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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 MARCH 31, 2003
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
---- ----
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
---- ----
On March 31, 2003, 66,894,517 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 and Six Months Ended March 31, 2003 and 2002 3
Condensed Consolidated Balance Sheets
As of March 31, 2003 and September 30, 2002 4
Condensed Statements of Consolidated Cash Flows
For the Six Months Ended March 31, 2003 and 2002 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 and Six Months Ended March 31, 2003 and 2002 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
(See the caption entitled "Market Risks" included in the Management's
Discussion and Analysis of Financial Condition and Results of Operations)
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 4. Results of Votes of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
2
THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(In thousands except per share data)
Three Months Six Months
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Sales and Revenues
Services $157,431 $150,688 $307,811 $298,854
Products 88,253 83,742 174,881 165,332
Financial services 9,415 10,572 19,055 20,925
----------- ----------- ----------- -----------
Total net sales and revenues 255,099 245,002 501,747 485,111
----------- ----------- ----------- -----------
Cost of Sales
Services 59,649 52,040 116,487 103,956
Products 51,111 48,744 99,076 93,560
Financial services 2,261 2,517 4,795 5,291
----------- ----------- ----------- -----------
Total cost of sales 113,021 103,301 220,358 202,807
----------- ----------- ----------- -----------
Gross Profit 142,078 141,701 281,389 282,304
Selling, General and Administrative Expenses 95,558 105,190 189,108 202,246
----------- ----------- ----------- -----------
Operating Income 46,520 36,511 92,281 80,058
----------- ----------- ----------- -----------
Other Charges (Income)
Interest expense 1,179 (291) 2,700 1,561
Interest income (462) (1,438) (1,333) (2,113)
Equity in net losses (income) of affiliated companies (512) 13,192 (1,084) 14,245
Other (1,777) 96 (2,201) (64)
----------- ----------- ----------- -----------
Total other charges (income) (1,572) 11,559 (1,918) 13,629
----------- ----------- ----------- -----------
Income Before Income Taxes 48,092 24,952 94,199 66,429
Provision for (Benefits from) Income Taxes 18,565 (4,115) 36,424 11,962
----------- ----------- ----------- -----------
Income Before Cumulative Effect of Accounting Change 29,527 29,067 57,775 54,467
Cumulative Effect of Accounting Change 0 0 0 (36,563)
----------- ----------- ----------- -----------
Net Income $29,527 $29,067 $57,775 $17,904
=========== =========== =========== ===========
Basic Earnings Per Common Share
Income Before Cumulative Effect of Accounting Change $0.43 $0.41 $0.84 $0.77
Cumulative Effect of Accounting Change $0.00 $0.00 $0.00 ($0.52)
Net Income $0.43 $0.41 $0.84 $0.25
Average Number of Common Shares Outstanding 68,094 71,073 68,647 70,855
Diluted Earnings Per Common Share
Income Before Cumulative Effect of Accounting Change $0.42 $0.39 $0.82 $0.74
Cumulative Effect of Accounting Change $0.00 $0.00 $0.00 ($0.50)
Net Income $0.42 $0.39 $0.82 $0.24
Average Number of Common Shares Outstanding 70,017 74,121 70,566 73,613
Cash Dividends Declared Per Common Share $0.11 $0.11 $0.22 $0.22
See Notes to Condensed Consolidated Financial Statements.
3
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND SEPTEMBER 30, 2002
(In thousands)
3/31/03 9/30/02
----------- -----------
AUTOMOTIVE SOLUTIONS ASSETS
Current Assets
Cash and equivalents $122,388 $155,295
Accounts receivable 106,216 117,471
Inventories 15,914 13,067
Other current assets 32,372 31,970
----------- -----------
Total current assets 276,890 317,803
Property, Plant and Equipment, less accumulated
depreciation of $162,643 at 3/31/03 and
$159,558 at 9/30/02 162,002 161,073
Goodwill 43,649 28,999
Software Licensed to Customers 91,377 81,557
Acquired Intangible Assets 38,981 44,366
Other Assets 95,780 95,762
----------- -----------
Total Automotive Solutions Assets 708,679 729,560
----------- -----------
FINANCIAL SERVICES ASSETS
Cash 1,405 635
Finance Receivables 396,749 406,160
Other Assets 689 810
----------- -----------
Total Financial Services Assets 398,843 407,605
----------- -----------
TOTAL ASSETS $1,107,522 $1,137,165
=========== ===========
AUTOMOTIVE SOLUTIONS LIABILITIES
Current Liabilities
Current portion of long-term debt $0 $6,061
Accounts payable 41,064 45,144
Accrued liabilities 77,738 81,860
Deferred revenues 28,380 24,404
----------- -----------
Total current liabilities 147,182 157,469
Long-Term Debt 107,190 107,408
Other Liabilities 91,195 96,488
----------- -----------
Total Automotive Solutions Liabilities 345,567 361,365
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 201,240 217,252
Other Liabilities 106,734 103,522
----------- -----------
Total Financial Services Liabilities 307,974 320,774
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 221,940 217,018
Other Comprehensive Losses (12,383) (14,234)
Retained Earnings 244,424 252,242
----------- -----------
Total Shareholders' Equity 453,981 455,026
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,107,522 $1,137,165
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(In thousands)
2003 2002
--------- ---------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided By Operating Activities $60,561 $72,780
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (11,714) 0
Capital expenditures (14,166) (22,565)
Net proceeds from asset sales 157 9,275
Capitalization of software licensed to customers (10,359) (10,837)
Repayments from financial services 1,910 32,119
--------- ---------
Net cash flows provided by (used for) investing
activities (34,172) 7,992
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Principal payments on debt (6,061) (346)
Cash dividends paid (7,548) (7,765)
Capital stock issued 10,620 36,039
Capital stock repurchased (57,797) (58,587)
--------- ---------
Net cash flows used for financing activities (60,786) (30,659)
--------- ---------
Effect of Exchange Rate Changes on Cash 1,490 (233)
--------- ---------
Increase (Decrease) in Cash and Equivalents (32,907) 49,880
Cash and Equivalents, Beginning of Period 155,295 110,511
--------- ---------
Cash and Equivalents, End of Period $122,388 $160,391
========= =========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $9,702 $10,765
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (76,100) (84,953)
Collections on finance receivables 85,090 92,093
--------- ---------
Net cash flows provided by investing activities 8,990 7,140
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 0 80,000
Principal payments on debt (16,012) (65,770)
Repayments to automotive solutions (1,910) (32,119)
--------- ---------
Net cash flows used for financing activities (17,922) (17,889)
--------- ---------
Increase in Cash and Equivalents 770 16
Cash and Equivalents, Beginning of Period 635 441
--------- ---------
Cash and Equivalents, End of Period $1,405 $457
========= =========
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
3/31/03 9/30/02
----------- -----------
Finished products $15,312 $12,539
Work in process 283 365
Raw materials 319 163
----------- -----------
Total inventories $15,914 $13,067
=========== ===========
(3) BUSINESS COMBINATIONS
In November 2002, the company purchased all outstanding shares of Networkcar,
Inc., the provider of a telematics device, which monitors a car's diagnostic
information, locates stolen cars through a satellite-based Global Positioning
System and performs remote emissions testing. The company purchased Networkcar
to enable the rollout to North American automotive retailers as a component of
the company's integrated suite of customer relationship management solutions.
The purchase price of $11,714 was paid with cash from existing balances. The
results of Networkcar's operations have been included in the company's financial
statements since the November 29, 2002, purchase date. As of March 31, 2003, the
company has recorded goodwill of $12,550 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. During 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 14,650 14,650
------------ ------------- ------------- -----------
Balances as of March 31, 2003 $10,412 $30,360 $2,877 $43,649
============ ============= ============= ===========
6
ACQUIRED INTANGIBLE ASSETS
Gross Accumulated Useful Life
Amount Amortization (years)
-------------- --------------- -------------
AS OF MARCH 31, 2003
Amortized intangible assets
Contractual customer relationship $33,100 $4,827 20
Customer contract 17,700 14,080 3.67
Trademarks 5,900 860 20
Other 4,016 1,968 2-15
-------------- ---------------
Total $60,716 $21,735
============== ===============
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 $1,830 and $3,584 for the three and six
months ended March 31, 2003, respectively. 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 March 31, 2003, 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 $7,372 at March 31, 2003 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 March 31, 2003, Reyna Funding, L.L.C.
had outstanding borrowings of $100,000 under this arrangement.
As of March 31, 2003, 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 $25,500.
These interest rate swap agreements were designated as cash flow hedges. The
fair value of the company's cash flow derivative instruments was a $3,449
liability at March 31, 2003 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
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
------------ ------------ ---------- ----------
Net income $29,527 $29,067 $57,775 $17,904
Foreign currency translation adjustment 1,375 (54) 1,490 (233)
Net unrealized gains on derivative contracts, net of taxes 195 703 361 925
------------ ------------ ---------- ----------
Comprehensive income $31,097 $29,716 $59,626 $18,596
============ ============ ========== ==========
(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 was effective for interim financial statements
beginning after December 15 2002.
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.
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
---------- ----------- --------- ----------
Net Income as reported $29,527 $29,067 $57,775 $17,904
Stock-based compensation employee expense, net of taxes 2,585 2,798 5,289 6,428
---------- ----------- --------- ----------
Pro forma net income $26,942 $26,269 $52,486 $11,476
========== =========== ========= ==========
Basic Earnings Per Common Share
Net Income as reported $0.43 $0.41 $0.84 $0.25
Pro forma net income $0.40 $0.37 $0.76 $0.16
Diluted Earnings Per Common Share
Net Income as reported $0.42 $0.39 $0.82 $0.24
Pro forma net income $0.38 $0.35 $0.74 $0.15
8
(8) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
SIX MONTHS
2003 2002
------------ -------------
AUTOMOTIVE SOLUTIONS
Net Income $51,020 $11,047
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Cumulative effect of accounting change 0 36,563
Depreciation and amortization 16,813 14,379
Deferred income taxes 2,165 9,149
Deferred income taxes transferred to (from) Financial Services 2,516 (1,780)
Losses on sales of assets 804 1,013
Changes in operating assets and liabilities
Accounts receivable 9,330 17,573
Inventories (2,549) (3,519)
Prepaid expenses and other current assets (1,486) (457)
Intangible and other assets (1,515) 15,629
Accounts payable (4,378) (4,509)
Accrued liabilities (6,408) (14,735)
Other liabilities (5,751) (7,573)
------------ -------------
Net Cash Provided by Operating Activities $60,561 $72,780
============ =============
FINANCIAL SERVICES
Net Income $6,755 $6,857
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Deferred income taxes 1,856 (3,939)
Deferred income taxes transferred to (from) Automotive Solutions (2,516) 1,780
Changes in receivables, other assets and other liabilities 3,607 6,067
------------ -------------
Net Cash Provided by Operating Activities $9,702 $10,765
============ =============
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.
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
------------- -------------- -------------- --------------
NET SALES AND REVENUES
Software Solutions $166,817 $150,205 $329,168 $298,233
Transformation Solutions 34,688 37,054 68,717 74,545
Documents 44,179 47,171 84,807 91,408
Financial Services 9,415 10,572 19,055 20,925
------------- -------------- -------------- --------------
Total Net Sales and Revenues $255,099 $245,002 $501,747 $485,111
============= ============== ============== ==============
OPERATING INCOME (LOSS)
Software Solutions $40,324 $25,108 $78,903 $55,424
Transformation Solutions (6,698) (3,422) (12,994) (5,200)
Documents 7,724 9,176 15,295 18,590
Financial Services 5,170 5,649 11,077 11,244
------------- -------------- -------------- --------------
Total Operating Income $46,520 $36,511 $92,281 $80,058
============= ============== ============== ==============
3/31/03 9/30/02
-------------- --------------
ASSETS
Automotive Solutions $708,679 $729,560
Financial Services 398,843 407,605
-------------- --------------
Total Assets $1,107,522 $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. In 2000, the company was named a defendant in a cost
recovery lawsuit filed by a PRP coalition in the United States District Court
for 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 March 31, 2003, this contingent
liability totaled $4,197. 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 March 31, 2003, the unamortized balance on
this letter of credit was $1,626.
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. See also related discussion of FASB interpretation
No. 46 in Note 11 to the Condensed Consolidated Financial Statements.
(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 discussed in Note
10 to the Condensed Consolidated Financial Statements 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 AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(In thousands except per share data)
2002 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
among the states. The combination of audit settlements, accrual adjustments and
amended returns added $5,890 or $.08 per share of earnings in the second quarter
of fiscal year 2002. The income tax adjustments were recorded as follows: $2,310
in selling, general and administrative (SG&A) expenses, primarily for
professional fees associated with obtaining the income tax benefits, $1,709 for
the reversal of previously recorded 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. 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 with the provision for (benefit from) income taxes on the
statement of consolidated income. The following discussion and analysis of
results of operations excludes the effect of the 2002 special items.
11
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
Three Months Six Months
------------------------------------------- -------------------------------------------
2003 2002 Change % Change 2003 2002 Change % Change
----------- ---------- -------- ----------- --------- ---------- --------- ------------
Net sales and revenues $255,099 $245,002 $10,097 4% $501,747 $485,111 $16,636 3%
Gross profit $142,078 $141,701 $377 0% $281,389 $282,304 ($915) 0%
% of revenues 55.7% 57.8% 56.1% 58.2%
SG&A expenses $95,558 $105,190 ($9,632) -9% $189,108 $202,246 ($13,138) -6%
% of revenues 37.5% 42.9% 37.7% 41.7%
Operating income $46,520 $36,511 $10,009 27% $92,281 $80,058 $12,223 15%
% of revenues 18.2% 14.9% 18.4% 16.5%
Income Before Cumulative Effect of
Accounting Change $29,527 $29,067 $460 2% $57,775 $54,467 $3,308 6%
Basic earnings per share $0.43 $0.41 $0.02 5% $0.84 $0.77 $0.07 9%
Diluted earnings per share $0.42 $0.39 $0.03 8% $0.82 $0.74 $0.08 11%
Consolidated revenues increased 4% in the quarter continuing a recent trend of
quarter to quarter revenue growth improvement. For both the second quarter and
six months, consolidated revenues reflected growth in excess of 10% for the
Software Solutions segment, partially offset by sales declines in the other
segments. Gross margins declined, reflecting sales growth of Software Solutions
computer systems products, which have lower margins than computer service
revenues, lower sales of Documents and consulting services and a change in the
allocation of certain expenses previously reported as SG&A expenses to cost of
sales. This improved allocation of expenses was made possible by a new general
ledger system, however, it was not practicable to restate the prior year. Second
quarter and year-to-date SG&A expenses declined from last year, both in total
dollars and as a percentage of revenues, primarily because of 2002 special
items. Excluding 2002 special items, SG&A expenses declined because of lower
selling expenses and the change in cost allocation methodology. Research and
development (R&D) expenses were approximately $18,000 in the quarter and $35,000
year-to-date, compared to $16,000 and $32,000 last year, respectively. Operating
income also included combined losses for the New Markets Group (which includes
BoatVentures.com acquired in August 2002), Networkcar (acquired in November
2002) and Dealerpoint (acquired in January 2003) of $3,400 for the quarter and
$5,100 year-to-date. Excluding the impact of these investments for future
growth, operating margins exceeded 19%.
Other income and expense improved from last year primarily because last year
included the previously mentioned pretax losses on the sale of Kalamazoo
Computer Group shares. In the second quarter of 2003, the company sold its
investment in Credit Online and recorded a pretax gain of $1,369. The effective
income tax rate was approximately the same as last year, excluding the tax
effect of special items.
SOFTWARE SOLUTIONS
Three Months Six Months
--------------------------------------------- -----------------------------------------
2003 2002 Change % Change 2003 2002 Change % Change
----------- ---------- ---------- ----------- --------- ---------- --------- ----------
Net sales and revenues $166,817 $150,205 $16,612 11% $329,168 $298,233 $30,935 10%
Gross profit $100,137 $93,636 $6,501 7% $199,045 $188,339 $10,706 6%
% of revenues 60.0% 62.3% 60.5% 63.2%
SG&A expenses $59,813 $68,528 ($8,715) -13% $120,142 $132,915 ($12,773) -10%
% of revenues 35.8% 45.6% 36.5% 44.6%
Operating income $40,324 $25,108 $15,216 61% $78,903 $55,424 $23,479 42%
% of revenues 24.2% 16.7% 24.0% 18.6%
Software Solutions revenues grew in excess of 10% over last year for both the
second quarter and six months 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. 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, growth in Network Services revenues and the addition of
Dealerpoint sales. The backlog of new orders for computer systems products and
deferred revenues (orders shipped, but not yet recognized in revenues) was
approximately $61,000 at March 31, 2003 compared to $60,000 at September 30,
2002. Gross profit increased over last year for the quarter and year-to-date
because of the sales increase, however, gross margins declined.
12
Gross margin declined from last year, primarily because of the strong growth in
product sales, which have lower margins than service revenues, and the
allocation of certain expenses previously reported as SG&A expenses to cost of
sales. The new allocation methodology reduced gross margin by about one
percentage point in both the second quarter and six months. This improved
allocation of expenses was made possible by a new general ledger system,
however, it was not practicable to restate the prior year. SG&A expenses
declined as a percentage of revenues for both the quarter and six months, as
compared to last year primarily because of 2002 special items. Excluding 2002
special items, SG&A expenses declined primarily because of lower severance
expenses and the change in cost allocation methodology. Excluding the impact of
2002 special items, operating margins exceeded last year for both the three and
six month periods, primarily because of the sales growth.
TRANSFORMATION SOLUTIONS
Three Months Six Months
----------------------------------------- -------------------------------------------
2003 2002 Change % Change 2003 2002 Change % Change
---------- --------- --------- ---------- ---------- --------- ---------- -----------
Net sales and revenues $34,688 $37,054 ($2,366) -6% $68,717 $74,545 ($5,828) -8%
Gross profit $10,681 $12,670 ($1,989) -16% $21,108 $25,011 ($3,903) -16%
% of revenues 30.8% 34.2% 30.7% 33.6%
SG&A expenses $17,379 $16,092 $1,287 8% $34,102 $30,211 $3,891 13%
% of revenues 50.1% 43.4% 49.6% 40.6%
Operating loss ($6,698) ($3,422) ($3,276) ($12,994) ($5,200) ($7,794)
% of revenues -19.3% -9.2% -18.9% -7.0%
Transformation Solutions revenues decreased from last year for both the three
and six month periods as growth of credit applications and Networkcar revenues
were more than offset by declines in consulting, Campaign Management Services,
and Automark Web Services revenues. Automark Web Services revenues declined as
the company began recording revenues over the contract service period, instead
of upon delivery of the software license. Automark Web Services 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. Gross profit and gross profit margins declined from last year
for both the three and six months because of the decline in consulting revenues
and the resulting lower utilization of consultants. Second quarter and
year-to-date operating losses reflected higher SG&A expenses resulting from the
purchases of Networkcar in November 2002 and BoatVentures.com in August 2002.
See Note 3 to the Condensed Consolidated Financial Statements for additional
disclosures regarding these business combinations.
DOCUMENTS
Three Months Six Months
------------------------------------------ ------------------------------------------
2003 2002 Change % Change 2003 2002 Change % Change
---------- --------- --------- ----------- --------- ---------- ---------- ----------
Net sales and revenues $44,179 $47,171 ($2,992) -6% $84,807 $91,408 ($6,601) -7%
Gross profit $24,106 $27,340 ($3,234) -12% $46,976 $53,320 ($6,344) -12%
% of revenues 54.6% 58.0% 55.4% 58.3%
SG&A expenses $16,382 $18,164 ($1,782) -10% $31,681 $34,730 ($3,049) -9%
% of revenues 37.1% 38.5% 37.4% 38.0%
Operating income $7,724 $9,176 ($1,452) -16% $15,295 $18,590 ($3,295) -18%
% of revenues 17.5% 19.5% 18.0% 20.3%
Documents sales decreased for both the three and six months ended March 31,
2003, as a result of the continued decline in the number of business forms sold.
Laser and continuous forms revenues increased; however, this increase was more
than offset by lower volume in other product lines. Gross profit and gross
profit margins were less than last year for both the second quarter and six
months primarily because of the sales decline, reducing fixed cost coverage and
contributing to manufacturing inefficiencies. Gross profit was also negatively
impacted by the change in allocation methodology, which shifted certain expenses
from SG&A expenses to cost of sales. It was not practicable to restate last
year. SG&A expenses declined from last year, for both periods, reflecting both
lower sales and the cost allocation change. Operating margins declined
consistent with the changes in gross profit margins.
13
FINANCIAL SERVICES
Three Months Six Months
-------------------------------------------- -----------------------------------------
2003 2002 Change % Change 2003 2002 Change % Change
-------- ---------- ----------- ------------ -------- ---------- ---------- ----------
Net sales and revenues $9,415 $10,572 ($1,157) -11% $19,055 $20,925 ($1,870) -9%
Gross profit $7,154 $8,055 ($901) -11% $14,260 $15,634 ($1,374) -9%
% of revenues 76.0% 76.2% 74.8% 74.7%
SG&A expenses $1,984 $2,406 ($422) -18% $3,183 $4,390 ($1,207) -27%
% of revenues 21.1% 22.8% 16.7% 21.0%
Operating income $5,170 $5,649 ($479) -8% $11,077 $11,244 ($167) -1%
% of revenues 54.9% 53.4% 58.1% 53.7%
Financial Services revenues decreased from last year for both the three and six
months. Revenues declined because of both, a decline in receivables balances and
lower interest rates. Gross profit decreased from last year, quarter and
year-to-date, because of the revenue decline, but gross profit margins remained
essentially flat. Year-to-date, Financial Services interest rate spread was
strong at 5.2%, compared to 4.9% last year. These interest rate spreads
represent relatively high levels for this segment as reduced interest rates
drove lower borrowing costs. SG&A Expenses declined from last year because of
lower bad debt expenses. Bad debt expenses were $1,100 in the second quarter of
2003, compared to $1,500 last year and $1,415 year-to-date, compared to $2,600
last year. Reduced bad debt expenses reflect lower write-offs and a decline in
past due accounts. Overall, operating margins remained strong for this segment.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The company's cash balances were $122,388 as of March 31, 2003. Cash flows from
operating activities were $60,561 for the six months ended March 31, 2003, and
resulted primarily from net income, adjusted for non cash charges, primarily
depreciation and amortization. Cash flows used for investing activities included
the company's purchase of Networkcar for $11,714, capital expenditures of
$14,166 for normal operations and the capitalization of $10,359 of software
licensed to customers. As of March 31, 2003, the balance of software licensed to
customers was $91,377. Most of the capitalized software development costs
related to Reynolds Generations Series solutions scheduled for release in the
second half of 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 $40,000.
Financial services operating cash flows and collections on finance receivables
were invested in new finance receivables for the company's automotive systems
and used to make scheduled debt repayments.
CAPITALIZATION
The company's ratio of total debt (total automotive solutions debt) to
capitalization (total automotive solutions debt plus shareholders' equity) was
19.1% as of March 31, 2003 and 20.0% as of September 30, 2002. During the first
six months of fiscal year 2003, the company repaid $6,061 of long-term debt.
Remaining credit available under committed revolving credit agreements was
$100,000 at March 31, 2003. 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.
14
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 March 31, 2003, 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 March
31, 2003, 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 March 31, 2003, the company repurchased 700 Class
A common shares for $16,887 ($24.12 per share). Year-to-date, the company
repurchased 2,280 Class A common shares for $57,797 ($25.35 per share). As of
March 31, 2003, the company could repurchase an additional 2,623 Class A common
shares under existing board of directors' authorizations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The company's consolidated financial statements and notes to consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements and applying accounting policies 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.
15
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.
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
Condensed 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 six months ended March 31, 2003, Reyna Funding, L.L.C., an
affiliate of the company, entered into interest rate swaps of $17,700 to
16
replace maturing interest rate swaps. The company does not use financial
instruments for trading purposes. See Note 5 to the Condensed Consolidated
Financial Statements for additional discussion of interest rate management
agreements.
Because of the company's debt profile, 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, located primarily in Canada, which
accounted for 6% of net sales and revenues for the six months ended March 31,
2003. In the conduct of its foreign operations the company has intercompany
sales, charges and loans between the U.S. and its foreign subsidiaries and may
receive dividends denominated in different currencies. These transactions expose
the company to changes in foreign currency exchange rates. At March 31, 2003,
the company had no foreign currency exchange contracts outstanding. Based on the
company's overall foreign currency exchange rate exposure at March 31, 2003,
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 Condensed Consolidated Financial Statements for a discussion
of the company's environmental contingencies.
ACCOUNTING STANDARDS
See Note 11 to the Condensed Consolidated Financial Statements for a discussion
of the effect of accounting standards that the company has not yet adopted.
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. 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.
17
PART II - OTHER INFORMATION
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS'
At the Annual Meeting of Shareholders on February 13, 2003, the shareholders of
the company voted on and approved the following issues
Issue 1 Election of Directors
Shares
Shares For Withheld
-------------- ---------------------
Three-year terms Expiring in 2006
Cleve L. Killingsworth, Jr. 74,579,855 1,400,297
Dale L. Medford 75,674,691 305,461
Lloyd G. Waterhouse 75,565,888 414,264
Renato Zambonini 75,673,768 306,384
Two-year term Expiring in 2005
Stephanie W. Bergeron 73,040,939 2,939,213
Issue 2 Appointment of Deloitte & Touche LLP as Independent Auditors
Shares For 72,773,265
Shares Against 2,939,850
Shares Abstain 267,035
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
There were no reports on Form 8-K filed during the
quarter ended March 31, 2003. The company filed a
report on Form 8-K on April 23, 2003 that included
the company's press release dated April 23, 2003
reporting second quarter results of fiscal year 2003.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE REYNOLDS AND REYNOLDS COMPANY
Date May 14, 2003 /s/ Lloyd G. Waterhouse
----------------- -----------------------
Lloyd G. Waterhouse
Chief Executive Officer,
Chairman and President
Date May 14, 2003 /s/ Dale L. Medford
----------------- -------------------
Dale L. Medford
Executive Vice President
and Chief Financial Officer
19
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 May 14, 2003 /s/Lloyd G. Waterhouse
------------ -----------------------
Lloyd G. Waterhouse
Chief Executive Officer, Chairman and President
20
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 May 14, 2003 /s/Dale L. Medford
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Dale L. Medford
Executive Vice President and Chief Financial Officer
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