Reynolds & Reynolds 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

(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 o No þ

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On August 4, 2006, 65,082,746 Class A common shares and 13,500,000 Class B common shares were outstanding.

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

The Reynolds and Reynolds Company

Statements of Consolidated Income (Unaudited)
For the Three and Nine Months Ended June 30, 2006 and 2005
(In thousands except per share data)


	Three Months						Nine Months
				2005						2005
				As Restated						As Restated
	2006			See Note 1			2006			See Note 1
	Amount			Amount			Amount			Amount
Net Sales and Revenue
Products	$	161,887		$	159,534		$	483,042		$	482,720
Services		82,435			80,576			236,127			233,776
Financial services		6,098			6,415			18,397			19,966

Total net sales and revenue		250,420			246,525			737,566			736,462

Cost of sales
Products		54,084			58,232			162,064			173,048
Services		50,612			50,505			151,877			152,979
Financial services		2,515			1,955			7,136			5,584

Total cost of sales		107,211			110,692			321,077			331,611


Gross Profit		143,209			135,833			416,489			404,851
Selling, general and administrative expenses		101,807			98,307			298,904			294,569

Operating Income		41,402			37,526			117,585			110,282


Other Income (Expense)
Interest expense		(2,176	)		(1,562	)		(6,368	)		(4,638	)
Interest income		2,483			1,103			5,715			2,467
Other — net		2,090			391			2,270			1,523

Total other income (expense)		2,397			(68	)		1,617			(648	)

Income Before Income Taxes		43,799			37,458			119,202			109,634
Provision for Income Taxes		(16,576	)		(14,149	)		(46,773	)		(43,260	)
Equity in Net Income of Affiliated Companies		557			487			1,480			1,346

Income Before Cumulative Effect of Accounting Change		27,780			23,796			73,909			67,720
Cumulative Effect of Accounting Change		—			—			1,047			—

Net Income	$	27,780		$	23,796		$	74,956		$	67,720


Earnings per Common Share
Class A common
Basic earnings per common share
Income Before Cumulative Effect of Accounting Change	$	0.44		$	0.38		$	1.18		$	1.06
Cumulative Effect of Accounting Change	$	0.00		$	0.00		$	0.02		$	0.00
Net income	$	0.44		$	0.38		$	1.20		$	1.06
Average number of common shares outstanding		62,584			62,319			61,974			63,044

Diluted earnings per common share
Income Before Cumulative Effect of Accounting Change	$	0.43		$	0.37		$	1.15		$	1.04
Cumulative Effect of Accounting Change	$	0.00		$	0.00		$	0.02		$	0.00
Net income	$	0.43		$	0.37		$	1.17		$	1.04
Average number of common shares outstanding		64,684			64,550			64,062			65,190

Class B common
Basic and Diluted earnings per common share
Income Before Cumulative Effect of Accounting Change	$	0.02		$	0.02		$	0.06		$	0.05
Cumulative Effect of Accounting Change	$	0.00		$	0.00		$	0.00		$	0.00
Net income	$	0.02		$	0.02		$	0.06		$	0.05
Average number of common shares outstanding		13,500			14,000			13,500			14,000

Cash Dividends Declared Per Common Share
Class A common	$	0.11		$	0.11		$	0.33		$	0.33
Class B common	$	0.0055		$	0.0055		$	0.0165		$	0.0165

See Notes to Condensed Consolidated Financial Statements

The Reynolds and Reynolds Company

Condensed Consolidated Balance Sheets (Unaudited)
June 30, 2006 and September 30, 2005
(In thousands)


	6/30/06			9/30/05
Assets
Current Assets
Cash and equivalents	$	130,445		$	133,403
Marketable securities — restricted		101,391			0
Trade accounts receivable (less allowance for doubtful accounts: 6/30/06—$5,065; 9/30/05—$5,071)		104,739			97,026
Other accounts receivables		2,288			2,521
Net finance receivables		122,092			129,032
Inventories		12,056			11,923
Deferred income taxes		13,101			9,522
Prepaid and other assets		40,396			39,859

Total current assets		526,508			423,286
Property, Plant and Equipment, less accumulated depreciation of $151,743 at 6/30/06 and $138,974 at 9/30/05		169,133			175,155
Goodwill		48,769			43,996
Software Licensed to Customers		5,043			4,966
Acquired Intangible Assets		31,740			32,671
Other Intangible Assets		6,677			6,677
Net Finance Receivables		190,965			201,342
Deferred Income Taxes		28,261			20,419
Other Assets		45,589			47,584

Total Assets	$	1,052,685		$	956,096


Liabilities
Current Liabilities
Current portion of long-term debt — Automotive Solutions	$	99,615		$	0
Current portion of long-term debt — Financial Services		38,599			39,261
Accounts payable		36,232			41,424
Accrued compensation and related items		34,210			40,038
Deferred revenue		43,487			40,571
Income taxes		4,059			8,242
Other accrued liabilities		41,012			46,188

Total current liabilities		297,214			215,724

Long-Term Debt — Automotive Solutions		0			100,237
Long-Term Debt — Financial Services		148,033			152,883

Total Long-Term Debt		148,033			253,120

Pensions		62,597			51,324
Postretirement Medical		43,585			42,365
Other Liabilities		14,984			9,077

Total Liabilities		566,413			571,610


Shareholders’ Equity
Capital Stock		437,978			390,441
Accumulated Other Comprehensive Losses		(27,224	)		(27,537	)
Retained Earnings		75,518			21,582

Total Shareholders’ Equity		486,272			384,486


Total Liabilities and Shareholders’ Equity	$	1,052,685		$	956,096

See Notes to Condensed Consolidated Financial Statements

The Reynolds and Reynolds Company

Statements of Consolidated Cash Flows (Unaudited)
For the Nine Months Ended June 30, 2006 and 2005
(In thousands)


	2006			2005
Cash Flows Provided by (Used for) Operating Activities:
Net Income	$	74,956		$	67,720
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change		(1,047	)		0
Depreciation and amortization		22,255			36,059
Provision for doubtful accounts		7,059			8,559
Stock-based compensation		9,985			8,016
Interest rate swap income		(333	)		0
Deferred income taxes		(12,700	)		(24,572	)
Net (gains) losses from sales of assets		264			(724	)
Excess tax benefit from share-based compensation		(1,286	)
Changes in operating assets and liabilities:
Accounts receivable		(10,983	)		(6,078	)
Finance receivables originated		(69,309	)		(66,899	)
Collections on finance receivables		92,324			91,111
Inventories		(117	)		1,217
Prepaid expenses		(939	)		98
Other assets		1,959			(1,609	)
Accounts payable		(4,069	)		3,094
Accrued liabilities		(11,774	)		18,792
Other liabilities		18,099			7,557

Net cash provided by operating activities		114,344			142,341


Cash Flows Provided by (Used for) Investing Activities:
Business combinations		(6,017	)		(1,300	)
Capital expenditures		(14,714	)		(24,260	)
Net proceeds from sales of assets		742			8,411
Capitalization of software licensed to customers		(400	)		0
Purchases of marketable securities — restricted in 2006		(102,972	)		(35,000	)
Sale of marketable securities — restricted in 2006		2,030			72,020
Finance receivables originated		(18,350	)		(19,156	)
Collections on finance receivables		9,310			7,853

Net cash provided by (used for) investing activities		(130,371	)		8,568


Cash Flows Provided by (Used for) Financing Activities:
Additional borrowings		0			27,000
Principal payments on debt		(5,511	)		(24,167	)
Cash dividends paid		(21,020	)		(21,125	)
Capital stock issued		38,418			49,814
Excess tax benefit from share-based compensation		1,286
Capital stock repurchased		(224	)		(120,891	)

Net cash provided by (used for) financing activities		12,949			(89,369	)


Effect of Exchange Rate Changes on Cash		120			826


Increase (Decrease) in Cash and Equivalents		(2,958	)		62,366
Cash and Equivalents — Beginning of Period		133,403			80,673

Cash and Equivalents — End of Period	$	130,445		$	143,039

Non-Cash Capital Expenditures Included in Accounts Payable	$	536

See Notes to Condensed Consolidated Financial Statements

The Reynolds and Reynolds Company

Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands except per share data)

1. Basis of Presentation

The balance sheet as of September 30, 2005 is condensed financial information 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 have been prepared on the basis of accounting principles and practices generally accepted in the United States of America (GAAP) applied consistently with those used in the preparation of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005, except for the accounting change described in Note 3 to the Condensed Consolidated Financial Statements.

Certain information and footnote disclosures normally included in the annual financial statements presented in accordance with GAAP have been condensed or omitted. The consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005.

Throughout this report the Company makes references to Automotive Solutions and Financial Services. Automotive Solutions is comprised of the Company’s Software Solutions and Document segments. Financial Services is comprised of Reyna Capital Corporation, Reyna Funding, L.L.C. and a similar operation in Canada.

The Company restated its prior financial statements to report basic and diluted earnings per share for all classes of common stock. Previously, the Company had not reported earnings per Class B common share. There was no change to earnings per Class A common share.

Revenue Recognition Policy

Automotive Solutions

Revenue from the Company’s multiple element arrangements are primarily accounted for in accordance with the general revenue recognition provisions of Staff Accounting Bulletin Topic 13. 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. The Company’s multiple element arrangements include computer hardware, software licenses, hardware installation services, software training services and recurring maintenance services (which consist of hardware maintenance and software support). The Company applies the guidance of Emerging Issues Task Force Issue (EITF) No. 00-21, “Revenue Arrangements with Multiple Deliverables” to determine its units of accounting and to allocate revenue among those units of accounting.

In a transaction containing a sales-type lease, hardware revenue is recognized at the present value of the payments allocated to the hardware lease element upon the commencement of the lease (when software training services have been performed). Revenue for software, hardware installation services and software training services are recognized, as a combined unit of accounting, as software training services are performed. Software training is typically completed between one and five months after shipment of the hardware.

In a transaction that does not contain a lease, revenue for hardware, software, hardware installation services and software training services are recognized, as a combined unit of accounting, as software training services are performed. Software training is typically completed between one and five months after shipment of the hardware.

Recurring maintenance services are recognized ratably over the contract period as services are performed.

Software revenue which does not meet the criteria set forth in EITF Issue No. 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” are considered service revenue and are recorded ratably over the contract period as services are provided.

Consulting revenue is recorded over the period that services are performed. The Company also provides certain transaction-based services for which it records revenue once services have been performed. Sales of documents products are recorded upon shipment, as title passes to customers.

Financial Services

Financial Services revenue consist primarily of interest earned on financing the Company’s computer systems sales. Revenue is recognized over the lives of financing contracts, generally five years, using the effective interest method.

2. Earnings Per Common Share

Net income is allocated to each class of common stock, with the distributed income allocated based on dividends paid and undistributed income allocated based on contractual rights of the common shareholders. Basic earnings per common share (EPS) is computed by dividing income by the weighted average number of common shares outstanding during the period for each class of common stock. Diluted EPS is computed by dividing income by the weighted average number of common shares and potential common shares outstanding during each period for each class of common stock. The Company’s Class A potential undistributed common shares represent the effect of employee stock options, restricted stock awards and conversion of Class B common shares. There are no Class B potential common shares.


	Three Months				Nine Months
	2006		2005		2006		2005

Allocation of Basic Net Income
Income before accounting change	$	27,780	$	23,796	$	73,909	$	67,720
Less distributed earnings (dividends):
Class A common		13,928		13,861		20,797		20,893
Class B common		149		155		223		232

Undistributed earnings before accounting change		13,703		9,780		52,889		46,595
Cumulative effect of accounting change		0		0		1,047		0

Undistributed earnings	$	13,703	$	9,780	$	53,936	$	46,595


	Class A		Class B		Class A		Class B		Class A		Class B		Class A		Class B
Distributed earnings	$	13,928	$	149	$	13,861	$	155	$	20,797	$	223	$	20,893	$	232
Undistributed earnings		13,557		146		9,671		109		52,319		570		46,083		512

Earnings before accounting change		27,485		295		23,532		264		73,116		793		66,976		744
Cumulative effect of accounting change		0		0		0		0		1,036		11		0		0

Totals	$	27,485	$	295	$	23,532	$	264	$	74,152	$	804	$	66,976	$	744


Allocation of Diluted Net Income
*Income before accounting change*
Numerator used for basic EPS	$	27,485	$	295	$	23,532	$	264	$	73,116	$	793	$	66,976	$	744
Add back: earnings allocated to Class B common shareholder		295				264				793				744

Numerator used for diluted EPS	$	27,780	$	295	$	23,796	$	264	$	73,909	$	793	$	67,720	$	744


*Cumulative effect of accounting change*
Numerator used for basic EPS									$	1,036	$	11
Add back: earnings allocated to Class B common shareholder										11

Numerator used for diluted EPS									$	1,047	$	11


*Net Income*
Numerator used for basic EPS	$	27,485	$	295	$	23,532	$	264	$	74,152	$	804	$	66,976	$	744
Add back: earnings allocated to Class B common shareholder		295				264				804				744

Numerator used for diluted EPS	$	27,780	$	295	$	23,796	$	264	$	74,956	$	804	$	67,720	$	744

Class A

Class B

Class A

Class B

Class A

Class B

Class A

Class B

Average Number of Common Shares and Potential Common Shares Outstanding

Denominator used for basic EPS

62,584

13,500

62,319

14,000

61,974

13,500

63,044

14,000

Effect of employee stock options and restricted stock awards

1,425

1,531

1,413

1,446

Shares issuable upon conversion of Class B common shares

675

700

675

700

Denominator used for diluted EPS

64,684

13,500

64,550

14,000

64,062

13,500

65,190

14,000

Employee stock options and restricted stock awards to acquire 338 shares and 636 shares in the three and nine months ended June 30, 2006, and 746 shares and 1,058 shares in the three and nine months ended June 30, 2005, were not included in the computation of diluted earnings per common share because the effect of the options’ exercise price plus unamortized stock compensation expense, in relation to the average market price of the common shares, would be anti-dilutive.

3. Employee Stock Plans

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” In March 2005, the SEC issued Staff Accounting Bulletin 107, “Share-Based Payment,” to assist companies in the adoption of SFAS No. 123 (revised). SFAS No. 123 (revised) requires that the cost resulting from all share-based payment transactions be 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. Effective October 1, 2005, the Company adopted SFAS No. 123 (revised) using the modified prospective transition method and recorded income of $1,047 (net of income tax benefits of $586), or $.02 per diluted Class A common share, as a cumulative effect of accounting change in the three months ended December 31, 2005, to reflect estimated forfeitures of unvested equity compensation. The Company was already in substantial compliance with SFAS No. 123 (revised) at the adoption date as the standard closely parallels SFAS No. 123. The adoption of SFAS No. 123 (revised) did not have a material impact on stock compensation expense for the periods ended June 30, 2006.

Prior to 2004, the Company awarded incentive stock options and/or nonqualified stock options to purchase Class A common shares to substantially all employees. In February 2004, the shareholders approved the 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive Plan. Since the inception of the 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive Plan, the Company issues fewer stock options.

There are an aggregate of 2,346 Class A common shares reserved for future awards under the incentive stock options and/or nonqualified stock option plans, 2004 REYShare Plus Plan and the 2004 Executive Stock Incentive Plan. Grants of stock options and other stock-based compensation awards are approved by the Compensation Committee of the Company’s Board of Directors.

Net income for the three and nine months ended June 30, 2006 includes $5,247 and $9,985 of compensation expense, respectively, and $2,029 and $3,914 of income tax benefits, respectively, related to our stock-based compensation arrangements. Net income for the three and nine months ended June 30, 2005 includes $2,491 and $8,016 of compensation expense, respectively, and $879 and $3,158 of income tax benefits related to our stock-based compensation arrangements.

Stock Option Plans

The Company valued its stock options granted after October 1, 2005, using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock over the immediately prior period equal in length to the expected life of the option. The expected life of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. Dividend yield is based on current dividends because the Company has not changed its dividend rate in recent years. The risk-free rate is based on the U.S. Treasury rate in effect at the time of the grant for a term equal in length to the expected life of the option. Stock options are generally granted at a price equal to fair market value of the common stock on the date of grant and are exercisable after a period of one to four years and expire between seven and ten years after the date of grant.

Option Valuation Assumptions


	2006			2005

Expected life in years		2.8			3.6
Dividend yield		1.6	%		1.7	%
Risk free interest rate		4.4	%		3.7	%
Volatility		22	%		24	%
Weighted average fair value	$	4.92		$	5.37

The total intrinsic value of options exercised during the three and nine months ended June 30, 2006 was approximately $7,998 and $11,799, respectively, and was approximately $1,616 and $11,131, respectively during the three and nine months ended June 30, 2005. The following table summarizes stock option activity of the plans.


				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Shares			Price		Life in Years		Value

Outstanding at September 30, 2005		6,430		$	22.28
Granted		100		$	27.24
Exercised		(1,736	)	$	22.16
Canceled		(61	)	$	27.10

Outstanding at June 30, 2006		4,733		$	22.36		3.5	$	38,822


Exercisable at June 30, 2006		4,141		$	21.70		3.1	$	36,724

As of June 30, 2006, there was approximately $1,681 of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.1 years.

Cash received from options exercised for the nine months ended June 30, 2006, was $38,418. The actual tax benefit realized for the tax deductions from options exercised totaled $4,260 for the nine months ended June 30, 2006.

Restricted Stock and Restricted Stock Units

The REYShare Plus Plan provides for restricted stock awards to substantially all employees in which the restrictions lapse based on service achievement. Generally these awards are granted with a cliff-vesting period of three years. 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 on service and/or Company performance. These awards vest over one to three years. Performance-based awards require achievement of certain financial targets and may incorporate a performance condition (i.e. revenue growth) or a market condition (i.e. total shareholder return) and may be measured against either predetermined goals or relative performance against a peer group (i.e. S&P Mid-Cap 400).

If a participant of either plan is not employed by the Company on the vesting date, or if the performance condition or market condition is not satisfied, the restricted stock award is forfeited, except potentially in the case of death, attainment of retirement eligibility age, or total permanent disability. 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. The following table summarizes restricted stock award activity of the plans.


	Shares or			Average Grant
	Units			Date Fair Value

Outstanding – Service Achievement Awards
Balance at September 30, 2005		501		$	25.85
Restricted Stock
Granted		185		$	27.69
Canceled		(44	)	$	25.89
Returned		(7	)	$	25.90
Released		(14	)	$	25.90
Restricted Stock Units
Granted		26		$	27.68
Released		(1	)	$	24.74
Canceled		(4	)	$	26.62

Balance at June 30, 2006		642		$	26.44


Outstanding – Performance/Market Condition Awards
Beginning at September 30, 2005		193		$	26.16
Restricted Stock
Granted		431		$	27.72
Canceled		(46	)	$	26.35
Restricted Stock Units
Granted		21		$	27.70
Canceled		(4	)	$	26.08

Balance at June 30, 2006		595		$	27.33

As of June 30, 2006, there was approximately $12,666 of unrecognized compensation cost related to nonvested restricted stock and restricted stock units, which is expected to be recognized over a weighted-average period of 1.3 years. Total fair value of awards vested was $38 and $606 during the three and nine months ended June 30, 2006, respectively, and was $970 and $1,265 during the three and nine months ended June 30, 2005, respectively.

The fair value of each share of restricted stock and restricted stock unit, subject to a service or performance condition, is the market price of the Company’s stock on the date of grant. The fair value of each share of restricted stock and restricted stock unit, subject to a market condition, is determined based on a Monte Carlo simulation. Service-based restricted stock awards are included in compensation expense over the vesting period. Performance-based restricted stock awards that are dependent upon achievement of a performance condition are included in compensation expense based on estimated achievement of the performance condition as of the date of the financial statements. Performance-based restricted stock awards that are dependent upon the achievement of a market condition are included in compensation expense based on estimated achievement of the market condition as of the date on which the award was issued.

Upon exercise of stock options, Class A common shares are issued to employees from treasury shares. Class A common shares are issued from treasury at the date of the restricted stock award. Upon vesting of the restricted stock award, employees will return restricted shares to the Company to meet minimum statutory income tax withholding requirements and the Company will release the remaining shares to employees. Shares withheld by the Company may either be sold on the open market or placed into treasury. Generally, the Company does not sell the withheld shares on the open market. Restricted stock units are handled in the same manner as restricted shares, except that Class A common shares are not issued to employees at the date of the award, but when the vesting requirement has been satisfied.

The Company does repurchase Class A common shares on the open market from time to time. One of the purposes of repurchasing Class A common shares is to offset potential dilution from the Company’s stock compensation plans. However, the Company is under no obligation to repurchase Class A common shares based on activity of stock compensation plans.

4. Comprehensive Income


	Three Months					Nine Months
	2006		2005			2006		2005
Net income	$	27,780	$	23,796		$	74,956	$	67,720
Foreign currency translation adjustment		92		(213	)		120		826
Net unrealized gains (losses) on derivative contracts, net of income tax provisions (benefit) of $56 and ($212) for the three months ended June 30, 2006 and 2005, respectively, and $129 and $343 for the nine months ended June 30, 2006 and 2005, respectively		82		(344	)		192		492

Comprehensive income	$	27,954	$	23,239		$	75,268	$	69,038

5. Reynolds Generations Series® Suite

On July 19, 2005, the Company’s board of directors decided to stop marketing, selling and installing the Reynolds Generations Series Suite (Suite) dealer management system for automobile dealers. For further information regarding this decision, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 21, 2005. During the quarter ended September 30, 2005, as a result of the decision to stop selling Suite, the Company wrote-off capitalized software development costs of $66,558 ($42,191 or $.65 per diluted Class A common share after income taxes) and recorded additional pre-tax expenses of $24,225 ($15,062 or $.23 per diluted Class A common share after income taxes) of which $22,728 remained payable as of September 30, 2005. These additional expenses included estimated future support obligations in excess of estimated revenue, migration costs, sales concessions and associate severance and outplacement benefits. Future support costs represent the costs of the Technical Assistance Center and product development in excess of expected revenue. Sales concessions represent concessions made to Suite customers, primarily in the form of credits issued to reverse training revenue previously recorded and not paid by customers. There were also some cash payments to customers. Migration costs represent the costs to install and train Suite customers on the Company’s core dealer management system, ERA, including data conversion from Suite to ERA. The following table summarizes the activity related to Suite.


Balance as of September 30, 2005	$	22,728
Payments		(5,025	)
Adjustments		598

Balance as of December 31, 2005		18,301
Payments		(4,872	)
Adjustments		1,156

Balance as of March 31, 2006	$	14,585
Payments		(3,113	)
Adjustments		(1,830	)

Balance as of June 30, 2006	$	9,642

The adjustments of $598 for the three months ended December 31, 2005, and $1,156 for the three months ended March 31, 2006, related primarily to additional sales concessions for Suite. During the three months ended June 30, 2006, adjustments of sales concessions of approximately $800 were offset by a reduction of approximately $2,615 in the estimated reserve for future support costs.

6. Inventories


	6/30/06		9/30/05
Finished products	$	11,558	$	11,452
Work in process		335		317
Raw materials		163		154

Total inventories	$	12,056	$	11,923

7. Business Combination

On February 1, 2006, the Company purchased net assets of Kodata Solutions (Kodata), a provider of data archiving solutions used by automobile dealers throughout the U.S. Kodata, based in Little Rock, Arkansas, had annual revenue of approximately $3,000 in 2005. The purchase price of $6,017 was paid with cash from existing balances. The results of Kodata’s operations have been included in the Company’s financial statements since the acquisition. In connection with this business combination, the Company recorded tax deductible goodwill of $4,773 based on the preliminary allocation of the purchase price. An independent appraisal firm is being utilized to assist the Company in determining the fair values of the intangible assets.

8. Goodwill and Acquired Intangible Assets

Goodwill


	Software
	Solutions		Documents		Totals
Balances as of September 30, 2005	$	41,119	$	2,877	$	43,996
Business combination		4,773				4,773

Balances as of June 30, 2006	$	45,892	$	2,877	$	48,769

Acquired Intangible Assets


	Gross		Accumulated
	Amount		Amortization
As of June 30, 2006
Amortized intangible assets
Contractual customer relationships	$	33,600	$	10,227
Trademarks		6,371		2,003
Other		6,287		2,288

Total	$	46,258	$	14,518


As of September 30, 2005
Amortized intangible assets
Contractual customer relationship	$	33,100	$	8,965
Trademarks		6,251		1,715
Other		5,747		1,747

Total	$	45,098	$	12,427

On February 1, 2006, the Company acquired the net assets of Kodata Solutions as discussed in Note 7. Based on a preliminary allocation of the purchase price, the Company recorded the following intangible assets: $500 of customer relationship, $100 of trademarks and $500 of non-compete agreements. These intangible assets will be amortized over 10 years, 3 years and 3 years, respectively. The weighted average life of the Kodata intangible assets is 6 years. Aggregate amortization expense was $742 and $642 for the three months ended June 30, 2006 and 2005, respectively, and $2,092 and $1,956 for the nine months ended June 30, 2006 and 2005, respectively. Estimated amortization expense for the years ended September 30, is $2,780 in 2006, $2,714 in 2007, $2,714 in 2008, $2,580 in 2009 and $2,340 in 2010.

9. Financing Arrangements

Automotive Solutions

During February 2002, the Company entered into $100,000 in notional amount 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 a liability of $363 at June 30, 2006, and an asset of $296 at September 30, 2005, and was included in accrued liabilities and other assets, respectively, 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.

The Company has $100,000 principal amount outstanding of 7% Notes due December 15, 2006 (the “Notes”) under an Indenture (the “Indenture”), dated as of December 15, 1996 between the Company and Wells Fargo Bank, N.A., as successor trustee (the “Trustee”). On February 24, 2006, the Trustee sent the Company a notice of default relating to the Company’s failure to timely file its Annual Report on Form 10-K for the year ended September 30, 2005 with the SEC and the Trustee. The default would have created an Event of Default (as defined under the Indenture) and resulted in the acceleration of the principal and interest of the Notes unless the Event of Default was cured by May 25, 2006. On May 15, 2006, the Company filed its Annual Report on Form 10-K for the year ended September 30, 2005, and cured the Event of Default. On May 25, 2006, the Company purchased $102,972 of U.S. Treasury Securities and deposited these securities in a trust. As of June 30, 2006, the remaining balance of these securities along with interest to be earned, will be sufficient to pay and discharge all remaining payments, aggregating approximately $103,500 of principal and interest under the Notes. Interest and principal payments are being made from this trust. These securities, which are classified as held-to-maturity, and related interest earned are presented as marketable securities – restricted within current assets on the Condensed Consolidated Balance Sheet and the debt remains the Company’s obligation until it is paid on December 15, 2006.

Financial Services

On May 19, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the Company, renewed a loan funding agreement (the “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. On April 25, 2006, the Loan Funding Agreement was extended through December 31, 2006, and the requirement to file financial statements was waived through September 30, 2006. The outstanding borrowings under this arrangement were included with Financial Services long-term debt on the Condensed Consolidated Balance Sheets. As of June 30, 2006, the balance outstanding on this facility was $127,000.

The fair value of the Company’s cash flow derivative instruments was an asset of $1,970 at June 30, 2006 and $1,316 at September 30, 2005, and was included in other assets, on the condensed consolidated balance sheets. The adjustments to record the net change in the fair value of cash flow hedges during the periods presented 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 2006, 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. As of June 30, 2006, the balance outstanding on this facility was $50,000.

The Company’s failure to timely file its Annual Report on Form 10-K for the year ended September 30, 2005, and its Quarterly Report on Form 10-Q for the quarters ended December 31, 2005 and March 31, 2006 (the “Delayed Reports”), and the default under the Indenture was also a default under the credit agreement. Pursuant to an amendment to the credit agreement, on March 16, 2006, the Company extended the date on which it was required to deliver the Delayed Reports and any other periodic reports required to be filed from June 30, 2006 to the earlier of (i) September 30, 2006 or (ii) the date such financial statements are filed with the SEC. On May 15, 2006, the Company filed its Annual Report on Form 10-K for the year ended September 30, 2005. With the filing of the Quarterly Report on Form 10-Q for the quarters ended December 31, 2005 and March 31, 2006, the Company has filed all required periodic financial reports and is now no longer in default. The amendment to the credit agreement also includes a financial covenant which provides that the Company must reach certain liquidity thresholds before it is permitted to enter into certain acquisitions and investments in partnerships and alliances.

10. Postretirement Benefits


	Three Months						Nine Months
	2006			2005			2006			2005

Pension Benefits
Service cost	$	3,175		$	2,899		$	9,525		$	8,704
Interest cost		4,577			4,578			13,730			13,726
Estimated return on plan assets		(4,309	)		(3,891	)		(12,926	)		(11,440	)
Amortization of prior service cost		191			190			573			573
Recognized net actuarial losses		1,319			895			3,957			2,687
Curtailment/Settlements		100			0			856			935
Termination Benefits		0			956			0			1,428

Net periodic pension cost	$	5,053		$	5,627		$	15,715		$	16,613

In 2006, the Company is not required to make a contribution to its pension plan and does not anticipate making such a contribution.


	Three Months						Nine Months
	2006			2005			2006		2005

Postretirement Medical and Life Insurance Benefits
Service cost	$	237		$	111		$	481	$	335
Interest cost		865			863			2,851		2,593
Amortization of prior service cost		656			(354	)		816		(1,060	)
Recognized net actuarial losses		(354	)		248			291		744

Net periodic postretirement medical and life insurance cost	$	1,404		$	868		$	4,439	$	2,612

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a Medicare prescription drug benefit beginning in 2006, as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit at least actuarially equivalent to the Medicare benefit. As a result of the new Medicare part D benefit, during 2005, the Company decided to discontinue offering prescription drug benefits as of January 1, 2006, to its retirees eligible for Medicare. During 2006, the Company reversed that decision and, to qualify for the federal subsidy, continued to provide prescription drug coverage to retirees eligible for Medicare. During 2006, the federal subsidy included as an offset in determining net periodic postretirement medical and life insurance expense was $526 and $1,616 for the three and nine months ended June 30, 2006, respectively. The benefit obligation was increased $15,526 as of October 1, 2005, as a result of the Company’s decision to offer prescription drug coverage to retirees eligible for Medicare.

11. Business Segments

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. Revenue classified as a product include computer hardware and software. Revenue classified as service consist of computer, transaction-based, hosting and rental services. Computer services are comprised of installation, training, consulting and hardware maintenance. Transaction-based services are primarily comprised of credit inquiries made by the Company’s customers. Hosting services represent software applications delivered via remote servers and related services. Rental services consist of operating lease arrangements.

The Documents segment manufactures and distributes printed business forms primarily to automotive retailers. The Company monitors legislative, regulatory, original equipment manufacturer and business environment changes so that contracts and lease documents keep pace with new developments. The Company provides an online portal for automotive

retailers to order documents. The portal also provides automotive retailers the opportunity to order promotional merchandise, apparel, event displays and advertising for 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				Nine Months
	2006		2005		2006		2005
Net Sales and Revenue
Software Solutions
Products
Software	$	108,970	$	106,380	$	327,487	$	319,226
Hardware		12,927		14,382		39,169		44,959
Services
Computer services		47,068		52,268		140,640		156,243
Transaction-based services		18,279		17,393		49,338		48,371
Hosting services		15,807		9,989		42,426		27,390
Rentals		1,281		926		3,723		1,772

Total		204,332		201,338		602,783		597,961
Documents		39,990		38,772		116,386		118,535
Financial Services		6,098		6,415		18,397		19,966

Total Net Sales and Revenue	$	250,420	$	246,525	$	737,566	$	736,462


Operating Income
Software Solutions	$	32,506	$	27,488	$	91,919	$	78,353
Documents		7,514		7,116		20,280		22,793
Financial Services		1,382		2,922		5,386		9,136

Total Operating Income	$	41,402	$	37,526	$	117,585	$	110,282


	6/30/06		9/30/05
Assets
Automotive Solutions	$	763,709	$	666,099
Financial Services		288,976		289,997

Total Assets	$	1,052,685	$	956,096

12. Contingencies

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. 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 expires in 2007. As of June 30, 2006, the unamortized balance on this letter of credit was $1,297. In October 2005, Relizon was acquired by Workflow Management, Inc.

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.

13. Accounting Standard

In June 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and Error Corrections.” The statement applies to all voluntary changes in accounting principle and changes the requirement for accounting for and reporting a change in accounting principle. This statement is a replacement for Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after May 31, 2005. The Company does not anticipate a material impact on the results of operations from the adoption of this pronouncement.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this standard on our Consolidated Financial Statements.

14. Subsequent Events

On August 1, 2006, the Company completed the sale of its Networkcar business for net proceeds of approximately $21,000 and will record a pre-tax gain of approximately $7,000 to $8,000 during the three months ending September 30, 2006.

On July 27, 2006, the Company completed the purchase of DCS Group PLC, a provider of software and services to the European automotive retailing market. DCS had revenue of £35,100 (approximately $60,000 U.S.) for the year ended December 31, 2005. Included in 2005 results was discontinued operations revenue of £8,300 (approximately $14,000 U.S.). The purchase price of approximately £23,600, net of cash acquired, (approximately $44,000 U.S.), including debt of approximately £15,000 and cash of approximately £1,400 (net debt of approximately £13,600 or approximately $25,000 U.S.) was paid with cash from existing balances.

On July 21, 2006, the Company announced a three-year plan encompassing a range of revenue growth initiatives, as well as productivity improvements and cost reductions expected to lower operating expenses by approximately $90,000. The reductions include approximately 450 positions that will be impacted through job eliminations, attrition and outsourcing, including the elimination of approximately 170 positions within 90 days of the announcement. Most of the positions to be eliminated are tied to overhead and management functions within the Company’s Dayton headquarters. The Company expects to incur a charge of approximately $4,000 to $6,000 during the three months ending September 30, 2006, to provide for the costs associated with plan implementation. During fiscal year 2007, the Company expects to incur an additional charge of approximately $8,000 to $10,000 associated with the plan, including a curtailment charge of approximately $5,200 to freeze its company-sponsored, defined-benefit pension plan for U.S. associates effective October 1, 2006.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months ended June 30, 2006 and 2005 (In thousands except employee and per share data and where otherwise indicated)

RECENT DEVELOPMENTS

On August 7, 2006, the Company’s board of directors approved a resolution recommending that shareholders adopt a merger agreement between the Company and an entity controlled by Universal Computers Systems whereby shareholders of the Company will receive $40.00 for each Class A common share, or as if converted into Class A for Class B shares. In addition to shareholder approval, other conditions are required to be satisfied or waived prior to closing including expiration of the Hart Scott Rodino waiting period following review by the U.S. government of any anti-trust issues. It is presently anticipated that the transaction will close during the quarter ended December 31, 2006. As a result of the proposed merger, some of the Company’s announced plans as described below under “Enhanced Shareholder Value Plan,” specifically with respect to streamlining business operations and product support costs, may be delayed or deferred pending the closing of the merger and further discussions with the potential buyer.

COMPANY OVERVIEW
Introduction
How the Company does business

The Company’s primary business is providing integrated software solutions and services to automobile dealers. The Company has provided products and services to automobile dealerships since 1927. The Company’s principal software solution is its ReynoldSystem™ or ERA® dealer management system. This established software application is used by approximately 10,000 automotive dealerships, or approximately 40% of the automobile dealerships in the United States and Canada, to operate the sales, service, parts and administrative areas of their dealerships.

The Company’s primary customers are automobile dealers in the United States and Canada, and thus the Company’s profitability could be adversely affected by negative developments in the automobile market. However, the Company’s financial performance is not necessarily correlated with the number of new vehicles sold by these retailers or the financial performance of the U.S. automobile manufacturers. Automobile dealers have other profit centers such as used vehicles, finance and insurance, service and parts which provide a more consistent revenue stream and a greater proportion of a typical automobile dealer’s income than provided by new vehicle sales. This allows automobile dealers 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 revenue which comprise approximately 60% of the Company’s total revenue. When documents and financial services revenue is included, approximately 80% of the Company’s revenue is recurring in nature. Additionally, much of consulting services revenue tends to be recurring in nature as programs are continued each year. This generally provides a measure of stability and limits the effect of economic downturns on the Company’s financial performance.

The Company’s growth plans, strategy and market opportunities

The Company believes that it can grow its business in the North American market by increasing penetration in the dealer management systems (DMS) market, providing a full range of value-added solutions and services to help dealers to manage their operations more efficiently and effectively and to comply with applicable legal requirements. The Company believes that it can grow its business in the international market by growing its DMS footprint in Europe to achieve scale and to offer value added applications (particularly customer relationship management (CRM) solutions) and services, and by expanding into high growth markets such as China. The Company believes that while automotive retail markets globally are competitive, retailers consistently seek DMS systems and value-added solutions which help them operate more efficiently and capture more revenue in all facets of their operations. The Company believes that it will facilitate its growth globally by realigning its internal resources to improve efficiency and execution thereby reducing costs and creating a more performance driven culture and by investing in more efficient internal management systems. The Company estimates the addressable market in the U.S. is $4.6 billion.

The Company views its DMS business as a cornerstone for growth due to its strong cash generation and its ability to integrate with and build penetration in other value-added applications essential for running its customers’ business operations. The types of opportunities for value-added applications sought by the Company’s customers include CRM tools, financing and insurance (F&I) applications, fixed operations and inventory management solutions and networking.

The Company also offers solutions in the form of services. Opportunities for growth include consulting services, information management and security and CRM services. These types of services include data extraction services and security tools.

The international front, with its fragmented markets, provides multiple opportunities as well. Europe, Asia and Latin America are primary areas of opportunity with estimates of over one hundred thousand retailers and over one million users. The Company believes that these markets will offer opportunities similar in scale to the market in North America. To achieve revenue growth, the Company is examining opportunities in Europe to acquire scale and to deploy new pricing and service models, along with entry into China. The Company believes it is ideally suited to grow in international markets because of its strong position in Canada, its DMS footprint in Europe and its plans for expansion in Asia.

The Company views its documents business as part of its total customer offering and is working on closer alignment with its DMS and systems businesses and the Saturn business opportunity. See “Consolidated Summary.” Plans include a selective expansion of the product offerings and selectively adding to and strengthening its sales force.

Management is also focused on realigning the organization to execute upon its strategic initiatives. This will be done by driving out fixed costs, developing a performance-driven culture and making prudent internal investments to support initiatives.

As indicated, the Company has focused its business on addressing the needs of automobile dealers. This is a highly competitive market where consumers are well-educated and can make informed decisions about with whom to do business when purchasing and servicing an automobile. The Company’s ReynoldSystem, is a single-source, integrated approach to dealership performance addressing automobile dealers’ desire for an integrated, end-to-end solution. This single-source approach helps ensure ease of use, reduced complexity, increased performance and the simplicity of relying on a single partner.

RESULTS OF OPERATIONS

Subsequent Events

Divesture

Business Combination

Enhanced Shareholder Value Plan

This estimated cost savings includes corporate actions targeted to result in savings of approximately $50,000 and include reductions of approximately 450 positions that will be impacted through job eliminations, attrition and outsourcing over the next three years, including the elimination of approximately 170 positions within 90 days of the announcement. These reductions will result from streamlining business operations through the automation of manual processes, consolidating facilities and improving business processes and logistics. In addition, the Company is improving its order processing systems and internal customer relationship management to accelerate sales productivity and customer satisfaction and expects to gain efficiencies through improved standards and scheduling for field support associates. The Company is also making changes to its retirement plans as discussed under the caption “Postretirement Benefits.”

In addition to the corporate actions noted above, the plan also includes a reduction of product-related and support costs totaling approximately $40,000 by 2009. To take advantage of offshore opportunities, the Company has opened an engineering and development center in Xian, China, which is expected to drive significant savings and organizational efficiencies in engineering and development.

Most of the positions to be eliminated are tied to overhead and management functions within the Company’s Dayton headquarters. The Company expects to incur a charge of approximately $4,000 to $6,000 during the three months ending September 30, 2006, to provide for the costs associated with plan implementation. During fiscal year 2007, the Company expects to incur an additional charge of approximately $8,000 to $10,000 associated with the plan, including a curtailment charge of approximately $5,200 to freeze its company-sponsored, defined-benefit pension plan for U.S. associates effective October 1, 2006.

Accounting Change

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” In March 2005, the SEC issued Staff Accounting Bulletin 107, “Share-Based Payment,” to assist companies in the adoption of SFAS No. 123 (revised). SFAS No. 123 (revised) requires that the cost resulting from all share-based payment transactions be 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. Effective October 1, 2005, the Company adopted SFAS No. 123 (revised) and recorded $1,047, or $.02 per Class A common share, of after-tax income as a cumulative effect of accounting change in the quarter ended December 31, 2005, to reflect estimated forfeitures of unvested equity compensation. The adoption of SFAS No. 123 (revised) did not have a material impact on stock compensation expense.

Business Combination

On February 1, 2006, the Company purchased net assets of Kodata Solutions, a provider of data archiving solutions used by automobile dealers throughout the U.S. Kodata, based in Little Rock, Arkansas, had annual revenue of approximately $3,000 in 2005. The purchase price of $6,017 was paid with cash from existing balances. The results of Kodata’s operations have been included in the Company’s financial statements since the acquisition.

Reynolds Generations Series® Suite (Suite)

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 revenue. The Company invested in research and development during recent years to develop new software solutions. In August 2003, the Company launched Suite. On July 19, 2005, the Company’s board of directors decided to stop marketing, selling and installing the Suite dealer management system for automobile dealers. The board of directors concluded that Suite was not the broad-based solution for the majority of the U.S. automotive retail market as originally believed. Suite required substantial change in dealership processes to provide the desired utilization levels and benefits. Implementation and training costs were high for both customers and the Company. For a description of the facts and circumstances leading to the board’s decision, see the Company’s Current Report on Form 8-K filed with the SEC on July 21, 2005. During the quarter ended September 30, 2005, as a result of the decision to stop selling Suite, the Company wrote-off capitalized software development costs of $66,558 ($42,191 or $.65 per diluted Class A common share after income taxes) and recorded additional pre-tax expenses of $24,225 ($15,062 or $.23 per diluted Class A common share after income taxes). These additional expenses included estimated future support obligations in excess of estimated revenue, migration costs, sales concessions and associate severance and outplacement benefits. During the three months ended June 30, 2006, the Company reduced the accrual for future support obligations and recorded income of $2,615 as the Company revised estimates of costs required to support Suite based on actual experience. See Note 5 to the Condensed Consolidated Financial Statements regarding Suite-related accruals.

Consolidated Summary


	Three Months											Nine Months
							Increase		% Increase									Increase		% Increase
	2006			2005			(Decrease)		(Decrease)			2006			2005			(Decrease)		(Decrease)

Net sales and revenue	$	250,420		$	246,525		$	3,895		2	%	$	737,566		$	736,462		$	1,104		0	%
Gross profit	$	143,209		$	135,833		$	7,376		5	%	$	416,489		$	404,851		$	11,638		3	%
% of revenue		*57.2*	%		55.1	%							*56.5*	%		55.0	%
SG&A expenses	$	101,807		$	98,307		$	3,500		4	%	$	298,904		$	294,569		$	4,335		1	%
% of revenue		*40.7*	%		39.9	%							*40.6*	%		40.0	%
Operating income	$	41,402		$	37,526		$	3,876		10	%	$	117,585		$	110,282		$	7,303		7	%
% of revenue		*16.5*	%		15.2	%							*15.9*	%		15.0	%
Income before accounting change	$	27,780		$	23,796		$	3,984		17	%	$	73,909		$	67,720		$	6,189		9	%
Cumulative effect of accounting change	$	0		$	0		$	0				$	1,047		$	0		$	1,047
Net income	$	27,780		$	23,796		$	3,984		17	%	$	74,956		$	67,720		$	7,236		11	%
Earnings per Class A common share
Income before accounting change
Basic earnings per share	$	0.44		$	0.38		$	0.06		16	%	$	1.18		$	1.06		$	0.12		11	%
Diluted earnings per share	$	0.43		$	0.37		$	0.06		16	%	$	1.15		$	1.04		$	0.11		11	%
Net income
Basic earnings per share	$	0.44		$	0.38		$	0.06		16	%	$	1.20		$	1.06		$	0.14		13	%
Diluted earnings per share	$	0.43		$	0.37		$	0.06		16	%	$	1.17		$	1.04		$	0.13		13	%

Consolidated net sales and revenue increased $3,895 or 2% in the quarter ended June 30, 2006, as compared to the corresponding period in 2005, as revenue growth in both Software Solutions and Documents was partially offset by a decline in Financial Services. Year-to-date, 2006 revenue increased $1,104 as growth in Software Solutions was partially offset by decreases in Documents and Financial Services revenue. Segment revenue is discussed in more detail under each segment’s separate caption within this analysis. The 2005 divestiture of the Campaign Management Services business reduced 2006 revenue versus 2005, by approximately $1,100 in the three months ended June 30, 2006 and $4,400 in the nine months ended June 30, 2006. The backlog of new orders for Software Solutions computer systems products and services and deferred revenue (orders shipped, but not yet recognized as revenue) was approximately $59,000 at June 30, 2006, compared to approximately $58,000 at March 31, 2006 and $60,000 at September 30, 2005.

In 2004 and 2005, three of the largest automobile dealership groups selected a single supplier to provide DMS solutions for all their dealerships. One dealership group selected the Company to be its exclusive provider of both DMS and Web solutions. The other two dealership groups chose a competitive DMS solution for their dealerships. In each case, the Company continues to provide substantial document and other solutions to each of these groups. If the Company is not able to continue to replace the net reduction in DMS-related revenue resulting from these three decisions, with revenue from other solutions or net gains from subsequent decisions in favor of the Company by other large dealership groups, the Company’s future revenue may be adversely impacted, albeit over time as the transition to a single source typically takes two to three years. The Company expects that its selection by General Motors, as described below, to supply an integrated dealer management system (IDMS) to all U.S. Saturn retailers, will help mitigate the net losses in revenue from these dealership groups.

On December 15, 2005, the Company announced that it was selected by General Motors to supply IDMS to all Saturn retailers in the U.S. As part of a 7-year agreement (with 2 one-year renewals possible), the Company will convert General Motors approximately 440 Saturn retailers to IDMS. The Company anticipates that implementation will begin in August 2007 and that the conversion process will be completed by May 2008. The Company expects to incur costs in fiscal years 2006 and 2007 to prepare for the implementation. General Motors has the right to terminate the agreement upon 180-days prior written notice to the Company. If General Motors terminates the agreement, they must pay certain defined charges, which may be substantial depending upon the timing of the termination. If the Company fails to meet specified service levels, the Company must pay defined penalties. The Company was also named an endorsed provider of the IDMS solution to GM-branded retailers in North America.

Gross profit increased in 2006, as compared to 2005, for both the three months and nine months ended June 30, 2006, primarily as a result of increased gross profit in Software Solutions. Documents gross profit increased over last year for the three months ended June 30, 2006, but decreased from last year for the nine months ended June 30, 2006. Financial Services gross profit declined from last year for both the three and nine months ended June 30, 2006.

SG&A expenses increased over last year for both the three and nine months ended June 30, 2006, as compared to the corresponding periods in 2005, primarily as a result of higher consulting expenses. Included in these consulting expenses were professional fees of approximately $1,800 in the three months ended June 30, 2006, and $6,400 through nine months ended June 30, 2006, related to completing the Securities and Exchange Commission (SEC) Staff’s review and the Company’s revenue recognition policy review. The SEC and revenue recognition reviews are described in more detail in the Company’s Form 10-K for the year ended September 30, 2005, which was filed with the SEC on May 15, 2006. The Company does not anticipate incurring any additional professional fees related to the SEC and revenue recognition reviews during the quarter ended September 30, 2006. Other consulting expenses related primarily to investments to improve the Company’s order processing and internal customer relationship management systems and processes. Additional consulting expenses related to marketing, business development and employment efforts. These increases were partially offset by the elimination of retirement and other employee separation costs of $3,495 in the three months ended June 30, 2005, and $7,305 in the nine months ended June 30, 2005. Research and development (R&D) expenses also declined from a year ago for both the three and nine months ended June 30, 2006, as a result of the discontinuance of Suite. In 2006, research and development (R&D) expenses were approximately $18,000 in the three months ended June 30, 2006, and $54,000 through nine months ended June 30, 2006, compared to $21,000 and $65,000, respectively, for the same periods in 2005. No internal 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. Through the first nine months of fiscal year 2006, bad debt expenses were approximately $1,200 higher than the corresponding period in 2005.

Operating margins were 16.5% and 15.9% in the three and nine months ended June 30, 2006, respectively, as compared to 15.2% and 15.0% in the corresponding periods in 2005. The increased operating margins resulted primarily from improved gross profit margins in the Software Solutions segment.

Interest expense and interest income each increased in 2006, versus 2005, for both the three and nine months ended June 30, 2006, as a result of rising interest rates. Interest income also increased for the three and nine months ended June 30, 2006, compared to the corresponding periods in 2005, because of increased balances of cash and marketable securities (restricted) as a result of the Company’s decision not to repurchase any of its Class A common shares on the open market. The Company also recorded foreign currency exchange gains of approximately $2,000 and $1,700 during the three and nine months ended June 30, 2006, as compared to

a loss of approximately $400 and a gain of approximately $300 in the corresponding periods in 2005.

Through nine months ended June 30, 2006, the effective income tax rate was 39.2%, compared to 39.5% in the corresponding period in 2005. Each year was favorably impacted by adjustments related to changes in tax laws, expiration of tax exposures previously reserved or revised outlook regarding the utilization of net operating loss carryforwards. In 2006, the effective income tax rate reflects lower state income taxes as a result of a change in the Ohio tax law. Ohio is transitioning from a franchise tax, based primarily on income, and a personal property tax to a commercial activity tax. The Company estimates that if the new tax law had been fully in place for fiscal year 2006, net income would increase by about $1,300 as a result of lower Ohio tax expenses. In the nine months ended June 30, 2006, the Company also recorded income tax benefits of approximately $800 related to the expiration of the statute of limitations on various tax exposures.

Equity in net income of affiliated companies is primarily comprised of the Company’s investment in Computerized Vehicle Registration, which provides on-line vehicle registration to automobile dealers.

Software Solutions


	Three Months												Nine Months
							Increase			% Increase									Increase			% Increase
	2006			2005			(Decrease)			(Decrease)			2006			2005			(Decrease)			(Decrease)
Net sales and revenue
Recurring revenue	$	162,168		$	155,477		$	6,691			4	%	$	474,781		$	457,541		$	17,240			4	%
One-time sales	$	42,164		$	45,861		($	3,697	)		-8	%	$	128,002		$	140,420		($	12,418	)		-9	%
Total net sales and revenue	$	204,332		$	201,338		$	2,994			1	%	$	602,783		$	597,961		$	4,822			1	%
Gross profit
Recurring revenue	$	107,795		$	99,734		$	8,061			8	%	$	315,257		$	287,498		$	27,759			10	%
One-time sales	$	9,334		$	10,247		($	913	)		-9	%	$	25,247		$	35,754		($	10,507	)		-29	%
Total gross profit	$	117,129		$	109,981		$	7,148			6	%	$	340,504		$	323,252		$	17,252			5	%
Gross Margin
Recurring revenue		*66.5*	%		64.1	%								*66.4*	%		62.8	%
One-time sales		*22.1*	%		22.3	%								*19.7*	%		25.5	%
Total gross margin		*57.3*	%		54.6	%								*56.5*	%		54.1	%
SG&A expenses	$	84,623		$	82,493		$	2,130			3	%	$	248,585		$	244,899		$	3,686			2	%
% of revenue		*41.4*	%		40.9	%								*41.3*	%		41.0	%
Operating income	$	32,506		$	27,488		$	5,018			18	%	$	91,919		$	78,353		$	13,566			17	%
% of revenue		*15.9*	%		13.7	%								*15.2*	%		13.1	%

Third quarter net sales and revenue increased $2,994 or 1% in 2006, as compared to the corresponding period in 2005, as recurring revenue increased 4% while one-time sales decreased 8%. In the nine months ended June 30, 2006, net sales and revenue increased $4,822 or 1% in 2006, as compared to the corresponding period in 2005, as recurring revenue grew 4% and one-time sales were 9% less than in the corresponding period in 2005. Recurring revenue consist primarily of monthly revenue from software licenses, software enhancements, telephone support, hardware maintenance, finance and insurance (F&I) services and network services. Recurring revenue increased for both the three and nine month periods ended June 30, 2006, over the corresponding periods in 2005, primarily as a result of revenue growth in F&I services, ERA applications on demand, CRM solutions and Web solutions as a result of increased volume, and the acquisition of Kodata Solutions. Recurring revenue also reflected the effect of the annual price increases of approximately 3%, which became effective March 1, 2006 and 2005. The growth in recurring revenue was partially offset by the effect of the 2005 divestiture of the Campaign Management Services business, which reduced 2006 recurring revenue by approximately $1,100 in the three months ended June 30, 2006 and $4,400 in the nine months ended June 30, 2006, versus the corresponding periods in 2005, and a decline in hardware maintenance revenue for both periods. One-time sales include revenue from hardware, software license fees, implementation services (installation and training) and consulting services. During 2006, one-time sales declined in both the quarter and nine months ended June 30, 2006, primarily because of lower consulting revenue, as a result of delivering fewer days of consulting services, and lower hardware sales.

In addition to the growth in recurring revenue, gross profit increased for both the third quarter and nine months ended June 30, 2006, as compared to the corresponding periods in 2005, because 2005 included Suite software amortization expenses of $3,273 in the third quarter and $9,820 through nine months ended June 30, 2005. The Company did not incur these expenses in 2006 because Suite capitalized software was fully written off during the fourth quarter ended September 30, 2005. During the three months ended June 30, 2006, the Company recorded income of $2,615 to reduce reserves for estimated future Suite support costs based on actual experience. In 2006, recurring gross margins also reflect the benefit of the 2005 consolidation of a service center. In 2005, the Company also wrote off $2,345 of other non-Suite software assets that would not have been recovered by future cash flows,

which reduced gross profit in the first quarter ended December 31, 2004. One-time gross margins, for both the third quarter and nine months ended June 30, 2006, were negatively impacted in 2006 by the decline in consulting services revenue and the resulting lower utilization of consultants.

SG&A expenses increased over last year for both the third quarter and nine months ended June 30, 2006, as compared to the corresponding periods in 2005, primarily as a result of higher consulting expenses. Included in these consulting expenses were professional fees related to completing the SEC Staff’s review and the Company’s revenue recognition policy review. Other consulting expenses related primarily to investments to improve the Company’s order processing and internal customer relationship management systems and processes, marketing, business development and employment efforts. These increases were partially offset by reduced R&D expenses as a result of the discontinuance of Suite and the elimination of retirement and other employee separation costs incurred during the corresponding periods of 2005. Year-to-date bad debt expenses were approximately $1,200 higher in 2006, than in 2005. Operating income increased in 2006, as compared to 2005, for both the quarter and nine months primarily because of the growth in recurring revenue and the elimination of Suite software amortization expenses.

Documents


	Three Months											Nine Months
							Increase		% Increase									Increase			% Increase
	2006			2005			(Decrease)		(Decrease)			2006			2005			(Decrease)			(Decrease)
Net sales and revenue	$	39,990		$	38,772		$	1,218		3	%	$	116,386		$	118,535		($	2,149	)		-2	%
Gross profit	$	22,497		$	21,392		$	1,105		5	%	$	64,724		$	67,217		($	2,493	)		-4	%
% of revenue		*56.3*	%		55.2	%							*55.6*	%		56.7	%
SG&A expenses	$	14,983		$	14,276		$	707		5	%	$	44,444		$	44,424		$	20			0	%
% of revenue		*37.5*	%		36.8	%							*38.2*	%		37.5	%
Operating income	$	7,514		$	7,116		$	398		6	%	$	20,280		$	22,793		($	2,513	)		-11	%
% of revenue		*18.8*	%		18.4	%							*17.4*	%		19.2	%

Documents sales increased $1,218 or 3% for the three months ended June 30, 2006, as compared to the prior year, primarily because of an increase in the volume of business forms sold. The increased volume was primarily driven by sales of retail installment contract forms required by customers as a result of law changes which took effect July 1, 2006. Through nine months ended June 30, 2006, documents revenue declined $2,149 or 2% from the first nine months of 2005, as a result of both lower volume and lower net sales prices. The Company expects the sales of certain documents to continue to decline as the demand for certain paper products is negatively affected by advances in technology. The Company continues to view its documents business as part of its total customer offering and plans a selective expansion of the product offerings and selectively adding to and strengthening its sales force.

During the third quarter ended June 30, 2006, Documents gross profit increased from the corresponding period in 2005, primarily because of increased sales volume. Year-to-date, 2006 gross profit declined from 2005, because of lower net sales prices, in addition to reduced sales volume and increased material costs. In 2006, SG&A expenses increased over 2005, for both the third quarter and nine months ended June 30 because of higher selling expenses. Operating income and operating margins increased in 2006, versus 2005, for both the three months ended June 30 primarily because of the sales increase. Operating income and operating margins declined in 2006, versus 2005, for both the nine months ended June 30 primarily because of the sales decline.

Financial Services


	Three Months												Nine Months
							Increase			% Increase									Increase			% Increase
	2006			2005			(Decrease)			(Decrease)			2006			2005			(Decrease)			(Decrease)
Net sales and revenue	$	6,098		$	6,415		($	317	)		-5	%	$	18,397		$	19,966		($	1,569	)		-8	%
Gross profit	$	3,583		$	4,460		($	877	)		-20	%	$	11,261		$	14,382		($	3,121	)		-22	%
% of revenue		*58.8*	%		69.5	%								*61.2*	%		72.0	%
SG&A expenses	$	2,201		$	1,538		$	663			43	%	$	5,875		$	5,246		$	629			12	%
% of revenue		*36.1*	%		24.0	%								*31.9*	%		26.2	%
Operating income	$	1,382		$	2,922		($	1,540	)		-53	%	$	5,386		$	9,136		($	3,750	)		-41	%
% of revenue		*22.7*	%		45.5	%								*29.3*	%		45.8	%

Financial Services revenue declined in 2006, as compared to 2005, for the quarter ended June 30 as a result of a decrease in average finance receivable balances and for the nine months ended June 30 as a result of a decrease in average finance receivable balances and lower average interest rates. Average finance receivable balances declined for both the quarter and nine months ended June 30, 2006, as compared to the corresponding periods in 2005, as a result of the level of one-time sales in Software Solutions as compared to previous years. The Company’s finance receivables generally have five-year terms, and accordingly, the outstanding balance is comprised of amounts financed during the past five years. While interest rates increased during the nine months ended June 30, 2006, as compared to the corresponding period in 2005, the rates were still lower than the rates on maturing finance receivable balances, and therefore lowered the average interest rate of the receivables portfolio.

Gross profit declined in 2006, as compared to 2005, for both the quarter and nine months ended June 30 because of the decline in revenue and higher borrowing costs. In 2006, interest rate spreads were 2.3% in the third quarter and 2.5% for the nine months ended June 30, compared to 3.4% and 3.6%,respectively, in the corresponding periods in 2005. Interest rate spreads declined in 2006 versus 2005, for the quarter and nine months because of both lower interest earned on finance receivable balances and higher borrowing costs. In fiscal year 2004, the tax treatment for the majority of new 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 receivables balances, additional debt will be required in the future to finance the portfolio because of the reduced tax benefits.

SG&A expenses increased over 2005, in both the third quarter and nine months ended June 30, 2006, compared to the corresponding periods in 2005, because of higher bad debt expenses, which increased to $1,368 in 2006, from $695 in 2005 in the three months ended June 30, and to $3,343 in 2006, from $2,720 in 2005, through nine months ended June 30. Operating income declined from 2005, in the three months and nine months, reflecting primarily declining receivable balances and higher bad debt expenses.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company’s balance of cash and equivalents was $130,445 at June 30, 2006. The Company also had a balance of marketable securities of $101,391 as June 30, 2006, the purpose which was restricted to the retirement of the Company’s $100,000 7% Notes due December 15, 2006. Cash flows provided by operating activities were $114,344 during the first nine months of 2006 and resulted primarily from net income, adjusted for non cash expenses such as depreciation and amortization, and net collections of finance receivables related to the sales of the Company’s products and services. Deferred income tax benefits declined because of the continued decrease in finance receivables and other liabilities reflected an increase in pension liabilities because no contribution payments are required in 2006. Accounts receivable and accrued liabilities represented uses of cash during the nine months ended June 30, 2006, primarily as a result of the revenue growth in the third quarter of 2006 and income tax payments, respectively. Cash flows used for investing activities consisted primarily of the purchase of U.S. Treasury Securities which were deposited in a trust. The amount of these securities, along with interest earned, will be sufficient to pay and discharge all remaining payments, aggregating approximately $103,500 of principal and interest of the Company’s $100,000 7% Notes due December 15, 2006. Additional cash used for investing activities included capital expenditures in the ordinary course of business of $14,714, the acquisition of Kodata Solutions (discussed in Note 7 to the condensed consolidated financial statements) and additional investment in third-party financing arrangements, which represent financing provided to customers for the purchase of non Company products. Capital expenditures in the ordinary course of business are anticipated to be approximately $15,000 to $20,000 in 2006 and approximately $15,000 in 2007. On July 27, 2006, the Company purchased DCS Group PLC, valued at £23,600 (approximately $44,000 U.S.). See the Subsequent Event section of this analysis regarding this business

combination. Cash flows from financing activities resulted primarily from stock option proceeds net of dividends paid. The Company did not repurchase any Class A common shares on the open market during the nine months ended June 30, 2006.

Capitalization

The Company’s ratio of net debt (total debt minus cash and equivalents and marketable securities - restricted) to capitalization (net debt plus shareholders’ equity) was 10.1% at June 30, 2006 and 29.3% at September 30, 2005. The reduction in the ratio of net debt to capitalization resulted from an increase in cash and equivalents and marketable securities – restricted from $133,403 at September 30, 2005 to $231,836 at June 30, 2006. The increase in cash and equivalents and marketable securities – restricted resulted from continued cash flow from operations while the Company has not repurchased Class A common shares on the open market. This calculation includes Financial Services debt for which the proceeds were invested in finance receivables. On April 8, 2004, the Company obtained a $200,000 revolving credit agreement (the “$200,000 Credit Agreement”) with a five-year term. Remaining credit available under the Credit Agreement was $150,000 at June 30, 2006. In addition to the Credit Agreement, the Company also has a variety of other short-term credit lines available. Management estimates that its cash balances, marketable securities - restricted, cash flow from operations and cash available from existing credit agreements will be sufficient to meet the Company’s short-term liquidity requirements. Cash balances are placed in short-term investments until needed.

The Company has consistently produced operating cash flows sufficient to fund normal operations. These operating cash flows result from relatively stable operating margins and a high percentage of recurring revenue which require relatively low capital investment. Debt instruments have been used primarily to fund business combinations and Financial Services receivables. Management believes that its strong balance sheet and cash flows should help provide access to capital sufficient to meet the Company’s long-term liquidity requirements.

The Company has $100,000 principal amount outstanding of 7% Notes due December 15, 2006 (the “Notes”) under an Indenture, dated as of December 15, 1996, between the Company and Wells Fargo Bank, N.A., as successor trustee (the “Trustee”). On May 25, 2006, the Company purchased U.S. Treasury Securities and deposited these securities in a trust. As of June 30, 2006, the remaining balance of these securities along with interest earned will be sufficient to pay and discharge all remaining payments, aggregating approximately $103,500 of principal and interest under the Notes. Future interest and principal payments will be made from this trust.

On May 19, 2004, Reyna Funding, L.L.C., a consolidated affiliate of the Company, renewed a loan funding agreement (the “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. On April 25, 2006, the Loan Funding Agreement was extended through December 31, 2006. The outstanding borrowings under this arrangement were included with Financial Services long-term debt on the Condensed Consolidated Balance Sheets. As of June 30, 2006, the balance outstanding on this facility was $127,000.

See Note 9 to the Condensed Consolidated Financial Statements 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 June 30, 2006, 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, 2005.

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 nine months ended June 30, 2006, and as of the date of this filing, the Company did not repurchase any Class A common shares on the open market. As of June 30, 2006, the Company could repurchase an additional 1,874 Class A common shares under existing board of directors’ authorizations. See Part II — Unregistered Sales of Equity Securities and Use of Proceeds.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s Condensed Consolidated Financial Statements and Notes to Condensed 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, revenue 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

The Company’s revenue recognition policy is complex, primarily because the Company sells its solutions under multiple element arrangements. Various elements of these arrangements are accounted for under different accounting literature which requires an allocation of the sales price among the elements utilizing a relative fair value allocation method. The application of the relative fair value allocation method requires the use of professional judgment in obtaining third party or other evidence of fair value for the various elements of its transactions. The timing of revenue recognition requires the use of estimates. For example, the Company must estimate the amount of software training services that will be required at the time an order is contracted. This estimate is used to recognize revenue over the appropriate period, as software training services are performed. The length of the software training services period, as well as the dispersion of training hours within the period, may vary each quarter, depending upon the size and complexity of the transactions. The Company monitors actual experience and updates these estimates each quarter. As of June 30, 2006, software training services typically are completed between one and five months after shipment of hardware.

The Company is in the design phase of implementing additional enterprise resource planning software modules related to processing orders and recognizing revenue. At the same time, the Company is reviewing its go-to-market strategy and contract terms in an effort to simplify the process for both customers and the Company. Once the new system and processes are implemented, the Company anticipates that increased standardization and integration will reduce the amount of time and resources needed to process orders and complete the accounting process. The Company anticipates that it will take approximately twelve to eighteen months to complete the process changes and system implementation.

Automotive Solutions

Revenue from the Company’s multiple element arrangements are primarily accounted for in accordance with the general revenue recognition provisions of Staff Accounting Bulletin Topic 13. 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. The Company’s multiple element arrangements include computer hardware, software licenses, hardware installation services, software training services and recurring maintenance services (which consist of hardware maintenance and software support). The Company applies the guidance of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” to determine its units of accounting and to allocate revenue among those units of accounting.

Recurring maintenance services are recognized ratably over the contract period as services are performed.

Financial Services

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. 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 revenue for each product bears to the total of current and anticipated future gross revenue for that product, or (b) the straight-line method over the remaining estimated economic life of the product, ranging from three to seven years. The unamortized balance of software licensed to customers is compared to its net realizable value 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 the asset is considered impaired, an impairment charge is recorded for the amount by which the unamortized balance of the asset exceeds its net realizable value.

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 Condensed 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, 2005. 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, decreasing the discount rate from 6.25% in fiscal year 2005 to 5.35% in fiscal year 2006. During fiscal year 2006, the Company recorded curtailments related to the settlements of non-qualified pension benefits. As a result, the Company remeasured non-qualified pension expense as of April 1, 2006 and increased the discount rate from 5.35% to 5.75% and will remeasure non-qualified pension expense again as of July 1, 2006 and anticipates another increase in the discount rate from 5.75% to approximately 6.15%. The expected long-term rate of return on plan assets was estimated at 8.25% in fiscal year 2005 and 7.75% in fiscal year 2006. The Company is not required to make minimum contributions to its postretirement plans in fiscal year 2006 and the Company does not anticipate making such contributions. See Note 12 to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2005, for more detailed disclosures regarding postretirement benefits, including relevant assumptions used to determine expense and future obligations. The Company’s net periodic pension expense was $5,053 for the three months ended June 30, 2006, compared to $5,627 for the three months ended June 30, 2005. The Company’s net periodic pension expense was $15,715 for the nine months ended June 30, 2006, compared to $16,613 for the nine months ended June 30, 2005. The Company’s net periodic postretirement medical and life insurance expense was $1,404 for the three months ended June 30, 2006, compared to $868 for the three months ended June 30, 2005. The Company’s net periodic postretirement medical and life insurance expense was $4,439 for the nine months ended June 30, 2006, compared to $2,612 for the nine months ended June 30, 2005. The Company’s net periodic postretirement medical and life insurance expense increased in 2006, for both the three and nine months ended June 30, 2006, primarily as a result of the decision to offer prescription drug coverage to retirees eligible for Medicare.

Effective October 1, 2006, the Company plans to freeze its defined benefit, company-sponsored pension plan for U.S. associates, which will result in a curtailment charge of approximately $5,200 during the first fiscal quarter of 2007. By freezing the plan, the company estimates it will reduce future annual expense by approximately $7,000 per year, based on current actuarial assumptions. The change will allow the company to minimize the financial volatility inherent in accounting for traditional defined benefit pension plans. At the same time the Company plans to double its 401(k) plan match from 50% to 100% of the first six percent contributed by participants. The Company will also establish an annual profit sharing plan through which it will make an additional contribution, tax-deferred, to associates’ 401(k) accounts. The contributions will be determined by the Company’s profitability. In addition, associates 40 years of age and older will receive an annual transitional contribution of up to 3% of base salary to their 401(k) accounts.

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 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 7.1% during both the three and nine months ended June 30, 2006. 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., 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 nine months ended June 30, 2006, Reyna Funding, L.L.C. entered into $48,356 of interest rate swaps associated with new debt issues and to replace maturing interest rate swaps.

As of June 30, 2006, 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 9 to the Condensed Consolidated Financial Statements 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 9% of net sales and revenue during the nine months ended June 30, 2006. In the conduct of its foreign operations, the Company has inter-company 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. During the third quarter of 2006, the Company sold forward foreign currency contracts to limit foreign currency risk on inter-company balances. Also during the quarter ended June 30, 2006, the Company purchased and sold forward currency contracts (which were not designated as hedges for accounting purposes) related to the anticipated purchase of DCS, as discussed in Note 14 to the Condensed Consolidated Financial Statements. As of June 30, 2006, these foreign currency positions were closed and the Company had no foreign currency exchange contracts outstanding. A pre-tax gain of approximately $1,200 was realized in connection with the currency positions taken related to the purchase of DCS. The Company will have additional foreign-based operations in Europe going forward due to the acquisition of DCS which will result in additional exposure to changes in foreign currency exchange rates. Based on the Company’s overall foreign currency exchange rate exposure at June 30, 2006, management believes that a 10% change in currency rates would not have a material effect on the Company’s financial statements.

CONTINGENCIES

See Note 12 to the Condensed Consolidated Financial Statements regarding the Company’s contingencies.

ACCOUNTING STANDARDS

See Note 13 to the Condensed Consolidated Financial Statements regarding the effect of accounting standards that the Company has not yet adopted.

MEANINGFUL CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q 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, including, among others, the following:

	•		the identification by the Company’s management and independent registered public accounting firm of an additional material weakness or the continuation of the existing material weakness in internal control over financial reporting;

	•		the higher cost of borrowing on future debt and the Company’s ability to access the debt markets due to the recent downgrades to the Company’s credit ratings;

	•		the Company’s ability to successfully complete and integrate any acquisitions it pursues,

	•		the Company’s estimates of addressable markets in the U.S. or internationally and the Company’s ability to save costs in the future,

	•		the Company’s ability to execute the three-year revenue growth and cost reduction plans; and

	•		other factors described in this Quarterly Report on Form 10-Q and prior filings of the Company with the SEC.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See the caption entitled “Market Risks” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls & Procedures

As required by Rule 13a-15 under the Securities Exchange Act, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of the chief executive officer and the chief financial officer. Based upon the evaluation conducted by management which included a material weakness in internal control over financial reporting, our chief executive officer and chief financial officer have concluded that, as of June 30, 2006, our disclosure controls and procedures were not effective at a reasonable assurance level. The scope of management’s evaluation excluded Kodata Solutions, which the Company acquired on February 1, 2006 as described in Frequently Asked Question No. 3 (Oct.6, 2004) regarding Release No. 34-47986, “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports”. Accordingly, management’s assessment of the Company’s internal control over financial reporting does not include internal control over financial reporting of Kodata Solutions. This business combination was not material to the Company’s financial statements. The application of GAAP to the Company’s multiple element revenue arrangements (computer hardware, software, hardware installation services, software training services and recurring maintenance services) is complex and management did not have sufficient resources with the requisite expertise to ensure that consideration was allocated appropriately to the various elements within the Company’s multiple element arrangements. Management considers its internal controls over financial reporting an integral component of its disclosure controls and procedures. The Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

When evaluating its disclosure controls and procedures management considered the fact that management’s review of its revenue recognition policy resulted in the inability to timely file the Company’s Annual Report on Form 10-K for the year ended September 30, 2005 and Quarterly Reports on Form 10-Q for the quarters ended December 31, 2005 and March 31, 2006. Additionally, management considered the circumstances that resulted in the restatement related to the balance sheet classification of auction rate securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities;” and the application of GAAP in reporting earnings per Class B common shares in accordance with SFAS No. 128, “Earnings Per Share.” Management evaluated the impact of our inability to timely file our periodic reports with the SEC on our disclosure controls and procedures and has concluded that the material weakness contributed to the inability to timely make these filings.

To address the material weakness described above, management performed additional analysis and other post-closing procedures designed to ensure that the consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial position, results of operations and cash flows for the periods presented.

Remediation Activities

To remediate the material weakness in internal control over financial reporting, management has taken or is taking the following actions:

	•		Partnering with a nationally recognized benchmarking and consulting group to assist management in evaluating the accounting function to determine whether there is adequate staffing, appropriate skill sets and organizational alignment. Management expects to complete this study by September 30, 2006, at which time organizational plans will be developed.

	•		Acquired additional accounting reference materials and working with outside consultants to structure a technical training curriculum for the accounting staff to ensure the staff is aware of and understands the Company’s critical accounting policies as well as new accounting pronouncements and SEC developments. This curriculum will be developed by September 30, 2006.

	•		Implemented a new policy requiring the accounting staff to re-evaluate the Company’s critical accounting policies at least once every three years even if there is no new guidance applicable to critical accounting policies. The Company’s critical accounting policies include revenue recognition. This policy was implemented in April 2006.

Changes in Internal Control Over Financial Reporting

Management has evaluated, with the participation of our chief executive officer and chief financial officer, the changes made in our internal control over financial reporting during the quarter ended June 30, 2006, and has concluded that the changes described following had a material effect or are reasonably likely to have a material effect on our internal control over financial reporting. Over the next twelve to eighteen months, the new procedures will be replaced with more automated procedures as management implements new software and simplifies procedures associated with processing sales orders, invoicing customers and managing field service operations.

During the quarter ended June 30, 2006, in addition to the steps taken to remediate the material weakness, management improved the documentation of its revenue recognition policy. Management also added new procedures associated with accumulating and validating data used to calculate deferred revenue adjustments. This data supports various estimates used to determine revenue, including the allocation of consideration to the elements of the Company’s multiple element arrangements, the period over which software training services are provided and the price dispersion of recurring maintenance services. These changes had a material effect or are reasonably likely to have a material effect on our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The information included in Note 12 to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated by reference.

Item 1A. Risk Factors

During the quarter ended June 30, 2006, there have been no material changes to the risk factors described in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005 except for the following which should supplement the risk factor entitled, “BUSINESS COMBINATIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES” in our Form 10-K for the year ended September 30, 2005, which was filed with the SEC on May 15, 2006:

IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE ANY ACQUISITIONS, OUR PROFITABILITY COULD BE ADVERSELY AFFECTED. We have acquired businesses in the past, and may consider acquiring businesses in the future, that expand our portfolio of products and thereby strengthen our position in the market. Integrating any acquired business requires substantial management, financial and other resources and may pose risks with respect to customer service and market share. Furthermore, integrating an acquisition involves a number of special risks, some or all of which could have a material adverse effect on our business, results of operations and financial condition. These risks include:

	•		unforeseen operating difficulties and expenditures;

	•		difficulties in assimilation of acquired personnel, operations and technologies;

	•		the need to manage a significantly larger and more geographically dispersed business;

	•		impairment of goodwill and other intangible assets;

	•		diversion of management’s attention from ongoing development of our business or other business concerns;

	•		potential loss of customers;

	•		failure to retain key personnel of the acquired businesses;

	•		the use of substantial amounts of our available cash; and

	•		the incurrence of additional indebtedness.

We may not be able to successfully integrate businesses that we acquire. Such acquisitions may not enhance our competitive position, business or financial prospects and could have a material adverse effect on our business, results of operations and financial position.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (in thousands except per share data)

On February 17, 2005, the Company’s board of directors authorized the repurchase of 5,000 Class A common shares. This authorization has no fixed expiration date and was in addition to previously approved authorizations. As of June 30, 2006, the Company could repurchase an additional 1,874 Class A common shares under this board of directors’ authorization. No other authorizations for share repurchase were outstanding as of June 30, 2006. During the three months ended June 30, 2006, the Company did not repurchase any Class A common shares.

Item 4. Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Shareholders on June 15, 2006, the shareholders of the Company voted on and approved the following issues:

Issue 1 Election of Directors


			Shares
Three-year terms Expiring in 2009	Shares For		Withheld
Cleve L. Killingsworth, Jr		71,563,729		1,886,093
Finbarr J. O’Neill		71,762,790		1,687,032
Renato Zambonini		67,475,471		5,974,351

Stephanie W. Bergeron, Dr. David E. Fry, Richard H. Grant, III, Ira D. Hall, Eustace W. Mita and Philip A. Odeen continued as directors of the Company after the meeting.

Broker

For

Against

Abstain

Nonvote

Issue 2 Appointment of Deloitte & Touche LLP as

Independent Registered Public Accounting Firm

68,256,969

4,989,953

202,900

Item 5. Other Information

Item 6. Exhibits

	31.1		Certification of Principal Executive Officer

	31.2		Certification of Principal 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.


		THE REYNOLDS AND REYNOLDS COMPANY

Date August 7, 2006		/s/ Finbarr J. O’Neill Finbarr J. O’Neill
		President and Chief Executive Officer

Date August 7, 2006		/s/ Gregory T. Geswein Gregory T. Geswein
		Senior Vice President and Chief Financial Officer

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		Page
		Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Statements of Consolidated Income (unaudited) For the Three and Nine Months Ended June 30, 2006 and 2005 (Restated)		1

	Condensed Consolidated Balance Sheets (unaudited) As of June 30, 2006 and September 30, 2005		2

	Statements of Consolidated Cash Flows (unaudited) For the Nine Months Ended June 30, 2006 and 2005		3

	Notes to Condensed Consolidated Financial Statements (unaudited)		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations For the Three and Nine Months Ended June 30, 2006 and 2005		14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk (See the caption entitled “Market Risks” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations)		27

Item 4.	Controls and Procedures		27

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		29

Item 1A.	Risk Factors		29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 4.	Submission of Matters to a Vote of Security Holders		30

Item 5.	Other Information		30

Item 6.	Exhibits		30

SIGNATURES			31
EX-31.1
EX-31.2
EX-32.1
EX-32.2