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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 2004
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
OHIO 31-0421120
(State of incorporation) (IRS Employer Identification No.)
ONE REYNOLDS WAY
DAYTON, OHIO 45430
(Address of principal executive offices)
(937) 485-2000
(Telephone No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
On December 31, 2004, 63,887,849 Class A common shares and 14,000,000 Class B
common shares were outstanding.
THE REYNOLDS AND REYNOLDS COMPANY
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (unaudited) For the Three Months
Ended December 31, 2004 and 2003 3
Condensed Consolidated Balance Sheets As of December 31, 2004
(unaudited) and September 30, 2004 4
Condensed Statements of Consolidated Cash Flows (unaudited) For the
Three Months Ended December 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
For the Three Months Ended December 31, 2004 and 2003 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
(See the caption entitled "Market Risks" included in the
Management's Discussion and Analysis of Financial Condition and
Results of Operations)
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 21
Item 6. Exhibits 21
SIGNATURES 22
2
THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(In thousands except per share data)
Three Months
2004 2003
-------- --------
Net Sales and Revenues
Products $165,197 $176,679
Services 67,276 63,324
Financial services 6,849 8,400
-------- --------
Total net sales and revenues 239,322 248,403
-------- --------
Cost of Sales
Products 60,749 62,724
Services 47,241 45,175
Financial services 1,751 1,917
-------- --------
Total cost of sales 109,741 109,816
-------- --------
Gross Profit 129,581 138,587
Selling, General and Administrative Expenses 93,977 102,628
-------- --------
Operating Income 35,604 35,959
-------- --------
Other Charges (Income)
Interest expense 1,445 1,340
Interest income (584) (657)
Other - net (1,955) (948)
-------- --------
Total other charges (income) (1,094) (265)
-------- --------
Income Before Income Taxes 36,698 36,224
Income Taxes 15,344 12,402
-------- --------
Net Income $ 21,354 $ 23,822
======== ========
Basic Earnings Per Common Share
Net income $ 0.33 $ 0.35
Average number of common shares outstanding 64,366 67,243
Diluted Earnings Per Common Share
Net income $ 0.33 $ 0.34
Average number of common shares outstanding 65,366 69,446
Cash Dividends Declared Per Common Share $ 0.11 $ 0.11
See Notes to Condensed Consolidated Financial Statements.
3
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND SEPTEMBER 30, 2004
(In thousands)
(UNAUDITED)
12/31/04 9/30/04
---------- ----------
AUTOMOTIVE SOLUTIONS ASSETS
Current Assets
Cash and equivalents $ 138,929 $ 116,792
Trade accounts receivable 100,581 102,293
Other accounts receivables 2,645 3,637
Inventories 13,148 12,843
Prepaid and other assets 42,152 39,689
---------- ----------
Total current assets 297,455 275,254
Property, Plant and Equipment, less accumulated depreciation of
$137,558 at 12/31/04 and $135,956 at 9/30/04 175,147 178,447
Goodwill 49,423 48,366
Software Licensed to Customers 80,332 83,757
Acquired Intangible Assets 34,738 35,315
Other Assets 85,803 86,916
---------- ----------
Total Automotive Solutions Assets 722,898 708,055
---------- ----------
FINANCIAL SERVICES ASSETS
Cash 744 901
Finance Receivables 347,310 351,649
Other Assets 672 262
---------- ----------
Total Financial Services Assets 348,726 352,812
---------- ----------
TOTAL ASSETS $1,071,624 $1,060,867
========== ==========
AUTOMOTIVE SOLUTIONS LIABILITIES
Current Liabilities
Accounts payable $ 38,366 $ 41,313
Accrued liabilities 52,543 55,323
Deferred revenues 31,157 27,871
Income taxes 29,184 14,838
---------- ----------
Total current liabilities 151,250 139,345
Long-Term Debt 102,369 103,512
Other Liabilities 85,673 81,983
---------- ----------
Total Automotive Solutions Liabilities 339,292 324,840
---------- ----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 187,545 192,131
Other Liabilities 73,036 74,079
---------- ----------
Total Financial Services Liabilities 260,581 266,210
---------- ----------
SHAREHOLDERS' EQUITY
Capital Stock 348,423 346,352
Accumulated Other Comprehensive Losses (11,967) (13,739)
Retained Earnings 135,295 137,204
---------- ----------
Total Shareholders' Equity 471,751 469,817
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,071,624 $1,060,867
========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(In thousands)
2004 2003
--------- ---------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided By Operating Activities $ 37,511 $ 56,545
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (500) (11,625)
Capital expenditures (5,666) (18,115)
Net proceeds from asset sales 1,702 9,727
Repayments from financial services 3,461 8,201
--------- ---------
Net cash flows used for investing activities (1,003) (11,812)
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Principal payments on debt 0 (5,275)
Capital stock issued 4,959 13,702
Capital stock repurchased (20,743) (36,007)
--------- ---------
Net cash flows used for financing activities (15,784) (27,580)
--------- ---------
Effect of Exchange Rate Changes on Cash 1,413 2,124
--------- ---------
Increase in Cash and Equivalents 22,137 19,277
Cash and Equivalents, Beginning of Period 116,792 105,829
--------- ---------
Cash and Equivalents, End of Period $ 138,929 $ 125,106
========= =========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 4,245 $ 5,573
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (33,613) (36,696)
Collections on finance receivables 37,258 37,798
--------- ---------
Net cash flows provided by investing activities 3,645 1,102
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 12,000 5,399
Principal payments on debt (16,586) (4,030)
Repayments to automotive solutions (3,461) (8,201)
--------- ---------
Net cash flows used for financing activities (8,047) (6,832)
--------- ---------
Decrease in Cash and Equivalents (157) (157)
Cash and Equivalents, Beginning of Period 901 722
--------- ---------
Cash and Equivalents, End of Period $ 744 $ 565
========= =========
See Notes to Condensed Consolidated Financial Statements.
5
THE REYNOLDS AND REYNOLDS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet as of September 30, 2004 is condensed financial information
taken from the annual audited financial statements. The interim financial
statements are unaudited. In the opinion of management, the accompanying interim
financial statements contain all significant adjustments necessary to present
fairly the company's financial position, results of operations and cash flows
for the periods presented. These interim financial statements should be read in
conjunction with the audited financial statements included in the company's 2004
Annual Report on Form 10-K.
(2) INVENTORIES
12/31/04 9/30/04
--------- ---------
Finished products $ 12,323 $ 12,420
Work in process 538 314
Raw materials 287 109
--------- ---------
Total inventories $ 13,148 $ 12,843
========= =========
(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.
In 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 December 31,
2004, the company has recorded goodwill of $6,681 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. During December 2004, the company paid an additional $500
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 $1,300 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 December 31, 2004, the company has recorded tax deductible
goodwill of $3,649 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.
6
(4) GOODWILL AND ACQUIRED INTANGIBLE ASSETS
GOODWILL
Software
Solutions Documents Totals
--------- --------- --------
Balances as of September 30, 2004 $ 45,489 $ 2,877 $ 48,366
Business Combinations 500 500
Foreign Currency Translation 557 557
--------- --------- --------
Balances as of December 31, 2004 $ 46,546 $ 2,877 $ 49,423
--------- --------- --------
ACQUIRED INTANGIBLE ASSETS
Weighted
Average
Gross Accumulated Life
Amount Amortization (years)
------- ------------ --------
AS OF DECEMBER 31, 2004
Amortized intangible assets
Contractual customer relationship $33,100 $ 7,723 20
Trademarks 6,296 1,460 19
Other 7,094 2,569 10
------- ------------
Total $46,490 $ 11,752 18
======= ============
AS OF SEPTEMBER 30, 2004
Amortized intangible assets
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
======= ============
Aggregate amortization expense was $675 for the three months ended December 31,
2004. Estimated amortization expense for the years ended September 30, is $2,636
in 2005, $2,636 in 2006, $2,486 in 2007, $2,486 in 2008 and $2,486 in 2009.
(5) 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 $2,465 at
December 31, 2004, and $3,621 at September 30, 2004, and was included in
Automotive Solutions' other assets on the condensed 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.
FINANCIAL SERVICES
On May 19, 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 up to
$150,000 using finance receivables purchased from Reyna Capital Corporation,
also a consolidated affiliate of the company, as security for the loan. Interest
is payable on a variable rate basis. This loan funding agreement is renewable
through January 23, 2006. As of December 31, 2004, Reyna Funding, L.L.C. had
outstanding borrowings of $112,000 under this arrangement.
The fair value of the company's cash flow derivative instruments was a $387
asset at December 31, 2004 and a $128 liability at September 30, 2004 and was
included in Financial Services' other assets and other liabilities on the
condensed consolidated balance sheets. The adjustments to record the net change
in the fair value of cash flow hedges during the
7
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 expects the amounts to be
reclassified out of other comprehensive income into earnings to be immaterial to
the financial statements.
REVOLVING CREDIT AGREEMENT
The company has a $200,000 revolving credit agreement. The revolving credit
agreement has a five year term expiring on April 8, 2009. Automotive Solutions
and Financial Services share this revolving credit agreement. As of December 31,
2004, the balance outstanding on this facility was $50,000.
(6) COMPREHENSIVE INCOME
THREE MONTHS
2004 2003
------- -------
Net income $21,354 $23,822
Foreign currency translation adjustment 1,413 2,124
Net unrealized gains on derivative contracts,
net of income tax provisions of $239 at 12/31/04
and $334 at 12/31/03 359 478
------- -------
Comprehensive income $23,126 $26,424
======= =======
8
(7) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
THREE MONTHS
2004 2003
-------- --------
AUTOMOTIVE SOLUTIONS
Net Income $ 19,394 $ 20,857
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and amortization 12,209 11,968
Stock-based compensation expense 1,883 2,591
Deferred income taxes (1,319) (2,147)
Deferred income taxes transferred (from) to Financial Services (2,259) 322
Net (gains) losses on sales of assets (88) 622
Changes in operating assets and liabilities
Accounts receivable 2,298 19,962
Inventories (305) (2,189)
Prepaid expenses and other current assets (2,591) (2,441)
Other assets 453 4,237
Accounts payable (2,947) (7,112)
Accrued liabilities 7,080 5,813
Other liabilities 3,703 4,062
-------- --------
Net Cash Provided by Operating Activities $ 37,511 $ 56,545
======== ========
FINANCIAL SERVICES
Net Income $ 1,960 $ 2,965
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Stock-based compensation expense 20 25
Deferred income taxes (3,966) 4,005
Deferred income taxes transferred to (from) Automotive Solutions 2,259 (322)
Changes in receivables, other assets and other
liabilities 3,972 (1,100)
-------- --------
Net Cash Provided by Operating Activities $ 4,245 $ 5,573
======== ========
9
(8) BUSINESS SEGMENTS
Effective October 1, 2004, the company changed its segment reporting for
consistency with the current organizational structure and how management views
the company's financial results. In fiscal year 2005, the company will report
financial information for 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 reflects the existing management structure with all software solutions
and related services under common leadership. This reporting will provide a
better 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 fiscal year 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 reviews the financial results of
Software Solutions, Documents and Financial Services to measure performance and
allocate resources. There were no changes in the reporting of the Documents and
Financial Services segments. Prior year financial results were restated to
report financial results on a consistent basis with the current year.
The Software Solutions segment provides computer solutions including computer
hardware, integrated software packages, software enhancements and related
support. This segment also includes the 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.
THREE MONTHS
2004 2003
---------- ----------
NET SALES AND REVENUES
Software Solutions
Products
Software $ 113,322 $ 121,537
Hardware 14,269 15,454
Services 67,276 63,324
---------- ----------
Total Software Solutions 194,867 200,315
Documents 37,606 39,688
Financial Services 6,849 8,400
---------- ----------
Total Net Sales and Revenues $ 239,322 $ 248,403
========== ==========
OPERATING INCOME (LOSS)
Software Solutions $ 24,933 $ 27,808
Documents 7,462 3,266
Financial Services 3,209 4,885
---------- ----------
Total Operating Income $ 35,604 $ 35,959
========== ==========
12/31/04 9/30/04
---------- ----------
ASSETS
Automotive Solutions $ 722,898 $ 708,055
Financial Services 348,726 352,812
---------- ----------
Total Assets $1,071,624 $1,060,867
========== ==========
10
(9)CONTINGENCIES
In 2000, the company was named one of many defendants 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 had 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 $712 as of December 31,
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. As of
December 31, 2004, the unamortized balance on this letter of credit was $1,601.
Subsequent to the company's announcement on June 24, 2004, regarding third
quarter earnings, two shareholder class action complaints and two shareholder
derivative claims, subsequently consolidated, were filed in the United States
District Court for the Southern District of Ohio. A third 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. On January 26, 2005, the second
shareholder class action was voluntarily dismissed, 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.
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.
(10) POSTRETIREMENT BENEFITS
THREE MONTHS
PENSION BENEFITS 2004 2003
------- -------
Service cost $ 2,901 $ 2,820
Interest cost 4,568 4,214
Estimated return on plan assets (3,654) (3,183)
Amortization of unrecognized transitional asset 0 65
Amortization of prior service cost 191 196
Recognized net actuarial losses 897 986
Settlements 935
------- -------
Net periodic pension cost $ 5,838 $ 5,098
======= =======
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
Service cost $ 112 $ 166
Interest cost 865 924
Amortization of prior service cost (353) (186)
Recognized net actuarial losses 248 280
------- -------
Net periodic postretirement medical and life insurance cost $ 872 $ 1,184
======= =======
11
During the three months ended December 31, 2004, the company made voluntary
contributions of $317 to its defined benefit pension plans. The company
anticipates additional contributions of $5,983 to its pension plans in fiscal
year 2005 for a total of $6,300.
(11) ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), "Share-Based
Payment." This statement requires that the cost resulting from all share-based
payment transactions are recognized in the financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. 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 123(R) is effective as the
first interim or annual reporting period that ends after June 15, 2005,
effective for the company's third quarter of fiscal 2005. The company is
currently evaluating this pronouncement and does not anticipate a material
impact on the company's results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(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, software enhancements and
computer hardware. Computer services include installation and maintenance of
computer hardware, software training 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 (typically when a perpetual software license is sold) or billed monthly
over the term of the software license agreement. 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 term licenses
and hardware maintenance revenues (i.e. recurring revenues) are invoiced monthly
and recognized ratably over the term of the contract as the software is used or
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.
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 January 4, 2005, the company announced that Finbarr J. O'Neill had been hired
as the company's President and Chief Executive Officer. Mr. O'Neill had
previously been President and Chief Executive Officer of Mitsubishi Motors North
12
America and prior thereto held the same position at Hyundai Motor America. Mr.
O'Neill will also join the company's board of directors. Philip A. Odeen, who
had served as Chairman and Acting Chief Executive Officer since July 2004, will
remain the company's Chairman.
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 has several software solutions which are relatively new
and in the early stages of their lifecycle. In August 2003, the company launched
Reynolds Generations Series (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 segment reporting, reorganization costs and special
items and business combinations 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 Condensed Consolidated
Financial Statements.
SEGMENT REPORTING
Effective October 1, 2004, the company changed its segment reporting for
consistency with the current organizational structure and how management views
the company's financial results. In fiscal year 2005, the company will report
financial information for 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 reflects the existing management structure with all software solutions
and related services under common leadership. This reporting will provide a
better 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 fiscal year 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 reviews the financial results of
Software Solutions, Documents and Financial Services to measure performance and
allocate resources. There were no changes in the reporting of the Documents and
Financial Services segments. Prior year financial results were restated to
report financial results on a consistent basis with the current year. See note 8
to the Condensed Consolidated Financial Statements for more information on
segment reporting.
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 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.
During the three months ended December 31, 2003, the company incurred expense of
$6,246 before taxes ($3,785 or $.05 per share after taxes) for severance,
outplacement, relocation and other plant consolidation efforts. For the twelve
months ended September 30, 2004, the company incurred expense of $7,054 before
taxes ($4,261 or $.06 per share after taxes) for severance, outplacement,
relocation and other plant consolidation efforts and eliminated 230 positions.
The company did not incur any expenses related to this reorganization in the
first quarter of 2005 and does not anticipate incurring additional expenses
related to these efforts in 2005.
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.
13
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.
See Note 3 to the Condensed Consolidated Financial Statements for more
information on business combinations.
CONSOLIDATED SUMMARY
Three Months
---------------------------------------
2004 2003 Change % Change
-------- -------- ------- --------
Net sales and revenues $239,322 $248,403 ($ 9,081) -4%
Gross profit $129,581 $138,587 ($ 9,006) -6%
% of revenues 54.1% 55.8%
SG&A expenses $ 93,977 $102,628 ($ 8,651) -8%
% of revenues 39.2% 41.3%
Operating income $ 35,604 $ 35,959 ($ 355) -1%
% of revenues 14.9% 14.5%
Net income $ 21,354 $ 23,822 ($ 2,468) -10%
Basic earnings per share $ 0.33 $ 0.35 ($ 0.02) -6%
Diluted earnings per share $ 0.33 $ 0.34 ($ 0.01) -3%
Consolidated net sales and revenues declined 4% during the three months ended
December 31, 2004, as revenues declined in all three segments. Software
Solutions revenues declined 3% with growth in professional services being more
than offset by declines in other one-time sales. Software Solutions one-time
sales were less than a strong quarter a year ago. The backlog of new orders for
Software Solutions computer systems products and services and deferred revenues
(orders shipped, but not yet recognized in revenues) was approximately $44,000
at December 31, 2004, the same as September 30, 2004. Last year the order
backlog was reduced to $47,000 at December 31, 2003 from $65,000 at September
30, 2003. Documents sales reflected the exit from low margin products during the
second half of last year. Financial Services revenues reflect both lower average
interest rates and lower average finance receivable balances.
Gross profit declined from last year for the first quarter, primarily because of
the decline in revenues. In the quarter ended December 2004, the company
incurred $2,345 of costs to write-off of software assets that will not be
recovered by estimated future cash flows. The company also incurred $665 of
costs for the consolidation of a service center. Documents gross margins
increased as compared to a year ago because of the productivity gains resulting
from last year's plant consolidation and the elimination of last year's plant
consolidation costs.
Selling General & Administrative (SG&A) expenses declined from last year which
included $4,886 of sales reorganization and consolidation costs. Additional
reductions in SG&A expenses reflect productivity gains from the actions taken a
year ago, as well as lower amortization expenses. Research and development
expenses were approximately $21,000 in the quarter ended December 31, 2004, the
same as last year. No software development costs were capitalized in either
year. See the Software Solutions caption of this analysis for additional
information regarding R&D expenses and software capitalization.
Operating margins were 14.9% in the first quarter of fiscal year 2005, compared
to 14.5% last year. Operating income was essentially flat with a year ago as the
effect of the decline in revenues was offset by fewer costs for asset write-offs
and consolidations than were incurred last year. Operating margins were impacted
by $2,345 of software write-offs and $665 of service center consolidation costs
in the current year and $6,246 of sales reorganization and plant consolidation
costs in the prior year. Other income reflected $934 of increased exchange gains
over last year resulting from movements in foreign currency.
The effective income tax rate was 41.8% for the three months ended December 31,
2004, compared to 34.2% last year. Last year 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 current year effective
income tax rate reflects the greater impact of international operations and
estimated reduced benefits from stock option exercises.
14
SOFTWARE SOLUTIONS
Three Months
----------------------------------------
2004 2003 Change % Change
-------- -------- ------ --------
Net sales and revenues
Recurring revenues $149,442 $150,123 ($ 681) 0%
One-time sales $ 45,425 $ 50,192 ($4,767) -9%
Total net sales and revenues $194,867 $200,315 ($5,448) -3%
Gross profit
Recurring revenues $ 91,860 $ 97,748 ($5,888) -6%
One-time sales $ 10,565 $ 14,476 ($3,911) -27%
Total gross profit $102,425 $112,224 ($9,799) -9%
Gross Margin
Recurring revenues 61.5% 65.1%
One-time sales 23.3% 28.8%
Total gross margin 52.6% 56.0%
SG&A expenses $ 77,492 $ 84,416 ($6,924) -8%
% of revenues 39.8% 42.1%
Operating income $ 24,933 $ 27,808 ($2,875) -10%
% of revenues 12.8% 13.9%
Net sales and revenues declined during the quarter ended December 31, 2004, with
recurring revenues essentially flat and one-time sales declining 9%. Recurring
revenues consist primarily of monthly revenues from software licenses, software
enhancements, telephone support, hardware maintenance, credit services and
network services. One-time sales include revenues from hardware, software
license fees, implementation services (installation and training) and
professional services (consulting). One-time sales declined primarily because of
reduced revenues from the ERA dealer management system. Last year the order
backlog was reduced $18,000 as strong shipments of ERA occurred early in the
quarter and allowed revenue recognition as implementations were completed. As of
December 31, 2004, the order backlog remained the same as at September 30, 2004.
The ERA decline was partially offset by growth in professional services.
Professional services increased because of an increase in the number of active
consultants. Utilization rates were also very high in the first quarter of
fiscal year 2005. Within recurring revenues, growth in web solutions and credit
services was more than offset by declines in hardware maintenance, network
services and from businesses sold (Boatventures.com) or exited (Web
classifieds). Hardware maintenance revenues, while down from last year, were
essentially flat with the fourth quarter of fiscal year 2004. Network services
revenues declined because the company ceased being a reseller of network
circuits. Network services profitability improved as a result of this action.
Gross profit declined primarily because of the decline in revenues. One-time
sales gross margins reflect the decline in revenues related to reducing the
order backlog last year. This decline was partially offset by higher gross
profit margins in professional services as a result of higher revenues and
utilization. Recurring gross profit margins reflect the decline in hardware
maintenance revenues from last year. Additionally, recurring gross profit also
reflects $2,345 of costs to write-off software assets that will not be recovered
by estimated future cash flows. Recurring gross profit also reflected $665 of
costs incurred from the consolidation of a service center into other locations.
These costs will continue in the second quarter until the estimated completion
of the consolidation in March 2005. Additionally, the second quarter will
include duplicate wage costs until work is fully transitioned to the new staffs
at existing locations and the consolidation is completed.
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 company did not capitalize any
software development costs during the three month periods ended December 31,
2004 and 2003. Software amortization expenses (included in cost of sales)
related to RGS Suite were $3,273 in the quarter ended December 31, 2004, the
same as a year ago. As of December 31, 2004, the unamortized balance of software
development costs related to RGS Suite was $73,105. The company believes that
the capitalized costs will be recovered from cash flow from future product
revenues.
SG&A expenses declined almost $7,000 with nearly one-half of the decline related
to consolidation costs incurred last year.
15
The remaining reduction reflects productivity gains from the consolidation and
reduced amortization expenses. Operating income declined from last year
primarily because of the decline in revenues. The impact of software asset
write-offs and consolidation costs in the current year was essentially the same
as consolidation costs incurred last year.
DOCUMENTS
Three Months
---------------------------------------
2004 2003 Change % Change
------- ------- ------ --------
Net sales and revenues $37,606 $39,688 ($2,082) -5%
Gross profit $22,058 $19,880 $2,178 11%
% of revenues 58.7% 50.1%
SG&A expenses $14,596 $16,614 ($2,018) -12%
% of revenues 38.9% 41.9%
Operating income $ 7,462 $ 3,266 $4,196 128%
% of revenues 19.8% 8.2%
During the quarter, Documents sales declined 5% from last year because of a
decrease in the volume of business forms. Almost half of the sales decline
resulted from the company's decision to stop selling low-margin stock continuous
and copy paper products in the second half of 2004. The company expects the
sales of certain documents to continue to decline as advances in technology
continue.
Gross profit increased over last year primarily because of productivity gains
from last year's consolidation of the Grand Prairie, Texas manufacturing
facility into the Celina, Ohio facility. Last year included consolidation costs
of $1,304 related to closing the Grand Prairie location as well as costs to set
up production capabilities in Celina. No such costs were incurred in 2005.
SG&A expenses declined 12% with about three quarters of the decline because of
sales reorganization and plant consolidation costs of $1,546 incurred last year.
The remainder of the reduction in SG&A expenses related to lower ongoing selling
costs as a result of last year's actions. Operating income increased $4,196 with
$2,850 related to last year's consolidation costs and the remainder from
productivity gains resulting from the consolidation activities. As a result
operating margin increased to nearly 20%, compared to 8% a year ago.
FINANCIAL SERVICES
Three Months
-------------------------------------
2004 2003 Change % Change
------ ------ ------ --------
Net sales and revenues $6,849 $8,400 ($1,551) -18%
Gross profit $5,098 $6,483 ($1,385) -21%
% of revenues 74.4% 77.2%
SG&A expenses $1,889 $1,598 $ 291 18%
% of revenues 27.5% 19.0%
Operating income $3,209 $4,885 ($1,676) -34%
% of revenues 46.9% 58.2%
Financial Services revenues declined 18% with about one-half of the decline
resulting from lower average interest rates and about one-third of the decrease
from lower average finance receivable balances. Average finance receivable
balances declined as a result of lower one-time sales in Software Solutions. The
remaining decline in revenues is related to a reduction in other income,
primarily for lease buyouts.
Gross profit also declined because of the declines in revenues. Interest rate
spreads were 3.9% in the quarter, compared to 4.7% last year. In fiscal year
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 will be required in the future to finance the portfolio
because of the reduced tax benefits.
SG&A expenses increased over last year because of higher bad debt expenses. Bad
debt expenses were $1,050 in the quarter, compared to $750 last year, because of
higher net write-offs than last year. Operating income reflected the decline in
revenues and higher bad debt expenses.
16
LIQUIDITY AND CAPITAL RESOURCES
AUTOMOTIVE SOLUTIONS CASH FLOWS (EXCLUDING FINANCIAL SERVICES)
The company's balance of cash and equivalents was $138,929 at December 31, 2004,
an increase of $22,137 during the quarter. Cash flows from operating activities
were $37,511 during the first quarter and resulted primarily from net income,
adjusted for non cash charges such as depreciation and amortization. Cash flow
from operating activities also reflected a benefit from the timing of first
quarter estimated income tax payments, which were not due until the second
quarter. Cash flows used for investing activities included capital expenditures
of $5,666, partially offset by proceeds from asset sales of $1,702. Fiscal year
2005 capital expenditures (net of proceeds from asset sales) in the ordinary
course of business are anticipated to be about $20,000, including about $10,000
for buildings. Cash flows used for investing activities also included an
additional payment related to the fiscal year 2004 purchase of Third Coast
Media. This payment had been contingent upon meeting certain operating criteria
established at the purchase date. 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 and used to make scheduled debt repayments.
CAPITALIZATION
The company's ratio of total debt (total Automotive Solutions debt) to
capitalization (total Automotive Solutions debt plus shareholders' equity) was
17.8% at December 31, 2004 and 18.1% at September 30, 2004. Remaining credit
available under a committed revolving credit agreement was $150,000 at December
31, 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 May 19, 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 up to
$150,000 using finance receivables purchased from Reyna Capital Corporation,
also a consolidated affiliate of the company, as security for the loan. Interest
is payable on a variable rate basis. This loan funding agreement is renewable
through January 23, 2006. The outstanding borrowings under this arrangement were
included with Financial Services notes payable on the Consolidated Balance
Sheets. As of December 31, 2004, the balance outstanding on this facility was
$112,000.
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 December 31, 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.
See Note 5 to the Condensed Consolidated Financial Statements for additional
disclosures regarding the company's debt instruments.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock Exchange.
There is no principal market for the Class B common shares. The company also has
an authorized class of 60,000 preferred shares with no par value. As of December
31, 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 as described in the company's annual report on
form 10-K for the fiscal year ended September 30, 2004.
Dividends are typically declared each November, February, May and August and
paid in January, April, June and September. Dividends per Class A common share
must be twenty times the dividends per Class B common share and all dividend
payments must be simultaneous. The company has paid dividends every year since
the company's initial public offering in 1961.
During the quarter ended December 31, 2004, the company repurchased 855 Class A
common shares for $20,743 (an
17
average price of $24.26 per share). As of December 31, 2004, the company could
repurchase an additional 1,590 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 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.
18
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. During the three months ended December 31, 2004, the company
contributed $317 to its pension plans. The company anticipates making additional
contributions of $5,983 during the remaining nine months of fiscal year 2005.
See Note 10 to the Consolidated Financial Statements included in Form 10-K for
the fiscal year ended September 30, 2004, 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
$5,838 for the three months ended December 31, 2004, compared to $5,098 last
year. The company's net periodic postretirement medical and life insurance
expense was $872 for the three months ended December 31, 2004, compared to
$1,184 a year ago.
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
4.3% during the quarter ended December 31, 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 the quarter ended December 31, 2004, Reyna Funding, L.L.C. entered into
$22,627 of interest rate swaps to replace maturing interest rate swaps.
As of December 31, 2004, a one percentage point increase in interest rates would
increase annual consolidated interest expense by $1,500 while a one percentage
point decline in interest rates would reduce annual consolidated interest
expense by $1,500. See Note 5 to the Condensed Consolidated Financial Statements
for additional disclosures regarding the
19
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 9% of net sales and revenues during the three months ended December 31,
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 9 to the Condensed Consolidated Financial Statements for a discussion
of the company's contingencies.
ACCOUNTING STANDARDS
See Note 11 to the Condensed Consolidated Financial Statements for a discussion
of the effect of accounting standards that the company has not yet adopted.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this Management's Discussion and Analysis of the Financial
Condition and Results of Operations constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on current expectations, estimates,
forecasts and projections of future company or industry performance based on
management's judgment, beliefs, current trends and market conditions.
Forward-looking statements made by the company may be identified by the use of
words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions. Forward-looking statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions which are difficult to predict. Actual outcomes and results may
differ materially from what is expressed, forecasted or implied in any
forward-looking statement. The company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise. See also the discussion of factors that may affect future
results contained in the company's Current Report on Form 8-K filed with the SEC
on November 3, 2004, which is incorporated herein by reference.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, Reynolds management,
including the Chief Executive Officer and Chief Financial Officer, have
conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this report has been made known to them in a
timely fashion. There have been no significant changes in internal controls, or
in factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 9 to the Condensed Consolidated Financial
Statements of this Quarterly Report on Form 10-Q is incorporated by reference.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES (IN THOUSANDS EXCEPT PER SHARE DATA)
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
December 31, 2004, the company could repurchase an additional 1,590 Class A
common shares under this board of directors' authorization. No other
authorizations for share repurchase were outstanding as of December 31, 2004.
During the three months ended December 31, 2004, the company repurchased 855
Class A common shares for $20,743 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 October 2004 0 $ 00.00 0 2,445
8/12/03 November 2004 200 $ 23.45 200 2,245
8/12/03 December 2004 655 $ 24.51 655 1,590
------ ----
8/12/03 Total Quarter 855 $ 24.26 855
====== ====
ITEM 6. EXHIBITS
10.1 Employment Agreement with Finbarr J. O'Neill
31.1 Certification
31.2 Certification
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.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE REYNOLDS AND REYNOLDS COMPANY
Date February 9, 2005 /s/ FINBARR J. O'NEILL
-----------------------
Finbarr J. O'Neill
President and Chief Executive Officer
Date February 9, 2005 /s/ DALE L. MEDFORD
-------------------
Dale L. Medford
Executive Vice President,
Chief Financial Officer and
Chief Administrative Officer
22