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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
[ ] 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. [ ]
Indicate 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 March 31, 2004, was $1,831920,125.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of December 1, 2004:
Class A Common Shares: 63,993,592 (exclusive of 28,071,016 Treasury shares)
Class B Common Shares: 14,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders are
incorporated by reference into Part III of this report to the extent described
herein.
1
PART I
(Dollars in thousands)
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Reynolds and Reynolds Company (NYSE: REY) was founded in 1866 and became an
Ohio corporation in 1889. Reynolds was one of the first printing companies to
produce standardized business forms. In 1927, the company began producing
standard business forms and paper-based accounting systems for Chevrolet
retailers nationwide. This led to the establishment of an automotive division as
the company expanded its market to additional automotive retailers. In the
1960s, Reynolds began offering computer services to automotive retailers
throughout the United States and expanded its operations into Canada. Today, the
company is one of the leading providers of integrated solutions to automotive
retailers.
The company's software and services solutions include a full range of retail and
enterprise management systems. Anchored by the company's dealer management
system, ERA(R), Reynolds also offers Web and Customer Relationship Management
(CRM) solutions; support, training and professional services; documents; data
management and integration services; networking; and financial services. A new
retail management solution, the Reynolds Generation Series(R) Suite was launched
in 2002. Reynolds customers comprise most automotive retailers and a majority of
car companies doing business in North America. In October 2003, the company
expanded its international operations through the acquisition of Incadea GmbH, a
provider of automotive retailing solutions.
SEGMENTS
The company is organized into four segments for financial reporting purposes:
Software Solutions, Services, Documents and Financial Services.
Software Solutions
The Software Solutions segment is the company's largest segment and provides
computer solutions including computer hardware, integrated software packages,
software enhancements and related support. The company's Software Solutions
segment also includes Incadea.
The company sells and supports three core platforms to automotive retailers:
- ERA DEALER MANAGEMENT SYSTEM . The ERA dealer management system is
comprised of software applications to serve all areas of an
automotive retailer's business. The ERA platform is used by more
than 10,000 dealerships and 350,000 dealership personnel in the
United States and Canada today. Since its introduction, the platform
has evolved to meet the changing needs of the company's customers
and advancements in technology.
- REYNOLDS GENERATIONS SERIES SUITE (RGS SUITE). RGS Suite is a new
family of software solutions with applications relating to virtually
all aspects of a dealership's operations, including client
management, sales management, finance and insurance, service and
parts operations, and business and employee management. It is the
company's next generation platform with embedded CRM tools.
- INCADEA(R). The Incadea platform is based on a standard Enterprise
Resource Planning (ERP) system developed by Microsoft and combines
the proven commercial management options with special extensions
designed for the vehicle sector. Acquired by the company in October
2003, Incadea provides solutions to automotive retailers and car
companies outside the United States and Canada, primarily in Western
Europe.
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The Incadea platform currently supports more than 20 languages and
is serving customers in over two dozen countries.
The company provides an extensive portfolio of high-value added applications
designed for the business office, sales, and service departments of the
automobile dealership. These solutions help automotive retailers manage their
customer relationships and improve the retailers' productivity. The primary
offerings are Contact Management, WebmakerX(R), Electronic Parts Catalog, and
Electronic Document Management.
Most of the company's software products are developed internally. The company
also purchases technology, licenses intellectual property rights, and oversees
customization of its products. The company believes it is not materially
dependent upon licenses and other agreements with third parties relating to the
development or support of its products.
The company has key relationships with IBM, Microsoft and LexisNexis, a division
of Reed Elsevier Group. Computer hardware and peripherals are essential to the
company's Software Solutions segment. The company purchases these products from
a variety of suppliers. IBM, however, supplies the hardware platform for the RGS
Suite and ERA systems. LexisNexis hosts certain applications that are provided
to Reynolds customers through remote access. If these relationships were to be
terminated or interrupted, some delay would occur in converting to new vendors.
The company historically has not experienced these difficulties, nor does it
reasonably foresee difficulty in replacing them in the future on competitive
terms and conditions.
Services
The Services segment includes the installation and maintenance of computer
hardware, software training and professional services. The company's technical
support and training resources are extensive. Reynolds University provides
online education and live training delivered on site or in classrooms. Reynolds
consultants deliver advanced process consulting tailored to the specific
business needs of the customer.
Documents
The Documents segment manufactures and distributes printed business forms
primarily to automotive retailers.
Financial Services
The Financial Services segment provides financing, principally for sales of the
company's computer solutions and services, through the company's wholly-owned
affiliates, Reyna Capital Corporation, Reyna Funding L.L.C. and a similar
operation in Canada.
See Note 12 to the Consolidated Financial Statements on page 55 for additional
information on reporting segments.
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.
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PRODUCT DEVELOPMENT
During fiscal year 2004, 2003 and 2002, research and development expense was
$93,000, $72,000 and $ 68,000, respectively. The company expects to incur
research and development expense of approximately $90,000 in 2005.
SALES CHANNELS
The company sells its solutions through a direct field sales force and Business
Development Centers (inside sales). The company's subsidiaries license and
support the company's products in their local countries as well as within other
foreign countries where it does not operate through a direct sales subsidiary.
In some countries, the company employs independent consultants to sell its
products. The company sells or licenses its products and services under a master
contractual arrangement that allows the end-user customer to acquire multiple
products and services over an extended period of time.
COMPETITION
The company is one of the leading providers of integrated software solutions and
services to automotive retailers in North America. In the Software Solutions and
Services segments, the company and its main competitor, the Dealer Services
division of Automatic Data Processing, Inc, provide a significant share of the
dealer management systems for automotive retailers in the United States and
Canada. Outside of North America, our international operations compete in a
fragmented market with many dealer management systems providers. The company's
Documents segment has a leading market share position, but experiences
competition from local printing brokers and regional printers throughout the
United States and Canada. The Financial Services segment provides financing to
the majority of the company's software solutions customers, but does compete
with local, regional and national lending institutions. The company believes it
competes by providing value-added solutions and services that satisfy customer
needs. By focusing exclusively on the automotive retailing market, the company
is able to effectively leverage its technological expertise, broad industry
knowledge, and long-term customer relationships to deliver value to its
customers.
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, 2004, the dollar
value of the backlog was $51,000 compared to $62,000 last year. The company
anticipates that substantially all of the backlog will be recognized as revenue
during fiscal year 2005.
EMPLOYEES
As of September 30, 2004, the company and its subsidiaries had 4,380 employees.
4
AVAILABLE INFORMATION
The company's 2004 Annual Report to Shareholders, annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and other SEC
filings are available, without charge, on its Web site, www.reyrey.com, as soon
as reasonably practicable after such reports are electronically filed with the
SEC.
The company also makes available its Corporate Governance Guidelines, Business
Principles, Code of Ethics, and the Charters of its Audit, Compensation and
Nominating and Governance Committees on its Web Site.
The company will also provide a free copy of any of the referred documents upon
written request to:
Douglas M. Ventura, 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, 2004, the company owned and operated a manufacturing plant
in Celina, Ohio encompassing approximately 316,000 square feet, which produces
the company's Documents segment products and services. Corporate headquarters
are located in the Dayton, Ohio area in several buildings owned or leased by the
company which contain approximately 882,000 square feet. In December, 2003, the
company began construction on phase three (133,000 square feet) at its principal
facility near Dayton, Ohio. In addition, the company leases approximately 35
offices throughout the United States and Internationally. All of the company's
business segments use these facilities.. 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 39.
ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 13 to the Consolidated Financial Statements
on page 56.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(In thousands except per share data and holders of record)
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 60,000,000 preferred shares with no par value. As of the
filing of this report, the company currently has no agreements or commitments
with respect to the sale or issuance of the preferred shares except as described
in Note 8 to the Consolidated Financial Statements, page 48.
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 58.
As of November 30, 2004, there were approximately 2.875 holders of record of
Class A Common Shares and one holder of record of Class B Common Shares.
On August 12, 2003, the company's board of directors authorized the repurchase
of 8,000 additional Class A common shares. This authorization has no fixed
expiration date and was in addition to previously approved authorizations. As of
September 30, 2004, the company could repurchase an additional 2,445 Class A
common shares under this board of directors' authorization. No other
authorizations for share repurchase were outstanding as of September 30, 2004.
During the three months ended September 30, 2004, the company repurchased 925
shares of Class A Common Shares for $21,934 as follows:
Total Shares Maximum Number
Shares Average Purchased During of Shares Remaining
Program Purchased Price the Period as for Purchase as
Approval During Paid Part of a Publicly Part of a Publicly
Date Month Period (per Share) Announced Program Announced Program
---- ----- ------ ----------- ----------------- -----------------
8/12/03 July 2004 100 $21.92 100 3,270
8/12/03 August 2004 475 $23.33 475 2,795
8/12/03 September 2004 350 $24.74 350 2,445
--- ---
8/12/03 Total Quarter 925 $23.71 925
=== ===
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
For The Years Ended September 30 2004 2003 2002 (2) 2001 2000
- -------------------------------- ---------- ---------- ---------- ---------- ----------
CONSOLIDATED
Net Sales and Revenues (1) $ 982,241 $1,008,245 $ 992,383 $1,004,012 $ 954,687
Income from Continuing Operations (1) $ 92,643 $ 109,800 $ 104,012 $ 97,934 $ 88,440
Basic earnings per common share $ 1.40 $ 1.61 $ 1.47 $ 1.34 $ 1.14
Diluted earnings per common share $ 1.37 $ 1.56 $ 1.42 $ 1.31 $ 1.11
Net Income (1) $ 92,643 $ 109,800 $ 67,449 $ 99,557 $ 116,596
Basic earnings per common share $ 1.40 $ 1.61 $ .95 $ 1.36 $ 1.50
Diluted earnings per common share $ 1.37 $ 1.56 $ .92 $ 1.33 $ 1.47
Return on Equity (1) 19.6% 23.2% 14.2% 20.4% 24.2%
Cash Dividends Per Class A Common Share $ .44 $ .44 $ .44 $ .44 $ .44
Book Value Per Outstanding Common Share (1) $ 7.25 $ 7.05 $ 6.82 $ 6.69 $ 6.68
Assets (1)
Automotive solutions $ 708,055 $ 746,342 $ 747,553 $ 732,073 $ 808,527
Financial services 352,812 395,494 407,605 422,334 421,129
---------- ---------- ---------- ---------- ----------
Total assets $1,060,867 $1,141,836 $1,155,158 $1,154,407 $1,229,656
========== ========== ========== ========== ==========
Long-Term Debt
Automotive solutions $ 103,512 $ 106,912 $ 107,408 $ 105,805 $ 111,124
Financial services 176,731 169,293 180,519 147,429 126,868
---------- ---------- ---------- ---------- ----------
Total long-term debt $ 280,243 $ 276,205 $ 287,927 $ 253,234 $ 237,992
========== ========== ========== ========== ==========
Number of Employees 4,380 4,518 4,602 4,763 4,945
AUTOMOTIVE SOLUTIONS (excluding Financial Services)
Current Ratio 1.98 2.01 2.02 1.80 1.90
Net Property, Plant and Equipment $ 178,447 $ 184,691 $ 161,073 $ 159,051 $ 138,108
Total Debt $ 103,512 $ 106,912 $ 113,469 $ 111,866 $ 116,838
Total Debt to Capitalization (1) 18.1% 18.4% 19.3% 19.0% 19.0%
(1) Financial information for 2003 and 2002 was restated to reflect the
retroactive adoption of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." Financial
information for 2001 and 2000 was not restated per SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure
and Amendment of FASB Statement No. 123."
(2) Effective October 1, 2001, the company adopted the provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets," and reduced
income by $36,563 for the cumulative effect of the accounting
change.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (In thousands except employee and per share data)
COMPANY OVERVIEW
INTRODUCTION
The company provides integrated computer systems products and related services,
documents and financial services primarily to automotive retailers. Computer
systems products include integrated software packages and computer hardware.
Computer services include installation and maintenance of computer hardware,
software training, ongoing support of software applications and professional
services. Typically hardware, hardware installation and software training
revenues (i.e. one-time revenues) are billed upon shipment and recognized over
the implementation period. Depending on their nature, software license fees may
be billed upon shipment or bundled with monthly software support services.
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" and related pronouncements. Service
revenues are recorded ratably over the contract period or as services are
performed. Software support and hardware maintenance revenues (i.e. recurring
revenues) are invoiced monthly and recognized ratably over the term of the
contract as services are provided. Professional services may be purchased
separately or bundled with the initial sale of software. Professional services
revenues are recognized as services are provided. Documents revenues are
recorded when title passes upon shipment to customers. The company also offers
financial services through Reyna Capital Corporation, Reyna Funding L.L.C. and a
similar operation in Canada. Financial services revenues consist primarily of
interest earned on financing the company's computer systems sales and are
recognized over the lives of financing contracts, generally five years, using
the interest method. See Note 1 to the Consolidated Financial Statements for
more information of the company's revenue recognition policies.
Although the company's primary customers are automotive retailers in the United
States and Canada, the company's financial performance is not necessarily
correlated with the number of new vehicles sold by these retailers. Automotive
retailers have other profit centers such as used vehicles, service and parts
which provide a more consistent revenue stream and a greater proportion of a
typical automotive retailer's income than provided by new vehicle sales. This
allows automotive retailers to invest in products and services that improve
customer satisfaction and increase productivity.
The company earns most of its income from recurring software and hardware
maintenance revenues. About 80% of the company's revenues are recurring in
nature when documents and financial services are included. Additionally, much of
professional services revenues tend to be recurring in nature as programs are
continued each year. This provides a measure of stability and limits the effect
of economic downturns on the company's financial performance.
KEY ISSUES
On July 7, 2004, the company announced the resignation of its former Chief
Executive Officer, Chairman and President. Philip A. Odeen, who had been serving
as Lead Director, became Chairman and Acting Chief Executive Officer. A search
committee was formed, comprised of the Acting Chief Executive Officer and
certain outside directors, to permanently fill this position. This committee has
engaged an executive search firm to help identify qualified candidates for this
position. Numerous candidates have been interviewed and the company anticipates
filling this position sometime during the first calendar quarter of 2005.
The company is in the process of implementing several actions to improve its
sales and marketing execution. The company has added new sales leadership to
drive strategic initiatives, initiated a more focused and rigorous sales
management system and implemented a simpler and more effective sales
compensation plan. The company has also increased the number of sales
specialists focused on customer relationship management applications and
expanded its inside sales effort. The marketing department is gathering
competitive intelligence, obtaining customer references and testimonials, and
developing strengthened return on investment and value propositions.
As a provider of software and related services, the company must continually
develop new software offerings and upgrade existing solutions to meet customer
requirements and increase revenues. The company has invested in research and
development during recent years to develop new software solutions. As a result,
the company currently
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has several software solutions which are relatively new and in the early stages
of their lifecycle. In August 2003, the company launched RGS Suite, the
company's next generation dealer management system. The company has
significantly slowed the rate of RGS Suite installations scheduled in 2005 to
focus on necessary software enhancements and improvements, system usability and
implementation improvements. The company has also taken a series of actions to
improve product development and ensure the readiness of software solutions. The
company has consolidated profit and loss responsibility for all software
solutions and related services under one management, devoted additional senior
management resources to focus on product development and created a Solutions
Readiness Council to improve solution readiness standards and processes.
RESULTS OF OPERATIONS
The following summaries of accounting changes, reorganization costs and special
items, business combinations and segment reporting and reclassifications have
been provided to facilitate an understanding of management's discussion and
analysis. Additional disclosures for these items have been provided in the Notes
to the Consolidated Financial Statements.
ACCOUNTING CHANGES
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 began recognizing stock-based compensation expense
in the Statements of Consolidated Income. Under the fair value recognition
provisions of SFAS No. 123, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense
over the vesting period. SFAS No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" provides three alternative methods for reporting
this change in accounting principle. The company elected the retroactive
restatement method which required 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, prior year financial
statements have been restated to reflect the adoption of SFAS No. 123. See Note
14 to the Consolidated Financial Statements for additional disclosures about
this 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 4 to the Consolidated Financial Statements
for additional discussion of this accounting change.
REORGANIZATION COSTS AND SPECIAL ITEMS
On October 2, 2003, the company announced the consolidation of its automotive
Documents printing plant, located in Grand Prairie, Texas, into the company's
Celina, Ohio manufacturing facility. All employees located in Texas were offered
the opportunity to accept a position in the Ohio facility. Those not accepting a
position in Ohio were offered severance and outplacement services. Grand Prairie
document production operations ceased in December 2003 and 72 positions were
eliminated. The company added about 65 positions at the Celina, Ohio
manufacturing facility as production was transferred from Grand Prairie. During
2004, the company also reorganized the Documents sales force, eliminating 37
positions, and eliminated 121 additional positions in Software Solutions
development, Services and administration.
Through September 30, 2004, the company incurred expense of $7,054 before taxes
or $.06 per share after taxes for severance, outplacement, relocation and other
plant consolidation efforts and eliminated 230 positions. The company does not
anticipate incurring additional expenses related to these efforts in 2005. See
Note 2 to the Consolidated Financial Statements for additional disclosures about
these reorganization costs.
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
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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 pretax 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.
BUSINESS COMBINATIONS
In October 2003, the company purchased the outstanding shares of Incadea GmbH, a
provider of global automotive retailing software solutions. At the time of the
acquisition, privately-held Incadea, based in Raubling, Germany, had annualized
revenues of about $6,000.
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. At the time of the acquisition, Third Coast Media, headquartered in
Richardson, Texas, had annualized revenues of about $5,000.
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 annual revenues of
about $1,000 in 2002.
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.com Corporation had revenues of about $1,000 in 2001. In September
2004, the company sold the net assets of BoatVentures.com for $2,100 and
recorded a gain of $1,300.
See Note 3 to the Consolidated Financial Statements for more information on
business combinations.
SEGMENT REPORTING AND RECLASSIFICATIONS
During the first quarter of 2004, the company changed its reporting segments to
reflect the revised organizational structure of the company and began reporting
financial information for the Software Solutions, Services, Documents and
Financial Services segments. Prior year financial statements were restated to
reflect financial statements consistent with the current year. In executing this
realignment, the company also changed its method of allocating certain revenues
and expenses. Prior year financial statements were restated, to the extent
possible, to reflect financial statements consistent with 2004. It was not
practical to restate financial statements for all changes. The estimated effect
of these non-restated items was to increase Software Solutions 2004 revenues by
$9,600 and operating income by $7,200. The offsetting unfavorable effect of
these changes was included in the Services segment.
In 2003, the company changed its allocation methodology for certain expenses,
the effect of which was to report certain expenses as costs 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
2002. In was not practical to restate 2002 financial statements.
In 2005, the company's segment reporting will consist of three reporting
segments; Software Solutions, Documents and Financial Services. Software
Solutions will be comprised of the former Software Solutions segment and the
former Services segment. This reporting will reflect the most recent management
reorganization which places all software solutions and related services under
common leadership. This reporting will benefit investors, providing a truer
economic picture of the company's solutions by combining the operating results
of products and related services that are sold together. For example, software
licenses and related software training will be included in a single segment. In
2004, these items were separated, with software licenses reported in the
Software Solutions
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segment and the related software training reported in the Services segment.
Management will review the financial results of Software Solutions, Documents
and Financial Services to measure performance and allocate resources. There will
be no changes in the reporting of the Documents and Financial Services segments.
See Note 12 to the Consolidated Financial Statements for additional disclosures
regarding business segments.
CONSOLIDATED SUMMARY
2004 vs. 2003 2003 vs. 2002
2004 2003 2002 Change Change
-------- ---------- -------- ---------------- --------------
Net sales and revenues $982,241 $1,008,245 $992,383 ($26,004) -3% $15,862 2%
Gross profit $543,754 $ 559,400 $572,934 ($15,646) -3% ($13,534) -2%
% of revenues 55.4% 55.5% 57.7%
SG&A expenses $399,776 $ 383,762 $411,681 $16,014 4% ($27,919) -7%
% of revenues 40.7% 38.1% 41.5%
Operating income $143,978 $ 175,638 $161,253 ($31,660) -18% $14,385 9%
% of revenues 14.7% 17.4% 16.2%
Income before cumulative effect of
accounting change $ 92,643 $ 109,800 $104,012 ($17,157) -16% $ 5,788 6%
Cumulative effect of accounting change $ 0 $ 0 ($36,563) $ 0 $36,563
Net income $ 92,643 $ 109,800 $ 67,449 ($17,157) -16% $42,351 63%
Basic earnings per common share
Income before cumulative effect of
accounting change $ 1.40 $ 1.61 $ 1.47 ($ 0.21) -13% $ 0.14 10%
Net income $ 1.40 $ 1.61 $ 0.95 ($ 0.21) -13% $ 0.66 69%
Diluted earnings per common share
Income before cumulative effect of
accounting change $ 1.37 $ 1.56 $ 1.42 ($ 0.19) -12% $ 0.14 10%
Net income $ 1.37 $ 1.56 $ 0.92 ($ 0.19) -12% $ 0.64 70%
In 2004, consolidated net sales and revenues declined 3% as growth in Software
Solutions recurring software revenues was more than offset by a decline in
Software Solutions one-time hardware and software sales and revenue declines in
Services, Documents and Financial Services. The backlog of new orders for
Software Solutions and Services computer systems products and deferred revenues
(orders shipped, but not yet recognized in revenues) was approximately $44,000
at September 30, 2004 compared to $65,000 at September 30, 2003. In 2003,
revenues increased slightly over 2002 as Software Solutions segment revenues
grew 9% while revenues declined in the other three segments.
In 2004, gross profit declined primarily because of the decline in revenues.
Growth in Software Solutions recurring software revenues was offset by higher
software amortization costs related to RGS Suite. See the Software Solutions
caption of this analysis for additional information regarding software
amortization expenses. Other costs affecting gross profit in 2004 were plant
consolidation costs, fourth quarter software costs and the impact of a fourth
quarter adjustment to record a non-income tax liability. This fourth quarter
adjustment was offset by lower income taxes. In 2003, gross profit reflected
lower Services and Documents revenues than in 2002. In 2003, gross profit 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. It was not practical to restate 2002
financial results.
In 2004, SG&A expenses increased over 2003, both in dollars and as a percentage
of revenues, primarily because of higher research and development (R&D) expenses
as no software development costs were capitalized. In 2004, SG&A expenses also
included $5,422 of reorganization expenses (see Note 2 to the Consolidated
Financial Statements), $4,825 of fourth quarter employee separation costs and
$3,330 of consulting costs to reengineer the company's order-to-cash process. In
2003, SG&A expenses declined from 2002, both in total dollars and as a
percentage of revenues, primarily because of the change in cost allocation
methodology which shifted certain expenses to cost of sales. Also contributing
to lower SG&A expenses in 2003 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
11
Reorganization Costs and Special Items caption of this analysis. Research and
development expenses were approximately $93,000 in 2004, $72,000 in 2003 and
$68,000 in 2002. The 2004 increase in R&D expenses occurred primarily because no
software development costs were capitalized, compared to capitalization of
$16,270 in 2003 and $20,370 in 2002. See the Software Solutions caption of this
analysis for additional information regarding R&D expenses and software
capitalization.
Operating margins were 14.7% in 2004, compared to 17.4% in 2003 and 16.2% in
2002. In 2004, operating margins were negatively affected by higher R&D
expenses, many of the other costs previously discussed and the October 2003
acquisition of Incadea GmbH which had revenues of $6,036 and operating losses of
$5,996 in 2004. In 2003, operating margins were higher than in 2002, because
2002 included the effect of special items previously discussed. In 2003,
operating income included losses of $11,000 from the acquisitions of
BoatVentures.com (acquired in August 2002), Networkcar (acquired in November
2002) and Internet Lead Management (formerly Microsoft's DealerPoint, a software
license acquired in January 2003).
In 2004, other income declined from 2003, primarily because less interest
expense was capitalized in 2004. In 2003 and 2002, interest was capitalized in
connection with capitalized software development costs. In 2003, interest
expense declined from 2002, primarily because of the full year effect of an
interest rate swap entered into in February 2002. This interest rate swap
effectively converted 7% fixed rate debt into variable rate debt, which averaged
4.1% in 2004, 3.3% in 2003 and 4.3% in 2002. The 2003 benefit of this swap was
partially offset by lower capitalized interest than in 2002 because of the
completion of a building construction project. Equity in net income of
affiliated companies increased in 2004 because of higher income from the
company's investment in ChoiceParts, which was profitable in 2004 as compared to
losses in 2003 and 2002. Fiscal year 2002 also included a loss of $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. In 2004 other charges
included a $1,612 pretax gain on the sale of the company's shares of
Carsales.com, an affiliate of Reynolds and Reynolds (Australia). Also included
in 2004, was a $1,301 pretax gain on the sale of the net assets of
Boatventures.com. In 2003, the company sold its investment in Credit Online and
recorded a pretax gain of $1,369.
The effective income tax rate was 37.3% in 2004, compared to 39.0% in 2003 and
29.6% in 2002. The effective income tax rate was impacted by a number of items
during the last three years. In 2004, the tax rate reflected a $1,859 reduction
of income taxes, primarily related to Ohio income tax legislation enacted during
the quarter ended December 31, 2003. The 2004 tax rate was also lowered in the
fourth quarter as an income tax reserve was reversed while the appropriate
pretax reserve was recorded. Additionally, an adjustment was made during the
fourth quarter to recognize the deductibility of all chief executive officer
compensation in 2004. In the third quarter of 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 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. Fiscal year 2002
included the tax benefits described in the Reorganization and Special Items
caption of this analysis. The increase in the adjusted 2004 effective income tax
rate, compared to 2003 and 2002 adjusted effective income tax rates, resulted
primarily from the effect of international tax rates related to the October 2003
purchase of Incadea GmbH. In 2005, the effective income tax rate is expected to
increase to 42% because of the greater impact of international operations and
estimated reduced benefits from stock option exercises. The following table has
been presented to illustrate the effect of the items previously discussed on the
company's effective income tax rates for 2004, 2003 and 2002 and to reconcile
the adjusted effective income tax rates to the effective income tax rates.
12
Income Income Effective
Before Tax Income
Income Provision Tax
Taxes (Benefit) Rate
-------- -------- ------
2004
Adjusted amounts $149,690 $59,313 39.6%
Ohio income tax legislation (1,859)
Record non-income tax liability (1,524) (596)
Record interest on non-income tax liability (297) (115)
Reverse reserve previously included in income tax
liability (1,110)
CEO compensation deduction adjustment (407)
-------- -------
Reported amounts $147,869 $55,226 37.3%
======== =======
2003
Adjusted amounts $180,028 $69,469 38.6%
Ohio income tax legislation 2,210
State deferred income tax adjustment for federal
bonus depreciation (1,451)
-------- -------
Reported amounts $180,028 $70,228 39.0%
======== =======
2002
Adjusted amounts $159,931 $61,912 38.7%
State income tax audit settlements & related accrual
adjustments and adjustments for amended tax returns 18 (5,872)
Sale of equity interest in Kalamazoo Computer Group plc (12,274) (12,377)
-------- -------
Reported amounts $147,675 $43,663 29.6%
======== =======
SOFTWARE SOLUTIONS
2004 vs. 2003 2003 vs. 2002
2004 2003 2002 Change Change
-------- -------- -------- --------------- ----------------
Net sales and revenues $539,763 $540,572 $497,874 ($ 809) 0% $42,698 9%
Gross profit $364,497 $361,385 $345,627 $ 3,112 1% $15,758 5%
% of revenues 67.5% 66.9% 69.4%
SG&A expenses $237,198 $224,563 $238,236 $12,635 6% ($13,673) -6%
% of revenues 43.9% 41.6% 47.8%
Operating income $127,299 $136,822 $107,391 ($ 9,523) -7% $29,431 27%
% of revenues 23.6% 25.3% 21.6%
During the first quarter of 2004, the company changed its reporting segments to
reflect the revised organizational structure of the company. In executing this
realignment, the company changed its method of allocating certain revenues and
expenses. It was not practical to restate financial statements for all changes.
The estimated effect of these non-restated items was to increase Software
Solutions revenues by $9,600 and operating income by $7,200 in 2004. The
offsetting unfavorable effect of these changes was included in the Services
segment. See Note 12 to the Consolidated Financial Statements for additional
disclosures about segment reporting.
The company capitalizes certain costs of developing its software products in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." SFAS No. 86 specifies that costs
incurred in creating a computer software product should be charged to expense
when incurred, as research and development, until technological feasibility has
been established for the product. Once technological feasibility is established,
software development costs are capitalized until the product is available for
general release to customers. Upon general release of a software product, the
capitalized software development costs are amortized to expense over the
estimated economic life of the product. The following table summarized the
impact of software capitalization and amortization.
13
2004 vs. 2003 2003 vs. 2002
2004 2003 2002 Change Change
-------- ------- ------- --------------- -------------
Total R&D cash expenditures $ 93,000 $88,270 $88,370 $ 4,730 5% ($ 100) 0%
Less capitalized software
development costs 0 (16,270) (20,370) 16,270 -100% 4,100 -20%
-------- ------- ------- ------- ------
Total R&D expenses (SG&A
expenses) 93,000 72,000 68,000 21,000 29% 4,000 6%
Software amortization
expenses (cost of sales) 18,823 3,455 403 15,368 445% 3,052 757%
-------- ------- ------- ------- ------
Total expenses $111,823 $75,455 $68,403 $36,368 48% $7,052 10%
======== ======= ======= ======= ======
Total R&D expenditures increased 5% in 2004 because of the acquisition of
Incadea GmbH. However, as illustrated in the table, the overall impact of
software development was much greater. In August 2003, RGS Suite, the company's
next generation dealer management system was available for general release to
customers. At this time the company stopped capitalizing software development
costs related to RGS Suite and began amortizing these costs over seven years.
Software amortization expenses related to RGS Suite were $13,094 in 2004 and
$2,182 in 2003 and were recorded in cost of sales. As of September 30, 2004, the
unamortized balance of software development costs related to RGS Suite was
$76,378. The company believes that the capitalized costs will be recovered from
cash flow from future product revenues.
In 2004, net sales and revenues were essentially flat with 2003. Recurring
software revenues increased 9% while one-time hardware and software sales
declined 25%. Recurring revenues grew primarily because of growth in Reynolds
Web Solutions revenues (which is converting to a recurring revenue model),
higher ERA software support revenues primarily because of additional
applications supported, growth of Contact Management revenues because of greater
volume and the October 2003 acquisition of Third Coast Media. Recurring revenues
also reflected the favorable benefit of the non-restated items previously
mentioned. The company also implemented an annual price increase effective March
1, 2004 to offset inflation. One-time hardware and software sales declined from
2003 primarily as a result of fewer sales of ERA dealer management systems and
related peripherals. One-time software sales also declined as a result of the
transition of Reynolds Web Solutions to a recurring revenue model (the first
half of 2003 was still predominately a one-time sales recognition model).
One-time sales included $5,257 of revenues from Incadea GmbH, acquired in
October 2003. Gross profit increased in 2004, because of the growth in higher
margin recurring software revenues, which more than offset the decline in lower
margin one-time hardware and software sales. Gross profit benefited in 2004,
from the previously mentioned change in method of allocating certain revenues
and expenses. Cost of sales also included the previously mentioned software
amortization costs related to RGS Suite. In the fourth quarter of 2004, cost of
sales also reflected $1,855 of additional software costs to write-off other
capitalized software which will not be recovered by estimated future cash flows.
SG&A expenses increased over last year primarily because of higher research and
development expenses as the company did not capitalize any software development
costs during fiscal year 2004. SG&A expenses benefited from lower selling
expenses, primarily the result of the change in allocation methodology among
reporting segments. SG&A expenses also included $2,292 of reorganization costs
and about $2,700 of fourth quarter employee separation costs in 2004. See Note 2
to the Consolidated Financial Statements for a discussion of these
reorganization costs. Operating income and operating margin declined in 2004,
primarily because of higher R&D expenses and the effect of consolidation costs.
In 2003, net sales and revenues increased 9% over 2002. Recurring software
revenues increased 10% while one-time hardware and software sales increased 6%.
Recurring revenues grew principally because of higher ERA software support
revenues which increased primarily because of additional applications supported,
growth in Network Services revenues and the addition of Internet Lead Management
sales. Internet Lead Management resulted from a license agreement between the
company and Microsoft in January 2003. The company also implemented an annual
price increase effective March 1, 2003 to offset inflation. One-time hardware
and software sales increased from 2002 primarily because of the higher sales of
ERA dealer management systems and related peripherals. Partially offsetting this
growth was a decline in one-time Reynolds Web Solutions revenues as a result of
the transition to a recurring revenue model. Gross profit increased in 2003,
because of the growth in higher margin recurring software revenues, which more
than offset the decline in lower margin one-time hardware and
14
software sales. In 2003, cost of sales included higher costs from the 2003
revised allocation methodology which shifted certain costs from SG&A expenses to
cost of sales. The new allocation methodology reduced gross margin by about one
to two percentage points in 2003. The improved allocation of expenses was made
possible by a new general ledger system. It was not practical to restate 2002
financial results. Cost of sales also included the ramp-up costs to transition
support of Internet Lead Management to the company from Microsoft and software
amortization costs related to RGS Suite. SG&A expenses declined in 2003 because
of the 2003 change in cost allocation methodology, the reduced number of
employees and 2002's special items previously discussed. Operating income and
operating margin increased in 2003, primarily because of the increase in
revenues.
SERVICES
2004 vs. 2003 2003 vs. 2002
2004 2003 2002 Change Change
-------- -------- -------- ------------------ -----------------
Net sales and revenues $244,410 $256,902 $269,277 ($12,492) -5% ($12,375) -5%
Gross profit $ 65,769 $ 76,093 $ 90,934 ($10,324) -14% ($14,841) -16%
% of revenues 26.9% 29.6% 33.8%
SG&A expenses $ 93,087 $ 87,783 $ 94,132 $ 5,304 6% ($ 6,349) -7%
% of revenues 38.1% 34.2% 35.0%
Operating loss ($ 27,318) ($ 11,690) ($ 3,198) ($15,628) ($ 8,492)
% of revenues -11.2% -4.6% -1.2%
During the first quarter of 2004, the company changed its reporting segments to
reflect the revised organizational structure of the company. In executing this
realignment, the company changed its method of allocating certain revenues and
expenses. It was not practical to restate financial statements for all changes.
The estimated effect of these non-restated items was to reduce Services revenues
by $9,600 and operating income by $7,200 in 2004. The offsetting favorable
benefit of these changes was included in the Software Solutions segment. See
Note 12 to the Consolidated Financial Statements for additional disclosures
about segment reporting.
In 2004, Services revenues declined from 2003 primarily because of the
aforementioned effect of non-restated items and lower Campaign Management
Services revenues which resulted from the loss of a customer in April 2003.
Partially offsetting this revenue decline was growth of professional services
revenues. Gross profit declined from 2003, primarily because of the decline in
revenues. Additionally, the company has incurred higher implementation costs
associated with RGS Suite. Cost of sales included a $1,524 expense to record a
non-income tax liability. This expense was offset by lower income taxes. Cost of
sales also included $805 of software license costs as sales were discontinued.
SG&A expenses included $1,535 of reorganization costs and about $1,200 of fourth
quarter employee separation costs in 2004. The remainder of the increase in SG&A
expenses over 2003 resulted primarily from a higher allocation of selling
expenses in 2004. Operating income and operating margins reflected the decline
in revenues and the aforementioned cost items.
In 2003, Services revenues declined from 2002 as growth of credit applications
revenues was more than offset by declines in Reynolds Consulting Services and
Campaign Management Services. Reynolds Consulting Services revenues reflected a
decline in the number of consulting days delivered and Campaign Management
Services lower revenues resulted from the loss of a customer in April 2003.
Gross profit and operating income declined in 2003, primarily because of the
decline in revenues which resulting in lower utilization of consultants and
lower fixed cost coverage for Campaign Management Services. In 2003, cost of
sales also included higher costs from the 2003 revised allocation methodology
which shifted certain costs from SG&A expenses to cost of sales. The new
allocation methodology reduced gross margin by between one and two percentage
points in 2003. The improved allocation of expenses was made possible by a new
general ledger system. It was not practical to restate 2002 financial results.
Also reflected in operating income were operating losses from the Networkcar,
acquired in November 2002.
15
DOCUMENTS
2004 vs. 2003 2003 vs. 2002
2004 2003 2002 Change Change
-------- -------- -------- ----------------- ------------------
Net sales and revenues $166,254 $174,239 $183,523 ($7,985) -5% ($ 9,284) -5%
Gross profit $ 88,938 $ 94,233 $105,308 ($5,295) -6% ($11,075) -11%
% of revenues 53.5% 54.1% 57.4%
SG&A expenses $ 62,940 $ 64,266 $ 71,172 ($1,326) -2% ($ 6,906) -10%
% of revenues 37.9% 36.9% 38.8%
Operating income $ 25,998 $ 29,967 $ 34,136 ($3,969) -13% ($ 4,169) -12%
% of revenues 15.6% 17.2% 18.6%
Documents sales declined in both 2004 and 2003 because of a decrease in the
volume of business forms sold which more than offset the effect of annual price
increases to offset inflation. Sales also declined about $2,229 in 2004 because
of the company's decision to stop selling low-margin stock continuous and copy
paper products in the second half of 2004. Excluding the impact of stock
continuous and copy paper, sales declined 3% in 2004. The company expects the
sales of certain documents to continue to decline as advances in technology
continue. Gross profit declined in 2004 and 2003 because of the decline in
sales. Gross margin declined in 2004 because of $1,596 of plant consolidation
costs, partially offset by a $605 gain on the sale of the closed facility. These
plant items reflected the consolidation of the Grand Prairie, Texas printing
plant into the Celina, Ohio manufacturing facility and the subsequent sale of
the Grand Prairie plant. See Note 2 to the Consolidated Financial Statements for
a discussion of these reorganization costs. In 2003, gross margins declined
primarily because of lower sales, which reduced fixed cost coverage and
contributed to manufacturing inefficiencies. Gross margin 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 practical to restate 2002
results. SG&A expenses declined in 2004 and 2003 as a result of lower sales and
the 2003 change in allocation methodology. SG&A expenses also included $1,625 of
costs in 2004 to close the Grand Prairie manufacturing facility and reorganize
the documents sales force. Operating income declined in 2004 and 2003 primarily
because of the lower sales. In 2004, operating margin declined primarily because
of $3,221 of plant consolidation and sales force reorganization costs. These
costs were partially offset by a $605 gain on the sale of the Grand Prairie
plant. In 2003, the decline in operating margin resulted primarily from the
sales decline.
FINANCIAL SERVICES
2004 vs. 2003 2003 vs. 2002
2004 2003 2002 Change Change
------- ------- ------- ----------------- ------------------
Net sales and revenues $31,814 $36,532 $41,709 ($4,718) -13% ($5,177) -12%
Gross profit $24,550 $27,689 $31,065 ($3,139) -11% ($3,376) -11%
% of revenues 77.2% 75.8% 74.5%
SG&A expenses $ 6,551 $ 7,150 $ 8,141 ($ 599) -8% ($ 991) -12%
% of revenues 20.6% 19.6% 19.5%
Operating income $17,999 $20,539 $22,924 ($2,540) -12% ($2,385) -10%
% of revenues 56.6% 56.2% 55.0%
Financial Services revenues declined in each of the past two years primarily
because of lower average interest rates. Average receivable balances declined as
a result of lower one-time sales in Software Solutions and Services and also
contributed to the revenue decline in 2004 and 2003. Gross profit also declined
in each of the past two years because of the declines in revenues. Interest rate
spreads were 4.4% in 2004, 5.1% in 2003 and 4.9% in 2002. In 2004, the tax
treatment for the majority of financing agreements changed from true leases to
installment sales contracts. The impact of this change was to lower deferred
income tax benefits. Assuming no change in the finance receivable balance,
additional debt would be required in the future to finance the portfolio because
of the reduced tax benefits. SG&A expenses declined each of the past two years
primarily because of lower bad debt expenses. Bad debt expenses were $3,064 in
2004, $3,765 in 2003 and $4,450 in 2002. Operating income declined each year
because of the declines in revenues. Operating margins remained fairly
consistent over the three years.
16
LIQUIDITY AND CAPITAL RESOURCES
AUTOMOTIVE SOLUTIONS CASH FLOWS (EXCLUDING FINANCIAL SERVICES)
The company's balance of cash and equivalents was $116,792 at September 30,
2004. Cash flows from operating activities were $161,782 during 2004 and
resulted primarily from net income, adjusted for non cash charges such as
depreciation and amortization. Collections of both trade accounts receivable and
other accounts receivable also contributed significantly to cash flow from
operations. The reduction in trade receivable balances resulted from the
implementation of new systems and processes. Cash flows used for investing
activities included the company's purchases of Third Coast Media and Incadea
GmbH for a combined $12,145. An additional $5,046 of Incadea debt repayments is
included in financing activities. Cash flows used for investing activities also
included capital expenditures of $33,783, partially offset by proceeds from
asset sales of $16,052. Fiscal year 2005 capital expenditures (net of proceeds
from asset sales) in the ordinary course of business are anticipated to be about
$25,000, including about $15,000 for buildings. See the Shareholders' Equity
caption of this analysis regarding the payment of dividends and share
repurchases.
FINANCIAL SERVICES CASH FLOWS
Financial Services operating cash flows, collections on finance receivables and
additional borrowings were invested in new finance receivables primarily for the
company's computer systems, used to make scheduled debt repayments and used to
make 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
18.1% at September 30, 2004 and 18.4% at September 30, 2003. During the first
quarter of 2004, the company repaid $5,046 of debt assumed in the purchase of
Incadea GmbH. Remaining credit available under a committed revolving credit
agreement was $138,000 at September 30, 2004. 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.
On January 22, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the
company, renewed a loan funding agreement, whereby Reyna Funding, L.L.C. may
borrow funds using finance receivables purchased from Reyna Capital Corporation,
also a consolidated affiliate of the company, as security for the loan. On May
19, 2004, the loan funding agreement was modified to increase the borrowing
limit from $100,000 to $150,000. Interest is 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 Sheets. As of September 30,
2004, the balance outstanding on this facility was $100,000.
The company has consistently produced operating cash flows sufficient to fund
normal operations. These operating cash flows result from stable operating
margins and a high percentage of recurring revenues which require relatively low
capital investment. Debt instruments have been used primarily to fund business
combinations and Financial Services receivables. As of September 30, 2004, 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. During the quarter
ended March 31, 2004, Moody's Investors Service lowered the company's senior
unsecured rating to Baa2 from Baa1. Standard and Poors maintained a rating of
BBB. The company does not expect this action to have a material effect on the
company's financial statements or its ability to access capital markets. On
April 8, 2004, the company obtained a new $200,000 revolving credit agreement
and terminated the old agreement. The new revolving credit agreement has a
five-year term. As of September 30, 2004, the balance outstanding on this
facility was $62,000.
See Note 7 to the Consolidated Financial Statements for additional disclosures
regarding the company's debt instruments.
17
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, 2004, 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 8 to the
Consolidated Financial Statements.
The company paid cash dividends of $28,961 in 2004, $30,024 in 2003 and $31,089
in 2002. Dividends per Class A common share were $.44 per share in each of 2004,
2003 and 2002. Dividends are typically declared each November, February, May and
August and paid in January, April, June and September. Dividends per Class A
common share must be twenty times the dividends per Class B common share and all
dividend payments must be simultaneous. The company has paid dividends every
year since the company's initial public offering in 1961.
The company repurchased $156,419 of Class A common shares in 2004, $127,871 in
2003 and $125,381 in 2002. Average prices paid per share were $27.35 in 2004,
$26.99 in 2003 and $26.23 in 2002. As of September 30, 2004, the company could
repurchase an additional 2,445 Class A common shares under existing board of
directors' authorizations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The company's Consolidated Financial Statements and Notes to Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements and applying accounting policies requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Critical accounting policies for the company
include revenue recognition, accounting for software licensed to customers,
accounting for long-lived assets, accounting for income taxes and accounting for
retirement benefits.
REVENUE RECOGNITION
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
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
18
revenues for each product bears to the total of current and anticipated future
gross revenues for that product, or (b) the straight-line method over the
remaining estimated economic life of the product, ranging from three to seven
years.
LONG-LIVED ASSETS
The company has completed numerous business combinations over the years. These
business combinations result in the acquisition of intangible assets and the
recognition of goodwill on the company's Consolidated Balance Sheet. The company
accounts for these assets under the provisions of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
142 requires that goodwill not be amortized, but instead tested for impairment
at least annually. The Statement also requires recognized intangible assets with
finite useful lives to be amortized over their useful lives. Long-lived assets,
goodwill and intangible assets are reviewed for impairment annually or whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable from future cash flows. Future cash flows are forecasted based on
management's estimates of future events and could be materially different from
actual cash flows. If the carrying value of an asset is considered impaired, an
impairment charge is recorded for the amount by which the carrying value of the
asset exceeds its fair value.
INCOME TAXES
The company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." The objectives of accounting for income taxes are
to recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the company's financial statements or tax returns.
Judgment is required in assessing the future tax consequences of events that
have been recognized in the company's financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could
materially impact the company's financial position or its results of operations.
POSTRETIREMENT BENEFITS
The company sponsors defined benefit pension plans for most employees. The
company also sponsors a defined benefit medical plan and a defined benefit life
insurance plan for certain employees. The company's postretirement plans are
described in the company's annual report on Form 10-K for the fiscal year ended
September 30, 2004. 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, increasing the discount
rate from 6.0% in fiscal year 2004 to 6.25% in fiscal year 2005. The expected
long-term rate of return on plan assets was estimated at 8.25% for both 2004 and
2005. The company is not required to make minimum contributions to its
postretirement plans in 2005, although the company may elect to make
contributions. See Note 10 to the Consolidated Financial Statements for more
detail disclosures regarding postretirement benefits, including relevant
assumptions used to determine expense and future obligations. The company's net
periodic pension expense was $26,161 in 2004, $21,405 in 2003 and $21,104 in
2002. The company's net periodic postretirement medical and life insurance
expense was $4,750 in 2004, $5,118 in 2003 and $4,679 in 2002. As of the June
30, 2004 measurement date, a one percentage point increase in the assumed
healthcare cost trend rate would increase net periodic postretirement medical
and life insurance expense by $2,322 and a one percentage point decrease in the
assumed healthcare cost trend rate would decrease net periodic postretirement
medical and life insurance expense by $2,032.
19
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 192,131 $ 77,400 63,509 $51,222
Interest payments
Automotive Solutions 9,065 4,110 4,955
Financial Services 13,466 5,824 5,873 1,769
Operating leases 31,029 7,420 9,268 5,443 $8,898
Computer services agreement 96,025 19,205 38,410 38,410 0
-------- -------- -------- ------- ------
Total contractual obligations $441,716 $113,959 $222,015 $96,844 $8,898
======== ======== ======== ======= ======
Interest payments were estimated using interest rates in effect as of September
30, 2004. The net effect of interest rate swaps outstanding as of September 30,
2004, was considered in determining estimated interest payments.
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
3.6% in 2004. These interest rate swap agreements were designated as fair value
hedges. The company does not use financial instruments for trading purposes.
The Financial Services segment of the business, including Reyna Funding L.L.C.,
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 2004, Reyna Funding, L.L.C. entered into $36,609 of interest rate swaps
to replace maturing interest rate swaps.
As of September 30, 2004, a one percentage point increase in interest rates
would increase consolidated interest expense by $1,620 while a one percentage
point decline in interest rates would reduce consolidated interest expense by
$1,620. See Note 7 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 8% of net sales and revenues in 2004. In the conduct of its foreign
operations, the company has intercompany sales, expenses and loans between the
U.S. and its foreign operations and may receive dividends denominated in
different currencies. These transactions expose the company to changes in
foreign currency exchange rates. At September 30, 2004, the company had no
foreign currency exchange contracts outstanding. Based on the company's overall
foreign currency exchange rate exposure at September 30, 2004, management
believes that a 10% change in currency rates would not have a material effect on
the company's financial statements.
CONTINGENCIES
See Note 13 to the Consolidated Financial Statements for a discussion of the
company's contingencies.
ACCOUNTING STANDARDS
See Note 15 to the Consolidated Financial Statements for a discussion of the
effect of accounting standards that the company has not yet adopted.
20
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 November 3, 2004, 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 20).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 15 of Part IV
(page 25) 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 Acting 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
Acting 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 Acting Chief Executive Officer and Chief Financial
Officer completed their evaluation.
21
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 2005 Annual Meeting of
Shareholders captioned "PROPOSAL I - ELECTION OF DIRECTORS."
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, 2004, are:
NAME AGE POSITION
- ------- --- --------
Philip A. Odeen 69 Chairman of the Board and Acting Chief Executive Officer
Dale L. Medford 54 Executive Vice President, Chief Financial
Officer, Chief Administrative Officer and Director
Douglas M. Ventura 44 Executive Vice President Operations, General Counsel
and Secretary
Michael J. Gapinski 54 Treasurer and Assistant Secretary
Michael J. Berry 41 Senior Vice President, Solutions Management
A description of prior positions held by executive officers of the company
within the past 5 years is as follows:
Mr. Odeen has been Chairman of the Board and Acting Chief Executive Officer
since July 2004; prior thereto, Chairman of TRW Inc. from 2001 until he retired
in December 2002; prior thereto, Executive Vice President, TRW Inc., a
technology manufacturing and services company, from 1998 to 2001.
Mr. Medford has been Executive Vice President, Chief Financial Officer and Chief
Administrative Officer since July 2004; prior thereto, Executive Vice President
and Chief Financial Officer from January 2001 to July 2004; prior thereto, Vice
President, Finance, and Chief Financial Officer.
Mr. Ventura has been Executive Vice President Operations, General Counsel and
Secretary since July 2004; prior thereto, Vice President Corporate and Business
Development, General Counsel and Secretary from October 2003 to July 2004; 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. Gapinski has been Treasurer and Assistant Secretary with the company for
more than five years.
Mr. Berry has been Senior Vice President, Solutions Management since August
2004; prior thereto, Senior Vice President Reynolds' Services Group since
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.
22
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 2005 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 Officer, 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 2005 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, 2004 is incorporated herein by reference
to the section of the company's Proxy Statement for its 2005 Annual Meeting of
Shareholders captioned "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
The following table sets forth certain information as of September 30, 2004,
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)
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding outstanding options, under equity compensation
options, warrants and warrants and rights plans (excluding securities
Plan Category rights (a) (b) reflected in column (a)).
- --------------------------- ----------------------- -------------------- ------------------------------
Equity
compensation plans approved
by shareholders 6,113 $22.02 4,006(1)
Equity
compensation plans not
approved by shareholders 3,399 $21.13 (2)
----- -----
TOTAL 9,512 $21.35 4,006
===== =====
(1) The total number of Class A Common Shares ("Shares") authorized for
issuance under the company's 2004 Executive Stock Incentive Plan and the
2004 REYShare Plus Plan (which were approved by the company's
shareholders) is 3,300 and 1,100 Shares, respectively. See Note 9 to the
Consolidated Financial Statements on page 50 for additional information
regarding the company's equity compensation plans.
(2) Effective with the shareholder approval of the 2004 REYShare Plus Plan, no
additional shares will be awarded from non-shareholder approved plans.
23
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 2001 Shares 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.
Effective with the approval of the 2004 REYShare Plus Plan at the 2004 Annual
Meeting of Shareholders, no further grants will be made under the 2001 Shares
Plan.
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.
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 2005 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 2005 Annual Meeting of Shareholders captioned "REPORT OF THE AUDIT
COMMITTEE."
24
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 34-58.
Statements of Consolidated Income - For The Years Ended
September 30, 2004, 2003 and 2002
Consolidated Balance Sheets - September 30, 2004 and 2003
Statements of Consolidated Shareholders' Equity and Comprehensive
Income - For The Years Ended September 30, 2004, 2003 and 2002
Statements of Condensed Consolidated Cash Flows - For the Years Ended
September 30, 2004, 2003 and 2002
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, 2004 ARE ATTACHED HERETO:
Schedule II Valuation Accounts Page 59
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.
25
Exhibit No. Item
- ----------- ----
(4)(c) Appointment of Wells Fargo Bank, N.A. dated October 26, 2004 as successor Rights Agent
to the Amended and Restated Rights Agreement dated December 1, 2001.
(9) Not applicable.
(10)(a)* Amended and Restated Employment Agreement with Lloyd G. Waterhouse, as of September 2,
2003; incorporated by reference to Exhibit (10)(a) to Form 10-K for the fiscal year
ended September 30, 2003.
(10)(b)* Agreement with Lloyd G. Waterhouse, Former Chief Executive Officer, Chairman and
President, dated July 29, 2004; incorporated by reference to Exhibit 10.1 to the
company's Form 10-Q dated August 13, 2004 filed with Securities and Exchange Commission.
(10)(c)* 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)(d)* 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)(e)* Amended and Restated Change in Control Agreement dated as of November 11, 2003 between
the company and Douglas M. Ventura; incorporated by reference to Exhibit 10(iii)(a) to
the company's Form 10-Q dated February 13, 2004 filed with the Securities and Exchange
Commission.
(10)(f)* Amended and Restated Change in Control Agreement dated as of November 11, 2003 between
the company and Dale L. Medford; incorporated by reference to Exhibit 10(iii)(b) to the
company's Form 10-Q dated February 13, 2004 filed with the Securities and Exchange
Commission.
(10)(g)* Form of Retention Agreement, effective August 16, 2004, between the company and each of
Messrs. Medford, Ventura, Berry and eleven other officers.
(10)(h)* Form of Change in Control Agreement, effective October 1, 2004, between the company and
each of Messrs. Medford, Ventura, Gapinski, Berry, and four other officers;
incorporated by reference to Exhibit 10.1 to the company's Form 8-K dated October 6,
2004 filed with the Securities and Exchange Commission.
(10)(i)* 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)(j)* 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)(k)* 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)(l)* 1996 Shares Plan, adopted August 6, 1996; incorporated by reference to Exhibit 4(e) to
Form S-8 filed on August 13, 1999.
(10)(m)* Amended and Restated 2004 Executive Stock Incentive Plan effective November 8, 2004.
(10)(n) Forms of Stock Incentive Agreements to be issued by the company to executive officers
and other participants under the Amended and Restated 2004 Executive Stock Incentive
Plan effective November 8, 2004 and its predecessor effective February 12, 2004.
(10)(o)* 2001 Shares Plan, adopted August 7, 2001; incorporated by reference to Exhibit 4(g) to
Form S-8 filed on October 1, 2001.
(10)(p)* 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)(q)* 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.
26
Exhibit No. Item
- ----------- ----
(10)(r)* The Reynolds and Reynolds Company Retirement Plan Revised and Restated effective
October 1, 1997; incorporated by reference to (10)(bb) to Form 10-K for the fiscal year
ended September 30, 2003 .
(10)(s)* The Reynolds and Reynolds Company Supplemental Retirement Plan Restatement dated
October 1, 2002.
(10)(t)* 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)(u)* Resolution of the Board of Directors and General Form of Amendment dated December 1,
1989 to the Deferred Compensation Agreements between the company and Dale L. Medford;
incorporated by reference to Exhibit (10)(fff) to Form 10-K for the fiscal year ended
September 30, 1989.
(10)(v)* General Form of Collateral Assignment Split-Dollar Insurance Agreement and Policy and
Non-Qualified Compensation and Disability Benefit Agreement between the company and
each of the following officers: Michael J. Gapinski and Dale L. Medford; incorporated
by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30,
1985.
(10)(w)* 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)(x)* Amendment No. 3 to Loan Funding Agreement dated May 19, 2004 among Reyna Funding,
L.L.C., Jupiter Securitization Corporation and Bank One, N.A.; incorporated by
reference to Exhibit 10.2 to the company's Form 10-Q dated August 13, 2004 filed with
the Securities and Exchange Commission.
(10)(y)* Credit Agreement dated April 4, 2004 among the company, Reyna Capital Corporation,
Credit Lyonnais New York Branch and JPMorgan Chase Bank; incorporated by reference to
Exhibit 10.3 to the company's Form 10-Q dated August 13, 2004 filed with the Securities
and Exchange Commission.
(10)(z) 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)(aa) 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 Registered Public Accounting Firm
(24) Not Applicable
27
Exhibit No. Item
- ----------- ----
(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, 2004, and first quarter to date,
the following reports were filed:
On July 7, 2004, the company filed a report on Form 8-K that included the
company's July 7, 2004 press release announcing changes to its executive
management.
On July 21, 2004, the company filed a report on Form 8-K that included the
company's July 7, 2004 press release announcing financial results for the
quarter ended June 30, 2004.
On October 6, 2004, the company filed a report on Form 8-K disclosing that
effective October 1, 2004, the Company entered into a Change in Control
Agreement (the 'Agreement') with each of its executive officers (except for
Mr.Philip A. Odeen, Chairman and Acting CEO) and certain other officers of the
Company in substantially the form of Exhibit 10.1 to the form.
On November 3, 2004, the company filed a report on Form 8-K to update previously
filed cautionary statements identifying important factors that could cause the
company's actual results to differ materially from those projected in
forward-looking statements that may be or have been made by or on behalf of the
company from time to time in the company's SEC filings, press releases, and
other oral or written announcements.
On November 3, 2004, the company filed a report on Form 8-K that included the
company's November 3, 2004 press release announcing financial results for the
quarter and year ended September 30, 2004.
On November 30, 2004, the company filed a report on Form 8-K disclosing the
forms of incentive stock agreements awards granted to certain executives and
members of the board of directors pursuant to the 2004 Executive Stock Incentive
Plan.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
Please refer to Part IV, Item 15(a)(3) beginning on page 25.
(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.
28
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
Executive Vice President Operations,
General Counsel and Secretary
Date: December 13, 2004
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: December 13, 2004
By /s/ PHILIP A. ODEEN
--------------------------------
PHILIP A. ODEEN
Chairman and Acting Chief Executive
Officer
(Principal Executive Officer)
Date: December 13, 2004
By /s/ DALE L. MEDFORD
--------------------------------
DALE L. MEDFORD
Executive Vice President, Chief
Financial Officer (Principal
Financial and Accounting
Officer), Chief Administrative
Officer and Director
Date: December 13, 2004
By /s/ STEPHANIE W. BERGERON
--------------------------------
STEPHANIE W. BERGERON, Director
Date: December 13, 2004
By /s/ DR. DAVID E. FRY
-----------------------------------
DR. DAVID E. FRY, Director
Date: December 13, 2004
By /s/ RICHARD H. GRANT, III
-----------------------------------
RICHARD H. GRANT, III, Director
Date: December 13, 2004
By /s/ IRA D. HALL
-----------------------------------
IRA D. HALL, Director
29
Date: December 13, 2004
By /s/ CLEVE L. KILLINGSWORTH, JR.
-----------------------------------
CLEVE L. KILLINGSWORTH, JR.
Director
Date: December 13, 2004
By /s/ EUSTACE W. MITA
-----------------------------------
EUSTACE W. MITA, Director
Date: December 13, 2004
By /s/ DONALD K. PETERSON
-----------------------------------
DONALD K. PETERSON, Director
Date: December 13, 2004
By /s/ RENATO ZAMBONINI
-----------------------------------
RENATO ZAMBONINI, Director
30
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, 2004
The Reynolds and Reynolds Company
Dayton, Ohio
31
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 upon 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, and 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 registered public accounting firm, 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 standards of the Public Company Accounting Oversight Board (United States)
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 registered public accounting firm. They discuss the overall audit
scope and the specific audit plans with the independent registered public
accounting firm and the internal auditors. This committee also meets regularly
(separately and jointly) with the independent registered public accounting firm,
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/ PHILIP A. ODEEN /s/ DALE L. MEDFORD
- ------------------- -------------------
Acting Chief Executive Officer and Chairman Executive Vice President,
Chief Financial Officer and
Chief Administrative Officer
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. 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 standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2004, 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 4 to the financial statements in 2002, the Company changed
its method of accounting for goodwill and other intangible assets to conform to
Statement of Financial Accounting Standards No. 142.
As discussed in Note 9 to the financial statements in 2004, the Company elected
to change its method of accounting for stock based compensation to conform to
Statement of Financial Accounting Standards No. 123.
DELOITTE & TOUCHE LLP
Dayton, Ohio
December 8, 2004
33
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share data)
For The Years Ended September 30 2004 2003 2002
- -------------------------------- -------- ----------- --------
Net Sales and Revenues
Software $539,763 $ 540,572 $497,874
Services 244,410 256,902 269,277
Documents 166,254 174,239 183,523
Financial services 31,814 36,532 41,709
-------- ----------- --------
Total net sales and revenues 982,241 1,008,245 992,383
-------- ----------- --------
Cost of sales
Software 175,266 179,187 152,247
Services 178,641 180,809 178,343
Documents 77,316 80,006 78,215
Financial services 7,264 8,843 10,644
-------- ----------- --------
Total cost of sales 438,487 448,845 419,449
-------- ----------- --------
Gross profit 543,754 559,400 572,934
Selling, general and administrative expenses 399,776 383,762 411,681
-------- ----------- --------
Operating Income 143,978 175,638 161,253
-------- ----------- --------
Other Charges (Income)
Interest expense 4,935 3,842 4,126
Interest income (2,005) (2,705) (3,848)
Equity in net (income) losses of affiliated companies (3,148) (2,306) 13,201
Other - net (3,673) (3,221) 99
-------- ----------- --------
Total other charges (income) (3,891) (4,390) 13,578
-------- ----------- --------
Income Before Income Taxes 147,869 180,028 147,675
Income Taxes 55,226 70,228 43,663
-------- ----------- --------
Income Before Cumulative Effect of Accounting Change 92,643 109,800 104,012
Cumulative Effect of Accounting Change (36,563)
-------- ----------- --------
Net Income $ 92,643 $ 109,800 $ 67,449
======== =========== ========
Basic Earnings Per Common Share
Income before cumulative effect of accounting change $ 1.40 $ 1.61 $ 1.47
Cumulative effect of accounting change ($ .52)
Net income $ 1.40 $ 1.61 $ .95
Average number of common shares outstanding 66,040 68,407 70,692
Diluted Earnings Per Common Share
Income before cumulative effect of accounting change $ 1.37 $ 1.56 $ 1.42
Cumulative effect of accounting change ($ .50)
Net income $ 1.37 $ 1.56 $ .92
Average number of common shares and equivalents outstanding 67,815 70,583 73,112
See Notes to Consolidated Financial Statements.
34
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 2004 2003
- ------------ ----------- ----------
AUTOMOTIVE SOLUTIONS ASSETS
Current Assets
Cash and equivalents $ 116,792 $ 105,829
----------- ----------
Trade accounts receivable (less allowance for
doubtful accounts: 2004--$6,404; 2003--$5,253) 102,293 118,694
----------- ----------
Other accounts receivables 3,637 21,063
----------- ----------
Inventories
Finished products 12,420 11,921
Work in process 314 295
Raw materials and supplies 109 216
----------- ----------
Total inventories 12,843 12,432
----------- ----------
Deferred income taxes 14,650 11,910
----------- ----------
Prepaid expenses and other assets 25,039 19,763
----------- ----------
Total current assets 275,254 289,691
----------- ----------
Property, Plant and Equipment
Land and improvements 9,527 11,447
Buildings and improvements 89,397 119,168
Computer equipment 125,230 123,383
Machinery and equipment 41,714 41,435
Furniture and other 40,541 44,124
Construction in progress 7,994 1,808
----------- ----------
Total property, plant and equipment 314,403 341,365
Less accumulated depreciation 135,956 156,674
----------- ----------
Net property, plant and equipment 178,447 184,691
----------- ----------
Intangible Assets
Goodwill 48,366 41,728
Software licensed to customers 83,757 94,472
Acquired intangible assets 35,315 37,731
Other 7,490 8,531
----------- ----------
Total intangible assets 174,928 182,462
----------- ----------
Other Assets 79,426 89,498
----------- ----------
Total Automotive Solutions Assets 708,055 746,342
----------- ----------
FINANCIAL SERVICES ASSETS
Cash 901 722
Net Finance Receivables 351,649 394,292
Other Assets 262 480
----------- ----------
Total Financial Services Assets 352,812 395,494
----------- ----------
TOTAL ASSETS $ 1,060,867 $1,141,836
=========== ==========
35
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 2004 2003
- ------------ ----------- ----------
AUTOMOTIVE SOLUTIONS LIABILITIES
Current Liabilities
Current portion of long-term debt
Accounts payable
Trade $ 35,191 $ 38,212
Other 6,122 7,705
Accrued liabilities
Compensation and related items 28,230 32,195
Income taxes 14,838 10,926
Other 27,093 21,041
Deferred revenues 27,871 33,704
----------- ----------
Total current liabilities 139,345 143,783
----------- ----------
Long-Term Debt 103,512 106,912
----------- ----------
Other Liabilities
Pensions 32,232 71,709
Postretirement medical 43,614 44,095
Other 6,137 2,648
----------- ----------
Total other liabilities 81,983 118,452
----------- ----------
Total Automotive Solutions Liabilities 324,840 369,147
----------- ----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 192,131 198,768
Deferred Income Taxes 68,530 90,503
Other Liabilities 5,549 8,507
----------- ----------
Total Financial Services Liabilities 266,210 297,778
----------- ----------
SHAREHOLDERS' EQUITY
Capital Stock
Preferred
Class A common - shares issued and
outstanding: 64,126 in 2004, 66,658 in 2003 345,914 299,310
Class B common - convertible to Class A
common; shares issued and outstanding:
14,000 in 2004, 15,000 in 2003 438 469
Accumulated Other Comprehensive Losses (13,739) (32,446)
Retained Earnings 137,204 207,578
----------- ----------
Total Shareholders' Equity 469,817 474,911
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,060,867 $1,141,836
=========== ==========
See Notes to Consolidated Financial Statements.
35
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands except per share data)
For The Years Ended September 30 2004 2003 2002
- -------------------------------- --------- --------- --------
Capital Stock
Class A common
Balance, beginning of year $ 299,310 $ 246,052 $ 167,356
Transition effect from expensing stock-based compensation 17,033
Capital stock issued 53,589 49,692 50,368
Converted from Class B common 31 31 125
Capital stock repurchased (22,363) (14,971) (11,374)
Capital stock retired (664) (291) (951)
Stock-based compensation 11,584 14,833 18,011
Tax benefits from stock-based compensation 4,427 3,964 5,484
--------- --------- ---------
Balance, end of year 345,914 299,310 246,052
--------- --------- ---------
Class B common
Balance, beginning of year 469 500 625
Converted to Class A common (31) (31) (125)
--------- --------- ---------
Balance, end of year 438 469 500
--------- --------- ---------
Accumulated Other Comprehensive Income (Losses)
Balance, beginning of year (32,446) (14,234) (9,547)
Foreign currency translation 1,599 3,757 (186)
Minimum pension liability, 15,751 (23,002) (3,679)
Net unrealized income (losses) on derivative contracts 1,357 1,033 (822)
--------- --------- ---------
Balance, end of year (13,739) (32,446) (14,234)
--------- --------- ---------
Retained Earnings
Balance, beginning of year 207,578 240,702 318,349
Net income 92,643 109,800 67,449
Cash dividends
Class A common (2004--$.44 PER SHARE;
2003--$.44 per share; 2002--$.44 per share) (28,647) (29,672) (30,715)
Class B common (2004--$.022 PER SHARE;
2003--$.022 per share; 2002--$.022 per share) (314) (352) (374)
Capital stock repurchased (134,056) (112,900) (114,007)
--------- --------- ---------
Balance, end of year 137,204 207,578 240,702
--------- --------- ---------
Total Shareholders' Equity $ 469,817 $ 474,911 $ 473,020
========= ========= =========
Comprehensive Income (Losses)
Net income $ 92,643 $ 109,800 $ 67,449
Foreign currency translation 1,599 3,757 (186)
Minimum pension liability, net of income tax provision
(benefit) of $10,580 in 2004, ($15,072) in 2003
and ($2,349) in 2002 15,751 (23,002) (3,679)
Net unrealized income (losses) on derivative contracts,
net of income tax provision (benefit)
of $915 in 2004, $581 in 2003 and
($490) in 2002 1,357 1,033 (822)
--------- --------- ---------
Total comprehensive income $ 111,350 $ 91,588 $ 62,762
========= ========= =========
See Notes to Consolidated Financial Statements.
36
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(In thousands)
For The Years Ended September 30 2004 2003 2002
- -------------------------------- --------- --------- ---------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided by Operating Activities $ 161,782 $ 131,972 $ 158,809
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Business combinations (12,145) (11,714) (5,971)
Capital expenditures (33,783) (57,810) (37,067)
Net proceeds from sales of assets 16,052 9,570 9,674
Capitalization of software licensed to customers (16,270) (20,370)
Repayments from financial services 15,188 5,584 53,817
--------- --------- ---------
Net cash provided by (used for) investing activities (14,688) (70,640) 83
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Principal payments on debt (5,275) (6,061) (6,869)
Cash dividends paid (28,961) (30,024) (31,089)
Capital stock issued 52,925 49,401 49,417
Capital stock repurchased (156,419) (127,871) (125,381)
--------- --------- ---------
Net cash used for financing activities (137,730) (114,555) (113,922)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash 1,599 3,757 (186)
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents 10,963 (49,466) 44,784
Cash and Equivalents, Beginning of Year 105,829 155,295 110,511
--------- --------- ---------
Cash and Equivalents, End of Year $ 116,792 $ 105,829 $ 155,295
========= ========= =========
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $ 3,844 $ 18,710 $ 19,457
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Finance receivables originated (131,275) (145,043) (154,250)
Collections on finance receivables 149,435 150,488 175,064
--------- --------- ---------
Net cash provided by investing activities 18,160 5,445 20,814
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 12,550 100,000
Principal payments on debt (19,187) (18,484) (86,260)
Repayments to automotive solutions (15,188) (5,584) (53,817)
--------- --------- ---------
Net cash used for financing activities (21,825) (24,068) (40,077)
--------- --------- ---------
Increase in Cash and Equivalents 179 87 194
Cash and Equivalents, Beginning of Year 722 635 441
--------- --------- ---------
Cash and Equivalents, End of Year $ 901 $ 722 $ 635
========= ========= =========
See Notes to Consolidated Financial Statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands, except for 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, Services 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 documents
inventories are determined by the last-in, first-out (LIFO) method. At September
30, 2004 and 2003, LIFO inventories were $4,587 and $4,305, respectively. These
inventories, if determined by the first-in, first-out (FIFO) method, would
increase by $3,536 in 2004 and $3,617 in 2003. 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.
38
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
In August 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. On July 1,
2003, the company purchased the aforementioned office building from the trust
for cash of $28,800 and terminated the lease agreement.
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. 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. Amortization
expense for software licensed to customers was $18,823 in 2004, $3,455 in 2003
and $403 in 2002. As of September 30, 2004 and 2003, accumulated amortization
was $55,455 and $37,748, respectively.
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.
SALE OF 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
39
of $12,377 related to the sale of these shares, included in the provision for
income taxes on the statement of consolidated income.
REVENUE RECOGNITION
AUTOMOTIVE SOLUTIONS
Sales of computer hardware and documents 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 and
installation, 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.
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, 2004, future minimum lease payments relating to operating lease
agreements were $31,029 with annual payments of, $7,420 in 2005, $5,223 in 2006,
$4,045 in 2007, $2,944 in 2008 and $2,499 in 2009. Rental expenses were $19,896
in 2004, $19,630 in 2003 and $21,814 in 2002.
COMMITMENTS
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. Research and
development consist primarily of software development associated with new
products, enhanced features and functionality, and compliance updates to
existing products. Research and development costs were $93,000 in 2004, $72,000
in 2003 and $68,000 in 2002.
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. The company anticipates that any
potential U.S. income tax cost from foreign earnings not permanently reinvested
would be offset by foreign tax credits. Undistributed earnings of the foreign
subsidiaries at September 30, 2004, were $21,013.
40
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 and restricted stock
awards.
2004 2003 2002
------ ------ ------
Average number of common shares outstanding
(used to determine basic earnings per common share) 66,040 68,407 70,692
Effect of employee stock options and restricted stock awards 1,775 2,176 2,420
------ ------ ------
Average number of common shares and equivalents outstanding
(used to determine diluted earnings per common share) 67,815 70,583 73,112
====== ====== ======
Employee stock options outstanding and restricted stock awards to acquire 1,244
shares in 2004, 608 shares in 2003 and 614 shares in 2002 were not included in
the computation of diluted earnings per common share because the effect of
either the options' exercise price or the unamortized expense of restricted
stock awards, in relation to the average market price of the common shares would
be antidilutive.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' consolidated financial
statements to conform with the presentation used in 2004.
In 2003, the company changed its allocation methodology for certain expenses,
the effect of which was to report certain expenses as costs 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
2002. It was not practical to restate 2002 financial statements.
2. REORGANIZATION COSTS
On October 2, 2003, the company announced the consolidation of its automotive
Documents printing plant, located in Grand Prairie, Texas, into the company's
Celina, Ohio manufacturing facility. All employees located in Texas were offered
the opportunity to accept a position in the Ohio facility. Those not accepting
positions in Ohio were offered severance and outplacement services. Grand
Prairie document production ceased in December 2003 and 72 positions were
eliminated. During the first six months of fiscal year 2004, the company also
reorganized the Documents sales force, eliminating 37 positions, and eliminated
121 additional positions in Software Solutions development, Services and
administration.
Through September 30, 2004, the company has incurred expense of $7,054 before
taxes or $.06 per share after taxes for severance, outplacement, relocation and
other plant consolidation efforts and eliminated 230 positions.
The following table summarizes reorganization costs recognized and payments made
by the company through September 30, 2004.
41
Software
Solutions Services Documents Total
--------- -------- --------- ------
Cost of Sales
Employee termination benefits $ 14 $ 15 $ 817 $ 846
Other direct expenses 786 786
------- ------- ------ ------
Total cost of sales 14 15 1,603 1,632
------- ------- ------ ------
SG&A Expenses
Employee termination benefits 1,714 1,164 1,070 3,948
Lease obligations 379 244 9 632
Other direct expenses 185 127 530 842
------- ------- ------ ------
Total SG&A expenses 2,278 1,535 1,609 5,422
------- ------- ------ ------
Total Reorganization Expenses 2,292 1,550 3,212 7,054
Payments (2,037) (1,350) (3,088) (6,475)
------- ------- ------ ------
Balance as of September 30, 2004 $ 255 $ 200 $ 124 $ 579
======= ======= ====== ======
The company has completed all actions associated with this reorganization. The
September 30, 2004 liability represents scheduled future payments to be paid
over the remaining severance or lease period. The remaining lease obligation
will expire in December 2005.
3. BUSINESS COMBINATIONS
On October 1, 2003, the company purchased the outstanding shares of Incadea
GmbH, a provider of global automotive retailing software solutions.
Privately-held Incadea, based in Raubling, Germany, had annual revenues of about
$6,000. The purchase price of $6,181 was paid with cash from existing balances.
During the first quarter of fiscal year 2004, the company also repaid $5,046 of
debt assumed in the purchase of Incadea GmbH. The results of Incadea's
operations have been included in the company's financial statements since the
acquisition. At September 30, 2004, the company has recorded goodwill of $6,124
based on the allocation of the purchase price. An independent appraisal firm was
used to assist the company in determining the fair values of intangible assets.
On October 1, 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, had annual
revenues of about $5,000. The purchase price of $5,464 was paid with cash from
existing balances. In April 2004, the company paid an additional $500 of
purchase price based on achievement of specified operating results. Under terms
of the purchase agreement, the company may be required to make additional
payments of up to $1,800 through 2006, contingent on the achievement of certain
operating results of the business purchased. The results of Third Coast Media's
operations have been included in the company's financial statements since the
acquisition. At September 30, 2004 the company has recorded tax deductible
goodwill of $3,149 based on the allocation of the purchase price. An independent
appraisal firm was used to assist the company in determining the fair values of
intangible assets.
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 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. An independent appraisal firm was used to assist the company in
determining the fair values of intangible assets. During fiscal year 2004, the
company adjusted tax benefits and recorded a deferred tax asset of $2,585 and
decreased goodwill by $2,585.
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.com 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.com 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 management with the assistance of
an independent appraisal firm. Based on this valuation, the company adjusted the
purchase price allocation to increase computer equipment by $200, increase
capitalized software by $100, reduce non-compete
42
agreement intangible assets by $2,400, decrease deferred tax assets by $765 and
increase goodwill by $2,865. BoatVentures.com 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 September 2004, the company sold the net assets of
BoatVentures.com for $2,100 and recorded a gain of $1,300.
COMPONENTS OF PURCHASE PRICES
2004 2003 2002
------- ------- ------
Cash (net of cash and equivalents acquired) $11,645 $11,714 $5,971
Contingent cash payments 500
------- ------- ------
Totals $12,145 $11,714 $5,971
======= ======= ======
4. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
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 estimated useful lives and reviewed for impairment in
accordance with SFAS 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 periods after
October 1, 2001. This statement also required certain intangible assets that did
not meet the criteria for recognition apart from goodwill, to be subsumed into
goodwill. During fiscal year 2002, 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. In
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 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 assist
the company in determining the fair value and allocate this fair value among
assets and liabilities. Based on this analysis, two reporting units within the
Services 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.
The company performs its annual goodwill impairment tests as of July 31 each
year, using a consistent methodology. In 2003, the company identified and
recorded an impairment loss of $302 within the Software 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.
In 2004, the company adjusted tax benefits related to Networkcar and recorded a
deferred tax asset of $2,585 and decreased goodwill by $2,585. In September
2004, the company decreased goodwill by $50 in connection with the sale of the
net assets of BoatVentures.com. The value of the goodwill write-off was based on
the fair value of BoatVentures.com compared to the fair value of the Software
Solutions segment.
43
ACQUIRED INTANGIBLE ASSETS
Weighted
Average
Gross Accumulated Life
Amount Amortization (years)
------- ------------ --------
AS OF SEPTEMBER 30, 2004
Contractual customer relationship $33,100 $ 7,310 20
Trademarks 6,263 1,364 19
Other 7,006 2,380 10
------- -------
Total $46,369 $11,054 18
======= =======
AS OF SEPTEMBER 30, 2003
Contractual customer relationship $33,100 $ 5,655 20
Customer contract 17,700 16,493 4
Trademarks 5,900 1,008 20
Other 6,449 2,262 11
------- -------
Total $63,149 $25,418 14
======= =======
Aggregate amortization expense was $3,845 in 2004, $7,233 in 2003 and $7,021 in
2002. As of September 30, 2004, estimated annual amortization expenses were
$2,620 in 2005, $2,620 in 2006, $2,470 in 2007, $2,470 in 2008 and $2,470 in
2009.
GOODWILL
Software
Solutions Services Documents Totals
--------- -------- --------- ------
Balance as of September 30, 2002 $19,654 $ 6,468 $2,877 $28,999
Business combinations 2,865 10,166 13,031
Impairment loss (302) (302)
------- ------- ------ -------
Balance as of September 30, 2003 22,217 16,634 2,877 41,728
Business combinations 9,273 9,273
Divestiture (50) (50)
Adjustment (2,585) (2,585)
------- ------- ------ -------
Balance as of September 30, 2004 $31,440 $14,049 $2,877 $48,366
======= ======= ====== =======
At September 30, 2004 and 2003, accumulated amortization was $53,837 and
$53,812, respectively.
5. INCOME TAXES
PROVISION FOR INCOME TAXES
2004 2003 2002
---- ---- ----
Current
Federal $59,242 $34,706 $24,728
State and local 10,803 9,067 (3,449)
Foreign 2,086 3,103 1,600
Deferred (16,905) 23,352 20,784
------- ------- -------
Provision for income taxes $55,226 $70,228 $43,663
======= ======= =======
Income taxes paid (net of refunds) $63,700 $54,000 $22,321
======= ======= =======
44
RECONCILIATION OF INCOME TAX RATES
2004 2003 2002
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Statutory federal income taxes $51,754 35.0% $63,010 35.0% $51,686 35.0%
State and local taxes less federal
income tax effect 3,341 2.3 7,318 4.1 6,234 4.2
State tax benefits less federal
income tax effect (5,872) (4.0)
Sale of Kalamazoo shares (7,746) (5.2)
Other 131 (100) (.1) (639) (0.4)
------- ---- ------- ---- ------- ----
Provision for income taxes $55,226 37.3% $70,228 39.0% $43,663 29.6%
======= ==== ======= ==== ======= ====
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 2004 2003
- ------------ ------- -------
Deferred income tax assets
Postretirement medical $18,298 $18,811
Pensions 10,170 25,721
Stock-based compensation 17,127 17,781
Receivables allowances 7,425 5,344
Non deductible state provision 4,096 3,818
Other 6,813 5,740
Deferred income tax liabilities
Depreciation and amortization (28,707) (26,677)
Other (1,112) (1,355)
------- -------
Totals 34,110 49,183
Current 14,650 11,910
------- -------
Noncurrent $19,460 $37,273
======= =======
FINANCIAL SERVICES DEFERRED INCOME TAX LIABILITIES
Financial Services deferred income tax liabilities resulted from temporary
differences from financing the company's computer systems sales.
6. FINANCIAL SERVICES
INCOME SUMMARY
2004 2003 2002
------- ------- -------
Revenues $31,814 $36,532 $41,709
Cost of sales - interest expense 7,264 8,843 10,644
------- ------- ------
Gross profit 24,550 27,689 31,065
Selling, general and administrative expenses 6,551 7,150 8,141
------- ------- -------
Operating income $17,999 $20,539 $22,924
======= ======= =======
NET FINANCE RECEIVABLES
September 30 2004 2003
- ------------ ---- ----
Product financing receivables $372,648 $423,770
Unguaranteed residual values 29,687 36,552
Allowance for doubtful accounts (6,701) (6,705)
Unearned interest income (47,064) (62,414)
Other 3,079 3,089
-------- --------
Totals $351,649 $394,292
======== ========
As of September 30, 2004, product financing receivables due for each of the next
five years were $143,326 in 2005, $104,332 in 2006, $69,865 in 2007, $40,423 in
2008 and $14,205 in 2009.
45
ALLOWANCE FOR DOUBTFUL ACCOUNTS
2004 2003
------ ------
Balance, beginning of year $6,705 $6,184
Provisions
Financial services 3,064 3,765
Automotive solutions 540 540
Net losses (3,608) (3,784)
------ ------
Balance, end of year $6,701 $6,705
====== ======
7. FINANCING ARRANGEMENTS
AUTOMOTIVE SOLUTIONS
During February 2002, the company entered into $100,000 of interest rate swap
agreements that effectively converted 7% fixed rate debt into variable rate
debt. These interest rate swap agreements were designated as fair value hedges.
The fair value of these derivative instruments was an asset of $3,621 at
September 30, 2004, and $7,069 at September 30, 2003, and was included in
Automotive Solutions' other assets on the consolidated balance sheets. The
adjustments to record the net change in the fair value of fair value hedges and
related debt during the periods presented were recorded in interest expense. All
existing fair value hedges were 100% effective. As a result, there was no
current impact to earnings because of hedge ineffectiveness.
Notional
Amounts
September 30, 2004 Notes Swaps
- ------------------ -------- --------
Fixed rate notes, $100,000 face value, maturing in 2007 $103,512 $100,000
Weighted average interest rate 7.0%
Weighted average pay rate 3.6%
Weighted average receive rate 7.0%
-------- --------
Totals 103,512 100,000
Current portion
-------- --------
Long-term portion $103,512 $100,000
======== ========
September 30, 2003
- ------------------
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
======== ========
Loan agreements require minimum interest coverage and consolidated leverage
ratios. At September 30, 2004, the company was in compliance with these loan
covenants. The fair values of Automotive Solutions' financing arrangements were
$103,512 at September 30, 2004, and $106,912 at September 30, 2003. At September
30, 2004, debt maturities were $100,000 in 2007. Interest paid was $4,529 in
2004, $4,076 in 2003 and $5,622 in 2002. Interest capitalized was $31 in 2004,
$1,000 in 2003 and $1,806 in 2002.
At September 30, 2004, $100,000 of 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
46
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.
On January 22, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the
company, renewed a loan funding agreement whereby Reyna Funding, L.L.C. may
borrow funds using finance receivables purchased from Reyna Capital Corporation,
also a consolidated affiliate of the company, as security for the loan. On May
19, 2004, the loan funding agreement was modified to increase the borrowing
limit from $100,000 to $150,000. Interest is payable on a variable rate basis.
This loan funding agreement is renewable annually through January 23, 2006. As
of September 30, 2004, Reyna Funding, L.L.C. had outstanding borrowings of
$100,000 under this arrangement.
The fair value of the company's cash flow derivative instruments was a $128
liability at September 30, 2004 and a $2,422 liability at September 30, 2003 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 2005, the company does not expect any
amounts to be reclassified out of other comprehensive income into earnings to be
material to the financial statements.
Notional
Amounts
September 30, 2004 Notes Swaps
- ------------------ -------- --------
Variable rate instruments, maturing through 2009 $165,125 $103,125
Weighted average interest rate 2.0%
Weighted average pay rate 3.1%
Weighted average receive rate 1.7%
Fixed rate notes, maturing through 2007 27,006
Weighted average interest rate 4.2%
-------- --------
Totals $192,131 $103,125
======== ========
September 30, 2003
- ------------------
Variable rate instruments, maturing through 2006 $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
======== ========
Loan agreements require minimum interest coverage and consolidated leverage
ratios. At September 30, 2004, the company was in compliance with these loan
covenants. The fair value of Financial Services debt was $192,299 and $199,404
at September 30, 2004 and 2003, respectively. At September 30, 2004, maturities
of notes were $77,400 in 2005, $32,275 in 2006, $31,234 in 2007 $26,222 in 2008
and $25,000 in 2009. Interest paid was $6,997 in 2004, $9,010 in 2003 and
$11,155 in 2002.
At September 30, 2004, notional amount maturities of swap agreements were
$45,633 in 2005, $36,758 in 2006, $14,866 in 2007 and $5,868 in 2008.
47
REVOLVING CREDIT AGREEMENT
On April 8, 2004, the company obtained a new $200,000 revolving credit agreement
and terminated the old agreement. The new revolving credit agreement has a five
year term. Automotive Solutions and Financial Services share this revolving
credit agreement. As of September 30, 2004, the balance outstanding on this
facility was $62,000 and was included in Financial Services notes payable.
8. CAPITAL STOCK
September 30 2004 2003 2002
- ----------------------------------------- ------- ------- -------
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 66,658 68,595 70,230
Issued 3,234 2,761 2,978
Restricted stock canceled & returned (73)
Converted from Class B common 50 50 200
Repurchased (5,720) (4,737) (4,779)
Retired (23) (11) (34)
------- ------- -------
Balance, end of year 64,126 66,658 68,595
======= ======= =======
Class B common
No par value
Authorized shares 40,000 40,000 40,000
Issued and outstanding shares
Balance, beginning of year 15,000 16,000 20,000
Converted to Class A common (1,000) (1,000) (4,000)
------- ------- -------
Balance, end of year 14,000 15,000 16,000
======= ======= =======
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. The company
has reserved sufficient authorized Class A common shares for Class B conversions
and stock-based compensation 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
$27.35 in 2004, $26.99 in 2003 and $26.23 in 2002. The remaining balance of
shares authorized for repurchase by the board of directors was 2,445 at
September 30, 2004. Treasury shares at September 30 were 27,939 in 2004, 25,430
in 2003 and 23,503 in 2002.
48
9. EMPLOYEE STOCK PLANS
Effective October 1, 2003, the company elected to adopt the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" and began recognizing
stock-based compensation expense in the statements of consolidated income. Under
the fair value recognition provisions of SFAS No. 123, stock-based compensation
cost is measured at the grant date based on the value of the award and is
recognized as expense over the vesting period. SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" provides three alternative
methods for reporting this change in accounting principle. The company elected
the retroactive restatement method which required 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. Financial statements have been
restated for 2002 and 2003, to reflect the adoption of SFAS No. 123. The company
valued its stock options using the Black-Scholes option valuation model. The
company recognized compensation expense of $11,639 in 2004, $14,833 in 2003 and
$18,011 in 2002.
Prior to 2004, the company awarded incentive stock options and/or nonqualified
stock options to purchase Class A common shares to substantially all employees.
Stock options were generally granted at a price equal to fair market value of
the common stock on the date of grant. In February 2004, the shareholders
approved the 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive
Plan. The REYShare Plus Plan provides for restricted stock awards to
substantially all employees in which the restrictions lapse based on service
achievement. The Executive Stock Incentive Plan provides for restricted stock
awards and other stock-based incentives to eligible recipients. Under the
Executive Stock Incentive Plan, restrictions on restricted stock awards lapse
based, in part, on service achievement and, in part, on company performance.
Restricted stock awards may consist of either restricted stock or restricted
stock units. Restricted stock units, which become shares when restrictions
lapse, are awarded in countries where it is not beneficial to award restricted
stock.
STOCK OPTION PLANS
Weighted Average
Shares Under Option Option Prices Per Share
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------
Outstanding
Beginning of year 12,147 13,075 13,941 $20.94 $20.02 $18.88
Granted 527 2,480 2,833 27.10 22.60 22.68
Exercised (2,783) (2,751) (2,970) 19.26 18.06 16.96
Canceled (533) (657) (729) 22.26 21.11 20.69
------ ------ ------
End of year 9,358 12,147 13,075 21.70 20.94 20.02
====== ====== ======
Exercisable at September 30 5,905 6,287 5,206 20.79 19.85 19.85
====== ====== ======
Outstanding, September 30, 2004 Exercisable, September 30, 2004
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 - $19.50 2,607 5.0 $17.95 2,604 $17.95
$19.60 - $22.53 3,050 5.6 21.87 1,811 21.45
$22.56 - $24.32 2,416 5.0 22.73 645 22.89
$24.43 - $30.27 1,285 3.8 26.99 845 26.56
----- -----
Totals 9,358 5.0 21.70 5,905 20.79
===== =====
OPTION VALUATION ASSUMPTIONS
2004 2003 2002
---- ---- ----
Expected life in years 3 3 4
Dividend yield 1.8% 1.9% 1.9%
Risk free interest rate 2.0% 2.1% 3.7%
Volatility 24% 31% 29%
Weighted average fair value $4.22 $4.52 $5.34
49
RESTRICTED STOCK AWARDS
Weighted Average
Shares or Units Fair Value
2004 2004
--------------- ----------------
Outstanding
Restricted Stock
Granted 442 $27.53
Canceled (72) 28.04
Returned (1) 28.04
Released (1) 28.04
Restricted Stock Units
Granted 25 27.52
Canceled (1) 28.04
---
Balance, end of year 392 27.43
===
The weighted average remaining vesting for restricted stock awards is 2 years as
of September 30, 2004.
10. POSTRETIREMENT BENEFITS
PENSION EXPENSE
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits an amendment of
FASB Statements No. 87, 88, and 106." This statement revised employers'
disclosures about pension plans and other postretirement plans. The revised
disclosures are reflected in the following.
2004 2003 2002
----------- ----------- -----------
NET PERIODIC COST
Service cost $11,280 $ 8,546 $ 8,839
Plan administration 880 774
Interest cost 16,857 17,038 15,915
Expected return on plan assets (12,730) (12,471) (13,277)
Amortization of prior service cost 786 598 431
Amortization of net actuarial loss 3,930 1,293 65
Amortization of transition obligation 259 139 145
----------- ----------- -----------
Net periodic benefit cost 20,382 16,023 12,892
Settlement 1,684
Special termination benefits 130 120
Defined Contribution Plan 5,642 5,249 6,503
Multi-employer Plan 7 13 25
----------- ----------- -----------
Total $26,161 $21,405 $21,104
=========== =========== ===========
Actuarial Assumptions
Discount rate 6.0% 6.5% - 7.25% 7.0% - 7.5%
Rate of compensation increase 3.25% - 4.5% 3.75% - 4.5% 3.75% - 5.0%
Expected return on plan assets 8.25% 9.0% 9.0%
Actuarial cost method PROJECTED UNIT CREDIT
Measurement period JULY 1 - JUNE 30
The expected rate of return on plan assets was determined through a combination
of long term historical returns and expected future returns, weighted to reflect
the plan's target asset allocation. 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.
50
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 non vested discretionary
contributions were used to reduce contributions required by the company.
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
Funded Pension Unfunded Pension
Benefits Benefits Total
2004 2003 2004 2003 2004 2003
---------- ---------- ---------- ---------- ---------- ----------
Change in benefit obligation
Benefit obligation, beginning of year $ 221,825 $ 182,488 $ 53,966 $ 46,265 $ 275,791 $ 228,753
Service cost 10,099 7,682 1,181 923 11,280 8,605
Interest cost 13,675 13,747 3,182 3,341 16,857 17,088
Actuarial loss (gain) 115 23,635 (4,978) 7,819 (4,863) 31,454
Benefits paid (8,094) (7,161) (4,287) (4,382) (12,381) (11,543)
Foreign currency translation 959 1,434 959 1,434
---------- ---------- ---------- ---------- ---------- ----------
Benefit obligation, end of year $ 238,579 $ 221,825 $ 49,064 $ 53,966 $ 287,643 $ 275,791
========== ========== ========== ========== ========== ==========
Change in Plan Assets
Fair value of plan assets, beginning of year $ 133,997 $ 127,477 $ 133,997 $ 127,477
Actual return on plan assets 22,699 1,922 22,699 1,922
Employer contribution 36,683 12,037 36,683 12,037
Benefits paid (8,094) (7,161) (8,094) (7,161)
Plan administration (1,279) (1,367) (1,279) (1,367)
Foreign currency translation 512 1,089 512 1,089
---------- ---------- ---------- ----------
Fair value of plan assets, end of year $ 184,518 $ 133,997 $ 184,518 $ 133,997
========== ========== ========== ==========
Net amount recognized
Fair value of plan assets $ 184,518 $ 133,997 $ 184,518 $ 133,997
Benefit obligation (238,579) (221,824) $ (49,064) $ (53,966) (287,643) (275,790)
---------- ---------- ---------- ---------- ---------- ----------
Funded status (54,061) (87,827) (49,064) (53,966) (103,125) (141,793)
Contributions or benefit payments
made after measurement date 14,636 26,945 5,153 1,087 19,789 28,032
Unrecognized net loss 63,234 74,821 5,819 11,391 69,053 86,212
Unrecognized prior service cost 5,850 6,349 1,641 1,923 7,491 8,272
Unrecognized net transition obligation 259 259
Multi-employer Liability (31) (39) (31) (39)
Minimum Pension Liability (24,461) (44,731) (4,655) (11,756) (29,116) (56,487)
---------- ---------- ---------- ---------- ---------- ----------
Net asset (liability) recognized $ 5,198 $ (24,443) $ (41,137) $ (51,101) $ (35,939) $ (75,544)
========== ========== ========== ========== ========== ==========
Minimum Pension Liability
Intangible Asset $ 5,850 $ 6,349 $ 1,641 $ 2,182 $ 7,491 $ 8,531
Deferred Income Tax Benefit 7,309 15,162 1,170 3,805 8,479 18,967
Accumulated Other Comprehensive Income 11,302 23,220 1,844 5,769 13,146 28,989
---------- ---------- ---------- ---------- ---------- ----------
Total $ 24,461 $ 44,731 $ 4,655 $ 11,756 $ 29,116 $ 56,487
========== ========== ========== ========== ========== ==========
2004 2003
---------- -----------
Actuarial Assumptions
Discount rate 6.25% 6.0%
Rate of compensation increase 4.0% 3.25% - 4.5%
51
Asset Allocation at
Target Allocation Measurement Date
Asset Allocation 2005 2004 2003
- ---------------- ---- ---- ----
Equity securities 80% 78% 75%
Debt securities 20% 20% 17%
Cash 2% 8%
--- --- ---
Total 100% 100% 100%
=== === ===
The assets above include the company's stock only to the extent that it is
represented in the Wilshire 5000 index. The plans' investment strategy is to
achieve the highest level of investment performance that is compatible with
prudent levels of risk and best practices in the management of investments.
Asset allocations are based on the expected duration of the plans' liabilities,
expected asset returns, correlation and diversification of asset classes and the
actuarial discount rate.
Funded Unfunded Total
2004 2003 2004 2003 2004 2003
---------- ---------- ---------- ---------- ---------- ----------
PLANS WITH PROJECTED BENEFIT OBLIGATION
GREATER THAN THE FAIR VALUE OF PLAN ASSETS
Projected benefit obligation $ 238,579 $ 221,825 $ 49,064 $ 53,966 $ 287,643 $ 275,791
Accumulated benefit obligation $ 193,956 $ 185,385 $ 46,143 $ 50,973 $ 240,099 $ 236,358
Fair value of plan assets $ 184,519 $ 133,997 $ 184,519 $ 133,997
PLANS WITH ACCUMULATED BENEFIT OBLIGATION
GREATER THAN THE FAIR VALUE OF PLAN ASSETS
Projected benefit obligation $ 238,579 $ 221,825 $ 49,064 $ 53,966 $ 287,643 $ 275,791
Accumulated benefit obligation $ 193,956 $ 185,385 $ 46,143 $ 50,973 $ 240,099 $ 236,358
Fair value of plan assets $ 184,519 $ 133,997 $ 184,519 $ 133,997
EXPECTED CASH FLOWS
Funded Pension Benefits Unfunded Pension Benefits
----------------------- -------------------------
Employer Contributions
2005 (expected) to plan trusts $ 5,000
2005 (expected) to plan participants $ 5,000
Expected Benefit Payments
2005 $ 8,300 $ 5,000
2006 $ 8,500 $ 5,000
2007 $ 8,900 $ 5,000
2008 $ 9,300 $ 5,000
2009 $ 9,800 $ 5,000
2010 - 2014 $ 180,500 $ 25,000
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
2004 2003 2002
---------- ---------- ----------
Net Periodic Cost
Service cost $ 664 $ 481 $ 547
Interest cost 3,708 4,291 4,027
Amortization of prior service cost (benefit) (742) (742) (532)
Amortization of net actuarial loss (gain) 1,120 1,088 637
---------- ---------- ----------
Net periodic benefit cost $ 4,750 $ 5,118 $ 4,679
========== ========== ==========
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%
52
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
2004 2003
---------- ----------
Change in benefit obligation
Benefit obligation, beginning of year $ 63,762 $ 60,769
Service cost 664 482
Interest cost 3,708 4,292
Plan participants' contributions 741 402
Actuarial loss (gain) (1,190) 2,308
Benefits paid (3,680) (4,531)
Foreign currency translation 20 40
---------- ----------
Benefit obligation, end of year $ 64,025 $ 63,762
========== ==========
Net amount recognized
Funded status $ (64,025) $ (63,762)
Unrecognized net (gain) loss 22,175 22,533
Unrecognized prior service cost (benefit) (5,664) (6,406)
---------- ----------
Net liability recognized $ (47,514) $ (47,635)
========== ==========
Actuarial Assumptions
Discount rate 6.25% 6.0%
Healthcare cost trend rate
Through 2007 10.0%
2005 9.0%
2006 8.0%
2007 7.0%
2008 6.0%
Thereafter 5.0% 5.0%
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage-point change in assumed health
care cost trend rates would have the following effect:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on postretirement benefit obligation $ 2,322 $ (2,032)
Effect on total of service cost and interest cost 145 (127)
PLANS WITH ACCUMULATED BENEFIT OBLIGATION GREATER THAN PLAN ASSETS
The accumulated postretirement benefit obligation was $64,025 in 2004 and
$63,762 in 2003. There were no plan assets in 2004 or 2003.
53
EXPECTED CASH FLOWS
Employer Contributions
2005 (expected) to plan participants $ 3,700
Expected Benefit Payments
2005 $ 3,900
2006 $ 4,300
2007 $ 4,600
2008 $ 4,900
2009 $ 5,200
2010 - 2014 $28,700
11. CASH FLOW STATEMENTS
2004 2003 2002
---------- ---------- ----------
AUTOMOTIVE SOLUTIONS
Cash flows provided by (used for) operating activities
Net income $ 80,620 $ 97,683 $ 53,393
Adjustments to reconcile net income to net cash
provided by operating activities
Cumulative effect of accounting change 36,563
Depreciation and amortization 48,393 36,237 31,395
Stock-based compensation 11,513 14,650 17,944
Deferred income taxes 6,608 29,237 23,687
Deferred income taxes transferred from
financial services (11,567) (5,514) (2,866)
Losses (gains) on sales of assets (2,636) 289 1,605
Changes in operating assets and liabilities, excluding
those acquired in business combinations
Accounts receivable 57,111 (20,485) (2,358)
Inventories (411) 933 (2,221)
Prepaid expenses and other assets (12,190) 4,599 11,538
Accounts payable (6,541) 475 506
Accrued and other liabilities (9,118) (26,132) (10,377)
---------- ---------- ----------
Net cash provided by operating activities $ 161,782 $ 131,972 $ 158,809
========== ========== ==========
FINANCIAL SERVICES
Cash flows provided by (used for) operating activities
Net income $ 12,023 $ 12,117 $ 14,056
Adjustments to reconcile net income to net cash
provided by operating activities
Stock-based compensation 126 183 67
Deferred income taxes (21,973) (4,040) (2,269)
Deferred income taxes transferred to
automotive solutions 11,567 5,514 2,866
Changes in receivables, other assets
and other liabilities 2,101 4,936 4,737
---------- ---------- ----------
Net cash provided by operating activities $ 3,844 $ 18,710 $ 19,457
========== ========== ==========
54
12. SEGMENT REPORTING
During the first quarter of 2004, the company changed its reporting segments to
reflect the revised organizational structure of the company. In executing this
realignment, the company changed its method of allocating certain revenues and
expenses. Prior year financial results were restated, to the extent possible, to
reflect financial results consistent with the current year. It was not practical
to restate financial statements for all changes. The estimated effect of these
non restated items was to increase Software Solutions 2004 revenues by $9,600
and operating income by $7,200. The offsetting unfavorable effect of these
changes was included in the Services segment.
The Software Solutions segment provides computer solutions including computer
hardware, integrated software packages, software enhancements and related
support. The Software Solutions segment includes the operating results of
Incadea GmbH which had revenues of $6,036 and an operating loss of $5,996 in
2004.
The Services segment includes installation and maintenance of computer hardware,
software training and consulting services.
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 solutions and services, through the company's wholly-owned
affiliates, Reyna Capital Corporation, Reyna Funding L.L.C. and a similar
operation in Canada.
In 2005, the company's segment reporting will consist of three reporting
segments; Software Solutions, Documents and Financial Services. Software
Solutions will be comprised of the former Software Solutions segment and the
former Services segment. This reporting will reflect the most recent management
reorganization which places all software solutions and related services under
common leadership. This reporting will benefit investors, providing a truer
economic picture of the company's solutions by combining the operating results
of products and related services that are sold together. For example, software
licenses and related software training will be included in a single segment. In
2004, these items were separated, with software licenses reported in the
Software Solutions segment and the related software training reported in the
Services segment. Management will review the financial results of Software
Solutions, Documents and Financial Services to measure performance and allocate
resources. There will be no changes in the reporting of the Documents and
Financial Services segments.
REPORTING SEGMENTS
2004 2003 2002
------------ ------------ ------------
Net sales and revenues
Software solutions $ 539,763 $ 540,572 $ 497,874
Services 244,410 256,902 269,277
Documents 166,254 174,239 183,523
Financial services 31,814 36,532 41,709
------------ ------------ ------------
Total net sales and revenues $ 982,241 $ 1,008,245 $ 992,383
============ ============ ============
Operating income (loss)
Software solutions $ 127,299 $ 136,822 $ 107,391
Services (27,318) (11,690) (3,198)
Documents 25,998 29,967 34,136
Financial services 17,999 20,539 22,924
------------ ------------ ------------
Total operating income $ 143,978 $ 175,638 $ 161,253
============ ============ ============
Assets
Automotive solutions $ 708,055 $ 746,342 $ 747,553
Financial services 352,812 395,494 407,605
------------ ------------ ------------
Total assets $ 1,060,867 $ 1,141,836 $ 1,155,158
============ ============ ============
55
Investments in equity method investees $ 7,325 $ 5,376 $ 8,270
Capital expenditures 33,783 57,810 37,067
Depreciation and amortization 48,393 36,237 31,395
GEOGRAPHIC AREAS
The company provides integrated computer systems products and services and
manufactures and distributes printed business forms primarily in the United
States.
2004 2003 2002
------------ ------------ ------------
United States
Net sales and revenues $ 911,992 $ 943,769 $ 930,144
Long-lived assets $ 396,149 $ 414,520 $ 377,168
Canada
Net sales and revenues $ 58,868 $ 59,828 $ 55,624
Long-lived assets $ 4,118 $ 4,763 $ 3,089
Other International
Net sales and revenues $ 18,517 $ 13,051 $ 12,868
Long-lived assets $ 13,077 $ 94 $ 29
Elimination of intersegment sales $ (7,136) $ (8,403) $ (6,253)
Totals
Net sales and revenues $ 982,241 $ 1,008,245 $ 992,383
Long-lived assets $ 413,344 $ 419,377 $ 380,286
13. CONTINGENCIES
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; however, the
mediation did not result in resolution of the matter. The company continues to
negotiate with the PRP coalition and the company believes that this matter can
still be resolved by settlement. The company believes that the reasonably
foreseeable resolution of this matter will not have a material adverse effect on
the financial statements.
In 2000, the company sold the net assets of its Information Solutions segment to
the Carlyle Group. The Carlyle Group renamed the business Relizon Corporation.
The company became secondarily liable under new real estate leases after being
released as primary obligor for facilities leased and paid by Relizon. This
contingent liability, which matures in January 2006, was $882 as of September
30, 2004. Also in connection with the sale of these operations to the Carlyle
Group, the company remained contingently liable for a portion of long-term debt,
which is collateralized by a Relizon facility in Canada and matures in 2007. In
connection with this contingent liability, the company secured a standby letter
of credit which expires in 2007. As of September 30, 2004, the unamortized
balance on this letter of credit was $1,580.
Subsequent to the company's announcement on June 24, 2004, regarding third
quarter earnings, two shareholder class action complaints and one shareholder
derivative claim were filed in the United States District Court for the Southern
District of Ohio. A second shareholder derivative claim was filed in the Court
of Common Pleas in Montgomery County, Ohio. The class action complaints allege
that the company, a current officer and a former officer violated provisions of
the Securities Exchange Act of 1934. On October 19, 2004, the plaintiffs in one
of the shareholder class actions voluntarily moved to dismiss the action,
without prejudice. The shareholder derivative claims were filed against the
company, as nominal defendant, members of the Board of Directors and certain
executive officers and allege breach of fiduciary duty, and other violations of
law. The company denies that these allegations have any merit and will
vigorously defend against these actions.
56
The company is also subject to other claims and lawsuits that arise in the
ordinary course of business. The company believes that the reasonably
foreseeable resolution of these matters will not have a material adverse effect
on the financial statements.
14. ACCOUNTING CHANGE
Effective October 1, 2003, the company elected to adopt the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" and began recognizing stock
option expense in the Statements of Consolidated Income. Under the fair value
recognition provisions of SFAS No. 123, stock-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense over the vesting period. SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" provides three alternative
methods for reporting this change in accounting principle. The company elected
the retroactive restatement method which required 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, prior year
financial statements have been restated to reflect the adoption of SFAS No. 123.
For the twelve months ended September 30, 2003 and September 30, 2002, income
before income taxes was reduced by $14,441 and $17,274, the provision for income
taxes was decreased by $5,224 and $5,734 and net income was reduced by $9,217
(or $.13 per share) and $11,540 (or $.16 per share), respectively. As of
September 30, 2003, deferred income tax assets were increased by $17,781,
capital stock was increased by $38,538 and retained earnings was reduced by
$20,757.
15. ACCOUNTING STANDARDS
In May 2004, the FASB staff issued FASB Staff Position SFAS 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" (the "Act"). This statement
prescribes accounting for the Act and is effective for interim periods beginning
after June 15, 2004. The company has determined that the benefits provided to
retirees under the company's prescription drug plan are not actuarially
equivalent to the benefits provided under the Act. Therefore, the company will
not qualify for the subsidy provided by the Act and the adoption of SFAS 106-2
did not have a material effect on the financial statements.
57
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
2004
Net sales and revenues $ 248,403 $ 249,492 $ 242,830 $ 241,516
Gross profit $ 138,587 $ 140,957 $ 134,350 $ 129,860
Net income $ 23,822 $ 26,357 $ 22,019 $ 20,445
Basic earnings per common share $ .35 $ .40 $ .34 $ .31
Diluted earnings per common share $ .34 $ .38 $ .33 $ .31
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 $ 29.35 $ 29.71 $ 30.58 $ 25.10
Low $ 26.42 $ 26.51 $ 22.70 $ 21.21
2003
Net sales and revenues $ 246,648 $ 255,099 $ 250,405 $ 256,093
Gross profit $ 137,854 $ 140,700 $ 138,762 $ 142,084
Net income $ 25,573 $ 26,990 $ 26,205 $ 31,032
Basic earnings per common share $ .37 $ .40 $ .38 $ .46
Diluted earnings per common share $ .36 $ .39 $ .37 $ .44
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
58
VALUATION ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003, AND 2002
(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, 2004 $ 5,253 $ 7,485 $ 9 $ 6,343 $ 6,404
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
Reserves for credit memos:
Year ended September 30, 2004 $ 11,691 $ 25,514 $ 71 $ 26,167 $11,109
Year ended September 30, 2003 $ 10,321 $ 31,153 $ 173 $ 29,956 $11,691
Year ended September 30, 2002 $ 6,724 $ 32,021 ($ 7) $ 28,417 $10,321
Reserves for inventories:
Year ended September 30, 2004 $ 1,665 $ 1,164 $ 7 $ 2,203 $ 633
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
FINANCIAL SERVICES
Reserves for finance receivables:
Year ended September 30, 2004 $ 6,705 $ 3,064 $ 557 $ 3,625 $ 6,701
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
(a) Includes adjustments from translation of foreign currency to United States
dollars, the effects of acquisitions of businesses and transfers between
reserves.
59