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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-0421120
(State of Incorporation) (IRS Employer Identification No.)
115 SOUTH LUDLOW STREET
DAYTON, OHIO 45402
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 485-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
CLASS A COMMON SHARES (NO PAR VALUE) NEW YORK STOCK EXCHANGE
------------------------------------- -----------------------
(Title of class) (Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
----
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in the definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or in any amendment to this Form 10-K. _
The aggregate market value of the Class A Common Shares held by non-affiliates
of the registrant, as of December 2, 2002, was $1,825,236,708.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of December 2, 2002:
Class A Common Shares: 68,217,523 (exclusive of 23,881,075 Treasury shares)
Class B Common Shares: 16,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Proxy Statement for 2003 Annual Meeting of Shareholders
PART I
(Dollars in thousands)
ITEM 1. DESCRIPTION OF BUSINESS
The Reynolds and Reynolds Company (the "company") was founded in 1866 and has
been an Ohio corporation since 1889. The company's services include a full range
of retail and enterprise management systems, networking and support, e-business
applications, Web services, learning and consulting services, customer
relationship management solutions, document management and financing services
for automotive retailers and manufacturers.
The company's five solutions business units have been aggregated into four
segments for reporting purposes.
The Software Solutions segment consists of the Software Solutions and the
Info-Structure Services business units. This segment provides integrated
computer systems products and related services. Products include integrated
software packages, computer hardware and installation of hardware and software.
Services include customer training, hardware maintenance and software support as
well as consulting services.
The Transformation Solutions segment provides specialized training, Web services
and customer relationship management.
The Documents segment manufactures and distributes printed business forms to
automotive retailers.
The Financial Services segment provides financing, principally for sales of the
company's computer systems, through the company's wholly-owned affiliates, Reyna
Capital Corporation, Reyna Funding, L.L.C. and a similar operation in Canada.
FINANCIAL INFORMATION ABOUT SEGMENTS
AND FOREIGN AND DOMESTIC OPERATIONS
See Note 12 to the Consolidated Financial Statements on page 50 for financial
and descriptive information about the business segments described above.
NEW SOLUTIONS
In fiscal 2002, the company continued its mission to lead the transformation of
automotive retailing and also invested significantly in people, processes, and
new products. During fiscal 2002, the company:
- - Introduced the Reynolds Generations Series(TM), the company's next
generation technology platform and solution suite for automotive retailing.
This family of solutions will deliver more than 200 applications and
services providing a new standard of tools and connectivity that enables
customers to implement module by module, or the full suite of solutions.
- - Continued to expand ReySource(TM), Reynolds' online procurement engine for
automotive retailers. During the year, Reynolds, teamed with General Motors
and Covisint to create the General Motors Dealer Supply Advantage
procurement site. Additionally, the Ford Minority Dealers Association and
the General Motors Minority Dealers Association also endorsed ReySource to
their members.
- - Expanded its market presence with Automark Web Services. Reynolds was
selected by Nissan to develop and implement a total retail services network
including e-commerce and brand management capabilities for its North
American Nissan and Infiniti dealers. The MINIUSA division of BMW selected
Reynolds to develop and launch its customer Web services.
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- - Announced In-Vehicle Merchandising for GM dealers in the United States, a
streamlined suite of information and business management tools that help GM
dealers build customer relationships and improve parts and service
operations.
- - Introduced 20 new service offerings including Proven for Profitability(TM),
a series of training and consulting initiatives designed to improve the
return on investment results of specific Reynolds applications in Service
and Sales.
- - Introduced an expanded set of professional, business and technical courses
through a new Internet-based training solution.
The company also announced it was selected by Mazda North America to implement
Mazda's retail strategy including the installation of a network that will allow
its dealers to leverage the Internet while giving them complete control over
their individual computer environments; its selection by Thrifty Car Sales to
develop and deliver a customized training program to the nationwide Thrifty Car
Sales franchise retail network; it was the only automotive services provider to
deliver complete 5300 Project capabilities to Chrysler Group dealers. The 5300
Project is a suite of software and process options designed to help dealers
manage their parts inventory and, ultimately, satisfy customers.
For the fourth consecutive year, the company received the prestigious STAR
(Software Technical Assistance Recognition) award in the high-volume category,
from the Software Professionals Association. The award recognizes outstanding
accomplishments and superior performance in the delivery of technical support to
external customers.
RAW MATERIALS
Computer hardware and peripherals are essential to the company. It purchases
these products from a variety of suppliers. IBM supplies the hardware platform
for the Reynolds Generations Series and the ERA system. If this source of supply
were to be interrupted, some delay would occur in converting to a new platform.
The company historically has not experienced difficulties in obtaining hardware
and peripherals, nor does it reasonably foresee difficulty in obtaining them in
the future on competitive terms and conditions.
PATENTS, TRADEMARKS AND RELATED RIGHTS
Except as described below, the company does not have any patents, trademarks,
licenses, franchises or concessions which are material to an understanding of
its business.
The company's trademark REYNOLDS & REYNOLDS(R) is associated with many goods and
services provided by the company. In the automotive systems market, the company
has a number of direct and indirect distribution and licensing arrangements with
equipment vendors and software providers relating to certain components of the
company's products, including the principal operating systems. These
arrangements are in the aggregate, but not individually (except for the
operating systems), material to the company's business.
COMPETITION
The company is North America's leading provider of integrated software solutions
and services to automotive retailers.
The company's main competitor in the Software Solutions segment is the Dealer
Services division of Automatic Data Processing, Inc. ("ADP"). ADP's assets and
financial resources substantially exceed those of the company. Together, the two
suppliers provide a significant share of the information management systems for
automotive retailers in the United States and Canada.
The company is expanding and supplementing its solutions in the Transformation
Solutions segment. This segment experiences competition from hundreds of
providers, ranging from local, to regional and national firms.
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The company's Documents segment has a leading market share position but
experiences energetic competition from local printing brokers and regional
printers across the United States and Canada.
The company believes it competes by providing value-added products, services and
solutions that satisfy market needs and uses current technology to provide
additional value and to improve price and performance. By specializing in a
particular niche market, the company has emphasized reliable and responsive
service, broad industry knowledge and long-term relationships to meet customer
needs more effectively.
No single customer accounts for five percent or more of the company's revenues.
BACKLOG
The backlog represents orders for computer systems or documents which have not
yet been shipped to customers, and deferred revenues (orders which have been
shipped but not yet recognized in revenues). At October 31, 2002, the dollar
value of the backlog including software license fees was estimated to be $61,000
compared to $40,000 last year. The company anticipates substantially all of the
backlog to be recognized as revenue during fiscal year 2003.
RESEARCH AND DEVELOPMENT
During fiscal 2002, the company continued its substantial investment in research
and development to deliver new and enhanced solutions for customers.
Expenditures for those activities were $68,000 in 2002, $71,000 in 2001 and
$76,000 in 2000.
ENVIRONMENTAL PROTECTION
The company believes that it is in substantial compliance with all applicable
federal, state and local statutes concerning environmental protection. The
company has not experienced any material costs in this regard. The U.S.
Environmental Protection Agency has designated the company as one of a number of
potentially responsible parties under the Comprehensive Environmental Response,
Compensation and Liability Act at one environmental remediation site, and the
company has also been named as a defendant in a cost recovery lawsuit in Dayton,
Ohio, regarding another environmental remediation site. (See Note 13 to the
Consolidated Financial Statements, page 51.)
EMPLOYEES
On September 30, 2002, the company and its subsidiaries employed 4,602 persons.
ITEM 2. PROPERTIES
As of September 30, 2002, the company owned and operated two forms manufacturing
plants in the United States, one in Celina, Ohio, and one in Dallas, Texas,
encompassing approximately 427,000 square feet. Corporate headquarters are
located in the Dayton, Ohio, area in several buildings owned by the company
which contain approximately 1,050,000 square feet. In addition, the company
leases approximately 31 offices throughout the United States and Canada.
See Note 1 to the Consolidated Financial Statements on page 35.
ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 13 to the Consolidated Financial Statements
on page 51.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
(Dollars in thousands except per share data)
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Class A Common Shares are listed on the New York Stock Exchange.
There is no principal market for the Class B Common Shares. The company also has
an authorized class of 60 million preferred shares with no par value. As of the
filing of this report, the company currently has no agreements or commitments
with respect to the sale or issuance of the preferred shares except as described
in Note 8 to the Consolidated Financial Statements, page 44.
Information on market prices and dividends is set forth in Note 16 to the
Consolidated Financial Statements on page 54.
As of December 2, 2002, there were approximately 3,170 holders of record of
Class A Common Shares and one holder of record of Class B Common Shares.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
For The Years Ended September 30 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net Sales and Revenues $ 992,383 $1,004,012 $ 954,687 $ 868,028 $ 805,653
Income from Continuing Operations $ 115,552 $ 97,934 $ 88,440 $ 87,891 $ 91,703
Basic earnings per common share $ 1.63 $ 1.34 $ 1.14 $ 1.12 $ 1.15
Diluted earnings per common share $ 1.58 $ 1.31 $ 1.11 $ 1.09 $ 1.13
Net Income $ 78,989 $ 99,557 $ 116,596 $ 122,721 $ 103,107
Basic earnings per common share $ 1.12 $ 1.36 $ 1.50 $ 1.57 $ 1.30
Diluted earnings per common share $ 1.08 $ 1.33 $ 1.47 $ 1.53 $ 1.27
Return on Equity 17.0% 20.4% 24.2% 28.3% 26.8%
Cash Dividends Per Class A Common Share $ .44 $ .44 $ .44 $ .40 $ .36
Book Value Per Outstanding Common Share $ 6.56 $ 6.69 $ 6.68 $ 5.98 $ 5.14
Assets
Automotive solutions $ 729,560 $ 732,073 $ 808,527 $ 761,686 $ 678,108
Financial services 407,605 422,334 421,129 427,591 411,159
---------- ---------- ---------- ---------- ----------
Total assets $1,137,165 $1,154,407 $1,229,656 $1,189,277 $1,089,267
========== ========== ========== ========== ==========
Long-Term Debt
Automotive solutions $ 107,408 $ 105,805 $ 111,124 $ 163,111 $ 160,346
Financial services 180,519 147,429 126,868 154,040 145,460
---------- ---------- ---------- ---------- ----------
Total long-term debt $ 287,927 $ 253,234 $ 237,992 $ 317,151 $ 305,806
========== ========== ========== ========== ==========
Number of Associates 4,602 4,763 4,945 9,083 9,152
AUTOMOTIVE SOLUTIONS (excluding Financial Services)
Current Ratio 2.02 1.80 1.90 1.75 1.31
Net Property, Plant and Equipment $ 161,073 $ 159,051 $ 138,108 $ 104,106 $ 93,900
Total Debt $ 113,469 $ 111,866 $ 116,838 $ 168,825 $ 166,837
Total Debt to Capitalization 20.0% 19.0% 19.0% 26.7% 29.2%
(1) Effective October 1, 2001, the company adopted the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," and reduced income by $36,563 for the cumulative effect of the
accounting change.
(2) Certain reclassifications were made to prior years' consolidated financial
statements to conform with the presentation used in 2002.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
(In thousands except per share data)
SIGNIFICANT EVENTS
ACCOUNTING CHANGE
During fiscal year 2002 the company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," and recorded a cumulative effect of accounting change of $36,563
($60,938 net of income tax benefits of $24,375) effective October 1, 2001. See
Note 14 to the Consolidated Financial Statements for additional discussion of
this accounting change.
SPECIAL ITEMS
During the second quarter of fiscal year 2002, the company recorded several
items that when combined added $742 or $.01 per share to earnings. The company
settled a state income tax audit that covered fiscal years 1992 through 1998.
Based on the settlement, the company reduced interest and income tax accruals
for fiscal years 1999 through 2001. The company also filed amended returns in a
number of states to correct the apportionment and allocation of taxable income.
The combination of audit settlements, accrual adjustments and amended returns
added $5,890 or $.08 per share of earnings in the second quarter of fiscal year
2002. The income tax adjustments were recorded as follows: $2,310 in selling,
general and administrative (SG&A) expenses, primarily for professional fees
associated with obtaining the income tax benefits, $1,709 for the reversal of
previously recorded interest expense, $819 of interest income on tax refunds,
$200 of other charges and $5,872 of income tax benefits. During the second
quarter of fiscal year 2002, the company also recorded $8,552 of expenses
($5,251 or $.07 per share after income taxes) for the following items: employee
termination benefits of $4,492 for 114 employees, communications software
distributed to customers of $2,500 and real estate costs of $1,560. These items
were recorded as follows: $2,000 in cost of sales, $6,552 in SG&A expenses and
related income tax benefits of $3,301. During March 2002, the company also sold
its shares of Kalamazoo Computer Group plc of the United Kingdom for cash of
$1,636 and recorded a net gain of $103. This gain of $103 was the net of a
$12,274 loss, included with equity in net losses of affiliated companies on the
statement of consolidated income, and $12,377 of income tax benefits related to
the sale of these shares, included in the provision for income taxes on the
statement of consolidated income.
BUSINESS COMBINATIONS
In August 2002, the company purchased BoatVentures.com, a provider of Web-based
applications and education processes to boat, power sports and recreational
vehicle retailers and manufacturers. Privately-held BoatVentures.com had
revenues of about $1,000 in 2001. See Note 4 to the Consolidated Financial
Statements for more information on business combinations.
In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a.
DealerKid, a provider of electronic customer marketing and relationship
management software and services for automotive retailers in the United States
and Canada. Privately-held DealerKid had revenues of about $2,000 in 2000.
In May 2000, the company purchased the outstanding membership interests of HAC
Group, LLC, the leading provider of learning, customer relationship management
and Web services to automobile retailers and manufacturers. The privately-held
HAC Group, LLC had revenues of $65,000 in 1999.
In May 2000, the company and other industry partners formed a new independent
company, named ChoiceParts, LLC, that is developing an electronic parts exchange
for the automotive parts market. The company contributed its existing parts
locator business, which had annual revenues of nearly $12,000, and in-process
software development of a Web-based parts locator product to ChoiceParts in
exchange for a minority equity interest, consisting of both common and preferred
interests.
DISCONTINUED OPERATIONS
In August 2000, the company sold the assets of its Information Solutions segment
to The Carlyle Group for cash of $360,000 and recorded an after-tax gain on the
sale of $10,853 or $.14 per diluted share. Operating results of the Information
Solutions segment have been presented as discontinued operations in the
statements of consolidated income. Cash flows from discontinued operations of
the Information Solutions segment have been reported as a single
7
line in the company's statements of condensed consolidated cash flows. See Note
2 to the Consolidated Financial Statements for more information on discontinued
operations.
RESTRUCTURING CHARGES
In connection with the sale of the Information Solutions segment, the company
approved a plan of restructuring and recorded a pre-tax charge of $10,560 or
$6,230 after taxes ($.08 per diluted share) during the fourth quarter of fiscal
year 2000. This charge represented costs for 272 former employees and included
costs associated with closing the Oklahoma City manufacturing facility and
vacating 38 leased facilities. See Note 3 to the Consolidated Financial
Statements for more information on restructuring charges.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' financial information to
conform with the presentation used in 2002.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
2002 vs. 2001 2001 vs. 2000
2002 2001 2000 Change Change
- --------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $992,383 $1,004,012 $954,687 ($11,629) -1% $49,325 5%
Gross profit $578,647 $ 566,100 $524,719 $12,547 2% $41,381 8%
% of revenues 58.3% 56.4% 55.0%
SG&A expenses $400,120 $ 394,368 $358,950 $ 5,752 1% $35,418 10%
% of revenues 40.3% 39.3% 38.7%
Restructuring charge $ 0 $ 0 $ 10,560
Operating income $178,527 $ 171,732 $155,209 $ 6,795 4% $16,523 11%
% of revenues 18.0% 17.1% 16.3%
Income from continuing operations $115,552 $ 97,934 $ 88,440 $17,618 18% $ 9,494 11%
Discontinued operations $ 0 $ 1,623 $ 28,156 ($1,623) ($26,533)
Income before accounting change $115,552 $ 99,557 $116,596 $15,995 16% ($17,039) -15%
Effect of accounting change ($36,563) $ 0 $ 0 ($36,563) $ 0
Net income $ 78,989 $ 99,557 $116,596 ($20,568) -21% ($17,039) -15%
Basic earnings per share
Income from continuing operations $ 1.63 $ 1.34 $ 1.14 $ 0.29 22% $ 0.20 18%
Income before accounting change $ 1.63 $ 1.34 $ 1.14 $ 0.29 22% $ 0.20 18%
Net income $ 1.12 $ 1.36 $ 1.50 ($0.24) -18% ($0.14) -9%
Diluted earnings per share
Income from continuing operations $ 1.58 $ 1.31 $ 1.11 $ 0.27 21% $ 0.20 18%
Income before accounting change $ 1.58 $ 1.31 $ 1.11 $ 0.27 21% $ 0.20 18%
Net income $ 1.08 $ 1.33 $ 1.47 ($0.25) -19% ($0.14) -10%
Consolidated net sales and revenues declined slightly in fiscal year 2002,
primarily because of the continued decline in MSN Autos (formerly named
CarPoint) revenues that began in June 2001. See the Transformation Solutions
segment section for more information on MSN Autos. This decline was partially
offset by growth in computer services revenues. Consolidated revenues grew 5% in
fiscal year 2001 because of the full year effect of business combinations and
growth in computer services revenues. Sales of computer systems products
declined in both fiscal years 2002 and 2001. Consolidated gross profit margins
increased in both fiscal years 2002 and 2001 primarily as a result of growth in
Software Solutions' computer services revenues. Consolidated SG&A expenses
included $8,862 related to special items recorded in the second quarter of
fiscal year 2002. Excluding these items, fiscal year 2002 SG&A expenses were
$391,258 or 39.4% of revenues. Research and development (R&D) expenses were
$68,000 in fiscal year 2002, compared to $71,000 last year and $76,000 in fiscal
year 2000. SG&A expenses included goodwill amortization of $11,316 in fiscal
year 2001 and $6,438 in fiscal year 2000. Excluding special items recorded in
the second quarter of fiscal year 2002, SG&A expenses reflected the following
items: $4,800 of severance and termination benefits, $3,000 of higher bad debt
expenses, a $1,200 increase in the cost of the annual worldwide sales and
service conference and
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somewhat higher inventory obsolescence and depreciation expenses. Bad debt
expenses increased in fiscal year 2002 because of higher charge-offs. Excluding
fiscal year 2002 special items and fiscal year 2000 restructuring charge,
operating margins were 19.1% in 2002 compared to 17.1% in 2001 and 17.4% in
2000. Fiscal year 2002 operating margins grew as a result of higher gross profit
margins. In fiscal year 2001, operating margins reflected a full year of the
fiscal year 2000 acquisition of HAC Group LLC, the fiscal year 2001 purchase of
DealerKid and costs related to a work stoppage of a software development
contract. These acquired businesses had lower operating margins than the
existing business.
Interest expense declined over the last three years because of lower effective
interest rates, debt repayments and capitalization of interest expense for
software development and construction of an office building. During February
2002, the company entered into $100,000 of interest rate swap agreements that
effectively converted 7% fixed rate debt into variable rate debt, which averaged
4.3% in fiscal year 2002. These interest rate swap agreements were designated as
fair value hedges. Interest income declined in fiscal year 2002 primarily
because of lower interest rates. In fiscal year 2001, interest income increased
because of higher investment balances as a result of the cash proceeds from the
August 2000 sale of the Information Solutions segment. In fiscal year 2002,
equity in net losses of affiliated companies was $13,201, of which $12,274
related to the sale of the company's shares of Kalamazoo Computer Group plc.
This loss was effectively offset by income tax benefits of $12,377. Equity in
net losses of affiliated companies was $13,019 in fiscal year 2001 and $4,416 in
fiscal year 2000. The increase from fiscal year 2000 to fiscal year 2001
occurred because of greater losses from the company's investment in Kalamazoo
Computer Group plc (subsequently sold), the May 2000 investment in ChoiceParts
LLC and the May 2001 $3,200 write-off of the company's investment in Consumer
Car Club. See Note 1 to the Consolidated Financial Statements for additional
disclosures about the company's investment in Kalamazoo and Note 4 for
additional disclosures about the company's investment in ChoiceParts LLC.
The effective income tax rate was 29.9% in 2002, compared to 39.7% in 2001 and
41.1% in 2000. Fiscal year 2002 included the tax benefits described in the
special items section. Excluding these items, the effective income tax rate was
38.2% in fiscal year 2002. The effective tax rate declined over the last two
fiscal years primarily because of reduced goodwill amortization for which there
was no tax deduction.
SOFTWARE SOLUTIONS
2002 vs. 2001 2001 vs. 2000
2002 2001 2000 Change Change
- --------------------------------------------------------------------------------------------------------------------------
Net sales and revenues
Computer services $482,152 $444,767 $404,676 $37,385 8% $40,091 10%
Computer systems products $145,299 $169,125 $181,370 ($23,826) -14% ($12,245) -7%
------------------------------------------------ -------
Total net sales and revenues $627,451 $613,892 $586,046 $13,559 2% $27,846 5%
Gross profit $392,385 $368,213 $324,911 $24,172 7% $43,302 13%
% of revenues 62.5% 60.0% 55.4%
SG&A expenses $265,089 $247,995 $217,475 $17,094 7% $30,520 14%
% of revenues 42.2% 40.4% 37.1%
Operating income $127,296 $120,218 $107,436 $ 7,078 6% $12,782 12%
% of revenues 20.3% 19.6% 18.3%
Software Solutions revenues increased in both 2002 and 2001 as growth in
computer services revenues more than offset declines in computer systems
products sales. Computer services revenues, comprised predominately of recurring
software support and equipment maintenance revenues, increased for both years
primarily because of the increased number of ERA retail management software
applications supported. Also contributing to the 2002 revenue increase was
growth in network services revenues. The company also increased sales prices to
offset inflation each year. Sales of computer systems products declined in
fiscal year 2002 for several products as technology spending was generally soft.
The fiscal year 2002 computer systems products sales decline also reflects the
cancellation of a software development contract last year. In fiscal year 2001,
sales of computer systems products declined primarily because of a decrease in
the number of ERA retail management systems sold. The backlog of new orders for
computer systems products and deferred revenues (orders shipped, but not yet
recognized in revenues) was $60,000 at September 30, 2002 compared to $40,000
last year. Gross profit margins and operating income margins increased in both
fiscal years 2002 and 2001 because of growth in higher margin computer service
revenues. Gross margins on computer service revenues
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also increased each year because of economies of scale in supporting the greater
number of software applications. In fiscal year 2002, SG&A expenses were 41.2%
of revenues excluding $6,682 of special items recorded in the second quarter. In
fiscal year 2002, SG&A expenses also included higher bad debt and severance
expenses which were partially offset by the elimination of $3,862 of goodwill
amortization. Operating margins were strong and increased each of the last two
years, primarily as a result of higher gross profit margins.
TRANSFORMATION SOLUTIONS
2002 vs. 2001 2001 vs. 2000
2002 2001 2000 Change Change
- -------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $139,700 $161,149 $132,093 ($21,449) -13% $29,056 22%
Gross profit $ 49,237 $ 58,559 $ 58,531 ($9,322) -16% $ 28 0%
% of revenues 35.2% 36.3% 44.3%
SG&A expenses $ 58,274 $ 70,491 $ 60,778 ($12,217) -17% $ 9,713 16%
% of revenues 41.7% 43.7% 46.0%
Operating loss ($9,037) ($11,932) ($2,247) $ 2,895 ($9,685)
% of revenues -6.5% -7.4% -1.7%
Transformation Solutions revenues declined in fiscal year 2002, primarily
because of the continued decline in MSN Autos (formerly named CarPoint) revenues
that began in June 2001. MSN Autos revenues declined over $20,000 in fiscal year
2002 and about $12,000 in fiscal year 2001 because of a change in the MSN Autos
business model. Because the transition to their new business model is now
complete, fiscal year 2003 revenues should be comparable to fiscal year 2002
revenues. In fiscal year 2002, this segment experienced strong growth in credit
applications and Automark Web Services revenues. This growth was essentially
offset by declines in revenues from customer relationship management (CRM)
consulting and campaign management services. Automark Web Services have
historically included a mixture of one-time and recurring revenues based on
contract terms which have allowed customers the option to host their Web sites.
As part of the Reynolds Generation Series, the company has launched additional
hosted services and will release more in the future. As many of these hosted
services integrate into the Web services offerings, the company is transitioning
Automark Web Services to the company's standard contract terms, which do not
contain the hosting option. As the new contracts are implemented, the company
will begin recording revenues over the contract service period, instead of upon
delivery of the software license. In fiscal year 2001, the full year effect of
the May 2000 acquisition of HAC Group LLC, comprised of CRM consulting services
and Automark Web Services, overcame the MSN Autos sales decline. Gross profit
margins were essentially flat in fiscal year 2002 after declining in fiscal year
2001 as a result of a slowdown in CRM consulting revenues. Fiscal year 2002
gross profit margins include a fourth quarter adjustment to accrue an additional
$1,923 of support costs related to non-cancelable contracts for Automark Web
hosting services. This accrual became necessary as a result of increased
integration and functionality which added support costs. SG&A expenses declined
in fiscal year 2002, in part because of the elimination of $6,175 of goodwill
amortization expenses. Fiscal year 2002 SG&A expenses also reflect lower selling
and marketing expenses. In fiscal year 2001, SG&A expenses increased primarily
because of the full year effect of the HAC Group, LLC business combination.
Operating losses declined slightly in fiscal year 2002 as a result of the
elimination of goodwill amortization, net of higher Automark Web Services
support costs. In fiscal year 2001, operating losses increased significantly
primarily because of a slowdown in CRM consulting revenues and the decline in
MSN Autos revenues.
DOCUMENTS
2002 vs. 2001 2001 vs. 2000
2002 2001 2000 Change Change
- -------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $183,523 $187,053 $196,342 ($3,530) -2% ($9,289) -5%
Gross profit $105,961 $110,668 $115,295 ($4,707) -4% ($4,627) -4%
% of revenues 57.7% 59.2% 58.7%
SG&A expenses $ 68,684 $ 70,877 $ 75,710 ($2,193) -3% ($4,833) -6%
% of revenues 37.4% 37.9% 38.5%
Operating income $ 37,277 $ 39,791 $ 39,585 ($2,514) -6% $ 206 1%
% of revenues 20.3% 21.3% 20.2%
10
Documents sales declined in fiscal years 2002 and 2001 primarily because of a
decline in the volume of business forms sold. Gross profit and operating margins
remained strong over the three-year period. Gross profit margins were negatively
affected in fiscal year 2002 because of lower revenues and a higher mix of
outsourced products, which have lower margins than manufactured standard
products. SG&A expenses declined each year as a percentage of revenues. Goodwill
amortization was $1,279 in both fiscal year 2001 and 2000. Operating margins
remained strong, essentially reflecting the trends in gross profit margins.
FINANCIAL SERVICES
2002 vs. 2001 2001 vs. 2000
2002 2001 2000 Change Change
- ------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $41,709 $41,918 $40,206 ($209) 0% $1,712 4%
Gross profit $31,064 $28,660 $25,982 $2,404 8% $2,678 10%
% of revenues 74.5% 68.4% 64.6%
SG&A expenses $ 8,073 $ 5,005 $ 4,987 $3,068 61% $ 18 0%
% of revenues 19.4% 12.0% 12.4%
Operating income $22,991 $23,655 $20,995 ($664) -3% $2,660 13%
% of revenues 55.1% 56.4% 52.2%
Financial Services revenues were essentially flat in fiscal year 2002 after
increasing 4% in fiscal year 2001. About half of the fiscal year 2001 increase
came from higher interest revenues and the other half related to realization of
residual values at contract maturity. The average interest rate earned on the
portfolio of finance receivables was relatively stable over the last three
years. Gross profit margins increased over the three years as interest rate
spreads strengthened. Financial Services interest rate spread was strong at 4.9%
in 2002, compared to 3.4% in 2001 and 3.1% in 2000. In fiscal year 2002, the
interest rate spread was at a relatively high level for this segment because of
lower borrowing costs as a result of lower interest rates. In fiscal year 2001,
the interest rate spread increased because of slightly higher average interest
rates on finance receivables. SG&A expenses increased in fiscal year 2002
primarily because of higher bad debt expenses as a result of increased
charge-offs. Bad debt expenses were $4,450 in 2002, $2,500 in 2001 and $2,360 in
2000. Operating margins continued to be strong in this segment.
LIQUIDITY AND CAPITAL RESOURCES
AUTOMOTIVE SOLUTIONS CASH FLOWS (EXCLUDING FINANCIAL SERVICES)
The company's cash position remained strong, with cash balances of $155,295 as
of September 30, 2002. Cash flows from operating activities were $158,071 during
the fiscal year and resulted primarily from net income, adjusted for non cash
charges, primarily depreciation and amortization and the cumulative effect of
the accounting change (and related deferred income taxes). Cash flows provided
by investing activities included intercompany loan repayments and dividends from
Financial Services and proceeds from the sale of internally used computer
equipment as part of a computer services outsourcing arrangement. These
operating and investing cash flows funded the company's investments for normal
operations including capital expenditures of $37,067. Capital expenditures
included about $17,000 to complete the construction of a new office building
near Dayton, Ohio. During the fiscal year, the company also capitalized $20,370
of software licensed to customers. As of September 30, 2002, the balance of
software licensed to customers was $81,557. Most of the capitalized software
development costs related to Reynolds Generations Series solutions scheduled for
release in fiscal year 2003 when the company will begin amortizing these costs.
Fiscal year 2003 capital expenditures and capitalized software in the ordinary
course of business are anticipated to be about $30,000. See the shareholders'
equity caption of this analysis regarding the payment of dividends and share
repurchases.
FINANCIAL SERVICES CASH FLOWS
Financial Services operating cash flows, collections on finance receivables and
additional borrowings were invested in new finance receivables for the company's
computer systems, used to make scheduled debt repayments and dividend payments
to Automotive Solutions.
CAPITALIZATION
The company's ratio of total debt (total Automotive Solutions debt) to
capitalization (total Automotive Solutions debt plus shareholders' equity) was
20.0% as of September 30, 2002 and 19.0% as of September 30, 2001. Remaining
credit
11
available under committed revolving credit agreements was $100,000 at September
30, 2002. In addition to this committed credit agreement, the company also has a
variety of other short-term credit lines available. Management estimates that
cash balances, cash flow from operations and cash available from existing credit
agreements will be sufficient to fund normal operations over the next year. Cash
balances are placed in short-term investments until needed. See Note 1 to the
Consolidated Financial Statements for a description of cash investments.
In August 1997, the company entered into an agreement with a trust for the
construction and lease of an office building near Dayton, Ohio. The trust was
formed by a consortium of institutional investors who purchased equity interests
in the trust and provided loans to the trust for the construction of the
building. This building was completed in 1999 at a cost of $28,800. This lease
is accounted for as an operating lease for financial reporting purposes.
Accordingly, neither the asset nor the related liability is reported on the
company's balance sheets. The company has guaranteed 80% of the trust's debt
related to the construction of the building. The company makes quarterly lease
payments based on the outstanding lease balance of $28,800. The original
five-year term was extended two years through August 2004. At the end of the
lease term, the company may either purchase the building for $28,800 or sell the
building on behalf of the lessor. If the building is sold and the proceeds from
the sale are insufficient to repay the investors, the company may be required to
make a payment to the lessor of up to 80% of the building's cost. Based on
appraised values, management does not believe any additional payments will be
required at the termination of the lease.
On January 24, 2002, Reyna Funding, L.L.C., a consolidated affiliate of the
company, entered into a loan funding agreement, whereby Reyna Funding, L.L.C.
may borrow up to $100,000 using finance receivables purchased from Reyna Capital
Corporation, also an affiliate of the company, as security for the loan. The
securitization allows additional borrowings, up to the $100,000 limit, through
January 23, 2003. This loan funding agreement is renewable annually through
January 23, 2006. Any borrowings will be repaid as collections on finance
receivables balances are received. During fiscal year 2002, Reyna Funding,
L.L.C. borrowed $100,000 under this agreement. These borrowings were included
with Financial Services' notes payable on the consolidated balance sheet.
Proceeds received by Reyna Capital Corporation from Reyna Funding, L.L.C. were
used to retire other debt.
The company has consistently produced strong operating cash flows sufficient to
fund normal operations. Strong operating cash flows are the result of stable
operating margins and a high percentage of recurring service revenues, which
require relatively low capital investment. Debt instruments have been used
primarily to fund business combinations and Financial Services receivables. As
of September 30, 2002, the company could issue an additional $130,000 of notes
under a shelf registration statement on file with the Securities and Exchange
Commission. Management believes that its strong balance sheet and cash flows
should help maintain an investment grade credit rating that should provide
access to capital sufficient to meet the company's cash requirements beyond the
next year. See Note 7 to the Consolidated Financial Statements for additional
disclosures regarding the company's debt instruments.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock Exchange.
There is no principal market for Class B common shares. The company also has an
authorized class of 60,000 preferred shares with no par value. As of November
12, 2002, no preferred shares were outstanding and there were no agreements or
commitments with respect to the sale or issuance of these shares, except for
those described in Note 8 to the Consolidated Financial Statements.
The company paid cash dividends of $31,089 in 2002, $32,121 in 2001 and $34,130
in 2000. Dividends per Class A common share were $.44 in each of 2002, 2001 and
2000. Dividends are typically declared each November, February, May and August
and paid in January, April, June and September. Dividends per Class A common
share must be twenty times the dividends per Class B common share and all
dividend payments must be simultaneous. The company has paid dividends each year
since its initial public offering in 1961.
The company repurchased $125,381 of Class A common shares in 2002, $140,816 in
2001 and $101,018 in 2000. Average prices paid per share were $26.23 in 2002,
$21.70 in 2001 and $18.41 in 2000. As of September 30, 2002, the company could
repurchase an additional 4,921 Class A common shares under existing board of
directors' authorizations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The company's consolidated financial statements and notes to consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
12
statements and applying accounting policies require management to make
judgments, estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Critical accounting policies for the company
include revenue recognition, accounting for software licensed to customers,
accounting for long-lived assets and accounting for income taxes.
REVENUE RECOGNITION
Sales of computer hardware and business forms products are recorded when title
passes upon shipment to customers. Revenues from software license fees are
accounted for in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition." The company recognizes revenue when (i) persuasive evidence of an
arrangement exists; (ii) delivery has occurred or services have been rendered;
(iii) the sales price is fixed or determinable; and (iv) collectibility is
reasonably assured. Service revenues, which include computer hardware
maintenance, software support, training, consulting and Web hosting are recorded
ratably over the contract period or as services are performed. The application
of SOP 97-2 requires judgment, including whether a software arrangement includes
multiple elements, and if so, whether vendor-specific objective evidence of fair
value exists for those elements. Software revenues which do not meet the
criteria set forth in Emerging Issues Task Force (EITF) Issue No. 00-3,
"Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use
Software Stored on Another Entity's Hardware," are recorded ratably over the
contract period as services are provided.
SOFTWARE LICENSED TO CUSTOMERS
The company capitalizes certain costs of developing its software products in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." SFAS No. 86 specifies that costs
incurred in creating a computer software product should be charged to expense
when incurred, as research and development, until technological feasibility has
been established for the product. Technological feasibility is established
either by creating a detail program design or a tested working model. Judgment
is required in determining when technological feasibility of a product is
established. The company follows a standard process for developing software
products. This process has five phases; selection, definition, development,
delivery and general customer acceptability (GCA). When using proven technology,
management believes that technological feasibility is established upon the
completion of the definition phase (i.e. detail program design). When using
newer technology, management believes that technological feasibility is
established upon completion of the delivery phase (tested working model). Once
technological feasibility has been established, software development costs are
capitalized until the product is available for general release to customers
(GCA). Software development costs consist primarily of payroll and benefits for
both employees and outside contractors. Upon general release of a software
product, amortization is determined based on the larger of the amounts computed
using (a) the ratio that current gross revenues for each product bears to the
total of current and anticipated future gross revenues for that product or (b)
the straight-line method over the remaining estimated economic life of the
product, ranging from three to seven years.
LONG-LIVED ASSETS
The company has completed numerous business combinations over the years. These
business combinations result in the acquisition of intangible assets and the
recognition of goodwill on the company's consolidated balance sheet. The company
accounts for these assets under the provisions of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
142 requires that goodwill not be amortized, but instead tested for impairment
at least annually. The statement also requires recognized intangible assets with
finite useful lives to be amortized over their useful lives. Long-lived assets,
goodwill and intangible assets are reviewed for impairment annually or whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable from future cash flows. Future cash flows are forecasted based on
management's estimates of future events and could be materially different from
actual cash flows. If the carrying value of an asset is considered impaired, an
impairment charge is recorded for the amount by which the carrying value of the
asset exceeds its fair value.
INCOME TAXES
The company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." The objectives of accounting for income taxes are
to recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the company's financial statements or tax returns.
Judgment is required in assessing the future tax consequences of events that
have been recognized in the company's financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could
materially impact the company's financial position or its results of operations.
13
PRINCIPAL CONTRACTUAL OBLIGATIONS
--------------------------------------------------------
Payments Due by Period
--------------------------------------------------------
Less than More than
Total 1 Year 1-3 Years 4-5 Years 5 Years
-----------------------------------------------------------------------
Long-Term Debt
Automotive Solutions $106,061 $ 6,061 $ 0 $100,000 $ 0
Financial Services $217,252 $36,733 $ 80,519 $ 50,000 $ 50,000
Operating Leases $ 39,196 $ 8,481 $ 12,467 $ 6,265 $ 11,983
Computer Services Agreement $134,435 $19,205 $ 38,410 $ 38,410 $ 38,410
-----------------------------------------------------------------------
Total Contractual Obligations $496,944 $70,480 $131,396 $194,675 $100,393
=======================================================================
Under terms of the May 2000, HAC Group, LLC purchase agreement, an additional
$60,000 of purchase price was contingent on the operating results of the
business purchased. Management does not believe that any payments will be
required under this agreement, which expires in fiscal year 2003.
PRINCIPAL COMMERCIAL COMMITMENTS
---------------------------------------------------------
Amount of Commitment Expiration Per Period
---------------------------------------------------------
Total
Amounts Less than More than
Committed 1 Year 1-3 Years 4-5 Years 5 Years
----------------------------------------------------------------------
Line of credit $150,000 $150,000
Guarantee of nonconsolidated entity debt $ 23,000 $ 23,000
----------------------------------------------------------------------
Total Commercial Commitments $173,000 $0 $173,000 $0 $0
======================================================================
MARKET RISKS
INTEREST RATES
The Automotive Solutions portion of the business borrows money, as needed,
primarily to fund business combinations. Generally the company borrows under
fixed rate agreements with terms of ten years or less. During fiscal year 2002,
the company entered into $100,000 of interest rate swap agreements that
effectively converted 7% fixed rate debt into variable rate debt which averaged
4.3% in fiscal year 2003. These interest rate swap agreements were designated as
fair value hedges.
The Financial Services segment of the business, including Reyna Funding, L.L.C.,
an affiliate of the company, obtains borrowings to fund the investment in
finance receivables. These fixed rate receivables generally have repayment terms
of five years. The company funds finance receivables with debt that has
repayment terms consistent with the maturities of the finance receivables.
Generally the company attempts to lock in the interest spread on the fixed rate
finance receivables by borrowing under fixed rate agreements or using interest
rate management agreements to manage variable interest rate exposure. Management
believes that over time it has reduced interest expense by using interest rate
management agreements and variable rate debt instead of directly obtaining fixed
rate debt. The company does not use financial instruments for trading purposes.
During fiscal year 2002, Reyna Funding, L.L.C., an affiliate of the company,
entered into $100,000 of interest rate swaps in connection with obtaining
$100,000 of variable rate debt. See Note 7 to the Consolidated Financial
Statements for additional discussion of interest rate management agreements.
Because fixed rate finance receivables are primarily funded with fixed rate debt
or its equivalent (variable rate debt that has been fixed with interest rate
swaps), management believes that a one percentage point move in interest rates
would not have a material effect on the company's financial statements. See Note
7 to the Consolidated Financial Statements for additional disclosures regarding
the company's debt instruments and interest rate management agreements.
14
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations, primarily in Canada, which accounted
for 6% of net sales and revenues in 2002. In the conduct of its foreign
operations, the company has intercompany sales, expenses and loans between the
U.S. and Canada and may receive dividends denominated in different currencies.
These transactions expose the company to changes in foreign currency exchange
rates. At September 30, 2002, the company had no foreign currency exchange
contracts outstanding. Based on the company's overall foreign currency exchange
rate exposure at September 30, 2002, management believes that a 10% change in
currency rates would not have a material effect on the company's financial
statements.
ENVIRONMENTAL MATTERS
See Note 13 to the Consolidated Financial Statements for a discussion of the
company's environmental contingencies.
ACCOUNTING STANDARDS
See Note 15 to the Consolidated Financial Statements for a discussion of the
effect of accounting standards that the company has not yet adopted.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this Management's Discussion and Analysis of the Financial
Condition and Results of Operations constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on current expectations, estimates,
forecasts and projections of future company or industry performance based on
management's judgment, beliefs, current trends and market conditions.
Forward-looking statements made by the company may be identified by the use of
words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions. Forward-looking statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict. Actual outcomes and results may
differ materially from what is expressed, forecasted or implied in any
forward-looking statement. The company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise. See also the discussion of factors that may affect future
results contained in the company's Current Report on Form 8-K filed with the SEC
on August 11, 2000, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risks" section in Management Discussion and Analysis (Part II, Item
7 of this report on page 14).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 15 of Part IV
(page 18) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, background information and business experience for each of the
company's directors and nominees are incorporated herein by reference to the
section of the company's Proxy Statement for its 2003 Annual Meeting of
Shareholders captioned "PROPOSAL I - ELECTION OF DIRECTORS."
15
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the company are elected by the Board of Directors at
its meeting immediately following the Annual Meeting of Shareholders to serve
generally for a term of one year. The executive officers of the company, as of
December 2, 2002, are:
NAME AGE POSITION
- ---- --- --------
Lloyd G. Waterhouse 51 Chief Executive Officer, Chairman and President
Dale L. Medford 52 Executive Vice President and Chief Financial Officer,
and Director
Douglas M. Ventura 42 Vice President Business Development, General Counsel
and Secretary
Michael J. Gapinski 52 Treasurer and Assistant Secretary
A description of prior positions held by executive officers of the company
within the past 5 years, to the extent applicable, is as follows:
Mr. Waterhouse has been Chief Executive Officer, Chairman and President since
January 2002; prior thereto President and Chief Executive Officer from November
2000 to January 2002; prior thereto President and Chief Operating Officer from
May 1999 to November 2000; prior thereto General Manager of E-Business Services
for IBM Corporation from July 1998 to May 1999; and prior thereto General
Manager of Marketing & Business Development for IBM Global Services from 1996 to
July 1998.
Mr. Ventura has been Vice President Business Development, General Counsel and
Secretary since June 2002; prior thereto Vice President Alliances and
Acquisitions, General Counsel and Secretary from January 2002 to June 2002;
prior thereto, General Counsel and Secretary from September 2000 to January
2002; prior thereto was Associate General Counsel and Assistant Secretary from
September 1996 to September 2000.
All other executive officers of the company have held their positions for at
least 5 years.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Compliance with the filings required under Section 16(a) of the Securities
Exchange Act of 1934 is herein incorporated by reference to the section of the
company's Proxy Statement for its 2003 Annual Meeting of Shareholders captioned
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE."
ITEM 11. EXECUTIVE COMPENSATION
Information on compensation of the company's executive officers and directors is
incorporated herein by reference to the section of the company's Proxy Statement
for its 2003 Annual Meeting of Shareholders captioned "EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The number of Common Shares of the company beneficially owned by each five
percent shareholder, director or current nominee for director, officer and by
all directors and officers as a group as of December 1, 2002 is incorporated
herein by reference to the section of the company's Proxy Statement for its 2003
Annual Meeting of Shareholders captioned "STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
The following table sets forth certain information regarding compensation plans
under which the company's equity securities have been authorized for issuance.
16
EQUITY COMPENSATION PLAN INFORMATION
(In thousands except per share data)
- ------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
in column [a])
- ------------------------------------------------------------------------------------------------------------------------
Equity 7,632 20.00 3,308(1)
compensation plans approved by
shareholders
- ------------------------------------------------------------------------------------------------------------------------
Equity
compensation plans not 5,443 20.05 (2)
approved by shareholders
- ------------------------------------------------------------------------------------------------------------------------
TOTAL 13,075 20.02 3,308
- ------------------------------------------------------------------------------------------------------------------------
(1) The total number of Class A Common Shares ("Shares") authorized for issuance
under the company's Stock Option Plan - 1995 (which was approved by the
company's shareholders) is 1,000 Shares plus an amount each year equal to the
lesser of (i) two percent of the company's total issued and outstanding Shares
as of October 1 of each full or partial company fiscal year during which the
plan is in effect beginning October 1, 1995 or (ii) 834.
(2) The number of Class A Common Shares authorized for issuance under the
company's 2001 Shares Plan (which was not approved by the company's
shareholders) is determined on or about October 1 of each year by the company's
board of directors in its sole discretion. The number of shares authorized for
issuance during the year beginning October 1, 2002 was 984 shares.
Following are the features of the equity compensation plans not approved by
shareholders:
2001 SHARES PLAN
On August 7, 2001, the company's board of directors approved the 2001 Shares
Plan. The plan was not approved by our shareholders. The purpose of the plan is
to provide employees with an additional incentive to contribute to the company's
success and to assist it in attracting and retaining the best personnel. The
plan provides for the granting of non-qualified stock options to full-time
employees and part-time, benefits-eligible employees who are not eligible to
participate in any other stock option plans. (The directors and key employees of
the company participate in the Stock Option Plan - 1995, which was approved by
our shareholders, and, therefore, they do not participate in this plan.)
Pursuant to the plan, each year the Board of Directors determines the number of
shares which may be issued upon the exercise of options to be granted on October
1 (or such other date determined by the Board) for the fiscal year under
consideration. The 2001 Shares Committee, which consists of persons appointed by
the Board who are not eligible to participate in the plan, has the authority to
select the employees to receive stock options under the plan, determine the
number of shares to be subject to the options granted, and determine the terms
and conditions of the options granted including, without limitation, the option
price. Each option is evidenced by an option certificate which sets forth the
terms and conditions of the particular option as determined by the Committee.
Unless the Committee determines otherwise, the exercise price per share subject
to the option is the fair market value of our common stock on the date of grant,
and the option is exercisable on and after the third anniversary of the date of
grant provided that the employee has been continuously employed by us since the
date of grant. Certain exceptions may be made by the Committee in the event the
employee dies, retires or is terminated for reasons other than for cause. No
option may have a term of more than ten years. The Committee has determined that
for options granted on or after October 1, 2002, such options will be
exercisable on and after the second anniversary (rather than the third
anniversary) of the date of grant and that the term of such options will be
seven years (rather than ten years). The plan expires on September 30, 2006 but
may be earlier terminated or modified by the Committee or the Board of
Directors, but no termination or modification of the plan or any option granted
may adversely affect any stock option previously granted under the plan without
the consent of the plan participant.
17
1996 SHARES PLAN
On August 6, 1996, the board of directors adopted the 1996 Shares Plan. This
plan was not approved by the company's shareholders. The terms of the plan are
substantially similar to the terms of the 2001 Shares Plan described above. The
plan expired on September 30, 2001. Accordingly, no new stock options may be
granted under the plan. The options granted under the plan had a term of ten
years. Therefore, options issued under the plan remain outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning transactions with management, certain business
relationships and indebtedness of management is incorporated herein by reference
to the section of the company's Proxy Statement for its 2003 Annual Meeting of
Shareholders captioned "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
ITEM 14. CONTROLS AND PROCEDURES
Reynolds management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this annual report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
PART IV
(Dollars in thousands)
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following consolidated financial statements of the company are set
forth on pages 31-54.
Statements of Consolidated Income - For The Years Ended
September 30, 2002, 2001 and 2000
Consolidated Balance Sheets - September 30, 2002 and 2001
Statements of Consolidated Shareholders' Equity and Comprehensive
Income - For The Years Ended September 30, 2002, 2001 and 2000
Statements of Condensed Consolidated Cash Flows - For the Years Ended
September 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements (Including Supplementary
Data)
(a) (2) FINANCIAL STATEMENT SCHEDULES FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 2002 ARE ATTACHED HERETO:
Schedule II Valuation Accounts Page 55
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
18
(a) (3) EXHIBITS
- ------------------------------------------------------------------------------------------------------------
Exhibit No. Item
- ------------------------------------------------------------------------------------------------------------
(3)(a) Amended Articles of Incorporation, Restatement effective February 9, 1995; incorporated
by reference to Exhibit A of the company's definitive proxy statement dated January 5,
1995 filed with the Securities and Exchange Commission.
- ------------------------------------------------------------------------------------------------------------
(3)(b) Amendment to Amended and Restated Articles of Incorporation, effective April 25, 1997;
incorporated by reference to Exhibit 2 of the company's Form 8A/A dated October 20, 1998
filed with the Securities and Exchange Commission.
- ------------------------------------------------------------------------------------------------------------
(3)(c) Amendment to Amended and Restated Articles of Incorporation, effective April 18, 2001;
incorporated by reference to Exhibit (3)(c) to Form 10-K for the fiscal year ended
September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(3)(d) Amended and Restated Consolidated Code of Regulations; incorporated by reference to
Exhibit A to the company's definitive proxy statement dated January 8, 2001 filed with
the Securities and Exchange Commission.
- ------------------------------------------------------------------------------------------------------------
(4)(a) Copies of the agreements relating to long-term debt, which are not required as exhibits
to this Form 10-K, will be provided to the Securities and Exchange Commission upon
request.
- ------------------------------------------------------------------------------------------------------------
(4)(b) Amended and Restated Rights Agreement between The Reynolds and Reynolds Company and
Mellon Investor Services, L.L.C. as Rights Agent dated as of December 1, 2001;
incorporated by reference to Exhibit (4)(b) to Form 10-K for the fiscal year ended
September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(9) Not applicable.
- ------------------------------------------------------------------------------------------------------------
(10)(c)* Amended and Restated Employment Agreement with Lloyd G. Waterhouse, as of December 1,
2001; incorporated by reference to Exhibit (10)(c) to Form 10-K for the fiscal year
ended September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(10)(d)* Employment Agreement with Dale L. Medford dated as of May 7, 2001; incorporated by
reference to Exhibit (10)(d) to Form 10-K for the fiscal year ended September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(10)(e)* Employment Agreement with Timothy J. Bailey dated as of December 1, 2001; incorporated
by reference to Exhibit (10)(e) to Form 10-K for the fiscal year ended September 30,
2001.
- ------------------------------------------------------------------------------------------------------------
(10)(f)* Employment Agreement with Douglas M. Ventura dated as of December 1, 2001; incorporated
by reference to Exhibit (10)(f) to Form 10-K for the fiscal year ended September 30,
2001.
- ------------------------------------------------------------------------------------------------------------
(10)(g)* Change in Control Agreement with Paul S. Guthrie dated as of June 28, 2002.
- ------------------------------------------------------------------------------------------------------------
(10)(h)* Amended and Restated Employment Agreement with Robert C. Nevin dated as of February 1,
1997; incorporated by reference to Exhibit (10)(b) to Form 10-K for the fiscal year
ended September 30, 1997.
- ------------------------------------------------------------------------------------------------------------
(10)(i)* Employment Agreement with Rodney A. Hedeen dated February 1, 1997; incorporated by
reference to Exhibit (10)(e) to Form 10-K for the fiscal year ended September 30, 1997.
- ------------------------------------------------------------------------------------------------------------
(10)(j)* General form of Indemnification Agreement between the company and each of its directors
dated as of August, 6, 2002.
- ------------------------------------------------------------------------------------------------------------
(10)(k)* Amended and Restated Stock Option Plan -- 1989, effective November 13, 2001;
incorporated by reference to Exhibit (10)(k) to Form 10-K for the fiscal year ended
September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(10)(l)* Restated Stock Option Plan - 1995, effective November 13, 2001; incorporated by
reference to Exhibit (10)(k) to Form 10-K for the fiscal year ended September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(10)(m)* 1996 Shares Plan, adopted August 6, 1996 and filed with the SEC as Exhibit 4(e) to Form
S-8 filed on August 13, 1999.
- ------------------------------------------------------------------------------------------------------------
(10)(n)* 2001 Shares Plan, adopted August 7, 2001 and filed with the SEC as Exhibit 4(g) to Form
S-8 filed on October 1, 2001.
- ------------------------------------------------------------------------------------------------------------
(10)(o)* The Reynolds and Reynolds Company Supplemental Retirement Plan; incorporated by
reference to Exhibit (10)(G) to Form 10-K for the fiscal year ended September 30, 1980.
- ------------------------------------------------------------------------------------------------------------
19
- ------------------------------------------------------------------------------------------------------------
Exhibit No. Item
- ------------------------------------------------------------------------------------------------------------
(10)(p)* The Reynolds and Reynolds Company Supplemental Retirement Plan; Amendment No. 2,
adopted on August 17, 1982; incorporated by reference to Exhibit (10)(j) to Form 10-K
for the fiscal year ended September 30, 1982.
- ------------------------------------------------------------------------------------------------------------
(10)(q)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 3,
adopted on August 16, 1983; incorporated by reference to Exhibit (10)(j) to Form 10-K
for the fiscal year ended September 30, 1983.
- ------------------------------------------------------------------------------------------------------------
(10)(r)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 4,
adopted on November 6, 1984; incorporated by reference to Exhibit (10)(l) to Form 10-K
for the fiscal year ended September 30, 1984.
- ------------------------------------------------------------------------------------------------------------
(10)(s)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 5,
adopted on May 13, 1985; incorporated by reference to Exhibit (10)(s) to Form 10-K for
the fiscal year ended September 30, 1985.
- ------------------------------------------------------------------------------------------------------------
(10)(t)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 6,
adopted on February 11, 1986; incorporated by reference to Exhibit (10)(r) to Form 10-K
for the fiscal year ended September 30, 1986.
- ------------------------------------------------------------------------------------------------------------
(10)(u)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 7,
adopted on August 12, 1986; incorporated by reference to Exhibit (10)(s) to Form 10-K
for the fiscal year ended September 30, 1986.
- ------------------------------------------------------------------------------------------------------------
(10)(v)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 8,
adopted on February 10, 1987; incorporated by reference to Exhibit (10)(s) to Form 10-K
for the fiscal year ended September 30, 1987.
- ------------------------------------------------------------------------------------------------------------
(10)(w)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 9,
adopted on August 11, 1987; incorporated by reference to Exhibit (10)(t) to Form 10-K
for the fiscal year ended September 30, 1987.
- ------------------------------------------------------------------------------------------------------------
(10)(x)* The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 10,
adopted on May 8, 1989; incorporated by reference to Exhibit (10)(dd) to Form 10-K for
the fiscal year ended September 30, 1989.
- ------------------------------------------------------------------------------------------------------------
(10)(y)* The Reynolds and Reynolds Company Restated Supplemental Retirement Plan adopted
November 9, 1988; incorporated by reference to Exhibit (10)(ee) to Form 10-K for the
fiscal year ended September 30, 1989.
- ------------------------------------------------------------------------------------------------------------
(10)(z)* Resolution of the Board of Directors amending The Reynolds and Reynolds Company
Supplemental Retirement Plan dated as of December 1, 1989; incorporated by reference to
Exhibit (10)(ff) to Form 10-K for the fiscal year ended September 30, 1989.
- ------------------------------------------------------------------------------------------------------------
(10)(aa)* Resolution of the Board of Directors amending The Reynolds and Reynolds Company
Supplemental Retirement Plan (Amendment No. 1), dated as of November 13, 1990;
incorporated by reference to Exhibit (10)(ff) to Form 10-K for the fiscal year ended
September 30, 1990.
- ------------------------------------------------------------------------------------------------------------
(10)(bb)* Resolution of the Board of Directors amending The Reynolds and Reynolds Company
Supplemental Retirement Plan (Amendment No. 2), dated as of July 23, 1991; incorporated
by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30,
1991.
- ------------------------------------------------------------------------------------------------------------
(10)(cc)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 3, adopted
August 8, 1995; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the
fiscal year ended September 30, 1995.
- ------------------------------------------------------------------------------------------------------------
(10)(dd)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 4, adopted
March 14, 1997; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the
fiscal year ended September 30, 1997.
- ------------------------------------------------------------------------------------------------------------
(10)(ee)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 5, adopted
November 12, 2001; incorporated by reference to Exhibit (10)(cc) to Form 10-K for the
fiscal year ended September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(10)(ff)* Description of The Reynolds and Reynolds Company Annual Incentive Compensation Plan
adopted as of October 1, 1986; incorporated by reference to Exhibit (10)(t) to Form 10-K
for the fiscal year ended September 30, 1987.
- ------------------------------------------------------------------------------------------------------------
20
- ------------------------------------------------------------------------------------------------------------
Exhibit No. Item
- ------------------------------------------------------------------------------------------------------------
(10)(gg)* Description of The Reynolds and Reynolds Company Amended and Restated Annual Incentive
Compensation Plan effective October 1, 1995; incorporated by reference to (10)(ff) to
Form 10-K for the fiscal year ended September 30, 1995.
- ------------------------------------------------------------------------------------------------------------
(10)(hh)* A performance-based incentive compensation plan for the Chief Executive Officer and those
other officers permitted under Internal Revenue Code Section 162(m) incorporated by
reference to Proposal II within the company's definitive proxy statement dated January 4,
2000 filed with the Securities and Exchange Commission.
- ------------------------------------------------------------------------------------------------------------
(10)(ii)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds
Company Salaried Retirement Plan) October 1, 1995 Restatement; incorporated by reference
to Exhibit (10)(ii) to Form 10-K for the fiscal year ended September 30, 1995.
- ------------------------------------------------------------------------------------------------------------
(10)(jj)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds
Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 1, adopted
December 19, 1996; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the
fiscal year ended September 30, 1997.
- ------------------------------------------------------------------------------------------------------------
(10)(kk)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds
Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 2, adopted
August 11, 1997; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the
fiscal year ended September 30, 1997.
- ------------------------------------------------------------------------------------------------------------
(10)(ll)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds
Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 3, adopted
September 22, 1998, as filed herewith; incorporated by reference to Exhibit (10)(oo) to
Form 10-K for the fiscal year ended September 30, 1998.
- ------------------------------------------------------------------------------------------------------------
(10)(mm)* General Form of Deferred Compensation Agreement between the company and each of the
following officers: R. H. Grant, III, David R. Holmes and Dale L. Medford; incorporated
by reference to Exhibit (10)(p) to Form 10-K for the fiscal year ended September 30,
1983.
- ------------------------------------------------------------------------------------------------------------
(10)(nn)* Resolution of the Board of Directors and General Form of Amendment dated December 1, 1989
to the Deferred Compensation Agreements between the company and each of the following
officers: David R. Holmes, Dale L. Medford and Daniel W. Dittman; incorporated by
reference to Exhibit (10)(fff) to Form 10-K for the fiscal year ended September 30, 1989.
- ------------------------------------------------------------------------------------------------------------
(10)(oo)* General Form of Collateral Assignment Split-Dollar Insurance Agreement and Policy and
Non-Qualified Compensation and Disability Benefit Agreement between the company and each
of the following officers: Michael J. Gapinski and Dale L. Medford; incorporated by
reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1985.
- ------------------------------------------------------------------------------------------------------------
(10)(pp)* Resolution of the Board of Directors and General Form of Amendment dated December
1, 1989 to the Non-Qualified Compensation and Disability Benefit between the company and
each of the following officers: Michael J. Gapinski and Dale L. Medford; incorporated by
reference to Exhibit (10)(hhh) to Form 10-K for the fiscal year ended September 30, 1989.
- ------------------------------------------------------------------------------------------------------------
(10)(qq)* General Form of Non-Qualified Deferred Compensation and Disability Agreement between
the Company and each of its officers effective December 1, 2001; incorporated by
reference to Exhibit (10)(qq) of Form 10-K for fiscal year ended September 30, 2001.
- ------------------------------------------------------------------------------------------------------------
(10)(rr) Agreement dated March 11, 1963, between the company and Richard H. Grant, Jr.,
restricting transfer of Class B Common Stock of the company; incorporated by reference
to Exhibit 9 to Registration Statement No. 2-40237 on Form S-7.
- ------------------------------------------------------------------------------------------------------------
(10)(ss) Amendment dated February 14, 1984 to Richard H. Grant, Jr.'s Agreement restricting
transfer of Class B Common Stock of the company dated March 11, 1963; incorporated by
reference to Exhibit (10)(u) to Form 10-K for the fiscal year ended September 30, 1984.
- ------------------------------------------------------------------------------------------------------------
(11) Not applicable
- ------------------------------------------------------------------------------------------------------------
21
- ------------------------------------------------------------------------------------------------------------
Exhibit No. Item
- ------------------------------------------------------------------------------------------------------------
(12) Not applicable
- ------------------------------------------------------------------------------------------------------------
(13) Not applicable
- ------------------------------------------------------------------------------------------------------------
(18) Not applicable
- ------------------------------------------------------------------------------------------------------------
(21) List of subsidiaries (See Page 80)
- ------------------------------------------------------------------------------------------------------------
(22) Not applicable
- ------------------------------------------------------------------------------------------------------------
(23) Consent of Independent Auditors (See Page 30)
- ------------------------------------------------------------------------------------------------------------
(24) Not Applicable
- ------------------------------------------------------------------------------------------------------------
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- ------------------------------------------------------------------------------------------------------------
(99.2) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- ------------------------------------------------------------------------------------------------------------
* Contracts or compensatory plans or arrangements
required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.
(b) REPORTS ON FORM 8-K
During the quarter ended September 30, 2002, no reports on Form 8-K were filed.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
Please refer to Part IV, Item 15(a)(3) beginning on page 19.
(d) CONSOLIDATED FINANCIAL STATEMENTS
Individual financial statements and schedules of the company's consolidated
subsidiaries are omitted from this Annual Report on Form 10-K because
consolidated financial statements and schedules are submitted and because the
registrant is primarily an operating company and all subsidiaries included in
the consolidated financial statements are wholly owned.
- --------------------------------------------------------------------------------
The Company provides free of charge access to our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and other SEC filings, through our website, www.reyrey.com, as soon as
reasonably practicable after such reports are electronically filed with
the SEC.
The Company will also provide free of charge a copy of its 2002 Annual
Report to Shareholders upon written request to:
DOUGLAS M. VENTURA, VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
THE REYNOLDS AND REYNOLDS COMPANY
P. O. BOX 2608
DAYTON, OHIO 45401
Or by calling: 1-888-4REYREY (473-9739)
- --------------------------------------------------------------------------------
22
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE REYNOLDS AND REYNOLDS COMPANY
By /s/ DOUGLAS M. VENTURA
---------------------------------------------------
DOUGLAS M. VENTURA
Vice President, General Counsel and Secretary
Date: December 13, 2002
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: December 13, 2002
By /s/ LLOYD G. WATERHOUSE
---------------------------------------------------
LLOYD G. WATERHOUSE
Chief Executive Officer, Chairman and President
(Principal Executive Officer)
Date: December 13, 2002
By /s/ DALE L. MEDFORD
---------------------------------------------------
DALE L. MEDFORD
Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer) and Director
Date: December 13, 2002
By /s/ JAMES L. ARTHUR
---------------------------------------------------
JAMES L. ARTHUR, Director
Date: December 13, 2002
By /s/ STEPHANIE W. BERGERON
---------------------------------------------------
STEPHANIE W. BERGERON, Director
Date: December 13, 2002
By /s/ DR. DAVID E. FRY
---------------------------------------------------
DR. DAVID E. FRY, Director
23
Date: December 13, 2002
By /s/ RICHARD H. GRANT, III
---------------------------------------------------
RICHARD H. GRANT, III, Director
Date: December 13, 2002
By /s/ IRA D. HALL
---------------------------------------------------
IRA D. HALL, Director
Date: December 13, 2002
By /s/ CLEVE L. KILLINGSWORTH, JR.,
---------------------------------------------------
CLEVE L. KILLINGSWORTH, JR.
Director
Date: December 13, 2002
By /s/ EUSTACE W. MITA
---------------------------------------------------
EUSTACE W. MITA, Director
Date: December 13, 2002
By /s/ PHILIP A. ODEEN
---------------------------------------------------
PHILIP A. ODEEN, Director
Date: December 13, 2002
By /s/ DONALD K. PETERSON
---------------------------------------------------
DONALD K. PETERSON, Director
24
CERTIFICATION
I, Lloyd G. Waterhouse, principal executive officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Reynolds and
Reynolds Company.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date December 13, 2002 /s/ Lloyd G. Waterhouse
-------------------- -----------------------------------------------
Lloyd G. Waterhouse
Chief Executive Officer, Chairman and President
25
CERTIFICATION
I, Dale L. Medford, principal financial officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Reynolds and
Reynolds Company.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date December 13, 2002 /s/ Dale L. Medford
-------------------- -----------------------------------------------
Dale L. Medford
Executive Vice President and Chief Financial Officer
26
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2); 14(c) and (d)
Financial Statements, Schedules and Exhibits
Year Ended September 30, 2002
The Reynolds and Reynolds Company
Dayton, Ohio
27
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
To Our Shareholders:
The management of The Reynolds and Reynolds Company is responsible for
accurately and objectively preparing the company's consolidated financial
statements. These statements are prepared in accordance with accounting
principles generally accepted in the United States of America and include
amounts based on management's best estimates and judgments. Management believes
that the financial information in this annual report is free from material
misstatement.
The company's management maintains an environment of multilevel controls. The
Company Business Principles, for example, is distributed to all employees and
communicates high standards of integrity that are expected in the company's
day-to-day business activities. The Company Business Principles addresses a
broad range of issues including potential conflicts of interest, business
relationships, accurate and timely reporting of financial information,
confidentiality of proprietary information, insider trading and social
responsibility.
The company also maintains and monitors a system of internal controls designed
to provide reasonable assurances regarding the safeguarding of company assets
and the integrity and reliability of financial records. These internal controls
include the appropriate segregation of duties and the application of formal
policies and procedures. Furthermore, an internal audit department, which has
access to all financial and other corporate records, regularly performs tests to
evaluate the system of internal controls to ensure the system is adequate and
operating effectively. At the date of these financial statements, management
believes the company has an effective internal control system.
The company's independent auditors, Deloitte & Touche LLP, perform an
independent audit of the company's consolidated financial statements. They have
access to minutes of board meetings, all financial information and other
corporate records. Their audit is conducted in accordance with auditing
standards generally accepted in the United States of America and includes
consideration of the system of internal controls. Their report is included in
this annual report.
Another level of control resides with the audit committee of the company's board
of directors. The committee, comprised of five directors who are not members of
management, oversees the company's financial reporting process. They recommend
to the board, subject to shareholder approval, the selection of the company's
independent auditors. They discuss the overall audit scope and the specific
audit plans with the independent auditors and the internal auditors. This
committee also meets regularly (separately and jointly) with the independent
auditors, the internal auditors and management to discuss the results of those
audits, the evaluation of internal controls, the quality of financial reporting
and specific accounting and reporting issues.
Lloyd G. "Buzz" Waterhouse Dale L. Medford
Chief Executive Officer, Chairman and President Executive Vice President
and Chief Financial Officer
28
INDEPENDENT AUDITORS' REPORT
To the Shareholders of The Reynolds and Reynolds Company:
We have audited the accompanying consolidated balance sheets of The Reynolds and
Reynolds Company and its subsidiaries as of September 30, 2002 and 2001, and the
related statements of consolidated income, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended September 30, 2002. Our audits also included the financial statement
schedule included as Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Reynolds and Reynolds Company
and its subsidiaries at September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 14 to the financial statements, in 2002, the Company
changed its method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standards No. 142.
DELOITTE & TOUCHE LLP
Dayton, Ohio
November 12, 2002
29
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in The Reynolds and Reynolds
Company (1) Registration Statement No. 33-56045 on Form S-8, (2) Post-Effective
Amendment No. 1 to Registration Statement No. 333-12681 on Form S-8, (3)
Registration Statement No. 333-16583 on Form S-3, (4) Registration Statement No.
333-18585 on Form S-3, (5) Registration Statement No. 333-41983 on Form S-3, (6)
Registration Statement No. 333-41985 on Form S-3, (7) Post-Effective Amendment
No. 1 to Registration Statement No. 33-51895 on Form S-3, (8) Post-Effective
Amendment No. 1 to Registration Statement No. 33-58877 on Form S-3, (9)
Pre-Effective Amendment No. 1 to Registration Statement No. 33-61725 on Form
S-3, (10) Registration Statement No. 33-59615 on Form S-3, (11) Registration
Statement No. 33-59617 on Form S-3, (12) Registration Statement No. 333-12967 on
Form S-3, (13) Registration Statement No. 333-72639 on Form S-3, (14)
Registration Statement No. 333-85177 on Form S-8, (15) Registration Statement
No. 333-85179 on Form S-8, (16) Registration Statement No. 333-85551 on Form
S-8, (17) Registration Statement No. 333-94687 on Form S-3, (18) Registration
Statement No. 333-30090 on Form S-8, (19) Registration Statement No. 333-53798
on Form S-3, (20) Registration Statement No. 333-57272 on Form S-8, (21)
Registration Statement No. 333-70630 on Form S-8, and (22) Registration
Statement No. 333-86780 on Form S-8 of our report dated November 12, 2002,
appearing in this Annual Report on Form 10-K of The Reynolds and Reynolds
Company for the year ended September 30, 2002, and to the reference to Deloitte
& Touche LLP under the heading "Experts" in the respective Prospectuses, which
is part of each of the above Registration Statements.
DELOITTE & TOUCHE LLP
Dayton, Ohio
December 13, 2002
30
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share data)
For The Years Ended September 30 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Net Sales and Revenues
Services $604,191 $ 600,681 $535,372
Products 346,483 361,413 379,109
Financial services 41,709 41,918 40,206
-------- ---------- --------
Total net sales and revenues 992,383 1,004,012 954,687
-------- ---------- --------
Cost of sales
Services 211,014 220,721 203,311
Products 192,077 203,933 212,433
Financial services 10,645 13,258 14,224
-------- ---------- --------
Total cost of sales 413,736 437,912 429,968
-------- ---------- --------
Gross profit 578,647 566,100 524,719
Selling, general and administrative expenses 400,120 394,368 358,950
Restructuring charges 10,560
-------- ---------- --------
Operating Income 178,527 171,732 155,209
-------- ---------- --------
Other Charges (Income)
Interest expense 4,126 5,303 7,441
Interest income (3,848) (7,818) (6,736)
Equity in net losses of affiliated companies 13,201 13,019 4,416
Other - net 100 (1,296) (54)
-------- ---------- --------
Total other charges 13,579 9,208 5,067
-------- ---------- --------
Income Before Income Taxes 164,948 162,524 150,142
Income Taxes 49,396 64,590 61,702
-------- ---------- --------
Income from Continuing Operations 115,552 97,934 88,440
Income from Discontinued Operations 1,623 28,156
-------- ---------- --------
Income Before Cumulative Effect of Accounting Change 115,552 99,557 116,596
Cumulative Effect of Accounting Change (36,563)
-------- ---------- --------
Net Income $ 78,989 $ 99,557 $116,596
======== ========== ========
Basic Earnings Per Common Share
Income from continuing operations $ 1.63 $ 1.34 $ 1.14
Income from discontinued operations $ .02 $ .36
Income before cumulative effect of accounting change $ 1.63 $ 1.36 $ 1.50
Cumulative effect of accounting change ($.52)
Net income $ 1.12 $ 1.36 $ 1.50
Average number of common shares outstanding 70,692 73,183 77,474
Diluted Earnings Per Common Share
Income from continuing operations $ 1.58 $ 1.31 $ 1.11
Income from discontinued operations $ .02 $ .35
Income before cumulative effect of accounting change $ 1.58 $ 1.33 $ 1.47
Cumulative effect of accounting change ($.50)
Net income $ 1.08 $ 1.33 $ 1.47
Average number of common shares and
equivalents outstanding 73,357 74,919 79,499
See Notes to Consolidated Financial Statements.
31
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 2002 2001
- ---------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS ASSETS
---------------------------
Current Assets
Cash and equivalents $ 155,295 $ 110,511
---------- ----------
Accounts receivable (less allowance for
doubtful accounts: 2002--$4,902;
2001--$3,662) 117,471 124,954
---------- ----------
Inventories
Finished products 12,539 10,271
Work in process 365 398
Raw materials and supplies 163 177
---------- ----------
Total inventories 13,067 10,846
---------- ----------
Deferred income taxes 15,575 24,348
---------- ----------
Prepaid expenses and other assets 16,395 16,465
---------- ----------
Total current assets 317,803 287,124
---------- ----------
Property, Plant and Equipment
Land and improvements 15,641 9,921
Buildings and improvements 109,809 64,668
Computer equipment 105,255 135,256
Machinery and equipment 40,666 42,004
Furniture and other 42,883 34,405
Construction in progress 6,377 51,859
---------- ----------
Total property, plant and equipment 320,631 338,113
Less accumulated depreciation 159,558 179,062
---------- ----------
Net property, plant and equipment 161,073 159,051
---------- ----------
Intangible Assets
Goodwill 28,999 34,663
Software licensed to customers 81,557 59,690
Acquired intangible assets 44,366 102,018
Other 3,382 5,244
---------- ----------
Total intangible assets 158,304 201,615
---------- ----------
Other Assets 92,380 84,283
---------- ----------
Total Automotive Solutions Assets 729,560 732,073
---------- ----------
FINANCIAL SERVICES ASSETS
-------------------------
Cash 635 441
Finance Receivables 406,160 421,370
Other Assets 810 523
---------- ----------
Total Financial Services Assets 407,605 422,334
---------- ----------
TOTAL ASSETS $1,137,165 $1,154,407
========== ==========
September 30 2002 2001
- --------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS LIABILITIES
--------------------------------
Current Liabilities
Current portion of long-term debt $ 6,061 $ 6,061
Accounts payable
Trade 41,186 41,258
Other 3,958 3,380
Accrued liabilities
Compensation and related items 52,599 43,321
Income taxes 316 19,018
Other 28,945 28,519
Deferred revenues 24,404 18,362
---------- ----------
Total current liabilities 157,469 159,919
---------- ----------
Long-Term Debt 107,408 105,805
---------- ----------
Other Liabilities
Pensions 49,932 56,192
Postretirement medical 43,471 42,742
Other 3,085 5,066
---------- ----------
Total other liabilities 96,488 104,000
---------- ----------
Total Automotive Solutions Liabilities 361,365 369,724
---------- ----------
FINANCIAL SERVICES LIABILITIES
------------------------------
Notes Payable 217,252 203,512
Deferred Income Taxes 94,543 96,812
Other Liabilities 8,979 7,576
---------- ----------
Total Financial Services Liabilities 320,774 307,900
---------- ----------
SHAREHOLDERS' EQUITY
--------------------
Capital Stock
Preferred
Class A common 216,518 167,356
Class B common 500 625
Other Comprehensive Losses (14,234) (9,547)
Retained Earnings 252,242 318,349
---------- ----------
Total Shareholders' Equity 455,026 476,783
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,137,165 $1,154,407
========== ==========
See Notes to Consolidated Financial Statements.
32
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands except per share data)
For The Years Ended September 30 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Capital Stock
Class A common
Balance, beginning of year $167,356 $124,247 $ 78,598
Capital stock issued 51,106 44,455 46,842
Converted from Class B common 125
Capital stock repurchased (11,374) (10,968) (5,653)
Capital stock retired (951) (459) (808)
Tax benefits from stock options 10,256 10,081 5,268
-------- -------- --------
Balance, end of year 216,518 167,356 124,247
-------- -------- --------
Class B common
Balance, beginning of year 625 625 625
Converted to Class A common (125)
-------- -------- --------
Balance, end of year 500 625 625
-------- -------- --------
Other Comprehensive Income (Losses)
Balance, beginning of year (9,547) (7,139) (9,448)
Foreign currency translation (186) (1,591) (645)
Minimum pension liability (3,679) 847 2,954
Cumulative effect of accounting change 15
Net unrealized losses on derivative contracts (822) (1,679)
-------- -------- --------
Balance, end of year (14,234) (9,547) (7,139)
-------- -------- --------
Retained Earnings
Balance, beginning of year 318,349 380,761 393,660
Net income 78,989 99,557 116,596
Cash dividends
Class A common (2002--$.44 per share;
2001--$.44 per share; 2000--$.44
per share) (30,715) (31,681) (33,690)
Class B common (2002--$.022 per share;
2001--$.022 per share; 2000--$.022
per share) (374) (440) (440)
Capital stock repurchased (114,007) (129,848) (95,365)
-------- -------- --------
Balance, end of year 252,242 318,349 380,761
-------- -------- --------
Total Shareholders' Equity $455,026 $476,783 $498,494
======== ======== ========
Comprehensive Income
Net income $ 78,989 $ 99,557 $116,596
Foreign currency translation (186) (1,591) (645)
Minimum pension liability (3,679) 847 2,954
Cumulative effect of accounting change 15
Net unrealized losses on derivative contracts (822) (1,679)
-------- -------- --------
Total comprehensive income $ 74,302 $ 97,149 $118,905
======== ======== ========
See Notes to Consolidated Financial Statements.
33
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(In thousands)
For The Years Ended September 30 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided by Operating Activities $ 158,071 $ 165,548 $ 118,948
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Business combinations (5,971) (12,008) (101,635)
Capital expenditures (37,067) (51,383) (65,677)
Net proceeds from sales of assets 9,674 3,770 9,157
Capitalization of software licensed to customers (20,370) (20,310) (20,258)
Repayments from (advances to) financial services 53,817 (4,321) 13,051
--------- --------- ---------
Net cash provided by (used for) investing activities 83 (84,252) (165,362)
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Principal payments on debt (6,869) (7,930) (61,036)
Cash dividends paid (31,089) (32,121) (34,130)
Capital stock issued 50,155 43,996 16,786
Capital stock repurchased (125,381) (140,816) (101,018)
--------- --------- ---------
Net cash used for financing activities (113,184) (136,871) (179,398)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash (186) (1,591) (645)
--------- --------- ---------
Net Cash Provided by (Used for) Discontinued Operations (37,778) 328,317
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents 44,784 (94,944) 101,860
Cash and Equivalents, Beginning of Year 110,511 205,455 103,595
--------- --------- ---------
Cash and Equivalents, End of Year $ 155,295 $ 110,511 $ 205,455
========= ========= =========
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $ 19,457 $ 14,019 $ 20,858
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Finance receivables originated (154,250) (178,268) (132,633)
Collections on finance receivables 175,064 168,577 131,854
--------- --------- ---------
Net cash provided (used for) investing activities 20,814 (9,691) (779)
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 100,000 78,813 63,887
Principal payments on debt (86,260) (87,477) (71,134)
Advances from (repayments to) automotive solutions (53,817) 4,321 (13,051)
--------- --------- ---------
Net cash used for financing activities (40,077) (4,343) (20,298)
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents 194 (15) (219)
Cash and Equivalents, Beginning of Year 441 456 675
--------- --------- ---------
Cash and Equivalents, End of Year $ 635 $ 441 $ 456
========= ========= =========
See Notes to Consolidated Financial Statements.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the parent company
and its domestic and foreign subsidiaries and present details of revenues,
expenses, assets, liabilities and cash flows for both Automotive Solutions and
Financial Services. Automotive Solutions is comprised of the company's Software
Solutions, Transformation Solutions and Documents segments. Financial Services
is comprised of Reyna Capital Corporation, Reyna Funding, L.L.C. and a similar
operation in Canada. In accordance with industry practice, the assets and
liabilities of Automotive Solutions are classified as current or noncurrent and
those of Financial Services are unclassified. Intercompany balances and
transactions are eliminated.
USE OF ESTIMATES
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and include
amounts based on management's best estimates and judgments. The use of estimates
and judgments may affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
CASH AND EQUIVALENTS
For purposes of reporting cash flows, cash and equivalents includes cash on
hand, cash deposits and investments with maturities of three months or less at
the time of purchase.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, cash equivalents and accounts receivable
approximate fair value because of the relatively short maturity of these
financial instruments. Fair values of debt and interest rate management
agreements are based on quoted prices for financial instruments with the same
remaining maturities.
CONCENTRATIONS OF CREDIT RISK
The company is a leading provider of information management systems and services
to automotive retailers. Substantially all finance receivables and accounts
receivable are from automotive retailers.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts on accounts receivable and finance
receivables is established based on historical loss experience, aging of
accounts and current customer and economic conditions. Receivables are charged
to the allowance for doubtful accounts when an account is deemed to be
uncollectible, taking into consideration the financial condition of the customer
and the value of any collateral. Recoveries of receivables, previously charged
off as uncollectible, are credited to the allowance for doubtful accounts.
INVENTORIES
Inventories are stated at the lower of cost or market. Costs of business forms
inventories are determined by the last-in, first-out (LIFO) method. At September
30, 2002 and 2001, LIFO inventories were $4,439 and $4,634, respectively. These
inventories determined by the first-in, first-out (FIFO) method would increase
by $3,539 in 2002 and $3,784 in 2001. For other inventories, comprised primarily
of computer equipment, cost is determined by specific identification or the FIFO
method. Market is based on net realizable value.
35
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful service lives of the assets or asset
groups, principally on the straight-line method for financial reporting
purposes. Estimated asset lives are:
Years
- ----------------------------------------------------------------------
Land improvements 10
Buildings and improvements 3--33
Computer equipment 3-- 5
Machinery and equipment 3--20
Furniture and other 3--15
SOFTWARE LICENSED TO CUSTOMERS
The company capitalizes certain costs of developing its software products in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." SFAS No. 86 specifies that costs incurred in creating a computer
software product should be charged to expense when incurred, as research and
development, until technological feasibility has been established for the
product. Technological feasibility is established either by creating a detail
program design or a tested working model. Once technological feasibility is
established, all software costs should be capitalized until the product is
available for general release to customers. Upon general release of a software
product to customers, amortization is determined based on the larger of the
amounts computed using (a) the ratio that current gross revenues for each
product bears to the total of current and anticipated future gross revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product, ranging from three to seven years. Amortization
expense for software licensed to customers was $403 in 2002, $1,967 in 2001 and
$1,105 in 2000. September 30, 2002 and 2001, accumulated amortization was
$33,933 and $48,032, respectively. During 2002, the company disposed of $14,502
of fully amortized software.
GOODWILL
The company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective October 1, 2001. SFAS No. 142 requires that goodwill no longer be
amortized, but instead tested for impairment at least annually. See Note 14 for
additional information.
The excess of cost over net assets of companies acquired is recorded as goodwill
and had been amortized on a straight-line basis over five to twenty years.
Amortization expense was $7,122 in 2001 and $7,003 in 2000. At September 30,
2002 and 2001, accumulated amortization was $53,760 and $51,344, respectively.
LONG-LIVED ASSETS
Long-lived assets, goodwill and intangible assets are reviewed for impairment
annually or whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable from undiscounted future cash flows. If the
carrying value of an asset is considered impaired, an impairment charge is
recorded for the amount by which the carrying value of the asset exceeds its
fair value.
EQUITY INVESTMENT
During March 2002, the company sold its shares of Kalamazoo Computer Group plc
of the United Kingdom for cash of $1,636 and recorded a net gain of $103. The
company recorded a loss of $12,274, included with equity in net losses of
affiliated companies on the statement of consolidated income, and income tax
benefits of $12,377 related to the sale of these shares, included in the
provision for income taxes on the statement of consolidated income. The company
recorded losses of $7,718 in 2001 and $4,362 in 2000, representing amortization
of the intangible assets and its share of Kalamazoo's net losses.
36
REVENUE RECOGNITION
AUTOMOTIVE SOLUTIONS
Sales of computer hardware and business forms products are recorded when title
passes upon shipment to customers. Revenues from software license fees are
accounted for in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition." The company recognizes revenue when (i) persuasive evidence of an
arrangement exists; (ii) delivery has occurred or services have been rendered;
(iii) the sales price is fixed or determinable; and (iv) collectibility is
reasonably assured. Service revenues, which include computer hardware
maintenance, software support, training, consulting and Web hosting are recorded
ratably over the contract period or as services are performed. The application
of SOP 97-2 requires judgment, including whether a software arrangement includes
multiple elements, and if so, whether vendor-specific objective evidence of fair
value exists for those elements. Software revenues which do not meet the
criteria set forth in Emerging Issues Task Force (EITF) Issue No. 00-3,
"Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use
Software Stored on Another Entity's Hardware," are recorded ratably over the
contract period as services are provided.
FINANCIAL SERVICES
Financial Services revenues consist primarily of interest earned on financing
the company's computer systems sales. Revenues are recognized over the lives of
financing contracts, generally five years, using the interest method.
LEASE OBLIGATIONS
The company leases premises and equipment under operating lease agreements.
Certain of these leases contain renewal and purchase options and residual value
guarantees. As of September 30, 2002, future minimum lease payments relating to
operating lease agreements were $39,196 with annual payments of $8,481 in 2003,
$7,053 in 2004, $5,414 in 2005, $3,549 in 2006 and $2,716 in 2007. Rental
expenses were $21,814 in 2002, $24,939 in 2001 and $25,188 in 2000.
COMMITMENTS
In 1997, the company entered into an agreement with a trust for the construction
and lease of an office building near Dayton, Ohio. This lease is accounted for
as an operating lease for financial reporting purposes. Accordingly, neither the
asset nor the related liability is reported on the company's balance sheets. The
company has guaranteed 80% of the trust's debt related to the construction of
the building. At the end of the lease term in August 2004, the company may
either purchase the building for $28,800 or sell the building on behalf of the
lessor. If the building is sold and the proceeds from the sale are insufficient
to repay the investors, the company may be required to make a payment to the
lessor of up to 80% of the building's cost. Based on appraised values,
management does not believe any additional payments will be required at the
termination of the lease.
During 2001, the company entered into an agreement to outsource certain computer
services such as desktop and network services through fiscal year 2009. This
agreement requires annual payments of about $20,000.
RESEARCH AND DEVELOPMENT COSTS
The company expenses research and development costs as incurred. These costs,
primarily representing software development costs, were $68,000 in 2002, $71,000
in 2001 and $76,000 in 2000.
INCOME TAXES
The parent company and its domestic subsidiaries file a consolidated U.S.
federal income tax return. No deferred income tax liabilities are recorded on
undistributed earnings of the foreign subsidiary because, for the most part,
those earnings are permanently reinvested. Undistributed earnings of the foreign
subsidiaries at September 30, 2002, were $20,520. The calculation of the
unrecognized deferred income tax liability on these earnings is not practicable.
37
EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is computed by dividing income by the
weighted average number of common shares outstanding during the year. Diluted
EPS is computed by dividing income by the weighted average number of common
shares and common share equivalents outstanding during each year. The weighted
average number of common shares outstanding assumed that Class B common shares
were converted into Class A common shares. The company's common share
equivalents represent the effect of employee stock options.
2002 2001 2000
- ------------------------------------------------------------------------------------------------
Average number of common shares outstanding
(used to determine basic EPS) 70,692 73,183 77,474
Effect of employee stock options 2,665 1,736 2,025
------ ------ ------
Average number of common shares and equivalents
outstanding (used to determine diluted EPS) 73,357 74,919 79,499
====== ====== ======
Employee stock options outstanding to purchase 614 shares in 2002, 3,705 shares
in 2001 and 4,092 shares in 2000 were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be antidilutive.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' consolidated financial
statements to conform with the presentation used in 2002.
2. DISCONTINUED OPERATIONS
During the second quarter of fiscal year 2001, the company recorded income from
discontinued operations of $1,623. Income from discontinued operations included
about $.01 per share from the collection of notes receivable obtained in the
October 1998 sale of the Healthcare Systems segment and about $.01 per share
from tax benefits related to the August 2000 sale of the Information Solutions
segment.
On August 4, 2000, the company sold the net assets of its Information Solutions
segment to The Carlyle Group for cash of $360,000. An after-tax gain of $10,853
(net of income taxes of $31,181) or $.14 per diluted share and income from
operations of $17,303 (net of $13,022 of income taxes) were recorded as
discontinued operations in 2000. The Information Solutions segment manufactured
and distributed printed business forms and provided forms management services to
general business markets.
3. RESTRUCTURING CHARGES
In the fourth quarter of fiscal year 2000, the company completed the sale of the
Information Solutions segment and approved a plan for restructuring the rest of
the company. The company recorded a pretax restructuring charge of $10,560. This
charge consisted of $4,751 of employee termination benefits, $4,715 of
retirement costs and $1,094 of lease obligations. During 2001, this
restructuring was completed and the costs incurred approximated those originally
accrued.
38
4. BUSINESS COMBINATIONS
In August 2002, the company purchased BoatVentures.com Corporation, a provider
of Web-based applications and education processes to boat, power sports and
recreational vehicle retailers and manufacturers. Privately-held BoatVentures
had revenues of about $1,000 in 2001. The purchase price of $5,971 was paid with
cash from existing balances. This business combination was accounted for as a
purchase and the accounts of BoatVentures were included in the company's
financial statements since the acquisition date. In connection with this
business combination the company recorded goodwill of $743 based on the
preliminary allocation of the purchase price. BoatVentures was previously
partially owned by a member of the company's board of directors and an officer
of the company. The company obtained an independent fairness opinion on the
purchase price and approval of the company's board of directors prior to
consummating this transaction.
In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a.
DealerKid, a provider of electronic customer marketing and relationship
management software and services for automotive retailers in the United States
and Canada. Privately-held DealerKid had revenues of about $2,000 in 2000. The
purchase price of $10,452 was paid with $9,758 of cash from existing balances
and the issuance of a $694 note payable. This business combination was accounted
for as a purchase and the accounts of DealerKid were included in the company's
financial statements since the acquisition date. In connection with this
business combination the company recorded goodwill of $11,307.
In May 2000, the company purchased the outstanding membership interests of HAC
Group, LLC, the leading provider of learning, customer relationship management
and Web services to automobile retailers and manufacturers. The privately-held
HAC Group had revenues of $65,000 in 1999. The purchase price of $124,660
consisted of $97,460 of cash and the issuance of 1,222 restricted Class A common
shares. The issuance of capital stock was considered a noncash transaction for
accounting purposes and was not included in the statements of cash flows. This
business combination was accounted for as a purchase and the accounts of HAC
Group were included in the company's financial statements since the acquisition
date. Under terms of the purchase agreement, the company may be required to make
additional cash payments over the next year of up to $60,000, contingent on the
operating results of the business purchased.
In May 2000, the company and other industry partners formed a new independent
company, named ChoiceParts, LLC, to develop an electronic parts exchange for the
automotive parts market. The company contributed its existing parts locator
business, which had annual revenues of nearly $12,000 and in-process software
development of a Web based parts locator product, to ChoiceParts in exchange for
a minority equity interest, consisting of both common and preferred interests.
The company also made a capital contribution to ChoiceParts of $1,675. This
investment is accounted for under the equity method and the carrying value is
included with other assets in the company's consolidated balance sheets. The
company recorded losses of $709 in 2002, $4,191 in 2001 and $959 in 2000. These
losses were recorded as equity in net losses of affiliated companies in the
statements of consolidated income.
Under the terms of certain purchase agreements, the company may be required to
make additional payments over the next year, contingent on the operating results
of the businesses purchased. The effect of contingent arrangements reduced
goodwill $728 in 2001 and increased goodwill $728 in 2000.
COMPONENTS OF PURCHASE PRICES
2002 2001 2000
- --------------------------------------------------------------------------------------------------
Cash (net of cash and equivalents acquired) $5,971 $12,008 $101,635
Capital stock issued (1,222 shares) 27,200
Note payable issued 694
Contingent payments made
Capital stock issued
2000 - 109 shares 2,048
------ -------- --------
Totals $5,971 $12,702 $130,883
====== ======= ========
39
5. INCOME TAXES
PROVISION FOR INCOME TAXES
2002 2001 2000
- -----------------------------------------------------------------------------------------
Current
Federal $28,677 $50,055 $47,831
State and local (2,626) 8,543 8,598
Foreign 1,600 1,502 1,695
Deferred 21,745 4,490 3,578
------- ------- -------
Provision for income taxes $49,396 $64,590 $61,702
======= ======= =======
Income taxes paid (net of refunds) $22,321 $56,404 $72,651
======= ======= =======
RECONCILIATION OF INCOME TAX RATES
2002 2001 2000
AMOUNT PERCENT Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------
Statutory federal income taxes $57,732 35.0% $56,884 35.0% $52,550 35.0%
State and local taxes less federal
income tax effect 6,584 4.0 6,611 4.1 5,840 3.9
State tax benefits less federal
income tax effect (5,872) (3.6)
Sale of Kalamazoo shares (7,746) (4.7)
Goodwill amortization 1,199 .7 1,924 1.3
Other (1,302) (.8) (104) (.1) 1,388 .9
------- ----- ------- ----- ------- -----
Provision for income taxes $49,396 29.9% $64,590 39.7% $61,702 41.1%
======= ===== ======= ===== ======= =====
In fiscal year 2002, the company settled a state income tax audit and filed
amended returns in a number of states to correct the apportionment and
allocation of taxable income.
AUTOMOTIVE SOLUTIONS DEFERRED INCOME TAX ASSETS (LIABILITIES)
September 30 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Deferred income tax assets
Postretirement medical $18,290 $18,280
Pensions 22,107 24,550
Receivables allowances 5,825 4,491
Other 13,628 21,375
Deferred income tax liabilities
Depreciation and amortization (9,296) (21,833)
Other (3,508) (1,896)
------- -------
Totals 47,046 44,967
Current 15,575 24,348
------- -------
Noncurrent $31,471 $20,619
======= =======
FINANCIAL SERVICES DEFERRED INCOME TAX LIABILITIES
Financial Services deferred income tax liabilities resulted from temporary
differences from financing the company's computer systems sales.
40
6. FINANCIAL SERVICES
INCOME SUMMARY
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Revenues $ 41,709 $ 41,918 $ 40,206
Cost of sales - interest expense 10,645 13,258 14,224
-------- -------- --------
Gross profit 31,064 28,660 25,982
Selling, general and administrative expenses 8,073 5,005 4,987
-------- -------- --------
Operating income $ 22,991 $ 23,655 $20,995
======== ======== ========
FINANCE RECEIVABLES
September 30 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Product financing receivables $ 442,069 $ 462,950
Unguaranteed residual values 38,370 40,434
Allowance for doubtful accounts (6,184) (5,956)
Unearned interest income (70,659) (78,939)
Other 2,564 2,881
--------- ---------
Totals $ 406,160 $ 421,370
========= =========
As of September 30, 2002, product financing receivables due for each of the next
five years were $171,770 in 2003, $125,888 in 2004, $80,978 in 2005, $45,333 in
2006 and $17,803 in 2007.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
September 30 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 5,956 $ 5,846
Provisions
Financial services 4,450 2,500
Automotive solutions 540 500
Net losses (4,762) (2,890)
------- -------
Balance, end of year $ 6,184 $ 5,956
======= =======
41
7. FINANCING ARRANGEMENTS
AUTOMOTIVE SOLUTIONS
During February 2002, the company entered into $100,000 of interest rate swap
agreements that effectively converted 7% fixed rate debt into variable rate
debt. These interest rate swap agreements were designated as fair value hedges.
As of September 30, 2002, the fair value of these derivative instruments was an
asset of $7,614 and was included in Automotive Solutions' other assets on the
consolidated balance sheets. These adjustments to record the net change in the
fair value of fair value hedges and related debt during the periods presented
were recorded in income. All existing fair value hedges were 100% effective. As
a result, there was no current impact to earnings because of hedge
ineffectiveness.
Notional
Amounts
Notes Swaps
- ------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------
Fixed rate notes, $100,000 face value, maturing in 2007 $ 107,408 $ 100,000
Weighted average interest rate 7.0%
Weighted average pay rate 4.3%
Weighted average receive rate 7.0%
Fixed rate note, maturing in 2003 6,061
--------- ---------
Totals $ 113,469 $ 100,000
Current portion 6,061
--------- ---------
Long-term portion $ 107,408 $ 100,000
========= =========
September 30, 2001
- ------------------------------------------------------------------------------------------------------------------
Fixed rate notes, $100,000 face value, maturing in 2007 $ 99,745
Weighted average interest rate 7.0%
Fixed rate note, maturing in 2003 12,121
---------
Totals $ 111,866
Current portion 6,061
---------
Long-term portion $ 105,805
=========
Loan agreements limit consolidated indebtedness and require a minimum interest
coverage ratio. The fair values of Automotive Solutions' financing arrangements
were $113,691 at September 30, 2002 and $117,917 at September 30, 2001. At
September 30, 2002, debt maturities were $6,061 in 2003 and $100,000 in 2007.
Interest paid was $5,653 in 2002, $4,484 in 2001 and $11,048 in 2000. Interest
capitalized was $1,806 in 2002, $4,016 in 2001 and $2,643 in 2000.
At September 30, 2002, the $100,000 notional amount of swap agreements mature in
2007.
FINANCIAL SERVICES
In the ordinary course of business, the company borrows cash to fund investments
in finance receivables from the sale of the company's products. The company
attempts to limit its interest rate exposure between the interest earned on
fixed rate finance receivables and the interest paid on variable rate financing
agreements through the use of interest rate management agreements. Interest rate
swaps provide for interest to be received on notional amounts at variable rates
and provide for interest to be paid on the same notional amounts at fixed rates.
Fixed interest rates do not change over the life of the agreements. Variable
interest rates are reset at least every ninety days and are based on LIBOR or
commercial paper indices and are settled with counterparties at that time. Net
interest expense or income on these contracts is reflected in interest expense.
The company is exposed to credit related losses in the event of nonperformance
by counterparties to the interest rate management agreements. The company
attempts to minimize this credit risk by entering into agreements only with
counterparties that have a Standard & Poor's rating of "A" or higher. The
company also diversifies its interest rate management agreements among several
financial institutions. Interest rate management agreements are accounted for
using settlement accounting.
42
On January 24, 2002, Reyna Funding, L.L.C., an affiliate of the company, entered
into a loan funding agreement, whereby Reyna Funding, L.L.C. may borrow up to
$100,000 using finance receivables purchased from Reyna Capital Corporation,
also an affiliate of the company, as security for the loan. The securitization
allows additional borrowings, up to the $100,000 limit, through January 23,
2003. This loan funding agreement is renewable annually through January 23,
2006. Any borrowings will be repaid as collections on finance receivables
balances are received. During fiscal year 2002, Reyna Funding, L.L.C. borrowed
$100,000 under this agreement. Proceeds received by Reyna Capital Corporation
from Reyna Funding, L.L.C. were used to retire other debt. During the fiscal
year 2002, Reyna Funding, L.L.C. entered into $100,000 of interest rate swap
agreements in connection with obtaining this variable rate debt. These interest
rate swap agreements meet the criteria for cash flow hedge accounting and were
highly effective.
The fair value of the company's cash flow derivative instruments was a $4,035
liability at September 30, 2002 and a $2,724 liability at September 30, 2001 and
was included in Financial Services' other liabilities on the consolidated
balance sheets. The adjustments to record the net change in the fair value of
cash flow hedges during the periods presented was recorded, net of income taxes,
in other comprehensive income. Fluctuations in the fair value of the derivative
instruments are generally offset by changes in the value or cash flows of the
underlying exposure being hedged because of the high degree of effectiveness of
these cash flow hedges. In fiscal year 2003, the company expects the amounts to
be reclassified out of other comprehensive income into earnings to be immaterial
to the financial statements.
Notional
Amounts
Notes Swaps
- ------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------
Variable rate instruments, maturing through 2006 $ 189,033 $ 136,500
Weighted average interest rate 2.2%
Weighted average pay rate 4.4%
Weighted average receive rate 1.8%
Fixed rate notes, maturing through 2005 28,219
Weighted average interest rate 6.4%
--------- ---------
Totals $ 217,252 $ 136,500
========= =========
September 30, 2001
- ------------------------------------------------------------------------------------------------------------------
Variable rate instruments, maturing through 2005 $ 146,200 $ 63,500
Weighted average interest rate 4.2%
Weighted average pay rate 6.3%
Weighted average receive rate 3.0%
Fixed rate notes, maturing through 2005 57,312
Weighted average interest rate 6.4%
--------- ---------
Totals $ 203,512 $ 63,500
========= =========
Loan agreements limit consolidated indebtedness and require a minimum interest
coverage ratio. The fair value of Financial Services debt was $218,366 and
$204,632 at September 30, 2002 and 2001, respectively. At September 30, 2002,
maturities of notes were $36,733 in 2003, $22,394 in 2004, $58,125 in 2005,
$25,000 in 2006 and $25,000 in 2007. Interest paid was $11,155 in 2002, $13,476
in 2001 and $14,301 in 2000.
At September 30, 2002, notional amount maturities of swap agreements were
$49,625 in 2003, $38,250 in 2004, $28,125 in 2005, $19,250 in 2006 and $1,250 in
2007.
REVOLVING CREDIT AGREEMENTS
Automotive Solutions and Financial Services share variable rate revolving credit
agreements which total $150,000 and require commitment fees on unused credit. At
September 30, 2002, available balances under these agreements were $100,000.
43
8. CAPITAL STOCK
September 30 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Preferred
No par value
Authorized shares 60,000 60,000 60,000
Class A common
No par value
Authorized shares 240,000 240,000 240,000
======= ======= =======
Issued and outstanding shares
Balance, beginning of year 70,230 73,622 76,532
Issued 2,978 3,119 2,611
Converted from Class B common 200
Repurchased (4,779) (6,490) (5,488)
Retired (34) (21) (33)
------- ------- -------
Balance, end of year 68,595 70,230 73,622
======= ======= =======
Class B common
No par value
Authorized shares 40,000 40,000 40,000
Issued and outstanding shares 16,000 20,000 20,000
Dividends on Class A common shares must be twenty times the dividends on Class B
common shares and must be paid simultaneously. Each share of Class A common and
Class B common is entitled to one vote. The Class B common shareholder may
convert twenty Class B common shares to one share of Class A common. During
February 2002, 4,000 Class B common shares were converted into 200 Class A
common shares. The company has reserved sufficient authorized Class A common
shares for Class B conversions and stock option plans.
Each outstanding Class A common share has one preferred share purchase right.
Each outstanding Class B common share has one-twentieth of a right. Rights
become exercisable if a person or group acquires or seeks to acquire, through a
tender or exchange offer, 15% or more of the company's Class A common shares. In
that event, all holders of Class A common shares and Class B common shares,
other than the acquirer, could exercise their rights and purchase preferred
shares at a specified amount. At the date of these financial statements, except
for the preferred share purchase rights, the company had no agreements or
commitments with respect to the sale or issuance of the preferred shares and no
preferred shares were outstanding.
The company repurchased Class A common shares for treasury at average prices of
$26.23 in 2002, $21.70 in 2001 and $18.41 in 2000. The remaining balance of
shares authorized for repurchase by the board of directors was 4,921 at
September 30, 2002. Treasury shares at September 30 were 23,503 in 2002, 21,903
in 2001 and 18,531 in 2000.
44
9. EMPLOYEE STOCK OPTION PLANS
The company's stock option plans award incentive stock options and/or
nonqualified stock options to purchase Class A common shares to substantially
all employees. Stock options are generally granted at a price equal to fair
market value of the common stock on the date of grant. During the year ended
September 30, 1999, the company granted a nonqualified stock option for 200
Class A common shares at an option price of $.01 per share and recognized
compensation expense of $512 in 2002, $1,009 in 2001 and $1,921 in 2000. At
September 30, 2002, options to purchase 3,308 additional Class A common shares
were available for future awards to certain key employees. Under a broad-based
stock option plan, the board of directors may award options at its discretion.
Shares Under Option Option Prices Per Share
2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Outstanding
Beginning of year 13,941 17,620 13,675 $18.88 $18.04 $17.48
Granted 2,833 281 6,493 22.68 19.99 18.61
Exercised (2,970) (3,090) (1,276) 16.96 13.89 12.19
Canceled (729) (870) (1,272) 20.69 19.96 20.85
------ ------ ------
End of year 13,075 13,941 17,620 20.02 18.88 18.04
====== ====== ======
Exercisable at September 30 5,206 5,090 5,719 19.85 18.96 16.56
====== ====== ======
Outstanding, September 30, 2002 Exercisable, September 30, 2002
Weighted Weighted
Average Average Weighted
Option Number of Remaining Option Number of Average
Price Range Options Life in Years Price Options Option Price
- -------------------------------------------------------------------------------------------------------------------
$ .01 50 6.6 $ .01
$10.00 - $17.44 4,666 6.3 16.79 2,528 $16.69
$17.69 - $22.53 6,845 7.2 21.07 1,548 20.38
$23.07 - $30.27 1,514 5.1 25.94 1,130 26.19
------ -----
TOTALS 13,075 6.6 20.02 5,206 19.85
====== =====
The company accounts for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and follows the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 requires the valuation of stock options using option valuation models
and the disclosure of the pro forma effect on earnings. The company valued its
stock options using the Black-Scholes option valuation model which was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of subjective assumptions, such as expected stock price
volatility, which can materially affect the fair value estimate. Because the
company's stock options have characteristics significantly different from traded
options, the fair value determined may not reflect the actual value of the
company's stock options. The weighted average fair value of the company's stock
options granted at fair market value was $5.34 in 2002, $6.47 in 2001 and $5.23
in 2000. There were no options granted below fair market value in 2002, 2001 or
2000. Had compensation expense been recognized using these fair values, the
company's net income and diluted earnings per common share would have decreased
by $11,780 or $.16 per share in 2002, $11,948 or $.16 per share in 2001 and
$11,695 or $.15 per share in 2000.
OPTION VALUATION ASSUMPTIONS
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Expected life in years 4 5 5
Dividend yield 1.9% 1.9% 1.7%
Risk free interest rate 3.7% 5.9% 6.1%
Volatility 29% 33% 33%
45
10. POSTRETIREMENT BENEFITS
PENSION EXPENSE
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Net periodic pension cost
Service cost $ 8,839 $ 8,794 $ 12,747
Interest cost 15,915 15,918 17,677
Estimated return on plan assets (13,277) (12,893) (15,840)
Amortization of unrecognized transitional asset 145 147 144
Amortization of prior service cost 431 427 523
Recognized net actuarial losses 65 153 830
Plan administration 774 767 791
Special termination benefits 4,526
Settlements 1,684 533
-------- -------- --------
Net periodic pension cost 14,576 13,313 21,931
Defined contribution plans 6,503 6,258 10,435
Multi-employer plans 25 37 154
-------- -------- --------
Totals $ 21,104 $ 19,608 $ 32,520
======== ======== ========
Actuarial assumptions
Discount rate 7.0% - 7.5% 6.5% - 7.75% 6.5% - 7.75%
Rate of compensation increase 3.75% - 5.0% 3.75% - 5.0% 3.75% - 6.0%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
Actuarial cost method PROJECTED UNIT CREDIT
Measurement period JULY 1 - JUNE 30
The company sponsors contributory and noncontributory defined benefit pension
plans for most employees. Pension benefits are primarily based on years of
service and compensation. The company's funding policy is to make annual
contributions to the plans sufficient to meet or exceed the minimum statutory
requirements. The company and its actuaries review the pension plans each year.
The actuarial assumptions are intended to reflect expected experience over the
life of the pension liability.
The company expensed special termination benefits of $4,526 in 2000 in
connection with a restructuring. These benefits were in addition to the
employees' regular plan benefits and will be paid directly from company assets
rather than plan assets.
The company expensed payments of $1,684 in 2002 in connection with the early
settlement of certain pension benefits for former executives. These payments
reduce the future company obligations for those individuals.
The company sponsors defined contribution savings plans covering most domestic
employees. Generally, contributions are funded monthly and represent 40% of the
first 3% of compensation contributed to the plan by participating employees. The
company also funds a discretionary contribution. Contributions for this portion
of the plan are funded annually based on the company's return on equity and
contributions are the same for each eligible employee. Forfeitures of nonvested
discretionary contributions are used to reduce contributions required by the
company.
46
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $221,507 $212,295
Service cost 8,835 8,672
Interest cost 15,911 15,905
Actuarial losses (gains) 1,580 (3,976)
Benefits paid (19,377) (11,021)
Change in plan provisions 330 71
Employee contributions (109)
Foreign currency translation (33) (330)
-------- --------
Projected benefit obligation, end of year $228,753 $221,507
======== ========
Change in plan assets
Fair value of plan assets, beginning of year $135,882 $149,166
Actual losses on plan assets (12,810) (9,770)
Administrative expenses paid (942) (809)
Employer contributions 12,833 3,927
Employee contributions (109)
Benefits paid (7,453) (6,179)
Foreign currency translation (33) (344)
-------- --------
Fair value of plan assets, end of year $127,477 $135,882
======== ========
Net amount recognized
Funded status $101,276 $ 85,625
Unrecognized transition obligation (405) (552)
Unrecognized prior service cost (2,944) (3,592)
Unrecognized net losses (51,547) (24,937)
Multi-employer liability 66 94
Minimum pension liability 13,264 8,012
-------- --------
Net amount recognized $ 59,710 $ 64,650
======== ========
Minimum pension liability
Intangible asset $ 3,382 $ 4,158
Deferred income tax benefit 3,895 1,546
Accumulated other comprehensive income 5,987 2,308
-------- --------
Totals $ 13,264 $ 8,012
======== ========
Actuarial assumptions
Projected benefit obligation discount rate 6.5% - 7.25% 7.0% - 7.5%
Rate of compensation increase 3.75% - 4.5% 3.75% - 5.0%
At September 30, 2002 and 2001, respectively, about 26% and 30% of the plans'
assets were invested in cash and equivalents, government bonds and investment
grade corporate bonds. The balance of the plans' assets were invested in
equities.
The company sponsors certain unfunded pension plans. These pension plans have
accumulated benefit obligations exceeding plan assets. The projected benefit
obligations were $46,265 and $52,529 at September 30, 2002 and 2001,
respectively. The accumulated benefit obligations were $44,164 and $51,143 at
September 30, 2002 and 2001, respectively. At September 30, 2002, the
accumulated benefit obligation of one of the company's funded pension plans also
exceeded plan assets. At September 30, 2002, the projected benefit obligation
for this plan was $174,349 and the accumulated benefit obligation was $136,958.
47
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
2002 2001 2000
- -----------------------------------------------------------------------------------
Service cost $ 547 $ 752 $1,127
Interest cost 4,027 3,773 3,209
Amortization of prior service cost (532) (337) (391)
Recognized net actuarial losses 637 260 3
Special termination benefits 189
Settlement - discontinued operations (865)
------ ------ ------
Totals $4,679 $4,448 $3,272
====== ====== ======
Actuarial assumptions
Discount rate 7.25% 7.75% 7.0% - 7.75%
Healthcare cost trend rate through 2007 6.0% 6.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0% 5.0%
The company sponsors a defined benefit medical plan for employees who retired
before October 1, 1993. Future retirees may purchase postretirement medical
insurance from the company. Discounts from the market price of postretirement
medical insurance will be provided to certain retirees based on age and length
of remaining service as of October 1, 1993. These discounts are included in the
determination of the accumulated benefit obligation. The company also sponsors a
defined benefit life insurance plan for substantially all employees. The company
funds medical and life insurance benefits on a pay-as-you-go basis.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION
2002 2001
- ----------------------------------------------------------------------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $55,394 $40,107
Service cost 546 751
Interest cost 4,026 3,773
Plan participant contributions 200 138
Actuarial losses 6,863 16,362
Benefits paid (3,943) (3,402)
Change in plan provisions (2,317) (2,335)
------- -------
Projected benefit obligation, end of year $60,769 $55,394
======= =======
Net amount recognized
Projected benefit obligation, end of year $60,769 $55,394
Unrecognized prior service cost 7,148 5,369
Unrecognized net losses (21,347) (15,121)
------- -------
Net amount recognized $46,570 $45,642
======= =======
Actuarial assumptions
Discount rate 7.25% 7.50%
Healthcare cost trend rate through 2007 6.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0%
The effect of a 1% increase in the assumed healthcare cost trend rate would have
increased fiscal year 2002 service and interest costs by $185 and the September
30, 2002 accumulated benefit obligation by $2,545. Similarly, a 1% decrease
would have decreased fiscal year 2002 service and interest costs by $161 and the
September 30, 2002 accumulated benefit obligation by $2,227.
48
11. CASH FLOW STATEMENTS
2002 2001 2000
- --------------------------------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash flows provided by (used for) operating activities
Net income $ 64,866 $ 85,019 $104,067
Adjustments to reconcile net income to net cash
provided by operating activities
Cumulative effect of accounting change 36,563
Depreciation and amortization 31,395 49,901 38,676
Deferred income taxes 23,256 8,135 1,658
Deferred income taxes transferred from
financial services (2,866) (2,647) (7,886)
Income from discontinued operations (1,623) (28,156)
Losses (gains) on sales of assets 1,605 (337) 557
Changes in operating assets and liabilities
Accounts receivable (2,358) 9,249 (1,955)
Inventories (2,221) 4,441 1,884
Prepaid expenses, intangible and other assets 11,538 (1,249) (5,828)
Accounts payable 506 (2,792) (1,443)
Accrued and other liabilities (4,213) 17,451 17,374
-------- -------- --------
Net cash provided by operating activities $158,071 $165,548 $118,948
======== ======== ========
FINANCIAL SERVICES
Cash flows provided by (used for) operating activities
Net income $ 14,123 $ 14,538 $ 12,529
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes (2,269) (6,422) (2,640)
Deferred income taxes transferred to
automotive solutions 2,866 2,647 7,886
Changes in receivables, other assets
and other liabilities 4,737 3,256 3,083
-------- -------- --------
Net cash provided by operating activities $ 19,457 $ 14,019 $ 20,858
======== ======== ========
49
12. SEGMENT REPORTING
The company's five solutions business units have been aggregated into four
segments for reporting purposes.
The Software Solutions segment consists of the Software Solutions business unit
and the Info-Structure Services business unit. This segment provides integrated
computer systems products and related services. Products include integrated
software packages, computer hardware and installation of hardware and software.
Services include customer training, hardware maintenance and software support as
well as consulting services.
The Transformation Solutions segment provides specialized training, Web services
and customer relationship management products and services.
The Documents segment manufactures and distributes printed business forms to
automotive retailers.
The Financial Services segment provides financing services, principally for
sales of the company's computer systems.
Total assets were not allocated by segment except for Financial Services'
assets. Investments in equity method investees and capital expenditures were not
allocated by segment. Depreciation and amortization were reflected in
determining segment operating income, however, it is not practicable to present
this information by segment.
OPERATING SEGMENTS
2002 2001 2000
- ------------------------------------------------------------------------------------------
Net sales and revenues
Software solutions
Computer services $ 482,152 $ 444,767 $ 404,676
Computer systems products 145,299 169,125 181,370
---------- ---------- ----------
Total software solutions 627,451 613,892 586,046
Transformation solutions 139,700 161,149 132,093
Documents 183,523 187,053 196,342
Financial services 41,709 41,918 40,206
---------- ---------- ----------
Total net sales and revenues $ 992,383 $1,004,012 $ 954,687
========== ========== ==========
Operating income (loss)
Software solutions $ 127,296 $ 120,218 $ 107,436
Transformation solutions (9,037) (11,932) (2,247)
Documents 37,277 39,791 39,585
Financial services 22,991 23,655 20,995
Restructuring charges (10,560)
---------- ---------- ----------
Total operating income $ 178,527 $ 171,732 $ 155,209
========== ========== ==========
Assets
Automotive solutions $ 729,560 $ 732,073 $ 808,527
Financial services 407,605 422,334 421,129
---------- ---------- -----------
Total assets $1,137,165 $1,154,407 $1,229,656
========== ========== ==========
Investments in equity method investees $ 8,270 $ 20,531 $ 32,906
Capital expenditures 37,067 51,383 65,677
Depreciation and amortization 31,395 49,901 38,676
50
GEOGRAPHIC AREAS
The company provides integrated computer systems products and services and
manufactures and distributes printed business forms primarily in the United
States.
2002 2001 2000
- ---------------------------------------------------------------------------------
United States
Net sales and revenues $941,709 $ 954,458 $908,528
Long-lived assets 377,168 420,906 390,649
International
Net sales and revenues 56,927 58,850 55,486
Long-lived assets 3,118 3,424 4,087
Elimination of intersegment sales (6,253) (9,296) (9,327)
Totals
Net sales and revenues 992,383 1,004,012 954,687
Long-lived assets 380,286 424,330 394,736
13. CONTINGENCIES
The U.S. Environmental Protection Agency (EPA) has designated the company as one
of a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at an
environmental remediation site. The EPA has contended that any company linked to
a CERCLA site is potentially liable for all response costs under the legal
doctrine of joint and several liability. This environmental remediation site
involves a municipal waste disposal facility owned and operated by four
municipalities. The company joined a PRP coalition and is sharing remedial
investigation and feasibility study costs with other PRPs. During fiscal year
1996, an agreement was reached whereby the state of Connecticut contributed
$8,000 towards remediation costs. Preliminary remediation continued during
fiscal year 2001 utilizing Connecticut's contribution. The EPA issued a Record
of Decision on September 28, 2001 which selects a remedy at the site involving
"monitored natural attenuation." The EPA's estimated future remedial costs are
approximately $3,200. The company was also named a defendant in a cost recovery
lawsuit filed by a PRP coalition in the United States District Court for the
Southern District of Ohio regarding an environmental remediation site in Dayton,
Ohio. The court has ordered the parties to participate in a non-binding
mediation. The company believes that the reasonably foreseeable resolution of
these two matters will not have a material adverse effect on the financial
statements.
14. ACCOUNTING CHANGE
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no
longer be amortized, but instead, tested for impairment at least annually. The
statement also requires recognized intangible assets with finite useful lives to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The company elected to adopt the
provisions of SFAS No. 142 effective October 1, 2001. Accordingly, goodwill has
not been amortized in the financial statements for the period ended September
30, 2002. This statement also required certain intangible assets that did not
meet the criteria for recognition apart from goodwill, to be subsumed into
goodwill. During the quarter ended December 31, 2001, the company subsumed into
goodwill $54,531 of intangible assets representing assembled workforce and a
noncontractual customer relationship, that did not meet the separability
criteria under SFAS No. 141, "Business Combinations."
SFAS No. 142 also requires that goodwill be tested for impairment, initially as
of October 1, 2001, and thereafter at least annually. During the second quarter
of fiscal year 2002, the company completed the goodwill impairment test and
recorded impairment losses of $36,563 ($60,938 net of income tax benefits of
$24,375). These impairment losses were
51
recorded effective October 1, 2001, as the cumulative effect of the accounting
change on the consolidated statements of income. The company divided its four
reporting segments into eight reporting units for purposes of applying the
provisions of this pronouncement. For each reporting unit a fair value was
determined based primarily on the present value of discounted future cash flows.
Other methods were considered to validate this valuation method. Where initial
impairment was indicated, the company hired an outside appraisal firm to
determine the fair value and allocate this fair value among assets and
liabilities. Based on this analysis, two reporting units within the
Transformation Solutions reporting segment incurred impairment losses. The
customer relationship management consulting business, acquired in fiscal year
2000 as part of the HAC Group business combination, recorded an impairment loss
of $33,515 ($55,858 net of income tax benefits of $22,343). The company also
recorded an impairment loss of $3,048 ($5,080 net of income tax benefits of
$2,032) related to its Campaign Management Services reporting unit. These
impairment losses occurred because of discounting future cash flows to determine
the fair value of the reporting units. Under previous accounting standards,
future cash flows were not discounted in determining if impairment existed. As
of July 31, 2002, the company completed its annual goodwill impairment test
using a consistent methodology with the initial impairment test and did not
identify an impairment.
ACQUIRED INTANGIBLE ASSETS
Gross Accumulated Useful Life
Amount Amortization (years)
- -----------------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 2002
Contractual customer relationship $ 33,100 $ 4,000 20
Customer contract 17,700 11,666 3.67
Trademarks 5,900 713 20
Other 6,889 2,844 3-10
-------- -------
Totals $ 63,589 $19,223
======== =======
As of September 30, 2001
Intangible assets subsumed into goodwill 10/1/01 $ 56,948 $ 2,417 10-20
Contractual customer relationship 33,100 2,344 20
Customer contract 17,700 6,839 3.67
Trademarks 5,900 418 20
Other 2,990 2,602 3-7
-------- -------
Totals $116,638 $14,620
======== =======
Aggregate amortization expense was $7,021 in 2002, $11,142 in 2001 and $4,777 in
2000. As of September 30, 2002, estimated amortization expense was $7,346 in
2003, $3,577 in 2004, $2,340 in 2005, $2,340 in 2006 and $2,340 in 2007.
GOODWILL
Software Transformation
Solutions Solutions Documents Totals
- -------------------------------------------------------------------------------------------------
Balances as of September 30, 2001 $10,412 $ 21,374 $2,877 $ 34,663
Intangible assets subsumed
Noncontractual customer relationship 47,376 47,376
Assembled workforce 7,155 7,155
Cumulative effect of accounting change (60,938) (60,938)
Business combination 743 743
------- -------- ------ --------
Balances as of September 30, 2002 $10,412 $ 15,710 $2,877 $ 28,999
======= ======== ====== ========
52
PRO FORMA INCOME FROM CONTINUING OPERATIONS
The table below presents the pro forma effect on net income and earnings per
share from the adoption of SFAS No. 142.
2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Income from continuing operations, as reported $115,552 $ 97,934 $88,440
Goodwill amortization, net of taxes 8,359 8,913
Subsumed intangible assets amortization, net of taxes 2,619 1,091
-------- -------- -------
Pro forma income from continuing operations $115,552 $108,912 $98,444
======== ======== =======
Basic Earnings per Common Share
Income from continuing operations, as reported $ 1.63 $ 1.34 $ 1.14
Pro forma income from continuing operations $ 1.63 $ 1.49 $ 1.27
Diluted Earnings per Common Share
Income from continuing operations, as reported $ 1.58 $ 1.31 $ 1.11
Pro forma income from continuing operations $ 1.58 $ 1.45 $ 1.24
15. ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This pronouncement establishes a single
accounting model, based on framework established in SFAS No. 121, for long-lived
assets to be disposed of by sale. The provisions of this statement are effective
for fiscal years beginning after December 15, 2001. Management does not believe
the adoption of this pronouncement will have a material impact on the company's
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is
required to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. Management is currently assessing the impact of this
pronouncement and has not determined the impact on the company's financial
statements.
53
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
2002
- -----------------------------------------------------------------------------------------------------
Net sales and revenues $240,109 $245,002 $250,568 $256,704
Gross profit $140,603 $141,701 $148,208 $148,135
Income from continuing operations $ 25,400 $ 29,067 $ 30,233 $ 30,852
Basic earnings per common share $ .36 $ .41 $ .43 $ .44
Diluted earnings per common share $ .35 $ .39 $ .41 $ .43
Net income (loss) $(11,163) $ 29,067 $ 30,233 $ 30,852
Basic earnings per common share $ (.16) $ .41 $ .43 $ .44
Diluted earnings per common share $ (.15) $ .39 $ .41 $ .43
Cash dividends declared per share
Class A common $ .11 $ .11 $ .11 $ .11
Class B common $ .0055 $ .0055 $ .0055 $ .0055
Closing market prices of Class A common shares
High $ 25.94 $ 31.55 $ 30.57 $ 27.33
Low $ 22.55 $ 24.03 $ 27.95 $ 22.30
(1) Effective October 1, 2001, the company adopted the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," and reduced income by $36,563 for the cumulative effect of the
accounting change.
(2) During the fourth quarter of fiscal year 2002, the company accrued an
additional $1,923 of support costs related to noncancelable contracts for
Web hosting services.
2001
- -----------------------------------------------------------------------------------------------------
Net sales and revenues $251,734 $250,094 $250,450 $251,734
Gross profit $142,000 $136,603 $141,451 $146,046
Income from continuing operations $ 23,879 $ 22,199 $ 24,719 $ 27,137
Basic earnings per common share $ .32 $ .31 $ .34 $ .37
Diluted earnings per common share $ .32 $ .30 $ .33 $ .36
Net income $ 23,879 $ 23,822 $ 24,719 $ 27,137
Basic earnings per common share $ .32 $ .33 $ .34 $ .37
Diluted earnings per common share $ .32 $ .32 $ .33 $ .36
Cash dividends declared per share
Class A common $ .11 $ .11 $ .11 $ .11
Class B common $ .0055 $ .0055 $ .0055 $ .0055
Closing market prices of Class A common shares
High $ 20.50 $ 22.97 $ 23.00 $ 25.14
Low $ 16.94 $ 19.25 $ 18.25 $ 21.26
54
VALUATION ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001, AND 2000
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
----Additions---- ----Deductions----
Balance Charged
at to Costs Other Write-offs Balance
Beginning and Net of At End
Description of Year Expenses (a) Recoveries of Year
- ------------------------------------------------------------------------------------------------------------------
Valuation Accounts - Deducted From Assets to Which They Apply
AUTOMOTIVE SOLUTIONS
Reserves for accounts receivable:
Year ended September 30, 2002 $3,662 $6,363 ($538) $4,585 $ 4,902
Year ended September 30, 2001 $2,324 $5,340 ($978) $3,024 $ 3,662
Year ended September 30, 2000 $2,056 $3,197 ($697) $2,232 $ 2,324
Reserves for credit memos:
Year ended September 30, 2002 $6,724 $3,814 ($7) $ 210 $10,321
Year ended September 30, 2001 $6,850 $ 300 ($26) $ 400 $ 6,724
Year ended September 30, 2000 $5,758 $ 777 $ 315 -- $ 6,850
Reserves for inventory:
Year ended September 30, 2002 $ 970 $1,965 $ 110 $1,725 $ 1,320
Year ended September 30, 2001 $1,644 $ 77 ($8) $ 743 $ 970
Year ended September 30, 2000 $2,336 $2,809 ($2,694) $ 807 $ 1,644
FINANCIAL SERVICES
Reserves for finance receivables:
Year ended September 30, 2002 $5,956 $4,450 $ 533 $4,755 $ 6,184
Year ended September 30, 2001 $5,846 $2,500 $ 493 $2,883 $ 5,956
Year ended September 30, 2000 $6,581 $2,360 $ 517 $3,612 $ 5,846
(a) Includes adjustments from translation of foreign currency to United States
dollars, the effects of acquisitions of businesses and transfers between
reserves.
55