to and strengthening its sales force.

Management is also focused on realigning the organization to execute upon its strategic initiatives. This will be done by driving out fixed costs, developing a performance-driven culture and making prudent internal investments to support initiatives.

As indicated, the Company has focused its business on addressing the needs of automobile dealers. This is a highly competitive market where consumers are well-educated and can make informed decisions about with whom to do business when purchasing and servicing an automobile. The Company’s “ReynoldSystem”, is a single-source, integrated approach to dealership performance addressing automobile dealers’ desire for an integrated, end-to-end solution. This single-source approach helps ensure ease of use, reduced complexity, increased performance and the simplicity of relying on a single partner.

The Company continues to explore strategic alternatives, including divestiture, for its Networkcar business. Networkcar, acquired in 2002, provides a Global Positioning Satellite tracking and diagnostic monitoring system. Since acquisition, the business has evolved from dealership- based retail sales to a fleet management tool. Presidio Merchant Partners LLC, a San Francisco-based investment bank, is acting as a financial advisor to Reynolds on Networkcar.

RESULTS OF OPERATIONS

Subsequent Events

On February 1, 2006, the Company purchased net assets of Kodata Solutions, a provider of data archiving solutions used by automobile dealers throughout the U.S. Kodata, based in Little Rock, Arkansas, had annual revenues of approximately $3,000 in 2005. The purchase price of $6,013 was paid with cash from existing balances.

On May 24, 2006, the Company announced that it reached agreement with the board of DCS Group PLC on the terms of a recommended proposal for the cash acquisition of DCS, a provider of software and services to the European automotive retailing market. DCS had revenues of £35,100 (approximately $65,000 U.S.) for the year ended December 31, 2005. Included in 2005 results were discontinued operations revenues of £8,300 (approximately $15,000 U.S.). The transaction is valued at £21,700 (approximately $41,000 U.S.), including debt of £13,100 and cash of £2,300 (net of debt of £10,800 or approximately $20,000 U.S.) as of December 31, 2005. The acquisition is to be implemented by means of a court approved process and requires the approval of DCS shareholders and court sanction in the UK. If approved, it is expected to become effective July 27, 2006. The Company anticipates paying the purchase price with cash from existing balances.

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Accounting Change

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” In March 2005, the SEC issued Staff Accounting Bulletin 107, “Share-Based Payment,” to assist companies in the adoption of SFAS No. 123 (revised). SFAS 123 (revised) requires that the cost resulting from all share-based payment transactions be 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. Effective October 1, 2005, the Company adopted SFAS 123 (revised) and recorded $1,047, or $.02 per Class A common share, of income as a cumulative effect of accounting change in the quarter ended December 31, 2005, to reflect estimated forfeitures of unvested equity compensation. The adoption of SFAS 123 (revised) did not have a material impact on stock compensation expense.

Reynolds Generations Series^® Suite (“Suite”)

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 invested in research and development during recent years to develop new software solutions. In August 2003, the Company launched Suite. On July 19, 2005, the Company’s board of directors decided to stop marketing, selling and installing the Suite dealer management system for automobile dealers. The board of directors concluded that Suite was not the broad-based solution for the majority of the U.S. automotive retail market as originally believed. Suite required substantial change in dealership processes to provide the desired utilization levels and benefits. Implementation and training costs were high for both customers and the Company. For a description of the facts and circumstances leading to the board’s decision, see the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2005. During the quarter ended September 30, 2005, as a result of the decision to stop selling Suite, the Company wrote-off capitalized software development costs of $66,558 ($42,191 or $.65 per diluted Class A common share after income taxes) and recorded additional pre-tax expenses of $24,225 ($15,062 or $.23 per diluted Class A common share after income taxes). These additional expenses included estimated future support obligations in excess of estimated revenues, migration costs, sales concessions and associate severance and outplacement benefits.

Consolidated Summary

									%
							Increase		Increase
	2005			2004			(Decrease)		(Decrease)
Net sales and revenues	$	239,815		$	239,322		$	493		0	%
Gross profit	$	133,715		$	129,581		$	4,134		3	%
% of revenues		55.8	%		54.1	%
SG&A expenses	$	94,064		$	93,977		$	87		0	%
% of revenues		39.3	%		39.2	%
Operating income	$	39,651		$	35,604		$	4,047		11	%
% of revenues		16.5	%		14.9	%
Income before accounting change	$	23,899		$	21,354		$	2,545		12	%
Accounting change (SFAS 123R)	$	1,047		$	0		$	1,047
Net income	$	24,946		$	21,354		$	3,592		17	%
Earnings per Class A common share
Income before accounting change
Basic earnings per share	$	0.38		$	0.33		$	0.05		15	%
Diluted earnings per share	$	0.38		$	0.33		$	0.05		15	%
Net income
Basic earnings per share	$	0.40		$	0.33		$	0.07		21	%
Diluted earnings per share	$	0.39		$	0.33		$	0.06		18	%

Consolidated net sales and revenues increased by $493 over last year for the three months ended December 31, 2005, as growth in Software Solutions revenues was mostly offset by declines in Documents revenues and Financial Services. Segment revenues are discussed in more detail under each segment’s separate caption within this analysis. The 2005 divestiture of the Campaign Management Services business reduced revenues for the quarter ended December 31, 2005 by approximately $1,800 versus the corresponding period in 2004. 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 $59,000 at December 31, 2005, compared to $60,000 at September 30, 2005.

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In 2004 and 2005, three of the largest automobile dealership groups selected a single supplier to provide 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 continues to provide substantial document and other solutions to each of these groups. If the Company is not able to continue to replace the net reduction in DMS-related revenue resulting 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. The Company expects that its selection by General Motors, as described below, to supply an integrated dealer management system (“IDMS”) to all U.S. Saturn retailers, will help mitigate the net losses in revenues from these dealership groups.

On December 15, 2005, the Company announced that it was selected by General Motors to supply IDMS to all Saturn retailers in the U.S. As part of a 7-year agreement (with 2 one-year renewals possible), the Company will convert General Motors approximately 440 Saturn retailers to IDMS. The Company anticipates that implementation will begin in August 2007 and that the conversion process will be completed by May 2008. The Company expects to incur costs in fiscal year 2006 and 2007 to prepare for the implementation. General Motors has the right to terminate the agreement upon 180-days prior written notice to the Company. If General Motors terminates the agreement, they must pay certain defined charges, which may be substantial depending upon the timing of the termination. If the Company fails to meet specified service levels, the Company must pay defined penalties. The Company was also named an endorsed provider of the IDMS solution to GM-branded retailers in North America.

Gross profit increased in the first quarter ended December 31, 2005, as compared to the corresponding period in 2004, as growth in Software Solutions gross profit was partially offset by lower gross profit from Documents and Financial Services.

In the quarter ended December 31, 2005, selling general & administrative (SG&A) expenses were essentially the same as in the corresponding period in 2004. In the quarter ended December 31, 2005, research and development (R&D) expenses were approximately $18,000, compared to $21,000 in the corresponding period in 2004. 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. The decline in R&D expenses was offset by higher bad debt expenses of $1,500 and professional fees, of which approximately $800 related to the Securities and Exchange Commission review and the Company’s revenue recognition policy review. An additional $3,800 was incurred in the quarter ended March 31, 2006, related to these reviews.

The Company is exploring alternatives to improve the cost structure of the Company. These alternatives relate primarily to reducing R&D expenses, reducing employee costs and increasing utilization of facilities. Such alternatives are in various stages of consideration and development. There can be no assurance that any such alternatives will be implemented or that any such implementation will reduce costs.

Operating margins were 16.5% in the quarter ended December 31, 2005, compared to 14.9% in the corresponding period in 2004, representing increased operating income of $4,047. The increase in operating income resulted primarily from the improved gross profit of Software Solutions, which offset declines from the quarter ended December 31, 2004 in Documents and Financial Services.

Both interest expense and interest income increased over last year as a result of rising interest rates. Interest income also increased over last year because of increased cash balances as a result of the Company’s decision not to repurchase any of its Class A common shares on the open market while completing the SEC and revenue recognition reviews. The SEC and revenue recognition reviews are described in more detail in our Form 10-K for the year ended September 30, 2005, which was filed with the SEC on May 15, 2006. The Company also recorded approximately $200 of exchange losses during the three months ended December 31, 2005, compared to approximately $1,200 of exchange gains in the corresponding period in 2004.

The effective income tax rate declined to 40.0% in the quarter ended December 31, 2005, compared to 41.9% in the corresponding period in 2004, primarily because of lower state income taxes as a result of a change in the Ohio tax law. Ohio is transitioning from a franchise tax, based primarily on income, and a personal property tax to a commercial activity tax. The Company estimates that if the new tax law had been fully in place for fiscal year 2006, net income would increase by about $1,300 as a result of lower Ohio tax expenses.

Equity in net income of affiliated companies is primarily comprised of the Company’s investment in Computerized Vehicle Registration, which provides on-line vehicle registration to automobile dealers.

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Software Solutions

							Increase			% Increase
	2005			2004			(Decrease)			(Decrease)
Net sales and revenues
Recurring revenues	$	154,195		$	149,442		$	4,753			3	%
One-time sales	$	43,744		$	45,425		($	1,681	)		-4	%
Total net sales and revenues	$	197,939		$	194,867		$	3,072			2	%
Gross profit
Recurring revenues	$	103,558		$	91,860		$	11,698			13	%
One-time sales	$	6,695		$	10,565		($	3,870	)		-37	%
Total gross profit	$	110,253		$	102,425		$	7,828			8	%
Gross Margin
Recurring revenues		67.2	%		61.5	%
One-time sales		15.3	%		23.3	%
Total gross margin		55.7	%		52.6	%
SG&A expenses	$	78,019		$	77,492		$	527			1	%
% of revenues		39.4	%		39.8	%
Operating income	$	32,234		$	24,933		$	7,301			29	%
% of revenues		16.3	%		12.8	%

Net sales and revenues increased 2% over a year ago during the quarter ended December 31, 2005, with recurring revenues increasing 3% and one-time sales decreasing 4%. Recurring revenues consist primarily of monthly revenues from software licenses, software enhancements, telephone support, hardware maintenance, credit services and network services. Recurring revenues increased in the quarter ended December 31, 2005 over the corresponding period in 2004, primarily as a result of revenue growth in ERA applications on demand, CRM solutions and Web solutions as a result of increased volume. Recurring revenues also reflected the effect of the annual price increase of approximately 3%, which became effective March 1, 2005. The growth in recurring revenues was partially offset by the effect of the 2005 divestiture of the Campaign Management Services business, which reduced recurring revenues for the quarter ended December 31, 2005 by approximately $1,800 versus the corresponding period in 2004, and a decline in hardware maintenance revenues. One-time sales include revenues from hardware, software license fees, implementation services (installation and training) and consulting services. During the quarter ended December 31, 2005, one-time sales declined primarily because of lower consulting revenues, as a result of delivering fewer days of consulting services, and lower incadea revenues as fewer software licenses were sold.

In addition to the growth in recurring revenues, gross profit increased for the quarter ended December 31, 2005, as compared to the corresponding period in 2004, because the corresponding period in 2004 included Suite software amortization expenses of $3,273. The Company did not incur these expenses in the quarter ended December 31, 2005 because Suite capitalized software was fully written off during the quarter ended September 30, 2005. The quarter ended December 31, 2004 also included the write-off of $2,345 of other non-Suite software assets that would not have been recovered by future cash flows. In the quarter ended December 31, 2005, recurring gross margins also reflect the benefit of the fiscal year 2005 consolidation of a service center. One-time gross margins were negatively impacted in the quarter ended December 31, 2005 by the decline in consulting services revenues and the resulting lower utilization of consultants.

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 three months ended December 31, 2005 and 2004. Software amortization expenses were $522 in the quarter ended December 31, 2005, compared to $3,425 in the corresponding period in 2004, the decline resulting primarily from the write-off of Suite capitalized software in the quarter ended September 30, 2005.

SG&A expenses increased slightly over last year in the quarter ended December 31, 2005, as compared to the corresponding period in 2004, primarily as a result of higher bad debt expenses and consulting expenses, primarily related to the SEC review and management’s revenue recognition policy review. These increases were partially offset by reduced

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R&D expenses as a result of the discontinuance of Suite. Operating income increased in the quarter ended December 31, 2005, as compared to the corresponding period in 2004, primarily because of the growth in recurring revenues and the elimination of Suite software amortization expenses.

Documents

							Increase			% Increase
	2005			2004			(Decrease)			(Decrease)
Net sales and revenues	$	35,937		$	37,606			($1,669	)		-4	%
Gross profit	$	19,954		$	22,058			($2,104	)		-10	%
% of revenues		55.5	%		58.7	%
SG&A expenses	$	13,960		$	14,596			($636	)		-4	%
% of revenues		38.8	%		38.9	%
Operating income	$	5,994		$	7,462			($1,468	)		-20	%
% of revenues		16.7	%		19.8	%

Documents sales declined in the quarter ended December 31, 2005, as compared to the corresponding period in 2004, because of higher sales discounts and a decrease in the volume of business forms sold. The Company expects the sales of certain documents to continue to decline as the demand for certain paper products is negatively affected by advances in technology. The Company continues to view its documents business as part of its total customer offering and plans a selective expansion of the product offerings and selectively adding to and strengthening its sales force.

In quarter ended December 31, 2005, gross profit declined from the corresponding period in 2004, because of the higher sales discounts and an increase in material costs. SG&A expenses declined in the quarter ended December 31, 2005, as compared to the corresponding period in 2004, and remained approximately the same percentage of sales as in the corresponding period in 2004. Operating income declined in quarter ended December 31, 2005, versus the corresponding period in 2004, primarily because of the sales decline.

Financial Services

							Increase			% Increase
	2005			2004			(Decrease)			(Decrease)
Net sales and revenues	$	5,939		$	6,849			($910	)		-13	%
Gross profit	$	3,508		$	5,098			($1,590	)		-31	%
% of revenues		59.1	%		74.4	%
SG&A expenses	$	2,085		$	1,889		$	196			10	%
% of revenues		35.1	%		27.5	%
Operating income	$	1,423		$	3,209			($1,786	)		-56	%
% of revenues		24.0	%		46.9	%

Financial Services revenues declined in the quarter ended December 31, 2005, as compared to the corresponding period in 2004, with a decrease in average finance receivable balances and lower average interest rates each contributing approximately equally to the decline. In the quarter ended December 31, 2005, average finance receivable balances declined, as compared to the corresponding period in 2004, as a result of the level of one-time sales in Software Solutions as compared to previous years. The Company’s finance receivables generally have five-year terms, and accordingly, the outstanding balance is comprised of amounts financed during the past five years. While interest rates increased during the quarter ended December 31, 2005, as compared to the corresponding period in 2004, the rates were still lower than the rates on maturing finance receivable balances, and therefore lowered the average interest rate of the receivables portfolio.

Gross profit declined in the quarter ended December 31, 2005, as compared to the corresponding period in 2004, because of the decline in revenues and higher borrowing costs. Interest rate spreads were 2.7% in the quarter ended December 31, 2005, compared to 3.9% in the corresponding period in 2004. Of the 1.2% decline in interest rate spreads, approximately two-thirds resulted from higher borrowing costs and one-third from lower interest earned on finance receivable balances. 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 receivables balances, additional debt will be required in the future to finance the portfolio because of the reduced tax benefits. In the quarter ended December 31, 2005, average debt balances increased slightly over the corresponding period in 2004, as a result of the different tax treatment, even though average finance receivable balances declined in the quarter

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ended December 31, 2005, as compared to the corresponding period in 2004.

SG&A expenses increased over last year in the quarter ended December 31, 2005, compared to the corresponding period in 2004, because of higher bad debt expenses, which increased to $1,284 in the quarter ended December 31, 2005, from $1,050 in the corresponding period in 2004. Operating income declined primarily as a result of the impact of interest rates.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company’s balance of cash and equivalents was $170,983 at December 31, 2005. Cash flows provided by operating activities were $39,904 during the first three months of 2006 and resulted primarily from net income, adjusted for non cash charges such as depreciation and amortization, and net collections of finance receivables related to the sales of the Company’s products and services. Cash flows used for investing activities consisted primarily of capital expenditures in the ordinary course of business of $4,850. Capital expenditures in the ordinary course of business are anticipated to be approximately $15,000 to $20,000 in 2006. On May 24, 2006, the Company announced that it reached agreement with the board of DCS Group PLC on the terms of a recommended proposal for the cash acquisition of DCS, valued at £21,700 (approximately $41,000 U.S.). See the Subsequent Event section of this analysis regarding this proposed business combination. Cash flows provided by financing activities resulted from stock option proceeds. The Company did not repurchase any Class A common shares on the open market during the three months ended December 31, 2005.

Capitalization

The Company’s ratio of net debt (total debt minus cash and equivalents) to capitalization (net debt plus shareholders’ equity) was 22.5% at December 31, 2005 and 29.3% at September 30, 2005. The reduction in the ratio of net debt to capitalization resulted from an increase in cash and equivalents from $133,403 at September 30, 2005 to $170,983 at December 31, 2005. The increase in cash and equivalents resulted from continued cash flow from operations while the Company has not repurchased Class A common shares on the open market. This calculation includes Financial Services debt for which the proceeds were invested in finance receivables. On April 8, 2004, the Company obtained a $200,000 revolving credit agreement (the “$200,000 Credit Agreement”) with a five-year term. Remaining credit available under the Credit Agreement was $150,000 at December 31, 2005. In addition to the Credit Agreement, the Company also has a variety of other short-term credit lines available. Management estimates that its cash balances, cash flow from operations and cash available from existing credit agreements will be sufficient to meet the Company’s short-term liquidity requirements. Cash balances are placed in short-term investments until needed.

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. Management believes that its strong balance sheet and cash flows should help provide access to capital sufficient to meet the Company’s long-term liquidity requirements beyond the next year.

The Company has $100,000 principal amount outstanding of 7% Notes Due December 15, 2006 (the “Notes”) under an Indenture, dated as of December 15, 1996 between the Company and Wells Fargo Bank, N.A., as successor trustee (the “Trustee”). On February 24, 2006, the Trustee sent the Company a notice of default relating to the Company’s failure to timely file its Annual Report on Form 10-K for the year ended September 30, 2005 with the SEC and the Trustee. The default would have created an Event of Default (as defined under the Indenture) and resulted in the acceleration of the principal and interest of the Notes unless the Event of Default was cured by May 25, 2006. On May 15, 2006, the Company filed its Annual Report on Form 10-K for the year ended September 30, 2005 and cured the Event of Default. On May 25, 2006, the Company purchased approximately $104,000 of U.S. Treasury Securities and deposited these securities in a trust which amount is sufficient to pay and discharge all remaining payments, aggregating approximately $107,000 of principal and interest under the Notes. Future interest and principal payments will be made from this trust. The Company will include this trust in current assets on its consolidated balance sheet and the debt will also remain the Company’s obligation until it is paid on December 15, 2006.

The Company’s failure to file its Annual Report on Form 10-K for the year ended September 30, 2005, and its Quarterly Report on Form 10-Q for the quarters ended December 31, 2005 and March 31, 2006 (the “Delayed Reports”), and the default under the Indenture was also a default under the credit agreement. Pursuant to an amendment to the credit agreement, on March 16, 2006, the Company extended the date on which it is required to deliver the Delayed Reports and any other periodic reports required to be filed from March 31, 2006 to the earlier of (i) September 30, 2006 or (ii) the date such financial statements are filed with the SEC. On May 15, 2006, the Company filed its Annual Report on Form 10-K for

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the year ended September 30, 2005. With the filing of the Quarterly Report on Form 10-Q for the quarters ended December 31, 2005 and March 31, 2006 on June 8, 2006, the Company has filed all required periodic financial reports and is current in such filings under the terms of the credit agreement.

On May 19, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the Company, renewed a loan funding agreement (the “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. On April 25, 2006, the Loan Funding Agreement was extended through December 31, 2006 and the requirement to file financial statements was waived through September 30, 2006. The outstanding borrowings under this arrangement were included with Financial Services long-term debt on the Consolidated Balance Sheets. As of December 31, 2005, the balance outstanding on this facility was $127,000.

In February and March 2006, Moody’s Investor Services downgraded the Company’s senior unsecured ratings to Ba1 from Baa2 and placed the ratings on review for further possible downgrade. Access to the public debt markets could be limited to the non-investment grade segment which would result in higher borrowing costs until the Company’s credit rating is restored to investment grade by Moody’s.

See Note 8 to the Condensed Consolidated Financial Statements 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 December 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, 2005.

Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. The Company has paid dividends every year since the Company’s initial public offering in 1961.

During the three months ended December 31, 2005, and as of the date of this filing, the Company did not repurchase any Class A common shares on the open market. As of December 31, 2005, the Company could repurchase an additional 1,874 Class A common shares under existing board of directors’ authorizations.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s Condensed Consolidated Financial Statements and Notes to Condensed 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

The Company’s revenue recognition policy is complex, primarily because the Company sells its solutions under multiple element arrangements. Various elements of these arrangements are accounted for under different accounting literature which requires an allocation of the sales price among the elements utilizing a relative fair value allocation method. The application of the relative fair value allocation method requires the use of professional judgment in obtaining third party or other evidence of fair value for the various elements of its transactions. The timing of revenue recognition requires the use of estimates. For example, the Company must estimate the amount of software training services that will be required at the time an order is contracted. This estimate is used to recognize revenue over the appropriate period, as software training services are performed. The length of the software training services period, as well as the dispersion of training hours within the period, may vary each quarter, depending upon the size and complexity of the transactions. The Company monitors actual experience and updates these estimates each quarter. As of December 31, 2006, software training services typically are completed between one and five months after shipment of hardware.

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The Company is in the design phase of implementing additional enterprise resource planning software modules related to processing orders and recognizing revenue. At the same time, the Company is reviewing its go-to-market strategy and contract terms in an effort to simplify the process for both customers and the Company. Once the new system and processes are implemented, the Company anticipates that increased standardization and integration will reduce the amount of time and resources needed to process orders and complete the accounting process. The Company anticipates that it will take approximately twelve to eighteen months to complete the process changes and system implementation.

Automotive Solutions

Revenues from the Company’s multiple element arrangements are primarily accounted for in accordance with the general revenue recognition provisions of Staff Accounting Bulletin Topic 13. 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. The Company’s multiple element arrangements include computer hardware, software licenses, hardware installation services, software training services and recurring maintenance services (which consist of hardware maintenance and software support). The Company applies the guidance of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” to determine its units of accounting and to allocate revenue among those units of accounting.

In a transaction containing a sales-type lease, hardware revenues are recognized at the present value of the payments allocated to the hardware lease element upon the commencement of the lease (when software training services have been performed). Revenues for software, hardware installation services and software training services are recognized, as a combined unit of accounting, as software training services are performed. Software training is typically completed between one and five months after shipment of the hardware.

In a transaction that does not contain a lease, revenues for hardware, software, hardware installation services and software training services are recognized, as a combined unit of accounting, as software training services are performed. Software training is typically completed between one and five months after shipment of the hardware.

Recurring maintenance services are recognized ratably over the contract period as services are performed.

Software revenues which do not meet the criteria set forth in EITF Issue No. 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” are considered service revenues and are recorded ratably over the contract period as services are provided.

Consulting revenues are recorded over the period that services are performed. The Company also provides certain transaction-based services for which it records revenues once services have been performed. Sales of documents products are recorded upon shipment, as title passes to customers.

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 effective interest method.

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,

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ranging from three to seven years. The unamortized balance of software licensed to customers is compared to its net realizable value 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 the asset is considered impaired, an impairment charge is recorded for the amount by which the unamortized balance of the asset exceeds its net realizable value.

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, 2005. 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, decreasing the discount rate from 6.25% in fiscal year 2005 to 5.35% in fiscal year 2006. The expected long-term rate of return on plan assets was estimated at 8.25% for fiscal year 2005 and 7.75% in fiscal year 2006. The Company is not required to make minimum contributions to its postretirement plans in fiscal year 2006 and the Company does not anticipate making such contributions. See Note 12 to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2005, 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 $4,953 for the three months ended December 31, 2005, and compared to $5,838 for the three months ended December 31, 2004. The Company’s net periodic postretirement medical and life insurance expense was $1,517 for the three months ended December 31, 2005, compared to $872 for the three months ended December 31, 2004. The Company’s net periodic postretirement medical and life insurance expense increased in 2006, primarily as a result of the decision to offer prescription drug coverage to retirees eligible for Medicare.

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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 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 6.1% during the three months ended December 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., 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 three months ended December 31, 2005, Reyna Funding, L.L.C. entered into $15,387 of interest rate swaps associated with new debt issues to replace maturing interest rate swaps.

As of December 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 8 to the Condensed Consolidated Financial Statements 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 three months ended December 31, 2005. In the conduct of its foreign operations, the Company has inter-company 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 first quarter of 2006, the Company sold foreign currency forward contracts to limit foreign currency risk on inter-company balances. As of December 31, 2005, these foreign currency positions were closed and the Company had no foreign currency exchange contracts outstanding. Based on the Company’s overall foreign currency exchange rate exposure at December 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 11 to the Condensed Consolidated Financial Statements regarding the Company’s contingencies.

ACCOUNTING STANDARDS

See Note 12 to the Condensed Consolidated Financial Statements regarding the effect of accounting standards that the Company has not yet adopted.

MEANINGFUL CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q 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, including, among others, the following:

• the identification by the Company’s management and independent registered public accounting firm of an additional material weakness or the continuation of the existing material weakness in internal control over financial reporting;

• the Company’s ability to make timely filings of its required periodic reports under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), particularly as it relates to the application of the Company’s new revenue recognition policy;

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• any impact on the listing of the Company’s common stock on the New York Stock Exchange;

• the Company’s ability to maintain adequate cash balances for operations after payment and discharge of the public debt and to meet its liquidity covenant under its credit facility;

• the higher cost of borrowing on future debt and the Company’s ability to access the debt markets due to the recent downgrades to the Company’s credit ratings;

• the Company’s ability to successfully complete and integrate any acquisitions it pursues.

• the Company’s estimates of addressable markets in the U.S. or internationally and the Company’s ability to save costs in the future; and

• other factors described in this Quarterly Report on Form 10-Q, the Annual Report on Form 10-K for the year ended September 30, 2005 and prior filings of the Company with the SEC.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

See the caption entitled “Market Risks” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In addition, management has performed the same evaluation as of the date of filing this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of the chief executive officer and the chief financial officer. Based upon the evaluation conducted by management which included a material weakness in internal control over financial reporting, our chief executive officer and chief financial officer have concluded that, as of December 31, 2005, and as of the date of filing this report our disclosure controls and procedures were not effective at a reasonable assurance level. The scope of management’s evaluation excluded Kodata Solutions, which the Company acquired on February 1, 2006 as described in Frequently Asked Question No. 3 (Oct.6, 2004) regarding Release No. 34-47986, “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports . “ Accordingly, management’s assessment of the Company’s internal control over financial reporting does not include internal control over financial reporting of Kodata Solutions. This business combination was not material to the Company’s financial statements. The application of GAAP to the Company’s multiple element revenue arrangements (computer hardware, software, hardware installation services, software training services and recurring maintenance services) is complex and management did not have sufficient resources with the requisite expertise to ensure that consideration was allocated appropriately to the various elements within the Company’s multiple element arrangements. Management considers its internal controls over financial reporting an integral component of its disclosure controls and procedures. The Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

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When evaluating its disclosure controls and procedures management considered the fact that management’s review of its revenue recognition policy resulted in the inability to timely file the Company’s Annual Report on Form 10-K for the year ended September 30, 2005 and this Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. Additionally, management considered the circumstances that resulted in the restatement related to the balance sheet classification of auction rate securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities;” and the application of GAAP in reporting earnings per Class B common shares in accordance with SFAS No. 128, “Earnings Per Share.” Management evaluated the impact of our inability to timely file our periodic reports with the SEC on our disclosure controls and procedures and has concluded that the material weakness contributed to the inability to timely make these filings.

To address the material weakness described above, management performed additional analysis and other post-closing procedures designed to ensure that the consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial position, results of operations and cash flows for the periods presented.

As disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005, it had come to Management’s attention that certain additional guidelines and procedures regarding communications with the public, investors and analysts were not consistently followed between December 2005 and the date of that filing. Management and the Audit Committee undertook to review the matter and to take remedial action designed to ensure that these guidelines and procedures are complied with in future periods. Management and the Audit Committee have now completed their review, which indicated instances of non-compliance with the above-referenced guidelines and procedures. In light of the review, the Audit Committee accepted Management’s recommendations designed to enhance disclosure policies and procedures and to improve oversight of compliance through an iterative process. Management is implementing these changes on an expedited basis, and will recommend additional enhancements to establish a strong and effective compliance system within the Company.

Remediation Activities

To remediate the material weakness in internal control over financial reporting, management has taken or is taking the following actions:

• Partnering with a nationally recognized benchmarking and consulting group to assist management in evaluating the accounting function to determine whether there is adequate staffing, appropriate skill sets and organizational alignment. Management expects to complete this study by September 30, 2006, at which time organizational plans will be developed.

• Acquired additional accounting reference materials and working with outside consultants to structure a technical training curriculum for the accounting staff to ensure the staff is aware of and understands the Company’s critical accounting policies as well as new accounting pronouncements and SEC developments. This curriculum will be developed by September 30, 2006.

• Implemented a new policy requiring the accounting staff to re-evaluate the Company’s critical accounting policies at least once every three years even if there is no new guidance applicable to critical accounting policies. The Company’s critical accounting policies include revenue recognition. This policy was implemented in April 2006. Management will formalize the review schedule by June 30, 2006.

Changes in Internal Control Over Financial Reporting

Management has evaluated, with the participation of our chief executive officer and chief financial officer, the changes made in our internal control over financial reporting during the quarter ended December 31, 2005, and has concluded that there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Subsequent to the quarter ended December 31, 2005, in addition to the steps taken to remediate the material weakness, management has improved the documentation of our revenue recognition policy. Management also added new procedures associated with accumulating and validating data used to calculate deferred revenue adjustments. This data supports various estimates used to determine revenue, including the allocation of consideration to the elements of the Company’s multiple element arrangements, the period over which software training services are provided and the price dispersion of recurring

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maintenance services. These changes had a material effect or are reasonably likely to have a material effect on our internal control over financial reporting. Over the next twelve to eighteen months, the new procedures will be replaced with more automated procedures as management implements new software and simplifies procedures associated with processing sales orders, invoicing customers and managing field service operations.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The information included in Note 11 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference.

Item 1A. Risk Factors

During the quarter ended December 31, 2005, there have been no material changes to the risk factors described in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005 except for the following which should supplement the risk factor entitled, “BUSINESS COMBINATIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES” in our Form 10-K for the year ended September 30, 2005, which was filed with the SEC on May 15, 2006:

IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ANY ACQUISITIONS, OUR PROFITABILITY COULD BE ADVERSELY AFFECTED. We have acquired businesses in the past, and may consider acquiring businesses in the future, that expand our portfolio of products and thereby strengthen our position in the market. Integrating any acquired business requires substantial management, financial and other resources and may pose risks with respect to customer service and market share. Furthermore, integrating an acquisition involves a number of special risks, some or all of which could have a material adverse effect on our business, results of operations and financial condition. These risks include:

• unforeseen operating difficulties and expenditures;

• difficulties in assimilation of acquired personnel, operations and technologies;

• the need to manage a significantly larger and more geographically dispersed business;

• impairment of goodwill and other intangible assets;

• diversion of management’s attention from ongoing development of our business or other business concerns;

• potential loss of customers;

• failure to retain key personnel of the acquired businesses;

• the use of substantial amounts of our available cash; and

• the incurrence of additional indebtedness.

We may not be able to successfully integrate businesses that we acquire. Such acquisitions may not enhance our competitive position, business or financial prospects and could have a material adverse effect on our business, results of operations and financial position.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (in thousands except per share data)

On February 17, 2005, the Company’s board of directors authorized the repurchase of 5,000 Class A common shares. This authorization has no fixed expiration date and was in addition to previously approved authorizations. As of December 31, 2005, the Company could repurchase an additional 1,874 Class A common shares under this board of directors’ authorization. No other authorizations for share repurchase were outstanding as of December 31, 2005. During the three months ended December 31, 2005, the Company did not repurchase any Class A common shares.

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Item 6. Exhibits

31.1	Certification of Principal Executive Officer
31.2	Certification of Principal 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.

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 June 8, 2006	/s/ Finbarr J. O’Neill Finbarr J. O’Neill
	President and Chief Executive Officer
Date June 8, 2006	/s/ Gregory T. Geswein
	Gregory T. Geswein Senior Vice President and Chief Financial Officer

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Finbarr J. O’Neill, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of The Reynolds and Reynolds Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably 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 the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 8 2006

/s/ Finbarr J. O’Neill  

President and Chief Executive Officer 

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EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Gregory T. Geswein, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of The Reynolds and Reynolds Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably 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 the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 8, 2006

/s/ Gregory T. Geswein  

Senior Vice President and 

Chief Financial Officer 

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EX-32.1

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

I, Finbarr J. O’Neill, President and Chief Executive Officer of The Reynolds and Reynolds Company (the “Company”), hereby certify that, to my knowledge:

1.	The Quarterly Report on Form 10-Q of the Company for the three months ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 8, 2006

/s/ Finbarr J. O’Neill  

President and Chief Executive Officer 

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EX-32.2

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

I, Gregory T. Geswein, Senior Vice President and Chief Financial Officer of The Reynolds and Reynolds Company (the “Company”), hereby certify that, to my knowledge:

1.	The Quarterly Report on Form 10-Q of the Company for the three months ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 8, 2006

/s/ Gregory T. Geswein  

Senior Vice President and 

Chief Financial Officer 

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