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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 2002
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
OHIO 31-0421120
(State of incorporation) (IRS Employer Identification No.)
115 SOUTH LUDLOW STREET
DAYTON, OHIO 45402
(Address of principal executive offices)
(937) 485-2000
(Telephone No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
On February 10, 2003, 67,442,434 Class A common shares and 16,000,000 Class B
common shares were outstanding.
THE REYNOLDS AND REYNOLDS COMPANY
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income
For the Three Months Ended December 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets
As of December 31, 2002 and September 30, 2002 4
Condensed Statements of Consolidated Cash Flows
For the Three Months Ended December 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three Months Ended December 31, 2002 and 2001 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk (See the caption entitled "Market Risks" included
in the Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(In thousands except per share data)
Three Months
2002 2001
--------- ---------
Net Sales and Revenues
Services $ 150,380 $ 148,166
Products 86,628 81,590
Financial services 9,640 10,353
--------- ---------
Total net sales and revenues 246,648 240,109
--------- ---------
Cost of Sales
Services 56,838 51,916
Products 47,965 44,816
Financial services 2,534 2,774
--------- ---------
Total cost of sales 107,337 99,506
--------- ---------
Gross Profit 139,311 140,603
Selling, General and Administrative Expenses 93,550 97,056
--------- ---------
Operating Income 45,761 43,547
--------- ---------
Other Charges (Income)
Interest expense 1,521 1,852
Interest income (871) (675)
Equity in net losses (income) of affiliated companies (572) 1,053
Other (424) (160)
--------- ---------
Total other charges (income) (346) 2,070
--------- ---------
Income Before Income Taxes 46,107 41,477
Provision for Income Taxes 17,859 16,077
--------- ---------
Income Before Cumulative Effect of Accounting Change 28,248 25,400
Cumulative Effect of Accounting Change 0 (36,563)
--------- ---------
Net Income $ 28,248 $ (11,163)
========= =========
Basic Earnings Per Common Share
Income Before Cumulative Effect of Accounting Change $ 0.41 $ 0.36
Cumulative Effect of Accounting Change $ 0.00 $ (0.52)
Net Income $ 0.41 $ (0.16)
Average Number of Common Shares Outstanding 69,188 70,642
Diluted Earnings Per Common Share
Income Before Cumulative Effect of Accounting Change $ 0.40 $ 0.35
Cumulative Effect of Accounting Change $ 0.00 $ (0.50)
Net Income $ 0.40 $ (0.15)
Average Number of Common Shares Outstanding 71,104 73,109
Cash Dividends Declared Per Common Share $ 0.11 $ 0.11
See Notes to Condensed Consolidated Financial Statements.
3
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND SEPTEMBER 30, 2002
(In thousands)
12/31/02 9/30/02
----------- -----------
AUTOMOTIVE SOLUTIONS ASSETS
Current Assets
Cash and equivalents $ 102,745 $ 155,295
Accounts receivable 107,283 117,471
Inventories 16,881 13,067
Other current assets 33,014 31,970
----------- -----------
Total current assets 259,923 317,803
Property, Plant and Equipment, less accumulated depreciation of
$164,340 at 12/31/02 and $159,558 at 9/30/02 163,815 161,073
Goodwill 43,601 28,999
Software Licensed to Customers 86,414 81,557
Acquired Intangible Assets 40,811 44,366
Other Assets 93,573 95,762
----------- -----------
Total Automotive Solutions Assets 688,137 729,560
----------- -----------
FINANCIAL SERVICES ASSETS
Cash 1,193 635
Finance Receivables 402,193 406,160
Other Assets 790 810
----------- -----------
Total Financial Services Assets 404,176 407,605
----------- -----------
TOTAL ASSETS $ 1,092,313 $ 1,137,165
=========== ===========
AUTOMOTIVE SOLUTIONS LIABILITIES
Current Liabilities
Current portion of long-term debt $ 0 $ 6,061
Accounts payable 38,528 45,144
Accrued liabilities 62,899 81,860
Deferred revenues 26,653 24,404
----------- -----------
Total current liabilities 128,080 157,469
Long-Term Debt 106,933 107,408
Other Liabilities 98,676 96,488
----------- -----------
Total Automotive Solutions Liabilities 333,689 361,365
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 210,167 217,252
Other Liabilities 105,563 103,522
----------- -----------
Total Financial Services Liabilities 315,730 320,774
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 219,822 217,018
Other Comprehensive Losses (13,953) (14,234)
Retained Earnings 237,025 252,242
----------- -----------
Total Shareholders' Equity 442,894 455,026
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,092,313 $ 1,137,165
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(In thousands)
2002 2001
--------- ---------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided By Operating Activities $ 8,718 $ 3,649
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (11,666) 0
Capital expenditures (9,505) (11,163)
Net proceeds from asset sales 145 8,968
Capitalization of software licensed to customers (5,079) (6,577)
Repayments from financial services 4,973 18,999
--------- ---------
Net cash flows provided by (used for) investing activities (21,132) 10,227
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 0 176
Principal payments on debt (6,061) (346)
Capital stock issued 6,720 14,626
Capital stock repurchased (40,910) (34,872)
--------- ---------
Net cash flows used for financing activities (40,251) (20,416)
--------- ---------
Effect of Exchange Rate Changes on Cash 115 (179)
--------- ---------
Decrease in Cash and Equivalents (52,550) (6,719)
Cash and Equivalents, Beginning of Period 155,295 110,511
--------- ---------
Cash and Equivalents, End of Period $ 102,745 $ 103,792
========= =========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 6,681 $ 6,082
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (36,217) (40,536)
Collections on finance receivables 42,152 44,659
--------- ---------
Net cash flows provided by investing activities 5,935 4,123
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 0 22,000
Principal payments on debt (7,085) (13,246)
Repayments to automotive solutions (4,973) (18,999)
--------- ---------
Net cash flows used for financing activities (12,058) (10,245)
--------- ---------
Increase (Decrease) in Cash and Equivalents 558 (40)
Cash and Equivalents, Beginning of Period 635 441
--------- ---------
Cash and Equivalents, End of Period $ 1,193 $ 401
========= =========
See Notes to Condensed Consolidated Financial Statements.
5
THE REYNOLDS AND REYNOLDS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet as of September 30, 2002 is condensed financial information
taken from the annual audited financial statements. The interim financial
statements are unaudited. In the opinion of management, the accompanying interim
financial statements contain all significant adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the company's
financial position, results of operations and cash flows for the periods
presented.
(2) INVENTORIES
12/31/02 9/30/02
------- -------
Finished products $16,353 $12,539
Work in process 296 365
Raw materials 232 163
------- -------
Total inventories $16,881 $13,067
======= =======
(3) BUSINESS COMBINATIONS
In November 2002, the company purchased all outstanding shares of Networkcar,
Inc., the provider of a telematics device called CAReader, which monitors a
car's diagnostic information, locates stolen cars through a satellite-based
Global Positioning System and performs remote emissions testing. The company
purchased Networkcar to enable the rollout of CAReader to North American
automotive retailers as a component of the company's integrated suite of
customer relationship management solutions. The purchase price of $11,666 was
paid with cash from existing balances. The results of Networkcar's operations
have been included in the company's financial statements since the November 29,
2002, purchase date. The company has recorded goodwill of $12,502 based on the
preliminary allocation of the purchase price. The company has engaged an
independent appraisal firm to determine fair values of intangible assets, such
as patents. Remaining asset and liability captions were not material. Because
the company purchased stock, goodwill would be tax deductible only if the
company disposes of the stock of Networkcar.
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. The company preliminarily
allocated the purchase price to the net assets at that time. In the first
quarter of fiscal year 2003, the valuation of the net assets was completed by an
independent appraisal firm and the company adjusted the purchase price
allocation to increase computer equipment by $200, increase capitalized software
by $100, reduce non-compete agreement intangible assets by $2,400 and increase
goodwill by $2,100.
(4) GOODWILL AND INTANGIBLE ASSETS
In 2002, the company adopted the provisions of Statement of Financial Accounting
Standards (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. During fiscal year 2002, the company completed the initial
goodwill impairment test and recorded impairment losses of $36,563 ($60,938 net
of income tax benefits of $24,375). These impairment losses were recorded
effective October 1, 2001, as the cumulative effect of accounting change in the
statements of consolidated income.
GOODWILL
Software Transform.
Solutions Solutions Documents Totals
--------- --------- --------- ------
Balances as of September 30, 2002 $10,412 $15,710 $ 2,877 $28,999
Business Combinations 14,602 14,602
------- ------- ------- -------
Balances as of December 31, 2002 $10,412 $30,312 $ 2,877 $43,601
======= ======= ======= =======
6
ACQUIRED INTANGIBLE ASSETS
Gross Accumulated Useful Life
Amount Amortization (years)
------ ------------- -----------
AS OF DECEMBER 31, 2002
Amortized intangible assets
Contractual customer relationship $33,100 $ 4,413 20
Customer contract 17,700 12,873 3.67
Trademarks 5,900 787 20
Other 5,091 2,907 2-15
------- -------
Total $61,791 $20,980
======= =======
AS OF SEPTEMBER 30, 2002
Amortized intangible assets
Contractual customer relationship $33,100 $ 4,000 20
Customer contract 17,700 11,666 3.67
Trademarks 5,900 713 20
Other 6,889 2,844 3-10
------- -------
Total $63,589 $19,223
======= =======
Aggregate amortization expense was $1,754 for the three months ended December
31, 2002. Estimated amortization expense for the years ended September 30, is
$7,235 in 2003, $3,549 in 2004, $2,147 in 2005, $2,113 in 2006 and $2,113 in
2007.
(5) FINANCING ARRANGEMENTS
Automotive Solutions
As of December 31, 2002, the company had outstanding interest rate swap
agreements with notional amounts of $100,000. These interest rate swap
agreements were designated as fair value hedges. The fair value of the company's
fair value derivative instruments was $7,127 at December 31, 2002 and $7,614 at
September 30, 2002 and was included in Automotive Solutions' other assets on the
condensed consolidated balance sheet. The adjustments to record the net change
in the fair value of fair value hedges and related debt during the periods
presented were recorded in income. All existing fair value hedges were 100%
effective. As a result, there was no current impact to earnings because of hedge
ineffectiveness.
Financial Services
On January 24, 2003, Reyna Funding, L.L.C., a consolidated affiliate of the
company, renewed a loan funding agreement, whereby Reyna Funding, L.L.C. may
borrow up to $100,000 using finance receivables purchased from Reyna Capital
Corporation, also a consolidated affiliate of the company, as security for the
loan. The securitization allows borrowings, up to the $100,000 limit, through
January 23, 2004. This loan funding agreement is renewable annually through
January 23, 2006. Any borrowings will be repaid as collections on finance
receivables balances are received. As of December 31, 2002, Reyna Funding,
L.L.C. had outstanding borrowings of $100,000 under this arrangement.
As of December 31, 2002, Reyna Funding, L.L.C. had outstanding interest rate
swap agreements with notional amounts of $100,000 and Reyna Capital Corporation
had outstanding interest rate swap agreements with notional amounts of $31,000.
These interest rate swap agreements were designated as cash flow hedges. The
fair value of the company's cash flow derivative instruments was a $3,766
liability at December 31, 2002 and a $4,035 liability at September 30, 2002 and
was included in Financial Services' other liabilities on the condensed
consolidated balance sheets. The adjustments to record the net change in the
fair value of cash flow hedges during the periods presented were 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 of
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.
7
(6) COMPREHENSIVE INCOME
2002 2001
-------- --------
Net income $ 28,248 ($11,163)
Foreign currency translation adjustment 115 (179)
Net unrealized gains on derivative contracts 166 222
-------- --------
Comprehensive income $ 28,529 ($11,120)
======== ========
(7) STOCK OPTIONS
In December 2002, The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends the disclosure
requirements of Statement 123, "Accounting for Stock-Based Compensation," to
require disclosure in interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. This statement is effective for interim financial statements
beginning after December 15, 2002, with early application encouraged.
The company accounts for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and follows the disclosure
requirements of SFAS No. 123. SFAS No. 123 requires the valuation of stock
options using option valuation models and the disclosure of the pro forma effect
on earnings. The company valued its stock options using the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of subjective assumptions,
such as expected stock price volatility, which can materially affect the fair
value estimate. Because the company's stock options have characteristics
significantly different from traded options, the fair value determined may not
reflect the actual value of the company's stock options.
2002 2001
---------- ----------
Income before cumulative effect of accounting change, as reported $ 28,248 $ 25,400
Stock-based compensation employee expense, net of taxes 2,704 3,630
---------- ----------
Pro forma income before accounting change $ 25,544 $ 21,770
========== ==========
Basic Earnings Per Common Share
Income before cumulative effect of accounting change, as reported $ 0.41 $ 0.36
Pro forma income before accounting change $ 0.37 $ 0.31
Diluted Earnings Per Common Share
Income before cumulative effect of accounting change, as reported $ 0.40 $ 0.35
Pro forma income before accounting change $ 0.36 $ 0.30
8
(8) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
2002 2001
-------- --------
AUTOMOTIVE SOLUTIONS
Net Income $ 24,712 $(14,532)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Cumulative effect of accounting change 36,563
Depreciation and amortization 8,662 6,870
Deferred income taxes 583 6,428
Deferred income taxes transferred to Financial Services (94) (1,055)
Losses (gains) on sales of assets 347 (6)
Changes in operating assets and liabilities
Accounts receivable 6,819 4,536
Inventories (3,516) (4,446)
Prepaid expenses and other current assets (1,042) (1,117)
Intangible and other assets 942 1,745
Accounts payable (6,914) (2,470)
Accrued liabilities (23,499) (26,822)
Other liabilities 1,718 (2,045)
-------- --------
Net Cash Provided by Operating Activities $ 8,718 $ 3,649
======== ========
FINANCIAL SERVICES
Net Income $ 3,536 $ 3,369
Deferred Income Taxes 207 (1,993)
Deferred Income Taxes Transferred from Automotive Solutions 94 1,055
Changes in Receivables, Other Assets and Other Liabilities 2,844 3,651
-------- --------
Net Cash Provided by Operating Activities $ 6,681 $ 6,082
======== ========
9
(9) BUSINESS SEGMENTS
Reclassifications were made to the prior year's segment information to conform
to the presentation used in fiscal year 2003. The results of operations for a
consulting business unit were transferred from the Software Solutions segment to
the Transformation Solutions segment. This presentation reflects the current
organizational structure of the company.
2002 2001
--------- ---------
NET SALES AND REVENUES
Software Solutions $ 162,351 $ 148,028
Transformation Solutions 34,029 37,491
Documents 40,628 44,237
Financial Services 9,640 10,353
---------- ----------
Total Net Sales and Revenues $ 246,648 $ 240,109
========== ==========
OPERATING INCOME (LOSS)
Software Solutions $ 38,579 $ 30,316
Transformation Solutions (6,296) (1,778)
Documents 7,571 9,414
Financial Services 5,907 5,595
---------- ----------
Total Operating Income $ 45,761 $ 43,547
========== ==========
12/31/02 9/30/02
---------- ----------
ASSETS
Automotive Solutions $ 688,137 $ 729,560
Financial Services 404,176 407,605
---------- ----------
Total Assets $1,092,313 $1,137,165
========== ==========
(10) 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 nonbinding
mediation. The company believes that the reasonably foreseeable resolution of
these two matters will not have a material adverse effect on the financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation requires the company
to disclose contingent obligations under certain guarantees in both interim and
annual financial statements. In fiscal year 2000, the company sold the net
assets of its Information Solutions segment to The Carlyle Group. The Carlyle
Group renamed the business Relizon Corporation. The company became secondarily
liable under new real estate leases after being released as primary obligor for
facilities leased and paid by Relizon. As of December 31, 2002, this contingent
liability totaled $5,056. The majority of these leases expire during 2003 and
2004. Also in connection with the sale of these operations to The Carlyle Group,
the company secured a stand-by letter of credit which expires in 2007. The
company is contingently liable for a portion of long-term debt secured by a
Relizon facility in Canada. As of December 31, 2002, the unamortized balance on
this letter of credit was $1,667.
10
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 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.
(11) ACCOUNTING STANDARDS
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 does not believe the adoption of this
pronouncement will have a material impact on the company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among the
parties involved. This interpretation applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date. It applies to the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. Management is currently assessing the impact
of this pronouncement and has not determined the impact on the company's
financial statements. In the fourth quarter of fiscal year 2003, the company
will likely be required to consolidate a nonconsolidated trust from which the
company leases an office building near Dayton, Ohio.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(In thousands except per share data)
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
2002 2001 Change % Change
-------- -------- -------- --------
Net sales and revenues $246,648 $240,109 $ 6,539 3%
Gross profit $139,311 $140,603 $(1,292) -1%
% of revenues 56.5% 58.6%
SG&A expenses $ 93,550 $ 97,056 $(3,506) -4%
% of revenues 37.9% 40.5%
Operating income $ 45,761 $ 43,547 $ 2,214 5%
% of revenues 18.6% 18.1%
Income Before Cumulative Effect of
Accounting Change $ 28,248 $ 25,400 $ 2,848 11%
Basic earnings per share $ 0.41 $ 0.36 $ 0.05 14%
Diluted earnings per share $ 0.40 $ 0.35 $ 0.05 14%
Consolidated revenues increased over the prior year as strong growth in Software
Solutions revenues was partially offset by sales declines in the other segments.
Gross margin declined as a percentage of revenues because of growth in lower
margin Software Solutions computer systems products, Documents sales decline and
a change in the method of allocating certain expenses previously reported as
SG&A expenses to cost of sales. This improved method of allocating expenses was
made possible by a new general ledger system, however, it was not practicable to
restate the prior year. SG&A expenses declined from last year primarily because
of lower severance expenses and the change in cost allocation methodology.
Research and development (R&D) expenses were approximately $18,000 in the
quarter, compared to $16,000 last year. Operating income also included about
$1,800 of operating losses for Reydiance (acquired as Boat Ventures.com in
August 2002) and Networkcar, acquired during the first quarter of fiscal year
2003. Overall, operating income grew at a higher rate than sales and the
operating margin improved to about 19%.
11
Other income and expense improved from last year primarily because last year
included losses from affiliated companies. Interest expense also declined from
last year because of the February 2002 interest rate swap which lowered
effective interest rates. Interest income grew because of higher average cash
balances during the first quarter of fiscal year 2003. The effective income tax
rate was approximately the same as last year.
SOFTWARE SOLUTIONS
2002 2001 Change % Change
-------- -------- -------- --------
Net sales and revenues $162,351 $148,028 $ 14,323 10%
Gross profit $ 98,908 $ 94,703 $ 4,205 4%
% of revenues 60.9% 64.0%
SG&A expenses $ 60,329 $ 64,387 $ (4,058) -6%
% of revenues 37.1% 43.5%
Operating income $ 38,579 $ 30,316 $ 8,263 27%
% of revenues 23.8% 20.5%
Software Solutions revenues increased over last year as both computer systems
products sales and computer service revenues increased over last year. After
declining for the last two years, computer systems products sales increased as
more ERA computer systems and related PCs were sold. Recurring computer services
revenues, comprised predominately of recurring software support and equipment
maintenance revenues, grew because of the increased number of ERA retail
management software applications supported and growth in network services
revenues. The backlog of new orders for computer systems products and deferred
revenues (orders shipped, but not yet recognized in revenues) was approximately
$59,000 at December 31, 2002 compared to $60,000 at September 30, 2002. Gross
profit increased because of the sales increase, however, gross margins declined.
This decline occurred because of the strong growth in lower margin product sales
and a change in the method of allocating certain expenses previously reported as
SG&A expenses to cost of sales. This improved method of allocating expenses was
made possible by a new general ledger system, however, it was not practicable to
restate the prior year. SG&A expenses declined from last year primarily because
of lower severance expenses and the change in cost allocation methodology.
Operating margins remained strong, exceeding last year because of the strong
sales growth and lower severance expense than incurred last year.
TRANSFORMATION SOLUTIONS
2002 2001 Change % Change
-------- -------- -------- --------
Net sales and revenues $34,029 $37,491 $(3,462) -9%
Gross profit $10,427 $12,341 $(1,914) -16%
% of revenues 30.6% 32.9%
SG&A expenses $16,723 $14,119 $ 2,604 18%
% of revenues 49.1% 37.6%
Operating loss $(6,296) $(1,778) $(4,518)
% of revenues -18.5% -4.7%
Transformation Solutions revenues were less than last year as growth of credit
applications and Automark Web Services was more than offset by declines in
consulting revenues 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 family of solutions, the company has
launched additional hosted services and will release more in the future. As many
of these hosted services integrate into the Web services offerings, the company
is transitioning Automark Web Services to the company's standard contract terms,
which do not contain the hosting option. 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. During the first quarter of
fiscal year 2003, the vast majority of Automark contracts included the hosting
option and revenues were recognized upon delivery of the software. Gross profit
and gross profit margins declined from last year because of the decline in
consulting revenues and the resulting lower utilization of consultants. The
operating income also reflects losses related to Reydiance, acquired in the
fourth quarter of fiscal year 2002 and Networkcar, acquired during the first
quarter of fiscal year 2003.
12
DOCUMENTS
2002 2001 Change % Change
-------- -------- -------- --------
Net sales and revenues $40,628 $44,237 $(3,609) -8%
Gross profit $22,870 $25,980 $(3,110) -12%
% of revenues 56.3% 58.7%
SG&A expenses $15,299 $16,566 $(1,267) -8%
% of revenues 37.7% 37.4%
Operating income $ 7,571 $ 9,414 $(1,843) -20%
% of revenues 18.6% 21.3%
Documents sales decreased in the first quarter of fiscal year 2003 as a result
of the continued decline in the number of business forms sold. When comparing
the previous two calendar years, the rate of sales decline has decreased. In
calendar year 2002, sales declined 2.6%, compared to a 5.2% decline in calendar
year 2001. Gross profit and gross profit margins, while still strong, were less
than last year because of the sales decline. Operating margins remained strong,
reflecting the change in gross profit as SG&A expenses declined with sales.
FINANCIAL SERVICES
2002 2001 Change % Change
-------- -------- -------- --------
Net sales and revenues $9,640 $10,353 $(713) -7%
Gross profit $7,106 $ 7,579 $(473) -6%
% of revenues 73.7% 73.2%
SG&A expenses $1,199 $ 1,984 $(785) -40%
% of revenues 12.4% 19.2%
Operating income $5,907 $ 5,595 $ 312 6%
% of revenues 61.3% 54.0%
Financial Services revenues decreased from last year as the average balance of
outstanding finance receivables declined from a year ago. The decline in finance
receivables resulted from lower new computer systems sales last year. The effect
of stronger sales of new computer systems in the first quarter of fiscal year
2003 should begin in the second quarter once systems are fully installed. Gross
profit decreased from last year because of the revenue decline, however, gross
profit margins increased over the last year as interest rate spreads
strengthened. Financial Services interest rate spread was strong at 5.2%,
compared to 4.6% last year. In fiscal year 2003, the interest rate spread was at
a relatively high level for this segment as reduced interest rates drove lower
borrowing costs. SG&A declined from last year because of lower bad debt
expenses. Bad debt expenses were $315 in the first quarter of 2003, compared to
$1,100 last year, reflecting a decline in past due accounts. Overall, operating
margins were very strong for this segment.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The company's cash balances were $102,745 as of December 31, 2002. Cash flows
from operating activities were $8,718 during the first three months of the
fiscal year and compare favorably with the prior year. Cash flow from operating
activities resulted primarily from net income, adjusted for non cash charges,
primarily depreciation and amortization, partially reduced by annual payments
related to compensation and benefit plans. Cash flows provided by investing
activities included intercompany loan repayments and dividends from financial
services. These operating and investing cash flows funded the company's purchase
of Networkcar for $11,666 and investments for normal operations including $9,505
of capital expenditures. See Note 3 to the Consolidated Financial Statements for
more disclosure on business combinations. During the first three months of the
fiscal year, the company also capitalized $5,079 of software licensed to
customers. As of December 31, 2002, the balance of software licensed to
customers was $86,414. 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 $35,000.
Financial services operating cash flows and collections on finance receivables
were invested in new finance receivables for the company's automotive systems,
used to make scheduled debt repayments and dividend payments to automotive
solutions.
CAPITALIZATION
The company's ratio of total debt (total automotive solutions debt) to
capitalization (total automotive solutions debt plus shareholders' equity) was
19.4% as of December 31, 2002 and 20.0% as of September 30, 2002. During the
first quarter of fiscal year 2003, the company repaid $6,061 of long-term debt.
13
Remaining credit available under committed revolving credit agreements was
$100,000 at December 31, 2002. In addition to committed credit agreements, the
company also has a variety of other short-term credit lines available. The
company anticipates that cash balances, cash flow from operations and cash
available from committed credit agreements will be sufficient to fund normal
operations over the next year. Cash balances are placed in short-term
investments until such time as needed.
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. In January 2003, the FASB issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." This
interpretation will require existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among the parties involved. Management is currently
assessing the impact of this pronouncement and has not determined the impact on
the company's financial statements. In the fourth quarter of fiscal year 2003,
the company will likely be required to consolidate this nonconsolidated trust,
recording the values of the building and outstanding debt on its consolidated
balance sheet.
On January 24, 2003, Reyna Funding, L.L.C., a consolidated affiliate of the
company, renewed a loan funding agreement, whereby Reyna Funding, L.L.C.
borrowed $100,000 using finance receivables purchased from Reyna Capital
Corporation, also an affiliate of the company, as security for the loan. The
securitization allows borrowings, up to the $100,000 limit, through January 23,
2004. This loan funding agreement is renewable annually through January 23,
2006. Any borrowings will be repaid as collections on finance receivables
balances are received. The outstanding borrowings under this arrangement were
included with Financial Services' notes payable on the consolidated balance
sheet.
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 December 31, 2002, the company can 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.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock Exchange.
There is no principal market for the Class B common shares. The company also has
an authorized class of 60,000 preferred shares with no par value. As of December
31, 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
preferred share purchase rights described in the company's annual report on Form
10-K for the fiscal year ended September 30, 2002.
Dividends are typically declared each November, February, May and August and
paid in January, April, June and September. Dividends per Class A common share
must be twenty times the dividends per Class B common share and all dividend
payments must be simultaneous. The company has paid dividends every year since
the company's initial public offering in 1961.
During the three months ended December 31, 2002, the company repurchased 1,580
Class A common shares for $40,910 ($25.89 per share). As of December 31, 2002,
the company could repurchase an additional 3,323 Class A common shares under
existing board of directors' authorizations.
14
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The company's consolidated financial statements and notes to consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements and applying accounting policies require management to make
judgments, estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Critical accounting policies for the company
include revenue recognition, accounting for software licensed to customers,
accounting for long-lived assets 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.
15
MARKET RISKS
INTEREST RATES
The Automotive Solutions portion of the business borrows money, as needed,
primarily to fund business combinations. Generally the company borrows under
fixed rate agreements with terms of ten years or less. During fiscal year 2002,
the company entered into $100,000 of interest rate swaps to reduce the effective
interest expense on outstanding long-term debt. In this transaction the company
effectively converted 7% fixed rate debt into variable rate debt. The company
does not use financial instruments for trading purposes. See Note 5 to the
Consolidated Financial Statements for additional discussion of interest rate
management agreements.
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. During the quarter ended December 31, 2002, Reyna Funding, L.L.C., an
affiliate of the company, entered into a $10,750 interest rate swap to replace a
maturing interest rate swap. The company does not use financial instruments for
trading purposes. See Note 5 to the Consolidated Financial Statements for
additional discussion of interest rate management agreements.
Because the company's borrowings are generally under fixed rate debt
arrangements 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.
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations, primarily in Canada, which accounted
for 6% of net sales and revenues for the three months ended December 31, 2002.
In the conduct of its foreign operations the company has intercompany sales,
charges 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 December 31, 2002, the company
had no foreign currency exchange contracts outstanding. Based on the company's
overall foreign currency exchange rate exposure at December 31, 2002, management
believes that a 10% change in currency rates would not have a material effect on
the company's financial statements.
ENVIRONMENTAL MATTER
See Note 10 to the Consolidated Financial Statements for a discussion of the
company's environmental contingencies.
ACCOUNTING STANDARDS
See Note 11 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 we incorporate herein by reference.
CONTROLS AND PROCEDURES
The company's management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14 within 90 days
prior to the filing date of this quarterly report.
16
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 quarterly
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 II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.
(b) Reports on Form 8-K
On December 3, 2002 the company filed a report on Form 8-K
disclosing the purchase of 577 Class A common shares from
Eustace W. Mita, a director, in two arms-length, off-market,
private transactions for $14,909.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE REYNOLDS AND REYNOLDS COMPANY
Date February 14, 2003 /s/ Lloyd G. Waterhouse
------------------- ------------------------------
Lloyd G. Waterhouse
Chief Executive Officer,
Chairman and President
Date February 14, 2003 /s/ Dale L. Medford
------------------- ------------------------------
Dale L. Medford
Executive Vice President
and Chief Financial Officer
18
CERTIFICATIONS
I, Lloyd G. Waterhouse, principal executive officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Reynolds and
Reynolds Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 (or persons
performing the equivalent functions):
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
quarterly 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 February 14, 2003 /s/Lloyd G. Waterhouse
----------------- ----------------------
Lloyd G. Waterhouse
Chief Executive Officer, Chairman and President
19
I, Dale L. Medford, principal financial officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Reynolds and
Reynolds Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly 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 (or persons
performing the equivalent functions):
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
quarterly 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 February 14, 2003 /s/ Dale L. Medford
----------------- --------------------
Dale L. Medford
Executive Vice President and Chief Financial Officer
20