SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

LAYNE CHRISTENSEN COMPANY

(Exact Name of Registrant as Specified in Charter)

Delaware		0-20578		48-0920712
(State or Other Jurisdiction of Incorporation)		(Commission File Number)		(I.R.S. Employer Identification No.)

(Address of Principal Executive Offices)

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CF$ 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c))

 

 

     Layne Christensen Company’s Current Report on Form 8-K filed October 4, 2005, is hereby amended to (i) include the audited financial statements of Reynolds, Inc. as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, 2003 and 2002, together with the reports of BKD, LLP and PricewaterhouseCoopers, LLP with respect thereto, and the unaudited financial statements of Reynolds, Inc. as of September 30, 2005 and for the nine months ended September 30, 2005 and 2004, (ii) include the unaudited pro forma consolidated financial statements of Layne Christensen Company (“Layne,” or the “Company”), pro forma for the merger of Reynolds, Inc. with and into a wholly-owned subsidiary of Layne, for the year ended January 31, 2005, and for the nine months ended October 31, 2005, and (iii) revise the exhibit index as set forth in Item 9.01 (c).

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial statements of businesses acquired.

The audited financial statements of Reynolds, Inc. as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 are included following this Item 9.01(a).

The unaudited financial statements of Reynolds, Inc. as of September 30, 2005 and for the nine months ended September 30, 2005 and 2004 are included following this Item 9.01(a).

Reynolds, Inc.

December 31, 2004, 2003 and 2002

Contents

Independent Accountants’ Report of BKD, LLP			4
Independent Auditors’ Report of PricewaterhouseCoopers LLP			5
Consolidated Financial Statements as of and for the Year Ended December 31, 2004 and Consolidated and Combined Financial Statements as of December 31, 2003 and for the Years Ended December 31, 2003 and 2002
Balance Sheets			6
Statements of Income			7
Statements of Stockholders’ Equity			8
Statements of Cash Flows			9
Notes to Financial Statements			10

Independent Accountants’ Report

Board of Directors and Stockholders
Reynolds, Inc.
Orleans, Indiana

We have audited the accompanying consolidated balance sheets of Reynolds, Inc. as of December 31, 2004 and 2003 and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reynolds, Inc. as of December 31, 2004 and 2003, respectively, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BKD, LLP

February 28, 2005

		1600 W. Bloomfield Road, Suite B		Bloomington, IN 47403-2043		812 336-8550		Fax 812 331-3037
										A member of
bkd.com				Beyond Your Numbers						Moores Rowland International

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Reynolds, Inc.
     and Reynolds Transport Co.:

In our opinion, the accompanying consolidated and combined statements of income, of stockholders’ equity and of cash flows present fairly, in all material respects, the results of operations of Reynolds, Inc. and its subsidiaries and Reynolds Transport Co. (referred to hereafter collectively as the Company) and their cash flows for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

February 28, 2003
Louisville, Kentucky

Reynolds, Inc.
Consolidated and Combined Balance Sheets
December 31, 2004 and 2003

		2004				2003
Assets
Current Assets
Cash and cash equivalents		$	8,805,014			$	4,971,864
Investments			11,726,257				4,940,297
Accounts receivable, net of allowance: 2004 - $482,871; 2003 - $50,000			35,221,074				33,142,544
Costs and estimated earnings in excess of billings on uncompleted contracts			4,706,024				4,768,413
Inventories			2,360,840				2,391,670
Other current assets			17,898				6,333
Total current assets			62,837,107				50,221,121
Investments			3,155,845				1,047,366
Property and Equipment, net			17,991,296				19,861,315
Acquired Intangible Asset, net			1,396,043				1,508,326
		$	85,380,291			$	72,638,128
Liabilities and Stockholders’ Equity
Current Liabilities
Outstanding checks in excess of bank balance		$	755,817			$	—
Current portion of long-term debt			2,682,735				3,465,479
Accounts Payable			10,116,044				8,087,765
Billings in excess of costs and estimated earnings on uncompleted contracts			16,502,269				14,610,744
Accrued compensation			2,119,583				1,354,910
Other accrued expenses			1,056,772				543,800
Total current liabilities			33,233,220				28,062,698
Long-Term Debt			2,791,615				4,823,852
Deferred Income Taxes			—				1,141,000
Stockholders’ Equity
Common Stock, no-par value; authorized shares: 1,000,000 – 2004 and 1,001,000 – 2003; issued shares: 476,700 – 2004 and 459,720 – 2003			4,188,359				1,695,000
Retained Earnings			45,167,097				36,915,578
			49,355,456				38,610,578
		$	85,380,291			$	72,638,128

See Notes to Consolidated and Combined Financial Statements.

Reynolds, Inc.
Consolidated and Combined Statements of Income
Years Ended December 31, 2004, 2003 and 2002

		2004				2003				2002
Contract Revenue Earned		$	176,961,264			$	159,434,332			$	165,867,068
Cost of Revenue Earned			157,891,315				141,869,749				145,352,352
Gross Profit			19,069,949				17,564,583				20,514,716
General and Administrative Expenses			9,776,624				9,232,296				9,305,754
Operating Income			9,293,325				8,332,287				11,208,962
Other Income (Expense)
Gain on sale of property and equipment			56,133				81,415				67,471
Interest income			193,567				190,966				378,048
Interest expense			(263,919	)			(314,503	)			(256,156	)
			(14,219	)			(42,122	)			189,163
Income Before Income Taxes			9,279,106				8,290,165				11,398,325
Provision (Benefit) for Income Taxes			(1,351,272	)			1,515,000				—
Net Income		$	10,630,378			$	6,775,165			$	11,398,325
Basic Earnings Per Share		$	22.30			$	14.74			$	25.03

See Notes to Consolidated and Combined Financial Statements.

Reynolds, Inc.
Consolidated and Combined Statements of Stockholders’ Equity
Years Ended December 31, 2004, 2003 and 2002

		Common Stock Issued								Retained
		Shares				Amount				Earnings				Total
Balance, January 1, 2002			452,696			$	1,312,600			$	33,028,788			$	33,341,388
Net income			—				—				11,398,325				11,398,325
Stockholders’ distributions			—				—				(9,773,975	)			(9,773,975	)
Common stock issued			1,000				71,000				—				71,000
Stock options exercised			3,249				136,450				—				136,450
Common stock repurchased			(1,600	)			(24,000	)			(89,600	)			(113,600	)
Balance, December 31, 2002			455,345				1,496,050				33,563,538				35,059,588
Net income			—				—				6,775,165				6,775,165
Stockholders’ distributions			—				—				(3,423,125	)			(3,423,125	)
Common stock issued			500				37,500				—				37,500
Stock options exercised			3,875				161,450				—				161,450
Balance, December 31, 2003			459,720				1,695,000				36,915,578				38,610,578
Net income			—				—				10,630,378				10,630,378
Reorganization shares redeemed			(95	)			(1,000	)			(2,378,859	)			(2,379,859	)
Reorganization shares issued			15,000				2,379,859				—				2,379,859
Common stock issued			325				26,975				—				26,975
Stock options exercised			1,750				87,525				—				87,525
Balance, December 31, 2004			476,700			$	4,188,359			$	45,167,097			$	49,355,456

See Notes to Consolidated and Combined Financial Statements.

Reynolds, Inc.
Consolidated and Combined Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002

		2004				2003				2002
Operating Activities
Net income		$	10,630,378			$	6,775,165			$	11,398,325
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			6,524,964				7,151,255				6,609,247
Gain on sale of property and equipment			(56,133	)			(81,415	)			(67,471	)
Deferred income taxes			(1,141,000	)			1,141,000				—
Changes in
Accounts receivable			(2,078,530	)			1,965,413				(584,772	)
Costs and estimated earnings in excess of billings on uncompleted contracts			62,389				284,843				(1,013,645	)
Inventories			30,830				425,009				(774,424	)
Other current assets			(11,565	)			514,133				(113,189	)
Accounts payable			2,028,279				(422,096	)			(1,295,618	)
Billings in excess of costs and estimated earnings on uncompleted contracts			1,891,525				(3,109,223	)			(7,034,561	)
Accrued expenses			1,277,645				(2,153,641	)			(717,741	)
Net cash provided by operating activities			19,158,782				12,490,443				6,406,151
Investing Activities
Proceeds from sale of property and equipment			574,605				917,142				1,401,878
Purchase of property and equipment			(4,065,886	)			(3,383,653	)			(7,726,988	)
Proceeds from held-to-maturity securities			5,335,405				7,561,725				4,628,301
Purchase of held-to-maturity securities			(14,229,844	)			(5,523,015	)			(4,517,429	)
Purchase of acquired intangible asset			—				—				(750,000	)
Net cash used in investing activities			(12,385,720	)			(427,801	)			(6,964,238	)
Financing Activities
Net change of outstanding checks in excess of bank balance			755,817				(2,445,072	)			2,445,072
Borrowings under line-of-credit agreement			—				—				15,902,000
Repayments under line-of-credit agreement			—				—				(16,402,000	)
Principal payments under long-term debt			(3,810,229	)			(3,469,307	)			(2,416,765	)
Proceeds from issuance of notes payable			—				—				3,302,461
Proceeds from common stock issued			26,975				37,500				71,000
Stockholder’s distributions			—				(3,423,125	)			(9,773,975	)
Proceeds from stock options exercised			87,525				161,450				136,450
Common stock retired			—				—				(113,600	)
Net cash used in financing activities			(2,939,912	)			(9,138,554	)			(6,849,357	)
Increase (Decrease) in Cash and Cash Equivalents			3,833,150				2,924,088				(7,407,444	)
Cash and Cash Equivalents, Beginning of Year			4,971,864				2,047,776				9,455,220
Cash and Cash Equivalents, End of Year		$	8,805,014			$	4,971,864			$	2,047,776
Supplemental Cash Flows Information
Interest paid		$	263,919			$	314,503			$	255,666
Additions to property and equipment and long-term debt		$	995,248			$	7,400,747

See Notes to Consolidated and Combined Financial Statements.

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Reynolds, Inc. earns revenues predominately from the construction of water and sewer lines, sewer rehabilitation and water and waste water treatment plants. The Company’s customers are principally municipalities and industrial companies. Construction projects are performed throughout the United States; however, such projects occur primarily in the midwestern and southeastern United States.

The Company’s main office is in Orleans, Indiana with field offices in Birmingham, Alabama; Baytown, Texas; Fairburn, Georgia; Louisville, Kentucky and Indianapolis, Indiana.

The wholly-owned subsidiaries of the Company earn revenues from transportation services, manufacturing of inliner components and royalties and commissions from a license agreement.

Principles of Consolidation

Effective January 2004, Reynolds, Inc. and Reynolds Transport Co. entered into a tax-free reorganization agreement. As a result of this agreement, Reynolds Transport Co. became a wholly-owned subsidiary of Reynolds, Inc. The assets of Reynolds Transport Co. were combined at historical cost with Reynolds, Inc. since the assets were under the common control of Reynolds, Inc.

The 2004 consolidated financial statements include Reynolds, Inc. and its wholly-owned subsidiaries: Reynolds Transport Co., Reynolds Inliner, LLC, Liner Products, LLC, and Inliner Technologies, LLC. Intercompany accounts are eliminated upon consolidation.

The 2003 and 2002 consolidated and combined financial statements, include Reynolds, Inc. (consolidated with its wholly-owned subsidiaries) and Reynolds Transport Co. The companies are commonly controlled and are related in their operation. Intercompany accounts are eliminated in consolidation and combination.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2004, 2003 and 2002 cash equivalents consisted primarily of money market accounts with banks and brokers. At December 31, 2004, the Company’s cash accounts exceeded federally insured limits by approximately $24,055,000.

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Inventory Pricing

Inventories consist of inliner materials, parts and other items. Inventories are stated at the lower of cost or market. Costs of inliner materials are determined using the first-in, first-out (FIFO) method. Costs of parts and other items are determined using the weighted-average method.

Investments

Debt securities for which the Company has the positive intent and ability to hold until maturity are classified as held-to-maturity securities and valued at historical cost, adjusted for amortization of premiums and accretion of discounts computed by the level-yield method. Realized gains and losses, based on the specifically identified cost of the security, are included in net income.

Accounts Receivable

Accounts receivable are based on amounts billed to customers. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.

Construction Joint Ventures

The Company, in the normal conduct of its business, enters into joint bid arrangements with other contractors. The agreements specify each item of the contract to be completed, which party will complete it and the applicable unit price accepted. Further, to the extent there may be profits and losses, each party agrees to look only to its separate segment of the contract and the revenue it generates. The joint venture partner named the sponsor submits all billings to the customer and collects all revenue when due. Such agreements are treated as agency agreements for financial statement purposes; however, both parties to the agreements have joint liability to complete the project.

Property and Equipment

Property and equipment are depreciated over the estimated useful life of each asset. Annual depreciation is primarily computed by the straight-line method for buildings and the declining-balance method for other assets. Depreciation expense was $6,392,681, $7,018,972, and $6,314,038 in 2004, 2003 and 2002, respectively. The lives used for items within each property classification are as follows:

		Years
Buildings			31.5
Construction Equipment			5
Autos and Trucks			5
Office Equipment			7

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Impairment of Long-Lived Assets

At each balance sheet date or as circumstances indicate necessary, a determination is made by management as to whether the value of long-lived assets, including assets to be disposed of, has been impaired. The determination is based on several criteria, including, but not limited to, revenue trends, undiscounted operating cash flows and other operating factors.

Allocation of Equipment Costs

The Company charges each contract for the use of Company-owned equipment based upon pre-established monthly rates. The actual equipment costs, including depreciation, are accumulated separately. The difference between amounts charged to contracts and the actual costs is included in the financial statements within Cost of Revenue Earned.

Acquired Intangible Asset

The Company has recorded an intangible asset related to its investment in a license agreement. Amortization is calculated by the straight-line method over a 15-year life. Annually, the Company assesses the implied fair value of the intangible asset and if it is lower than its carrying amount, the intangible asset is written down to its implied fair value.

Income Taxes

Effective January 1, 2004, the Reynolds Transport Co. became an “S” Corporation. This election resulted in the reversal of the $1,141,000 deferred tax liability and a credit to the provision for income taxes. Previously, deferred tax assets and liabilities were recognized in the Reynolds Transport Co. financial statements for the tax effects of differences between the financial statement and tax bases of assets and liabilities.

The Company’s stockholders have elected to have the Company’s income taxed as an “S” Corporation under provisions of the Internal Revenue Code and a similar section of the state income tax law. Therefore, taxable income or loss is reported to the individual stockholders for inclusion in their respective tax returns and no provision for federal and state income taxes is included in these statements.

Revenue and Cost Recognition

Profits from construction contracts and construction joint ventures are generally recognized by applying percentages of completion for each year to the total estimated profits for the respective contracts. The length of each contract varies, but is typically about one year. The percentages of completion are determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred.

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

When the estimate on a contract indicates a loss, the Company’s policy is to record the entire loss. The cumulative effect of revisions in estimates of total costs or revenue during the course of the work is reflected in the accounting period in which the facts that caused the revision first become known. An amount equal to the costs attributable to unapproved change orders and claims is included in the total estimated revenue when realization is probable. Profit from claims is recorded in the year such claims are resolved. Because of the inherent uncertainties in estimating costs and revenues, it is at least reasonably possible that the estimates used could change in the near term.

Revenues from transportation services are recognized at the time of shipment.

Revenues from manufactured products are recognized on the date goods are shipped from the factory and title is transferred.

Royalty and commission revenues from the KMG license agreement are recognized at the time of service.

Earnings Per Share

Earnings per common share are based upon the weighted average number of common and dilutive equivalent shares outstanding. Options to purchase common stock are included based on the treasury stock method for dilutive earnings per share except when their effect is antidilutive. Options to purchase 6,025, 7,825 and 11,451 shares have been excluded from weighted average shares in 2004, 2003 and 2002, respectively, as their effect was antidilutive.

Stock Option Plan

At December 31, 2004, the Company has a stock-based employee compensation plan, which is described more fully in Note 13. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Years Ended December 31		2004				2003				2002
Net income, as reported		$	10,630,378			$	6,775,165			$	11,398,325
Less: Total stock-based employee compensation cost determined under the fair value based method			(55,000	)			(60,000	)			(10,000	)
Pro forma net income		$	10,575,378			$	6,715,165			$	11,388,325
Earnings per share
Basic – as reported		$	22.30			$	14.74			$	25.03
Basic – pro forma		$	22.18			$	14.61			$	24.99

Disclosure About Fair Value of Financial Instruments

Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Cash and cash equivalents, receivables, accounts payable, bank loans payable and long-term debt have carrying values that approximate fair values. Investment fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities.

Reclassifications

Certain reclassifications have been made to the 2003 and 2002 financial statements to conform to the 2004 financial statement presentation. These reclassifications had no effect on net earnings.

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Note 2: Investments

The amortized cost and approximate fair values of held-to-maturity securities are as follows:

		2004								2003
		Current				Noncurrent				Current				Noncurrent
Corporate debt securities
Amortized cost		$	11,726,257			$	3,155,845			$	4,940,297			$	1,047,366
Unrealized gains			702				809				2,159				—
Unrealized losses			(28,872	)			(16,244	)			(1,802	)			(359	)
Approximate fair value		$	11,698,087			$	3,140,410			$	4,940,654			$	1,047,007

Maturities of held-to-maturity debt investments at December 31, 2004:

		Amortized				Approximate
		Cost				Fair Value
One year or less		$	11,726,257			$	11,698,087
After one through five years			3,155,845				3,140,410
		$	14,882,102			$	14,838,497

Note 3: Accounts Receivable

		2004				2003
Billed		$	21,992,083			$	22,031,987
Retainage			13,333,166				10,770,573
Related party			378,696				389,984
Less allowance for doubtful accounts			(482,871	)			(50,000	)
		$	35,221,074			$	33,142,544

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Note 4: Contracts in Progress

		2004				2003
Costs incurred on uncompleted contracts		$	247,688,410			$	223,041,355
Estimated earnings			16,811,704				13,622,099
			264,500,114				236,663,454
Billings to date			(276,296,359	)			(246,505,785	)
		$	(11,796,245	)		$	(9,842,331	)

Included in the accompanying balance sheet under the following captions:

		2004				2003
Costs and estimated earnings in excess of billings on uncompleted contracts		$	4,706,024			$	4,768,413
Billings in excess of costs and estimated earnings on uncompleted contracts			(16,502,269	)			(14,610,744	)
		$	(11,796,245	)		$	(9,842,331	)

Note 5: Inventories

		2004				2003
Reynolds Inliner, LLC – materials		$	912,935			$	1,005,974
Liner Products, LLC – raw materials			1,096,400				1,021,924
Parts and other			351,505				363,772
		$	2,360,840			$	2,391,670

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Note 6: Property and Equipment

		2004				2003
Land		$	332,926			$	332,926
Buildings			4,312,850				4,312,850
Construction equipment			28,703,238				28,591,881
Autos and trucks			22,819,460				22,818,697
Office equipment			683,805				653,691
Other			100,000				100,000
			56,952,279				56,810,045
Less accumulated depreciation			(38,960,983	)			(36,948,730	)
		$	17,991,296			$	19,861,315

Note 7: Acquired Intangible Asset

The Company holds certain patents and trademarks, acquired from KMG Kanal-Muller-Gruppe GmbH (“KMG”), for the use of certain sewer rehabilitation technology (the “KMG License”). These patents and trademarks were assigned to the Company in conjunction with the cancellation of an agreement with KMG which licensed the technology to the Company. The technology is used in providing the Company’s services and is also sub-licensed to third parties. The intangible asset is being carried at the acquisition cost and is being amortized over fifteen years, the expected economic life of the technology.

The carrying basis and accumulated amortization of the recognized intangible asset at December 31, 2004 and 2003 was:

		2004								2003
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible asset KMG License		$	1,684,249			$	288,206			$	1,684,249			$	175,923

Amortization expense for the years ended December 31, 2004 and 2003 was $112,283. Amortization expense for the year ended December 31, 2002 was $63,640. Estimated amortization expense for each of the following five years is:

2005		$	112,000
2006			112,000
2007			112,000
2008			112,000
2009			112,000

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Note 8: Line of Credit

The Company has a $10,000,000 revolving line of credit expiring on June 30, 2006. At December 31, 2004, 2003 and 2002, there were no borrowings against this line. The line is collateralized by substantially all of the Company’s assets. Interest varies with the bank’s prime rate, which was 5% on December 31, 2004 and is payable monthly.

The Company also has a $500,000 revolving line of credit due on demand. At December 31, 2004, 2003, and 2002, there were no borrowings against this line. The line is collateralized by substantially all of the Company’s assets. Interest varies with the bank’s prime rate, which was 5% on December 31, 2004 and is payable monthly.

In conjunction with Liner Products, LLC and Inliner Technologies, LLC, Reynolds, Inc. is party to and co-guarantor to a $3,500,000 revolving line of credit expiring in January 2006. At December 31, 2004, 2003 and 2002, there were no borrowings against the line. The line is collateralized by substantially all of the Company’s assets. Interest varies with the bank’s prime rate, which was 5% on December 31, 2004 and is payable monthly.

Note 9: Long-term Debt

		2004				2003
Equipment contracts notes payable (A)		$	1,241,141			$	1,862,248
Notes payable, bank (B)			4,233,209				6,427,083
			5,474,350				8,289,331
Less current maturities			(2,682,735	)			(3,465,479	)
		$	2,791,615			$	4,823,852

Aggregate annual maturities of long-term debt and payments at December 31, 2004 are:

2005		$	2,682,735
2006			1,809,348
2007			982,267
		$	5,474,350

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

The notes payable contain certain covenants including restrictions on the incurrence of additional indebtedness and liens, investments, acquisitions, transfer or sale of assets, transactions with affiliates, payment of dividends and certain financial maintenance covenants, including among others, fixed charge coverage, maximum debt to tangible net worth and minimum ratio of current assets to current liabilities. The Company was in compliance with its covenants as of December 31, 2004.

Note 10: Income Taxes

The provision for income taxes includes these components:

		2004				2003				2002
Taxes currently payable (benefit)		$	(210,272	)		$	374,000			$	—
Deferred income taxes (benefit)			(1,141,000	)			1,141,000				—
Income tax expense (benefit)		$	(1,351,272	)		$	1,515,000			$	—

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

		2004				2003				2002
Computed at the statutory rate (34%)		$	3,154,897			$	2,818,656			$	3,875,430
Increase (decrease) resulting from S corporations and partnership income			(3,154,897	)			(1,860,076	)			(3,875,430	)
State income taxes			(132,570	)			222,420				—
Reversal of federal deferred taxes			(1,047,000	)			—				—
Other			(171,702	)			334,000				—
Actual tax expense (benefit)		$	(1,351,272	)		$	1,515,000			$	—

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

		2004				2003				2002
Deferred tax assets
State income taxes		$	—			$	32,000			$	—
Net operating loss carry forward											257,940
Valuation allowance											(71,323	)
			—				32,000				186,617
Deferred tax liabilities							—
Depreciation			—				(1,173,000	)			(186,617	)
Net deferred tax liability		$	—			$	(1,141,000	)		$	—

The above net deferred tax liability is presented on the balance sheets as follows:

		2004				2003				2002
Deferred tax liability – long-term		$	—			$	(1,141,000	)		$	—

Note 11: Pension and Profit-Sharing Plans

Pension Plan

The Company has a defined-contribution 401(k) plan covering all employees not covered by a collective bargaining agreement. The plan allows employees to contribute up to 15% of their pay on a pre-tax basis. The Company’s funding policy is to annually contribute such amounts as the Company may determine to be appropriate. Contributions to the plan were approximately $159,000, $153,000 and $141,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

The Company also made contributions of approximately $868,000, $892,000, and $920,000 for the years ended December 31, 2004, 2003 and 2002, respectively, to collectively bargained, multi-employer, defined benefit pension plans in accordance with provisions of labor contracts, generally based on the number of hours worked. Under the construction industry exemption provisions of the Multi-employer Pension Plan Amendments Act of 1980, the Company has no withdrawal liability for unfunded vested benefits relating to these plans.

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Note 12: Related Party Transactions

Included in the financial statements are the following amounts that resulted from related party transactions:

		2004				2003				2002
Transactions with Companies related through common ownership:
Accounts receivable		$	324,877			$	350,969			$	230,000
Cost of revenue earned			50,240				47,750				20,650
Transactions with Stockholders:
Accounts receivable			53,819				39,015				52,797
Accounts payable			—				374,645				84,705

Note 13: Employee Stock Option Plan

The Company has a fixed option plan under which key employees are offered stock at fair value (as established by the Board of Directors on a yearly basis) and granted additional stock options at the same price. Typically, an option’s maximum term is four years and not more than 25% of the total stock options may be exercised each year.

     A summary of the status of the plan at December 31, 2004, 2003 and 2002 changes during the years then ended is presented below:

		2004								2003								2002
						Weighted								Weighted								Weighted
						Average								Average								Average
		Shares				Exercise Price				Shares				Exercise Price				Shares				Exercise Price
Outstanding beginning of year			7,825			$	46.43			$	11,451			$	44.11				13,700			$	41.64
Granted			—				—				500				75.00				1,000				74.00
Exercised			(1,750	)			50.01				(3,875	)			41.66				(3,249	)			41.98
Forfeited			—				—				—				—				—				—
Expired			(50	)			61.00				(251	)			71.00				—
Outstanding, end of year			6,025			$	45.27				7,825			$	46.53				11,451			$	44.11
Options exercisable end of year			0								0								0

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

The fair value of options granted is estimated on the date of the grant using the Black-Scholes method with the following weighted-average assumptions :

		2004				2003				2002
Dividend per share		$	—			$	—			$	—
Risk-free interest rate			1.39	%			1.03	%			1.65	%
Expected life of options		4 years				4 years				4 years
Weighted-average fair value of options granted during the year		$	—			$	11.67			$	13.72

The following table summarizes information about stock options under the plan outstanding at December 31, 2004.

		Number				Remaining
Exercise Price		Outstanding				Contractual Life
$40			5,000				5
$61			150				1
$71			500				2
$75			375				3

Note 14: Earnings Per Share

     Earnings per share were computed as follows:

		2004				2003				2002
Net Income		$	10,630,378			$	6,775,165			$	11,398,325
Weighted Average Shares			476,700				459,720				455,345
Basic Earnings Per Share		$	22.30			$	14.74			$	25.03

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Note 15: Lines of Business

The Company groups its operations into two lines of business – Construction and Inliner. The two lines of business operate as and are separate legal entities. The accounting policies for each line are the same as those described in the summary of significant accounting policies.

Financial information for the Company’s lines of business is presented below:

		2004				2003				2002
Contract Revenue Earned
Construction		$	130,166,378			$	118,900,668			$	140,749,860
Inliner			46,794,886				40,533,664				25,117,208
		$	176,961,264			$	159,434,332			$	165,867,068
Intersegment Contract Revenue Eliminated in Consolidation and Combination
Construction		$	6,600,000			$	8,842,188			$	11,051,378
Inliner			7,990,814				8,609,810				3,998,883
		$	14,590,814			$	17,451,998			$	15,050,261
Operating Income
Construction		$	5,320,198			$	5,462,026			$	8,781,523
Inliner			3,973,127				2,870,261				2,427,439
		$	9,293,325			$	8,332,287			$	11,208,962
Total Assets
Construction		$	50,268,960			$	49,294,826
Inliner			19,284,920				16,349,402
Corporate			15,826,411				6,993,900
		$	85,380,291			$	72,638,128

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Total contract revenue earned by line of business before adjustments and eliminations includes both revenue to unaffiliated customers (as reported in the Company’s consolidated and combined statements of income and stockholders’ equity) and intersegment contract revenue. Intersegment contract revenue is accounted for by the same method as contract revenue to unaffiliated customers.

Depreciation and amortization and capital expenditures related to the lines of business are as follows:

		2004				2003				2002
Deprecation and amortization
Construction		$	5,631,584			$	6,272,402			$	6,026,395
Inliner			809,545				784,644				477,339
Corporate			83,835				94,209				105,513
		$	6,524,964			$	7,151,255			$	6,609,247
Capital expenditures
Construction		$	4,496,001			$	9,511,895			$	5,733,487
Inliner			543,227				1,262,999				1,965,801
Corporate			21,906				9,506				27,700
		$	5,061,134			$	10,784,400			$	7,726,988

Operating income is contract revenue earned less cost of revenue earned and general and administrative expenses. In computing operating income, none of the following have been added or deducted; other income (expense) or provision (benefit) for income taxes.

Identifiable assets by line of business are those assets that are used in the Company’s operations in each industry.

Note 16: Significant Estimates and Concentrations

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to calculating the current estimated total costs and revenue of contracts in process are included in Note 1 under the heading Revenue and Cost Recognition. Other matters include the following:

General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company.

Reynolds, Inc.
Notes to Consolidated and Combined Financial Statements
December 31, 2004, 2003 and 2002

Labor Agreement

Approximately 50% of the Company’s employees are covered by collective bargaining agreements. Collective bargaining agreements covering approximately 58% of these employees expire within the next year.

Major Customers

The Company has net sales to two major customers (defined as a customer who provided in excess of 10% of total revenue), which approximated 25% and 9% of net sales in 2004 and 2003, respectively. The Company had no customers which met the definition of major customer in 2002.

Future Change in Accounting Principle

The Financial Accounting Standards Board recently issued Statement No. 123R “Share-Based Payment” which requires the Company to recognize compensation cost for options awards. The Company expects to first apply the new statement during fiscal year ending December 31, 2006 by using a modified version of prospective application. The impact of applying the new statement has not yet been determined.

In November 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This statement clarifies that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs should be classified as a current-period charge. The Statement also requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. The Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has not yet determined the impact that this new pronouncement will have on the Company’s consolidated financial statements.

In December 2004, the FASB issued Statement 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. Statement No. 29 generally provides that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged subject to exception for exchanges involving similar productive assets with a general exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges in periods beginning after June 15, 2005. The Company has not yet determined the impact that this new pronouncement will have on the Company’s consolidated financial statements.

Reynolds, Inc.

Contents

Unaudited Consolidated Financial Statements as of September 30, 2005 and for the nine months ended September 30, 2005 and 2004

Balance Sheet			27
Statements of Income			28
Statements of Cash Flows			29
Notes to Financial Statements			30

Reynolds, Inc.
Unaudited Consolidated Balance Sheet
September 30, 2005

Assets
Current Assets
Accounts receivable, net of allowance: $163,742		$	48,302,325
Costs and estimated earnings in excess of billings on uncompleted contracts			4,838,988
Inventories			2,657,100
Other current assets			351,208
Total current assets			56,149,621
Property and Equipment, net			17,472,865
Acquired Intangible Asset, net			1,311,830
		$	74,934,316
Liabilities and Stockholders’ Equity
Current Liabilities
Outstanding checks in excess of bank balance		$	542,365
Accounts payable			19,180,085
Billings in excess of costs and estimated earnings on uncompleted contracts			10,141,918
Accrued compensation			2,753,448
Other accrued expenses			1,934,556
Total current liabilities			34,552,372
Stockholders’ Equity
Common stock, no-par value ; authorized shares: 1,000,000; issued shares: 478,425			2,638,035
Retained earnings			37,743,909
			40,381,944
		$	74,934,316

See Notes to Consolidated Financial Statements.

Reynolds, Inc.
Unaudited Consolidated Statements of Income
Nine Months Ended September 30, 2005 and 2004

		2005				2004
Contract Revenue Earned		$	150,089,222			$	132,302,053
Cost of Revenue Earned			131,368,986				118,175,349
Gross Profit			18,720,236				14,126,704
General and Administrative Expenses			8,793,644				7,959,961
Operating Income			9,926,592				6,166,743
Other Income (Expense)
Loss on sale of property and equipment			(47,930	)			—
Interest income			320,098				98,715
Interest expense			(114,969	)			(187,967	)
			157,199				(89,252	)
Income Before Income Taxes			10,083,791				6,077,491
Benefit from Income Taxes			—				(1,515,000	)
Net Income		$	10,083,791			$	7,592,491
Basic Earnings Per Share		$	21.08			$	15.93

See Notes to Consolidated Financial Statements.

Reynolds, Inc.
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004

		2005				2004
Operating Activities
Net income		$	10,083,791			$	7,592,491
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			4,361,897				5,035,741
Loss (gain) on sale of property and equipment			36,097				(42,584	)
Deferred income taxes			—				(1,141,000	)
Changes in:
Accounts receivable			(13,081,252	)			(1,548,433	)
Costs and estimated earnings in excess of billings on uncompleted contracts			(170,094	)			(977,289	)
Inventories			(296,260	)			68,812
Other current assets			(333,310	)			948
Accounts payable			9,064,041				2,874,740
Billings in excess of costs and estimated earnings on uncompleted contracts			(6,323,220	)			(1,643,247	)
Accrued expenses			1,511,648				390,789
Net cash provided by operating activities			4,853,338				10,610,968
Investing Activities
Proceeds from sale of property and equipment			202,041				152,850
Purchase of property and equipment			(3,854,928	)			(3,510,835	)
Proceeds from investments			14,882,102				—
Purchase of investments			(755,818	)			(3,453,806	)
Net cash used in investing activities			10,330,935				(6,811,791	)
Financing Activities
Net change of outstanding checks in excess of bank balance			542,366				—
Principal payments under long-term debt			(5,616,812	)			(3,103,684	)
Proceeds from common stock issued			37,200				26,975
Stockholders’ distributions			(19,329,928	)			—
Proceeds from stock options exercised			254,025				87,525
Common stock retired			(18,600	)			—
Net cash used in financing activities			(23,989,287	)			(2,989,184	)
Increase (Decrease) in Cash and Cash Equivalents			(8,805,014	)			809,993
Cash and Cash Equivalents, Beginning of Period			8,805,014				4,971,864
Cash and Cash Equivalents, End of Period		$	—			$	5,781,857
Supplemental Cash Flows Information
Interest paid		$	114,969			$	187,967
Additions to property and equipment and long-term debt		$	142,462			$	752,766

See Notes to Consolidated Financial Statements.

Reynolds, Inc.
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2005 and 2004

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Reynolds, Inc. earns revenues predominately from the construction of water and sewer lines, sewer rehabilitation and water and waste water treatment plants. The Company’s customers are principally municipalities and industrial companies. Construction projects are performed throughout the United States; however, such projects occur primarily in the midwestern and southeastern United States.

The Company’s main office is in Orleans, Indiana with field offices in Birmingham, Alabama; Baytown, Texas; Fairburn, Georgia; Louisville, Kentucky and Indianapolis, Indiana.

The wholly-owned subsidiaries of the Company earn revenues from transportation services, manufacturing of inliner components and royalties and commissions from a license agreement.

On September 28, 2005, the Company was acquired by Layne Christensen Company (“Layne”), a publicly traded company providing services and products to the water resources, mineral exploration, geoconstruction and energy markets. Reynolds will continue to operate as a separate unit within Layne and the acquisition had no effect on the stand alone financial statements of Reynolds.

Principles of Consolidation

Effective January 2004, Reynolds, Inc. and Reynolds Transport Co. entered into a tax-free reorganization agreement. As a result of this agreement, Reynolds Transport Co. became a wholly-owned subsidiary of Reynolds, Inc. The assets of Reynolds Transport Co. were combined at historical cost with Reynolds, Inc. since the assets were under the common control of Reynolds, Inc. The consolidated financial statements include Reynolds, Inc. and its wholly-owned subsidiaries: Reynolds Transport Co., Reynolds Inliner, LLC, Liner Products, LLC, and Inliner Technologies, LLC. Intercompany accounts are eliminated upon consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.

Reynolds, Inc.
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2005 and 2004

Inventory Pricing

Inventories consist of inliner materials, parts and other items. Inventories are stated at the lower of cost or market. Costs of inliner materials are determined using the first-in, first-out (FIFO) method. Costs of parts and other items are determined using the weighted-average method.

Investments

Debt securities for which the Company has the positive intent and ability to hold until maturity are classified as held-to-maturity securities and valued at historical cost, adjusted for amortization of premiums and accretion of discounts computed by the level-yield method. Realized gains and losses, based on the specifically identified cost of the security, are included in net income.

Accounts Receivable

Accounts receivable are based on amounts billed to customers. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.

Construction Joint Ventures

The Company, in the normal conduct of its business, enters into joint bid arrangements with other contractors. The agreements specify each item of the contract to be completed, which party will complete it and the applicable unit price accepted. Further, to the extent there may be profits and losses, each party agrees to look only to its separate segment of the contract and the revenue it generates. The joint venture partner named the sponsor submits all billings to the customer and collects all revenue when due. Such agreements are treated as agency agreements for financial statement purposes; however, both parties to the agreements have joint liability to complete the project.

Property and Equipment

Property and equipment are depreciated over the estimated useful life of each asset. Annual depreciation is primarily computed by the straight-line method for buildings and the declining-balance method for other assets. Depreciation expense was $4,277,685 and $4,951,529, for the nine months ended September 30, 2005 and 2004, respectively. The lives used for items within each property classification are as follows:

		Years
Buildings			31.5
Construction Equipment			5
Autos and Trucks			5
Office Equipment			7

Reynolds, Inc.
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2005 and 2004

Impairment of Long-Lived Assets

At each balance sheet date or as circumstances indicate necessary, a determination is made by management as to whether the value of long-lived assets, including assets to be disposed of, has been impaired. The determination is based on several criteria, including, but not limited to, revenue trends, undiscounted operating cash flows and other operating factors.

Allocation of Equipment Costs

The Company charges each contract for the use of Company-owned equipment based upon pre-established monthly rates. The actual equipment costs, including depreciation, are accumulated separately. The difference between amounts charged to contracts and the actual costs is included in the financial statements within Cost of Revenue Earned.

Acquired Intangible Asset

The Company has recorded an intangible asset related to its investment in a license agreement. Amortization is calculated by the straight-line method over a 15-year life. Annually, the Company assesses the implied fair value of the intangible asset and if it is lower than its carrying amount, the intangible asset is written down to its implied fair value.

Income Taxes

Effective January 1, 2004, the Reynolds Transport Co. became an “S” Corporation. This election resulted in the reversal of the deferred tax liability and a credit to the provision for income taxes. Previously, deferred tax assets and liabilities were recognized in the Reynolds Transport Co. financial statements for the tax effects of differences between the financial statement and tax bases of assets and liabilities.

The Company’s stockholders have elected to have the Company’s income taxed as an “S” Corporation under provisions of the Internal Revenue Code and a similar section of the state income tax law. Therefore, taxable income or loss is reported to the individual stockholders for inclusion in their respective tax returns and no provision for federal and state income taxes is included in these statements.

Revenue and Cost Recognition

Profits from construction contracts and construction joint ventures are generally recognized by applying percentages of completion for each year to the total estimated profits for the respective contracts. The length of each contract varies, but is typically about one year. The percentages of completion are determined by relating the actual costs of work performed to date to the current estimated total costs of the respective contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred.

Reynolds, Inc.
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2005 and 2004

When the estimate on a contract indicates a loss, the Company’s policy is to record the entire loss. The cumulative effect of revisions in estimates of total costs or revenue during the course of the work is reflected in the accounting period in which the facts that caused the revision first become known. An amount equal to the costs attributable to unapproved change orders and claims is included in the total estimated revenue when realization is probable. Profit from claims is recorded in the year such claims are resolved. Because of the inherent uncertainties in estimating costs and revenues, it is at least reasonably possible that the estimates used could change in the near term.

Revenues from transportation services are recognized at the time of shipment.

Revenues from manufactured products are recognized on the date goods are shipped from the factory and title is transferred.

Royalty and commission revenues from the KMG license agreement are recognized at the time of service.

Earnings Per Share

Earnings per common share are based upon the weighted average number of common and dilutive equivalent shares outstanding. Options to purchase common stock are included based on the treasury stock method for dilutive earnings per share except when their effect is antidilutive. There were no dilutive stock options for the nine months ended September 30, 2005 or 2004.

Earnings per share were computed as follows:

		2005				2004
Net Income		$	10,083,791			$	7,592,491
Weighted Average Shares			478,425				476,700
Basic Earnings Per Share		$	21.08			$	15.93

Stock Option Plan

The Company had a stock-based employee compensation plan accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Reynolds, Inc.
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2005 and 2004

		2005				2004
Net income, as reported		$	10,083,791			$	7,592,491
Less: Total stock-based employee compensation cost determined under the fair value based method			(41,000	)			(41,000	)
Pro forma net income		$	10,042,791			$	7,551,491
Earnings per share
Basic – as reported		$	21.08			$	15.93
Basic – pro forma		$	20.99			$	15.84