Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO __________.
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-0421120
(State of Incorporation) (IRS Employer Identification No.)
ONE REYNOLDS WAY
DAYTON, OHIO 45430
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 485-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
CLASS A COMMON SHARES (NO PAR VALUE) NEW YORK STOCK EXCHANGE
------------------------------------- ------------------------------
(Title of class ) (Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
----
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in the definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or in any amendment to this Form 10-K. [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ].
The aggregate market value of the Class A Common Shares held by non-affiliates
of the registrant, as of December 1, 2003, was $1,854,041,610.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of December 1, 2003:
Class A Common Shares: 66,274,855 (exclusive of 25,812,905 Treasury shares)
Class B Common Shares: 15,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders are
incorporated by reference into Part III of this report to the extent described
herein.
PART I
(Dollars in thousands)
ITEM 1. DESCRIPTION OF BUSINESS
The Reynolds and Reynolds Company (the "company" or "Reynolds") was founded in
1866 and has been an Ohio corporation since 1889. The company's services include
a full range of retail and enterprise management systems, networking and
support, e-business applications, Web services, learning and consulting
services, customer relationship management solutions, document management and
financing services primarily for automotive retailers and manufacturers.
The company is organized into four segments for reporting purposes.
The Software Solutions segment provides integrated computer systems products and
related services. Products include integrated software packages, computer
hardware and installation of hardware and software. Services include customer
training, hardware maintenance and software support as well as consulting
services.
The Transformation Solutions segment provides specialized training, Web services
and customer relationship management solutions.
The Documents segment manufactures and distributes printed business forms
primarily to automotive retailers.
The Financial Services segment provides financing, principally for sales of the
company's computer systems, through the company's wholly-owned affiliates, Reyna
Capital Corporation, Reyna Funding, L.L.C. and a similar operation in Canada.
FINANCIAL INFORMATION ABOUT SEGMENTS
AND FOREIGN AND DOMESTIC OPERATIONS
See Note 11 to the Consolidated Financial Statements on page 49 for financial
and descriptive information about the business segments described above.
NEW SOLUTIONS AND BUSINESS EVENTS IN 2003
In fiscal year 2003, the company continued its mission to lead the
transformation of automotive retailing, investing in people, processes, and new
products that will deliver solutions and services to automotive retailers and
car companies.
- - In fiscal year 2003, Reynolds introduced the Reynolds Generations Series(R)
Suite, a sophisticated customer-centric automotive retail management
solution. Designed from the ground up and based on extensive market
research, the Reynolds Generations Series Suite is a total retail
management solution consisting of seamlessly integrated dealership
applications that include Web Brand Management, Customer Management,
Finance and Insurance Management, Fixed Operations Management, Business
Management, and Employee Management.
- - Reynolds acquired MSN Autos' Dealerpoint automotive lead management
service, the leading provider of these services for the automotive
industry.
- - Reynolds Web Solutions played an integral role in designing and developing
Web sites for Scion retailers during the year as Toyota U.S.A. launched the
Scion brand in the U.S. Scion vehicles, which are sold through most
existing Toyota stores, are being rolled out in phases from mid-2003
through mid-2004.
- - Reynolds acquired Networkcar, Inc. ("Networkcar"), an advanced telematics
solution. The acquisition built on a minority stake the company took in
Networkcar in January 2001. During the year, the company also introduced
Networkcar for Business, a fleet management technology that gives fleet
managers on-line access to
2
detailed vehicle performance indicators such as mileage, speed, speed
history, malfunction indicator lamp status, fuel efficiency, and diagnostic
trouble code descriptions.
RECENT EVENTS
In October 2003, the company purchased the outstanding shares of Incadea AG, a
provider of global automotive retailing software solutions. Privately-held
Incadea, based in Raubling, Germany, has annual revenues of about $6,000. The
purchase price of about $7,000 was paid with cash from existing balances.
In October 2003, the company purchased the net assets of Third Coast Media, a
provider of Web and customer relationship management software to automotive
retailers. Third Coast Media, headquartered in Richardson, Texas, has annual
revenues of about $5,000. The purchase price of about $8,000 was paid with cash
from existing balances.
Effective October 1, 2003, the company elected to adopt the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" and will begin recognizing stock option expense in the
Statements of Consolidated Income. SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" provides three alternative methods for
reporting this change in accounting principle. The company has elected the
retroactive restatement method which requires that all periods presented be
restated to reflect stock-based compensation cost under the fair value based
accounting method of SFAS No. 123 for all awards granted, modified or settled in
fiscal years beginning after December 31, 1994. Accordingly, the company is
currently assessing the impact this will have on the company's Consolidated
Financial Statements and will restate all periods beginning in fiscal 2004. See
pro forma earnings effect in Note 1 to the Consolidated Financial Statements.
On October 2, 2003, the company announced the consolidation of its automotive
forms manufacturing facility located in Grand Prairie, Texas, into the company's
Celina, Ohio facility. The company also eliminated additional positions in
technology, administration and documents sales bringing the total number of
reductions to about 200. The company estimates that costs for severance,
outplacement, relocation and other plant consolidation efforts will total about
$8,000 or $.07 per share in the first quarter of fiscal year 2004.
RAW MATERIALS
Computer hardware and peripherals are essential to the company. It purchases
these products from a variety of suppliers. International Business Machines
Corporation supplies the hardware platform for the Reynolds Generations Series
and the ERA(R) system. If this source of supply were to be interrupted, some
delay would occur in converting to a new platform. The company historically has
not experienced difficulties in obtaining hardware and peripherals, nor does it
reasonably foresee difficulty in obtaining them in the future on competitive
terms and conditions.
PATENTS, TRADEMARKS AND RELATED RIGHTS
Except as described below, the company does not have any patents, trademarks,
licenses, franchises or concessions which are material to an understanding of
its business.
The company's trademark REYNOLDS & REYNOLDS(R) is associated with many goods and
services provided by the company. In the automotive systems market, the company
has a number of direct and indirect distribution and licensing arrangements with
equipment vendors and software providers relating to certain components of the
company's products, including the principal operating systems. These
arrangements are in the aggregate, but not individually (except for the
operating systems), material to the company's business.
3
COMPETITION
The company is North America's leading provider of integrated software solutions
and services to automotive retailers.
The company's main competitor in the Software Solutions segment is the Dealer
Services division of Automatic Data Processing, Inc. ("ADP"). ADP's assets and
financial resources substantially exceed those of the company. Together, the
company and ADP provide a significant share of the information management
systems for automotive retailers in the United States and Canada.
The company is expanding and supplementing its solutions in the Transformation
Solutions segment. This segment experiences competition from hundreds of
providers, ranging from local to regional and national firms.
The company's Documents segment has a leading market share position but
experiences energetic competition from local printing brokers and regional
printers across the United States and Canada and those competitors using
advances in technology.
The company believes it competes by providing value-added products, services and
solutions that satisfy market needs and uses current technology to provide
additional value and to improve price and performance. By specializing in a
particular niche market, the company has emphasized reliable and responsive
service, broad industry knowledge and long-term relationships to meet customer
needs more effectively.
No single customer accounts for five percent or more of the company's revenues.
BACKLOG
The backlog represents orders for computer systems or documents which have not
yet been shipped to customers, and deferred revenues (orders which have been
shipped but not yet recognized in revenues). At October 31, 2003, the dollar
value of the backlog including software license fees was $62,000 compared to
$61,000 last year. The company anticipates substantially all of the backlog to
be recognized as revenue during fiscal year 2004.
RESEARCH AND DEVELOPMENT
During fiscal 2003, the company continued its substantial investment in research
and development to deliver new and enhanced solutions for customers.
Expenditures for those activities were $72,000 in 2003, $68,000 in 2002 and
$71,000 in 2001.
ENVIRONMENTAL PROTECTION
The company believes that it is in substantial compliance with all applicable
federal, state and local statutes concerning environmental protection. The
company has not experienced any material costs in this regard. The U.S.
Environmental Protection Agency had designated the company as one of a number of
potentially responsible parties under the Comprehensive Environmental Response,
Compensation and Liability Act at one environmental remediation site, but a
consent decree was entered on May 7, 2003 pursuant to which the company paid
$244. The company has also been named as a defendant in a cost recovery lawsuit
in Dayton, Ohio, regarding another environmental remediation site. (See Note 12
to the Consolidated Financial Statements, page 50.)
EMPLOYEES
On September 30, 2003, the company and its subsidiaries employed 4,518 persons.
4
AVAILABLE INFORMATION
The Company provides free of charge access to its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and other SEC
filings, through its Web site, www.reyrey.com, as soon as reasonably practicable
after such reports are electronically filed with the SEC.
The Company will also provide free of charge a copy of its 2004 Annual Report to
Shareholders upon written request to:
Douglas M. Ventura, Vice President Corporate and Business Development, General
Counsel and Secretary
The Reynolds and Reynolds Company
One Reynolds Way
Dayton, Ohio 45430
Or by calling: 1-888-4REYREY (473-9739)
ITEM 2. PROPERTIES
As of September 30, 2003, the company owned and operated two manufacturing
plants in the United States, one in Celina, Ohio, and one in Grand Prairie,
Texas, encompassing approximately 427,000 square feet, which produce the
company's Documents segment products and services. Corporate headquarters are
located in the Dayton, Ohio area in several buildings owned by the company which
contain approximately 1,232,000 square feet. In addition, the company leases
approximately 35 offices throughout the United States and Canada. All of the
company's business segments use these offices.
On October 2, 2003, the company announced that it would consolidate its
automotive forms manufacturing facility located in Grand Prairie, Texas, into
the company's Celina, Ohio facility effective December 31, 2003. On October 8,
2003, the company sold properties which encompassed approximately 350,000 square
feet.
Management believes that the company's facilities are adequate to support the
business efficiently.
See also "Property, Plant and Equipment" under Note 1 to the Consolidated
Financial Statements on page 35.
ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 12 to the Consolidated Financial Statements
on page 50.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
(Dollars in thousands except per share data)
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Class A Common Shares are listed on the New York Stock Exchange.
There is no principal market for the Class B Common Shares. The company also has
an authorized class of 60 million preferred shares with no par value. As of the
filing of this report, the company currently has no agreements or commitments
with respect to the sale or issuance of the preferred shares except as described
in Note 7 to the Consolidated Financial Statements, page 43.
Information on market prices of the company's common stock and dividends paid on
such stock is set forth in Note 16 to the Consolidated Financial Statements on
page 55.
5
As of December 1, 2003, there were approximately 3,040 holders of record of
Class A Common Shares and one holder of record of Class B Common Shares.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
For The Years Ended September 30 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net Sales and Revenues $1,008,245 $ 992,383 $1,004,012 $ 954,687 $ 868,028
Income from Continuing Operations $ 119,017 $ 115,552 $ 97,934 $ 88,440 $ 87,891
Basic earnings per common share $ 1.74 $ 1.63 $ 1.34 $ 1.14 $ 1.12
Diluted earnings per common share $ 1.69 $ 1.58 $ 1.31 $ 1.11 $ 1.09
Net Income $ 119,017 $ 78,989 $ 99,557 $ 116,596 $ 122,721
Basic earnings per common share $ 1.74 $ 1.12 $ 1.36 $ 1.50 $ 1.57
Diluted earnings per common share $ 1.69 $ 1.08 $ 1.33 $ 1.47 $ 1.53
Return on Equity 26.1% 17.0% 20.4% 24.2% 28.3%
Cash Dividends Per Class A Common Share $ .44 $ .44 $ .44 $ .44 $ .40
Book Value Per Outstanding Common Share $ 6.78 $ 6.56 $ 6.69 $ 6.68 $ 5.98
Assets
Automotive solutions $ 728,560 $ 729,560 $ 732,073 $ 808,527 $ 761,686
Financial services 395,495 407,605 422,334 421,129 427,591
---------- ---------- ---------- ---------- ----------
Total assets $1,124,055 $1,137,165 $1,154,407 $1,229,656 $1,189,277
========== ========== ========== ========== ==========
Long-Term Debt
Automotive solutions $ 106,912 $ 107,408 $ 105,805 $ 111,124 $ 163,111
Financial services 169,293 180,519 147,429 126,868 154,040
---------- ---------- ---------- ---------- ----------
Total long-term debt $ 276,205 $ 287,927 $ 253,234 $ 237,992 $ 317,151
========== ========== ========== ========== ==========
Number of Employees 4,518 4,602 4,763 4,945 9,083
AUTOMOTIVE SOLUTIONS (excluding Financial Services)
Current Ratio 2.01 2.02 1.80 1.90 1.75
Net Property, Plant and Equipment $ 184,691 $ 161,073 $ 159,051 $ 138,108 $ 104,106
Total Debt $ 106,912 $ 113,469 $ 111,866 $ 116,838 $ 168,825
Total Debt to Capitalization 19.0% 20.0% 19.0% 19.0% 26.7%
(1) Effective October 1, 2001, the company adopted the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," and reduced income by $36,563 for the cumulative effect of the
accounting change.
(2) Certain reclassifications were made to prior years' Consolidated Financial
Statements to conform with the presentation used in 2003. The company also
changed its allocation methodology for certain expenses in fiscal year
2003, the effect of which was to report certain expenses as cost of sales
instead of SG&A expenses. This improved allocation of expenses was made
possible by a new general ledger system. Management believes the new
allocation methodology reduced gross margin by between one and two
percentage points as compared to fiscal year 2002. It was not practicable,
however, to restate prior years.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (In thousands except per share data)
SIGNIFICANT EVENTS
SUBSEQUENT EVENTS
In October 2003, the company purchased the outstanding shares of Incadea AG, a
provider of global automotive retailing software solutions. Privately-held
Incadea, based in Raubling, Germany, has annual revenues of about $6,000. The
purchase price of about $7,000 was paid with cash from existing balances.
In October 2003, the company purchased the net assets of Third Coast Media, a
provider of Web and customer relationship management software to automotive
retailers. Third Coast Media, headquartered in Richardson, Texas, has annual
revenues of about $5,000. The purchase price of about $8,000 was paid with cash
from existing balances.
Effective October 1, 2003, the company elected to adopt the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" and will begin recognizing stock option expense in the
Statements of Consolidated Income. SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" provides three alternative methods for
reporting this change in accounting principle. The company has elected the
retroactive restatement method which requires that all periods presented be
restated to reflect stock-based compensation cost under the fair value based
accounting method of SFAS No. 123 for all awards granted, modified or settled in
fiscal years beginning after December 15, 1994. Accordingly, the company is
currently assessing the impact this will have on the company's Consolidated
Financial Statements and will restate all periods beginning in fiscal year 2004.
See pro forma earnings effects in Note 1 to the Consolidated Financial
Statements on page 34.
On October 2, 2003, the company announced the consolidation of its automotive
forms manufacturing facility located in Grand Prairie, Texas, into the company's
Celina, Ohio facility. The 76 employees located in Texas will be offered the
opportunity to accept a position in the Ohio facility. Those not accepting
positions in Ohio will be offered severance and outplacement services. The
company also eliminated additional positions in technology, administration and
documents sales bringing the total number of reductions to about 200. The
company estimates that costs for severance, outplacement, relocation and other
plant consolidation efforts will total about $8,000 or $.07 per share in the
first quarter of fiscal year 2004.
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,
Inc. to enable the rollout to North American automotive retailers as a component
of the company's integrated suite of customer relationship management solutions.
Networkcar had annual revenues of about $1,000 in 2002. See Note 3 to the
Consolidated Financial Statements on page 38 for more information on business
combinations.
In August 2002, the company purchased BoatVentures.com Corporation, a provider
of Web based applications and process training to boat, power sports and
recreational vehicle retailers and manufacturers. Privately-held
BoatVentures.com Corporation had revenues of about $1,000 in 2001.
In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a.
DealerKid, a provider of electronic customer marketing and relationship
management software and services for automotive retailers in the United States
and Canada. Privately-held DealerKid had revenues of about $2,000 in 2000.
ACCOUNTING CHANGE
During fiscal year 2002, the company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets," and recorded a cumulative effect of
accounting change of $36,563 ($60,938 net of income tax benefits of $24,375)
effective October 1, 2001. See Note 13 to the Consolidated Financial Statements
on page 51 for additional discussion of this accounting change.
7
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 gain, after tax benefit, of $103. The company recorded a
loss of $12,274, included with equity in net losses of affiliated companies on
the Statement of Consolidated Income, and income tax benefits of $12,377 related
to the sale of these shares, included in the provision for income taxes on the
Statement of Consolidated Income.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' financial information to
conform to the presentation used in fiscal year 2003. The company also changed
its allocation methodology for certain expenses in fiscal year 2003, the effect
of which was to report certain expenses as cost of sales instead of SG&A
expenses. This improved allocation of expenses was made possible by a new
general ledger system. Management believes the new allocation methodology
reduced gross margin by between one and two percentage points as compared to
fiscal year 2002. It was not practicable, however, to restate prior years.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
2003 vs. 2002 2002 vs. 2001
2003 2002 2001 Change Change
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $1,008,245 $992,383 $1,004,012 $15,862 2% ($11,629) -1%
Gross profit $ 564,664 $578,647 $ 566,100 ($13,983) -2% $12,547 2%
% of revenues 56.0% 58.3% 56.4%
SG&A expenses $ 374,585 $400,120 $ 394,368 ($25,535) -6% $ 5,752 1%
% of revenues 37.1% 40.3% 39.3%
Operating income $ 190,079 $178,527 $ 171,732 $11,552 6% $ 6,795 4%
% of revenues 18.9% 18.0% 17.1%
Income from continuing operations $ 119,017 $115,552 $ 97,934 $ 3,465 3% $17,618 18%
Discontinued operations $ 0 $ 0 $ 1,623 $ 0 ($ 1,623)
Income before accounting change $ 119,017 $115,552 $ 99,557 $ 3,465 3% $15,995 16%
Effect of accounting change $ 0 ($ 36,563) $ 0 $36,563 ($36,563)
Net income $ 119,017 $ 78,989 $ 99,557 $40,028 51% ($20,568) -21%
Basic earnings per share
Income from continuing operations $ 1.74 $ 1.63 $ 1.34 $ 0.11 7% $ 0.29 22%
Income before accounting change $ 1.74 $ 1.63 $ 1.36 $ 0.11 7% $ 0.27 20%
Net income $ 1.74 $ 1.12 $ 1.36 $ 0.62 55% ($ 0.24) -18%
Diluted earnings per share
Income from continuing operations $ 1.69 $ 1.58 $ 1.31 $ 0.11 7% $ 0.27 21%
Income before accounting change $ 1.69 $ 1.58 $ 1.33 $ 0.11 7% $ 0.25 19%
Net income $ 1.69 $ 1.08 $ 1.33 $ 0.61 56% ($ 0.25) -19%
8
Consolidated net sales and revenues grew slightly in fiscal year 2003 with
growth in Software Solutions segment revenues, the company's largest segment,
and revenue declines in the three smaller segments. In fiscal year 2002,
consolidated revenues declined slightly, primarily because of the continued
decline in MSN Autos (formerly named CarPoint) revenues that began in June 2001.
See the Transformation Solutions segment section for more information on MSN
Autos.
In fiscal year 2003, gross profit and gross margins declined from last year
reflecting lower Transformation Solutions revenues and Documents sales. Gross
margin was also negatively affected by a shift in the Software Solutions sales
mix, with lower margin systems sales growing faster than higher margin recurring
service revenues. Gross margin also reflected 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 prior years. In fiscal year
2002, consolidated gross profit and gross margins increased primarily as a
result of growth in Software Solutions' computer services revenues.
SG&A expenses declined from last year, both in total dollars and as a percentage
of revenues in fiscal year 2003, primarily because of the change in cost
allocation methodology which shifted certain expenses to cost of sales. Also
contributing to lower SG&A expenses was a decline in the number of employees.
Fiscal year 2002 SG&A expenses also included $8,862 of special items previously
discussed under the Special Items caption on page 8 of this analysis. Excluding
the $8,862 of special items, fiscal year 2002 SG&A expenses were $391,258 or
39.4% of revenues compared to 39.3% of revenues in fiscal year 2001. Research
and development (R&D) expenses were approximately $72,000 in fiscal year 2003,
$68,000 in fiscal year 2002 and $71,000 in fiscal year 2001.
Operating margins were 18.9% in fiscal year 2003, compared to 18.0% in fiscal
year 2002 and 17.1% in fiscal year 2001. Excluding fiscal year 2002 special
items, operating margins were 19.1% in 2002. In fiscal year 2003, operating
income reflected combined losses of $11,000 or $.09 per share from Reydiance(TM)
(acquired as BoatVentures.com in August 2002), Networkcar (acquired in November
2002) and Internet Lead Management (formerly Microsoft's Dealerpoint, a software
license acquired in January 2003). In fiscal year 2002, operating margins
increased because of higher gross profit margins.
Interest expense declined over the last three years primarily because of lower
effective interest rates. During February 2002, the company entered into
$100,000 of interest rate swap agreements that effectively converted 7% fixed
rate debt into variable rate debt, which averaged 3.3% in fiscal year 2003 and
4.3% in fiscal year 2002. These interest rate swap agreements were designated as
fair value hedges. Interest income also declined during the last three years
because of lower interest rates. In fiscal year 2002, equity in net losses of
affiliated companies was $13,201, of which $12,274 related to the sale of the
company's shares of Kalamazoo Computer Group plc. This loss was offset by income
tax benefits of $12,377. Equity in net losses of affiliated companies was
$13,019 in fiscal year 2001 and included losses from the company's investments
in Kalamazoo Computer Group plc (subsequently sold) and ChoiceParts LLC, and the
May 2001 $3,200 write-off of the company's investment in Consumer Car Club. See
Note 1 to the Consolidated Financial Statements on page 34 for additional
disclosures about the company's investment in Kalamazoo. In fiscal year 2003,
the company sold its investment in Credit Online and recorded a pretax gain of
$1,369 in other income.
The effective income tax rate was 38.8% in fiscal year 2003, compared to 29.9%
in fiscal year 2002 and 39.7% in fiscal year 2001. The effective tax rate was
impacted by two separate events in fiscal year 2003, which essentially offset
one another. In the third quarter of fiscal year 2003, the tax rate reflected
$3,400 of higher state income tax expense ($2,210 net of federal income tax
benefits) related to Ohio tax legislation enacted in late June 2003. This tax
law resulted in increased taxable income apportioned to the state of Ohio and
did not reduce taxable income apportioned to other states. In the fourth quarter
of fiscal year 2003, the tax rate included a $2,233 reduction of state income
tax expense ($1,451 net of federal income tax benefits). This reduction of state
income tax expense represented the recognition of deferred state income taxes as
states clarified the deductibility of federal bonus depreciation. Excluding
these two items, the effective tax rate was 38.4% in fiscal year 2003. Fiscal
year 2002 included the tax benefits described in the Special Items caption on
page 8 of this analysis. Excluding these special items, the effective income tax
rate was 38.2% in fiscal year 2002. The fiscal year 2002 effective tax rate,
excluding the special items, declined from the prior year, primarily because of
reduced goodwill amortization for which there was no tax deduction.
9
SOFTWARE SOLUTIONS
2003 vs. 2002 2002 vs. 2001
2003 2002 2001 Change Change
- -----------------------------------------------------------------------------------------------------------------------------
Net sales and revenues
Computer services $501,562 $468,584 $431,370 $32,978 7% $37,214 9%
Computer systems products $164,624 $145,299 $169,125 $19,325 13% ($23,826) -14%
-------- -------- -------- ------- -------
Total net sales and revenues $666,186 $613,883 $600,495 $52,303 9% $13,388 2%
Gross profit $403,155 $387,231 $363,571 $15,924 4% $23,660 7%
% of revenues 60.5% 63.1% 60.5%
SG&A expenses $241,114 $260,906 $243,938 ($19,792) -8% $16,968 7%
% of revenues 36.2% 42.5% 40.6%
Operating income $162,041 $126,325 $119,633 $35,716 28% $ 6,692 6%
% of revenues 24.3% 20.6% 19.9%
In fiscal year 2003, Software Solutions revenues grew over last year as both
computer systems products sales and computer service revenues increased over
last year. Computer systems products sales increased as more ERA retail
management systems, Electronic Document Management systems and personal
computers were sold. The company also launched its Reynolds Generations
Series(R) Suite retail management solution in the fourth quarter of fiscal year
2003. Computer services revenues, comprised predominately of recurring software
support and equipment maintenance revenues, grew in fiscal year 2003, because of
the increased number of ERA retail management software applications supported
and growth in Network Services revenues. Also contributing to revenue growth was
the addition of Internet Lead Management sales which resulted from a license
agreement between the company and Microsoft Corporation. The company also
increased sales prices to offset inflation. The backlog of new orders for
computer systems products and deferred revenues (orders shipped, but not yet
recognized in revenues) was approximately $65,000 at September 30, 2003,
compared to $60,000 at September 30, 2002. In fiscal year 2003, gross profit
increased over last year because of the sales increase. Gross margins, however,
declined from last year, primarily because of the strong growth in product
sales, which have lower margins than recurring service and support 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 to
two percentage points in fiscal year 2003. This improved allocation of expenses
was made possible by a new general ledger system. It was not practicable,
however, to restate prior years. Gross margins also reflected the ramp up of
costs to transition support of Internet Lead Management to the company from
Microsoft. SG&A expenses declined from last year, as a percentage of revenues,
primarily because of the change in cost allocation methodology, the reduced
number of employees and last year's special items previously discussed.
Operating margins reflected both the change in sales mix and lower SG&A
expenses.
In fiscal year 2002, Software Solutions revenues increased as growth in computer
services revenues more than offset declines in computer systems products sales.
Computer services revenues increased primarily because of the increased number
of ERA retail management software applications supported. Also contributing to
the fiscal year 2002 revenue increase was growth in Network Services revenues.
The company also increased sales prices to offset inflation. Sales of computer
systems products declined in fiscal year 2002 for several products as spending
on technology was generally soft. The fiscal year 2002 computer systems products
sales decline also reflects the cancellation of a software development contract
in fiscal year 2001. In fiscal year 2002, gross profit and gross margins
increased over 2001 because of growth in higher margin computer service
revenues. In fiscal year 2002, SG&A expenses were 41.4% of revenues excluding
$6,682 of special items recorded in the second quarter. In fiscal year 2002,
SG&A expenses also included higher bad debt and severance expenses which were
partially offset by the elimination of $3,862 of goodwill amortization.
Operating margins were strong and increased over the prior year, primarily as a
result of the higher gross margins.
10
TRANSFORMATION SOLUTIONS
2003 vs. 2002 2002 vs. 2001
2003 2002 2001 Change Change
- ----------------------------------------------------------------------------------------------------------------------
Net sales and revenues $131,288 $153,268 $174,546 ($21,980) -14% ($21,278) -12%
Gross profit $ 38,939 $ 54,391 $ 63,201 ($15,452) -28% ($ 8,810) -14%
% of revenues 29.7% 35.5% 36.2%
SG&A expenses $ 64,173 $ 62,457 $ 74,548 $ 1,716 3% ($12,091) -16%
% of revenues 48.9% 40.8% 42.7%
Operating loss ($ 25,234) ($ 8,066) ($ 11,347) ($17,168) $ 3,281
% of revenues -19.2% -5.3% -6.5%
In fiscal year 2003, Transformation Solutions revenues declined as growth of
credit applications revenues was more than offset by declines in Reynolds
Consulting Services, Campaign Management Services, and Automark(R) Web Services
revenues. Reynolds Consulting Services revenues reflected a decline in the
number of consulting days delivered and Campaign Management Services lower
revenues resulted from a decrease in the number of service reminders mailed.
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 allowed customers the option to
host their Web sites. As part of the Reynolds Generations 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. In
fiscal year 2003, gross profit and gross margins declined because of the decline
in revenues which resulted in lower utilization of consultants and lower fixed
cost coverage for Campaign Management Services and Automark Web Services. Fiscal
year 2003 operating losses reflected the revenue driven decline in gross profit
and the purchases of Networkcar in November 2002 and BoatVentures.com in August
2002. These businesses lost a combined $8,800 in fiscal year 2003. See Note 3 to
the Consolidated Financial Statements on page 38 for additional disclosures
regarding these business combinations.
Transformation Solutions revenues declined in fiscal year 2002, primarily
because of the continued decline in MSN Autos revenues that began in June 2001.
MSN Autos revenues declined over $20,000 in fiscal year 2002 because of a change
in the MSN Autos business model. In fiscal year 2002, this segment also
experienced strong growth in credit applications and Automark Web Services
revenues. This growth was essentially offset by declines in revenues from
Reynolds Consulting Services and Campaign Management Services. Gross profit
margins were essentially flat in fiscal year 2002 as compared to fiscal year
2001. Fiscal year 2002 gross profit margins included a fourth quarter adjustment
to accrue an additional $1,923 of support costs related to non cancelable
contracts for Automark Web hosting services. This accrual became necessary as a
result of increased integration and functionality which added support costs.
SG&A expenses declined in fiscal year 2002, in part because of the elimination
of $6,175 of goodwill amortization expenses. Fiscal year 2002 SG&A expenses also
reflect lower selling and marketing expenses. Operating losses declined in
fiscal year 2002 as a result of the elimination of goodwill amortization,
partially offset by higher Automark Web Services support costs.
DOCUMENTS
2003 vs. 2002 2002 vs. 2001
2003 2002 2001 Change Change
- ------------------------------ ------------ --------------- ------------- ----------------------- ---------------------
Net sales and revenues $174,239 $183,523 $187,053 ($ 9,284) -5% ($3,530) -2%
Gross profit $ 94,881 $105,961 $110,668 ($11,080) -10% ($4,707) -4%
% of revenues 54.5% 57.7% 59.2%
SG&A expenses $ 62,330 $ 68,684 $ 70,877 ($ 6,354) -9% ($2,193) -3%
% of revenues 35.8% 37.4% 37.9%
Operating income $ 32,551 $ 37,277 $ 39,791 ($ 4,726) -13% ($2,514) -6%
% of revenues 18.7% 20.3% 21.3%
Documents sales declined in both fiscal years 2003 and 2002, primarily because
of a decrease in the volume of business forms sold. The company expects the
volume of documents sold to continue to decline as advances in technology
continue. Laser forms revenues increased in both fiscal years 2003 and 2002;
however, this increase was more than offset by lower volumes in other product
lines. Gross profit and gross margins declined in both fiscal years 2003 and
2002, primarily because of lower sales, which reduced fixed cost coverage and
contributed to
11
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 prior years. SG&A
expenses declined each year, both in absolute dollars and as a percentage of
revenues. In fiscal year 2003, lower SG&A expenses reflected both the impact of
lower sales and the cost allocation change. In fiscal year 2002, the elimination
of $1,279 of goodwill amortization accounted for about half of the reduction.
Operating income declined in each of the past two years, reflecting the sales
decrease, partially offset by the SG&A expense reductions.
FINANCIAL SERVICES
2003 vs. 2002 2002 vs. 2001
2003 2002 2001 Change Change
- ------------------------------ ------------ --------------- ----------- ------------------------ ----------------------
Net sales and revenues $36,532 $41,709 $41,918 ($5,177) -12% ($ 209) 0%
Gross profit $27,689 $31,064 $28,660 ($3,375) -11% $2,404 8%
% of revenues 75.8% 74.5% 68.4%
SG&A expenses $ 6,968 $ 8,073 $ 5,005 ($1,105) -14% $3,068 61%
% of revenues 19.1% 19.4% 12.0%
Operating income $20,721 $22,991 $23,655 ($2,270) -10% ($ 664) -3%
% of revenues 56.7% 55.1% 56.4%
In fiscal year 2003, Financial Services revenues declined from last year because
of lower average interest rates and a decrease in average receivable balances
from a year ago. In fiscal year 2002, revenues were essentially flat with fiscal
year 2001 as average interest rates and average receivable balances were about
the same as in fiscal year 2001. Gross profit declined in fiscal year 2003 from
the prior year because of the revenue decline. In fiscal year 2002, gross profit
improved because of lower borrowing costs. Interest rate spreads were 5.1% in
fiscal year 2003, 4.9% in fiscal year 2002 and 3.4% in fiscal year 2001. In
fiscal year 2003, SG&A expenses declined from fiscal year 2002, primarily
because of lower bad debt expenses. In fiscal year 2002, SG&A expenses increased
over fiscal year 2001, primarily because of higher bad debt expenses. Bad debt
expenses were $3,765 in fiscal year 2003, $4,450 in fiscal year 2002 and $2,500
in fiscal year 2001. Bad debt expenses reflected the relative level of
write-offs over the last three years. Overall, operating margins remained strong
for this segment.
LIQUIDITY AND CAPITAL RESOURCES
AUTOMOTIVE SOLUTIONS CASH FLOWS (EXCLUDING FINANCIAL SERVICES)
The company's balance of cash and equivalents was $105,829 as of September 30,
2003. Cash flows from operating activities were $131,580 during the fiscal year
and resulted primarily from net income, adjusted for non cash charges, primarily
depreciation and amortization. Cash flows from operating activities were lower
than fiscal year 2002, primarily because of additional voluntary contributions
to the company's qualified pension plans in fiscal year 2003. Cash flows used
for investing activities included the company's purchase of Networkcar for
$11,714, capital expenditures of $57,810 and the capitalization of $16,270 of
software licensed to customers. Capital expenditures included $28,800 for the
purchase of an office building that was previously leased. See related
disclosures regarding this office building in Notes 1 and 14 to the Consolidated
Financial Statements on pages 36 and 53, respectively. As of September 30, 2003,
the balance of software licensed to customers was $94,472. Most of the
capitalized software development costs relate to the Reynolds Generations Series
(RGS) Suite solution. In the fourth quarter of fiscal year 2003, RGS Suite
became available for general release to customers and the company stopped
capitalizing software development costs and began amortizing previously
capitalized costs to expense. Fiscal year 2004 capital expenditures and
capitalized software in the ordinary course of business are anticipated to be
about $40,000, including about $20,000 for construction of an office building in
Kettering, Ohio. See the Shareholders' Equity caption on page 13 of this
analysis regarding the payment of dividends and share repurchases.
FINANCIAL SERVICES CASH FLOWS
Financial Services operating cash flows, collections on finance receivables and
additional borrowings were invested in new finance receivables primarily for the
company's computer systems, used to make scheduled debt repayments and dividend
payments to Automotive Solutions.
CAPITALIZATION
The company's ratio of total debt (total Automotive Solutions debt) to
capitalization (total Automotive Solutions debt plus shareholders' equity) was
19.0% as of September 30, 2003 and 20.0% as of September 30, 2002. During fiscal
year 2003, the company repaid $6,061 of long-term debt. Remaining credit
available under committed
12
revolving credit agreements was $100,000 at September 30, 2003. In addition to
this committed credit agreement, the company also has a variety of other
short-term credit lines available. Management estimates that cash balances, cash
flow from operations and cash available from existing credit agreements will be
sufficient to fund normal operations over the next year. Cash balances are
placed in short-term investments until needed. See Note 1 to the Consolidated
Financial Statements on page 34 for a description of cash investments.
In August 1997, the company entered into an agreement with a trust for the
construction and lease of an office building near Dayton, Ohio. The trust was
formed by a consortium of institutional investors who purchased equity interests
in the trust and provided loans to the trust for the construction of the
building. This building was completed in 1999 at a cost of $28,800. This lease
was accounted for as an operating lease for financial reporting purposes.
Accordingly, neither the asset nor the related liability was reported on the
company's balance sheets. The company guaranteed 80% of the trust's debt related
to the construction of the building. The company made 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 had the option to purchase the building for $28,800 or sell the building
on behalf of the lessor. If the building was sold and the proceeds from the sale
were insufficient to repay the investors, the company might have been required
to make a payment to the lessor of up to 80% of the building's cost. On July 1,
2003, the company purchased the aforementioned office building from the trust
for cash of $28,800 and terminated the lease agreement.
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, with
interest payable on a variable rate basis. This loan funding agreement is
renewable annually through January 23, 2006. The outstanding borrowings under
this arrangement were included with Financial Services notes payable on the
Consolidated Balance Sheet. As of September 30, 2003, the balance outstanding on
this facility was $100,000.
The company has consistently produced strong operating cash flows sufficient to
fund normal operations. Strong operating cash flows are the result of stable
operating margins and a high percentage of recurring service revenues, which
require relatively low capital investment. Debt instruments have been used
primarily to fund business combinations and Financial Services receivables. As
of September 30, 2003, the company could issue an additional $130,000 of notes
under a shelf registration statement on file with the Securities and Exchange
Commission. Management believes that its strong balance sheet and cash flows
should help maintain an investment grade credit rating that should provide
access to capital sufficient to meet the company's cash requirements beyond the
next year. See Note 6 to the Consolidated Financial Statements on page 41 for
additional disclosures regarding the company's debt instruments.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock Exchange.
There is no principal market for the Class B common shares. The company also has
an authorized class of 60,000 preferred shares with no par value. As of
September 30, 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 Note 7 to the
Consolidated Financial Statements on page 43.
The company paid cash dividends of $30,024 in 2003, $31,089 in 2002 and $32,121
in 2001. Dividends per Class A common share were $.44 in each of 2003, 2002 and
2001. Dividends are typically declared each November, February, May and August
and paid in January, April, June and September. Dividends per Class A common
share must be twenty times the dividends per Class B common share and all
dividend payments must be simultaneous. The company has paid dividends each year
since its initial public offering in 1961.
The company repurchased $127,872 of Class A common shares in fiscal year 2003,
$125,381 in fiscal year 2002 and $140,816 in fiscal year 2001. Average prices
paid per share were $26.99 in fiscal year 2003, $26.23 in fiscal year 2002 and
$21.70 in fiscal year 2001. As of September 30, 2003, the company could
repurchase an additional 8,165 Class A common shares under existing board of
directors' authorizations.
13
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, accounting for income taxes and accounting for
retirement benefits.
REVENUE RECOGNITION
Sales of computer hardware and business forms products are recorded when title
passes upon shipment to customers. Revenues from software license fees are
accounted for in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition." The company recognizes revenue when (i) pervasive 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 (as defined in Emerging Issues Task Force (EITF) Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables"), and if so, whether
vendor-specific objective evidence of fair value exists for those elements.
Software revenues which do not meet the criteria set forth in EITF Issue No.
00-3, "Application of AICPA SOP 97-2 to Arrangements That Include the Right to
Use Software Stored on Another Entity's Hardware," are recorded ratably over the
contract period as services are provided.
SOFTWARE LICENSED TO CUSTOMERS
The company capitalizes certain costs of developing its software products in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." SFAS No. 86 specifies that costs
incurred in creating a computer software product should be charged to expense
when incurred, as research and development, until technological feasibility has
been established for the product. Technological feasibility is established
either by creating a detail program design or a tested working model. Judgment
is required in determining when technological feasibility of a product is
established. The company follows a standard process for developing software
products. This process has five phases: selection, definition, development,
delivery and general customer acceptability (GCA). When using proven technology,
management believes that technological feasibility is established upon the
completion of the definition phase (detail program design). When using newer
technology, management believes that technological feasibility is established
upon completion of the delivery phase (tested working model). Once technological
feasibility is established, software development costs are capitalized until the
product is available for general release to customers (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.
14
INCOME TAXES
The company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes."
The objectives of accounting for income taxes are to recognize the amount of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in the company's financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in the
company's financial statements or tax returns. Fluctuations in the actual
outcome of these future tax consequences could materially impact the company's
financial position or its results of operations.
POSTRETIREMENT BENEFITS
The company sponsors defined benefit pension plans for most employees. The
company also sponsors a defined benefit medical plan and a defined benefit life
insurance plan for certain employees. See Note 9 to the Consolidated Financial
Statements on page 45 for additional descriptions of the company's plans. The
company accounts for its postretirement benefit plans according to SFAS No. 87,
"Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." These statements require the
use of actuarial models that allocate the cost of an employee's benefits to
individual periods of service. The accounting under SFAS No. 87 and SFAS No. 106
therefore requires the company to recognize costs before the payment of
benefits. Certain assumptions must be made concerning future events that will
determine the amount and timing of the benefit payments. Such assumptions
include the discount rate, the expected long-term rate of return on plan assets,
the rate of future compensation increases and the healthcare cost trend rate. In
addition, the actuarial calculation includes subjective factors such as
withdrawal and mortality rates to estimate the projected benefit obligation. The
actuarial assumptions used may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates, or
longer or shorter life spans of participants. These differences may result in a
significant impact on the amount of postretirement benefit expense recorded in
future periods. The company annually evaluates the assumptions used to determine
postretirement benefit expense for its qualified and non-qualified defined
benefit plans. The company adjusted assumptions used to measure the amount of
postretirement benefit expense, reducing the discount rate from 7.25% in fiscal
year 2003 to 6.0% in fiscal year 2004 and reducing the expected long-term rate
of return on plan assets from 9.0% in fiscal year 2003 to 8.25% in fiscal year
2004. The company is not required to make minimum contributions to its
postretirement plans in fiscal year 2004, although the company may elect to make
contributions. In fiscal year 2003, the company made voluntary contributions of
$38,982 to its qualified pension plans. See Note 9 to the Consolidated Financial
Statements for more detail disclosures regarding postretirement benefits,
including relevant assumptions used to determine expense and future obligations.
PRINCIPAL CONTRACTUAL OBLIGATIONS
Less Than More Than
Total 1 Year 1-3 Years 4-5 Years 5 Years
--------------------------------------------------------------
Long-term debt
Automotive Solutions $100,000 $100,000
Financial Services 198,768 $ 79,475 $ 41,219 28,074 $ 50,000
Operating leases 34,565 7,023 11,116 5,888 10,538
Computer services agreement 115,230 19,205 38,410 38,410 19,205
-------- -------- -------- -------- --------
Total contractual obligations $448,563 $105,703 $ 90,745 $172,372 $ 79,743
======== ======== ======== ======== ========
15
PRINCIPAL COMMERCIAL COMMITMENTS
Amount of Commitment Expiration Per Period
Total -----------------------------------------------
Amounts Less Than More Than
Committed 1 Year 1-3 Years 4-5 Years 5 Years
-------------------------------------------------------------
Line of credit $150,000 $150,000
Secondary liability for leases 2,651 1,770 $ 881
Letter of credit 1,678 201 466 $1,011
-------------------------------------------------------------
Total commercial commitments $154,329 $151,971 $1,347 $1,011 $0
=============================================================
The secondary liability for leases and the letter of credit relate to real
estate leases of Relizon Corporation, sold by the company in August 2000. See
Note 12 to the Consolidated Financial Statements on page 50 for additional
disclosures regarding these contingent obligations.
MARKET RISKS
INTEREST RATES
The Automotive Solutions portion of the business borrows money, as needed,
primarily to fund business combinations. Generally the company borrows under
fixed rate agreements with terms of ten years or less. During fiscal year 2002,
the company entered into $100,000 of interest rate swaps to reduce the effective
interest expense on outstanding long-term debt. In this transaction the company
effectively converted 7% fixed rate debt into variable rate debt, which averaged
3.3% in fiscal year 2003. These interest rate swap agreements were designated as
fair value hedges. The company does not use financial instruments for trading
purposes. See Note 6 to the Consolidated Financial Statements on page 41 for
additional discussion of interest rate management agreements.
The Financial Services segment of the business, including Reyna Funding L.L.C.,
a consolidated affiliate of the company, obtains borrowings to fund the
investment in finance receivables. These fixed rate receivables generally have
repayment terms of five years. The company funds finance receivables with debt
that has repayment terms consistent with the maturities of the finance
receivables. Generally the company attempts to lock in the interest spread on
the fixed rate finance receivables by borrowing under fixed rate agreements or
using interest rate management agreements to manage variable interest rate
exposure. The company does not use financial instruments for trading purposes.
During fiscal year 2003, Reyna Funding, L.L.C. entered into $32,932 of interest
rate swaps to replace maturing interest rate swaps. See Note 6 to the
Consolidated Financial Statements for additional discussion of interest rate
management agreements.
Because fixed rate finance receivables are primarily funded with fixed rate debt
or its equivalent (variable rate debt that has been fixed with interest rate
swaps), management believes that a one percentage point move in interest rates
would not have a material effect on the company's financial statements. See Note
6 to the Consolidated Financial Statements for additional disclosures regarding
the company's debt instruments and interest rate management agreements.
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations, primarily in Canada, which accounted
for 7% of net sales and revenues in fiscal year 2003. In the conduct of its
foreign operations, the company has intercompany sales, expenses and loans
between the U.S. and Canada and may receive dividends denominated in different
currencies. These transactions expose the company to changes in foreign currency
exchange rates. At September 30, 2003, the company had no foreign currency
exchange contracts outstanding. Based on the company's overall foreign currency
exchange rate exposure at September 30, 2003, management believes that a 10%
change in currency rates would not have a material effect on the company's
financial statements.
16
ENVIRONMENTAL MATTERS
See Note 12 to the Consolidated Financial Statements on page 50 for a discussion
of the company's environmental contingencies.
ACCOUNTING STANDARDS
See Note 14 to the Consolidated Financial Statements on page 53 for a discussion
of the effect of accounting standards that the company has not yet adopted.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this Management's Discussion and Analysis of the Financial
Condition and Results of Operations constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on current expectations, estimates,
forecasts and projections of future company or industry performance based on
management's judgment, beliefs, current trends and market conditions.
Forward-looking statements made by the company may be identified by the use of
words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions. Forward-looking statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict. Actual outcomes and results may
differ materially from what is expressed, forecasted or implied in any
forward-looking statement. The company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise. See also the discussion of factors that may affect future
results contained in the company's Current Report on Form 8-K filed with the SEC
on August 11, 2000, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risks" section in Management Discussion and Analysis (Part II, Item
7 of this report on page 16).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 15 of Part IV
(page 21) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, Reynolds management,
including the Chief Executive Officer and Chief Financial Officer, have
conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, background information and business experience for each of the
company's directors and nominees are incorporated herein by reference to the
section of the company's Proxy Statement for its 2004 Annual Meeting of
Shareholders captioned "PROPOSAL I - ELECTION OF DIRECTORS."
17
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the company are elected by the Board of Directors at
its meeting immediately following the Annual Meeting of Shareholders to serve
generally for a term of one year. The executive officers of the company, as of
December 1, 2003, are:
NAME AGE POSITION
- ------- --- --------
Lloyd G. Waterhouse 52 Chief Executive Officer, Chairman and President
Dale L. Medford 53 Executive Vice President and Chief Financial
Officer, and Director
Douglas M. Ventura 43 Vice President Corporate and Business Development,
General Counsel and Secretary
Michael J. Gapinski 53 Treasurer and Assistant Secretary
Michael J. Berry 40 Senior Vice President, Reynolds Services Group
Randall P. Harvey 50 Senior Vice President, Reynolds Software Solutions
Thomas E. Suttmiller 57 Senior Vice President, Sales and Marketing
A description of prior positions held by executive officers of the company
within the past 5 years, to the extent applicable, is as follows:
Mr. Waterhouse has been Chief Executive Officer, Chairman and President since
January 2002; prior thereto President and Chief Executive Officer from November
2000 to January 2002; prior thereto President and Chief Operating Officer from
May 1999 to November 2000; and prior thereto General Manager of E-Business
Services for IBM Corporation from July 1998 to May 1999.
Mr. Ventura has been Vice President Corporate and Business Development, General
Counsel and Secretary since October 2003; prior thereto Vice President Business
Development, General Counsel and Secretary from June 2002 to October 2003; prior
thereto Vice President Alliances and Acquisitions, General Counsel and Secretary
from January 2002 to June 2002; prior thereto, General Counsel and Secretary
from September 2000 to January 2002; prior thereto was Associate General Counsel
and Assistant Secretary from September 1996 to September 2000.
Mr. Berry joined the company as Senior Vice President, Reynolds Services Group
in November 2003; prior thereto, held the position of Executive Vice President,
Customer Support and General Manager, Retail Services of Comdata Corporation
since June 2001; prior thereto, served in several different roles from December
1993 to June 2001 including Vice President and General Manager, Retail Payments
Products and Vice President, Planning and Acquisitions, for Travelers Express
Co., Inc.
Mr. Harvey has been Senior Vice President, Reynolds Software Solutions since
February 2002; prior thereto, Managing Director of Enoventure Group 2001-2002;
prior thereto, Executive Vice President, Firepond from 2000-2001; prior thereto,
Senior Vice President, Product Development of OnDisplay in 2000; and prior
thereto, from 1993 to 2000 was Vice President, Product Development for Sterling
Commerce.
Mr. Suttmiller has been Senior Vice President, Sales and Marketing since October
2003; prior thereto was Senior Vice President, Integrated Document Solutions,
for the company from October 2001 to October 2003; prior thereto, since October
1990, held various Senior Vice President positions with the company.
Mr. Gapinski and Mr. Medford have held their positions with the company for at
least 5 years.
18
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Compliance with the filings required under Section 16(a) of the Securities
Exchange Act of 1934 is herein incorporated by reference to the section of the
company's Proxy Statement for its 2004 Annual Meeting of Shareholders captioned
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE."
The company has adopted a Code of Ethics for Principal Executives and Senior
Financial Officers that applies to its Chief Executive Office, Chief Financial
Officer and its Controller. The Company has posted this Code of Ethics to its
Web site, www.reyrey.com, and will provide a copy to any person without charge
upon request in the manner set forth under Available Information on page 5 of
this annual report.
ITEM 11. EXECUTIVE COMPENSATION
Information on compensation of the company's executive officers and directors is
incorporated herein by reference to the section of the company's Proxy Statement
for its 2004 Annual Meeting of Shareholders captioned "EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The number of Class A and Class B Common Shares of the company beneficially
owned by each five percent shareholder and by all executive officers and
directors as a group as of December 1, 2003 is incorporated herein by reference
to the section of the company's Proxy Statement for its 2004 Annual Meeting of
Shareholders captioned "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
The following table sets forth certain information regarding compensation plans
under which the company's equity securities have been authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(In thousands except per share data)
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance
of outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
in column [a])
- -------------------------------------------------------------------------------------------------------------------
Equity
compensation plans approved
by shareholders 7,328 $21.17 3,541(1)
- -------------------------------------------------------------------------------------------------------------------
Equity
compensation plans not
approved by shareholders 4,819 $20.60 (2)
- -------------------------------------------------------------------------------------------------------------------
TOTAL 12,147 $20.94 3,541
- -------------------------------------------------------------------------------------------------------------------
(1) The total number of Class A Common Shares ("Shares") authorized for issuance
under the company's Stock Option Plan - 1995 (which was approved by the
company's shareholders) is 1,000 Shares plus an amount each year equal to the
lesser of (i) two percent of the company's total issued and outstanding Shares
as of October 1 of each full or partial company fiscal year during which the
plan is in effect beginning October 1, 1995 or (ii) 834.
(2) The number of Class A Common Shares authorized for issuance under the
company's 2001 Shares Plan (which was not approved by the company's
shareholders) is determined on or about October 1 of each year by the company's
board of directors in its sole discretion.
19
Following are the features of the equity compensation plans not approved by
shareholders:
2001 SHARES PLAN
On August 7, 2001, the company's board of directors approved the 2001 Shares
Plan. The plan was not approved by our shareholders. The purpose of the plan is
to provide employees with an additional incentive to contribute to the company's
success and to assist it in attracting and retaining the best personnel. The
plan provides for the granting of non-qualified stock options to full-time
employees and part-time, benefits-eligible employees who are not eligible to
participate in any other stock option plans. (The directors and key employees of
the company participate in the Stock Option Plan - 1995, which was approved by
our shareholders, and, therefore, they do not participate in this plan.)
Pursuant to the plan, each year the Board of Directors determines the number of
shares which may be issued upon the exercise of options to be granted on October
1 (or such other date determined by the Board) for the fiscal year under
consideration. The 2001 Shares Committee, which consists of persons appointed by
the Board who are not eligible to participate in the plan, has the authority to
select the employees to receive stock options under the plan, determine the
number of shares to be subject to the options granted, and determine the terms
and conditions of the options granted including, without limitation, the option
price. Each option is evidenced by an option certificate which sets forth the
terms and conditions of the particular option as determined by the Committee.
Unless the Committee determines otherwise, the exercise price per share subject
to the option is the fair market value of our common stock on the date of grant,
and the option is exercisable on and after the third anniversary of the date of
grant provided that the employee has been continuously employed by us since the
date of grant. Certain exceptions may be made by the Committee in the event the
employee dies, retires or is terminated for reasons other than for cause. No
option may have a term of more than ten years. The Committee has determined that
for options granted on or after October 1, 2002, such options will be
exercisable on and after the second anniversary (rather than the third
anniversary) of the date of grant and that the term of such options will be
seven years (rather than ten years). The plan expires on September 30, 2006 but
may be earlier terminated or modified by the Committee or the Board of
Directors, but no termination or modification of the plan or any option granted
may adversely affect any stock option previously granted under the plan without
the consent of the plan participant.
1996 SHARES PLAN
On August 6, 1996, the board of directors adopted the 1996 Shares Plan. This
plan was not approved by the company's shareholders. The terms of the plan are
substantially similar to the terms of the 2001 Shares Plan described above. The
plan expired on September 30, 2001 and was succeeded by the 2001 Shares Plan.
Accordingly, no new stock options may be granted under the plan. The options
granted under the plan had a term of ten years. Therefore, options issued under
the plan remain outstanding.
The company intends to terminate the 2001 Shares Plan and the 1996 Shares Plan
if and when the plans described in the company's Proxy Statement for its 2004
Annual Meeting of Shareholders are approved.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning transactions with management, certain business
relationships and indebtedness of management is incorporated herein by reference
to the section of the company's Proxy Statement for its 2004 Annual Meeting of
Shareholders captioned "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICE
Information as to the company's principal accountant's fees and services is
herein incorporated by reference to the section of the company's Proxy Statement
for its 2004 Annual Meeting of Shareholders captioned "REPORT OF THE AUDIT
COMMITTEE."
20
PART IV
(Dollars in thousands)
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the company are set
forth on pages 30-55.
Statements of Consolidated Income - For The Years Ended
September 30, 2003, 2002 and 2001
Consolidated Balance Sheets - September 30, 2003 and 2002
Statements of Consolidated Shareholders' Equity and Comprehensive
Income - For The Years Ended September 30, 2003, 2002 and 2001
Statements of Condensed Consolidated Cash Flows - For the Years Ended
September 30, 2003, 2002 and 2001
Notes to Consolidated Financial Statements (Including Supplementary
Data)
(a) (2) FINANCIAL STATEMENT SCHEDULES FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 2003 ARE ATTACHED HERETO:
Schedule II Valuation Accounts Page 56
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(a) (3) EXHIBITS
Exhibit No. Item
(3)(a) Amended Articles of Incorporation, Restatement
effective February 9, 1995; incorporated by reference
to Exhibit A of the company's definitive proxy
statement dated January 5, 1995 filed with the
Securities and Exchange Commission.
(3)(b) Amendment to Amended and Restated Articles of
Incorporation, effective April 25, 1997; incorporated
by reference to Exhibit 2 of the company's Form 8A/A
dated October 20, 1998 filed with the Securities and
Exchange Commission.
(3)(c) Amendment to Amended and Restated Articles of
Incorporation, effective April 18, 2001; incorporated
by reference to Exhibit (3)(c) to Form 10-K for the
fiscal year ended September 30, 2001.
(3)(d) Amended and Restated Consolidated Code of
Regulations; incorporated by reference to Exhibit A
to the company's definitive proxy statement dated
January 8, 2001 filed with the Securities and
Exchange Commission.
(4)(a) Copies of the agreements relating to long-term debt,
which are not required as exhibits to this Form 10-K,
will be provided to the Securities and Exchange
Commission upon request.
(4)(b) Amended and Restated Rights Agreement between The
Reynolds and Reynolds Company and Mellon Investor
Services, L.L.C. as Rights Agent dated as of December
1, 2001; incorporated by reference to Exhibit (4)(b)
to Form 10-K for the fiscal year ended September 30,
2001.
(9) Not applicable.
21
Exhibit No. Item
(10)(a)* Amended and Restated Employment Agreement with Lloyd
G. Waterhouse, as of September 2, 2003.
(10)(b)* Employment Agreement with Dale L. Medford dated as of
May 7, 2001; incorporated by reference to Exhibit
(10)(d) to Form 10-K for the fiscal year ended
September 30, 2001.
(10)(c)* Employment Agreement with Douglas M. Ventura dated as
of December 1, 2001; incorporated by reference to
Exhibit (10)(f) to Form 10-K for the fiscal year
ended September 30, 2001.
(10)(d)* General form of Indemnification Agreement
between the company and each of its directors dated
as of August, 6, 2002; incorporated by reference to
Exhibit (10)(j) to form 10-K for the fiscal year
ended September 30, 2002.
(10)(e)* Amended and Restated Stock Option Plan --
1989, effective November 13, 2001; incorporated by
reference to Exhibit (10)(k) to Form 10-K for the
fiscal year ended September 30, 2001.
(10)(f)* Restated Stock Option Plan - 1995, effective
November 13, 2001; incorporated by reference to
Exhibit (10)(k) to Form 10-K for the fiscal year
ended September 30, 2001.
(10)(g)* 1996 Shares Plan, adopted August 6, 1996;
incorporated by reference to Exhibit 4(e) to Form S-8
filed on August 13, 1999.
(10)(h)* 2001 Shares Plan, adopted August 7, 2001;
incorporated by reference to Exhibit 4(g) to Form S-8
filed on October 1, 2001.
(10)(i)* The Reynolds and Reynolds Company Supplemental
Retirement Plan; incorporated by reference to Exhibit
(10)(G) to Form 10-K for the fiscal year ended
September 30, 1980.
(10)(j)* The Reynolds and Reynolds Company Supplemental
Retirement Plan; Amendment No. 2, adopted on August
17, 1982; incorporated by reference to Exhibit
(10)(j) to Form 10-K for the fiscal year ended
September 30, 1982.
(10)(k)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 3, adopted on August
16, 1983; incorporated by reference to Exhibit
(10)(j) to Form 10-K for the fiscal year ended
September 30, 1983.
(10)(l)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 4, adopted on November
6, 1984; incorporated by reference to Exhibit (10)(l)
to Form 10-K for the fiscal year ended September 30,
1984.
(10)(m)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 5, adopted on May 13,
1985; incorporated by reference to Exhibit (10)(s) to
Form 10-K for the fiscal year ended September 30,
1985.
(10)(n)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 6, adopted on February
11, 1986; incorporated by reference to Exhibit
(10)(r) to Form 10-K for the fiscal year ended
September 30, 1986.
(10)(o)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 7, adopted on August
12, 1986; incorporated by reference to Exhibit
(10)(s) to Form 10-K for the fiscal year ended
September 30, 1986.
(10)(p)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 8, adopted on February
10, 1987; incorporated by reference to Exhibit
(10)(s) to Form 10-K for the fiscal year ended
September 30, 1987.
(10)(q)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 9, adopted on August
11, 1987; incorporated by reference to Exhibit
(10)(t) to Form 10-K for the fiscal year ended
September 30, 1987.
(10)(r)* The Reynolds and Reynolds Company Supplemental
Retirement Plan, Amendment No. 10, adopted on May 8,
1989; incorporated by reference to Exhibit (10)(dd)
to Form 10-K for the fiscal year ended September 30,
1989.
(10)(s)* The Reynolds and Reynolds Company Restated
Supplemental Retirement Plan adopted November 9,
1988; incorporated by reference to Exhibit (10)(ee)
to Form 10-K for the fiscal year ended September 30,
1989.
(10)(t)* Resolution of the Board of Directors amending The
Reynolds and Reynolds Company Supplemental Retirement
Plan dated as of December 1, 1989; incorporated by
reference to Exhibit (10)(ff) to Form 10-K for the
fiscal year ended September 30, 1989.
22
Exhibit No. Item
(10)(u)* Resolution of the Board of Directors amending The
Reynolds and Reynolds Company Supplemental Retirement
Plan (Amendment No. 1), dated as of November 13,
1990; incorporated by reference to Exhibit (10)(ff)
to Form 10-K for the fiscal year ended September 30,
1990.
(10)(v)* Resolution of the Board of Directors amending The
Reynolds and Reynolds Company Supplemental Retirement
Plan (Amendment No. 2), dated as of July 23, 1991;
incorporated by reference to Exhibit (10)(dd) to Form
10-K for the fiscal year ended September 30, 1991.
(10)(w)* The Reynolds and Reynolds Company Supplemental
Retirement Plan Amendment No. 3, adopted August 8,
1995; incorporated by reference to Exhibit (10)(dd)
to Form 10-K for the fiscal year ended September 30,
1995.
(10)(x)* The Reynolds and Reynolds Company Supplemental
Retirement Plan Amendment No. 4, adopted March 14,
1997; incorporated by reference to Exhibit (10)(dd)
to Form 10-K for the fiscal year ended September 30,
1997.
(10)(y)* The Reynolds and Reynolds Company Supplemental
Retirement Plan Amendment No. 5, adopted November 12,
2001; incorporated by reference to Exhibit (10)(cc)
to Form 10-K for the fiscal year ended September 30,
2001.
(10)(z)* Description of The Reynolds and Reynolds Company
Annual Incentive Compensation Plan adopted as of
October 1, 1986; incorporated by reference to Exhibit
(10)(t) to Form 10-K for the fiscal year ended
September 30, 1987.
(10)(aa)* Description of The Reynolds and Reynolds Company
Amended and Restated Annual Incentive Compensation
Plan effective October 1, 1995; incorporated by
reference to (10)(ff) to Form 10-K for the fiscal
year ended September 30, 1995.
(10)(bb)* The Reynolds and Reynolds Company Retirement Plan
Revised and Restated effective October 1, 1997.
(10)(cc)* The Reynolds and Reynolds Company Retirement Plan
(formerly The Reynolds and Reynolds Company Salaried
Retirement Plan) October 1, 1995 Restatement;
incorporated by reference to Exhibit (10)(ii) to Form
10-K for the fiscal year ended September 30, 1995.
(10)(dd)* The Reynolds and Reynolds Company Retirement Plan
(formerly The Reynolds and Reynolds Company Salaried
Retirement Plan) October 1, 1995 Restatement
Amendment No. 1, adopted December 19, 1996;
incorporated by reference to Exhibit (10)(ii) to Form
10-K for the fiscal year ended September 30, 1997.
(10)(ee)* The Reynolds and Reynolds Company Retirement Plan
(formerly The Reynolds and Reynolds Company Salaried
Retirement Plan) October 1, 1995 Restatement
Amendment No. 2, adopted August 11, 1997;
incorporated by reference to Exhibit (10)(ii) to Form
10-K for the fiscal year ended September 30, 1997.
(10)(ff)* The Reynolds and Reynolds Company Retirement Plan
(formerly The Reynolds and Reynolds Company Salaried
Retirement Plan) October 1, 1995 Restatement
Amendment No. 3, adopted September 22, 1998, as filed
herewith; incorporated by reference to Exhibit
(10)(oo) to Form 10-K for the fiscal year ended
September 30, 1998.
(10)(gg)* General Form of Deferred Compensation Agreement
between the company and each of the following
officers: R. H. Grant, III, and Dale L. Medford;
incorporated by reference to Exhibit (10)(p) to Form
10-K for the fiscal year ended September 30, 1983.
(10)(hh)* Resolution of the Board of Directors and General Form
of Amendment dated December 1, 1989 to the Deferred
Compensation Agreements between the company and each
of the following officers: Dale L. Medford and Daniel
W. Dittman; incorporated by reference to Exhibit
(10)(fff) to Form 10-K for the fiscal year ended
September 30, 1989.
(10)(ii)* General Form of Collateral Assignment Split-Dollar
Insurance Agreement and Policy and Non-Qualified
Compensation and Disability Benefit Agreement between
the company and each of the following officers:
Michael J. Gapinski and Dale L. Medford; incorporated
by reference to Exhibit (10)(dd) to Form 10-K for the
fiscal year ended September 30, 1985.
23
Exhibit No. Item
(10)(jj)* Resolution of the Board of Directors and General Form
of Amendment dated December 1, 1989 to the
Non-Qualified Compensation and Disability Benefit
between the company and each of the following
officers: Michael J. Gapinski and Dale L. Medford;
incorporated by reference to Exhibit (10)(hhh) to
Form 10-K for the fiscal year ended September 30,
1989.
(10)(kk)* General Form of Non-Qualified Deferred Compensation
and Disability Agreement between the Company and each
of its officers effective December 1, 2001;
incorporated by reference to Exhibit (10)(qq) of Form
10-K for fiscal year ended September 30, 2001.
(10)(ll)* General Form of Non-Qualified Deferred Compensation
Agreement between the Company and each of its
officers effective January 1, 2003.
(10)(mm) Agreement dated March 11, 1963, between the company
and Richard H. Grant, Jr., restricting transfer of
Class B Common Stock of the company; incorporated by
reference to Exhibit 9 to Registration Statement No.
2-40237 on Form S-7.
(10)(nn) Amendment dated February 14, 1984 to Richard H.
Grant, Jr.'s Agreement restricting transfer of Class
B Common Stock of the company dated March 11, 1963;
incorporated by reference to Exhibit (10)(u) to Form
10-K for the fiscal year ended September 30, 1984.
(11) Not applicable
(12) Not applicable
(13) Not applicable
(18) Not applicable
(21) List of subsidiaries
(22) Not applicable
(23) Consent of Independent Auditors
(24) Not Applicable
(31.1) Certification of Chief Executive Officer.
(31.2) Certification of Chief Financial Officer.
(32.1) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(32.2) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Contracts or compensatory plans or arrangements required to be filed as an
exhibit to this form pursuant to Item 15(a) (3) of this report.
(b) REPORTS ON FORM 8-K.
During the fourth quarter ended September 30, 2003, and first quarter to date,
the following reports were filed:
On July 9, 2003, the company filed a report on Form 8-K that included the
company's July 8, 2003, press release announcing that a retroactive Ohio tax law
change would increase tax expense and reduce earnings.
On July 23, 2003, the company filed a report on Form 8-K that included the
company's July 23, 2003, press release announcing financial results for the
quarter ended June 30, 2003.
24
On October 2, 2003, the company filed a report on Form 8-K that included the
company's October 2, 3003 press release announcing a series of actions to
accelerate growth and strengthen the company as a leader in providing software
and services to automotive retailers and car companies globally.
On November 5, 2003, the company filed a report on Form 8-K that included the
financial results for the fourth quarter and fiscal year ended September 30,
2003.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
Please refer to Part IV, Item 15(a)(3) beginning on page 21.
(d) CONSOLIDATED FINANCIAL STATEMENTS
Individual financial statements and schedules of the company's consolidated
subsidiaries are omitted from this Annual Report on Form 10-K because
Consolidated Financial Statements and schedules are submitted and because the
registrant is primarily an operating company and all subsidiaries included in
the Consolidated Financial Statements are wholly owned.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE REYNOLDS AND REYNOLDS COMPANY
By /s/ DOUGLAS M. VENTURA
----------------------------------------------
DOUGLAS M. VENTURA
Vice President, Corporate and Business
Development, General Counsel
and Secretary
Date: December 12, 2003
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: December 12, 2003
By /s/ LLOYD G. WATERHOUSE
----------------------------------------------
LLOYD G. WATERHOUSE
Chief Executive Officer, Chairman
and President
(Principal Executive Officer)
Date: December 12, 2003
By /s/ DALE L. MEDFORD
----------------------------------------------
DALE L. MEDFORD
Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer) and Director
25
Date: December 12, 2003
By /s/ STEPHANIE W. BERGERON
----------------------------------------------
STEPHANIE W. BERGERON, Director
Date: December 12, 2003
By /s/ DR. DAVID E. FRY
----------------------------------------------
DR. DAVID E. FRY, Director
Date: December 12, 2003
By /s/ RICHARD H. GRANT, III
----------------------------------------------
RICHARD H. GRANT, III, Director
Date: December 12, 2003
By /s/ IRA D. HALL
----------------------------------------------
IRA D. HALL, Director
Date: December 12, 2003
By /s/ CLEVE L. KILLINGSWORTH, JR.
----------------------------------------------
CLEVE L. KILLINGSWORTH, JR.
Director
Date: December 12, 2003
By /s/ EUSTACE W. MITA
----------------------------------------------
EUSTACE W. MITA, Director
Date: December 12, 2003
By /s/ PHILIP A. ODEEN
----------------------------------------------
PHILIP A. ODEEN, Director
Date: December 12, 2003
By /s/ DONALD K. PETERSON
----------------------------------------------
DONALD K. PETERSON, Director
Date: December 12, 2003
By /s/ RENATO ZAMBONINI
----------------------------------------------
RENATO ZAMBONINI, Director
26
ANNUAL REPORT ON FORM 10-K
ITEM 15(a)(1) and (2); 15(c) and (d)
Financial Statements, Schedules and Exhibits
Year Ended September 30, 2003
The Reynolds and Reynolds Company
Dayton, Ohio
27
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
To Our Shareholders:
The management of The Reynolds and Reynolds Company is responsible for
accurately and objectively preparing the company's Consolidated Financial
Statements. These statements are prepared in accordance with accounting
principles generally accepted in the United States of America and include
amounts based on management's best estimates and judgments. Management believes
that the financial information in this annual report is free from material
misstatement.
The company's management maintains an environment of multilevel controls. The
Company Business Principles, for example, is signed by all employees on hiring
and annually thereafter and communicates high standards of integrity that are
expected in the company's day-to-day business activities. The Company Business
Principles addresses a broad range of issues including potential conflicts of
interest, business relationships, accurate and timely reporting of financial
information, confidentiality of proprietary information, insider trading and
social responsibility.
The company also maintains and monitors a system of internal controls designed
to provide reasonable assurances regarding the safeguarding of company assets
and the integrity and reliability of financial records. These internal controls
include the appropriate segregation of duties and the application of formal
policies and procedures. Furthermore, an internal audit department, which has
access to all financial and other corporate records, regularly performs tests to
evaluate the system of internal controls to ensure the system is adequate and
operating effectively. At the date of these financial statements, management
believes the company has an effective internal control system. The company has
formed a Disclosure Committee comprised of senior officers of the company for
the purpose of assuring adequacy and timeliness of public disclosure of material
information.
The company's independent auditors, Deloitte & Touche LLP, perform an
independent audit of the company's Consolidated Financial Statements. They have
access to minutes of board meetings, all financial information and other
corporate records. Their audit is conducted in accordance with auditing
standards generally accepted in the United States of America and includes
consideration of the system of internal controls. Their report is included in
this annual report.
Another level of control resides with the audit committee of the company's board
of directors. The committee, comprised of four directors who are not members of
management, oversees the company's financial reporting process. They recommend
to the board, subject to shareholder approval, the selection of the company's
independent auditors. They discuss the overall audit scope and the specific
audit plans with the independent auditors and the internal auditors. This
committee also meets regularly (separately and jointly) with the independent
auditors, the internal auditors and management to discuss the results of those
audits, the evaluation of internal controls, the quality of financial reporting
and specific accounting and reporting issues.
/s/ LLOYD G. WATERHOUSE /s/ DALE L.MEDFORD
- ----------------------- -----------------
Lloyd G. Waterhouse Dale L. Medford
Chief Executive Officer, Chairman and President Executive Vice President
and Chief Financial Officer
28
INDEPENDENT AUDITORS' REPORT
The Shareholders of The Reynolds and Reynolds Company:
We have audited the accompanying consolidated balance sheets of The Reynolds and
Reynolds Company and its subsidiaries as of September 30, 2003 and 2002, and the
related statements of consolidated income, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended September 30, 2003. Our audits also included the financial statement
schedule included as Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Reynolds and Reynolds Company
and its subsidiaries at September 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 13 to the consolidated financial statements in 2002, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142.
DELOITTE & TOUCHE LLP
Dayton, Ohio
November 12, 2003
29
Statements of Consolidated Income
(In thousands except per share data)
For The Years Ended September 30 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net Sales and Revenues
Services $ 624,795 $604,191 $ 600,681
Products 346,918 346,483 361,413
Financial services 36,532 41,709 41,918
--------- -------- ---------
Total net sales and revenues 1,008,245 992,383 1,004,012
--------- -------- ---------
Cost of sales
Services 233,097 211,014 220,721
Products 201,641 192,077 203,933
Financial services 8,843 10,645 13,258
--------- -------- ---------
Total cost of sales 443,581 413,736 437,912
--------- -------- ---------
Gross profit 564,664 578,647 566,100
Selling, general and administrative expenses 374,585 400,120 394,368
--------- -------- ---------
Operating Income 190,079 178,527 171,732
--------- -------- ---------
Other Charges (Income)
Interest expense 3,842 4,126 5,303
Interest income (2,705) (3,848) (7,818)
Equity in net (income) losses of affiliated companies (2,306) 13,201 13,019
Other - net (3,221) 100 (1,296)
--------- -------- ---------
Total other charges (income) (4,390) 13,579 9,208
--------- -------- ---------
Income Before Income Taxes 194,469 164,948 162,524
Income Taxes 75,452 49,396 64,590
--------- -------- ---------
Income from Continuing Operations 119,017 115,552 97,934
Income from Discontinued Operations 1,623
--------- -------- ---------
Income Before Cumulative Effect of Accounting Change 119,017 115,552 99,557
Cumulative Effect of Accounting Change (36,563)
--------- -------- ---------
Net Income $ 119,017 $ 78,989 $ 99,557
========= ======== =========
Basic Earnings Per Common Share
Income from continuing operations $ 1.74 $ 1.63 $ 1.34
Income from discontinued operations $ .02
Income before cumulative effect of accounting change $ 1.74 $ 1.63 $ 1.36
Cumulative effect of accounting change $ (.52)
Net income $ 1.74 $ 1.12 $ 1.36
Average number of common shares outstanding 68,407 70,692 73,183
Diluted Earnings Per Common Share
Income from continuing operations $ 1.69 $ 1.58 $ 1.31
Income from discontinued operations $ .02
Income before cumulative effect of accounting change $ 1.69 $ 1.58 $ 1.33
Cumulative effect of accounting change ($ .50)
Net income $ 1.69 $ 1.08 $ 1.33
Average number of common shares and equivalents
outstanding 70,606 73,357 74,919
See Notes to Consolidated Financial Statements.
30
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 2003 2002
- -----------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS ASSETS
Current Assets
Cash and equivalents $ 105,829 $ 155,295
---------- ----------
Trade accounts receivable (less allowance for doubtful
accounts: 2003-- $5,253; 2002--$4,902) 118,694 113,262
---------- ----------
Other accounts receivables 21,063 4,209
---------- ----------
Inventories
Finished products 11,921 12,539
Work in process 295 365
Raw materials and supplies 216 163
---------- ----------
Total inventories 12,432 13,067
---------- ----------
Deferred income taxes 11,910 15,575
---------- ----------
Prepaid expenses and other assets 19,763 16,395
---------- ----------
Total current assets 289,691 317,803
---------- ----------
Property, Plant and Equipment
Land and improvements 11,447 15,641
Buildings and improvements 119,168 109,809
Computer equipment 123,383 105,255
Machinery and equipment 41,435 40,666
Furniture and other 44,124 42,883
Construction in progress 1,808 6,377
---------- ----------
Total property, plant and equipment 341,365 320,631
Less accumulated depreciation 156,674 159,558
---------- ----------
Net property, plant and equipment 184,691 161,073
---------- ----------
Intangible Assets
Goodwill 41,728 28,999
Software licensed to customers 94,472 81,557
Acquired intangible assets 37,731 44,366
Other 8,531 3,382
---------- ----------
Total intangible assets 182,462 158,304
---------- ----------
Other Assets 71,716 92,380
---------- ----------
Total Automotive Solutions Assets 728,560 729,560
---------- ----------
FINANCIAL SERVICES ASSETS
Cash 722 635
Finance Receivables 394,292 406,160
Other Assets 481 810
---------- ----------
Total Financial Services Assets 395,495 407,605
---------- ----------
TOTAL ASSETS $1,124,055 $1,137,165
========== ==========
September 30 2003 2002
- -----------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS LIABILITIES
Current Liabilities
Current portion of long-term debt $ 6,061
Accounts payable
Trade $ 38,212 41,186
Other 7,705 3,958
Accrued liabilities
Compensation and related items 32,195 52,599
Income taxes 10,926 316
Other 21,041 28,945
Deferred revenues 33,704 24,404
----------- -----------
Total current liabilities 143,783 157,469
----------- -----------
Long-Term Debt 106,912 107,408
----------- -----------
Other Liabilities
Pensions 71,709 49,932
Postretirement medical 44,095 43,471
Other 2,648 3,085
----------- -----------
Total other liabilities 118,452 96,488
----------- -----------
Total Automotive Solutions Liabilities 369,147 361,365
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 198,768 217,252
Deferred Income Taxes 90,503 94,543
Other Liabilities 8,508 8,979
----------- -----------
Total Financial Services Liabilities 297,779 320,774
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock
Preferred
Class A common 260,772 216,518
Class B common 469 500
Accumulated Other Comprehensive Losses (32,446) (14,234)
Retained Earnings 228,334 252,242
----------- -----------
Total Shareholders' Equity 457,129 455,026
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,124,055 $ 1,137,165
=========== ===========
31
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands except per share data)
For The Years Ended September 30 2003 2002 2001
- -----------------------------------------------------------------------------------------------
Capital Stock
Class A common
Balance, beginning of year $ 216,518 $ 167,356 $ 124,247
Capital stock issued 50,085 51,106 44,455
Converted from Class B common 31 125
Capital stock repurchased (14,971) (11,374) (10,968)
Capital stock retired (291) (951) (459)
Tax benefits from stock options 9,400 10,256 10,081
--------- --------- ---------
Balance, end of year 260,772 216,518 167,356
--------- --------- ---------
Class B common
Balance, beginning of year 500 625 625
Converted to Class A common (31) (125)
--------- --------- ---------
Balance, end of year 469 500 625
--------- --------- ---------
Accumulated Other Comprehensive Income (Losses)
Balance, beginning of year (14,234) (9,547) (7,139)
Foreign currency translation 3,757 (186) (1,591)
Minimum pension liability (23,002) (3,679) 847
Cumulative effect of accounting change 15
Net unrealized income (losses) on derivative contracts 1,033 (822) (1,679)
--------- --------- ---------
Balance, end of year (32,446) (14,234) (9,547)
--------- --------- ---------
Retained Earnings
Balance, beginning of year 252,242 318,349 380,761
Net income 119,017 78,989 99,557
Cash dividends
Class A common (2003--$.44 PER SHARE;
2002--$.44 per share; 2001--$.44 per share) (29,672) (30,715) (31,681)
Class B common (2003--$.022 PER SHARE;
2002--$.022 per share; 2001--$.022 per share) (352) (374) (440)
Capital stock repurchased (112,901) (114,007) (129,848)
--------- --------- ---------
Balance, end of year 228,334 252,242 318,349
--------- --------- ---------
Total Shareholders' Equity $ 457,129 $ 455,026 $ 476,783
========= ========= =========
Comprehensive Income (Losses)
Net income $ 119,017 $ 78,989 $ 99,557
Foreign currency translation 3,757 (186) (1,591)
Minimum pension liability (23,002) (3,679) 847
Cumulative effect of accounting change 15
Net unrealized income (losses) on derivative contracts 1,033 (822) (1,679)
--------- --------- ---------
Total comprehensive income $ 100,805 $ 74,302 $ 97,149
========= ========= =========
See Notes to Consolidated Financial Statements.
32
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(In thousands)
For The Years Ended September 30 2003 2002 2001
- ---------------------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided by Operating Activities $ 131,580 $ 158,071 $ 165,548
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Business combinations (11,714) (5,971) (12,008)
Capital expenditures (57,810) (37,067) (51,383)
Net proceeds from sales of assets 9,570 9,674 3,770
Capitalization of software licensed to customers (16,270) (20,370) (20,310)
Repayments from (advances to) financial services 5,584 53,817 (4,321)
--------- --------- ---------
Net cash provided by (used for) investing activities (70,640) 83 (84,252)
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Principal payments on debt (6,061) (6,869) (7,930)
Cash dividends paid (30,024) (31,089) (32,121)
Capital stock issued 49,794 50,155 43,996
Capital stock repurchased (127,872) (125,381) (140,816)
--------- --------- ---------
Net cash used for financing activities (114,163) (113,184) (136,871)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash 3,757 (186) (1,591)
--------- --------- ---------
Net Cash Used for Discontinued Operations (37,778)
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents (49,466) 44,784 (94,944)
Cash and Equivalents, Beginning of Year 155,295 110,511 205,455
--------- --------- ---------
Cash and Equivalents, End of Year $ 105,829 $ 155,295 $ 110,511
========= ========= =========
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $ 18,710 $ 19,457 $ 14,019
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Finance receivables originated (145,043) (154,250) (178,268)
Collections on finance receivables 150,488 175,064 168,577
--------- --------- ---------
Net cash provided (used for) investing activities 5,445 20,814 (9,691)
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 100,000 78,813
Principal payments on debt (18,484) (86,260) (87,477)
Advances from (repayments to) automotive solutions (5,584) (53,817) 4,321
--------- --------- ---------
Net cash used for financing activities (24,068) (40,077) (4,343)
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents 87 194 (15)
Cash and Equivalents, Beginning of Year 635 441 456
--------- --------- ---------
Cash and Equivalents, End of Year $ 722 $ 635 $ 441
========= ========= =========
See Notes to Consolidated Financial Statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The Consolidated Financial Statements include the accounts of the parent company
and its domestic and foreign subsidiaries and present details of revenues,
expenses, assets, liabilities and cash flows for both Automotive Solutions and
Financial Services. Automotive Solutions is comprised of the company's Software
Solutions, Transformation Solutions and Documents segments. Financial Services
is comprised of Reyna Capital Corporation, Reyna Funding L.L.C. and a similar
operation in Canada. In accordance with industry practice, the assets and
liabilities of Automotive Solutions are classified as current or noncurrent and
those of Financial Services are unclassified. Intercompany balances and
transactions are eliminated.
USE OF ESTIMATES
The Consolidated Financial Statements are prepared in conformity with accounting
principles generally accepted in the United States of America and include
amounts based on management's best estimates and judgments. The use of estimates
and judgments may affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
CASH AND EQUIVALENTS
For purposes of reporting cash flows, cash and equivalents includes cash on
hand, cash deposits and investments with maturities of three months or less at
the time of purchase.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, cash equivalents and accounts receivable
approximate fair value because of the relatively short maturity of these
financial instruments. Fair values of debt and interest rate management
agreements are based on quoted prices for financial instruments with the same
remaining maturities.
CONCENTRATIONS OF CREDIT RISK
The company is a leading provider of information management systems and services
to automotive retailers. Substantially all finance receivables and accounts
receivable are from automotive retailers.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts on accounts receivable and finance
receivables is established based on historical loss experience, aging of
accounts and current customer and economic conditions. Receivables are charged
to the allowance for doubtful accounts when an account is deemed to be
uncollectible, taking into consideration the financial condition of the customer
and the value of any collateral. Recoveries of receivables, previously charged
off as uncollectible, are credited to the allowance for doubtful accounts.
INVENTORIES
Inventories are stated at the lower of cost or market. Costs of business forms
inventories are determined by the last-in, first-out (LIFO) method. At September
30, 2003 and 2002, LIFO inventories were $4,305 and $4,439, respectively. These
inventories determined by the first-in, first-out (FIFO) method would increase
by $3,617 in 2003 and $3,539 in 2002. For other inventories, comprised primarily
of computer equipment, cost is determined by specific identification or the FIFO
method. Market is based on net realizable value.
34
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful service lives of the assets or asset
groups, principally on the straight-line method for financial reporting
purposes. Estimated asset lives are:
Years
-----
Land improvements 10
Buildings and improvements 3--33
Computer equipment 3-- 5
Machinery and equipment 3--20
Furniture and other 3--15
SOFTWARE LICENSED TO CUSTOMERS
The company capitalizes certain costs of developing its software products in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." SFAS No. 86 specifies that costs incurred in creating a computer
software product should be charged to expense when incurred, as research and
development, until technological feasibility has been established for the
product. Technological feasibility is established either by creating a detail
program design or a tested working model. Once technological feasibility is
established, all software development costs should be capitalized until the
product is available for general release to customers. Upon general release of a
software product to customers, amortization is determined based on the larger of
the amounts computed using (a) the ratio that current gross revenues for each
product bears to the total of current and anticipated future gross revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product, ranging from three to seven years. Amortization
expense for software licensed to customers was $3,455 in 2003, $403 in 2002 and
$1,967 in 2001. September 30, 2003 and 2002, accumulated amortization was
$37,748 and $33,933, respectively. During 2002, the company disposed of $14,502
of fully amortized software.
LONG-LIVED ASSETS
Long-lived assets, goodwill and intangible assets are reviewed for impairment
annually or whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable from undiscounted future cash flows. If the
carrying value of an asset is considered impaired, an impairment charge is
recorded for the amount by which the carrying value of the asset exceeds its
fair value.
EQUITY INVESTMENT
During March 2002, the company sold its shares of Kalamazoo Computer Group plc
of the United Kingdom for cash of $1,636 and recorded a gain, after tax benefit,
of $103. The company recorded a loss of $12,274, included with equity in net
losses of affiliated companies on the statement of consolidated income, and
income tax benefits of $12,377 related to the sale of these shares, included in
the provision for income taxes on the statement of consolidated income. The
company recorded a loss of $7,718 in 2001, representing amortization of the
intangible assets and its share of Kalamazoo's net losses.
REVENUE RECOGNITION
AUTOMOTIVE SOLUTIONS
Sales of computer hardware and business forms products are recorded when title
passes upon shipment to customers. Revenues from software license fees are
accounted for in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue
Recognition." The company recognizes revenue when (i) persuasive evidence of an
arrangement exists; (ii) delivery has occurred or services have been rendered;
(iii) the sales price is fixed or determinable; and (iv) collectibility is
reasonably assured. Service revenues, which include computer hardware
maintenance, software support, training, consulting and Web hosting are recorded
ratably over the contract period or as services are performed. The application
of SOP 97-2 requires judgment, including whether a software arrangement includes
multiple elements (as defined in Emerging Issues Task Force (EITF) Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables"), and if so, whether
35
vendor-specific objective evidence of fair value exists for those elements.
Software revenues which do not meet the criteria set forth in EITF Issue No.
00-3, "Application of AICPA SOP 97-2 to Arrangements That Include the Right to
Use Software Stored on Another Entity's Hardware," are recorded ratably over the
contract period as services are provided.
FINANCIAL SERVICES
Financial Services revenues consist primarily of interest earned on financing
the company's computer systems sales. Revenues are recognized over the lives of
financing contracts, generally five years, using the interest method.
LEASE OBLIGATIONS
The company leases premises and equipment under operating lease agreements. As
of September 30, 2003, future minimum lease payments relating to operating lease
agreements were $34,565 with annual payments of $7,023 in 2004, $6,595 in 2005,
$4,521 in 2006, $3,491 in 2007 and $2,397 in 2008. Rental expenses were $19,630
in 2003, $21,814 in 2002 and $24,939 in 2001.
COMMITMENTS
In 1997, the company entered into an agreement with a trust for the construction
and lease of an office building near Dayton, Ohio. This lease was accounted for
as an operating lease for financial reporting purposes. Accordingly, neither the
asset nor the related liability were reported on the company's balance sheets.
The company guaranteed 80% of the trust's debt related to the construction of
the building. At the end of the lease term in August 2004, the company had the
option to purchase the building for $28,800 or sell the building on behalf of
the lessor. If the building was sold and the proceeds from the sale were
insufficient to repay the investors, the company might have been required to
make a payment to the lessor of up to 80% of the building's cost. On July 1,
2003, the company purchased the office building for cash of $28,800 and
terminated the lease agreement.
During 2001, the company entered into an agreement to outsource certain computer
services such as desktop and network services through fiscal year 2009. This
agreement requires annual payments of about $20,000.
RESEARCH AND DEVELOPMENT COSTS
The company expenses research and development costs as incurred. These costs,
primarily representing software development costs, were $72,000 in 2003, $68,000
in 2002 and $71,000 in 2001.
INCOME TAXES
The parent company and its domestic subsidiaries file a consolidated U.S.
federal income tax return. No deferred income tax liabilities are recorded on
undistributed earnings of the foreign subsidiaries because, for the most part,
those earnings are permanently reinvested. Undistributed earnings of the foreign
subsidiaries at September 30, 2003, were $19,727. The calculation of the
unrecognized deferred income tax liability on these earnings is not practicable.
36
EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is computed by dividing income by the
weighted average number of common shares outstanding during the year. Diluted
EPS is computed by dividing income by the weighted average number of common
shares and common share equivalents outstanding during each year. The weighted
average number of common shares outstanding assumed that Class B common shares
were converted into Class A common shares. The company's common share
equivalents represent the effect of employee stock options.
2003 2002 2001
------ ------ ------
Average number of common shares outstanding
(used to determine basic EPS) 68,407 70,692 73,183
Effect of employee stock options 2,199 2,665 1,736
------ ------ ------
Average number of common shares and equivalents
outstanding (used to determine diluted EPS) 70,606 73,357 74,919
====== ====== ======
Employee stock options outstanding to purchase 608 shares in 2003, 614 shares in
2002 and 3,705 shares in 2001 were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be antidilutive.
STOCK COMPENSATION
The company has stock based compensation plans, which are described more fully
in Note 8 to the Consolidated Financial Statements. The company accounts for
those plans under the recognition and measurement principals of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. The company recognized compensation
expense of $168 in 2003, $512 in 2002 and $1,009 in 2001. The following table
illustrates the effect on net income and earnings per share as if the company
had applied the fair value recognition provisions of the Financial Accounting
Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based
Compensation."
2003 2002 2001
-------- ------- -------
Net income as reported $119,017 $78,989 $99,557
Stock-based employee compensation expense,
net of taxes 9,970 11,780 11,948
-------- ------- -------
Pro forma net income $109,047 $67,209 $87,609
======== ======= =======
Basic earnings per common share
Net income as reported $ 1.74 $ 1.12 $ 1.36
Pro forma net income $ 1.59 $ 0.95 $ 1.20
Diluted earnings per common share
Net income as reported $ 1.69 $ 1.08 $ 1.33
Pro forma net income $ 1.54 $ 0.92 $ 1.17
RECLASSIFICATIONS
Certain reclassifications were made to prior years' Consolidated Financial
Statements to conform with the presentation used in fiscal year 2003. The
company also changed its allocation methodology for certain expenses in fiscal
year 2003, the effect of which was to report certain expenses as cost of sales
instead of SG&A expenses. This improved allocation of expenses was made possible
by a new general ledger system. Management believes the new allocation
methodology reduced gross margin by between one and two percentage points as
compared to fiscal year
37
2002. It was not practicable, however, to restate prior years.
2. DISCONTINUED OPERATIONS
During the second quarter of fiscal year 2001, the company recorded income from
discontinued operations of $1,623 or $.02 per share. Income from discontinued
operations included about $.01 per share from the collection of notes receivable
obtained in the October 1998 sale of the Healthcare Systems segment and about
$.01 per share from tax benefits related to the August 2000 sale of the
Information Solutions segment.
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. Networkcar had revenues of about
$1,000 in 2002. 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. In connection with this business combination, the company
recorded goodwill of $10,166.
In August 2002, the company purchased BoatVentures.com Corporation, a provider
of Web-based applications and education processes to boat, power sports and
recreational vehicle retailers and manufacturers. Privately-held BoatVentures
had revenues of about $1,000 in 2001. The purchase price of $5,971 was paid with
cash from existing balances. This business combination was accounted for as a
purchase and the accounts of BoatVentures were included in the company's
financial statements since the acquisition date. In connection with this
business combination, the company recorded goodwill of $743 based on the 2002
preliminary allocation of the purchase price. In 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, decrease deferred tax assets by $765 and increase goodwill by
$2,865. BoatVentures was previously partially owned by a member of the company's
board of directors and an officer of the company. The company obtained an
independent fairness opinion on the purchase price and approval of the company's
board of directors prior to consummating this transaction.
In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a.
DealerKid, a provider of electronic customer marketing and relationship
management software and services for automotive retailers in the United States
and Canada. Privately-held DealerKid had revenues of about $2,000 in 2000. The
purchase price of $10,452 was paid with $9,758 of cash from existing balances
and the issuance of a $694 note payable. This business combination was accounted
for as a purchase and the accounts of DealerKid were included in the company's
financial statements since the acquisition date. In connection with this
business combination, the company recorded goodwill of $11,307.
COMPONENTS OF PURCHASE PRICES
2003 2002 2001
------- ------ -------
Cash (net of cash and equivalents acquired) $11,714 $5,971 $12,008
Note payable issued 694
------- ------ -------
Totals $11,714 $5,971 $12,702
======= ====== =======
38
4. INCOME TAXES
PROVISION FOR INCOME TAXES
2003 2002 2001
- --------------------------------------------------------------------
Current
Federal $ 39,143 $ 28,677 $ 50,055
State and local 10,066 (2,626) 8,543
Foreign 3,103 1,600 1,502
Deferred 23,140 21,745 4,490
-------- -------- --------
Provision for income taxes $ 75,452 $ 49,396 $ 64,590
======== ======== ========
Income taxes paid (net of refunds) $ 54,000 $ 22,321 $ 56,404
======== ======== ========
RECONCILIATION OF INCOME TAX RATES
2003 2002 2001
AMOUNT PERCENT Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------
Statutory federal income taxes $68,064 35.0% $57,732 35.0% $56,884 35.0%
State and local taxes less federal
income tax effect 8,072 4.1 6,584 4.0 6,611 4.1
State tax benefits less federal
income tax effect (5,872) (3.6)
Sale of Kalamazoo shares (7,746) (4.7)
Goodwill amortization 1,199 0.7
Other (684) (.3) (1,302) (0.8) (104) (0.1)
------- ---- ------- ---- ------- ----
Provision for income taxes $75,452 38.8% $49,396 29.9% $64,590 39.7%
======= ==== ======= ==== ======= ====
In fiscal year 2002, the company settled a state income tax audit and filed
amended returns in a number of states to correct the apportionment and
allocation of taxable income.
AUTOMOTIVE SOLUTIONS DEFERRED INCOME TAX ASSETS (LIABILITIES)
September 30 2003 2002
- --------------------------------------------------------
Deferred income tax assets
Postretirement medical $ 18,811 $ 18,290
Pensions 25,721 22,107
Receivables allowances 5,344 5,825
Other 9,558 13,628
Deferred income tax liabilities
Depreciation and amortization (26,677) (9,296)
Other (1,355) (3,508)
-------- --------
Totals 31,402 47,046
Current 11,910 15,575
-------- --------
Noncurrent $ 19,492 $ 31,471
======== ========
FINANCIAL SERVICES DEFERRED INCOME TAX LIABILITIES
Financial Services deferred income tax liabilities resulted from temporary
differences from financing the company's computer systems sales.
39
5. FINANCIAL SERVICES
INCOME SUMMARY
2003 2002 2001
- ---------------------------------------------------------------------------------------------------
Revenues $36,532 $41,709 $41,918
Cost of sales - interest expense 8,843 10,645 13,258
------- ------- -------
Gross profit 27,689 31,064 28,660
Selling, general and administrative expenses 6,968 8,073 5,005
------- ------- -------
Operating income $20,721 $22,991 $23,655
======= ======= =======
FINANCE RECEIVABLES
September 30 2003 2002
- --------------------------------------------------------
Product financing receivables $ 423,770 $ 442,069
Unguaranteed residual values 36,552 38,370
Allowance for doubtful accounts (6,705) (6,184)
Unearned interest income (62,414) (70,659)
Other 3,089 2,564
--------- ---------
Totals $ 394,292 $ 406,160
========= =========
As of September 30, 2003, product financing receivables due for each of the next
five years were $161,574 in 2004, $116,312 in 2005, $76,715 in 2006, $47,164 in
2007 and $21,673 in 2008.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
2003 2002
- ------------------------------------------------
Balance, beginning of year $ 6,184 $ 5,956
Provisions
Financial services 3,765 4,450
Automotive solutions 540 540
Net losses (3,784) (4,762)
------- -------
Balance, end of year $ 6,705 $ 6,184
======= =======
40
6. FINANCING ARRANGEMENTS
AUTOMOTIVE SOLUTIONS
During February 2002, the company entered into $100,000 of interest rate swap
agreements that effectively converted 7% fixed rate debt into variable rate
debt. These interest rate swap agreements were designated as fair value hedges.
The fair value of these derivative instruments was an asset of $7,069 at
September 30, 2003 and $7,614 at September 30, 2002 and was included in
Automotive Solutions' other assets on the consolidated balance sheets. These
adjustments to record the net change in the fair value of fair value hedges and
related debt during the periods presented were recorded in income. All existing
fair value hedges were 100% effective. As a result, there was no current impact
to earnings because of hedge ineffectiveness.
National
Amounts
September 30, 2003 Notes Swaps
- -------------------------------------------------------------------------------
Fixed rate notes, $100,000 face value, maturing in 2007 $106,912 $100,000
Weighted average interest rate 7.0%
Weighted average pay rate 3.3%
Weighted average receive rate 7.0%
-------- --------
Totals 106,912 100,000
Current portion
-------- --------
Long-term portion $106,912 $100,000
======== ========
September 30, 2002
- ------------------------------------------------------------------------------
Fixed rate notes, $100,000 face value, maturing in 2007 $107,408 $100,000
Weighted average interest rate 7.0%
Weighted average pay rate 4.3%
Weighted average receive rate 7.0%
Fixed rate note, maturing in 2003 6,061
-------- --------
Totals 113,469 100,000
Current portion 6,061
-------- --------
Long-term portion $107,408 $100,000
======== ========
Loan agreements limit consolidated indebtedness and require a minimum interest
coverage ratio. The fair values of Automotive Solutions' financing arrangements
were $106,912 at September 30, 2003 and $113,691 at September 30, 2002. At
September 30, 2003, debt maturities were $100,000 in 2007. Interest paid was
$4,076 in 2003 and $5,622 in 2002. Interest capitalized was $1,000 in 2003,
$1,806 in 2002 and $4,016 in 2001.
At September 30, 2003, the $100,000 notional amount of swap agreements mature in
2007.
FINANCIAL SERVICES
In the ordinary course of business, the company borrows cash to fund investments
in finance receivables from the sale of the company's products. The company
attempts to limit its interest rate exposure between the interest earned on
fixed rate finance receivables and the interest paid on variable rate financing
agreements through the use of interest rate management agreements. Interest rate
swaps provide for interest to be received on notional amounts at variable rates
and provide for interest to be paid on the same notional amounts at fixed rates.
Fixed interest rates do not change over the life of the agreements. Variable
interest rates are reset at least every ninety days and are based on LIBOR or
commercial paper indices and are settled with counterparties at that time. Net
interest expense or income on these contracts is reflected in interest expense.
The company is exposed to credit related losses in the event of nonperformance
by counterparties to the interest rate management agreements. The company
attempts to minimize this credit risk by entering into agreements only with
counterparties that have a Standard & Poor's rating of "A" or higher. The
company also diversifies its interest rate management agreements among several
financial institutions. Interest rate management agreements are accounted for
using settlement accounting.
41
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, with
interest payable on a variable rate basis. This loan funding agreement is
renewable annually through January 23, 2006. As of September 30, 2003, the
balance outstanding on this facility was $100,000.
The fair value of the company's cash flow derivative instruments was a $2,422
liability at September 30, 2003 and a $4,035 liability at September 30, 2002 and
was included in Financial Services' other liabilities on the consolidated
balance sheets. The adjustments to record the net change in the fair value of
cash flow hedges during the periods presented was recorded, net of income taxes,
in other comprehensive income. Fluctuations in the fair value of the derivative
instruments are generally offset by changes in the value or cash flows of the
underlying exposure being hedged because of the high degree of effectiveness of
these cash flow hedges. In fiscal year 2004, the company expects the amounts to
be reclassified out of other comprehensive income into earnings to be immaterial
to the financial statements.
Notional
Amounts
SEPTEMBER 30, 2003 Notes Swaps
- -------------------------------------------------------------------------
Variable rate instruments, maturing through 2009 $ 169,340 $116,375
Weighted average interest rate 1.5%
Weighted average pay rate 3.7%
Weighted average receive rate 1.1%
Fixed rate notes, maturing through 2007 29,428
Weighted average interest rate 4.9%
---------- --------
Totals $ 198,768 $116,375
========== ========
September 30, 2002
- --------------------------------------------------------------------------
Variable rate instruments, maturing through 2006 $ 189,033 $136,500
Weighted average interest rate 2.2%
Weighted average pay rate 4.4%
Weighted average receive rate 1.8%
Fixed rate notes, maturing through 2005 28,219
Weighted average interest rate 6.4%
---------- --------
Totals $ 217,252 $136,500
========== ========
Loan agreements limit consolidated indebtedness and require a minimum interest
coverage ratio. The fair value of Financial Services debt was $199,404 and
$218,366 at September 30, 2003 and 2002, respectively. At September 30, 2003,
maturities of notes were $79,475 in 2004, $12,172 in 2005, $29,047 in 2006,
$28,074 in 2007 and $25,000 in 2008. Interest paid was $9,010 in 2003, $11,155
in 2002 and $13,476 in 2001.
At September 30, 2003, notional amount maturities of swap agreements were
$46,598 in 2004, $36,473 in 2005, $27,598 in 2006 and $5,706 in 2007.
REVOLVING CREDIT AGREEMENTS
Automotive Solutions and Financial Services share variable rate revolving credit
agreements, which total $150,000 and require commitment fees on unused credit.
At September 30, 2003, available balances under these agreements were $100,000.
The facility expires in August 2004.
42
7. CAPITAL STOCK
September 30 2003 2002 2001
- -------------------------------------------------------------------
Preferred
No par value
Authorized shares 60,000 60,000 60,000
Class A common
No par value
Authorized shares 240,000 240,000 240,000
======= ======= =======
Issued and outstanding shares
Balance, beginning of year 68,595 70,230 73,622
Issued 2,761 2,978 3,119
Converted from Class B common 50 200
Repurchased (4,737) (4,779) (6,490)
Retired (11) (34) (21)
------- ------- -------
Balance, end of year 66,658 68,595 70,230
======= ======= =======
Class B common
No par value
Authorized shares 40,000 40,000 40,000
Issued and outstanding shares 15,000 16,000 20,000
Dividends on Class A common shares must be twenty times the dividends on Class B
common shares and must be paid simultaneously. Each share of Class A common and
Class B common is entitled to one vote. The Class B common shareholder may
convert twenty Class B common shares to one share of Class A common. During
September 2003 and February 2002, 1,000 and 4,000 Class B common shares were
converted into 50 and 200 Class A common shares, respectively. The company has
reserved sufficient authorized Class A common shares for Class B conversions and
stock option plans.
Each outstanding Class A common share has one preferred share purchase right.
Each outstanding Class B common share has one-twentieth of a right. Rights
become exercisable if a person or group acquires or seeks to acquire, through a
tender or exchange offer, 15% or more of the company's Class A common shares. In
that event, all holders of Class A common shares and Class B common shares,
other than the acquirer, could exercise their rights and purchase preferred
shares at a specified amount. At the date of these financial statements, except
for the preferred share purchase rights, the company had no agreements or
commitments with respect to the sale or issuance of the preferred shares and no
preferred shares were outstanding.
The company repurchased Class A common shares for treasury at average prices of
$26.99 in 2003, $26.23 in 2002 and $21.70 in 2001. The remaining balance of
shares authorized for repurchase by the board of directors was 8,165 at
September 30, 2003. Treasury shares at September 30 were 25,430 in 2003, 23,503
in 2002 and 21,903 in 2001.
43
8. EMPLOYEE STOCK OPTION PLANS
The company's stock option plans award incentive stock options and/or
nonqualified stock options to purchase Class A common shares to substantially
all employees. Stock options are generally granted at a price equal to fair
market value of the common stock on the date of grant. At September 30, 2003,
options to purchase 3,541 additional Class A common shares were available for
future awards to certain key employees. Under a broad-based stock option plan,
the board of directors may award options at its discretion.
Weighted Average
Shares Under Option Option Prices Per Share
2003 2002 2001 2003 2002 2001
- --------------------------------------------------------------------------------------
Outstanding
Beginning of year 13,075 13,941 17,620 $20.02 $18.88 $18.04
Granted 2,480 2,833 281 22.60 22.68 19.99
Exercised (2,751) (2,970) (3,090) 18.06 16.96 13.89
Canceled (657) (729) (870) 21.11 20.69 19.96
------ ------ ------
End of year 12,147 13,075 13,941 20.94 20.02 18.88
====== ====== ======
Exercisable at September 30 6,287 5,206 5,090 19.85 19.85 18.96
====== ====== ======
Outstanding, September 30, 2003 Exercisable, September 30, 2003
Weighted Weighted
Average Average Weighted
Option Number of Remaining Option Number of Average
Price Range Options Life in Years Price Options Option Price
- -------------------------------------------------------------------------------------------------------------
$12.50 - $17.44 3,047 5.8 $16.93 2,689 $16.92
$17.69 - $21.94 3,174 5.4 20.33 2,040 19.79
$22.01 - $22.56 4,517 6.5 22.55 475 22.53
$23.07 - $30.27 1,409 4.3 25.87 1,083 26.09
------ -----
TOTALS 12,147 5.8 20.94 6,287 19.85
====== =====
The company accounts for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and follows the disclosure
requirements of SFAS No. 123. SFAS No. 123 requires the valuation of stock
options using option valuation models and the disclosure of the pro forma effect
on earnings. The company valued its stock options using the Black-Scholes option
valuation model, which was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of subjective assumptions,
such as expected stock price volatility, which can materially affect the fair
value estimate. Because the company's stock options have characteristics
significantly different from traded options, the fair value determined may not
reflect the actual value of the company's stock options. The weighted average
fair value of the company's stock options granted at fair market value was $4.52
in 2003, $5.34 in 2002 and $6.47 in 2001.
OPTION VALUATION ASSUMPTIONS 2003 2002 2001
- ---------------------------------------------------
Expected life in years 3 4 5
Dividend yield 1.9% 1.9% 1.9%
Risk free interest rate 2.1% 3.7% 5.9%
Volatility 31% 29% 33%
44
9. POSTRETIREMENT BENEFITS
PENSION EXPENSE
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Net periodic pension cost
Service cost $ 8,546 $ 8,839 $ 8,794
Interest cost 17,038 15,915 15,918
Estimated return on plan assets (12,471) (13,277) (12,893)
Amortization of unrecognized transitional asset 139 145 147
Amortization of prior service cost 598 431 427
Recognized net actuarial losses 1,293 65 153
Plan administration 880 774 767
Settlements 120 1,684
-------- -------- --------
Net periodic pension cost 16,143 14,576 13,313
Defined contribution plans 5,249 6,503 6,258
Multi-employer plans 13 25 37
-------- -------- --------
Totals $ 21,405 $ 21,104 $ 19,608
======== ======== ========
Actuarial assumptions
Discount rate 6.5% - 7.25% 7.0% - 7.5% 6.5% - 7.75%
Rate of compensation increase 3.75% - 4.50% 3.75% - 5.0% 3.75% - 5.0%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
Actuarial cost method PROJECTED UNIT CREDIT
Measurement period JULY 1 - JUNE 30
The company sponsors contributory and noncontributory, defined benefit pension
plans for most employees. Pension benefits are primarily based on years of
service and compensation. The company's funding policy is to make annual
contributions to the plans sufficient to meet or exceed the minimum statutory
requirements. The company and its actuaries review the pension plans each year.
The actuarial assumptions are intended to reflect expected experience over the
life of the pension liability.
The company expensed payments of $1,684 in 2002 in connection with the early
settlement of certain pension benefits for former executives. These payments
reduce the future company obligations for those individuals.
The company sponsors defined contribution savings plans covering most domestic
employees. Effective January 1, 2003, the company increased its contribution to
50% of the first 6% of compensation contributed to the plan by participating
employees from 40% of the first 3% of compensation. Prior to fiscal year 2003,
the company also funded a discretionary contribution. Forfeitures of nonvested
discretionary contributions were used to reduce contributions required by the
company.
45
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
Funded Unfunded Total
- ------------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
---------------------- ---------------------- ----------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $ 182,488 $ 168,979 $ 46,265 $ 52,528 $ 228,753 $ 221,507
Service cost 7,682 8,039 923 796 8,605 8,835
Interest cost 13,747 12,432 3,341 3,479 17,088 15,911
Actuarial losses (gains) 23,635 (94) 7,819 1,674 31,454 1,580
Benefits paid (7,161) (7,453) (4,382) (11,924) (11,543) (19,377)
Change in plan provisions 618 (288) 330
Foreign currency translation 1,434 (33) 1,434 (33)
--------- --------- --------- --------- --------- ---------
Projected benefit obligation, end of year $ 221,825 $ 182,488 $ 53,966 $ 46,265 $ 275,791 $ 228,753
========= ========= ========= ========= ========= =========
Change in plan assets
Fair value of plan assets, beginning of year $ 127,477 $ 135,882 $ 127,477 $ 135,882
Actual income (losses) on plan assets 1,922 (12,810) 1,922 (12,810)
Administrative expenses paid (1,367) (942) (1,367) (942)
Employer contributions 38,982 12,833 38,982 12,833
Benefits paid (7,161) (7,453) (7,161) (7,453)
Foreign currency translation 1,089 (33) 1,089 (33)
--------- --------- --------- ---------
Fair value of plan assets, end of year $ 160,942 $ 127,477 $ 160,942 $ 127,477
========= ========= ========= =========
Net amount recognized
Funded status $ 60,882 $ 55,011 $ 53,966 $ 46,265 $ 114,848 $ 101,276
Unrecognized transition obligation 113 (259) (518) (259) (405)
Unrecognized prior service cost (6,349) (770) (1,923) (2,174) (8,272) (2,944)
Unrecognized net losses (74,821) (46,596) (12,478) (4,951) (87,299) (51,547)
Multi-employer liability 39 66 39 66
Minimum pension liability 44,731 7,392 11,756 5,872 56,487 13,264
--------- --------- --------- --------- --------- ---------
Net amount recognized $ 24,443 $ 15,150 $ 51,101 $ 44,560 $ 75,544 $ 59,710
========= ========= ========= ========= ========= =========
Minimum pension liability
Intangible asset $ 6,349 $ 690 $ 2,182 $ 2,692 $ 8,531 $ 3,382
Deferred income tax benefit 15,162 2,642 3,805 1,253 18,967 3,895
Accumulated other comprehensive income 23,220 4,060 5,769 1,927 28,989 5,987
--------- --------- --------- --------- --------- ---------
Totals $ 44,731 $ 7,392 $ 11,756 $ 5,872 $ 56,487 $ 13,264
========= ========= ========= ========= ========= =========
2003 2002
----------------------------
Actuarial assumptions
Projected benefit obligation discount rate 6.0% 6.5% - 7.25%
Rate of compensation increase 3.25% - 4.5% 3.75% - 4.5%
At September 30, 2003 and 2002, respectively, about 27% and 26% of the plans'
assets were invested in cash and equivalents, government bonds and investment
grade corporate bonds. The balance of the plans' assets were invested in
equities.
PLANS WITH ACCUMULATED BENEFIT OBLIGATION GREATER THAN PLAN ASSETS
Funded Unfunded Total
- -------------------------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
--------------------- ------------------- -------------------
PBO $221,825 $174,349 $53,966 $46,265 $275,791 $220,614
ABO $185,385 $136,958 $50,973 $44,164 $236,358 $181,122
FMV Plan Assets $160,942 $120,727 $160,942 $120,727
46
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
2003 2002 2001
- ----------------------------------------------------------------------------
Service cost $ 481 $ 547 $ 752
Interest cost 4,291 4,027 3,773
Amortization of prior service cost (742) (532) (337)
Recognized net actuarial losses 1,088 637 260
------- ------- -------
Totals $ 5,118 $ 4,679 $ 4,448
======= ======= =======
Actuarial assumptions
Discount rate 6.0% 7.25% 7.75%
Healthcare cost trend rate through 2007 10.0% 6.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0% 5.0%
The company sponsors a defined benefit medical plan for employees who retired
before October 1, 1993. Future retirees may purchase postretirement medical
insurance from the company. Discounts from the market price of postretirement
medical insurance will be provided to certain retirees based on age and length
of remaining service as of October 1, 1993. These discounts are included in the
determination of the accumulated benefit obligation. The company also sponsors a
defined benefit life insurance plan for substantially all employees. The company
funds medical and life insurance benefits on a pay-as-you-go basis.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION
2003 2002
- --------------------------------------------------------------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $ 60,769 $ 55,394
Service cost 482 546
Interest cost 4,292 4,026
Plan participant contributions 402 200
Actuarial losses 2,308 6,863
Benefits paid (4,531) (3,943)
Change in plan provisions 40 (2,317)
-------- --------
Projected benefit obligation, end of year $ 63,762 $ 60,769
======== ========
Net amount recognized
Projected benefit obligation, end of year $ 63,762 $ 60,769
Unrecognized prior service cost 6,406 7,148
Unrecognized net losses (22,533) (21,347)
-------- --------
Net amount recognized $ 47,635 $ 46,570
======== ========
Actuarial assumptions
Discount rate 6.0% 7.25%
Healthcare cost trend rate through 2007 10.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0%
The effect of a 1% increase in the assumed healthcare cost trend rate would have
increased fiscal year 2003 service and interest costs by $135 and the September
30, 2003 accumulated benefit obligation by $2,261. Similarly, a 1% decrease
would have decreased fiscal year 2003 service and interest costs by $116 and the
September 30, 2003 accumulated benefit obligation by $1,943.
47
10. CASH FLOW STATEMENTS
2003 2002 2001
- --------------------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash flows provided by (used for) operating activities
Net income $ 106,717 $ 64,866 $ 85,019
Adjustments to reconcile net income to net cash
provided by operating activities
Cumulative effect of accounting change 36,563
Depreciation and amortization 36,237 31,395 49,901
Deferred income taxes 28,572 23,256 8,135
Deferred income taxes transferred from
financial services (5,514) (2,866) (2,647)
Income from discontinued operations (1,623)
Losses (gains) on sales of assets 289 1,605 (337)
Changes in operating assets and liabilities
Accounts receivable (20,485) (2,358) 9,249
Inventories 933 (2,221) 4,441
Prepaid expenses, intangible and other assets 4,599 11,538 (1,249)
Accounts payable 475 506 (2,792)
Accrued and other liabilities (20,243) (4,213) 17,451
--------- --------- ---------
Net cash provided by operating activities $ 131,580 $ 158,071 $ 165,548
========= ========= =========
FINANCIAL SERVICES
Cash flows provided by (used for) operating activities
Net income $ 12,300 $ 14,123 $ 14,538
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes (4,040) (2,269) (6,422)
Deferred income taxes transferred to
automotive solutions 5,514 2,866 2,647
Changes in receivables, other assets
and other liabilities 4,936 4,737 3,256
--------- --------- ---------
Net cash provided by operating activities $ 18,710 $ 19,457 $ 14,019
========= ========= =========
48
11. SEGMENT REPORTING
The company is organized into four segments for reporting purposes.
The Software Solutions segment provides integrated computer systems products and
related services. Products include integrated software packages, computer
hardware and installation of hardware and software. Services include customer
training, hardware maintenance and software support.
The Transformation Solutions segment provides specialized training, Web services
and customer relationship management products and services as well as consulting
services.
The Documents segment manufactures and distributes printed business forms to
automotive retailers.
The Financial Services segment provides financing services, principally for
sales of the company's computer systems.
Total assets were not allocated by segment except for Financial Services'
assets. Investments in equity method investees and capital expenditures were not
allocated by segment. Depreciation and amortization were reflected in
determining segment operating income; however, it is not practicable to present
this information by segment.
OPERATING SEGMENTS
2003 2002 2001
- ----------------------------------------------------------------------------------
Net sales and revenues
Software solutions
Computer services $ 501,562 $ 468,584 $ 431,370
Computer systems products 164,624 145,299 169,125
----------- ----------- -----------
Total software solutions 666,186 613,883 600,495
Transformation solutions 131,288 153,268 174,546
Documents 174,239 183,523 187,053
Financial services 36,532 41,709 41,918
----------- ----------- -----------
Total net sales and revenues $ 1,008,245 $ 992,383 $ 1,004,012
=========== =========== ===========
Operating income (loss)
Software solutions $ 162,041 $ 126,325 $ 119,633
Transformation solutions (25,234) (8,066) (11,347)
Documents 32,551 37,277 39,791
Financial services 20,721 22,991 23,655
----------- ----------- -----------
Total operating income $ 190,079 $ 178,527 $ 171,732
=========== =========== ===========
Assets
Automotive solutions $ 728,560 $ 729,560 $ 732,073
Financial services 395,495 407,605 422,334
----------- ----------- -----------
Total assets $ 1,124,055 $ 1,137,165 $ 1,154,407
=========== =========== ===========
Investments in equity method investees $ 5,376 $ 8,270 $ 20,531
Capital expenditures 57,810 37,067 51,383
Depreciation and amortization 36,237 31,395 49,901
49
GEOGRAPHIC AREAS
The company provides integrated computer systems products and services and
manufactures and distributes printed business forms primarily in the United
States.
2003 2002 2001
- -----------------------------------------------------------------------------
United States
Net sales and revenues 943,769 $ 937,275 $ 937,956
Long-lived assets 414,464 377,168 420,906
International
Net sales and revenues 72,879 61,361 75,352
Long-lived assets 4,913 3,118 3,424
Elimination of intersegment sales (8,403) (6,253) (9,296)
Totals
Net sales and revenues 1,008,245 992,383 1,004,012
Long-lived assets 419,377 380,286 424,330
12. CONTINGENCIES
The U.S. Environmental Protection Agency (EPA) had 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 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
involved a municipal waste disposal facility owned and operated by four
municipalities. The company joined a PRP coalition and shared remedial
investigation and feasibility study costs with other PRPs. On May 7, 2003, a
consent decree was entered in the United States District of Connecticut (U.S. v.
Regional Refuse Disposal District, et al) pursuant to which the company paid
$244 on May 14, 2003. The company believes that any further involvement in the
remediation will be minimal and will not have a material adverse effect on the
financial statements.
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 Southern District of Ohio
regarding an environmental remediation site in Dayton, Ohio. The court has
ordered the parties to participate in non-binding mediation. The company
believes that the reasonably foreseeable resolution of this matter 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 September 30, 2003, this contingent
liability totaled $2,651. 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 standby 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 September 30, 2003, the unamortized balance on
this letter of credit was $1,678.
50
13. ACCOUNTING CHANGE
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no
longer be amortized, but instead, tested for impairment at least annually. The
statement also requires recognized intangible assets with finite useful lives to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The company elected to adopt the
provisions of SFAS No. 142 effective October 1, 2001. Accordingly, goodwill has
not been amortized in the financial statements for the periods ended September
30, 2003 and September 30, 2002. This statement also required certain intangible
assets that did not meet the criteria for recognition apart from goodwill, to be
subsumed into goodwill. During the quarter ended December 31, 2001, the company
subsumed into goodwill $54,531 of intangible assets representing assembled
workforce and a noncontractual customer relationship, that did not meet the
separability criteria under SFAS No. 141, "Business Combinations."
SFAS No. 142 also requires that goodwill be tested for impairment, initially
upon adoption (as of October 1, 2001), and thereafter at least annually. During
the second quarter of fiscal year 2002, the company completed the goodwill
impairment test and recorded impairment losses of $36,563 ($60,938 net of income
tax benefits of $24,375). These impairment losses were recorded effective
October 1, 2001, as the cumulative effect of the accounting change on the
consolidated statements of income. The company divided its four reporting
segments into eight reporting units for purposes of applying the provisions of
this pronouncement. For each reporting unit a fair value was determined based
primarily on the present value of discounted future cash flows. Other methods
were considered to validate this valuation method. Where initial impairment was
indicated, the company hired an outside appraisal firm to determine the fair
value and allocate this fair value among assets and liabilities. Based on this
analysis, two reporting units within the Transformation Solutions reporting
segment incurred impairment losses. Reynolds Consulting Services, acquired in
fiscal year 2000 as part of the HAC Group business combination, recorded an
impairment loss of $33,515 ($55,858 net of income tax benefits of $22,343). The
company also recorded an impairment loss of $3,048 ($5,080 net of income tax
benefits of $2,032) related to its Campaign Management Services reporting unit.
These impairment losses occurred because of discounting future cash flows to
determine the fair value of the reporting units. Under previous accounting
standards, future cash flows were not discounted in determining if impairment
existed.
The company performed its annual goodwill impairment test as of July 31, 2002
and 2003, using a consistent methodology with the initial impairment tests. In
2003, the company identified and recorded an impairment loss of $302 within the
Transformation Solutions reporting segment, related to BoatVentures.com. This
impairment loss resulted from a decline in estimated future discounted cash
flows from those originally forecasted at the time of acquisition.
51
ACQUIRED INTANGIBLE ASSETS
Useful
Gross Accumulated Life
Amount Amortization (years)
----------------------------------
AS OF SEPTEMBER 30, 2003
Amortized intangible assets
Contractual customer relationship $33,100 $ 5,655 20
Customer contract 17,700 16,493 3.67
Trademarks 5,900 1,008 20
Other 6,449 2,262 2-15
------- -------
Total $63,149 $25,418
======= =======
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 $7,233 in 2003, $7,021 in 2002 and $11,142 in
2001. As of September 30, 2003, estimated annual amortization expense was $3,537
in 2004, $2,300 in 2005, $2,300 in 2006, $2,300 in 2007 and $2,300 in 2008.
GOODWILL
Software Transformation
Solutions Solutions Documents Totals
--------- --------- --------- ------
Balances as of September 30, 2001 $ 10,412 $ 21,374 $ 2,877 $ 34,663
Intangible assets subsumed
Noncontractual customer relationship 47,376 47,376
Assembled workforce 7,155 7,155
Cumulative effect of accounting change (60,938) (60,938)
Business combinations 743 743
-------- -------- -------- --------
Balances as of September 30, 2002 10,412 15,710 2,877 28,999
Business combinations 13,031 13,031
Impairment loss (302) (302)
-------- -------- -------- --------
Balance as of September 30, 2003 $ 10,412 $ 28,439 $ 2,877 $ 41,728
======== ======== ======== ========
Prior to the adoption of SFAS No. 142, the excess of cost over net assets of
companies acquired was recorded as goodwill and had been amortized on a
straight-line basis over five to twenty years. Amortization expense was $7,122
in 2001. At September 30, 2003 and 2002, accumulated amortization was $53,812
and $53,760, respectively.
52
PRO FORMA INCOME FROM CONTINUING OPERATIONS
The table below presents the pro forma effect on net income and earnings per
share from the adoption of SFAS No. 142.
2003 2002 2001
- --------------------------------------------------------------------------------------
Income from continuing operations, as reported $119,017 $115,552 $ 97,934
Goodwill amortization, net of taxes 8,359
Subsumed intangible assets amortization, net of taxes 2,619
-------- -------- --------
Pro forma income from continuing operations $119,017 $115,552 $108,912
======== ========= ========
Basic Earnings per Common Share
Income from continuing operations, as reported $ 1.74 $ 1.63 $ 1.34
Pro forma income from continuing operations $ 1.74 $ 1.63 $ 1.49
Diluted Earnings per Common Share
Income from continuing operations, as reported $ 1.69 $ 1.58 $ 1.31
Pro forma income from continuing operations $ 1.69 $ 1.58 $ 1.45
14. ACCOUNTING STANDARDS
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 which an enterprise holds a
variable interest that it acquired before February 1, 2003. On July 1, 2003, the
company purchased an office building, leased from a nonconsolidated trust
discussed in Note 1 to the Consolidated Financial Statements, for cash of
$28,800 and terminated the lease agreement. The company has no other variable
interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amended and
clarified financial accounting and reporting for derivative instruments and
hedging activities. The provisions of this statement were effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of this pronouncement
did not have a material effect on the company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that certain financial instruments be classified as either a liability
or an asset, instead of equity, on the balance sheet. The provisions of this
statement were effective for the first interim period beginning after June 15,
2003. The adoption of this pronouncement did not have a material effect on the
company's financial statements.
15. SUBSEQUENT EVENTS
In October 2003, the company purchased the outstanding shares of Incadea AG, a
provider of global automotive retailing software solutions. Privately-held
Incadea, based in Raubling, Germany, has annual revenues of about $6,000. The
purchase price of about $7,000 was paid with cash from existing balances.
In October 2003, the company purchased the net assets of Third Coast Media, a
provider of Web and customer relationship management software to automotive
retailers. Third Coast Media, headquartered in Richardson, Texas, has annual
revenues of about $5,000. The purchase price of about $8,000 was paid with cash
from existing balances.
53
Effective October 1, 2003, the company elected to adopt the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" and begin recognizing stock option expense in the
Statements of Consolidated Income. SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" provides three alternative methods for
reporting this change in accounting principle. The company has elected the
retroactive restatement method which requires that all periods presented be
restated to reflect stock-based compensation cost under the fair value based
accounting method of SFAS No. 123 for all awards granted, modified or settled in
fiscal years beginning after December 31, 1994. Accordingly, the company is
currently assessing the impact this will have on the company's Consolidated
Financial Statements and will restate all periods beginning in fiscal year 2004.
See pro forma earnings effects in Note 1 to the Consolidated Financial
Statements.
On October 2, 2003, the company announced the consolidation of its automotive
forms manufacturing facility located in Grand Prairie, Texas, into the company's
Celina, Ohio facility. The 76 employees located in Texas will be offered the
opportunity to accept a position in the Ohio facility. Those not accepting
positions in Ohio will be offered severance and outplacement services. The
company also eliminated additional positions in technology, administration and
forms sales bringing the total number of reductions to about 200. The company
estimates that costs for severance, outplacement, relocation and other plant
consolidation efforts will total about $8,000 or $.07 per share in the first
quarter of fiscal year 2004.
54
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------
2003
Net sales and revenues $246,648 $255,099 $ 250,405 $256,093
Gross profit $139,311 $142,078 $ 140,069 $143,206
Income from continuing operations $ 28,248 $ 29,527 $ 28,249 $ 32,993
Basic earnings per common share $ .41 $ .43 $ .41 $ .48
Diluted earnings per common share $ .40 $ .42 $ .40 $ .47
Net income (loss) $ 28,248 $ 29,527 $ 28,249 $ 32,993
Basic earnings (loss) per common share $ .41 $ .43 $ .41 $ .48
Diluted earnings per common share $ .40 $ .42 $ .40 $ .47
Cash dividends declared per share
Class A common $ .11 $ .11 $ .11 $ .11
Class B common $ .0055 $ .0055 $ .0055 $ .0055
Closing market prices of Class A common shares
High $ 27.27 $ 26.90 $ 29.90 $ 29.88
Low $ 19.90 $ 22.99 $ 25.41 $ 26.87
2002
Net sales and revenues $240,109 $245,002 $ 250,568 $256,704
Gross profit $140,603 $141,701 $ 148,208 $148,135
Income from continuing operations $ 25,400 $ 29,067 $ 30,233 $ 30,852
Basic earnings per common share $ .36 $ .41 $ .43 $ .44
Diluted earnings per common share $ .35 $ .39 $ .41 $ .43
Net income (loss) ($ 11,163) $ 29,067 $ 30,233 $ 30,852
Basic earnings (loss) per common share ($ .16) $ .41 $ .43 $ .44
Diluted earnings (loss) per common share ($ .15) $ .39 $ .41 $ .43
Cash dividends declared per share
Class A common $ .11 $ .11 $ .11 $ .11
Class B common $ .0055 $ .0055 $ .0055 $ .0055
Closing market prices of Class A common shares
High $ 25.94 $ 31.55 $ 30.57 $ 27.33
Low $ 22.55 $ 24.03 $ 27.95 $ 22.30
(1) Effective October 1, 2001, the company adopted the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," and reduced income by $36,563 for the cumulative effect of the
accounting change.
55
VALUATION ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
(Dollars in Thousands)
Column A Column B Column C Column D Column E
-----Additions---- -----Deductions---
Balance Charged
at to Costs Write-offs Balance
Beginning and Other Net of At End
Description of Year Expenses (a) Recoveries of Year
Valuation Accounts - Deducted From Assets to Which They Apply
AUTOMOTIVE SOLUTIONS
Reserves for accounts receivable:
Year ended September 30, 2003 $ 4,902 $ 4,399 $ 213 $ 4,261 $ 5,253
Year ended September 30, 2002 $ 3,662 $ 6,363 ($ 538) $ 4,585 $ 4,902
Year ended September 30, 2001 $ 2,324 $ 5,340 ($ 978) $ 3,024 $ 3,662
Reserves for credit memos:
Year ended September 30, 2003 $10,321 $ 1,362 $ 173 $ 165 $11,691
Year ended September 30, 2002 $ 6,724 $ 3,814 ($ 7) $ 210 $10,321
Year ended September 30, 2001 $ 6,850 $ 300 ($ 26) $ 400 $ 6,724
Reserves for inventory:
Year ended September 30, 2003 $ 1,320 $ 1,222 $ 19 $ 896 $ 1,665
Year ended September 30, 2002 $ 970 $ 1,965 $ 110 $ 1,725 $ 1,320
Year ended September 30, 2001 $ 1,644 $ 77 ($ 8) $ 743 $ 970
FINANCIAL SERVICES
Reserves for finance receivables:
Year ended September 30, 2003 $ 6,184 $ 3,765 $ 566 $ 3,810 $ 6,705
Year ended September 30, 2002 $ 5,956 $ 4,450 $ 533 $ 4,755 $ 6,184
Year ended September 30, 2001 $ 5,846 $ 2,500 $ 493 $ 2,883 $ 5,956
(a) Includes adjustments from translation of foreign currency to United States
dollars, the effects of acquisitions of businesses and transfers between
reserves.
56