-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OlEUFqkbZb3Bo+7aXkd1vA8NNmcdBPa8G3CuNBAEo8hohweu1RBibVmMDWQW7eoY k5woJOxR/GaU+lPsX3fcHQ== 0000950152-96-006262.txt : 19961122 0000950152-96-006262.hdr.sgml : 19961122 ACCESSION NUMBER: 0000950152-96-006262 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961121 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS & REYNOLDS CO CENTRAL INDEX KEY: 0000083588 STANDARD INDUSTRIAL CLASSIFICATION: MANIFOLD BUSINESS FORMS [2761] IRS NUMBER: 310421120 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10147 FILM NUMBER: 96670461 BUSINESS ADDRESS: STREET 1: 115 S LUDLOW ST CITY: DAYTON STATE: OH ZIP: 45402 BUSINESS PHONE: 5134432000 MAIL ADDRESS: STREET 1: P.O. BOX 2608 CITY: DAYTON STATE: OH ZIP: 45401 10-K405 1 THE REYNOLDS & REYNOLDS COMPANY 10-K405 1 ================================================================================ FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. [FEE REQUIRED] -------------- FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. [NO FEE REQUIRED] ----------------- FOR THE TRANSITION PERIOD FROM _______________ TO _______________. COMMISSION FILE NO. 0-132 THE REYNOLDS AND REYNOLDS COMPANY (Exact name of registrant as specified in its charter) OHIO 31-0421120 (State of Incorporation) (IRS Employer Identification No.) 115 SOUTH LUDLOW STREET DAYTON, OHIO 45402 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 485-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: CLASS A COMMON SHARES PAR VALUE $.625 PER SHARE NEW YORK STOCK EXCHANGE - ----------------------------------------------- ----------------------- (Title of class) (Exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ---- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or in any amendment to this Form 10-K. X --- The aggregate market value of the Class A Common Shares held by non-affiliates of the registrant, as of November 1, 1996, was $2,088,792,381. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of November 1, 1996: Class A Common Shares: 80,983,063 (exclusive of 11,380,329 Treasury shares) Class B Common Shares: 20,000,000 DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ 2 PART I (Dollars In Thousands) ITEM 1. BUSINESS GENERAL The Reynolds and Reynolds Company, an Ohio corporation, incorporated in 1889, operates principally in two business segments -- computer systems and business forms. COMPUTER SYSTEMS The computer systems segment offers its products and services to the automotive and healthcare markets. The company markets turnkey information management systems and professional services primarily to automobile dealers. The hardware portion of the systems come from manufacturers who specialize in platforms for industry-standard operating systems. The application software products are either owned by the company or obtained from third parties and licensed to end users. Some of the software products offered include standard programs for accounting, payroll, vehicle and parts inventory control, service merchandising and scheduling, leasing, finance and insurance, parts and vehicle locators, manufacturer communications, new and used vehicle retailing, and electronic document imaging. Other applications link dealerships to credit bureaus to verify the credit worthiness of prospective customers, process and approve credit documentation and electronically process vehicle registrations in five states. The company also markets computer products and services directly to automobile manufacturers. Hardware maintenance, software support and training and other professional services are integral parts of the company's turnkey approach to marketing computer systems. These services are provided by service and support personnel located in nearly 200 offices in the United States and Canada. The Healthcare Systems Division markets a similar array of turnkey computer systems and services to physician groups and integrated healthcare delivery networks. Products include software and services that address the administrative and clinical processes that enhance the practice of medicine. The company also provides financial services to automotive and healthcare customers throughout the United States and Canada. Financial services typically consist of financing sales of the companies' computer systems products. BUSINESS FORMS The business forms segment offers its products and services to customers in the automotive, healthcare and general business markets. It operates 19 manufacturing facilities in the United States and Canada. In the automotive market, the company offers its products and services to all departments of automobile, truck and recreational vehicle dealerships including sales, parts, service, finance and insurance, and accounting. The company also markets its products and services to related-automotive businesses such as repair garages, auto parts stores, service stations and body shops. The products and services include standard and custom business forms (including dealer image products), forms management services, promotional items, custom designed filing systems, dealership customer satisfaction measurement and management services, customer prospecting services, and promotional mailing services. In the healthcare market, the company offers standard and custom forms and forms management services to hospitals and large healthcare organizations. In the general business markets, the company offers a wide variety of paper-based and electronic business document solutions to value-seeking businesses. Solutions offered include standard and custom business forms, electronic business forms, on-demand printing services, checks, labels, mailers, stationery, envelopes and tickets. Many of these business documents incorporate a broad range of security features to help deter fraudulent document 2 3 reproduction and counterfeiting. The company also offers a wide variety of forms management solutions to help customers improve their productivity: forms survey and analysis, inventory management and reporting, cost center reporting, low stock reporting, distribution services and process work flow reengineering services. Additionally, pegboard accounting systems are sold to smaller businesses through a network of office supply dealers and independent forms distributors. NEW PRODUCTS In the computer systems segment, the company introduced SalesVision, an advanced ERA(R) application which employs the latest multimedia and client server technology to aid auto dealership salespeople to prospect for customers and to make sales presentations. The company also added ERA Customer Loyalty Management, an integrated tool to monitor the customer service experience. Using its DealerNet(R) service, the company introduced an on-line credit application service for automotive consumers over the Internet. It also released a new entry level document storage solution and, through acquisition, enhanced its consulting services by adding specialized service, parts and body shop operations. In the business forms segment, the company expanded document solutions and outsourcing capability through two strategic acquisitions and by internal product development. The acquisitions added electronic print and mail services, labels and integrated product capability, an electronic catalog and requisitioning tool and expanded forms and documents management services. Internal developments included digital publishing services, fulfillment services, process consulting capability and expanded electronic forms and workflow automation capability. In healthcare, the company expanded its product line with major software enhancement releases designed to extend overall functionality, marketability and customer value. RAW MATERIALS An adequate supply of paper products is essential to the company's business forms segment. The company obtains those products from a variety of sources and, historically has not experienced any difficulty in obtaining them. An adequate supply of paper is expected for the foreseeable future and is not anticipated to adversely impact the company's ability to fully meet the needs of customers. Computer hardware is essential to the company's computer systems segment. This hardware comes from a variety of sources, principally Silicon Graphics, Inc. in the automotive sector and Hewlett Packard and IBM in the healthcare sector. Historically, the company has experienced an ample supply. In the opinion of the company, loss of one or more if its present suppliers of either paper products or computer hardware would not have a significant impact on the company's operations because of the general availability of alternate sources at competitive prices. PATENTS, TRADEMARKS AND RELATED RIGHTS Except as described below, the company does not have any patents, trademarks, licenses, franchises or concessions which are material to an understanding of the company's business. The company's trademark REYNOLDS & REYNOLDS(R) is associated with many goods and services provided by the company. In the computer systems segment, the company has a number of direct and indirect distribution and licensing arrangements with equipment vendors and software providers relating to certain components of Reynolds' products, including the principal operating systems. Such arrangements are in the aggregate, but not individually (except for the operating systems), material to Reynolds' business. COMPETITION Both in the provision of computer systems products and services and in the manufacture and sale of business forms, the company is subject to competition from a number of other business organizations, some of 3 4 which have substantially greater assets and financial resources than the company. The company believes that it competes by providing high value products and services that meet customers' changing needs and which utilize current technology to provide additional value and to improve price and performance. The company has specialized in selected markets and has emphasized service and long-term relationships to meet customer needs more effectively. While no single customer represents 5% or more of the revenues of either principal business segment, the company does have several significant customers whose loss, in the aggregate, could be material to the business forms segment. The company believes that the likelihood of losing all of such customers is remote. BACKLOG COMPUTER SYSTEMS: The backlog represents unbilled computer systems or terminals which have not yet been shipped to customers. At November 1, 1996, the dollar value of the product backlog, including software license fees, is estimated to be $30,100 compared with $25,600 last year. BUSINESS SYSTEMS: The company manufactures several thousand different types of standard and custom business forms. At November 1, 1996, the dollar value of the printing backlog is estimated to be $26,200 compared with $18,900 last year. RESEARCH AND DEVELOPMENT During fiscal 1996, the company continued its research and development of in-house computer systems, terminal products, electronic image-based systems, information exchange products and printing plant automation. In addition to those programs, the company also had several other development projects of lesser magnitude. Expenditures for all such activities were approximately $24,400 in 1996, $21,000 in 1995 and $18,100 in 1994. ENVIRONMENTAL PROTECTION The company believes that it is in substantial compliance with all applicable federal, state and local statutes concerning environmental protection. The company has not experienced any material costs in this regard. The U.S. Environmental Protection Agency has designated the company as one of a number of potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act at four environmental remediation sites. (See Note 11 to the consolidated financial statements, page 52.) EMPLOYEES On October 1, 1996, the company and its subsidiaries had 7,544 employees. It is party to a number of collective bargaining agreements with union locals which represent an aggregate of approximately 264 employees at its Dayton, Ohio, Hagerstown, Maryland and Lebanon, Indiana plants. ITEM 2. PROPERTIES As of September 30, 1996, the company operated 18 forms manufacturing plants in the United States and one in Canada encompassing approximately 2 million square feet. Of those, more than 1.5 million square feet are owned outright by the company. The remaining .5 million square feet are leased. Corporate headquarters and the respective headquarters of the business forms segment and the computer systems segment are located in Dayton, Ohio in several buildings owned by the company which contain more than .5 million square feet. In addition, the company leases approximately 200 sales offices and more than 29 warehouses throughout the country. The company has no encumbrances securing long-term debt as of September 30, 1996, on its owned facilities. Substantially all printing and other equipment used in the manufacture of business forms and systems is owned by the company and its subsidiaries. 4 5 The company believes its properties are in good condition and adequate for current activities. See Note 2 to the consolidated financial statements on pages 39-40 regarding assets held for sale.. ITEM 3. LEGAL PROCEEDINGS Relevant information appears in Note 11 to the consolidated financial statements on page 52. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II (Dollars In Thousands Except Per Share Data) ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The company's Class A Common Shares are listed on the New York Stock Exchange. There is no principal market for the Class B Common Shares. The company also has an authorized class of 60 million preferred shares with no par value. The company currently has no agreements or commitments with respect to the sale or issuance of the preferred shares. Information on market prices and dividends is set forth below: CLASS A COMMON SHARES SALE PRICES*
1996 1995 - ---------------------------------------------------------------------------------------------- Fiscal Quarter High Low High Low - ---------------------------------------------------------------------------------------------- First $19.69 $16.50 $12.94 $11.13 - ---------------------- Second $20.50 $18.31 $14.25 $11.63 - ---------------------- Third $26.63 $21.38 $15.31 $13.00 - ---------------------- Fourth $27.00 $22.31 $18.19 $15.13 - ---------------------------------------------------------------------------------------------- CASH DIVIDENDS PAID* Class A Common Class B Common - ---------------------------------------------------------------------------------------------- Months 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------- January $.06 $.05 $.003 $.0025 - ---------------------- April $.06 $.05 $.003 $.0025 - ---------------------- June $.06 $.05 $.003 $.0025 - ---------------------- September $.07 $.05 $.0035 $.0025 - ---------------------------------------------------------------------------------------------- * Reflects the two-for-one stock split of the company's Common Shares effective September 3, 1996.
As of November 1, 1996, there were approximately 2,750 holders of record of Class A Common Shares and one holder of record of Class B Common Shares. See Note 5 to the consolidated financial statements on pages 43 and 44 regarding the amount of retained earnings available for dividends. 5 6 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SELECTED FINANCIAL DATA
For The Years Ended September 30 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------ CONSOLIDATED Net Sales and Revenues Information systems $1,074,180 $888,580 $789,306 $ 677,748 $625,634 Financial services 26,263 22,311 19,488 19,218 19,190 ---------- -------- -------- --------- -------- Total net sales and revenues $1,100,443 $910,891 $808,794 $ 696,966 $644,824 ========== ======== ======== ========= ======== Income Before Effect of Accounting Changes $ 93,738 $ 78,594 $ 66,204 $ 52,522 $ 38,092 Effect of Accounting Changes(1) (19,106) 1,100 ---------- -------- -------- --------- -------- Net Income $ 93,738 $ 78,594 $ 66,204 $ 33,416 $ 39,192 ========== ======== ======== ========= ======== Earnings Per Common Share(2) Income before effect of accounting changes $ 1.10 $ .92 $ .76 $ .60 $ .41 Effect of accounting changes(1) (.22) .01 ---------- -------- -------- --------- -------- Net income $ 1.10 $ .92 $ .76 $ .38 $ .42 ========== ======== ======== ========= ======== Return on Equity Income before effect of accounting changes 26.6% 25.1% 23.8% 20.2% 14.8% Net income 26.6% 25.1% 23.8% 12.9% 15.3% Cash Dividends Per Class A Common Share(2) $ .25 $ .20 $ .165 $ .13 $ .1125 Book Value Per Outstanding Common Share(2) $ 4.55 $ 4.01 $ 3.47 $ 3.07 $ 2.95 Assets Information systems $ 610,362 $489,501 $430,592 $ 407,761 $366,173 Financial services 313,282 265,965 204,107 162,790 155,672 ---------- -------- -------- --------- -------- Total assets $ 923,644 $755,466 $634,699 $ 570,551 $521,845 ========== ======== ======== ========= ======== Long-Term Debt Information systems $ 84,601 $ 41,443 $ 41,014 $ 40,000 $ 28,284 Financial services 93,589 92,425 76,638 62,771 70,250 ---------- -------- -------- --------- -------- Total long-term debt $ 178,190 $133,868 $117,652 $ 102,771 $ 98,534 ========== ======== ======== ========= ======== Number of Employees 7,544 6,036 5,478 5,636 4,995 INFORMATION SYSTEMS (with financial services on an equity basis) Current Ratio 1.90 1.81 2.27 2.21 2.23 Net Property, Plant and Equipment $ 167,667 $128,462 $117,485 $ 111,177 $105,014 Total Debt $ 99,092 $ 51,649 $ 41,301 $ 40,000 $ 37,713 Total Debt to Capitalization 21.0% 13.4% 12.4% 13.2% 12.8% (1) Represents the cumulative effect of accounting changes for the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" in 1993 and SFAS No. 109, "Accounting for Income Taxes" in 1992. (2) Reflects the two-for-one common stock split effective September 3, 1996.
6 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS ENVIRONMENT AUTOMOTIVE MARKET Automobile dealerships represent a significant number of customers for the company's products and services. The number of automobile dealerships remained about the same as last year as the automotive business environment was stable in 1996. In October 1996, economists projected calendar year 1996 new vehicle sales to be over 15 million units for the third year in a row. Those same economists also projected about 15 million new vehicle sales in calendar year 1997. Automobile dealerships generate revenues and profits from a variety of products and services. Sales of used vehicles, replacement parts and maintenance services are the major sources of a typical dealership's profits. Strong used vehicle sales are expected to continue because of the increased supply of previously leased vehicles. The trend of franchises consolidating into megadealerships is expected to continue, in part, in response to increased competition from used car superstores. Used car superstores represent a small but growing segment of the automobile retail channel. A few megadealerships have raised capital through public equity offerings to fund the acquisition of additional dealerships. These superstores and megadealerships have sophisticated information management needs for which the company's products and services provide solutions. GENERAL BUSINESS MARKET Companies are continuing to seek ways to offload non-strategic activities and streamline their document systems to improve organizational efficiency and increase effectiveness. This growing trend is favorable for the company's forms management programs which simplify, standardize, automate and integrate customers' information management and document usage. In calendar year 1995 paper manufacturers increased prices several times because of increased demand for paper. As a result, the company's cost of paper increased significantly in 1995 and the company raised business forms sales prices accordingly. The company's cost of paper declined in 1996 as paper manufacturers lowered paper prices because of reduced demand for paper. HEALTHCARE MARKET The healthcare market continued to move toward managed care in 1996. This industry is experiencing significant growth in integrated healthcare delivery networks and large group practices as physicians strive to operate efficiently in a managed care environment. The information systems needs of this market are complex as systems must integrate among healthcare providers, claims processors, insurance companies and regulatory agencies. In 1996, the company aggressively invested in sales, marketing and product development resources to provide the information management solutions required by this market. SIGNIFICANT EVENTS BUSINESS COMBINATIONS On April 22, 1996 the company announced a cash tender offer to acquire the outstanding shares of Duplex Products Inc. (Duplex) for $12 per share. On May 20, 1996 the company purchased the tendered shares of Duplex for a total price of $89,800. Duplex provides business forms and labels, electronic printing and mailing services, document management programs, forms automation solutions and process analysis to customers throughout the United States. Although Duplex reported annual sales of $275,000 in fiscal year 1995, at the time of the acquisition Duplex annual sales rate was about $230,000 per year. The company expects Duplex sales to decline further to about $200,000 as the business is integrated with existing operations and sales of lower margin products are deemphasized. From 1994 through 1996 the company purchased fifteen additional businesses in the automotive, healthcare and general business forms markets. Automotive business combinations consisted primarily of new products to supplement the company's existing product offerings. Healthcare and general business forms acquisitions resulted 7 8 in stronger products and services offerings and additional customers for the company. See Note 2 to the Consolidated Financial Statements for additional disclosures about the company's business combinations. STOCK SPLIT On August 6, 1996, the company's board of directors approved a two-for-one common stock split. As a result of the split, common shareholders received one additional share for each share held as of September 3, 1996. This split was the third such split since November 1992 and the seventh split since the company's initial public offering in 1961. All share and per share information presented in this annual report reflects the stock split. BUSINESS FORMS RESTRUCTURING In 1994, the company recorded a $12,400 restructuring charge for costs to be incurred in the disposal of part of its computer paper product line and the consolidation of certain custom business forms printing operations. General business forms operations restructured to focus on value-added solutions for customers and to improve profitability. The company discontinued the manufacture of certain low-margin computer paper products and closed its Chambersburg, Pennsylvania plant. The company also closed its custom business forms plant in Chestertown, Maryland and several distribution facilities and sales offices. This transaction generated $11,500 of income tax benefits which more than offset the negative after-tax effect of the restructuring charge. See Note 1 to the Consolidated Financial Statements for additional disclosures about the restructuring. RESULTS OF OPERATIONS CONSOLIDATED
1996 vs. 1995 1995 vs. 1994 1996 1995 1994 Change Change - ------------------------------------------------------------------------------------------------------------------- Revenues $1,100,443 $910,891 $808,794 $189,552 21% $102,097 13% Gross profit $510,525 $417,935 $359,392 $92,590 22% $58,543 16% Operating income $164,825 $137,015 $98,067 $27,810 20% $38,948 40% Net income $93,738 $78,594 $66,204 $15,144 19% $12,390 19% Earnings per share $1.10 $0.92 $0.76 $0.18 20% $0.16 21%
Consolidated net sales and revenues set a record for the fourth consecutive year in 1996. Computer systems, business forms and financial services revenues all grew significantly in 1996 and 1995. The net effect of business combinations and divestitures was to increase consolidated sales $133,000 in 1996 and $9,000 in 1995. Consolidated gross profit represented 47.5% of information systems sales, compared to 47.0% in 1995 and 45.5% in 1994. The gross profit percentage increased in 1996 primarily as a result of strong growth in computer systems recurring revenues. Business forms gross profit percentage declined in 1996 as production efficiencies were offset by lower gross profit margins for Duplex. Gross profit increased in 1995 primarily because of business forms improvement as a result of the 1994 restructuring. Computer systems gross profit percentage also rose in 1995. Consolidated operating income grew significantly in 1996 and 1995 primarily because of higher business forms operating income. Computer systems and financial services operating income also rose in 1996 and 1995. In 1994, the company recorded a $12,400 restructuring charge and $2,793 of business forms restructuring related costs and environmental expenses. As a percentage of sales, operating income was 15% in 1996 and 1995, and 12% in 1994 (14% excluding restructuring and related charges). Total other charges were $2,582 in 1996, $260 in 1995 and $745 in 1994. Other charges increased in 1996 because of higher net interest expense related to the Duplex transaction. Net interest expense was relatively flat during 1995 and 1994 as information systems debt balances and interest rates remained relatively stable. 8 9 The effective income tax rate was 42.2% in 1996, compared to 42.5% in 1995 and 32.0% in 1994. The 1996 tax rate included the benefits of certain tax credits which will not repeat in 1997. The 1996 tax rate would have been 42.8% excluding these benefits. In 1994, the company recorded an $11,500 tax benefit associated with the computer paper divestiture. The company also recorded $581 of tax expense related to the sale of the French subsidiary. The 1994 effective tax rate was 41.8%, excluding the effect of the computer paper and French divestitures. The company's 1996 net income and earnings per share set a record for the fifth straight year and significantly exceeded last year's strong results. The after-tax effect of 1994's restructuring charge, restructuring related costs and environmental expenses increased 1994's net income by $840 or $.01 per share. In 1996, return on average shareholders' equity was 26.6% compared to 25.1% in 1995 and 23.8% in 1994. COMPUTER SYSTEMS (excluding financial services)
1996 vs. 1995 1995 vs. 1994 1996 1995 1994 Change Change - ------------------------------------------------------------------------------------------------------------------- Revenues $478,994 $422,678 $363,763 $56,316 13% $58,915 16% Gross profit $234,280 $198,667 $169,031 $35,613 18% $29,636 18% % of revenues 48.9% 47.0% 46.5% Operating income $69,751 $64,138 $59,254 $5,613 9% $4,884 8% % of revenues 14.6% 15.2% 16.3%
In 1996 computer systems revenues grew primarily because of higher recurring service revenues, growing sales of newer products and the effect of fiscal year 1995 business combinations. Recurring service revenues continued to grow primarily because of the increased number of software applications supported. These recurring service revenues result from monthly billings for technical support, software updates and hardware maintenance that allow customers to maximize the value of their computer systems. Sales of newer products and services such as Customer Marketing Services, SalesVision, consulting services and a document management system continued to grow. Automotive and healthcare business combinations contributed about $12,000 of the segment's revenue growth in 1996. In 1995 computer systems revenues increased because of higher unit sales of the company's ERA(R) computer systems to automobile dealers, higher recurring service revenues and the net effect of acquisitions and the 1994 divestiture of operations in France. Recurring service revenues continued to grow because strong systems sales increased the number of software applications supported. Automotive and healthcare business combinations, net of the effect of the divestiture in France, contributed about $13,000 of the segment's revenue growth in 1995. Computer systems gross profit percentage increased primarily because the higher margin recurring service revenues became a greater part of the revenue mix. Selling, general and administrative (SG&A) expenses were 34.3% of revenues in 1996, compared to 31.8% of revenues in 1995 and 30.2% in 1994. The 1996 and 1995 increases in SG&A expenses, as a percentage of revenues, reflected new investments in both the automotive and healthcare businesses. Automotive investments were new products and services oriented. Healthcare investments involved integrating two acquisitions with the existing business and implementing sales, marketing and product development strategies for future growth. Computer systems operating income grew, but declined as a percentage of sales in both 1996 and 1995 because of new investments in healthcare systems. Automotive's operating margin was relatively constant during the last three years. Healthcare systems continued to operate at a loss in 1996 because of the aggressive investments in the organization's products and capabilities. 9 10 BUSINESS FORMS
1996 vs. 1995 1995 vs. 1994 1996 1995 1994 Change Change - ------------------------------------------------------------------------------------------------------------------- Revenues $595,186 $465,902 $425,543 $129,284 28% $40,359 9% Gross profit $276,245 $219,268 $190,361 $56,977 26% $28,907 15% % of revenues 46.4% 47.1% 44.7% Operating income $80,629 $59,716 $25,741 $20,913 35% $33,975 132% % of revenues 13.5% 12.8% 6.0%
In 1996 business forms revenues rose primarily because of the effect of 1995 and 1996 business combinations which contributed $121,000 of the sales increase. The remaining sales increase resulted from strong growth in sales of forms management products and services, which was partially offset by reduced volume for other custom forms sales. In 1995 business forms revenues increased primarily because of growth in forms management products and services and the effect of sales price increases on both automotive and general business forms. In 1995 sales of businesses acquired were less than sales lost in the 1994 divestiture of certain low margin products. The company raised sales prices in 1995 in response to rising paper costs. Business forms gross profit percentage declined in 1996 because of the effect of lower gross profit margins of Duplex. Excluding the effect of Duplex, gross profit margins were 48.5% in 1996. Also favorably contributing to gross profit margins were lower paper costs which reduced LIFO inventory adjustments. In 1995 business forms gross profit percentage increased primarily because of the successful completion of the 1994 restructuring which improved the sales mix and reduced operating expenses. In 1995, the company experienced significantly higher paper costs accounted for under the LIFO method. The effect of the higher paper costs reported in cost of sales was offset by higher sales prices. SG&A expenses were 32.9% of revenues in 1996, compared to 34.3% in 1995 and 35.8% in 1994. SG&A expenses declined, as a percentage of revenues in 1996 primarily because of business combinations which provided strong revenue growth and lower SG&A expenses as a percentage of sales. The company also further reduced SG&A expenses by eliminating duplicate administrative functions of the companies acquired. SG&A expenses in 1994 included restructuring related costs and environmental expenses. Business forms operating income increased significantly in 1996 because of higher sales and the successful integration of 1995 and 1996 business combinations. In 1995 business forms operating income grew substantially over 1994 which included a $12,400 restructuring charge, $1,043 of restructuring related costs and $1,750 of environmental expenses. Excluding these expenses from 1994, operating income increased $18,782 or 46% over 1994. Operating income was $40,934 (excluding the aforementioned expenses) or 10% of sales in 1994. FINANCIAL SERVICES
1996 vs. 1995 1995 vs. 1994 1996 1995 1994 Change Change - ------------------------------------------------------------------------------------------------------------------- Revenues $26,263 $22,311 $19,488 $3,952 18% $2,823 14% Operating income $14,445 $13,161 $13,072 $1,284 10% $89 1% % of revenues 55.0% 59.0% 67.1%
Average finance receivables grew 22% in 1996 and 27% in 1995 as a result of strong computer systems sales. Financial services revenues grew significantly each of the last two years because of the increased receivable balances. The average interest rate earned on the receivable portfolio declined slightly in both 1996 and 1995 because interest rates on new receivables were less than those for maturing receivables. 10 11 Financial services operating income grew solidly in 1996 because of the revenue growth. In 1995 operating income increased only slightly because the revenue growth was largely offset by higher interest expense as a result of rising interest rates on borrowings. In 1996 average interest rates on borrowings were about the same as last year. The company has entered into various interest rate management agreements to limit interest rate exposure on financial services variable rate debt. It is important to manage this interest rate exposure because the proceeds from these borrowings were invested in fixed rate finance receivables. The company believes that over time it has reduced interest expense by using interest rate management agreements and variable rate debt instead of directly obtaining fixed rate debt. During fiscal year 1996 the company did not enter into any new interest rate management agreements because current market conditions made fixed rate debt more attractive. See Note 5 to the Consolidated Financial Statements for additional disclosures regarding the company's interest rate management agreements. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Information systems strong cash flow from operating activities of $110,345 resulted primarily from record net income. During the third quarter of fiscal year 1996, the company completed the purchase of Duplex which accounted for the majority of cash spent on business combinations and cash received from new borrowings. See the business combinations section of this analysis and Note 2 to the Consolidated Financial Statements for additional information regarding these transactions. Capital expenditures of $39,980 occurred in the normal course of business. Capital expenditures in the ordinary course of business are anticipated to be about $45,000 to $50,000 in fiscal year 1997. The company also paid cash dividends of $20,594 and repurchased $33,323 of capital stock in fiscal year 1996. See the shareholders' equity caption of this analysis for a further discussion of dividends and share repurchases. Financial services operating cash flow, collections on finance receivables and additional borrowings were invested in new finance receivables for the company's computer systems and used to make scheduled debt repayments. CAPITALIZATION The company's ratio of total debt (total information systems debt) to capitalization (total information systems debt plus shareholders' equity) was 21.0% at September 30, 1996 and 13.4% at September 30, 1995. Available credit under existing revolving credit agreements was $33,580 at September 30, 1996. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. In fiscal year 1997, the company expects to obtain new long-term financing to permanently fund the Duplex purchase and repay the related revolving credit borrowings. The company estimates that cash flow from operations and cash available from existing credit agreements will be sufficient to fund fiscal year 1997 normal operations. SHAREHOLDERS' EQUITY The company lists its Class A common shares on the New York Stock Exchange. There is no principal market for Class B common shares. The company also has an authorized class of 60 million preferred shares with no par value. As of November 11, 1996, none of these preferred shares was outstanding and there were no agreements or commitments with respect to the sale or issuance of these shares. The company paid cash dividends of $20,594 in 1996, $16,651 in 1995 and $14,226 in 1994. Dividends per Class A common share were $.25 in 1996, $.20 in 1995 and $.165 in 1994. Dividends are typically declared each November, February, May and August and paid in January, April, June and September, respectively. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. In November 1996, the board of directors raised the quarterly dividend 14% to $.08 per Class A common share. The quarterly dividend was also increased 17% in August 1996. The company has increased cash dividends eleven times since 1989 and paid dividends each year since the company's initial public offering in 1961. 11 12 The company has conducted an active share repurchase program during recent years to provide additional returns to shareholders. The company repurchased $33,323 of Class A common shares in 1996, $35,079 in 1995 and $39,083 in 1994. Average prices paid per share were $20.83 in 1996, $12.93 in 1995 and $11.80 in 1994. As of September 30, 1996 the company could repurchase an additional 3,539,000 Class A common shares under existing board of directors' authorizations. ENVIRONMENTAL MATTERS See Note 11 to the Consolidated Financial Statements for a discussion of the company's environmental contingencies. ACCOUNTING STANDARDS See Note 12 to the Consolidated Financial Statements for a discussion of the effect of accounting standards which the company has not yet adopted. SUBSEQUENT EVENT See Note 13 to the Consolidated Financial Statements for a discussion of a proposed business combination. ITEM. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 is contained in Item 14 of Part IV (pages 25 and 26) of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 12 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The name, age, background information and term for each of the company's directors and nominees are as follows:
NOMINEES FOR TERMS EXPIRING IN 2000 DIRECTOR NAME AGE PRINCIPAL OCCUPATION AND FIVE YEAR EMPLOYMENT HISTORY SINCE - ------------------------------------------------------------------------------------------------------------------- Cleve L. Killingsworth, Jr. 44 President, Kaiser Permanente's Mid-Atlantic States Region since ---- March 1996; President of Kaiser Permanente's Ohio Region from August 1994 to March 1996; prior thereto, Senior Vice President of health care operation for Blue Cross and Blue Shield of Rochester since January 1986. Kaiser Permanente, a non-profit group practice health plan, is the country's largest health maintenance organization. Dale L. Medford(1) 46 Vice President, Corporate Finance and Chief Financial Officer. 1991 Gayle B. Price, Jr. 66 Chairman and Chief Executive Officer, Price Brothers Company, 1976 manufacturer of concrete construction materials. Kenneth W. Thiele 80 Private Investor. 1975 NOMINEE FOR TERM EXPIRING IN 1998 DIRECTOR NAME AGE PRINCIPAL OCCUPATION AND FIVE YEAR EMPLOYMENT HISTORY SINCE - ------------------------------------------------------------------------------------------------------------------- Robert C. Nevin(1) 56 President, Business Systems Division. 1985 DIRECTORS WHOSE TERMS EXPIRE IN 1999 DIRECTOR NAME AGE PRINCIPAL OCCUPATION AND FIVE YEAR EMPLOYMENT HISTORY SINCE - ------------------------------------------------------------------------------------------------------------------- Dr. David E. Fry 53 President and Chief Executive Officer, Northwood University. 1987 Richard H. Grant, III 57 Private Investor since October 1994; prior thereto, Senior 1960 Vice President, International, Computer Systems Division of The Reynolds and Reynolds Company. David R. Holmes(1) 56 Chairman of the Board, President and Chief Executive 1987 Officer.(2) Martin D. Walker 64 Chairman and Chief Executive Officer of M. A. Hanna Company, an 1991 international specialty chemicals company.(3) DIRECTORS WHOSE TERMS EXPIRE IN 1998 DIRECTOR NAME AGE PRINCIPAL OCCUPATION AND FIVE YEAR EMPLOYMENT HISTORY SINCE - ------------------------------------------------------------------------------------------------------------------- Joseph N. Bausman(1) 53 President, Automotive Systems Division since February 1995; 1989 prior thereto President, Computer Systems Division. Richard H. Grant, Jr.(1) 83 Chairman of the Steering Committee and father of Richard H. 1939 Grant, III. Allan Z. Loren 58 Executive Vice President and Chief Information Officer of 1996 American Express Company since May 1994; President and CEO of Galileo International (a global computer reservation system company owned by 11 airlines) from January 1993 to May 1994; President and CEO of Covia Partnership (computer reservation system company) from January 1991 to January 1993 at which time Covia and Galileo merged.(4) (Footnotes on following page)
13 14 (1) Also executive officer of the company. (2) Mr. Holmes also serves as a director of The Dayton Power & Light Company. (3) Mr. Walker also serves as a director of Textron, Inc., Comerica Inc. and The Timken Company. (4) Mr. Loren also serves as a director of U.S. Cellular Corporation. The executive officers of the company are elected by the Board of Directors at its meeting immediately following the Annual Meeting of Shareholders to serve generally for a term of one year. The executive officers of the company, other than those shown above as of November 1, 1996 are:
EXECUTIVE OFFICERS NAME AGE PRINCIPAL OCCUPATION AND FIVE YEAR EMPLOYMENT HISTORY - ------------------------------------------------------------------------------------------------------------------- H. John Proud 48 President, Healthcare Systems Division since February 1995; prior thereto Senior Vice President and General Manager, Automotive Systems Division. Michael J. Gapinski 46 Treasurer and Assistant Secretary. Adam M. Lutynski 54 General Counsel and Secretary.
ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following tables and narrative text discuss the compensation paid to the company's Chief Executive Officer and the company's four other most highly compensated executive officers during the fiscal year ended September 30, 1996, and the two prior fiscal years.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------- ------------------------------ NAME AND OPTION LTIP ALL OTHER PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS (#)(1) PAYOUTS ($) COMPENSATION ($)(2) - ------------------------- ------- ----------- ----------- ------------- ------------ ------------------- David R. Holmes 1996 466,575 487,095 439,600 466,575 38,232 - --------------- Chairman of the Board, 1995 452,975 362,380 53,280 452,975 34,460 President and Chief 1994 439,250 351,400 624,320 409,229 24,394 Executive Officer Robert C. Nevin 1996 286,463 302,985 18,480 229,170 36,977 - --------------- President, Business 1995 278,120 221,757 24,720 222,496 32,950 Systems Division 1994 269,750 194,980 345,040 201,050 28,401 Joseph N. Bausman 1996 286,463 258,298 18,480 229,170 25,777 - ----------------- President, Automotive 1995 278,120 214,152 24,720 222,496 23,080 Systems Division 1994 269,750 215,800 345,040 201,050 16,914 Dale L. Medford 1996 218,003 216,689 11,520 152,602 13,936 - --------------- Vice President 1995 211,657 158,744 15,360 148,161 12,820 Corporate Finance and 1994 205,250 153,938 228,240 133,856 11,915 Chief Financial Officer H. John Proud 1996 221,250 131,667 13,920 177,000 11,380 - ------------- President, Healthcare 1995 194,815 146,113 11,040 141,908 10,508 Systems Division (Footnotes on following page)
14 15 (1) Option Awards reflect the company's September 3, 1996 two-for-one stock split. (2) The 1996 amounts disclosed in this column include:
ABOVE MARKET DEFINED IMPUTED INTEREST INTEREST ON TOTAL CONTRIBUTION ON SPLIT DOLLAR DEFERRED OTHER NAME PLANS($) LIFE INSURANCE($)(1) COMPENSATION($) (2) COMPENSATION($) ------------------------------------------------------------------------------------------------------- David R. Holmes 2,697 23,815 11,720 38,232 Robert C. Nevin 2,475 20,254 14,248 36,977 Joseph N. Bausman 2,475 16,202 7,100 25,777 Dale L. Medford 2,697 8,053 3,186 13,936 H. John Proud 2,697 8,683 0 11,380 (1) The life insurance component is provided on a split dollar basis with each participant paying the term equivalent premium and the company paying the remainder of the premium. At termination of the policy, all premium payments made by the company are reimbursed. Interest was imputed on the amount receivable from the participant at the company's short-term investment rate. (2) The named executives (except Mr. Proud) entered into Deferred Compensation Agreements with the company whereby income was deferred for four years in order to provide individual retirement benefits at age 65 of up to $100,000 per year for a fixed term of 15 years. The deferrals were completed as of September 30, 1989. Benefits payable are reduced for early retirement and lump sum distributions are available at the participant's discretion. The amounts presented represent the above market interest earned on the funds deferred and were calculated assuming a 15 year payment stream at age 65.
OPTION/SAR GRANTS IN LAST FISCAL YEAR Individual Grants(1) -------------------------------------------------------------- POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED ANNUAL OPTIONS RATES OF STOCK PRICE GRANTED TO EXERCISE APPRECIATION FOR NUMBER OF EMPLOYEES IN OR OPTION TERM OPTIONS FISCAL YEAR BASE PRICE EXPIRATION ------------------------- NAME GRANTED(2) (%) ($/Share)(2) DATE 5%($) 10%($) - ------------------- ----------- ------------ ------------ ----------- ---------- ------------- David R. Holmes 439,600 44.5193 17.25 10/02/05 4,768,971 12,085,508 Robert C. Nevin 18,480 1.8715 17.25 10/02/05 200,499 508,053 Joseph N. Bausman 18,480 1.8715 17.25 10/02/05 200,499 508,053 Dale L. Medford 11,520 1.1667 17.25 10/02/05 124,974 316,709 H. John Proud 13,920 1.4097 17.25 10/02/05 151,010 382,689 (1) No Stock Appreciation Rights (SARs) were awarded in the 1996 fiscal year. (2) Grants were made on October 2, 1995, with the exercise price equal to the fair market value ($17.25) on that date. Options vest 25% annually beginning October 2, 1996. The number of shares and option price reflect the September 3, 1996 stock split.
15 16 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT OPTIONS AT ACQUIRED FY-END FY-END ON REALIZED EXERCISABLE/ EXERCISABLE/ EXERCISE VALUE UNEXERCISABLE UNEXERCISABLE NAME (#)(1) ($) (#) ($) ---- ----------- --------- ----------------- -------------------- David R. Holmes 39,400 313,913 0 / 1,071,720 0 /12,680,415 Robert C. Nevin 39,768 726,676 23,740 / 367,180 385,436 / 4,941,577 Joseph N. Bausman 0 0 13,620 / 367,180 207,578 / 4,941,577 Dale L. Medford 5,802 93,059 37,760 / 242,160 721,095 / 3,259,800 H. John Proud 0 0 9,600 / 168,920 150,844 / 2,248,945 (1) The number of shares reflects the September 3, 1996 stock split.
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS PERFORMANCE OR --------------------------------------------- OTHER OTHER PERIOD THRESHOLD TARGET MAXIMUM NAME RIGHTS UNTIL PAYOUT ($) ($) ($) - --------------------------- --------- ------------------ ------------ -------------- --------------- David R. Holmes (1) (1) 0 233,288 466,576 Robert C. Nevin (1) (1) 0 114,585 229,170 Joseph N. Bausman (1) (1) 0 114,585 229,170 Dale L. Medford (1) (1) 0 76,301 152,602 H. John Proud (1) (1) 0 88,500 177,000 (1) Participants in the Intermediate Plan (including Mr. Holmes who participates in his own substantially similar plan), which is considered a long-term incentive plan, are determined strictly by grade level within the company. No formal awards are made and there are no vested rights. Annual amounts are paid to participants with the amount of the award dependent upon the company's three year average return on equity. The periods considered in the calculation are the most recent fiscal year and the preceding two years. The Threshold and Maximum measurements are the same as those used to determine annual bonuses. The potential annual payout amounts reported here were calculated using fiscal year 1996 salaries. The payout for fiscal year 1996 is included in the LTIP Payout column of the Summary Compensation Table.
16 17
PENSION PLAN TABLE (1) YEARS OF SERVICE (2) ------------------------------------------------------------------------------ REMUNERATION 10 15 20 25 30 - ------------------- --------- ---------- --------- --------- --------- $ 300,000 $ 45,000 $ 67,500 $ 90,000 $112,500 $135,000 400,000 60,000 90,000 120,000 150,000 180,000 500,000 75,000 112,500 150,000 187,500 225,000 600,000 90,000 135,000 180,000 225,000 270,000 700,000 105,000 157,500 210,000 262,500 315,000 800,000 120,000 180,000 240,000 300,000 360,000 900,000 135,000 202,500 270,000 337,500 405,000 1,000,000 150,000 225,000 300,000 375,000 450,000 1,100,000 165,000 247,500 330,000 412,500 495,000 1,200,000 180,000 270,000 360,000 450,000 540,000 1,300,000 195,000 292,500 390,000 487,500 585,000 1,400,000 210,000 315,000 420,000 525,000 630,000 1,500,000 225,000 337,500 450,000 562,500 675,000 1,600,000 240,000 360,000 480,000 600,000 720,000 1,700,000 255,000 382,500 510,000 637,500 765,000 1,800,000 270,000 405,000 540,000 675,000 810,000 (1) This table sets forth the annual retirement benefits payable under the company's qualified pension plan and the non-qualified Supplemental Retirement Plan ("Supplemental Plan") upon retirement at age 65 based on an employee's final average annual compensation. Compensation as defined in the Plans includes Salary, Bonus and Long-Term Incentive Plan payments. The qualified pension benefits are reduced by 1.67% of monthly primary Social Security benefits multiplied by years of credited service up to a maximum of 30 years. The Supplemental Plan provides benefits to participants who would lose benefits because of legislative limits imposed on qualified plans or because of their participation in the company's Non-Qualified Deferred Compensation Plan. Additional benefits provided under the Supplemental Plan for participants with employment agreements are not included in the table but are discussed below with employment agreements. Participation in the Supplemental Plan requires approval by the Board. Optional payment forms of actuarial equivalence are also available. (2) Respective years of service as of September 30, 1996, for the persons named in the Summary Compensation Table are: Mr. Holmes, 11; Mr. Nevin, 10; Mr. Bausman, 31; Mr. Medford, 22; and Mr. Proud, 25. In addition to the plans discussed above, the company also provides compensation or death benefits generally payable over 10 years, beginning at the earlier of retirement or death of the employee. The compensation benefit is equal to either 100%, 150% or 200% of the current year's total cash compensation depending upon the respective officer's grade level. The company generally insures against its obligations through the purchase of life insurance policies on the lives of such officers.
EMPLOYMENT AGREEMENTS Effective October 1, 1995, Mr. Holmes entered into an amended and restated agreement by which he agrees to remain employed by the company as its President and Chief Executive Officer until October 3, 2000, at an annual base salary of $436,300 which may not be reduced without his consent or resolution by arbitration. This base salary may be increased from time to time consistent with the recommendations of the Compensation Committee and as approved by the Board of Directors. The retirement benefit at age 59 is 65% of final average annual compensation. The age 55 early retirement benefit is 61% of final average annual compensation which thereafter increases by an additional 1% of final average annual compensation for each additional twelve month period of employment, including retirement after age 59. Mr. Holmes' agreement also provides for special grants of non-qualified stock options on October 1, 1995 and October 1, 1996, of 400,000 shares and 200,000 shares, respectively. (Reflects the September 3, 1996, 17 18 two-for-one stock split.) Both grants are at fair market value on the date of the grant. These grants are in addition to the customary annual awards made under the company's stock option plan in which Mr. Holmes is a participant. Messrs. Bausman, Nevin and Proud have Employment Agreements by which they each agree to remain employed by the company until, respectively, May 31, 2000, September 30, 1997, and September 1, 1999, at respective annual base salaries of $280,160, $252,000 and $210,000 which may not be reduced without the individual's consent or resolution by arbitration. These base salaries may be increased from time to time consistent with the recommendations of the Compensation Committee and as approved by the Board of Directors. Age 65 retirement benefits for Messrs. Bausman and Nevin are 65% of final average annual compensation. Early retirement benefits for them are 55% of final average annual compensation (reduced by 1/15 for each year of service, as defined in the company's pension plan, less than 15) if they retire after reaching age 55 and before reaching age 58. If they elect early retirement after reaching age 58, their respective annual retirement benefits shall be 55% of final average annual compensation plus 1% for each additional twelve-month period of service after age 58, but before reaching age 65, with no reduction if their respective years of service are fewer than 15. Mr. Proud's retirement benefits are those provided under the company-sponsored qualified and non-qualified programs in which he participates. The Employment Agreements of Messrs. Holmes, Nevin and Bausman also provide for certain disability and death benefits, including retirement benefits as described above in case of permanent disability. The Agreements also provide for continued medical coverage of the surviving spouses for a period which ends at the earlier of the spouse's death or 42 months after the employee's death. During the terms of the Agreements and for two years after the respective terminations of them, or the cessation of payments made under them (whichever is later), each employee shall not compete directly or indirectly with the company. Mr. Proud's coverage in the case of death or disability is that provided under the company-sponsored programs in which he participates. However, if Mr. Proud's Agreement is not renewed, his non-competition restriction shall continue for only one year. All four Agreements generally provide that if the employee is discharged by the company before the expiration date other than for cause (as defined in the Agreements), or if the company fails to renew the Agreements other than for cause, the employee shall be entitled to receive (i) payments equal to the employee's Annual Compensation Value (as defined in the Agreements), reduced by 70% of compensation from subsequent employment (reduction does not apply to Mr. Proud) (a) for two years from the date of termination of employment with respect to discharge before the expiration of the Agreements, or (b) for one year from the expiration of the Agreements in the case of non-renewal; (ii) credit for certain amounts of additional service under the Supplemental Plan (iii) continuing coverage under company-sponsored medical benefits programs ending at the earlier of employee's securing other employment or two years from termination; (iv) reimbursement of up to $20,000 in out-placement fees; and (v) required payments under the employee's (except for Mr. Proud) Deferred Compensation Agreement. These Employment Agreements also contain provisions which may require the company to fund an escrow immediately in the event of a "change in control" (as defined in such Agreements) of the company. Funding is required upon the occurrence of any "escrow funding event," as defined in such Agreements. The company estimates that if Messrs. Holmes, Nevin, Bausman and Proud had been terminated on November 1, 1996, following a change in control of the company, the total severance payments by the company to the officers under their Agreements would have been $9,877,501. If such termination were to occur, the non-competition restrictions in the respective Employment Agreements are void and non-binding. These Employment Agreements also provide that: (i) the employee will be entitled to receive the escrowed amount upon a Change in Control Termination that occurs within 24 months of a change in control; (ii) the employee will receive an additional 24 months of service credit under the Supplemental Plan following a Change in Control Termination; (iii) the payments to be made upon a Change in Control Termination include a payment equal to three times the employee's annual salary in effect at the date of termination or immediately prior to the change in control (whichever is higher) and his average bonus with respect to the three calendar years preceding the year in which his termination of employment occurs; (iv) if the total amount of any payments payable to the employee upon the termination of the employee's employment or upon a change in control (whether or not pursuant to the severance provisions) would be subject to an excise tax as "parachute payments" pursuant to Sections 280G and 4999 of 18 19 the Internal Revenue Code of 1986, the amount of the severance payments under the severance provisions will be reduced to avoid such excise tax, but only if the net effect of such reduction is to increase the net after tax income to the executive; and (v) the amount paid into escrow shall be the amount described in clause (iii) as may be limited pursuant to clause (iv) and for periodic adjustment of such amount. The Employment Agreements of Messrs. Holmes and Nevin further provide that (i) if the employee voluntarily terminates employment or is discharged by the company other than for "cause" (as defined therein) prior to attainment of age 55, he will be entitled to receive, commencing at age 55, a portion of his annual retirement benefits prorated to reflect his service with the company; and (ii) upon a Change in Control Termination prior to the date he attains age 55, the employee will be entitled to receive, commencing at age 55, retirement benefits equal to 61% and 55% of his final average compensation, respectively. Mr. Bausman's Employment Agreement further provides that (i) if he voluntarily terminates his employment or is discharged by the company prior to his attainment of age 55, he will be entitled to receive under the Supplemental Plan a portion of his age 55 benefit prorated to reflect his service with the company after November 9, 1987, in excess of his vested Pension Plan benefit and the Officer's Life Insurance and Compensation Program benefits; and (ii) upon a Change in Control Termination prior to the date he attains age 55, he will be entitled to receive, commencing at age 55, retirement benefits equal to 55% of his Final Average Compensation. PERFORMANCE GRAPH FISCAL YEARS 1992 THROUGH 1996 Comparison of Five Year Cumulative Total Return Among The Reynolds and Reynolds company, S&P 500 Index and a Composite of Two Indices ================================================================================
Measurement Period (Fiscal Year Covered) Reynolds S&P 500 Peer Group 9/91 100 100 100 9/92 175 111 101 9/93 318 125 124 9/94 412 130 146 9/95 572 169 209 9/96 880 203 264
Illustrates the value of $100 invested at Sept. 30, 1991 assuming reinvestment of dividends. ================================================================================ The graph compares the cumulative total shareholder return on a $100 investment in the company's Class A Shares for the last five fiscal years with the cumulative total return on $100 invested in each of (i) the S&P 500 Index and (ii) a composite of two indices. The composite index is comprised of the S&P Computer Software and Services Index and a self-constructed business forms index and is adjusted each year to reflect the percent of the company's business segments' revenues represented by each index. The company selected the following business forms companies for its self-constructed index: American Business Products, Inc., Ennis Business Forms, Inc., Moore, Ltd., New England Business Services, Inc., Standard Register Company and Wallace Computer Services, Inc. Duplex Products Inc. ("Duplex") previously reported in the self-constructed business forms index was excluded for 19 20 all years presented as Duplex was acquired by the company in May 1996. The graph assumes all investments were made at market value on September 30, 1991, and the reinvestment of all dividends. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors consists entirely of nonemployee, independent Directors. The Committee reviews, recommends and approves changes to the company's compensation policies and programs applicable to the company's officers and senior personnel. COMPENSATION POLICY AND OBJECTIVES Our primary goal as members of the Compensation Committee is unchanged from last year: to assure that the compensation provided to executives is linked to the company's business strategies and objectives, thereby aligning the financial interests of senior management with those of the shareholders. Beyond that, our priorities are to assure that the executive compensation programs enable the company to attract, retain and motivate the high caliber executives required for the success of the business. These objectives are achieved through a variety of compensation programs, summarized below, which support both the current and long-term performance of the business. BASE SALARY Base salaries for executive officers are determined by evaluating the responsibilities of the position and comparing it with other executive positions in the marketplace. From time to time the company's compensation consultant surveys senior executive salaries from a representative sampling (approximately 20) of companies in the computer services and business forms industries. The company's pay grade levels are then set at approximately the competitive mid-range. Each of the executive officers is assigned a pay grade based on that competitive marketplace data. Individual salaries may then vary somewhat below or above the mid-range, based upon the individual's performance and contribution to company success, tenure on the job and internal equity. Annual salary adjustments are determined by individual performance within an officer salary increase budget approved by the Committee. Base salary levels for executive officers increased an average of 4% effective January 1, 1996. The provisions of this paragraph apply to all executives except those whose employment agreements may contain terms which vary from these provisions. See pages 17-19 of this report. ANNUAL INCENTIVES At the Annual Meeting of Shareholders on February 15, 1996, a significant majority of shareholders approved a separate performance-based, incentive plan ("CEO Plan") for the company's Chief Executive Officer ("CEO"), the terms of which are substantially similar to the annual and intermediate compensation plans for the other officers. The purpose of this separate CEO Plan was to qualify all CEO compensation in excess of $1 million for deductibility under the applicable provisions of the Internal Revenue Code. Officers have an opportunity to earn annual bonuses ("Annual Plan") based on performance against financial targets established by the Committee. Since 1987, the company has used corporate return on equity ("ROE") as its primary measure of corporate performance. During fiscal 1996, the Committee introduced growth in sales and growth in earnings as additional measures for determining annual bonuses. ROE is weighted more heavily (75%) than the growth components (25%) in determining annual bonuses. Also, the ROE performance level which must be achieved before any bonus is paid was raised as was the maximum bonus achievable. At the divisional level, other measures of performance for the annual bonus include sales, operating income and return on net assets. In addition, the Committee approves adjustments to the bonus formula as may be necessary from time to time to insure against unmerited windfalls or penalties due to accounting changes or other non-operating factors. Over time, the company believes it has found that linking executive pay principally to corporate ROE directly ties the 20 21 executive's interests and rewards to those of the shareholder. Under the structure of the Annual Plan in effect for fiscal 1996, no bonus is paid until a threshold corporate ROE of 10% is achieved; maximum payout requires a combination of a 28% ROE and a 15% growth factor in sales and earnings. The annual bonus payout can range between 0% of annual salary to 90% of annual salary. For fiscal 1996, because the company achieved a 26.6% ROE and healthy growth of both sales and earnings (which varied by division), the annual bonus payout for the executive officers (including Mr. Holmes under his substantially similar but separate plan) averaged 77.4% of annual salary. Another annual incentive plan is the personal performance bonus. This plan is designed to reward all officers for the achievement of financial and non-financial goals which are agreed upon by the officer and the officer's superior. In the case of Mr. Holmes, his annual goals are agreed upon by this Committee in consultation with Mr. Holmes. Examples of financial goals have been ROE, sales, return on net assets and operating income. Examples of non-financial goals have been market share growth, total quality measures, customer satisfaction and the strengthening of a key organizational process. With the exception of Mr. Holmes and the three division presidents, whose personal performance bonuses are determined by the Compensation Committee during its year-end review, all other executive officers have their personal performance bonus determined by the respective individual to whom they report during year-end evaluations. Depending on an individual's performance against goals, this bonus can range between 0% to 20% of annual salary. For fiscal 1996 this personal performance bonus for the named executive officers ranged from 15% to 20% of annual salary. LONG-TERM INCENTIVES STOCK OPTIONS To further align the interests of shareholders and management, the company grants incentive stock options annually to approximately 300 officer and director-level employees. The number of shares awarded is driven by a pay grade level formula which is established and reviewed from time to time by the Compensation Committee. The Committee assigns a percentage to each pay grade level. That percentage is multiplied by the salary mid-point for that grade level and the result is divided by the fair market value of the Company's stock on October 1. For all officers during fiscal year 1996, the percentage of annual salary used in determining stock option grants ranged from 40% to 125%. The exercise price is the fair market value of the stock on the date of the grant. The options, which have a ten year life, are not exercisable during the first year after the grant. Thereafter, on each of the first four anniversaries of the grant, twenty-five percent of the options become exercisable. Such stock options provide incentive for the creation of shareholder value, since the full benefit of the compensation package cannot be realized unless an appreciation in the price of the company's common shares occurs over a specified number of years. STOCK OWNERSHIP GUIDELINES (Share information reflects September, 1996, two-for-one stock split) During fiscal year 1994, the Compensation Committee established suggested stock ownership guidelines for all officers of the company. These guidelines specify an appropriate level of ownership of company stock as a multiple of the officer's annual base salary. These multiples range from a high of 4.25 times annual salary (in the case of Mr. Holmes) to a low of 1.5 times annual salary. The Committee thought it appropriate to permit the officers to achieve these ownership guidelines over a ten year period in increments of 10% per year. To encourage the officers to make steady progress toward meeting the guidelines, the Committee determined that if an officer owns a quantity of shares sufficient to meet the ownership guidelines for that year the officer would be granted options on 20% more shares in addition to the officer's standard stock option grant for that year. If, for example, the standard stock option grant for that year were one hundred shares, the officer would receive options on twenty additional shares of stock for having met the guidelines for that year. As of September 1, 1996, stock ownership among the fifty officers stood at approximately 1,710,300 shares representing a market value of approximately $42.5 million. The Committee believes that these guidelines will have the positive effect of further aligning the interests of the officer group with those of all shareholders. 21 22 INTERMEDIATE INCENTIVE COMPENSATION Certain senior officers, including all named executive officers (except Mr. Holmes), also participate in an Intermediate Incentive Compensation Plan. This plan, which is paid annually, is based on a three-year average return on equity, and is designed to focus and reward senior management on producing consistent longer-term financial results. For fiscal 1996 the payout from the CEO Plan (for Mr. Holmes) and from the Intermediate Incentive Compensation Plan for the other named executive officers ranged from 70% to 100% of annual salary. CEO COMPENSATION (Share information reflects September, 1996, two-for-one stock split) Mr. Holmes has served as Chairman, President and Chief Executive Officer since August 1990, and President and Chief Executive Officer since January 1989. The Performance Graph on page 19 illustrates the company's accomplishments during much of this period. In fiscal 1996 the company achieved record revenues and earnings and exceeded a 26% ROE. Shareholders realized a 52% increase in share value during the year. Mr. Holmes' 1996 compensation of $1,458,477 (as shown in the Summary Compensation Table on page 14) included a market-priced base salary of $466,575. Under the CEO Plan he is eligible for annual and intermediate incentive compensation the performance standards of which are substantially similar to those in the annual and intermediate compensation plans for other named executive officers. The Committee awarded a personal performance bonus of $93,315 to Mr. Holmes following its year-end evaluation. On October 2, 1995, the Committee awarded Mr. Holmes an annual stock option grant for 39,600 Class A Shares which was based on the formula (explained above) applicable to his position. In addition Mr. Holmes received a grant of 400,000 non-qualified stock options pursuant to the terms of his Employment Agreement described on pages 17 through 19. SUMMARY The Committee believes that a high caliber, motivated management team is critical to sustained business success. As in prior years, in 1996 a significant portion (approximately 66%) of the total compensation potential for the named executive officers was "at risk" and payable based on individual and corporate performance-based variables that will motivate and focus management on those issues that drive the success of the company. The Committee intends to continue its performance-based pay policy which links executive rewards to shareholder returns. THE COMPENSATION COMMITTEE Dr. David E. Fry Allan Z. Loren Gayle B. Price, Jr. Martin D. Walker, Chairman DIRECTOR COMPENSATION Non-employee Directors receive an annual fee of $22,500 plus $1,000 for each Board of Directors Meeting attended. In addition, on October 1 of each year non-employee Directors receive options to purchase that number of Class A Shares which represent a fair market value of $40,000. Non-employee Directors who serve on a committee receive an additional $500 for each committee meeting attended. Committee Chairmen receive an additional $1,500 per year. No Director who is an employee of the company receives any compensation for services as a Director or committee member. 22 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT =================================================================================================================== CLASS A CLASS B TOTAL VOTING SHARES % SHARES % SHARES % =================================================================================================================== Number of shares outstanding on November 1, 1996, except as noted 80,983,063(1) 100.0 20,000,000 100.0 100,983,063(1) 100.0 below were: The following are the only persons known by the Company to own beneficially more than 5% of either class of voting security on November 1, 1996: Richard H. Grant, III 119,047(2) .15 20,000,000 100.0 20,119,047(2) 20.0 - --------------------- Director and Private Investor 800 Germantown Street Dayton, Ohio 45407 American Express Financial Advisors - ----------------------------------- IDS Tower 10 6,310,700(3) 7.8 6,310,700(3) 6.2 Minneapolis, Minnesota 55440 On November 1, 1996, the shares beneficially owned by all executive officers and Directors as a group (14 persons) were: 2,449,605(4) 3.0 20,000,000 100.0 22,449,605(4) 22.2 =================================================================================================================== (1) Does not include 11,380,329 Class A Shares held in treasury. (2) Richard H. Grant, III has sole voting and sole investment power with regard to 98,828 Class A Shares held in his own name. The total includes 20,219 Class A Shares as to which Mr. Grant holds options exercisable within 60 days. The amount excludes 12,776 Class A Shares held by Mrs. Grant as to which Mr. Grant disclaims beneficial ownership. This amount does not include 1,000,000 Class A Shares into which his 20,000,000 Class B Shares are convertible at a 20-to-1 ratio. (3) As of November 1, 1996, American Express Financial Advisors and its affiliates share dispositive power, and American Express Financial Advisors and an affiliate share voting power, for the 6,310,700 shares. (4) Includes 245,323 Class A Shares as to which such persons may exercise options within the next 60 days.
23 24 The shares beneficially owned on November 1, 1996 by each Director and Nominee for Director other than for Richard H. Grant, III who is shown above were:
NUMBER NAME OF SHARES VOTING AND INVESTMENT POWER(1) - ------------------------------------------------------------------------------------------------------------------- Joseph N. Bausman 144,856 Mr. Bausman has sole voting and sole investment power with regard to 112,996 Class A Shares held in his own name. The total includes 31,860 Class A Shares as to which Mr. Bausman holds options exercisable within 60 days. Dr. David E. Fry 1,379 Dr. Fry has sole voting and sole investment power with regard to 800 Class A Shares held in his own name. The total includes 579 Class A Shares as to which Dr. Fry holds options exercisable within 60 days. Richard H. Grant, Jr. 1,016,238 Richard H. Grant, Jr. has sole voting and sole investment power with regard to 1,986 Class A Shares held in his own name. He also has sole voting and sole investment power with regard to 1,014,252 Class A Shares held in a trust for his benefit. This amount excludes 42,532 Class A Shares held by Mrs. Grant as to which Mr. Grant disclaims beneficial ownership. David R. Holmes 578,824 Mr. Holmes has sole voting and sole investment power with regard to 507,551 Class A Shares. The total includes 12,367 Class A Shares, 9,803 Class A Shares and 9,803 Class A Shares held in the names of his three sons and 39,300 Class A Shares as to which Mr. Holmes holds options exercisable within 60 days. This amount excludes 10,211 Class A Shares held by Mrs. Holmes as to which Mr. Holmes disclaims beneficial ownership. Cleve L. Killingsworth, Jr. 0 ----- Allan Z. Loren 0 ----- Dale L. Medford 149,346 Mr. Medford has sole voting and sole investment power with regard to 89,906 shares held in his own name, and shared voting and shared investment power with regard to 10,400 shares held jointly with his spouse. The total includes 49,040 Class A Shares as to which Mr. Medford holds options exercisable within 60 days. Robert C. Nevin 175,208 Mr. Nevin has sole voting and sole investment power with regard to 121,628 Class A Shares held in his own name, 5,800 Class A Shares in the name of his daughter, and 5,800 Class A Shares held in the name of his son. The total includes 41,980 Class A Shares as to which Mr. Nevin holds options exercisable within 60 days. Gayle B. Price, Jr. 10,179 Mr. Price has sole voting and sole investment power with regard to 9,600 Class A Shares held in his own name. The total includes 579 Class A Shares as to which Mr. Price holds options exercisable within 60 days. (Table continued on following page)
24 25 Kenneth W. Thiele 8,579 Mr. Thiele has sole voting and sole investment power with regard to 8,000 Class A Shares held in his own name. The total includes 579 Class A Shares as to which Mr. Thiele holds options exercisable within 60 days. Martin D. Walker 8,579 Mr. Walker has sole voting and sole investment power with regard to 8,000 Class A Shares held in his own name. The total included 579 Class A Shares as to which Mr. Walker holds options exercisable within 60 days. (1) All shares are held with sole voting and sole investment power unless otherwise indicated. The individual holdings of each Director equal less than 1% of the issued and outstanding Class A or Class B Shares, except for Richard H. Grant, Jr. and Richard H. Grant, III. Richard H. Grant, III is the son of Richard H. Grant, Jr., and they may be deemed to be "control persons" with respect to the company; however, each disclaims any beneficial ownership of the Class A Shares or Class B Shares held by the other.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS No Executive Officer or Director is or has been indebted to the company during the last fiscal year in excess of $60,000. PART IV (Dollars in thousands) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following consolidated financial statements of the company are set forth on pages 33 through 54. Statements of Consolidated Income - For The Years Ended September 30, 1996, 1995 and 1994 Consolidated Balance Sheets - September 30, 1996 and 1995 Statements of Consolidated Shareholders' Equity - For The Years Ended September 30, 1996, 1995 and 1994 Statements of Consolidated Cash Flows - For The Years Ended September 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (Including Supplementary Data) (a)(2) FINANCIAL STATEMENT SCHEDULES FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1996 ARE ATTACHED HERETO: Schedule II - Valuation Accounts Page 55 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 25 26 (b) REPORTS ON FORM 8-K On June 3, 1996, the company filed a Report on Form 8-K under Item 2 which set forth the completion of the tender offer for all outstanding shares of the common stock of Duplex Products Inc. On August 2, 1996, the company filed a Current Report Amendment on Form 8-K under Item 7(b) which set forth the combined pro forma financial information required of the company and Duplex Products Inc. (c) EXHIBITS The exhibits as shown in "Index of Exhibits" (pages 56-63) are filed as a part of this Report. (d) CONSOLIDATED FINANCIAL STATEMENTS Individual financial statements and schedules of the company's consolidated subsidiaries are omitted from this Annual Report on Form 10-K because consolidated financial statements and schedules are submitted and because the registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements are wholly owned. -------------------------------------------------------------- The Company will provide a copy of its 1996 Annual Report to Shareholders upon written request to: ADAM M. LUTYNSKI, GENERAL COUNSEL & SECRETARY THE REYNOLDS AND REYNOLDS COMPANY P. O. BOX 2608 DAYTON, OHIO 45401 -------------------------------------------------------------- 26 27 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. THE REYNOLDS AND REYNOLDS COMPANY By /S/ ADAM M. LUTYNSKI ------------------------------------------------------------ ADAM M. LUTYNSKI General Counsel and Secretary
Date: November 19, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Date: November 19, 1996 By /S/ DAVID R. HOLMES ------------------------------------------------------------ DAVID R. HOLMES Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Date: November 19, 1996 By /S/ DALE L. MEDFORD ------------------------------------------------------------ DALE L. MEDFORD Vice President, Corporate Finance and Chief Financial Officer (Principal Financial and Accounting Officer) and Director Date: November 19, 1996 By /S/ JOSEPH N. BAUSMAN ------------------------------------------------------------ JOSEPH N. BAUSMAN President, Automotive Systems Division and Director
27 28 Date: November 19, 1996 By /S/ DR. DAVID E. FRY ------------------------------------------------------------ DR. DAVID E. FRY, Director Date: November 19, 1996 By /S/ RICHARD H. GRANT, JR. ------------------------------------------------------------ RICHARD H. GRANT, JR. Chairman of the Steering Committee and Director Date: November 19, 1996 By /S/ RICHARD H. GRANT, III ------------------------------------------------------------ RICHARD H. GRANT, III, Director Date: November 19, 1996 By /S/ ALLAN Z. LOREN ------------------------------------------------------------ ALLAN Z. LOREN, Director Date: November 19, 1996 By /S/ ROBERT C. NEVIN ------------------------------------------------------------ ROBERT C. NEVIN President, Business Systems Division and Director Date: November 19, 1996 By /S/ GAYLE B. PRICE, JR. ------------------------------------------------------------ GAYLE B. PRICE, JR., Director Date: November 19, 1996 By /S/ KENNETH W. THIELE ------------------------------------------------------------ KENNETH W. THIELE, Director Date: November 19, 1996 By /S/ MARTIN D. WALKER ------------------------------------------------------------ MARTIN D. WALKER, Director
28 29 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) and (2); 14(c) and (d) Financial Statements, Schedules and Exhibits Year Ended September 30, 1996 The Reynolds and Reynolds Company Dayton, Ohio 29 30 MANAGEMENT'S STATEMENT OF RESPONSIBILITY November 11, 1996 To Our Shareholders: The management of The Reynolds and Reynolds Company is responsible for accurately and objectively preparing the company's consolidated financial statements. These statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's best estimates and judgments. Management believes that the financial information in this annual report is free from material misstatement. The company's management maintains an environment of multilevel controls. The Company Business Principles, for example, is distributed to all employees and communicates high standards of integrity that are expected in the company's day-to-day business activities. The Company Business Principles addresses a broad range of issues including potential conflicts of interest, business relationships, accurate and timely reporting of financial information, confidentiality of proprietary information, insider trading and social responsibility. The company also maintains and monitors a system of internal controls designed to provide reasonable assurances regarding the safeguarding of company assets and the integrity and reliability of financial records. These internal controls include the appropriate segregation of duties and the application of formal policies and procedures. Furthermore, an internal audit department, which has access to all financial and other corporate records, regularly performs tests to evaluate the system of internal controls to ensure the system is adequate and operating effectively. At the date of these financial statements, management believes the company has an effective internal control system. The company's independent public auditors, Deloitte & Touche LLP, perform an independent audit of the company's consolidated financial statements. They have access to minutes of board meetings, all financial information and other corporate records. Their audit is conducted in accordance with generally accepted auditing standards and includes consideration of the system of internal controls. Their report is included in this annual report on page 31. Another level of control resides with the audit committee of the company's board of directors. The committee, comprised of four directors who are not members of management, oversees the company's financial reporting process. They recommend to the board, subject to shareholder approval, the selection of the company's independent public auditors. They discuss the overall audit scope and the specific audit plans with the independent public auditors and the internal auditors. This committee also meets regularly (separately and jointly) with the independent public auditors, the internal auditors and management to discuss the results of those audits, the evaluation of internal controls, the quality of financial reporting and specific accounting and reporting issues. David R. Holmes Dale L. Medford Chairman, President and Vice President, Corporate Finance Chief Executive Officer and Chief Financial Officer 30 31 INDEPENDENT AUDITORS' REPORT The Shareholders of The Reynolds and Reynolds Company: We have audited the accompanying consolidated balance sheets of The Reynolds and Reynolds Company and its subsidiaries as of September 30, 1996 and 1995, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. Our audits also included the financial statement schedules included at Item 14(a) (2). These financial statements and financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Reynolds and Reynolds Company and its subsidiaries at September 30, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP - -------------------------- Dayton, Ohio November 11, 1996 (November 19, 1996 as to Note 13) 31 32 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-56045 of The Reynolds and Reynolds Company on Form S-8, Post-Effective Amendments No. 1 and No. 2 to Registration Statement No. 33-48546 of The Reynolds and Reynolds Company on Form S-3, Post-Effective Amendment No. 1 to Registration Statement No. 33-51895 of The Reynolds and Reynolds Company on Form S-3, Pre-Effective Amendment No. 1 to Registration Statement No. 33-58877 of The Reynolds and Reynolds Company on Form S-3, Pre-Effective Amendment No. 1 to Registration Statement No. 33-61725 of The Reynolds and Reynolds Company on Form S-3, Registration Statement No. 33-59615 of The Reynolds and Reynolds Company on Form S-3 and Registration Statement No. 33-59617 of The Reynolds and Reynolds Company on Form S-3 of our report dated November 11, 1996 (November 19, 1996 as to Note 13), appearing in this Annual Report on Form 10-K of The Reynolds and Reynolds Company for the year ended September 30, 1996, and to the reference to us under the heading "Experts" in the Prospectus, which is part of Registration Statement No. 333-12967 of The Reynolds and Reynolds Company on Form S-3, and Registration Statement No. 333-19681 of The Reynolds and Reynolds Company on Form S-8. /s/ DELOITTE & TOUCHE LLP - -------------------------- Dayton, Ohio November 19, 1996 32 33 STATEMENTS OF CONSOLIDATED INCOME (In thousands except per share data)
For The Years Ended September 30 1996 1995 1994 - --------------------------------------------------------------------------------------- Net Sales and Revenues Information systems Products $ 756,664 $ 621,909 $ 564,976 Services 317,516 266,671 224,330 ----------- --------- --------- Total information systems 1,074,180 888,580 789,306 Financial services 26,263 22,311 19,488 ----------- --------- --------- Total net sales and revenues 1,100,443 910,891 808,794 ----------- --------- --------- Costs and Expenses Cost of sales Products 438,041 363,303 333,630 Services 125,614 107,342 96,284 ----------- --------- --------- Total cost of sales 563,655 470,645 429,914 Selling, general and administrative expenses 360,145 294,081 261,997 Restructuring charge 12,400 Financial services 11,818 9,150 6,416 ----------- --------- --------- Total costs and expenses 935,618 773,876 710,727 ----------- --------- --------- Operating Income 164,825 137,015 98,067 ----------- --------- --------- Other Charges (Income) Interest expense 5,778 3,779 3,820 Interest income (1,648) (1,674) (1,449) Other (1,548) (1,845) (1,626) ----------- --------- --------- Total other charges 2,582 260 745 ----------- --------- --------- Income Before Income Taxes 162,243 136,755 97,322 Provision for Income Taxes 68,505 58,161 31,118 ----------- --------- --------- Net Income $ 93,738 $ 78,594 $ 66,204 =========== ========= ========= Earnings Per Common Share $ 1.10 $ .92 $ .76 =========== ========= ========= Average Number of Common Shares Outstanding 85,228 85,032 87,563 =========== ========= =========
See Notes to Consolidated Financial Statements. 33 34 CONSOLIDATED BALANCE SHEETS (In thousands)
September 30 1996 1995 - --------------------------------------------------------------------------------- INFORMATION SYSTEMS ASSETS Current Assets Cash and equivalents $ 11,130 $ 18,366 -------- -------- Accounts receivable (less allowance for doubtful accounts: 1996--$5,744;1995--$3,166) 161,278 114,617 -------- -------- Inventories Finished products 42,953 33,064 Work in process 3,788 1,541 Raw materials and supplies 6,461 3,191 -------- -------- Total inventories 53,202 37,796 -------- -------- Deferred income taxes 22,398 10,912 -------- -------- Prepaid expenses and other assets 23,075 6,500 -------- -------- Total current assets 271,083 188,191 -------- -------- Property, Plant and Equipment Land and improvements 9,521 8,237 Buildings and improvements 84,716 70,678 Machinery and equipment 203,875 168,761 Furniture and other 32,607 28,216 Construction in progress 10,535 6,154 -------- -------- Total property, plant and equipment 341,254 282,046 Less accumulated depreciation 173,587 153,584 -------- -------- Net property, plant and equipment 167,667 128,462 -------- -------- Intangible Assets Goodwill 94,969 101,275 Software licensed to customers 15,435 15,063 Other 10,349 13,551 -------- -------- Total intangible assets 120,753 129,889 -------- -------- Other Assets 50,859 42,959 -------- -------- Total Information Systems Assets 610,362 489,501 -------- -------- FINANCIAL SERVICES ASSETS Finance Receivables 311,576 264,901 Cash and Other Assets 1,706 1,064 -------- -------- Total Financial Services Assets 313,282 265,965 -------- -------- TOTAL ASSETS $923,644 $755,466 ======== ======== 1996 1995 - --------------------------------------------------------------------------------- INFORMATION SYSTEMS LIABILITIES Current Liabilities Current portion of long-term debt $ 6,832 $ 714 Notes payable 7,659 9,492 Accounts payable Trade 45,208 32,636 Other 5,331 6,715 Accrued liabilities Compensation and related items 43,847 26,838 Income taxes 2,451 8,886 Other 49,033 34,301 Deferred revenues 6,917 6,251 -------- -------- Total current liabilities 167,278 125,833 -------- -------- Long-Term Debt 84,601 41,443 -------- -------- Other Liabilities Postretirement medical 38,104 35,462 Pensions 23,795 18,285 Other 1,317 1,406 -------- -------- Total other liabilities 63,216 55,153 -------- -------- Total Information Systems Liabilities 315,095 222,429 -------- -------- FINANCIAL SERVICES LIABILITIES Notes Payable 161,911 131,675 Deferred Income Taxes 71,181 67,159 Other Liabilities 2,462 1,648 -------- -------- Total Financial Services Liabilities 235,554 200,482 -------- -------- SHAREHOLDERS' EQUITY Capital Stock Preferred Class A common 50,601 25,628 Class B common 625 313 Additional Paid-In Capital 15,815 Other Adjustments (6,203) (3,581) Retained Earnings 327,972 294,380 -------- -------- Total Shareholders' Equity 372,995 332,555 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $923,644 $755,466 ======== ========
See Notes to Consolidated Financial Statements. 34 35 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands except per share data)
For The Years Ended September 30 1996 1995 1994 - ------------------------------------------------------------------------------------------- Capital Stock Class A common Balance, beginning of year $ 25,628 $ 26,067 $ 13,199 Stock splits 25,629 13,199 Capital stock issued 379 420 670 Converted from Class B common 63 Capital stock repurchased (1,000) (848) (1,035) Capital stock retired (35) (11) (29) --------- --------- --------- Balance, end of year 50,601 25,628 26,067 --------- --------- --------- Class B common Balance, beginning of year 313 313 188 Stock splits 312 188 Converted to Class A common (63) --------- --------- --------- Balance, end of year 625 313 313 --------- --------- --------- Additional Paid-In Capital Balance, beginning of year 15,815 2,557 2,693 Stock splits (18,712) (13,387) Capital stock issued 3,314 12,507 15,315 Capital stock repurchased (2,177) Capital stock retired (1,117) (451) (999) Tax benefits from stock options 700 1,202 1,112 --------- --------- --------- Balance, end of year 0 15,815 2,557 --------- --------- --------- Other Adjustments Balance, beginning of year (3,581) (2,566) (3,316) Foreign currency translation (269) 28 (328) Minimum pension liability (2,353) (1,043) 1,078 --------- --------- --------- Balance, end of year (6,203) (3,581) (2,566) --------- --------- --------- Retained Earnings Balance, beginning of year 294,380 266,668 250,561 Stock split (7,229) Net income 93,738 78,594 66,204 Cash dividends Class A common (1996--$.25 PER SHARE; 1995--$.20 per share; 1994--$.165 per share) (20,344) (16,451) (14,036) Class B common (1996--$.0125 PER SHARE; 1995--$.01 per share; 1994--$.00825 per share) (250) (200) (190) Capital stock repurchased (32,323) (34,231) (35,871) --------- --------- --------- Balance, end of year 327,972 294,380 266,668 --------- --------- --------- Total Shareholders' Equity $ 372,995 $ 332,555 $ 293,039 ========= ========= =========
See Notes to Consolidated Financial Statements. 35 36 STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands)
For The Years Ended September 30 1996 1995 1994 - ------------------------------------------------------------------------------------------- INFORMATION SYSTEMS Cash Flows Provided by Operating Activities $ 110,345 $ 107,222 $ 94,956 --------- --------- -------- Cash Flows Provided by (Used for) Investing Activities Business combinations (78,039) (20,824) (9,814) Capital expenditures (39,980) (30,750) (27,888) Net proceeds from sales of assets 10,943 3,744 8,312 Proceeds from sale of receivables 6,000 Capitalization of software licensed to customers (4,103) (3,471) (2,695) (Advances to) repayments from financial services 4,189 (9,708) 336 --------- --------- -------- Net cash used for investing activities (106,990) (55,009) (31,749) --------- --------- -------- Cash Flows Provided by (Used for) Financing Activities Additional borrowings 50,000 1,254 1,250 Principal payments on debt (8,159) (5,051) (2,266) Cash dividends paid (20,594) (16,651) (14,226) Capital stock issued 1,754 1,422 1,882 Capital stock repurchased (33,323) (35,079) (39,083) --------- --------- -------- Net cash used for financing activities (10,322) (54,105) (52,443) --------- --------- -------- Effect of Exchange Rate Changes on Cash (269) 28 29 --------- --------- -------- Increase (Decrease) in Cash and Equivalents (7,236) (1,864) 10,793 Cash and Equivalents, Beginning of Year 18,366 20,230 9,437 --------- --------- -------- Cash and Equivalents, End of Year $ 11,130 $ 18,366 $ 20,230 ========= ========= ======== FINANCIAL SERVICES Cash Flows Provided by Operating Activities $ 15,449 $ 13,854 $ 10,767 --------- --------- -------- Cash Flows Provided by (Used for) Investing Activities Finance receivables originated (117,040) (115,643) (81,940) Collections on finance receivables 76,174 64,232 55,038 --------- --------- -------- Net cash used for investing activities (40,866) (51,411) (26,902) --------- --------- -------- Cash Flows Provided by (Used for) Financing Activities Additional borrowings 72,988 70,000 41,650 Principal payments on debt (42,752) (42,688) (24,975) Advances from (repayments to) information systems (4,189) 9,708 (336) --------- --------- -------- Net cash provided by financing activities 26,047 37,020 16,339 --------- --------- -------- Increase (Decrease) in Cash and Equivalents 630 (537) 204 Cash and Equivalents, Beginning of Year 663 1,200 996 --------- --------- -------- Cash and Equivalents, End of Year $ 1,293 $ 663 $ 1,200 ========= ========= ========
See Notes to Consolidated Financial Statements. 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of the parent company and its domestic and foreign subsidiaries and present details of revenues, expenses, assets, liabilities and cash flows for both information systems and financial services. Information systems is comprised of the company's computer systems and business forms operations. Financial services is comprised of Reyna Financial Corporation, the company's wholly-owned financial services subsidiary and a similar operation in Canada. In accordance with industry practice, the assets and liabilities of information systems are classified as current or non-current and those of financial services are unclassified. Intercompany balances and transactions between the consolidated companies are eliminated. USE OF ESTIMATES The consolidated financial statements are prepared in conformity with generally accepted accounting principles and include amounts based on management's best estimates and judgments. The use of estimates and judgments may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. CASH AND EQUIVALENTS For purposes of reporting cash flows, cash and equivalents includes cash on hand, cash deposits and investments with maturities of three months or less at the time of purchase. TRANSFER OF RECEIVABLES The company has entered into an agreement to transfer a percentage interest in a pool of accounts receivable. The transferee's recourse is limited to certain circumstances. Under terms of the agreement, which is accounted for as a sale of receivables, the transferee advances the company funds equal to the face value of the receivables transferred. Monthly, the company pays the transferee a discount, based on market interest rates, on the uncollected receivable balances. The company may transfer up to $10,000 of receivables under this agreement, which expires September 30, 1998. The balance of receivables transferred was $6,000 at September 30, 1996 and 1995. The transferee also has a collateral interest in $1,500 of other receivables at September 30, 1996. CONCENTRATIONS OF CREDIT RISK The company is a leading provider of information management systems to automobile dealerships. A significant portion of finance receivables and accounts receivable are from automobile dealerships. ALLOWANCE FOR LOSSES An allowance for losses on finance receivables is established based on historical loss experience, portfolio profile, industry averages and current economic conditions. Finance receivables are charged to the allowance for losses when an account is deemed to be uncollectible, taking into consideration the financial condition of the customer and the value of the collateral. Recoveries of finance receivables, previously charged off as uncollectible, are credited to the allowance for losses. 37 38 INVENTORIES Inventories are stated at the lower of cost or market. Costs of domestic business forms inventories are determined by the last-in, first-out (LIFO) method. At September 30, 1996 and 1995, LIFO inventories were $45,253 and $27,928, respectively. These inventories determined by the first-in, first-out (FIFO) method would increase by $6,232 in 1996, $7,096 in 1995 and $4,256 in 1994. For other inventories, cost is determined by specific identification or the FIFO method. Market is based on net realizable value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are provided over the estimated useful service lives of the assets or asset groups, principally on the straight-line method for financial reporting purposes. Estimated asset lives are:
Years - -------------------------------------------------------------------------------- Land improvements 10 Buildings and improvements 3--33 Machinery and equipment 3--18 Furniture and other 3--15
INTANGIBLE ASSETS The excess of cost over net assets of companies acquired is recorded as goodwill and amortized on a straight-line basis typically over five to forty years. Amortization expense was $10,541 in 1996, $8,530 in 1995 and $5,707 in 1994. At September 30, 1996 and 1995, the accumulated amortization was $36,183 and $25,644, respectively. The company capitalizes certain costs of developing its software products. Upon completion of a software product, amortization is determined based on the larger of the amounts computed using (a) the ratio that current gross revenues for each product bears to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product, ranging from five to seven years. Amortization expense for software licensed to customers was $3,731 in 1996, $3,746 in 1995 and $4,059 in 1994. At September 30, 1996 and 1995, the accumulated amortization was $43,052 and $39,347, respectively. Other intangible assets are amortized over periods ranging from three to fifteen years. Amortization expense was $2,408 in 1996, $2,165 in 1995 and $1,688 in 1994. At September 30, 1996 and 1995, the accumulated amortization was $10,398 and $8,099, respectively. LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This statement also requires that long-lived assets and certain intangible assets to be disposed of be reported at the lower of their carrying amount or fair value less costs to sell. The adoption of this statement had no material effect on the financial statements of the company. REVENUE RECOGNITION - INFORMATION SYSTEMS Information systems revenues consist of both product sales and service revenues. Product sales, including computer hardware, software licenses and business forms, are generally recorded upon shipment to customers. In certain instances, computer systems sales are not recognized until installation is completed. Under certain forms management contractual arrangements, custom forms are stored for future delivery to customers, and are recognized as revenue when title passes and the customer has been invoiced. Service revenues, which include computer hardware maintenance, software support, training and forms management services, are recorded ratably over the contract period or as services are performed. Forms management services represent fees for inventory management 38 39 and warehousing services. Forms management services may be included in product sales or separately billed to customers. REVENUE RECOGNITION - FINANCIAL SERVICES Financial services revenues consist primarily of interest earned on financing the company's computer systems product sales. Revenues are recognized over the lives of financing contracts, generally four to eight years, using the interest method. LEASE OBLIGATIONS The company leases premises and equipment under various operating lease agreements. As of September 30, 1996, future minimum lease payments relating to these agreements were $20,916 in 1997, $15,214 in 1998, $9,367 in 1999, $6,439 in 2000 and $4,704 in 2001. Rental expenses were $25,660 in 1996, $19,408 in 1995 and $19,577 in 1994. RESEARCH AND DEVELOPMENT COSTS The company expenses research and development costs as incurred. These costs were $24,439 in 1996, $20,978 in 1995 and $18,115 in 1994. INCOME TAXES The parent company and its domestic subsidiaries file a consolidated U.S. federal income tax return. Deferred income taxes are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. Temporary differences result principally from financial services product financing activities, postretirement benefits and different depreciation methods. No deferred income tax liabilities are recorded on undistributed earnings of the foreign subsidiary because, for the most part, those earnings are permanently reinvested. Undistributed earnings of the foreign subsidiary at September 30, 1996 were $16,722. The calculation of the unrecognized deferred income tax liability on these earnings is not practicable. EARNINGS PER COMMON SHARE Earnings per common share are computed by dividing net income by the weighted average number of Class A common shares and Class A common share equivalents outstanding during each year. Class A common share equivalents consist of those shares which would be outstanding, assuming all Class B common shares were converted into Class A common shares and assuming all dilutive stock options were exercised and the proceeds used to repurchase Class A common shares at the average market price. The dilutive effect of stock options is not material. BUSINESS FORMS RESTRUCTURING In 1994, the company recorded a restructuring charge of $12,400 for costs to be incurred in the disposal of part of its computer paper product line and the consolidation of certain custom business forms printing operations. This transaction generated $11,500 of income tax benefits which more than offset the negative after-tax effect of the restructuring charge. During 1995 this restructuring was completed and the costs incurred approximated those originally accrued. 2. BUSINESS COMBINATIONS On April 22, 1996 the company announced a cash tender offer to acquire the outstanding shares of Duplex Products Inc. (Duplex) for $12 per share. On May 20, 1996 the company purchased the tendered shares of Duplex for $89,800. Duplex, a provider of business forms and labels, electronic printing and mailing services, document management programs, forms automation solutions and process analysis to customers throughout the United States, reported sales of $275,000 in 1995. The company initially financed this transaction through existing revolving credit agreements. Ultimately, the company expects to obtain new long-term financing and repay the revolving credit agreement borrowings. 39 40 The company recorded liabilities for the costs to exit duplicate manufacturing, distribution and administrative facilities of Duplex. These liabilities included the costs of closing seven Duplex manufacturing plants, five distribution facilities and an administrative building. At September 30, 1996 the company had closed three of the manufacturing plants, one distribution facility and the administrative building. The company plans to exit the remaining facilities during fiscal year 1997. As of May 20, 1996 key elements of the costs accrued for exiting duplicate facilities were involuntary termination benefits of $8,620, relocation costs of $1,346 and lease costs of $1,760. Involuntary termination benefits represent severance payments and outplacement services for 550 employees, comprised principally of manufacturing employees. Through September 30, 1996, 255 employees were terminated and $2,086 of involuntary termination benefits, $302 of relocation costs and $46 of lease costs were paid. The company recorded the assets of the duplicate Duplex facilities as current assets held for sale. At May 20, 1996, these assets of $14,397 were recorded at their fair market value less costs to dispose. At September 30, 1996, $4,305 of these assets had been sold. The company also purchased fifteen other businesses in the automotive, healthcare and general business forms markets during the last three years. The other businesses purchased in 1996 had annual sales of about $50,000. Businesses acquired in 1995 and 1994 had annual sales of $56,000 and $32,000, respectively. The businesses were purchased with a combination of cash, notes payable and stock as reported in the table below. The issuances of notes payable and capital stock were considered non-cash transactions for accounting purposes and were not included in the statements of cash flows. These business combinations were accounted for as purchases and the accounts of the acquired businesses were included in the company's financial statements since the dates of acquisition. In connection with these business combinations, the company recorded goodwill of $859 in 1996, $31,367 in 1995 and $18,979 in 1994. This goodwill is being amortized on a straight-line basis over five to fifteen years. No goodwill was recorded for the Duplex transaction. Under the terms of some of the purchase agreements, the company may be required to make additional payments, contingent on the sales and profitability of the business purchased. These payments, if made, will either be expensed in the period incurred or charged to goodwill. The amount of contingent payments charged to goodwill was $4,270 in 1996 and $1,351 in 1995. Contingent payments may be made through 2006. COMPONENTS OF PURCHASE PRICES
1996 1995 1994 - ---------------------------------------------------------------------------------- Cash (net of cash and equivalents acquired) $78,039 $20,824 $ 9,814 Notes payable 9,492 Capital stock issued (1996 -- 31,472 SHARES; 1995 -- 827,576 shares; 1994 -- 1,225,384 shares) 796 11,383 13,075 ------- ------- ------- Totals $78,835 $41,699 $22,889 ======= ======= =======
PRO FORMA INFORMATION (UNAUDITED) On a pro forma basis, assuming that the 1996 business combinations were made as of October 1, 1994, the consolidated revenues of the company would have increased by about $174,000 in 1996 and $337,000 in 1995. Net earnings would have decreased by $2,600 or $.03 per share in 1996 and $4,000 or $.04 per share in 1995. These pro forma results of operations include pre-acquisition results of the businesses acquired and may not be indicative of the results of operations that actually would have been obtained if the business combinations had been in effect or that may be obtained in the future. 40 41 3. INCOME TAXES
PROVISION FOR INCOME TAXES 1996 1995 1994 - ------------------------------------------------------------------------------------- Current Federal $ 50,598 $ 36,800 $ 20,340 State and local 11,112 9,221 4,121 Foreign 902 (276) (380) Deferred Financial services product financing activities 4,022 15,557 9,538 Depreciation 690 2,774 (5,778) Capital losses 1,696 2,814 (3,900) Capital losses valuation allowance (1,122) (1,800) 2,198 Other 607 (6,929) 4,979 -------- -------- -------- Provision for income taxes $ 68,505 $ 58,161 $ 31,118 ======== ======== ======== Income taxes paid (net of refunds) $ 79,616 $ 39,821 $ 24,017 ======== ======== ========
RECONCILIATION OF INCOME TAX RATES 1996 1995 1994 AMOUNT PERCENT Amount Percent Amount Percent - ----------------------------------------------------------------------------------------------- Statutory federal income taxes $ 56,785 35.0% $47,864 35.0% $ 34,062 35.0% State and local taxes less federal income tax effect 8,996 5.5 7,573 5.5 5,631 5.8 Divestiture of computer paper business (11,500) (11.8) Goodwill amortization and write-off 2,636 1.6 2,228 1.6 3,207 3.3 Other 88 .1 496 .4 (282) (.3) -------- ---- ------- ---- -------- ---- Provision for income taxes $ 68,505 42.2% $58,161 42.5% $ 31,118 32.0% ======== ==== ======= ==== ======== ====
INFORMATION SYSTEMS DEFERRED INCOME TAX ASSETS (LIABILITIES) 1996 1995 - ------------------------------------------------------------------------------ Postretirement medical $ 15,419 $ 14,371 Pensions 9,005 5,496 Acquired net operating losses 6,668 Costs to exit duplicate facilities 3,743 Capital losses 157 1,853 Other 24,165 14,327 Depreciation (17,700) (11,341) Capital losses valuation allowance (43) (1,165) Other (17,009) (10,360) -------- -------- Totals 24,405 13,181 Current 22,398 10,912 -------- -------- Non-current $ 2,007 $ 2,269 ======== ========
The carryforward of net operating losses expires primarily in 2009. 41 42 4. FINANCIAL SERVICES
INCOME STATEMENTS 1996 1995 1994 - -------------------------------------------------------------------------------- Revenues $26,263 $ 22,311 $ 19,488 ------- -------- -------- Expenses Interest expense 9,072 7,191 5,044 Allowance for losses provision (benefit) 500 (150) (700) General and administrative 2,246 2,109 2,072 ------- -------- -------- Total expenses 11,818 9,150 6,416 ------- -------- -------- Income before income taxes 14,445 13,161 13,072 Provision for income taxes 5,708 5,192 5,199 ------- -------- -------- Net income $ 8,737 $ 7,969 $ 7,873 ======= ======== ========
FINANCE RECEIVABLES 1996 1995 - -------------------------------------------------------------------------------- Product financing receivables $ 356,387 $ 306,470 Unguaranteed residual values 22,143 16,495 Allowance for losses (3,314) (3,903) Unearned interest income (65,933) (56,054) Other 2,293 1,893 --------- --------- Totals $ 311,576 $ 264,901 ========= =========
As of September 30, 1996, product financing receivables due for each of the next five years were $110,598 in 1997, $93,464 in 1998, $76,829 in 1999, $51,997 in 2000 and $22,033 in 2001.
ALLOWANCE FOR LOSSES 1996 1995 - -------------------------------------------------------------------------------- Balance, beginning of year $ 3,903 $ 4,854 Provision (benefit) 500 (150) Net losses (1,089) (801) ------- ------- Balance, end of year $ 3,314 $ 3,903 ======= =======
42 43 5. FINANCING ARRANGEMENTS
INFORMATION SYSTEMS 1996 1995 - ------------------------------------------------------------------------------------ Short-term notes, weighted average interest rates of 6.0% at September 30, 1996 and 7.3% at September 30, 1995 $ 7,659 $ 9,492 ======= ======= Fixed rate notes, weighted average interest rates of 6.6% at September 30, 1996 and 6.5% at September 30, 1995, maturing through 2003 $41,433 $42,157 Variable rate notes, weighted average interest rate of 6.1% at September 30, 1996, maturing through 2002 50,000 ------- ------- Totals 91,433 42,157 Current portion 6,832 714 ------- ------- Long-term portion $84,601 $41,443 ======= =======
Loan agreements limit consolidated indebtedness and require a minimum current ratio of 1.50. Loan agreements also limit dividend payments to $39,000 as of September 30, 1996. As of September 30, 1996, the fair values of information systems financing arrangements were $7,659 for short-term notes, $39,954 for fixed rate notes and $50,000 for variable rate notes. At September 30, 1995, the fair values of information systems financing arrangements were $9,525 for short-term notes and $41,148 for fixed rate notes. At September 30, 1996, debt maturities were $6,832 in 1997, $8,531 in 1998, $19,048 in 1999, $21,298 in 2000 and $21,548 in 2001. Interest paid was $5,882 in 1996, $3,006 in 1995 and $3,153 in 1994. FINANCIAL SERVICES In the ordinary course of business, the company borrows cash to fund investments in finance receivables from the sale of the company's products. The company attempts to limit its interest rate exposure between the interest earned on fixed rate finance receivables and the interest paid on variable rate financing agreements through the use of interest rate management agreements. Interest rate swaps provide for interest to be received on notional amounts at variable rates and provide for interest to be paid on the same notional amounts at fixed rates. Ceiling agreements limit the maximum interest rates the company pays on variable rate financing agreements. Fixed interest rates do not change over the life of the agreements. Variable interest rates are reset at least every ninety days and are based on LIBOR or commercial paper indices and are settled with counterparties at that time. Net interest received or paid on these contracts is reflected in interest expense. The company is exposed to credit related losses in the event of nonperformance by counterparties to the interest rate management agreements. The company attempts to minimize this credit risk by only entering into agreements with counterparties that have a Standard & Poor's rating of "A" or higher. The company also diversifies its interest rate management agreements among several financial institutions. Interest rate management agreements are accounted for using settlement accounting. 43 44
Notional Amounts Notes Swaps Ceilings - -------------------------------------------------------------------------------- SEPTEMBER 30, 1996 - -------------------------------------------------------------------------------- Variable rate notes, maturing through 2002 $ 76,875 $ 1,875 $20,625 Weighted average interest rate 6.0% Weighted average pay rate 4.4% Weighted average receive rate 5.6% Weighted average ceiling interest rate 7.2% Fixed rate notes, maturing through 2000 85,036 Weighted average interest rate 6.1% --------- ------- ------- Totals $ 161,911 $ 1,875 $20,625 ========= ======= =======
- -------------------------------------------------------------------------------- September 30, 1995 - -------------------------------------------------------------------------------- Variable rate notes, maturing through 2000 $ 61,675 $ 10,938 $ 30,625 Weighted average interest rate 6.6% Weighted average pay rate 5.1% Weighted average receive rate 5.9% Weighted average ceiling interest rate 7.2% Fixed rate notes, maturing through 1999 70,000 Weighted average interest rate 6.0% --------- -------- -------- Totals $ 131,675 $ 10,938 $ 30,625 ========= ======== ========
Loan agreements require financial services to maintain a minimum ratio of income before income taxes and interest expense to interest expense of 1.25. The fair value of financial services debt was $161,367 and $131,293 at September 30, 1996 and 1995, respectively. At September 30, 1996, maturities of notes were $68,322 in 1997, $38,010 in 1998, $32,364 in 1999, $14,299 in 2000 and $6,667 in 2001. Interest paid was $9,032 in 1996, $7,211 in 1995 and $5,141 in 1994. The interest rate swap agreement matures in 1997. At September 30, 1996, notional amount maturities of ceiling agreements were $10,000 in 1997, $8,750 in 1998 and $1,875 in 1999. The fair values of interest rate swap agreements were $6 and $62 at September 30, 1996 and 1995, respectively. The fair values of interest rate ceiling agreements were $21 and $83 at September 30, 1996 and 1995, respectively. The premiums paid for an interest rate ceiling agreement is amortized on a straight-line basis over the life of the agreement. Unamortized premium costs were $219 at September 30, 1996 and $329 at September 30, 1995. REVOLVING CREDIT AGREEMENTS Information systems and financial services share variable rate revolving credit agreements which total $110,000 and require commitment fees on unused credit. At September 30, 1996, available balances under these agreements were $33,580. FAIR VALUES Fair values of financial instruments are determined using interest rates available to the company for debt and interest rate management agreements with the same remaining maturities. 44 45 6. CAPITAL STOCK
1996 1995 1994 - --------------------------------------------------------------------------------- Preferred No par value Authorized shares 60,000,000 60,000,000 60,000,000 Class A common Par value per share $ .625 $ .625 $ .625 Authorized shares 120,000,000 120,000,000 60,000,000 ============ ============ =========== Issued and outstanding shares Balance, beginning of year 82,011,136 83,415,152 84,476,044 Issued 605,877 1,342,926 2,144,268 Converted from Class B common 200,000 Repurchased (1,600,000) (2,712,600) (3,310,800) Retired (56,442) (34,342) (94,360) ------------ ------------ ----------- Balance, end of year 80,960,571 82,011,136 83,415,152 ============ ============ =========== Class B common Par value per share $ .03125 $ .03125 $ .03125 Authorized shares 30,000,000 30,000,000 30,000,000 Issued and outstanding shares 20,000,000 20,000,000 20,000,000
Dividends on Class A common shares must be twenty times the dividends on Class B common shares and must be paid simultaneously. Each share of Class A common and Class B common is entitled to one vote. The Class B common shareholder may convert twenty Class B common shares to one share of Class A common. In 1994, 4,000,000 Class B common shares were converted into 200,000 Class A common shares. The company has reserved sufficient authorized Class A common shares for Class B conversions and stock option plans. Each outstanding Class A common share has one preferred share purchase right. Each outstanding Class B common share has one-twentieth of a right. Rights become exercisable if a person or group acquires or seeks to acquire, through a tender or exchange offer, 20% or more of the company's Class A common shares. In that event, all holders of Class A common shares and Class B common shares, other than the acquirer, could exercise their rights and purchase preferred shares at a substantial discount. At the date of these financial statements, the company had no agreements or commitments with respect to the sale or issuance of the preferred shares. On August 6, 1996, the company's board of directors approved a two-for-one common stock split. As a result of the split, on September 17, 1996, common shareholders received one additional share for each share held as of September 3, 1996. Par value remained $.625 per Class A common share and $.03125 per Class B common share. The company reclassified $25,629 to Class A common and $312 to Class B common from additional paid-in capital and retained earnings for the par value of the additional shares. Share and per share information presented in the accompanying financial statements reflects the stock split. The company repurchased Class A common shares for treasury at average prices of $20.83 in 1996, $12.93 in 1995 and $11.80 in 1994. The remaining balance of shares authorized for repurchase by the board of directors was 3,539,000 at September 30, 1996. Treasury shares at September 30 were 11,402,821 in 1996, 10,408,698 in 1995 and 9,039,024 in 1994. 45 46 7. EMPLOYEE STOCK OPTION PLANS The company's stock option plans consist of incentive stock options and non-qualified stock options to purchase Class A common shares which are awarded to certain key employees. Stock options are generally granted at a price equal to fair market value on the date of grant. Options may be granted at any price not less than par value ($.625 at September 30, 1996). During the three years ended September 30, 1996, no options were granted at a price less than fair market value. At September 30, 1996, options to purchase 1,242,327 Class A common shares were exercisable and options to purchase 2,648,232 additional Class A common shares were available for future awards.
Weighted Average Shares Under Option Prices Option Per Share - ----------------------------------------------------------------------------------- Outstanding, September 30, 1993 2,680,772 $ 3.52 Granted 5,471,280 12.38 Exercised (918,884) 3.26 Canceled (19,920) 10.00 --------- Outstanding, September 30, 1994 7,213,248 10.25 Granted 736,080 12.52 Exercised (547,256) 3.82 Canceled (82,000) 12.19 --------- Outstanding, September 30, 1995 7,320,072 10.94 Granted 996,710 17.27 Exercised (574,405) 5.31 Canceled (137,770) 12.78 --------- Outstanding, September 30, 1996 7,604,607 12.16 =========
On August 7, 1996, the company's board of directors approved a non-qualified stock option plan for substantially all employees not covered by an existing stock option plan. Stock options to purchase Class A common shares may be awarded each year at the discretion of the board of directors. The number of options, terms and conditions of options are also determined by the board of directors. Options may be granted at any price not less than par value ($.625 at September 30, 1996). No options have been awarded as of September 30, 1996. 46 47 8. POSTRETIREMENT BENEFITS
PENSION EXPENSE 1996 1995 1994 - ---------------------------------------------------------------------------------- Defined benefit plans Service cost $ 6,525 $ 5,384 $ 5,314 Interest on projected benefit obligation 9,524 8,463 7,546 Actual return on plan assets (13,586) (12,640) (85) Net amortization and deferral 6,100 5,535 (5,781) -------- -------- ------- Net periodic pension cost 8,563 6,742 6,994 Defined contribution plans 2,313 2,007 1,916 Multi-employer plans 312 319 255 -------- -------- ------- Totals $ 11,188 $ 9,068 $ 9,165 ======== ======== ======= Actuarial assumptions of defined benefit plans Discount rate 7.875% 8.25% 7.5% Rate of compensation increase 5.0% 5.0% 4.5% Expected long-term rate of return on assets 9.0% 9.0% 9.0% Actuarial cost method PROJECTED UNIT CREDIT Measurement period JULY 1 - JUNE 30
The company sponsors non-contributory, defined benefit pension plans for most employees. Pension benefits are based on years of service and compensation during an employee's final ten years of employment. The company's funding policy is to make annual contributions to the plans sufficient to meet or exceed the minimum statutory requirements. The company and its actuaries review the pension plans each year. The actuarial assumptions are intended to reflect expected experience over the life of the pension liability. In 1996 the company revised actuarial assumptions regarding retirement age and incentive compensation to better reflect expectations. The company sponsors defined contribution savings plans covering most domestic employees. Generally, contributions are funded monthly and represent 40% of the first 3% of compensation contributed to the plan by participating employees. The company also participates in several multi-employer plans which provide defined benefits to union employees. 47 48
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS SEPTEMBER 30, 1996 September 30, 1995 ABO ABO ASSETS EXCEEDS Assets Exceeds EXCEED ABO ASSETS Exceed ABO Assets - -------------------------------------------------------------------------------------- Defined benefit plans Vested benefit obligation $ 76,069 $ 26,407 $ 71,428 $ 22,200 ========= ======== ======== ======== Accumulated benefit obligation (ABO) $ 79,584 $ 29,128 $ 73,732 $ 23,765 ========= ======== ======== ======== Projected benefit obligation (PBO) $ 107,505 $ 32,725 $ 95,696 $ 26,768 Fair market value of plan assets (100,621) (2,775) (87,838) (2,187) --------- -------- -------- -------- PBO greater than plan assets 6,884 29,950 7,858 24,581 Unrecognized net loss (8,553) (9,965) (10,832) (5,414) Minimum pension liability 11,100 7,548 Unrecognized prior service cost (775) (2,500) (764) (2,556) Unrecognized net asset (liability) being amortized over 8 to 15 years 1,732 (2,232) 2,762 (2,581) --------- -------- -------- -------- Net pension (asset) liability (712) 26,353 (976) 21,578 Multi-employer liability 206 219 --------- -------- -------- -------- Totals (asset) liability $ (712) $ 26.559 $ ( 976) $ 21,797 ========= ======== ======== ======== Minimum pension liability Intangible asset $ 4,735 $ 5,144 Deferred income tax benefit 2,582 974 Charge to shareholders' equity 3,783 1,430 -------- -------- Totals $ 11,100 $ 7,548 ======== ======== Actuarial assumptions of defined benefit plans PBO discount rate 8.0% 7.875% Rate of compensation increase 3.75%-5.0% 5.0%
At September 30, 1996 and 1995, about 51% and 53% of the plans' assets were invested in cash and equivalents, government bonds and investment grade corporate bonds. The balance of the plans' assets were invested in equities. 48 49
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE 1996 1995 1994 - --------------------------------------------------------------------------- Defined contribution plan $3,617 $3,434 $3,416 ------ ------ ------ Defined benefit plans Service cost 1,120 935 1,016 Interest on accumulated benefit obligation 3,150 2,835 2,460 ------ ------ ------ Total defined benefit plans 4,270 3,770 3,476 ------ ------ ------ Totals $7,887 $7,204 $6,892 ====== ====== ====== Actuarial assumptions of defined benefit plans Discount rate 7.875% 8.25% 7.5% Healthcare cost trend rate through 2007 6.0% 6.0% 6.0% Healthcare cost trend rate thereafter 5.0% 5.0% 5.0%
The company funds a defined contribution plan, which covers substantially all employees. This plan, known as Retiree Medical Savings Accounts, will enable future retirees to purchase postretirement medical insurance from the company. Contributions are funded annually based on the company's return on equity and are the same for each eligible employee. Forfeitures of non-vested savings accounts are used to reduce contributions required by the company. The company sponsors a defined benefit medical plan for employees who retired before October 1, 1993. Future retirees may purchase postretirement medical insurance from the company using Retiree Medical Savings Accounts. Discounts from the market price of postretirement medical insurance will be provided to certain retirees based on age and length of remaining service as of October 1, 1993. These discounts are included in the determination of the accumulated benefit obligation. The company also sponsors a defined benefit life insurance plan for substantially all employees. The company funds medical and life insurance benefits on a pay-as-you-go basis.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION 1996 1995 - ------------------------------------------------------------------- Accumulated benefit obligation Retirees $ 21,099 $ 21,681 Fully eligible active plan participants 6,629 6,724 Other active plan participants 13,854 12,455 Unrecognized net loss (1,978) (3,798) -------- -------- Totals $ 39,604 $ 37,062 ======== ======== Actuarial assumptions Discount rate 8.0% 7.875% Healthcare cost trend rate through 2007 6.0% 6.0% Healthcare cost trend rate thereafter 5.0% 5.0%
The effect of a 1% increase in the assumed healthcare cost trend rate would have increased the service and interest cost components of postretirement medical insurance in 1996 by $188 and the accumulated benefit obligation at September 30, 1996 by $2,297. 49 50 9. CASH FLOW STATEMENTS
1996 1995 1994 - ------------------------------------------------------------------------------------------- INFORMATION SYSTEMS Cash flows provided by (used for) operating activities Net income $ 85,001 $ 70,625 $ 58,331 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 44,327 37,348 34,934 Deferred income taxes 1,605 (3,314) (2,484) Deferred income taxes transferred to (from) financial services (1,587) 8,664 6,026 Loss on sales of assets (2,677) (617) 3,743 Changes in operating assets and liabilities Accounts receivable (22,050) (22,406) (10,184) Inventories 15,038 4,500 2,687 Prepaid expenses, intangible and other assets (9,209) (6,279) (6,013) Accounts payable 1,785 1,882 5,879 Accrued and other liabilities (1,888) 16,819 2,037 --------- --------- -------- Net cash provided by operating activities $ 110,345 $ 107,222 $ 94,956 ========= ========= ======== FINANCIAL SERVICES Cash flows provided by (used for) operating activities Net income $ 8,737 $ 7,969 $ 7,873 Adjustments to reconcile net income to net cash provided by operating activities Deferred income taxes 4,022 15,557 9,538 Deferred income taxes transferred to (from) information systems 1,587 (8,664) (6,026) Changes in receivables, other assets and other liabilities 1,103 (1,008) (618) --------- --------- -------- Net cash provided by operating activities $ 15,449 $ 13,854 $ 10,767 ========= ========= ========
50 51 10. SEGMENT REPORTING The company conducts business throughout the United States and Canada in three industry segments, computer systems, business forms and financial services. The computer systems segment provides integrated computer systems products and services to automotive and healthcare markets. The segment's products include integrated software packages, computer hardware and related hardware and software installation. Services include customer training and consulting, hardware maintenance, software support and database management. The business forms segment manufactures and distributes printed business forms and systems, custom continuous and snap out forms, specialty printed products and provides forms management services to automotive, healthcare and general business markets. The financial services segment provides financing for the company's computer systems products to the automotive and healthcare markets.
Computer Business Financial Systems Forms Services Corporate Totals - ------------------------------------------------------------------------------------------ 1996 - ------------------------------------------------------------------------------------------ Net sales and revenues $478,994 $595,186 $ 26,263 $1,100,443 Operating income 69,751 80,629 14,445 164,825 Income before income taxes 72,123 80,723 14,445 $ (5,048) 162,243 Identifiable assets 196,508 363,214 313,282 50,640(1) 923,644 Depreciation and amortization 26,060 16,880 1,387 44,327 Capital expenditures 21,539 11,796 6,645 39,980 1995 - ------------------------------------------------------------------------------------------ Net sales and revenues $422,678 $465,902 $ 22,311 $ 910,891 Operating income 64,138 59,716 13,161 137,015 Income before income taxes 66,903 59,500 13,161 $ (2,809) 136,755 Identifiable assets 182,727 257,022 265,965 49,752(1) 755,466 Depreciation and amortization 21,832 14,246 1,270 37,348 Capital expenditures 18,462 10,927 1,361 30,750 1994 - ------------------------------------------------------------------------------------------ Net sales and revenues $363,763 $425,543 $ 19,488 $ 808,794 Operating income(2) 59,254 25,741 13,072 98,067 Income before income taxes(2) 61,760 25,448 13,072 $ (2,958) 97,322 Identifiable assets 139,038 242,838 204,107 48,716(1) 634,699 Depreciation and amortization 17,218 16,746 970 34,934 Capital expenditures 13,933 8,502 5,453 27,888 (1) Principally cash and equivalents, and corporate headquarters office building and contents. (2) Business forms income was reduced by a $12,400 restructuring charge.
51 52 11. CONTINGENCIES The U.S. Environmental Protection Agency (EPA) has designated the company as one of a number of potentially responsible parties (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at four environmental remediation sites. The EPA has contended that any company linked to a CERCLA site is potentially liable for all response costs under the legal doctrine of joint and several liability. The first site relates to a privately owned and operated solid waste disposal facility. The EPA has issued a record of decision mandating certain remediation activities. The company has shared costs with other PRPs for the remedial investigation and feasibility study of the site. During the fourth quarter of fiscal year 1996, the company accepted a de minimis settlement offer and has no future obligation with respect to this site. The second site involves a municipal waste disposal facility owned and operated by four municipalities. The company joined a PRP coalition and is sharing remedial investigation and feasibility study costs with other PRPs. In 1994, the PRP coalition received an engineering evaluation/cost analysis of the presumed remedy for the site from its private contractor. However, because the EPA has not yet selected a remedy, potential remediation costs for this site remain uncertain. Remediation costs for a typical CERCLA site on the National Priorities List average about $30,000. The engineering evaluation/cost analysis was consistent with this average. During the fourth quarter of fiscal year 1996, an agreement was reached whereby the state of Connecticut will contribute $8,000 towards remediation costs. In January 1994, by means of a special notice letter, the EPA notified the company that it was considered to be one of more than three hundred PRPs at a former drum reconditioning facility. A remedial investigation and feasibility study is complete. A record of decision has been issued, and a statement of work for the remedial design and remedial action is in circulation. The company was unable to substantiate any previous involvement with this facility. During the fourth quarter of fiscal year 1996, the company accepted a de minimis settlement offer and is awaiting final approval. Upon final approval, the company will have no further obligation with respect to this site. In connection with the acquisition of Duplex, the company became involved in one additional environmental remediation site. In 1994, Duplex was named a PRP as one of several thousand users of a solid waste landfill. At September 30, 1996 potential remediation costs are uncertain. The company has accrued its estimated share of response costs for all four environmental remediation sites as of September 30, 1996 and believes that the reasonably foreseeable resolution will not have a material adverse effect on the financial statements. 52 53 12. ACCOUNTING STANDARDS In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement encourages, but does not require, stock options to be accounted for under a fair value method. Companies are permitted to continue accounting for stock options under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." If APB Opinion No. 25 is followed, SFAS No. 123 requires disclosure of the pro forma effect of the new standard on net income and earnings per share. The company will continue to follow the accounting prescribed by APB Opinion No. 25. This statement will be effective for the fiscal year ending September 30, 1997. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement will be effective for transactions occurring after December 31, 1996 and may not be applied earlier. The company believes this statement will not have a material effect on the financial statements. 13. SUBSEQUENT EVENT On November 19, 1996 the company signed a letter of intent to purchase Vanier Graphics Corporation, a national provider of business forms and forms management services. Vanier, a subsidiary of American Business Products, Inc., had annual sales of about $150,000 in 1995. This transaction is expected to be finalized in late December 1996, after the completion of the company's due diligence process. 53 54 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------- 1996 - ------------------------------------------------------------------------------------------- Net sales and revenues Information systems $227,133 $250,538 $280,457 $316,052 Financial services 6,234 6,466 6,592 6,971 -------- -------- -------- -------- Totals $233,367 $257,004 $287,049 $323,023 ======== ======== ======== ======== Costs and expenses Cost of sales $115,746 $130,610 $146,636 $170,663 Selling, general and administrative expenses 77,487 83,439 94,314 104,905 Financial services 2,862 2,872 2,871 3,213 -------- -------- -------- -------- Totals $196.095 $216,921 $243,821 $278,781 ======== ======== ======== ======== Net income $ 21,386 $ 22,958 $ 24,308 $ 25,086 Earnings per common share $ .25 $ .27 $ .28 $ .29 Cash dividends declared per share Class A common $ .06 $ .06 $ .06 $ .07 Class B common $ .003 $ .003 $ .003 $ .0035 Closing market prices of Class A common shares High $ 19.69 $ 20.50 $ 26.63 $ 27.00 Low $ 16.50 $ 18.31 $ 21.38 $ 22.31 1995 - ------------------------------------------------------------------------------------------- Net sales and revenues Information systems $203,599 $223,138 $225,327 $236,516 Financial services 5,100 5,380 5,871 5,960 -------- -------- -------- -------- Totals $208,699 $228,518 $231,198 $242,476 ======== ======== ======== ======== Costs and expenses Cost of sales $107,758 $120,391 $120,094 $122,402 Selling, general and administrative expenses 65,866 72,554 74,229 81,432 Financial services 2,035 2,131 2,445 2,539 -------- -------- -------- -------- Totals $175,659 $195,076 $196,768 $206,373 ======== ======== ======== ======== Net income $ 18,889 $ 19,330 $ 19,860 $ 20,515 Earnings per common share $ .22 $ .23 $ .23 $ .24 Cash dividends declared per share Class A common $ .05 $ .05 $ .05 $ .05 Class B common $ .0025 $ .0025 $ .0025 $ .0025 Closing market prices of Class A common shares High $ 12.94 $ 14.25 $ 15.31 $ 18.19 Low $ 11.13 $ 11.63 $ 13.00 $ 15.13
54 55 Schedule II VALUATION ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E -----------Additions----------- ----------Deductions---------- Balance Charged at to Costs Other Write-offs Other Balance Description Beginning and Net of at End of Year Expenses (a) Recoveries (a) of Year - ----------------------------------------------------------------------------------------------------------------------------------- Valuation Accounts - Deducted From Assets to Which They Apply INFORMATION SYSTEMS Reserves for accounts receivable: Year ended September 30, 1996 $ 3,166 $ 2,325 $ 2,407 $ 2,154 $ 0 $ 5,744 Year ended September 30, 1995 2,683 1,977 202 1,696 0 3,166 Year ended September 30, 1994 6,090 1,040 52 4,102 397 2,683 Reserves for inventory: Year ended September 30, 1996 1,387 1,926 5,033 1,346 0 7,000 Year ended September 30, 1995 1,503 1,660 0 1,776 0 1,387 Year ended September 30, 1994 1,887 1,761 0 1,943 202 1,503 Reserves for notes receivable: Year ended September 30, 1996 471 170 0 215 0 426 Year ended September 30, 1995 731 (205) 0 55 0 471 Year ended September 30, 1994 3,023 575 0 2,867 0 731 FINANCIAL SERVICES Reserves for finance receivables: Year ended September 30, 1996 3,903 500 0 1,088 0 3,315 Year ended September 30, 1995 4,854 (150) 0 801 0 3,903 Year ended September 30, 1994 5,846 (700) 0 292 0 4,854 (a) Includes adjustments from translation of foreign currency to United States dollars and the effects of acquisitions and disposals of businesses.
55 56 INDEX OF EXHIBITS Securities Exchange Act of 1934
Page in Exhibit Item Form No. 10-K - ------ ------------------------------------------------------------------------ ----------- (3)(a) Amended Articles of Incorporation, Restatement effective February 9, 1995; incorporated by reference to Exhibit A of the company's definitive proxy statement dated January 5, 1995 filed with the Securities and Exchange Commission. (3)(b) Consolidated Code of Regulations; incorporated by reference to Exhibit B to the company's definitive proxy statement dated January 8, 1990 filed with the Securities and Exchange Commission. (4)(a) Loan Agreement with Metropolitan Life Insurance Company dated September 17, 1986, incorporated by reference to Exhibit (4)(a) to Form 10-K for the fiscal year ended September 30, 1986. (4)(b) Copies of the agreements relating to long-term debt, which are not required as exhibits to this Form 10-K, will be provided to the Securities and Exchange Commission upon request. (4)(c) Shareholder Rights Plan incorporated by reference to Exhibit I to the company's Form 8-A (File No. 1-10147), which was adopted on May 6, 1991 and filed with the Securities and Exchange Commission on May 8, 1991. (9) Not applicable. (10)(a) Amended and Restated Employment Agreement with David R. Holmes dated as of October 1, 1995; incorporated by reference to Exhibit (10)(a) to Form 10-K for the fiscal year ended September 30, 1995. (10)(b) Amended and Restated Employment Agreement with Robert C. Nevin dated as of September 30, 1992; incorporated by reference to Exhibit 10)(e) to Form 10-K for the fiscal year ended September 30, 1992. (10)(c) Amended and Restated Employment Agreement with Joseph N. Bausman dated May 31, 1995; incorporated by reference to Exhibit (10)(e) to Form 10-K for the fiscal year ended September 30, 1995. (10)(d) Employment Agreement with H. John Proud dated September 1, 1995; incorporated by reference to Exhibit (10)(f) to Form 10-K for the fiscal year ended September 30, 1995. (10)(e) Settlement Agreement with Wayne C. Jira dated as of November 9, 1987; incorporated by reference to Exhibit (10)(f) to Form 10-K for the fiscal year ended September 30, 1987.
56 57
Page in Exhibit Item Form No. 10-K - ------ ------------------------------------------------------------------------ ----------- (10)(f) General form of Indemnification Agreement between the company and each of its directors dated as of December 1, 1989; incorporated by reference to Exhibit (10)(m) to Form 10-K for the fiscal year ended September 30, 1989. (10)(g) Non-Qualified Stock Option Plan -- 1980, Amended and Restated August 11, 1987; incorporated by reference to Exhibit (10)(h) to Form 10-K for the fiscal year ended September 30, 1987. (10)(h) Amendment to Non-Qualified Stock Option Plan -- 1980 dated as of December 8, 1989; incorporated by reference to Exhibit (10)(o) to Form 10-K for the fiscal year ended September 30, 1989. (10)(i) Amended and Restated Stock Option Plan -- 1989, effective September 29, 1993; incorporated by reference to Exhibit (10)(l) to Form 10-K for the fiscal year ended September 30, 1993. (10)(j) Stock Option Plan - 1995; incorporated by reference to Exhibit B of the company's definitive proxy statement dated January 5, 1995; incorporated by reference to Exhibit (10)(l) to Form 10-K for the fiscal year ended September 30, 1995. (10)(k) Performance Options Policy of the Compensation Committee of the Board of Directors of The Reynolds and Reynolds Company under the Non-Qualified Stock Option Plan -- 1980, effective October 1, 1986; incorporated by reference to Exhibit (10)(i) to Form 10-K for the fiscal year ended September 30, 1987. (10)(l) Amendment and Restatement No. 1 to the Performance Options Policy of the Compensation Committee of the Board of Directors of The Reynolds and Reynolds Company under the Non-Qualified Stock Option Plan -- 1980, effective October 28, 1987; incorporated by reference to Exhibit (10)(j) to Form 10-K for the fiscal year ended September 30, 1987. (10)(m) Amendment and Restatement No. 2 to the Performance Options Policy of the Compensation Committee of the Board of Directors of The Reynolds and Reynolds Company under the Non-Qualified Stock Option Plan -- 1980, effective November 12, 1987; incorporated by reference to Exhibit (10)(k) to Form 10-K for the fiscal year ended September 30, 1987. (10)(n) The Reynolds and Reynolds Company Supplemental Retirement Plan; incorporated by reference to Exhibit (10)(G) to Form 10-K for the fiscal year ended September 30, 1980. (10)(o) The Reynolds and Reynolds Company Supplemental Retirement Plan; Amendment No. 2, adopted on August 17, 1982; incorporated by reference to Exhibit (10)(j) to Form 10-K for the fiscal year ended September 30, 1982.
57 58
Page in Exhibit Item Form No. 10-K - ------ ------------------------------------------------------------------------ ----------- (10)(p) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 3, adopted on August 16, 1983; incorporated by reference to Exhibit (10)(j) to Form 10-K for the fiscal year ended September 30, 1983. (10)(q) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 4, adopted on November 6, 1984; incorporated by reference to Exhibit (10)(l) to Form 10-K for the fiscal year ended September 30, 1984. (10)(r) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 5, adopted on May 13, 1985; incorporated by reference to Exhibit (10)(s) to Form 10-K for the fiscal year ended September 30, 1985. (10)(s) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 6, adopted on February 11, 1986; incorporated by reference to Exhibit (10)(r) to Form 10-K for the fiscal year ended September 30, 1986. (10)(t) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 7, adopted on August 12, 1986; incorporated by reference to Exhibit (10)(s) to Form 10-K for the fiscal year ended September 30, 1986. (10)(u) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 8, adopted on February 10, 1987; incorporated by reference to Exhibit (10)(s) to Form 10-K for the fiscal year ended September 30, 1987. (10)(v) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 9, adopted on August 11, 1987; incorporated by reference to Exhibit (10)(t) to Form 10-K for the fiscal year ended September 30, 1987. (10)(w) The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 10, adopted on May 8, 1989; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1989. (10)(x) The Reynolds and Reynolds Company Restated Supplemental Retirement Plan adopted November 9, 1988; incorporated by reference to Exhibit (10)(ee) to Form 10-K for the fiscal year ended September 30, 1989. (10)(y) Resolution of the Board of Directors amending The Reynolds and Reynolds Company Supplemental Retirement Plan dated as of December 1, 1989; incorporated by reference to Exhibit (10)(ff) to Form 10-K for the fiscal year ended September 30, 1989. (10)(z) Resolution of the Board of Directors amending The Reynolds and Reynolds Company Supplemental Retirement Plan (Amendment No. 1), dated as of November 13, 1990; incorporated by reference to Exhibit (10)(ff) to Form 10-K for the fiscal year ended September 30, 1990.
58 59
Page in Exhibit Item Form No. 10-K - ------ ------------------------------------------------------------------------ ----------- (10)(aa) Resolution of the Board of Directors amending The Reynolds and Reynolds Company Supplemental Retirement Plan (Amendment No. 2), dated as of July 23, 1991; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1991. (10)(bb) The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 3, adopted August 8, 1995; incorporated by reference to Exhibit (10) (dd) to Form 10-K for the fiscal year ended September 30, 1995. (10)(cc) Description of The Reynolds and Reynolds Company Annual Incentive Compensation Plan adopted as of October 1, 1986; incorporated by reference to Exhibit (10)(t) to Form 10-K for the fiscal year ended September 30, 1987. (10)(dd) Description of The Reynolds and Reynolds Company Amended and Restated Annual Incentive Compensation Plan effective October 1, 1995; incorporated by reference to (10)(ff) to Form 10-K for the fiscal year ended September 30, 1995. (10)(ee) Description of The Reynolds and Reynolds Company Intermediate Incentive Compensation Plan adopted as of October 1, 1986; incorporated by reference to Exhibit (10)(v) to Form 10-K for the fiscal year ended September 30, 1987. (10)(ff) Resolution of the Board of Directors amending The Reynolds and Reynolds Company Intermediate Incentive Compensation Plan dated as of December 1, 1989; incorporated by reference to Exhibit (10)(jj) to Form 10-K for the fiscal year ended September 30, 1989. (10)(gg) The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the fiscal year ended September 30, 1995. (10)(hh) The Reynolds and Reynolds Company Tax Deferred Savings and Protection Plan ("401(k)" Plan), January 1, 1994 Restatement; incorporated by reference to Exhibit (10)(jj) to Form 10-K for the fiscal year ended September 30, 1995. (10)(ii) The Reynolds and Reynolds Company Tax Deferred Savings and Protection Plan ("401(k)" Plan) First Amendment adopted March 31, 1995; incorporated by reference to Exhibit (10)(kk) to Form 10-K for the fiscal year ended September 30, 1995. (10)(jj) The Reynolds and Reynolds Company Tax Deferred Savings and Protection Plan ("401(k)" Plan) Second Amendment adopted March 31, 1995; incorporated by reference to Exhibit (10)(ll) to Form 10-K for the fiscal year ended September 30, 1995.
59 60
Page in Exhibit Item Form No. 10-K - ------ ------------------------------------------------------------------------ ----------- (10)(kk) The Reynolds and Reynolds Company Tax Deferred Savings and Protection Plan ("401(k)" Plan ) Third Amendment adopted August 8, 1995; incorporated by reference to Exhibit (10)(mm) to Form 10-K for the fiscal year ended September 30, 1995. (10)(ll) The Reynolds and Reynolds Company Tax Deferred Savings and Protection Plan ("401(k)" Plan) Fourth Amendment adopted August 8, 1995; incorporated by reference to Exhibit (10)(nn) to Form 10-K for the fiscal year ended September 30, 1995. (10)(mm) The Reynolds and Reynolds Company Tax Deferred Savings and Protection Plan ("401(k)" Plan) Fifth Amendment adopted March 1, 1996. (10)(nn) The Reynolds and Reynolds Company Tax Deferred Savings and Protection Plan ("401(k)" Plan) Sixth Amendment adopted January 23, 1996. (10)(oo) The Reynolds and Reynolds Company Retiree Medical Savings Account Plan effective October 1, 1993; incorporated by reference to Exhibit 10(oo) to Form 10-K for the fiscal year ended September 30, 1995. (10)(pp) The Reynolds and Reynolds Company Retiree Medical Savings Account Plan, Amendment No. 1, adopted August 8, 1995; incorporated by reference to Exhibit (10)(pp) to Form 10-K for the fiscal year ended September 30, 1995. (10)(qq) General Form of Deferred Compensation Agreement between the company and each of the following officers; incorporated by reference to Exhibit (10)(p) to Form 10-K for the fiscal year ended September 30, 1983. Joseph N. Bausman, R. H. Grant, III, David R. Holmes, Dale L. Medford and Robert C. Nevin (10)(rr) Resolution of the Board of Directors and General Form of Amendment dated December 1, 1989 to the Deferred Compensation Agreements between the company and each of the following officers; incorporated by reference to Exhibit (10)(fff) to Form 10-K for the fiscal year ended September 30, 1989. Joseph N. Bausman, R. H. Grant, III, David R. Holmes, Dale L. Medford and Robert C. Nevin (10)(ss) General Form of Collateral Assignment Split-Dollar Insurance Agreement and Policy and Non-Qualified Compensation and Disability Benefit Agreement between the company and each of the following officers; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1985. Joseph N. Bausman, Michael J. Gapinski, R. H. Grant, III, David R. Holmes, Adam M. Lutynski, Dale L. Medford and Robert C. Nevin.
60 61
Page in Exhibit Item Form No. 10-K - ------ ------------------------------------------------------------------------ ----------- (10)(tt) Resolution of the Board of Directors and General Form of Amendment dated December 1, 1989 to the Non-Qualified Compensation and Disability Benefit between the company and each of the following officers; incorporated by reference to Exhibit (10)(hhh) to Form 10-K for the fiscal year ended September 30, 1989. Joseph N. Bausman, Michael J. Gapinski, R. H. Grant, III, David R. Holmes, Adam M. Lutynski, Dale L. Medford and Robert C. Nevin. (10)(uu) Agreement dated March 11, 1963, between the company and Richard H. Grant, Jr., restricting transfer of Class B Common Stock of the company; incorporated by reference to Exhibit 9 to Registration Statement No. 2-40237 on Form S-7. (10)(vv) Amendment dated February 14, 1984 to Richard H. Grant, Jr.'s Agreement restricting transfer of Class B Common Stock of the company dated March 11, 1963; incorporated by reference to Exhibit (10)(u) to Form 10-K for the fiscal year ended September 30, 1984. (10)(ww) Agreement and Plan of Merger dated April 20, 1996 among the company, Delaware Acquisition Co. and Duplex Products Inc.; incorporated by reference to Exhibit (c)(1) to the company's schedule 14 D-1 filed with the Securities and Exchange Commission on April 22, 1996. (10)(xx) Exchange Agreement dated May 29, 1992 among the company, Norick Investment Company A Limited Partnership, Frances N. Lilly and Majorie K. Norick; incorporated by reference to Exhibit 2(b) to the company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 11, 1992 (Registration Statement No. 33-48546). (10)(yy) Exchange Agreement dated May 29, 1992 between the company and Third Generation Leasing Company; incorporated by reference to Exhibit 2(c) to the company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 11, 1992 (Registration Statement No. 33-48546). (11) Not applicable (12) Not applicable (13) Not applicable (18) Not applicable (21) List of subsidiaries 63
61 62
Page in Exhibit Item Form No. 10-K - ------ ------------------------------------------------------------------------ ----------- (22) Not applicable (23) Consent of Independent Auditors 32 (24) Not applicable (27) Financial Data Schedule (28) Not applicable (99) Not applicable
62 EX-10.MM 2 EXHIBIT 10(MM) 1 Exhibit (10)(mm) FIFTH AMENDMENT TO THE REYNOLDS AND REYNOLDS COMPANY 401(K) SAVINGS PLAN (JANUARY 1, 1994 RESTATEMENT) The Reynolds and Reynolds Company hereby amends The Reynolds and Reynolds Company 401(k) Savings Plan (January 1, 1994 Restatement) (the "Plan") as follows: Effective for periods beginning on or after March 1, 1996, the first sentence of Section 2.1 of the Plan is amended to provide as follows: Each Employee who is in an eligible employment classification as set forth in this Section 2.1 shall become an Eligible Employee on or as soon as administratively practicable after the first date he is in an eligible employment classification as set forth in this Section 2.1, but in no event later than the first day of the sixth calendar week beginning after the first date he is in an eligible employment classification as set forth in this Section 2.1. * * * IN WITNESS WHEREOF, The Reynolds and Reynolds Company has caused this Amendment to be executed by its duly authorized officer on this ____ day of ____________, 1996. ATTEST: THE REYNOLDS AND REYNOLDS COMPANY _______________________ By: ______________________________ Title: EX-10.NN 3 EXHIBIT 10(NN) 1 Exhibit (10)(nn) SIXTH AMENDMENT TO THE REYNOLDS AND REYNOLDS COMPANY 401(K) SAVINGS PLAN (JANUARY 1, 1994 RESTATEMENT) ----------------------------- The Reynolds and Reynolds Company hereby amends The Reynolds and Reynolds Company 401(k) Savings Plan (January 1, 1994 Restatement) (the "Plan") as follows: Effective as of January 23, 1996, the definition of "Enrollment Date" in Section 1.1 of the Plan is amended by adding as a new sentence at the end thereof the following: Notwithstanding the foregoing, with respect to persons who were employees of Jordan Graphics, Inc. on January 23, 1996 and became Employees on January 23, 1996, January 23, 1996, shall be an Enrollment Date. * * * IN WITNESS WHEREOF, The Reynolds and Reynolds Company has caused this Amendment to be executed by its duly authorized officer on this 22nd day of January, 1996. ATTEST: THE REYNOLDS AND REYNOLDS COMPANY __________________ By:______________________________ Title: EX-21 4 EXHIBIT 21 1 EXHIBIT (21) LIST OF SUBSIDIARIES
STATE OR OTHER JURISDICTION OF NAME INCORPORATION OR ORGANIZATION - ---------------------------------------------------------------------------------------- Dataforms, Inc. Wisconsin Duplex Products Inc. Delaware Formcraft, Inc. Texas Reyna Financial Corporation Ohio Reyna Leasing Corporation * New York Reynolds and Reynolds (Canada) Limited Canada Reynolds Vehicle Registration, Inc. Ohio Salcris Corporation Alabama * Wholly-owned subsidiary of Reyna Financial Corporation
63 EX-27 5 EXHIBIT 27
5 1,000 U.S. 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 1 11,130 0 167,022 5,744 53,202 271,083 341,254 173,587 923,644 167,278 178,190 51,226 0 0 321,769 923,644 756,664 1,100,443 438,041 563,655 0 0 14,850 162,243 68,505 93,738 0 0 0 93,738 1.10 1.10
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