-----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, NQnCxgWcgf6dLJtM2cEwjX7pVzcE3fEaj/iUI7fuibkVw7GmbDQlJskg7ppD3q6y vycvbVKuBjq0zFVQU629og== 0000950152-98-009844.txt : 19981229 0000950152-98-009844.hdr.sgml : 19981229 ACCESSION NUMBER: 0000950152-98-009844 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981228 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: SEC FILE NUMBER: 001-10147 FILM NUMBER: 98776457 BUSINESS ADDRESS: STREET 1: 115 S LUDLOW ST CITY: DAYTON STATE: OH ZIP: 45402 BUSINESS PHONE: 9374852000 MAIL ADDRESS: STREET 1: P.O. BOX 2608 CITY: DAYTON STATE: OH ZIP: 45401 10-K405 1 THE REYNOLDS & REYNOLDS COMPANY FORM 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. FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _______________ TO _______________. COMMISSION FILE NO. 1-10147 THE REYNOLDS AND REYNOLDS COMPANY ------------------------------------------------------ (Exact name of registrant as specified in its charter) OHIO 31-0421120 ------------------------ --------------------------------- (State of Incorporation) (IRS Employer Identification No.) 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 (NO PAR VALUE) NEW YORK STOCK EXCHANGE - ------------------------------------ ------------------------------ (Title of class) (Exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ---------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. X ----- The aggregate market value of the Class A Common Shares held by non-affiliates of the registrant, as of December 1, 1998, was $1,612,888,755. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 1, 1998: Class A Common Shares: 77,439,364 (exclusive of 14,796,192 Treasury shares) Class B Common Shares: 20,000,000 DOCUMENTS INCORPORATED BY REFERENCE Part III -- Portions of Proxy Statement for 1999 Annual Meeting of Shareholders 1 2 PART I (Dollars in thousands) ITEM 1. BUSINESS The Reynolds and Reynolds Company, founded in 1866 and an Ohio corporation since 1889 (the "company"), operates principally in two business segments: the Automotive Division and the Business Systems Division. AUTOMOTIVE DIVISION During the late 1920s, the company created a niche in the automotive market by manufacturing and selling standardized business forms for automobile dealerships across the United States. Then, in the mid-1960s the company leveraged its strong relationships with automobile dealers and manufacturers, and its knowledge of the automotive industry by applying that knowledge to develop automated accounting solutions for automobile dealerships. Over the next three decades, the company moved from those early simple batch systems to its current extensive portfolio of information management solutions for automotive retailers and manufacturers. During 1998 the company created special teams to address the unique information management needs of the growing enterprise segment of the retail automotive market. Integrated hardware, software and data communications systems; e-commerce solutions; a complete line of paper-based and electronic business forms; integrated document management systems; ongoing customer service and support; and a full suite of consulting and training services comprise the automotive-focused products and services offering. The company owns a 26.5% interest in Kalamazoo Computer Group plc, a Great Britain based leading supplier of information management systems to the automotive retail market in Europe. These products and services are provided through the company's sales and service personnel located in about 180 offices in the United States and Canada. BUSINESS SYSTEMS DIVISION Although the company served the business forms needs of the general business market ever since its founding in 1866, it did not seriously expand its coverage of that market until the acquisition of The Arnold Corporation in 1986. Since that time, the company has further expanded its position through internal growth and acquisitions, most notably the acquisitions of Duplex Products Inc. (1996), Vanier Graphics (1996) and Crain-Drummond (1997). While printed business forms remain its leading source of revenue, this business is moving beyond its traditional paper-based solutions to higher value-added and technology-enhanced solutions for medium to large-sized organizations. Key to the division's offerings is the Reynolds Advantage Network (RAN), a fully integrated client-server solution which includes Customer Advantage, an Internet-based document management service. RAN facilitates document procurement, document management and work process optimization for the company's customers. These permit customers to outsource non-strategic activities, streamline document systems, reduce inventory burdens and improve organizational efficiency. Other products and services include applied document solutions such as laser-print solutions, labels, digital printing and mailers; other document management services including outsourcing, document storage, fulfillment, flexible billing and reporting; and electronic document solutions including business process consulting, electronic forms, document automation solutions, electronic print and mail services, and other business communication services. The division operates 23 business forms manufacturing facilities in the United States and Canada. FINANCIAL SERVICES Through its wholly-owned subsidiary, Reyna Capital Corporation, the company provides financing services to automotive dealers throughout the United States and Canada who wish to invest in the acquisition of one of the Automotive Division's computerized dealer management systems. Reyna's portfolio also includes a number of leases for computer systems previously offered by the Healthcare Systems Division. (See next paragraph.) 2 3 HEALTHCARE SYSTEMS DIVISION In September 1998, the company's board of directors approved a plan to sell this business unit which had provided computer systems products and services to both hospital-based and office-based physicians. See Management Discussion and Analysis (Part II, ITEM 7) on page 8 and Note 2 to the Consolidated Financial Statements on page 37 for more information on this divestiture. FINANCIAL INFORMATION ABOUT SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONS See Note 13 to the Consolidated Financial Statements on page 50 for financial and descriptive information about the business segments described above, including information about foreign and domestic operations and export sales. NEW PRODUCTS New products and services introduced by the company's AUTOMOTIVE DIVISION include: ERA2, a new dealership information system; ERA ConsumerLink(TM), a decision-support and marketing tool that gives dealership staff instant access to all information available on each customer; ERA Intellipath(TM), a laser printing and document delivery system that allows business communications to be routed automatically to all appropriate destinations within the dealership, throughout the enterprise and to the customer; ERALink(TM), an information access tool that allows dealership staff to access ERA2 systems with personal computers and download data directly to popular PC applications such as spreadsheets and word processors; and LEASELink(TM), made possible with the company's partnership with Lease Marketing Ltd., one of the industry's leading providers of electronic leasing systems whereby the company will interface that software with its ERA2 system. New products and services introduced by the company's BUSINESS SYSTEMS DIVISION include the establishment of an Electronic Document Solutions Group, a new business unit offering customers electronic forms, print-and-mail and automated data collection services; Customer Advantage enhancements giving users access to electronic print-on-demand and "fill-in" forms through their web browsers; Automated Identification Services, which are electronic document solutions that use digital camera technology to automate high-speed, real-time verification and quality inspection of critical documents such as checks and statements; and E-Merge(R), an output management system for generating enterprise-wide documents, which accepts variable print data from virtually any software application, combines it with electronic forms and outputs high-quality documents on laser printers located anywhere in an organization. RAW MATERIALS Computer hardware and peripherals are essential to the company's Automotive Division. It purchases these products from a variety of suppliers. The hardware platform for the ERA system is supplied by Silicon Graphics, Inc. If this source of supply were to be interrupted, some delay would occur in converting to a new platform. The company historically has not experienced difficulties in obtaining hardware and peripherals, nor does it reasonably foresee difficulty in obtaining them in the future on competitive terms and conditions. An adequate supply of paper products is essential to the manufacture of the company's business forms product line. The company obtains those products from a major supplier and historically has not experienced difficulties in obtaining them, nor does it reasonably foresee difficulty in obtaining them in the future on competitive terms and conditions. 3 4 Through its supply management initiative, the company from time to time has realized substantial savings by consolidating its purchases of goods and services with a single supplier. While there is some risk in being dependent on a single supplier, the company believes if one of those single sources of supply were to be interrupted for whatever reason, the goods and services would be available from an alternate source of supply on competitive terms and conditions. PATENTS, TRADEMARKS AND RELATED RIGHTS Except as described below, the company does not have any patents, trademarks, licenses, franchises or concessions which are material to an understanding of its business. The company's trademark REYNOLDS & REYNOLDS(R) is associated with many goods and services provided by the company. In the automotive systems market, the company has a number of direct and indirect distribution and licensing arrangements with equipment vendors and software providers relating to certain components of the company's products, including the principal operating systems. Such arrangements are in the aggregate, but not individually (except for the operating systems), material to the company's business. COMPETITION The company's Automotive Division is North America's leading provider of information management solutions to automotive retailers. The division's main competitor is Automatic Data Processing, Inc., whose assets and financial resources substantially exceed those of the company. Together, the two vendors provide a significant share of the information management systems for automotive retailers in the United States and Canada. The company's automotive forms business has a leading market share position but experiences energetic competition from local printing brokers and regional printers across the United States and Canada. The company's Business Systems Division is one of four large North American business forms and document management services providers, some of whom have assets and resources greater than those of the company. Even when combined, those four companies have less than a majority share of the document services business in the general business market, which is also served by a large number of local and regional brokers and printers. The company believes it competes in both business segments by providing high value-added products, services and solutions that satisfy market needs and use current technology to provide additional value and to improve price and performance. By specializing in a particular niche market, the Automotive Division has emphasized reliable and responsive service, broad industry knowledge and long-term relationships to meet customer needs more effectively. While no single customer accounts for five percent or more of the revenues of either of the two business segments, the company does have several significant customers whose loss, in the aggregate, could be material to the Business Systems Division. The company believes that the likelihood of losing all such customers is remote. BACKLOG AUTOMOTIVE DIVISION: The backlog represents unbilled computer systems or upgrades which have not yet been shipped to customers. At December 1, 1998, the dollar value of the product backlog, including software license fees, is estimated to be $27,944 compared with $27,377 last year. BUSINESS SYSTEMS DIVISION: The company manufactures several thousand different types of standard and custom business forms. At December 1, 1998, the dollar value of the printing backlog is estimated to be $41,592 compared with $37,281 last year. The company expects this backlog and the backlog of the Automotive Division to be filled during the coming fiscal year. 4 5 RESEARCH AND DEVELOPMENT During fiscal 1998 the company continued its research and development to deliver new and enhanced solutions for customers in the automotive and general business markets. Expenditures for those activities were approximately $46,588 in 1998, $43,052 in 1997 and $24,439 in 1996. 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 one environmental remediation site. (See Note 14 to the Consolidated Financial Statements, page 52.) EMPLOYEES On September 30, 1998, the company and its subsidiaries employed 9,152 persons. ITEM 2. PROPERTIES As of September 30, 1998, the company operated 16 forms manufacturing plants in the United States and 7 in Canada encompassing approximately 2.3 million square feet. Of those, approximately 1.4 million square feet are owned outright by the company. The remaining .9 million square feet are leased. Corporate headquarters and the respective division headquarters 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 180 sales offices and 30 warehouses throughout the country. Most printing and other equipment used in the manufacture of business forms is owned by the company and its subsidiaries. Although the company believes its properties are in good condition and adequate for current activities, there is always room for improvement. As a consequence, in early 1999 the company will complete the first phase of a new Dayton facility (240,000 square feet) for its operating divisions. The new campus will provide an environment that fosters high-level creative thinking and enhances the company's ability to attract and retain a very high quality workforce. See Note 1 to the Consolidated Financial Statements on page 36 under the heading "Lease Obligations." See Note 4 to the Consolidated Financial Statements on page 38 regarding assets held for sale. ITEM 3. LEGAL PROCEEDINGS Relevant information appears in Note 14 to the Consolidated Financial Statements on page 52. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 5 6 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. As of the filing of this report, the company currently has no agreements or commitments with respect to the sale or issuance of the preferred shares except as described in Note 8 to the Consolidated Financial Statements, page 43. Information on market prices and dividends is set forth below:
CLASS A COMMON SHARES SALE PRICES 1998 1997 ---- ---- Fiscal Quarter High Low High Low - -------------- ---- --- ---- --- First $21.00 $17.00 $27.88 $25.50 Second $22.25 $17.69 $29.38 $23.88 Third $23.88 $16.88 $24.75 $15.63 Fourth $18.50 $12.63 $21.31 $16.38 CASH DIVIDENDS PAID Class A Common Class B Common ---------------- ------------------- Months 1998 1997 1998 1997 ------ ---- ---- ---- ---- January $.09 $.08 $.0045 $.004 April $.09 $.08 $.0045 $.004 June $.09 $.08 $.0045 $.004 September $.09 $.08 $.0045 $.004
As of December 1, 1998, there were approximately 3,857 holders of record of Class A Common Shares and one holder of record of Class B Common Shares. 6 7 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SELECTED FINANCIAL DATA (Dollars in thousands except per share data)
For The Years Ended September 30 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED Net Sales and Revenues Information systems $1,451,466 $1,314,956 $1,033,369 $856,984 $771,114 Financial services 34,497 30,383 26,263 22,311 19,488 ---------- ---------- ---------- -------- -------- Total net sales and revenues $1,485,963 $1,345,339 $1,059,632 $879,295 $790,602 ========== ========== ========== ======== ======== Income from Continuing Operations $ 113,556 $ 80,491 $ 99,100 $ 81,052 $ 66,844 Basic earnings per common share $ 1.43 $ .99 $ 1.20 $ .97 $ .78 Diluted earnings per common share $ 1.40 $ .96 $ 1.16 $ .95 $ .76 Net Income $ 103,107 $ 59,219 $ 93,738 $ 78,594 $ 66,204 Basic earnings per common share $ 1.30 $ .73 $ 1.14 $ .94 $ .77 Diluted earnings per common share $ 1.27 $ .70 $ 1.10 $ .92 $ .76 Return on Equity 26.8% 16.1% 26.6% 25.1% 23.8% Cash Dividends Per Class A Common Share $ .36 $ .32 $ .25 $ .20 $ .165 Book Value Per Outstanding Common Share $ 5.14 $ 4.55 $ 4.55 $ 4.01 $ 3.47 Assets Information systems $ 746,561 $ 729,335 $ 610,362 $489,501 $430,592 Financial services 411,159 373,175 313,282 265,965 204,107 ---------- ---------- ---------- -------- -------- Total assets $1,157,720 $1,102,510 $ 923,644 $755,466 $634,699 ========== ========== ========== ======== ======== Long-Term Debt Information systems $ 161,541 $ 170,150 $ 84,601 $ 41,443 $ 41,014 Financial services 145,460 137,455 93,589 92,425 76,638 ---------- ---------- ---------- -------- -------- Total long-term debt $ 307,001 $ 307,605 $ 178,190 $133,868 $117,652 ========== ========== ========== ======== ======== Number of Employees 9,152 9,138 7,544 6,036 5,478 INFORMATION SYSTEMS (excluding Financial Services) Current Ratio 1.88 1.57 1.62 1.50 1.95 Net Property, Plant and Equipment $ 174,226 $ 188,501 $ 167,667 $128,462 $117,485 Total Debt $ 168,366 $ 191,526 $ 99,092 $ 51,649 $ 41,301 Total Debt to Capitalization 29.4% 34.5% 21.0% 13.4% 12.4%
7 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands except per share data) SIGNIFICANT EVENTS SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires that a public enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the same basis used internally for evaluating segment performance and deciding how to allocate resources to segments. Early in 1998, the company determined that its reportable operating segments under the new pronouncement would be Automotive, Business Systems, Healthcare Systems and Financial Services. Automotive, Business Systems and Healthcare Systems operate as independent divisions with separate management, operations and sales personnel, different customers and their own unique products and services. Financial Services will continue to be reported as a separate segment because, as a financing operation, it has a much different financial profile than other divisions. Financial information for the new operating segments was presented throughout the year, as supplemental information, in the company's reports on Form 10-Q, filed with the Securities and Exchange Commission. Effective July 1, 1998, the company formally adopted SFAS Statement No. 131 and released earnings in a format consistent with the new reporting requirements. The 1998 financial statements and the following discussion have been presented in conformity with the new segment structure. Prior financial information has also been restated to conform to the new segment structure. See Note 13 to the Consolidated Financial Statements for more information on business segments. DISCONTINUED OPERATIONS In September 1998, the company's board of directors approved a plan to discontinue operations of the company's Healthcare Systems segment. This separate division provided computer systems products and services to hospital-based and office-based physicians. Net sales and revenues were $48,226 in 1998, $40,346 in 1997 and $40,811 in 1996. Operating losses were $16,700 in 1998, $32,055 in 1997 and $8,215 in 1996. Operating losses in 1997 included restructuring and special charges of $13,075. The 1998 operating results of Healthcare Systems have been segregated from continuing operations and reported as discontinued operations on a separate line in the consolidated statement of income. Prior financial statements have been restated to present the operating results of Healthcare Systems as discontinued operations. In October 1998, the company sold essentially all net assets of Healthcare Systems to InfoCure Corporation for about $50,000. The proceeds consisted of about $40,000 in cash with the balance in subordinated notes. The company expects to record a gain on the sale of about $.07 per share in the first quarter of fiscal year 1999. See Note 2 to the Consolidated Financial Statements for more information on discontinued operations. RESTRUCTURING AND SPECIAL CHARGES During fiscal year 1997 the company recorded pretax charges of $49,241 consisting of a $25,339 restructuring charge ($1,427 included in discontinued Healthcare Systems operations) and $23,902 of other special charges ($11,648 included in discontinued Healthcare Systems operations). After income taxes, the restructuring and special charges reduced net income by $34,078 or $.41 per share. The income tax benefit on the combined charges represented a 30.8% effective income tax rate because not all of the charges were tax deductible. See Note 3 to the Consolidated Financial Statements for more information on restructuring and special charges. BUSINESS COMBINATIONS In fiscal year 1997, the company's Business Systems Division purchased two sizable business forms and document management services companies. On July 2, 1997, the company purchased the outstanding shares of Canadian-based Crain-Drummond Inc. from UARCO, a subsidiary of Settsu Corporation of Osaka, Japan. Effective 8 9 December 31, 1996, the company purchased substantially all net assets of Vanier Graphics Corporation from American Business Products. Crain-Drummond and Vanier Graphics provide document outsourcing, document management and work optimization services to customers in Canada and the United States, respectively. The combined annual revenues of these two businesses were about $261,000 in fiscal year 1996. The company retained about $190,000 of these sales. On May 20, 1996, the company purchased the outstanding shares of Duplex Products Inc. Duplex provides business forms and labels, electronic printing and mailing services, document management services, forms automation solutions and process analysis to customers throughout the United States. At the time of the acquisition, Duplex's annual sales rate was about $230,000. The company retained about $200,000 of Duplex sales, as expected. The company also purchased one additional business forms company in fiscal year 1996 with annual sales of about $50,000. See Note 4 to the Consolidated Financial Statements for additional disclosures about the company's business combinations. RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY 1998 vs. 1997 1997 vs. 1996 1998 1997 1996 Change Change - -------------------------------------------------------------------------------------------------------------------- AS REPORTED Net sales and revenues $1,485,963 $1,345,339 $1,059,632 $140,624 10% $285,707 27% Gross profit $651,946 $596,441 $494,401 $55,505 9% $102,040 21% Operating income $203,355 $158,101 $173,040 $45,254 29% ($14,939) -9% Net income $103,107 $59,219 $93,738 $43,888 74% ($34,519) -37% Basic earnings per share $1.30 $0.73 $1.14 $0.57 78% ($0.41) -36% Diluted earnings per share $1.27 $0.70 $1.10 $0.57 81% ($0.40) -36% EXCLUDING 1997 RESTRUCTURING AND SPECIAL CHARGES Net sales and revenues $1,485,963 $1,345,339 $1,059,632 $140,624 10% $285,707 27% Gross profit $651,946 $600,502 $494,401 $51,444 9% $106,101 21% Operating income $203,355 $190,417 $173,040 $12,938 7% $17,377 10% Net income $103,107 $93,297 $93,738 $9,810 11% ($441) 0% Basic earnings per share $1.30 $1.15 $1.14 $0.15 13% $0.01 1% Diluted earnings per share $1.27 $1.11 $1.10 $0.16 14% $0.01 1%
Consolidated net sales and revenues were a new record for the company in 1998 and increased for the eighth consecutive year. About $110,000 of 1998 sales growth and $221,000 of the 1997 sales increase resulted from business combinations in the Business Systems Division. Excluding the effect of business combinations, consolidated net sales and revenues increased 2% in 1998 as Automotive's 9% revenue growth was partially offset by Business Systems' lower sales. In 1997, consolidated net sales and revenues grew 6%, excluding the effect of business combinations, with Automotive's revenues rising 8% and Business Systems' sales increasing 3%. Consolidated gross profit represented 44.9% of information systems revenues (excluding Financial Services) in 1998, compared to 45.4% in 1997 and 47.8% in 1996. Gross profit margins declined from 1996 to 1998 primarily as a result of Business Systems business combinations. The businesses acquired had lower gross profit margins than the company's Business Systems Division. Automotive gross profit margins were essentially flat during 1996 - 1998. As a percentage of revenues, consolidated operating income was 13.7% in 1998, compared to 11.8% in 1997 (14.2% excluding 1997 restructuring and special charges) and 16.3% in 1996. The decline in operating profit percentages (excluding 1997 restructuring and special charges) resulted primarily from including the lower operating margins of 9 10 the previously mentioned Business Systems business combinations. Automotive operating margins remained strong, reaching nearly 22% in 1998, and provided about 80% of 1998's consolidated operating income. Interest expense was $15,196 in 1998, $10,443 in 1997 and $5,778 in 1996. The increase in interest expense was primarily the result of higher debt balances used to fund Business Systems business combinations. In 1998, the company borrowed to finance the July 1997 purchase of Crain-Drummond. In 1997, the company completed a public debt offering by issuing $100,000 of notes to permanently finance the purchase of Duplex Products and Vanier Graphics. Other charges increased in 1998 and 1997, compared to 1996, because of the company's 1997 purchase of an equity interest in Kalamazoo Computer Group plc. See Note 1 to the Consolidated Financial Statements for additional disclosures about the company's investment in Kalamazoo. The effective income tax rate was 39.6% in 1998, compared to 45.5% in 1997 and 41.9% in 1996. Excluding the following items, the comparable tax rates were 43.0% in 1998, 42.9% in 1997 and 42.5% in 1996. The 1998 tax rate reflected a $4,910 gain from the favorable resolution of several tax audits in the third quarter of fiscal year 1998. The 1997 tax rate included the effect of nondeductible restructuring and special charges. The 1996 tax rate included benefits of certain tax credits, which did not repeat in 1997. In 1998, net income and earnings per common share (diluted) set a new record for the company as net income topped $100,000 for the first time. Also contributing to earnings per share were fewer average shares outstanding, primarily as a result of the company's share repurchase program. In fiscal year 1998, return on average shareholders' equity also reached a new high of 26.8%, compared to 24.2% in 1997 (excluding the effect of restructuring and special charges) and 26.6% in 1996.
AUTOMOTIVE 1998 vs. 1997 1997 vs. 1996 1998 1997 1996 Change Change - ------------------------------------------------------------------------------------------------------------------ AS REPORTED Net sales and revenues $741,858 $681,145 $631,779 $60,713 9% $49,366 8% Gross profit $400,521 $363,217 $340,294 $37,304 10% $22,923 7% % of revenues 54.0% 53.3% 53.9% SG&A expenses $239,663 $223,077 $207,387 $16,586 7% $15,690 8% % of revenues 32.3% 32.7% 32.9% Restructuring charge $0 $14,895 $0 % of revenues 2.2% Operating income $160,858 $125,245 $132,907 $35,613 28% ($7,662) -6% % of revenues 21.7% 18.4% 21.0% EXCLUDING 1997 RESTRUCTURING AND SPECIAL CHARGES Net sales and revenues $741,858 $681,145 $631,779 $60,713 9% $49,366 8% Gross profit $400,521 $367,278 $340,294 $33,243 9% $26,984 8% % of revenues 54.0% 53.9% 53.9% SG&A expenses $239,663 $219,911 $207,387 $19,752 9% $12,524 6% % of revenues 32.3% 32.3% 32.9% Operating income $160,858 $147,367 $132,907 $13,491 9% $14,460 11% % of revenues 21.7% 21.6% 21.0%
In 1998 and 1997, Automotive revenues increased because of strong growth of computer services and systems revenues which more than offset a slight decline in Automotive business forms sales. Computer services revenues increased 15% in 1998 and 14% in 1997 primarily because of the increased number of software applications supported. Computer systems sales increased 9% in 1998 primarily because of higher sales volume of ERA dealer management systems and electronic parts catalogs. A portion of the higher sales volume resulted from customers 10 11 replacing systems that were not year 2000 qualified. In 1997, computer systems sales increased 7% primarily because of increased sales volume of Document Management, SalesVision and Kiosk systems. Automotive business forms sales declined slightly each year because of lower volume, primarily caused by the shift to laser printing. The company includes its laser printing equipment and support revenues in computer systems products and services, respectively, and related forms and supplies sales in business forms products. In 1998, laser revenues, while still relatively small, continued to grow. Management expects the shift from printed forms to laser printing to continue. Gross profit percentages were essentially flat in fiscal year 1998 compared to last year (excluding 1997 restructuring and special charges). In 1997, an increase in forms margins essentially offset a decline in computer margins. Operating margins remained strong, exceeding 21% for each of the three years (excluding 1997 restructuring and special charges). Operating margins improved from 1996 as selling, general and administrative (SG&A) expenses declined as a percentage of revenues.
BUSINESS SYSTEMS 1998 vs. 1997 1997 vs. 1996 1998 1997 1996 Change Change - ------------------------------------------------------------------------------------------------------------------ AS REPORTED Net sales and revenues $710,221 $634,172 $401,916 $76,049 12% $232,256 58% Gross profit $251,425 $233,224 $154,107 $18,201 8% $79,117 51% % of revenues 35.4% 36.8% 38.3% SG&A expenses $209,227 $189,337 $115,112 $19,890 11% $74,225 64% % of revenues 29.5% 29.9% 28.6% Restructuring charge $0 $3,866 $0 % of revenues 0.6% Operating income $42,198 $40,021 $38,995 $2,177 5% $1,026 3% % of revenues 5.9% 6.3% 9.7% EXCLUDING 1997 RESTRUCTURING AND SPECIAL CHARGES Net sales and revenues $710,221 $634,172 $401,916 $76,049 12% $232,256 58% Gross profit $251,425 $233,224 $154,107 $18,201 8% $79,117 51% % of revenues 35.4% 36.8% 38.3% SG&A expenses $209,227 $188,160 $115,112 $21,067 11% $73,048 63% % of revenues 29.5% 29.7% 28.6% Operating income $42,198 $45,064 $38,995 ($2,866) -6% $6,069 16% % of revenues 5.9% 7.1% 9.7%
In fiscal years 1998 and 1997, business systems revenues rose primarily because of the effect of business combinations which contributed about $110,000 and $221,000 of the sales increase in 1998 and 1997, respectively. Excluding the effect of the business combinations, sales declined about 5% in 1998 because of reduced volume and lower sales prices. Sales prices were lowered to reflect declining paper costs. In 1997 sales increased 3%, excluding the effect of business combinations, primarily as a result of higher volume. Business Systems gross profit percentage declined in both 1998 and 1997 primarily because of including lower gross profit margins of businesses acquired (Duplex Products, Crain-Drummond and Vanier Graphics). In 1998, paper costs declined. Gross profit margins were relatively unaffected by the 1998 decline in paper costs because the company lowered sales prices a comparable amount. Paper costs were relatively stable during most of 1997. 11 12 SG&A expenses increased substantially over the three-year period because of the three significant business combinations previously mentioned. In 1998, SG&A expenses, as a percentage of revenues, were slightly less than 1997 (excluding 1997 restructuring and special charges). In 1997 (excluding 1997 restructuring and special charges), SG&A expenses increased, as a percentage of revenues, as a result of higher acquisition integration expenses and software development costs. Operating margins declined in fiscal years 1998 and 1997 (excluding 1997 restructuring and special charges) primarily because of including lower margins of businesses acquired. In 1998, declining sales (excluding business combinations) also contributed to lower operating margins.
FINANCIAL SERVICES 1998 vs. 1997 1997 vs. 1996 1998 1997 1996 Change Change - -------------------------------------------------------------------------------------------------------------------- Net sales and revenues $34,497 $30,383 $26,263 $4,114 14% $4,120 16% Operating income $16,546 $15,101 $14,445 $1,445 10% $656 5% % of revenues 48.0% 49.7% 55.0%
Average finance receivables grew 14% in 1998 and 19% in 1997 as a result of strong computer systems sales. Financial Services revenues grew significantly each of the last two years because of the increased receivables balances. The average interest rate earned on the receivables portfolio declined slightly in both 1998 and 1997 because interest rates on new receivables were less than those for maturing receivables. Financial Services' interest rate spread remained strong at 3.2% in 1998, compared to 3.5% in 1997 and 3.7% in 1996. The decline in the interest rate spread resulted from slightly higher borrowing rates in addition to the previously mentioned change in the receivables portfolio. Bad debt expenses were $2,395 in 1998, $1,600 in 1997 and $500 in 1996. The increased bad debt expense relates primarily to growth in the receivables portfolio and a slight increase in known and expected write-offs. LIQUIDITY AND CAPITAL RESOURCES INFORMATION SYSTEMS CASH FLOWS (EXCLUDING FINANCIAL SERVICES) Information systems continued to provide strong cash flow from operating activities in fiscal year 1998. Operating cash flow was $146,248 in 1998 compared to $149,325 in 1997. Fiscal year 1998's operating cash flow resulted primarily from net income adjusted for noncash charges, such as depreciation and amortization. This strong cash flow funded the company's investments for normal operations including capital expenditures of $34,266. Fiscal year 1999 capital expenditures in the ordinary course of business are anticipated to be about $45,000. See the shareholders' equity caption of this analysis regarding the payment of dividends and share repurchases. FINANCIAL SERVICES CASH FLOWS 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 29.4% at September 30, 1998 and 34.5% at September 30, 1997. Remaining credit available under a revolving credit agreement was $129,500 at September 30, 1998. In addition to this committed credit agreement, the company also has a variety of other short-term credit lines available. Management estimates that cash flow from operations and cash available from existing credit agreements will be sufficient to fund fiscal year 1999 normal operations. 12 13 The company has consistently produced strong operating cash flows sufficient to fund normal operations. These cash flows resulted primarily from income, of which Automotive generates about 80% of the total. Automotive's strong cash flows are the result of stable operating margins and a high percentage of recurring service revenues, which require relatively low capital investment. Debt instruments have been used primarily to fund Financial Services' receivables and business combinations. In fiscal year 1997, the company filed a shelf registration statement with the SEC whereby the company can issue up to $300,000 of notes. Through September 30, 1998, the company has issued $170,000 of notes under this arrangement. Management believes that its strong balance sheet and cash flows should help maintain an investment grade credit rating that should provide access to capital sufficient to meet the company's cash requirements beyond fiscal year 1999. See Note 7 to the Consolidated Financial Statements for additional disclosures regarding the company's debt instruments. SHAREHOLDERS' EQUITY The company lists its Class A common shares on the New York Stock Exchange. There is no principal market for Class B common shares. The company also has an authorized class of 60 million preferred shares with no par value. As of November 17, 1998, none of these preferred shares was outstanding, and there were no agreements or commitments with respect to the sale or issuance of these shares, except for those described in Note 8 to the Consolidated Financial Statements. The company paid cash dividends of $28,604 in 1998, $26,056 in 1997 and $20,594 in 1996. Dividends per Class A common share were $.36 in 1998, $.32 in 1997 and $.25 in 1996. Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share, and all dividend payments must be simultaneous. In November 1998, the board of directors raised the quarterly dividend 11.1% to $.10 per Class A common share. The company has increased cash dividends thirteen times in the last nine years and paid dividends each year since the company's initial public offering in 1961. The company has conducted an active share repurchase program during recent years to provide additional returns to shareholders. The company repurchased $35,583 of Class A common shares in 1998, $46,799 in 1997 and $33,323 in 1996. Average prices paid per share were $19.77 in 1998, $19.75 in 1997 and $20.83 in 1996. As of September 30, 1998, the company could repurchase an additional 5,370 Class A common shares under existing board of directors authorizations. YEAR 2000 STATE OF READINESS The company has assessed potential year 2000 effects on its internal computer systems, computer systems provided to customers and other non-information technology systems. The assessment included not only the company's systems, but also systems of outside parties such as key suppliers and business partners. Detailed plans were prepared to address year 2000 issues. These plans covered software applications, operating systems, hardware and embedded technology in other equipment. The plans called for a determination of whether affected systems should be modified, replaced or retired. Management reviews progress against these plans with the Audit Committee of the board of directors at its regularly scheduled meetings. The majority of systems are scheduled to be year 2000 qualified by December 1998. The remaining systems are scheduled to be year 2000 qualified on or before June 1999. In July 1998, the company released a year 2000 qualified version of its ERA2 dealer management system for automobile dealers. The company is continuing to convert existing customers to the new software release with substantial completion scheduled for December 1998. The company decided late in 1997 to retire several older product lines by December 1998 rather than make these systems year 2000 qualified. Early in fiscal year 1998, the company communicated this decision to affected customers and presented them with various product alternatives. During the year, the company reinforced this communication on a number of occasions. As of September 30, 1998, the vast majority of customers with non-year 13 14 2000 qualified systems have implemented or are in the process of implementing a year 2000 qualified system. The majority of these customers purchased a year 2000 qualified system from the company. The company plans to discontinue support of non-year 2000 qualified systems on January 1, 1999. The company has contacted significant suppliers, customers and critical business partners to determine the extent to which the company may be vulnerable in the event those parties fail to properly remediate their own year 2000 issues. The company has performed testing where applicable to determine that the third-party systems are year 2000 qualified and function properly with the company's systems. To date, the company has not experienced material adverse results from third-party systems. While the company has taken significant actions to help ensure that these systems will be able to process and store dates into the next century, no amount of testing or contractual assurances will guarantee that errors or systems failures will not occur. COSTS The company's year 2000 efforts have been undertaken largely with existing personnel. In some instances, consultants have been engaged to perform specific services. Through September 30, 1998, the company has spent about $7,000 on year 2000 compliance efforts. In fiscal year 1998, year 2000 compliance costs were about $6,000, which was less than 10% of the company's total information technology costs. Prior to fiscal year 1998, the company spent an additional $1,000 on year 2000 compliance. The company estimates that the total costs (including costs already incurred) to make all systems year 2000 qualified will be about $11,000 to $13,000. However, there can be no assurance that the company will not incur unanticipated costs, which could have a material adverse effect on the company's financial statements. RISKS Management believes that the reasonably likely worst-case scenario, with respect to year 2000 issues, is the failure of a supplier (including energy or communications suppliers) to be year 2000 qualified. Such a failure could temporarily interrupt the supply of needed products or services to the company or its customers, which could affect the company's ability to deliver products and services and have a material adverse effect on the company's financial statements. CONTINGENCY PLANS The company has focused its year 2000 compliance efforts on assessing potential year 2000 effects, developing or purchasing year 2000 qualified solutions and implementing and testing year 2000 qualified solutions. The company continually assesses known, potential risks remaining and has begun to develop contingency plans to mitigate any significant risks identified. The company anticipates that contingency plans will be developed during 1999. MARKET RISKS INTEREST RATES The information systems portion of the business borrows money, as needed, primarily to fund business combinations. Generally the company borrows under fixed-rate agreements with terms of ten years or less. The Financial Services segment of the business obtains borrowings to fund the investment in finance receivables. These fixed-rate receivables have repayment terms of four to eight years, with five years being the most common term. The company funds finance receivables with debt that has repayment terms consistent with the maturities of the finance receivables. Generally the company attempts to lock in the interest spread on the fixed-rate finance receivables by borrowing under fixed-rate agreements or using interest rate management agreements to manage variable interest rate exposure. At September 30, 1998, about two-thirds of Financial Services' borrowings were under fixed-rate agreements. The company does not use financial instruments for trading purposes. 14 15 Because fixed-rate finance receivables are directionally funded with fixed-rate debt or its equivalent (variable-rate debt that has been fixed with interest-rate swaps), management believes that a 100 basis point change in interest rates would not have a material effect on the company's financial statements. See Note 7 to the Consolidated Financial Statements for additional disclosures regarding the company's debt instruments and interest rate management agreements. FOREIGN CURRENCY EXCHANGE RATES The company has foreign based operations in Canada, which accounted for 13% of net sales and revenues in 1998. In the conduct of its foreign operations, the company has intercompany sales, charges and loans between the U.S. and Canada and may receive dividends denominated in different currencies. These transactions expose the company to changes in foreign currency exchange rates. At September 30, 1998, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at September 30, 1998, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. COMMODITIES The company is exposed to changes in the cost of paper, a key raw material in the production of business forms. The company has attempted to limit this exposure by consolidating its purchases among a few suppliers and negotiating longer-term contracts that limit the amount and frequency of price increases and generally delays the effective date of the increase. When paper costs increase, historically the company has been able to increase the sales prices of its business forms products and maintain its profit margins. Conversely, when paper costs decline, the company generally lowers its sales prices to meet competitive pressures. Historically, the company has not used financial instruments to manage its exposure to changes to the cost of paper. Because the company has historically been able to raise sales prices to offset higher paper costs, management believes that a 10% change in paper costs would not have a material effect on the company's financial statements. ENVIRONMENTAL MATTERS See Note 14 to the Consolidated Financial Statements for a discussion of the company's environmental contingencies. ACCOUNTING STANDARDS See Note 15 to the Consolidated Financial Statements for a discussion of the effect of accounting standards that the company has not yet adopted. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Please see "Market Risks" section in Management Discussion and Analysis (Part II, ITEM 7 of this report on pages 14 and 15). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 is contained in Item 14 of Part IV (pages 17-23) of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 15 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The name, age and background information for each of the company's directors and nominees are incorporated herein by reference to the section of the company's Proxy Statement for its 1999 Annual Meeting of Shareholders captioned "ELECTION OF DIRECTORS." EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the company are elected by the Board of Directors at its meeting immediately following the Annual Meeting of Shareholders to serve generally for a term of one year. The executive officers of the company, as of December 1, 1998, are:
NAME AGE POSITION - ---- --- -------- Richard H. Grant, Jr. 85 Chairman of the Steering Committee and Director David R. Holmes 58 Chairman of the Board, President and Chief Executive Officer Robert C. Nevin 58 President, Automotive Division Dale L. Medford 48 Vice President, Corporate Finance and Chief Financial Officer, and Director Rodney A. Hedeen 50 President, Business Systems Division Michael J. Gapinski 48 Treasurer and Assistant Secretary Adam M. Lutynski 56 General Counsel and Secretary
A description of prior positions held by executive officers of the company within the past 5 years, to the extent applicable, is as follows: Mr. Nevin has been President, Automotive Division since January 1997; prior thereto was President, Business Systems Division. Mr. Hedeen has been President, Business Systems Division since January 1997; prior thereto was Senior Vice President and General Manager, Forms and Systems Group. All other executive officers of the company have held their positions for at least 5 years. ITEM 11. EXECUTIVE COMPENSATION Information on compensation of the company's executive officers and directors is incorporated herein by reference to the section of the company's Proxy Statement for its 1999 Annual Meeting of Shareholders captioned "EXECUTIVE COMPENSATION." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The number of Common Shares of the company beneficially owned by each five percent shareholder, director or current nominee for director, and by all directors and officers as a group as of December 1, 1998 is incorporated herein by reference to the section of the company's Proxy Statement for its 1999 Annual Meeting of Shareholders captioned "VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." 16 17 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning transactions with management, certain business relationships and indebtedness of management is incorporated herein by reference to the section of the company's Proxy Statement for its 1999 Annual Meeting of Shareholders captioned "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." 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 30 through 53. Statements of Consolidated Income - For The Years Ended September 30, 1998, 1997 and 1996 Consolidated Balance Sheets - September 30, 1998 and 1997 Statements of Consolidated Shareholders' Equity and Comprehensive Income - For The Years Ended September 30, 1998, 1997 and 1996 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, 1998 ARE ATTACHED HERETO: Schedule II Valuation Accounts Page 54 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a)(3) EXHIBITS
------------------ ----------------------------------------------------------------------------------------- Exhibit No. Item ------------------ ----------------------------------------------------------------------------------------- (3) (a) Amended Articles of Incorporation, Restatement effective February 9, 1995; incorporated by reference to Exhibit A of the company's definitive proxy statement dated January 5, 1995 filed with the Securities and Exchange Commission. ------------------ ----------------------------------------------------------------------------------------- (3)(b) Amendment to Amended and Restated Articles of Incorporation, effective April 25, 1997; incorporated by reference to Exhibit 2 of the company's Form 8A/A dated October 20, 1998 filed with the Securities and Exchange Commission. ------------------ ----------------------------------------------------------------------------------------- (3)(c) 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. ------------------ -----------------------------------------------------------------------------------------
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------------------ ----------------------------------------------------------------------------------------- Exhibit No. Item ------------------ ----------------------------------------------------------------------------------------- (4)(a) Copies of the agreements relating to long-term debt, which are not required as exhibits to this Form 10-K, will be provided to the Securities and Exchange Commission upon request. ------------------ ----------------------------------------------------------------------------------------- (4)(b) 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)* Second Amended and Restated Employment Agreement with David R. Holmes dated as of August 17, 1998, as filed herewith. ------------------ ----------------------------------------------------------------------------------------- (10)(b)* Amended and Restated Employment Agreement with Robert C. Nevin dated as of February 1, 1997; incorporated by reference to Exhibit (10)(b) to Form 10-K for the fiscal year ended September 30, 1997. ------------------ ----------------------------------------------------------------------------------------- (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)* Employment Agreement with Rodney A. Hedeen dated February 1, 1997; incorporated by reference to Exhibit (10)(e) to Form 10-K for the fiscal year ended September 30, 1997. ------------------ ----------------------------------------------------------------------------------------- (10)(f)* 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. ------------------ ----------------------------------------------------------------------------------------- (10)(g)* General Form of Change in Control Severance Agreement between the company and each of the following officers: Adam M. Lutynski, Dale L. Medford and Thomas J. Momchilov, effective August 17, 1998, as filed herewith. ------------------ ----------------------------------------------------------------------------------------- (10)(h)* 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)(i)* 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)(j)* 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)(k) * 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. ------------------ -----------------------------------------------------------------------------------------
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------------------ ----------------------------------------------------------------------------------------- Exhibit No. Item ------------------ ----------------------------------------------------------------------------------------- (10)(l)* 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)(m)* 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)(n)* 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)(o)* 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)(p)* 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)(q)* 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. ------------------ ----------------------------------------------------------------------------------------- (10)(r)* 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)(s)* 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)(t)* 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)(u)* 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)(v)* 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)(w)* 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. ------------------ -----------------------------------------------------------------------------------------
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------------------ ----------------------------------------------------------------------------------------- Exhibit No. Item ------------------ ----------------------------------------------------------------------------------------- (10)(x)* 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)(y)* 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)(z)* 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)(aa)* 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)(bb)* 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. ------------------ ----------------------------------------------------------------------------------------- (10)(cc)* 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)(dd)* 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)(ee)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 4, adopted March 14, 1997; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1997. ------------------ ----------------------------------------------------------------------------------------- (10)(ff)* The Reynolds and Reynolds Company Supplemental Retirement Plan Amendment No. 5, adopted May 18, 1998, as filed herewith. ------------------ ----------------------------------------------------------------------------------------- (10)(gg)* 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)(hh)* 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)(ii)* 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)(jj)* 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. ------------------ -----------------------------------------------------------------------------------------
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------------------ ----------------------------------------------------------------------------------------- Exhibit No. Item ------------------ ----------------------------------------------------------------------------------------- (10)(kk) A separate performance-based incentive compensation plan for the Chief Executive Officer incorporated by reference to Proposal II within the company's definitive proxy statement dated January 4, 1996 filed with the Securities and Exchange Commission. ------------------ ----------------------------------------------------------------------------------------- (10)(ll)* 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)(mm)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 1, adopted December 19, 1996; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the fiscal year ended September 30, 1997. ------------------ ----------------------------------------------------------------------------------------- (10)(nn)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 2, adopted August 11, 1997; incorporated by reference to Exhibit (10)(ii) to Form 10-K for the fiscal year ended September 30, 1997. ------------------ ----------------------------------------------------------------------------------------- (10)(oo)* The Reynolds and Reynolds Company Retirement Plan (formerly The Reynolds and Reynolds Company Salaried Retirement Plan) October 1, 1995 Restatement Amendment No. 3, adopted September 22, 1998, as filed herewith. ------------------ ----------------------------------------------------------------------------------------- (10)(pp)* General Form of Deferred Compensation Agreement between the company and each of the following officers: R. H. Grant, III, David R. Holmes, Dale L. Medford and Robert C. Nevin; incorporated by reference to Exhibit (10)(p) to Form 10-K for the fiscal year ended September 30, 1983. ------------------ ----------------------------------------------------------------------------------------- (10)(qq)* 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: R. H. Grant, III, David R. Holmes, Dale L. Medford and Robert C. Nevin; incorporated by reference to Exhibit (10)(fff) to Form 10-K for the fiscal year ended September 30, 1989. ------------------ ----------------------------------------------------------------------------------------- (10)(rr)* General Form of Collateral Assignment Split-Dollar Insurance Agreement and Policy and Non-Qualified Compensation and Disability Benefit Agreement between the company and each of the following officers: Michael J. Gapinski, R. H. Grant, III, David R. Holmes, Adam M. Lutynski, Dale L. Medford and Robert C. Nevin; incorporated by reference to Exhibit (10)(dd) to Form 10-K for the fiscal year ended September 30, 1985. ------------------ ----------------------------------------------------------------------------------------- (10)(ss)* Resolution of the Board of Directors and General Form of Amendment dated December 1, 1989 to the Non-Qualified Compensation and Disability Benefit between the company and each of the following officers: Michael J. Gapinski, R. H. Grant, III, Rodney A. Hedeen, David R. Holmes, Adam M. Lutynski, Dale L. Medford, Robert C. Nevin and H. John Proud; incorporated by reference to Exhibit (10)(hhh) to Form 10-K for the fiscal year ended September 30, 1989. ------------------ ----------------------------------------------------------------------------------------- (10)(tt) 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. ------------------ -----------------------------------------------------------------------------------------
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------------------ ----------------------------------------------------------------------------------------- Exhibit No. Item ------------------ ----------------------------------------------------------------------------------------- (10)(uu) 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)(vv) 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)(ww) 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)(xx) 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). ------------------ ----------------------------------------------------------------------------------------- (10)(yy) Asset Purchase Agreement dated as of September 28, 1998 by and among The Reynolds and Reynolds Company, InfoCure Corporation and Thoroughbred Acquisition, Inc. and Amendment No. 1 dated as of October 22, 1998; incorporated by reference to Exhibit (c)(2) to the company's filing on Form 8-K dated November 9, 1998 (File No. 001-10147). ------------------ ----------------------------------------------------------------------------------------- (11) Not applicable ------------------ ----------------------------------------------------------------------------------------- (12) Not applicable ------------------ ----------------------------------------------------------------------------------------- (13) Not applicable ------------------ ----------------------------------------------------------------------------------------- (18) Not applicable ------------------ ----------------------------------------------------------------------------------------- (21) List of subsidiaries (See Page 55) ------------------ ----------------------------------------------------------------------------------------- (22) Not applicable ------------------ ----------------------------------------------------------------------------------------- (23) Consent of Independent Auditors (See Page 29) ------------------ ----------------------------------------------------------------------------------------- (24) Not Applicable ------------------ ----------------------------------------------------------------------------------------- (27) Financial Data Schedule ------------------ ----------------------------------------------------------------------------------------- (28) Not applicable ------------------ ----------------------------------------------------------------------------------------- (99) Not applicable ------------------ -----------------------------------------------------------------------------------------
* Management contracts or compensatory plans or arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 22 23 (b) REPORTS ON FORM 8-K. During the quarter ended September 30, 1998, no reports on Form 8-K were filed by registrant. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. Please refer to Part IV, ITEM 14. (a)(3) beginning on page 17. (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 1998 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 Or by calling: 1-888-4REYREY (473-9739) --------------------------------------------------------- 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: December 28, 1998 23 24 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Date: December 28, 1998 By /s/ DAVID R. HOLMES ---------------------------------------- DAVID R. HOLMES Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Date: December 28, 1998 By /s/ DALE L. MEDFORD ---------------------------------------- DALE L. MEDFORD Vice President, Corporate Finance and Chief Financial Officer (Principal Financial and Accounting Officer) and Director Date: December 28, 1998 By /s/ JAMES L. ARTHUR ---------------------------------------- JAMES L. ARTHUR, Director Date: December 28, 1998 By /s/ DR. DAVID E. FRY ---------------------------------------- DR. DAVID E. FRY, Director Date: December 28, 1998 By /s/ RICHARD H. GRANT, JR. ---------------------------------------- RICHARD H. GRANT, JR. Chairman of the Steering Committee and Director Date: December 28, 1998 By /s/ RICHARD H. GRANT, III ---------------------------------------- RICHARD H. GRANT, III, Director Date: December 28, 1998 By /s/ CLEVE L. KILLINGSWORTH, JR. ---------------------------------------- CLEVE L. KILLINGSWORTH, JR. Director 24 25 Date: December 28, 1998 By /s/ ALLAN Z. LOREN ---------------------------------------- ALLAN Z. LOREN, Director Date: December 28, 1998 By /s/ PHILIP A. ODEEN ---------------------------------------- PHILIP A. ODEEN, Director Date: December 28, 1998 By /s/ DONALD K. PETERSON ---------------------------------------- DONALD K. PETERSON, Director Date: December 28, 1998 By /s/ GAYLE B. PRICE, JR. ---------------------------------------- GAYLE B. PRICE, JR., Director Date: December 28, 1998 By /s/ MARTIN D. WALKER ---------------------------------------- MARTIN D. WALKER, Director 25 26 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, 1998 The Reynolds and Reynolds Company Dayton, Ohio 26 27 MANAGEMENT'S STATEMENT OF RESPONSIBILITY November 17, 1998 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 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 28. Another level of control resides with the audit committee of the company's board of directors. The committee, comprised of 7 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 auditors. They discuss the overall audit scope and the specific audit plans with the independent auditors and the internal auditors. This committee also meets regularly (separately and jointly) with the independent 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 27 28 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, 1998 and 1997 and the related statements of consolidated income, shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended September 30, 1998. Our audits also included the financial statement schedule included at Item 14(a) (2). These financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with 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, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, 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. DELOITTE & TOUCHE LLP Dayton, Ohio November 17, 1998 28 29 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in The Reynolds and Reynolds Company (1) Registration Statement No. 33-56045 on Form S-8, (2) Post-Effective Amendment No. 1 to Registration Statement No. 333-12681 on Form S-8, (3) Registration Statement No. 333-16583 on Form S-3, (4) Registration Statement No. 333-18585 on Form S-3, (5) Registration Statement No. 333-41983 on Form S-3, (6) Registration Statement No. 333-41985 on Form S-3, (7) Post-Effective Amendment No. 1 to Registration Statement No. 33-51895 on Form S-3, (8) Pre-Effective Amendment No. 1 to Registration Statement No. 33-58877 on Form S-3, (9) Pre-Effective Amendment No. 1 to Registration Statement No. 33-61725 on Form S-3, (10) Registration Statement No. 33-59615 on Form S-3, (11) Registration Statement No. 33-59617 on Form S-3, and (12) Registration Statement No. 333-12967 on Form S-3, of our report dated November 17, 1998, appearing in this Annual Report on Form 10-K of The Reynolds and Reynolds Company for the year ended September 30, 1998, and to the reference to us under the heading "Experts" in the respective Prospectuses, which is part of each of the above Registration Statements. /s/ DELOITTE & TOUCHE LLP - -------------------------- Dayton, Ohio December 22, 1998 29 30
STATEMENTS OF CONSOLIDATED INCOME (In thousands except per share data) For The Years Ended September 30 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Net Sales and Revenues Information systems Products $1,039,626 $ 953,106 $ 728,076 Services 411,840 361,850 305,293 ---------- ---------- ---------- Total information systems 1,451,466 1,314,956 1,033,369 Financial services 34,497 30,383 26,263 ---------- ---------- ---------- Total net sales and revenues 1,485,963 1,345,339 1,059,632 ---------- ---------- ---------- Costs and Expenses Cost of sales Products 630,818 569,979 417,200 Services 168,702 148,536 121,768 ---------- ---------- ---------- Total cost of sales 799,520 718,515 538,968 Selling, general and administrative expenses 465,137 429,529 335,806 Restructuring charge 23,912 Financial services 17,951 15,282 11,818 ---------- ---------- ---------- Total costs and expenses 1,282,608 1,187,238 886,592 ---------- ---------- ---------- Operating Income 203,355 158,101 173,040 ---------- ---------- ---------- Other Charges (Income) Interest expense 15,196 10,443 5,778 Interest income (2,505) (2,306) (1,632) Other 2,641 2,269 (1,556) ---------- ---------- ---------- Total other charges 15,332 10,406 2,590 ---------- ---------- ---------- Income Before Income Taxes 188,023 147,695 170,450 Provision for Income Taxes 74,467 67,204 71,350 ---------- ---------- ---------- Income from Continuing Operations 113,556 80,491 99,100 Discontinued Operations (10,449) (21,272) (5,362) ---------- ---------- ---------- Net Income $ 103,107 $ 59,219 $ 93,738 ========== ========== ========== Basic Earnings Per Common Share Income from continuing operations $1.43 $.99 $1.20 Discontinued operations $(.13) $(.26) $(.06) Net income $1.30 $.73 $1.14 Average Number of Common Shares Outstanding 79,451 81,462 82,532 Diluted Earnings Per Common Share Income from continuing operations $1.40 $.96 $1.16 Discontinued operations $(.13) $(.25) $(.06) Net income $1.27 $.70 $1.10 Average Number of Common Shares and Equivalents Outstanding 81,146 84,023 85,228
See Notes to Consolidated Financial Statements. 30 31
CONSOLIDATED BALANCE SHEETS (In thousands) September 30 1998 1997 - ------------ ---- ---- INFORMATION SYSTEMS ASSETS Current Assets Cash and equivalents $ 39,980 $ 7,604 ---------- ---------- Accounts receivable (less allowance for doubtful accounts: 1998--$6,781; 1997--$7,652) 227,158 197,215 ---------- ---------- Inventories Finished products 54,778 59,683 Work in process 5,795 6,256 Raw materials and supplies 5,623 9,706 ---------- ---------- Total inventories 66,196 75,645 ---------- ---------- Deferred income taxes 17,483 21,699 ---------- ---------- Prepaid expenses and other assets 21,230 25,764 ---------- ---------- Total current assets 372,047 327,927 ---------- ---------- Property, Plant and Equipment Land and improvements 14,153 14,134 Buildings and improvements 89,804 90,159 Computer equipment 135,328 128,373 Machinery and equipment 101,904 99,155 Furniture and other 39,137 36,916 Construction in progress 9,108 12,954 ---------- ---------- Total property, plant and equipment 389,434 381,691 Less accumulated depreciation 215,208 193,190 ---------- ---------- Net property, plant and equipment 174,226 188,501 ---------- ---------- Intangible Assets Goodwill 82,280 94,241 Software licensed to customers 11,882 13,713 Other 5,445 8,588 ---------- ---------- Total intangible assets 99,607 116,542 ---------- ---------- Other Assets 100,681 96,365 ---------- ---------- Total Information Systems Assets 746,561 729,335 ---------- ---------- FINANCIAL SERVICES ASSETS Finance Receivables 408,765 372,073 Cash and Other Assets 2,394 1,102 ---------- ---------- Total Financial Services Assets 411,159 373,175 ---------- ---------- TOTAL ASSETS $1,157,720 $1,102,510 ========== ========== 1998 1997 ---- ---- INFORMATION SYSTEMS LIABILITIES Current Liabilities Current portion of long-term debt $ 6,048 $ 8,131 Notes payable 777 13,245 Accounts payable Trade 68,749 56,159 Other 6,193 7,310 Accrued liabilities Compensation and related items 51,188 56,379 Other 60,479 58,902 Deferred revenues 4,774 8,453 ---------- ---------- Total current liabilities 198,208 208,579 ---------- ---------- Long-Term Debt 161,541 170,150 ---------- ---------- Other Liabilities Postretirement medical 43,523 42,247 Pensions 37,107 29,753 Other 3,073 2,662 ---------- ---------- Total other liabilities 83,703 74,662 ---------- ---------- Total Information Systems Liabilities 443,452 453,391 ---------- ---------- FINANCIAL SERVICES LIABILITIES Notes Payable 210,561 198,314 Deferred Income Taxes 96,371 84,189 Other Liabilities 2,885 2,386 ---------- ---------- Total Financial Services Liabilities 309,817 284,889 ---------- ---------- SHAREHOLDERS' EQUITY Capital Stock Preferred Class A common 57,610 53,269 Class B common 625 625 Other Comprehensive Income (9,727) (5,481) Retained Earnings 355,943 315,817 ---------- ---------- Total Shareholders' Equity 404,451 364,230 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,157,720 $1,102,510 ========== ==========
See Notes to Consolidated Financial Statements. 31 32
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands except per share data) For The Years Ended September 30 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Capital Stock Class A common Balance, beginning of year $ 53,269 $ 50,601 $ 41,443 Stock split 6,917 Capital stock issued 5,967 4,039 3,693 Capital stock repurchased (1,206) (1,481) (1,000) Capital stock retired (1,463) (1,327) (1,152) Tax benefits from stock options 1,043 1,437 700 --------- --------- --------- Balance, end of year 57,610 53,269 50,601 --------- --------- --------- Class B common Balance, beginning of year 625 625 313 Stock split 312 --------- --------- --------- Balance, end of year 625 625 625 --------- --------- --------- Other Comprehensive Income Balance, beginning of year (5,481) (6,203) (3,581) Foreign currency translation (1,487) (212) (269) Minimum pension liability (2,759) 934 (2,353) --------- --------- --------- Balance, end of year (9,727) (5,481) (6,203) --------- --------- --------- Retained Earnings Balance, beginning of year 315,817 327,972 294,380 Stock split (7,229) Net income 103,107 59,219 93,738 Cash dividends Class A common (1998--$.36 PER SHARE; 1997--$.32 per share; 1996--$.25 per share) (28,244) (25,736) (20,344) Class B common (1998--$.018 PER SHARE; 1997--$.016 per share; 1996--$.0125 per share) (360) (320) (250) Capital stock repurchased (34,377) (45,318) (32,323) --------- --------- --------- Balance, end of year 355,943 315,817 327,972 --------- --------- --------- Total Shareholders' Equity $ 404,451 $ 364,230 $ 372,995 ========= ========= ========= Comprehensive Income Net income $ 103,107 $ 59,219 $ 93,738 Foreign currency translation (1,487) (212) (269) Minimum pension liability (2,759) 934 (2,353) --------- --------- --------- Total Comprehensive Income $ 98,861 $ 59,941 $ 91,116 ========= ========= =========
See Notes to Consolidated Financial Statements. 32 33
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands) For The Years Ended September 30 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- INFORMATION SYSTEMS Cash Flows Provided by Operating Activities $ 146,248 $ 149,325 $ 110,345 --------- --------- --------- Cash Flows Provided by (Used for) Investing Activities Business combinations (1,203) (145,347) (78,039) Capital expenditures (34,266) (47,707) (39,980) Net proceeds from sales of assets 17,279 18,307 10,943 Capitalization of software licensed to customers (4,041) (1,465) (4,103) (Advances to) repayments from financial services (5,375) 6,368 4,189 --------- --------- --------- Net cash used for investing activities (27,606) (169,844) (106,990) --------- --------- --------- Cash Flows Provided by (Used for) Financing Activities Additional borrowings 2,126 145,641 50,000 Principal payments on debt (25,335) (57,122) (8,159) Cash dividends paid (28,604) (26,056) (20,594) Capital stock issued 2,617 1,541 1,754 Capital stock repurchased (35,583) (46,799) (33,323) --------- --------- --------- Net cash provided by (used for) financing activities (84,779) 17,205 (10,322) --------- --------- --------- Effect of Exchange Rate Changes on Cash (1,487) (212) (269) --------- --------- --------- Increase (Decrease) in Cash and Equivalents 32,376 (3,526) (7,236) Cash and Equivalents, Beginning of Year 7,604 11,130 18,366 --------- --------- --------- Cash and Equivalents, End of Year $ 39,980 $ 7,604 $ 11,130 ========= ========= ========= FINANCIAL SERVICES Cash Flows Provided by Operating Activities $ 19,482 $ 19,875 $ 15,449 --------- --------- --------- Cash Flows Provided by (Used for) Investing Activities Finance receivables originated (145,808) (142,588) (117,040) Collections on finance receivables 109,886 92,305 76,174 --------- --------- --------- Net cash used for investing activities (35,922) (50,283) (40,866) --------- --------- --------- Cash Flows Provided by (Used for) Financing Activities Additional borrowings 69,993 91,258 72,988 Principal payments on debt (57,746) (54,855) (42,752) Advances from (repayments to) information systems 5,375 (6,368) (4,189) --------- --------- --------- Net cash provided by financing activities 17,622 30,035 26,047 --------- --------- --------- Increase (Decrease) in Cash and Equivalents 1,182 (373) 630 Cash and Equivalents, Beginning of Year 920 1,293 663 --------- --------- --------- Cash and Equivalents, End of Year $ 2,102 $ 920 $ 1,293 ========= ========= =========
See Notes to Consolidated Financial Statements. 33 34 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 Automotive and Business Systems Divisions. Financial services is comprised of Reyna Capital 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 noncurrent 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. The carrying amount of these short-term investments approximates fair value. CONCENTRATIONS OF CREDIT RISK The company is a leading provider of information management systems to automotive retailers. A significant portion of finance receivables and accounts receivable are from automotive retailers. 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. INVENTORIES Inventories are stated at the lower of cost or market. Costs of Business Systems and Automotive business forms inventories are determined by the last-in, first-out (LIFO) method. At September 30, 1998 and 1997, LIFO inventories were $56,913 and $66,732, respectively. These inventories determined by the first-in, first-out (FIFO) method would increase by $5,068 in 1998, $5,744 in 1997 and $6,232 in 1996. For other inventories, cost is determined by specific identification or the FIFO method. Market is based on net realizable value. 34 35 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are provided over the estimated useful service lives of the assets or asset groups, principally on the straight-line method for financial reporting purposes. Estimated asset lives are: Years - ------------------------------------------ Land improvements 10 Buildings and improvements 3--33 Computer equipment 3-- 5 Machinery and equipment 3--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 over five to forty years. Amortization expense was $15,258 in 1998, $15,066 in 1997 and $10,541 in 1996. Amortization expense in 1997 included $3,560 from restructuring and special charges. At September 30, 1998 and 1997, accumulated amortization was $62,626 and $49,762, 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 $5,872 in 1998, $9,188 in 1997 and $3,731 in 1996. Amortization expense in 1997 included $3,920 from restructuring and special charges. At September 30, 1998 and 1997, accumulated amortization was $58,025 and $52,389 respectively. Other intangible assets are amortized over periods ranging from three to fifteen years. Amortization expense was $2,492 in 1998, $2,885 in 1997 and $2,408 in 1996. At September 30, 1998 and 1997, accumulated amortization was $15,728 and $13,264, respectively. The carrying values of goodwill and other intangible assets are reviewed if the facts and circumstances indicate potential impairment of their carrying value. Any impairment in the carrying value of such intangibles is recorded when identified in accordance with Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets" and 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." EQUITY INVESTMENT In September 1997, the company purchased 16,500 shares of Kalamazoo Computer Group plc of the United Kingdom for about $36,000. This investment represents about 26% of Kalamazoo's outstanding shares and was accounted for under the equity method. Accordingly, the investment in Kalamazoo's common stock was presented as a single line in the balance sheet as other assets. The company's share of Kalamazoo's net losses was presented as a single line in the consolidated income statement as other charges. The company recorded its share of Kalamazoo's net losses of $3,225 in 1998 and $3,850 in 1997. At September 30, 1998, the market value of the company's share of Kalamazoo's stock was about $12,500. 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. 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, 35 36 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 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 capital and operating lease agreements. As of September 30, 1998, future minimum lease payments relating to operating lease agreements were $101,355 with annual payments of $27,486 in 1999, $22,512 in 2000, $16,077 in 2001, $11,160 in 2002 and $5,116 in 2003. Rental expenses were $37,210 in 1998, $36,018 in 1997 and $25,660 in 1996. Under the provisions of purchase accounting, the carrying value of assets under capital lease is not significant. The obligation associated with the capital lease is discussed in Note 7 to the Consolidated Financial Statements. During 1997, the company entered into an agreement for the construction and lease of a new office building. Construction is estimated to be completed in 1999 at a total cost of $29,000. RESEARCH AND DEVELOPMENT COSTS The company expenses research and development costs as incurred. These costs were $46,588 in 1998, $43,052 in 1997 and $24,439 in 1996. Included in 1997 were $14,850 of purchased in-process research and development costs. In-process research and development acquired in business combinations represented software development costs for which technological feasibility was not established and for which there was no alternative future use. 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, 1998, were $19,339. The calculation of the unrecognized deferred income tax liability on these earnings is not practicable. EARNINGS PER COMMON SHARE Basic earnings per common share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding during each year. The weighted average number of common shares outstanding assumed that Class B common shares were converted into Class A common shares. The company's common share equivalents represent the effect of employee stock options. RECLASSIFICATION Certain amounts in the 1997 and 1996 financial statements were reclassified to conform with the 1998 presentation. 36 37 2. DISCONTINUED OPERATIONS In late September 1998, the company's board of directors approved a plan to discontinue operations of the company's Healthcare Systems segment. This separate division, which provided computer systems products and services to hospital-based and office-based physicians, had operated at a loss for several years. As discontinued operations, the 1998 operating results of Healthcare Systems have been segregated from continuing operations and reported as a separate line on the consolidated statement of income. Prior financial statements have been restated to also present the operating results of Healthcare Systems as discontinued operations. OPERATING RESULTS 1998 1997 1996 - ------------------------------------------------------------------------ Net sales and revenues $ 48,226 $ 40,346 $ 40,811 Cost of sales 32,323 27,852 24,687 SG&A expenses 32,603 43,122 24,339 Restructuring charge 1,427 --------- --------- --------- Operating loss (16,700) (32,055) (8,215) Other income (74) (67) (8) --------- --------- --------- Loss before income taxes (16,626) (31,988) (8,207) Benefit from income taxes (6,177) (10,716) (2,845) --------- --------- --------- Net loss ($10,449) ($21,272) ($ 5,362) ========= ========= ========= Net assets of about $27,000 at September 30, 1998 and about $28,000 at September 30, 1997 were included in the company's consolidated balance sheet. In October 1998 the company sold substantially all net assets of Healthcare Systems to Infocure Corporation for about $50,000. The proceeds consisted of about $40,000 of cash with the balance in subordinated notes. The company expects to record a gain on the sale of about $.07 per share in the first quarter of fiscal year 1999. 3. RESTRUCTURING AND SPECIAL CHARGES During fiscal year 1997 the company recorded a pretax charge of $49,241 consisting of a $25,339 restructuring charge (recorded in the fourth quarter) and $23,902 of other special charges ($17,063 recorded in the third quarter and $6,839 recorded in the fourth quarter). Restructuring charges included $1,427 related to discontinued operations. Special charges increased cost of sales $4,061, selling general and administrative expenses $4,343, other charges $3,850 and loss on discontinued operations $11,648 before income taxes. The restructuring charge consisted primarily of employee termination benefits related to closing a number of manufacturing and distribution facilities. At September 30, 1998, these facilities had been closed and involuntary termination benefits, which approximated amounts accrued, were paid. Voluntary termination benefits are discussed in Note 11 to the Consolidated Financial Statements. Special charges consisted primarily of in-process research and development expenses from three 1997 computer services business combinations and represented software development costs for which technological feasibility was not established and for which there was no alternative future use. The balance of restructuring and special charges represented the write-off of intangible assets associated with discontinued products in the automotive business and the write-off of impaired software licensed to customers and internal software which the company will no longer use. After income taxes, the combined charges reduced net income by $34,078 or $.41 per diluted earnings per common share. The income tax benefit on the combined charges represented a 30.8% effective income tax rate because not all of the charges were tax deductible. 37 38 4. BUSINESS COMBINATIONS The company purchased seven businesses in the automotive, healthcare and general business forms markets during fiscal years 1997 and 1996 with annual sales of $271,000 and $337,000 respectively. In recording the assets and liabilities of these business combinations, the company accrued the estimated costs to close duplicate facilities. With the exception of Crain-Drummond Inc, purchased July 1, 1997, the company has closed the acquired duplicate facilities and paid associated costs, which approximated the costs accrued. Since acquiring Crain-Drummond, the company has closed one manufacturing facility with a second facility scheduled to be closed in January 1999. As of July 1, 1997, key elements of the costs accrued for exiting duplicate facilities of Crain-Drummond were involuntary termination benefits of $2,665 and relocation costs of $416. Involuntary termination benefits represent severance payments and outplacement services for about 170 employees, principally manufacturing employees. Through September 30, 1998, $987 of involuntary termination benefits were paid to 61 employees and $63 of relocation costs were paid. The company recorded the assets of the duplicate facilities as current assets held for sale. As of July 1, 1997, these assets of $4,972 were recorded at estimated fair market value less disposal costs. At September 30, 1998, $2,149 of these assets had been sold. All businesses were purchased with a combination of cash and stock as reported in the table titled Components of Purchase Prices. The issuance of capital stock was considered a noncash transaction for accounting purposes and was not included in the statements of cash flows. All 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 $10,609 in 1997 and $859 in 1996. This goodwill is being amortized on a straight-line basis over five to fifteen years. 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. Contingent payments increased goodwill by $2,071 in 1998, $3,728 in 1997 and $3,447 in 1996. Contingent payments may be made through 2006. COMPONENTS OF PURCHASE PRICES
1998 1997 1996 - ------------------------------------------------------------------------------------- Cash (net of cash and equivalents acquired) $ 565 $142,022 $75,313 Capital stock issued (1996 - 31 shares) 796 Contingent payments Cash 638 3,325 2,726 Capital stock issued (1998 - 105 SHARES; 1997 - 44 shares) 1,933 1,171 ------ -------- ------- Totals $3,136 $146,518 $78,835 ====== ======== =======
38 39 5. INCOME TAXES
PROVISION FOR INCOME TAXES 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Current Federal $52,647 $49,959 $52,654 State and local 9,663 13,095 11,701 Foreign 1,076 647 902 Deferred Financial services product financing activities 12,494 13,040 4,022 Tax audit settlements (4,910) Depreciation (1,507) (7,012) 345 Capital losses 37 (1,926) 1,696 Capital losses valuation allowance 397 1,588 (1,122) Other 4,570 (2,187) 1,152 ------- ------- ------- Provision for income taxes $74,467 $67,204 $71,350 ======= ======= ======= Income taxes paid (net of refunds) $63,685 $60,101 $79,616 ======= ======= =======
RECONCILIATION OF INCOME TAX RATES 1998 1997 1996 Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------ Statutory federal income taxes $ 65,808 35.0% $51,693 35.0% $ 59,657 35.0% State and local taxes less federal income tax effect 8,409 4.5 8,733 5.9 9,379 5.5 Tax audit settlements (4,910) (2.6) Goodwill amortization 2,458 1.3 3,675 2.5 2,324 1.4 In-process research and development 1,348 .9 Other 2,702 1.4 1,755 1.2 (10) -------- ---- ------- ---- -------- ---- Provision for income taxes $ 74,467 39.6% $67,204 45.5% $ 71,350 41.9% ======== ==== ======= ==== ======== ====
INFORMATION SYSTEMS DEFERRED INCOME TAX ASSETS (LIABILITIES) 1998 1997 - -------------------------------------------------------------------- Deferred income tax assets Postretirement medical $ 18,421 $ 17,684 Pensions 14,463 11,770 Acquired net operating losses 3,400 5,062 Severance 691 4,203 Capital losses 2,011 2,083 Other 22,622 28,883 Deferred income tax liabilities Depreciation (2,611) (9,063) Capital losses valuation allowance (2,011) (1,631) Other (13,501) (18,547) -------- -------- Totals 43,485 40,444 Current 17,483 21,699 -------- -------- Noncurrent $ 26,002 $ 18,745 ======== ========
The carryforward of capital losses expires primarily in 1999. The carryforward of net operating losses expires primarily in 2009. 39 40 6. FINANCIAL SERVICES
INCOME STATEMENTS 1998 1997 1996 - ----------------------------------------------------------------------- Revenues $34,497 $30,383 $26,263 ------- ------- ------- Expenses Interest expense 13,241 11,410 9,072 Allowance for losses 2,395 1,600 500 General and administrative 2,315 2,272 2,246 ------- ------- ------- Total expenses 17,951 15,282 11,818 ------- ------- ------- Income before income taxes 16,546 15,101 14,445 Provision for income taxes 6,642 5,972 5,708 ------- ------- ------- Net income $ 9,904 $ 9,129 $ 8,737 ======= ======= =======
FINANCE RECEIVABLES 1998 1997 - -------------------------------------------------------------- Product financing receivables $ 458,501 $ 420,088 Unguaranteed residual values 33,289 27,575 Allowance for losses (4,540) (3,571) Unearned interest income (81,327) (74,877) Other 2,842 2,858 --------- --------- Totals $ 408,765 $ 372,073 ========= =========
As of September 30, 1998, product financing receivables due for each of the next five years were $151,164 in 1999, $125,930 in 2000, $93,766 in 2001, $60,941 in 2002 and $25,867 in 2003.
ALLOWANCE FOR LOSSES 1998 1997 - ------------------------------------------------------- Balance, beginning of year $ 3,571 $ 3,314 Provision 2,395 1,600 Net losses (1,426) (1,343) ------- ------- Balance, end of year $ 4,540 $ 3,571 ======= =======
40 41 7. FINANCING ARRANGEMENTS
INFORMATION SYSTEMS 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Short-term notes, weighted average interest rate of 7.3% at September 30, 1998 and 6.3% at September 30, 1997 $ 777 $ 13,245 ======== ======== Fixed rate notes, interest rate of 7.0%, maturing in 2007 $ 99,598 $ 99,549 Fixed rate notes, weighted average interest rate of 6.7%, maturing through 2003 28,571 34,602 Variable rate notes, weighted average interest rate of 6.1% at September 30, 1998 and 4.0% at September 30, 1997, maturing through 2000 37,891 42,030 Capital lease obligation, weighted average interest rate of 6.7% at September 30, 1998 and 10.7% at September 30, 1997, maturing through 2002 1,529 2,100 -------- -------- Totals 167,589 178,281 Current portion 6,048 8,131 -------- -------- Long-term portion $161,541 $170,150 ======== ========
Loan agreements limit consolidated indebtedness and require a minimum consolidated net worth. In December 1996, the company issued $100,000 (face value) ten year notes at 99.51% of par. At September 30, 1998, the fair values of information systems financing arrangements were $777 for short-term notes, $129,360 for fixed rate notes, $1,534 for capital lease obligations, and $37,891 for variable rate notes. At September 30, 1997, the fair values of information systems financing arrangements were $13,245 for short-term notes, $134,985 for fixed rate notes, $42,030 for variable rate notes and $2,100 for capital lease obligations. At September 30, 1998, debt maturities were $6,048 in 1999, $43,963 in 2000, $6,096 in 2001, $6,169 in 2002 and $5,714 in 2003. Interest paid was $11,698 in 1998, $7,620 in 1997 and $5,882 in 1996. 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 expense or income on these contracts is reflected in interest expense. The company is exposed to credit related losses in the event of nonperformance by counterparties to the interest rate management agreements. The company attempts to minimize this credit risk by entering into agreements only with counterparties that have a Standard & Poor's rating of "A" or higher. The company also diversifies its interest rate management agreements among several financial institutions. Interest rate management agreements are accounted for using settlement accounting. 41 42
NOTIONAL AMOUNTS NOTES SWAPS CEILINGS - ---------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1998 - ---------------------------------------------------------------------------------------------------------------- Variable rate instruments, maturing through 2002 $ 71,495 $32,246 $1,875 Weighted average interest rate 6.0% Weighted average pay rate 5.6% Weighted average receive rate 5.6% Weighted average ceiling interest rate 7.7% Fixed rate notes, maturing through 2001 139,066 Weighted average interest rate 6.2% -------- ------- ------ Totals $210,561 $32,246 $1,875 ======== ======= ====== September 30, 1997 - ---------------------------------------------------------------------------------------------------------------- Variable rate instruments, maturing through 2002 $113,076 $17,066 $10,625 Weighted average interest rate 5.9% Weighted average pay rate 6.3% Weighted average receive rate 5.3% Weighted average ceiling interest rate 7.3% Fixed rate notes, maturing through 2001 85,238 Weighted average interest rate 6.4% -------- ------- ------- Totals $198,314 $17,066 $10,625 ======== ======= =======
Loan agreements limit consolidated indebtedness and require a minimum consolidated net worth. The fair value of financial services debt was $211,563 and $198,124 at September 30, 1998 and 1997, respectively. At September 30, 1998, maturities of notes were $65,101 in 1999, $45,822 in 2000, $59,138 in 2001 and $40,500 in 2002. Interest paid was $12,814 in 1998, $11,178 in 1997 and $9,032 in 1996. At September 30, 1998, notional amount maturities of swap agreements were $9,524 in 1999, $9,523 in 2000, $8,199 in 2001 and $5,000 in 2002 and notional amount maturities of ceiling agreements were $1,875 in 1999. The fair values of interest rate swap agreements were $415 and $96 at September 30, 1998 and 1997, respectively. The fair values of interest rate ceiling agreements were $0 at September 30, 1998 and 1997. The premiums paid for interest rate ceiling agreements are amortized to interest expense on a straight-line basis over the life of the agreement. Unamortized premium costs were $7 at September 30, 1998 and $109 at September 30, 1997. REVOLVING CREDIT AGREEMENTS Information systems and financial services share variable rate revolving credit agreements which total $150,000 and require commitment fees on unused credit. At September 30, 1998, available balances under these agreements were $129,500. FAIR VALUES Fair values of financial instruments are estimated based on quoted market prices for debt and interest rate management agreements with the same remaining maturities. The fair value of interest rate swap agreements represents the cost if existing agreements had been settled at September 30. 42 43 8. CAPITAL STOCK
1998 1997 1996 - ---------------------------------------------------------------------------- Preferred No par value Authorized shares 60,000 60,000 60,000 Class A common No par value Authorized shares 240,000 240,000 120,000 ======= ======= ======= Issued and outstanding shares Balance, beginning of year 78,986 80,961 82,011 Issued 644 447 606 Repurchased (1,800) (2,369) (1,600) Retired (73) (53) (56) ------- ------- ------- Balance, end of year 77,757 78,986 80,961 ======= ======= ======= Class B common No par value Authorized shares 40,000 40,000 30,000 Issued and outstanding shares 20,000 20,000 20,000
Dividends on Class A common shares must be twenty times the dividends on Class B common shares and must be paid simultaneously. Each share of Class A common and Class B common is entitled to one vote. The Class B common shareholder may convert twenty Class B common shares to one share of Class A common. The company has reserved sufficient authorized Class A common shares for Class B conversions and stock 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, except for the preferred share purchase rights, the company had no agreements or commitments with respect to the sale or issuance of the preferred shares. The company repurchased Class A common shares for treasury at average prices of $19.77 in 1998, $19.75 in 1997 and $20.83 in 1996. The remaining balance of shares authorized for repurchase by the board of directors was 5,370 at September 30, 1998. Treasury shares at September 30 were 14,482 in 1998, 13,327 in 1997 and 11,403 in 1996. 43 44 9. EMPLOYEE STOCK OPTION PLANS The company's stock option plans award incentive stock options and/or nonqualified stock options to purchase Class A common shares to substantially all employees. Stock options are generally granted at a price equal to fair market value on the date of grant. During the three years ended September 30, 1998, no options were granted at a price less than fair market value. At September 30, 1998, options to purchase 4,077 additional Class A common shares were available for future awards to certain key employees. Under a broad-based stock option plan, the board of directors may award options at its discretion.
Weighted Average Shares Under Option Option Prices Per Share 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Outstanding Beginning of year 8,788 7,605 7,320 $14.97 $12.16 $10.94 Granted 2,735 1,712 997 19.61 26.47 17.27 Exercised (540) (403) (574) 7.56 8.00 5.31 Canceled (368) (126) (138) 22.07 23.98 12.78 ------ ----- ----- End of year 10,615 8,788 7,605 16.30 14.97 12.16 ====== ===== ===== Exercisable at September 30 1,441 1,367 1,242 11.52 8.31 6.27 ====== ===== =====
Outstanding, September 30, 1998 Exercisable, September 30, 1998 Weighted Weighted Average Average Weighted Option Number of Remaining Option Number of Average Price Range Options Life in Years Price Options Option Price - ---------------------------------------------------------------------------------------------------------------------- $1.64 - $5.47 355 3.2 $ 3.97 356 $ 3.97 $10.00 - $18.03 6,501 5.6 13.32 978 12.64 $18.31 - $27.13 3,759 6.6 22.60 107 26.42 ----- ----- Totals 10,615 8.6 16.30 1,441 11.52 ====== =====
The company accounts for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no compensation expense for stock options was recognized in the financial statements because the option price equals the market price of the stock on the date of grant. In 1997, the company adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," which requires the valuation of stock options using option valuation models and the disclosure of the pro forma effect on earnings. The company valued its stock options using the Black-Scholes option valuation model which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, such as expected stock price volatility, which can materially affect the fair value estimate. Because the company's stock options have characteristics significantly different from traded options, the fair value determined may not reflect the actual value of the company's stock options. The weighted average fair value of the company's stock options granted was $6.05 in 1998, $7.49 in 1997 and $4.74 in 1996. Had compensation expense been recognized using these fair values, the company's net income and diluted earnings per common share would have decreased by $5,885 or $.07 per share in 1998, $3,645 or $.04 per share in 1997 and $1,080 or $.01 per share in 1996. The full effect on pro forma earnings will not be reflected until fiscal year 1999 because compensation expense need only be determined for options granted after fiscal year 1995, and compensation expense is amortized to expense over the option vesting period. 44 45
OPTION VALUATION ASSUMPTIONS 1998 1997 1996 - ---------------------------------------------------------------------- Expected life in years 5 5 5 Dividend yield 1.4% 1.48% 1.48% Risk free interest rate 5.9% 6.4% 6.0% Volatility 28% 23% 23%
10. EARNINGS PER COMMON SHARE In February 1997, the FASB issued SFAS 128, "Earnings Per Share." This statement, effective for both interim and annual periods ending after December 15, 1997, requires the company to report basic EPS and diluted EPS. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. All prior period earnings per share amounts have been restated.
COMPUTATION OF BASIC AND DILUTED EPS 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Income from continuing operations $113,556 $80,491 $99,100 ======== ======= ======= Average number of common shares outstanding (used to determine basic EPS) 79,451 81,462 82,532 Effect of employee stock options 1,695 2,561 2,696 ------- ------- ------- Average number of common shares and equivalents outstanding (used to determine diluted EPS) 81,146 84,023 85,228 ====== ====== ======
Employee stock options to purchase 2,956, 1,234 and 1 shares of common stock were outstanding during 1998, 1997 and 1996, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 45 46 11. POSTRETIREMENT BENEFITS
PENSION EXPENSE 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Defined benefit plans Service cost $ 9,657 $ 8,119 $ 6,525 Interest on projected benefit obligation 14,838 11,615 9,524 Actual return on plan assets (12,593) (17,241) (13,586) Net amortization and deferral 989 8,478 6,100 Special termination benefits 8,430 -------- -------- -------- Net periodic pension cost 12,891 19,401 8,563 Defined contribution plans 8,715 6,647 5,930 Multi-employer plans 235 265 312 -------- -------- ------- Totals $ 21,841 $ 26,313 $14,805 ======== ======== ======= Actuarial assumptions of defined benefit plans Discount rate 7.12%-8.0% 7.25% - 8.0% 7.875% Rate of compensation increase 3.75%-5.0% 3.75% - 5.0% 5.0% 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 contributory and noncontributory, defined benefit pension plans for most employees. Pension benefits are primarily based on years of service and compensation. The company's funding policy is to make annual contributions to the plans sufficient to meet or exceed the minimum statutory requirements. The company and its actuaries review the pension plans each year. The actuarial assumptions are intended to reflect expected experience over the life of the pension liability. During the fiscal year 1997 the company expensed $8,430 of special termination benefits in connection with a voluntary early retirement program. These benefits will be in addition to the employee's regular plan benefits and will be paid directly from company assets rather than plan assets. These benefits were accounted for as a curtailment and the present value of the future benefit payments was accrued by the company. These special termination benefits consisted primarily of enhanced benefits costing $6,835. The balance of the charge represented immediate recognition of deferred obligations, consisting of prior service cost, transition obligations and gains and losses of $2,521. These costs were partially offset by a $926 reduction of the projected benefit obligation related to revised compensation assumptions. All employees were fully vested in their accumulated benefits. 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. Effective January 1, 1997, the company merged Retiree Medical Savings Accounts into the Reynolds and Reynolds 401(k) Savings Plan. Contributions for this portion of the plan are funded annually based on the company's return on equity and are the same for each eligible employee. Forfeitures of nonvested savings accounts are used to reduce contributions required by the company. 46 47
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS SEPTEMBER 30, 1998 September 30, 1997 ASSETS ABO Assets Abo EXCEED EXCEEDS Exceed Exceeds ABO ASSETS Abo Assets - ------------------------------------------------------------------------------------------------------------------ Defined benefit plans Vested benefit obligation $138,756 $ 42,364 $116,237 $34,420 ======== ======== ======== ======= Accumulated benefit obligation (ABO) $144,077 $ 45,881 $118,195 $37,207 ======== ======== ======== ======= Projected benefit obligation (PBO) $191,064 $ 49,511 $149,901 $40,112 Fair market value of plan assets (162,571) (464) (147,596) (457) -------- -------- -------- ------- PBO greater than plan assets 28,493 49,047 2,305 39,655 Unrecognized net loss (32,687) (12,924) (5,792) (7,459) Unrecognized prior service cost (558) (1,404) (683) (1,551) Unrecognized net asset (liability) being amortized over 6 to 15 years 587 (1,596) 781 (1,860) Minimum pension liability 12,385 8,196 -------- -------- -------- ------- Net pension (asset) liability (4,165) 45,508 (3,389) 36,981 Multi-employer liability 154 170 -------- -------- -------- ------- Totals (asset) liability $ (4,165) $ 45,662 $ (3,389) $37,151 ======== ======== ======== ======= Minimum pension liability Intangible asset $ 3,000 $3,411 Deferred income tax benefit 3,777 1,936 Charge to shareholders' equity 5,608 2,849 -------- ------- Totals $ 12,385 $ 8,196 ======== ======= Actuarial assumptions of defined benefit plans PBO discount rate 7.0% - 7.25% 7.25% - 8.0% Rate of compensation increase 3.75% - 5.0% 3.75% - 5.0%
At September 30, 1998 and 1997, about 47% and 45% 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. 47 48
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE 1998 1997 1996 - --------------------------------------------------------------------------------------- Service cost $1,129 $1,131 $1,120 Interest on accumulated benefit obligation 3,458 3,265 3,150 Special termination benefits 731 ------ ------ ------ Totals $4,587 $5,127 $4,270 ====== ====== ====== Actuarial assumptions of defined benefit plans Discount rate 8.0% 8.0% 7.875% 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 sponsors a defined benefit medical plan for employees who retired before October 1, 1993. Future retirees may purchase postretirement medical insurance from the company. Discounts from the market price of postretirement medical insurance will be provided to certain retirees based on age and length of remaining service as of October 1, 1993. These discounts are included in the determination of the accumulated benefit obligation. During fiscal year 1997 the company expensed $731 of special termination benefits in connection with a voluntary early retirement program. 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 1998 1997 - ------------------------------------------------------------------------ Accumulated benefit obligation Retirees $28,049 $24,076 Fully eligible active plan participants 8,872 6,499 Other active plan participants 16,863 13,796 Unrecognized prior service cost 1,424 Unrecognized net loss (9,201) (828) ------- ------- Totals $46,007 $43,543 ======= ======= Actuarial assumptions Discount rate 7.0% 8.0% 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 1998 by $184 and the accumulated benefit obligation at September 30, 1998 by $2,850. 48 49 12. CASH FLOW STATEMENTS
1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- INFORMATION SYSTEMS Cash flows provided by (used for) operating activities Net income $ 93,203 $ 50,090 $ 85,001 Adjustments to reconcile net income to net cash provided by operating activities Purchased in-process research and development costs 14,850 Depreciation and amortization 59,562 60,636 44,327 Deferred income taxes (1,201) (13,173) 1,605 Deferred income taxes transferred to (from) financial services 5,361 4,001 (1,587) Loss (gain) on sales of assets (627) 4,215 (2,677) Changes in operating assets and liabilities Accounts receivable (33,074) (9,216) (22,050) Inventories 9,537 8,525 15,038 Prepaid expenses, intangible and other assets 3,108 6,619 (9,209) Accounts payable 11,473 3,197 1,785 Accrued and other liabilities (1,094) 19,581 (1,888) --------- --------- --------- Net cash provided by operating activities $ 146,248 $ 149,325 $ 110,345 ========= ========= ========= FINANCIAL SERVICES Cash flows provided by (used for) operating activities Net income $ 9,904 $ 9,129 $ 8,737 Adjustments to reconcile net income to net cash provided by operating activities Deferred income taxes 12,182 13,008 4,022 Deferred income taxes transferred to (from) information systems (5,361) (4,001) 1,587 Changes in receivables, other assets and other liabilities 2,757 1,739 1,103 --------- --------- --------- Net cash provided by operating activities $ 19,482 $ 19,875 $ 15,449 ========= ========= =========
49 50 13. SEGMENT REPORTING Effective July 1, 1998 the company formally adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires the company to report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The company has changed its reported business segments to comply with this pronouncement. At September 30, 1998, the company's business segments were Automotive, Business Systems and Financial Services. Healthcare Systems would have been reported as a separate business segment were it not reported as discontinued operations because of the sale discussed in Note 2 to the Consolidated Financial Statements. Prior years information has been restated for consistency with 1998's presentation. GEOGRAPHIC AREAS The company provides integrated computer systems products and services and manufactures and distributes printed business forms and systems throughout the United States and Canada.
1998 1997 1996 - ----------------------------------------------------------------------------------------- United States Net sales and revenues $ 1,326,454 $ 1,275,649 $ 1,022,662 Long-lived assets 330,691 363,423 331,185 Canada Net sales and revenues 166,507 74,939 41,123 Long-lived assets 17,821 19,240 6,087 Elimination of intersegment sales (6,998) (5,249) (4,153) Totals Net sales and revenues 1,485,963 1,345,339 1,059,632 Long-lived assets 348,512 382,663 337,272
BUSINESS SEGMENTS The Automotive Division provides integrated computer systems products and services, along with printed business forms to the automotive market. The division's products include integrated software packages, computer hardware, related hardware and software installation and business forms. Services include customer training and consulting, hardware maintenance, software support and database management. The Business Systems Division manufactures and distributes printed business forms and systems, custom continuous and snap out forms, specialty printed products and provides forms management services to healthcare and general business markets. Financial Services provides financing for the company's computer systems products to automotive and healthcare markets. Discontinued operations represents the company's Healthcare Systems Division that was sold in October 1998. See Note 2 to the Consolidated Financial Statements for additional information regarding this transaction. 50 51
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Automotive Net sales and revenues Computer services $ 375,467 $ 325,770 $ 286,757 Business forms products 185,282 189,734 190,048 Computer systems products 181,109 165,641 154,974 ---------- ---------- ---------- Total net sales and revenues 741,858 681,145 631,779 Operating income 160,858 125,245 132,907 Total assets 242,259 270,214 262,930 Investments in equity method investees 36,096 38,375 5,468 Depreciation and amortization 35,886 39,535 29,902 Capital expenditures 19,983 24,325 24,170 Business systems Net sales and revenues Business forms products 670,007 593,699 383,380 Services and computer systems products 40,214 40,473 18,536 ---------- ---------- ---------- Total net sales and revenues 710,221 634,172 401,916 Operating income 42,198 40,021 38,995 Total assets 360,417 355,671 267,914 Depreciation and amortization 15,017 13,819 9,651 Capital expenditures 10,659 16,983 6,686 Financial services Net sales and revenues 34,497 30,383 26,263 Operating income 16,546 15,101 14,445 Total assets 411,159 373,175 313,282 Unallocated corporate Operating expenses (16,247) (22,266) (13,307) Total assets 108,597 65,041 50,640 Depreciation and amortization 2,265 1,695 1,387 Capital expenditures 2,234 5,155 6,645 Elimination of intersegment sales (613) (361) (326) Discontinued operations Total assets 35,288 38,409 28,878 Depreciation and amortization 6,394 5,587 3,387 Capital expenditures 1,390 1,244 2,479 Totals Net sales and revenues 1,485,963 1,345,339 1,059,632 Operating income 203,355 158,101 173,040 Total assets 1,157,720 1,102,510 923,644 Depreciation and amortization 59,562 60,636 44,327 Capital expenditures 34,266 47,707 39,980
51 52 14. CONTINGENCY The U.S. Environmental Protection Agency (EPA) designated the company as one of a number of potentially responsible parties (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at an environmental remediation site. 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. This environmental remediation 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. During fiscal year 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 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 fiscal year 1996, an agreement was reached whereby the state of Connecticut will contribute $8,000 towards remediation costs. Preliminary remediation was ongoing during fiscal year 1998 utilizing Connecticut's contribution. The company believes that the reasonably foreseeable resolution will not have a material adverse effect on the financial statements. 15. ACCOUNTING STANDARDS In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The new SOP will be effective for transactions entered into in fiscal years beginning after December 15, 1997. The company adopted this pronouncement effective October 1, 1998. The company estimates that the adoption of this pronouncement will reduce fiscal year 1999 revenues by about $25 million and diluted earnings per common share by about $.12 per share, primarily in the first quarter. These estimates may differ from actual results based on the timing and number of systems installations. In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that certain costs associated with developing or obtaining internal use software should be capitalized. Capitalized costs are then amortized over their useful life. This statement is effective for fiscal years beginning after December 15, 1998. The company does not expect the adoption of this statement to have a material effect because the company was already capitalizing certain costs related to internal use software. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This statement is effective for fiscal years beginning after December 15, 1997. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Gains or losses resulting from changes in fair values of derivatives are recorded either as a separate component of shareholders' equity or in the income statement depending upon whether the instruments meet the criteria for hedge accounting. This statement is effective for all fiscal quarters for fiscal years beginning after June 15, 1999 (fiscal year 2000 as to the company). The company has not yet determined the effect of this pronouncement. 52 53
16. QUARTERLY FINANCIAL DATA (UNAUDITED) First Second Third Fourth Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------- 1998 - ----------------------------------------------------------------------------------------------------------------- Net sales and revenues Information systems $349,721 $364,986 $362,443 $374,316 Financial services 8,097 8,570 8,788 9,042 -------- -------- -------- -------- Totals $357,818 $373,556 $371,231 $383,358 ======== ======== ======== ======== Gross profit $156,197 $164,413 $160,464 $170,872 Income from continuing operations $26,148 $28,819 $28,171 $30,418 Basic earnings per common share $.33 $.36 $.35 $.39 Diluted earnings per common share $.32 $.35 $.35 $.38 Net income $23,748 $26,360 $26,049 $26,950 Basic earnings per common share $.30 $.33 $.33 $.34 Diluted earnings per common share $.29 $.32 $.32 $.34 Cash dividends declared per share Class A common $.09 $.09 $.09 $.09 Class B common $.0045 $.0045 $.0045 $.0045 Closing market prices of Class A common shares High $21.00 $22.25 $23.88 $18.50 Low $17.00 $17.69 $16.88 $12.63 1997 Net sales and revenues Information systems $297,893 $336,265 $322,489 $358,309 Financial services 7,124 7,525 7,787 7,947 -------- -------- -------- -------- Totals $305,017 $343,790 $330,276 $366,256 ======== ======== ======== ======== Gross profit $141,372 $152,174 $143,502 $159,393 Income from continuing operations $28,217 $28,661 $19,868 $3,745 Basic earnings per common share $.34 $.35 $.24 $.05 Diluted earnings per common share $.33 $.34 $.24 $.05 Net income $25,500 $26,267 $7,278 $174 Basic earnings per common share $.31 $.32 $.09 $.00 Diluted earnings per common share $.30 $.31 $.09 $.00 Cash dividends declared per share Class A common $.08 $.08 $.08 $.08 Class B common $.004 $.004 $.004 $.004 Closing market prices of Class A common shares High $27.88 $29.38 $24.75 $21.31 Low $25.50 $23.88 $15.63 $16.38
53 54
VALUATION ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (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 Beginning and Net of At End Description 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, 1998 7,652 3,303 (612) 3,562 0 6,781 Year ended September 30, 1997 5,744 3,960 476 2,528 0 7,652 Year ended September 30, 1996 3,166 2,325 2,407 2,154 0 5,744 Reserves for inventory: Year ended September 30, 1998 6,809 2,129 (258) 2,626 0 6,054 Year ended September 30, 1997 7,000 2,402 2,368 4,961 0 6,809 Year ended September 30, 1996 1,387 1,926 5,033 1,346 0 7,000 Reserves for notes receivable: Year ended September 30, 1998 235 0 0 199 0 36 Year ended September 30, 1997 629 57 (336) 115 0 235 Year ended September 30, 1996 471 170 203 215 0 629 FINANCIAL SERVICES Reserves for finance receivables: Year ended September 30, 1998 3,571 2,395 550 1,976 0 4,540 Year ended September 30, 1997 3,314 1,600 336 1,679 0 3,571 Year ended September 30, 1996 3,903 500 0 1,089 0 3,314
(a) Includes adjustments from translation of foreign currency to United States dollars, the effects of acquisitions and disposals of businesses and transfers between reserves. 54 EX-10.A 2 EXHIBIT 10(A) 1 Exhibit (10)(a) SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT ------------------------------------------------ SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") made and entered into as of the 17th day of August, 1998, by and between THE REYNOLDS AND REYNOLDS COMPANY, a corporation existing under the laws of the State of Ohio ("Reynolds"), and DAVID R. HOLMES ("Holmes"). W I T N E S S E T H: WHEREAS, Holmes and Reynolds have entered into an Employment Agreement dated as of November 9, 1987, as amended effective May 8, 1989 and December 1, 1989, and as amended and restated in its entirety October 1, 1995 (as so amended and as amended and restated in its entirety the "Employment Agreement"), pursuant to which Holmes is currently employed as Chairman of the Board, President and Chief Executive Officer of Reynolds; and WHEREAS, Holmes and Reynolds desire again to amend, restate in its entirety, and continue the Employment Agreement and enter into this Agreement on the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of the foregoing premises and of the mutual promises set forth below, Reynolds and Holmes hereby agree as follows: 1. AMENDMENT, RESTATEMENT IN ITS ENTIRETY AND CONTINUATION OF EMPLOYMENT --------------------------------------------------------------------- AGREEMENT. --------- Effective as of the date hereof, the Employment Agreement shall be, and hereby is, amended, restated in its entirety and continued as set forth in this Agreement, and all terms, 2 conditions and provisions of the Employment Agreement shall be, and hereby are, superseded by this Agreement and shall no longer be of any force and effect. 2. DEFINITIONS. ----------- For purposes of this Agreement, the terms set forth below shall have the following meanings: (a) "Annual Compensation Value" shall mean Holmes' then-current Base Compensation plus an amount equal to the average of all Bonuses (excluding any compensation attributable to stock options of any type granted by Reynolds) earned by Holmes during the three (3) calendar years preceding the date upon which the valuation is made. (b) "Base Compensation" shall mean the then-current annual base salary (exclusive of Bonuses) of Holmes. (c) "Bonuses" shall mean bonus payments earned by Holmes under Reynolds' Incentive Compensation Plans and under any future bonus or incentive compensation plans of Reynolds for its executive officers. (d) "Change in Control" shall mean the occurrence of any of the following: (i) Any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than Richard H. Grant, Jr., his children or his grandchildren, Reynolds, any trustee or other fiduciary holding securities under an employee benefit plan of Reynolds, or any company owned, directly or indirectly, by the shareholders of Reynolds in substantially the same proportions as their ownership of stock of Reynolds), is or becomes the "beneficial owner" (as defined in Rule 2 3 13d-3 under the Exchange Act), directly or indirectly, of securities of Reynolds representing fifty percent (50%) or more of the combined voting power of Reynolds' then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, any new director (other than a director designated by a person who has entered into an agreement with Reynolds to effect a transaction described in clause (i), (iii) or (iv) of this Section whose election by the Board or nomination for election by Reynolds' shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election was previously so approved) cease for any reason to constitute at least a majority thereof; (iii) the shareholders of Reynolds approve a merger or consolidation of Reynolds with any other company, other than (1) a merger or consolidation which would result in the voting securities of Reynolds outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting security of Reynolds or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of Reynolds (or similar transaction) in which no "person" (as hereinabove defined) acquires more than fifty percent (50%) of the combined voting power of Reynolds' then outstanding securities; or (iv) the shareholders of Reynolds approve a plan of liquidation, dissolution or winding up of Reynolds or an agreement for the sale or disposition by Reynolds of all or substantially all of Reynolds' assets. 3 4 (e) "Discharge For Cause" shall be construed to have occurred whenever occasioned by reason of felonious acts on the part of Holmes, actions by Holmes involving serious moral turpitude or his misconduct in such manner as to bring substantial and material discredit upon Reynolds, following the giving of thirty (30) days' written notice to Holmes specifying the respect in which Reynolds claims Holmes has violated this provision and the failure, inability or unwillingness of Holmes to remedy the situation to the satisfaction of Reynolds within said thirty-day period. In establishing whether a Discharge For Cause shall have occurred, the standard for judgment shall be the level of conduct by Holmes and by other comparably situated executive officers prior to the alleged improper activity of Holmes for which the Discharge For Cause has been made. (f) "Escrow Agreement" shall mean the agreement dated November 9, 1987 as amended October 1, 1995 and as further amended simultaneously herewith entered into between Reynolds and Bank One, NA, a copy of which (including the first and second amendments) is attached hereto and made a part hereof as Exhibit A. (g) "Escrow Agent" shall mean Bank One, NA. (h) "Escrow Amount" shall mean the amounts placed in escrow by Reynolds pursuant to subsection (e)(iii) of Section 8 of this Agreement. (i) "Escrow Funding Event" shall mean the occurrence of any of the following events: 4 5 (i) Class A Common Shares of Reynolds have been acquired other than directly from Reynolds in exchange for cash or property by any person (other than Richard H. Grant, Jr., his children or his grandchildren, Reynolds, any trustee or other fiduciary holding securities under an employee benefit plan of Reynolds, or any company owned directly or indirectly by the shareholders of Reynolds in substantially the same proportions as their ownership of the stock of Reynolds) who either thereby becomes the owner of more than nine and one half percent (9.5%) of Reynolds' outstanding Class A Common Shares, or having directly or indirectly become the owner of more than five percent (5%) of Reynolds' Class A Common Shares either alone or in conjunction with another person has expressed an intent to continue acquiring Reynolds' outstanding Class A Common Shares so as to become thereby the owner of more than nine and one-half percent (9.5%) of such stock either directly or indirectly; (ii) Any person (other than Richard H. Grant, Jr., his children or grandchildren, Reynolds, any trustee or other fiduciary holding securities under an employee benefit plan of Reynolds, or any company owned directly or indirectly by the shareholders of Reynolds in substantially the same proportions as their ownership of stock of Reynolds) has made a tender offer for, or a request for invitations for tenders of, Class A Common Shares of Reynolds. (iii) Any person forwards or causes to be forwarded to shareholders of Reynolds proxy statement(s) in any period of twenty-four (24) consecutive months, soliciting proxies, to elect to the Board of Reynolds two (2) or more candidates who were not nominated as candidates in proxy statements forwarded to shareholders during such period by the Board; or 5 6 (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, an Escrow Funding Event has occurred. (j) "Final Annual Compensation" shall mean Holmes' Base Compensation at the time of termination of employment plus an amount equal to the average of all Bonuses (excluding any compensation attributable to stock options of any type granted by Reynolds) earned by Holmes during the three (3) calendar years preceding his termination of employment. (k) "Final Average Annual Compensation" shall mean the average of Holmes' Base Compensation and Bonuses (excluding any compensation attributable to stock options of any type granted by Reynolds) as determined for the five (5) consecutive calendar years of the last ten (10) calendar years preceding and including the calendar year in which Holmes' employment terminates which yields the highest sum. (l) "Pension Plan" shall mean the existing Reynolds and Reynolds Company Non-Union Pension Plan, as the same may be amended from time to time. (m) "Retirement Benefits" shall mean payments to Holmes based upon his lifetime in an annual amount equal to a designated percentage of Holmes' Final Average Annual Compensation or, in the case of Section 8(d) below, Final Annual Compensation, which shall be comprised of the sum of (i) Holmes' primary Social Security retirement benefits when he is entitled to receive such benefit (age sixty-two (62)) [until that time an amount equal to the primary Social Security retirement benefit shall be paid to Holmes from Reynolds' Supplemental Plan], (ii) Holmes' pension benefits determined as a life annuity (without regard to actual payment form) under the Pension Plan and deferred compensation 6 7 payments under the Non-Qualified Deferred Compensation and Disability Benefit Agreement dated December 20, 1984 between Holmes and Reynolds, or such other non-contributory deferred compensation agreement(s) then existing between Reynolds and Holmes, and (iii) such amount of supplemental retirement benefits under the Supplemental Plan as shall be necessary to achieve the designated percentage of Holmes' Final Average Annual Compensation or, in the case of Section 8(d) below, Final Annual Compensation. In addition to said annual amount, Retirement Benefits shall include a continuation of coverage for the remainder of Holmes' life under Reynolds-sponsored medical benefits and life insurance programs, but only to the extent applicable to participants in Reynolds' Qualified Retiree Medical Plans. For purposes of determining the amount of supplemental retirement benefits to be made by Reynolds pursuant to the Supplemental Plan, the method of payment of retirement benefits to Holmes pursuant to the Pension Plan shall determine the amount and method of payment of the supplemental retirement payments pursuant to the Supplemental Plan. These supplemental retirement payments by Reynolds pursuant to the Supplemental Plan shall continue so long as pension benefits are payable under the Pension Plan and shall be in addition to the pension benefit payments under the Pension Plan. (n) "Supplemental Plan" shall mean Reynolds' existing Supplemental Retirement Plan, as the same may be amended from time to time. 3. TERMS AND DUTIES. ---------------- (a) The term of this Agreement shall continue from the date hereof and end on August 17, 2003. Holmes shall continue in the employ of Reynolds as Chairman of the Board, President and Chief Executive Officer or such other reasonably equivalent position 7 8 designated by the Board, consistent with the provisions of this Agreement. In addition, Holmes agrees to perform such other duties as may be specifically designated for him from time to time by the Board, consistent with the provisions of this Agreement. (b) At all times Holmes will, to the best of his ability, energy and skill, faithfully perform all of the duties that may be required of him from time to time by the Board and diligently devote his entire working time, attention and efforts to the business affairs and best interests of Reynolds, except for absences for sickness and vacations. If the Board determines that any outside activity engaged in by him is detrimental to the best interests of Reynolds, he will discontinue such outside activity within thirty (30) days after written notice from the Board. (c) Holmes agrees that during the period of his employment by Reynolds, for so long as he is entitled to receive payments under this Agreement, and for a period of two (2) years thereafter (subject to the provisions of Section 9 below), he will not, directly or indirectly, further the affairs of any other corporation, partnership, or any business enterprise by employment of any kind, investment therein (except as otherwise permitted under Section 9(d) below), counseling or otherwise, if the same is in competition with Reynolds, without the written consent of the Board. This provision, however, shall not be construed to prevent him from pursuing personal investments in any business or enterprise which is not in competition with Reynolds and which do not interfere with his employment and the performance of his duties to Reynolds hereunder. 8 9 4. COMPENSATION AND FRINGE BENEFITS. -------------------------------- (a) Effective January 1, 1999, the Base Compensation of Holmes during the then remaining term of this Agreement shall be $640,000, which may be increased from time to time by the Board or, in the case of any proposed decrease, such other amount as mutually may be agreed upon by Holmes and Reynolds; provided, however, that such Base Compensation may not be reduced below said rate of $640,000 ($560,000 for the period from the date hereof through December 31, 1998) without Holmes' consent, unless necessitated by general business conditions adversely affecting Reynolds' operations; but, in the event of a reduction, his Base Compensation shall be fair and reasonable, and any disagreement concerning the same shall be resolved by arbitration in the manner provided in Section 10 below. Holmes' Base Compensation shall be reviewed at least annually to determine whether in view of Reynolds' performance during the year any increase is warranted. Responsibility for this determination rests within the sole discretion of the Board, and this provision shall not be construed as requiring any such increase for any given year. (b) Holmes shall continue his participation in the existing Deferred Compensation Plan and the existing bonus plan arrangements under the Incentive Compensation Plans (or their equivalent) for executive officers of Reynolds and shall be entitled to such awards under any future bonus, incentive, or similar compensation plans of Reynolds, as shall, in the determination of the Board, be appropriate and consistent with the purposes of such plans and with the awards granted to other executive officers of Reynolds. (c) Holmes shall continue to be eligible for participation in the Stock Option Plan -1995 of Reynolds and shall be entitled to the grant of such options to purchase shares of Class A Common Stock ("Common Stock") of Reynolds under any other future stock option plans for employees and to participate in such other executive compensation incentive plans 9 10 awarding stock as shall, in the determination of the Board, be appropriate and consistent with the purposes of the plans and with the grants of such options to the executive officers of Reynolds. Effective the date hereof, Reynolds hereby awards Holmes non-qualified stock options covering 250,000 shares of Common Stock on the terms and conditions of the Stock Option Agreements entered into between the parties simultaneously herewith and attached hereto as Exhibits B and C and made a part hereof. (d) In addition to the specific benefits provided for Holmes under the terms of this Agreement, Reynolds shall provide him with other fringe benefits (including bonuses, vacations, health and disability insurance, pension plan participation and others) at least equivalent to those of the other executive officers of Reynolds and as set forth on Exhibit D attached hereto and made a part hereof. 5. EXPENSES. -------- Holmes shall be reimbursed for his reasonable business-related expenses incurred for the benefit of Reynolds in accordance with Reynolds' policies governing such reimbursement in effect from time to time. Such expenses shall include, but shall not be limited to, travel, lodging away from home, entertainment, and meals. With respect to any expenses which are reimbursed by Reynolds to Holmes, Holmes shall account to Reynolds in sufficient detail to entitle Reynolds to a federal income tax deduction for such reimbursed item if such item is deductible. 6. RETIREMENT AND EARLY RETIREMENT BENEFITS. ---------------------------------------- (a) If Holmes continues his employment with Reynolds until he attains age fifty-nine (59), he shall be entitled to receive at the time of his retirement Retirement 10 11 Benefits at a level equal to sixty-five percent (65%) of his Final Average Annual Compensation. If Holmes continues his employ with Reynolds beyond age fifty-nine (59), the level of his retirement benefits as a percentage of his Final Average Annual Compensation shall be increased by one percent (1%) for each additional twelve (12) month period over age fifty-nine (59). (b) Holmes may elect to retire from Reynolds upon giving twelve (12) months prior written notice and having attained at least age fifty-five (55) and he shall be entitled to receive at the time of such early retirement Retirement Benefits at a level equal to sixty-one percent (61%) of his Final Average Annual Compensation. If Holmes elects to retire upon giving twelve (12) months prior written notice at any time from age fifty-six (56) through age fifty-nine (59), the level of his Retirement Benefits as a percentage of his Final Average Annual Compensation shall be increased by one percent (1%) for each additional twelve (12) month period over age fifty-five (55). (c) To the extent Holmes receives any similar benefits under the Pension Plan, Supplemental Plan or other Reynolds benefit plan for any of its employees, such benefits shall be included in calculating the amount to which Holmes shall be entitled under Sections 6(a) and 6(b) above; provided, however, that in no event shall the benefits described in Sections 6(a) and 6(b) above be reduced by the provisions of this Section 6(c). 7. DISABILITY AND DEATH BENEFITS. ----------------------------- (a) If Holmes becomes disabled prior to his retirement, he shall be deemed to have elected retirement under this Agreement. See Section 8(c) below. 11 12 (b) In the event of Holmes' death while still employed by Reynolds pursuant to this Agreement, Holmes shall be entitled to Retirement Benefits calculated as if he had elected retirement as of the day before his actual death. Reynolds shall also pay to such beneficiary or beneficiaries as he shall have designated by written notice delivered to Reynolds prior to his death, or failing such written notice, to his estate, an amount equal to the Base Compensation plus the Bonuses, if any, which Holmes would have received or which would have been accrued for his benefit during the period of six (6) months immediately following his death if he had lived and had been employed by Reynolds during that period. Such payment shall be made in one lump sum or in six (6) equal monthly installments as Reynolds shall elect and shall be in addition to the proceeds of any insurance policies carried on Holmes' life with respect to which he has the right to designate beneficiaries. Also, Reynolds shall pay to Holmes' spouse an amount, periodically as such payments are required to be made by said spouse, to enable her to continue medical coverage for her and her dependents in the same manner as immediately prior to Holmes' death for a period expiring at the earlier of: (i) her death; (ii) forty-two (42) months after Holmes' death; or (iii) eligibility for regular Medicare and Medicaid or any successor programs furnished by the government. Thereafter, Reynolds shall make available to Holmes' spouse (including her dependents), at her cost, such medical coverage as shall be available to a person of her then age under the then-existing Reynolds-sponsored medical benefits program, but only to the extent coverage is available under such program. 8. TERMINATION; DISCHARGE. ---------------------- (a) Termination or Discharge Without Cause. Reynolds reserves the right to discharge Holmes at any time and for any reason; but such discharge, unless a Discharge For 12 13 Cause, shall not extinguish the obligation of Reynolds to provide Holmes (and, in the event of his prior death, his designated beneficiary or beneficiaries or his estate) with the following severance benefits: (i) If such discharge occurs prior to August 17, 2003, Holmes shall be entitled to receive for the balance of the term of this Agreement, payments from Reynolds in an amount equal to his Annual Compensation Value, which shall be reduced by seventy percent (70%) of the amount of compensation received by Holmes from any subsequent employment obtained by him during said payment period. (ii) Holmes shall be entitled, during the period expiring on the earlier of Holmes' securing other employment or August 17, 2003 (or such longer period as required by law), to continuing coverage under the then-existing Reynolds-sponsored medical benefits program, which, at the option of Reynolds, may be provided outside of such program through the purchase of insurance or otherwise. (iii) For purposes of determining Holmes' benefits under the Supplemental Plan, Holmes shall receive credit toward his Years of Service under the Supplemental Plan for the time period that he receives or is entitled to receive payments under subsection (i) of this Section 8(a). In addition, during the time period that he receives or is entitled to receive payments under said subsection (i) of this Section 8(a), Holmes' Base Compensation shall be deemed to be increased by the annual economic range adjustment for Reynolds' salaried employees announced in October of each year (or, if there is no such announced economic range adjustment in a given year, by an assumed five (5%) increase for that year) in order to calculate his highest earnings during five (5) consecutive years out of the last ten (10) 13 14 years prior to retirement under the Supplemental Plan, and his Final Annual Compensation (see Section 8(d) below) and Final Average Annual Compensation shall be deemed to increase in the same manner for purposes of determining the amount of his Retirement Benefits under this Agreement. (iv) Holmes shall be reimbursed for up to $20,000 for out-placement fees if he chooses to seek other employment following his discharge by Reynolds. Holmes shall not be obligated to seek other employment in order to mitigate his damages resulting from his discharge. (v) In addition to all of the foregoing, Holmes shall be entitled to receive the payments required of Reynolds under his then-existing deferred compensation agreement(s) with Reynolds in accordance with the terms of such agreement(s). Holmes acknowledges that he shall remain subject to and bound by the restrictive provisions of Section 9 below. (b) Discharge For Cause. If Holmes' employment with Reynolds is terminated by a Discharge For Cause, regardless of whether such Discharge For Cause occurs after the occurrence of any of the events set forth in Sections 8(d) or 8(e) below, he shall be entitled to receive only his Base Compensation up to the date of his discharge and no further payments hereunder shall be required from Reynolds; provided, however, that Holmes shall be entitled to receive his benefits, if any, under the Pension Plan and the payments required of Reynolds under his then-existing deferred compensation agreement(s) with Reynolds in accordance with the terms of such agreement(s). Holmes shall remain subject to the restrictive provisions of Section 9 below for a period for two (2) years from the date of discharge. Should Holmes disagree that his discharge was a Discharge For Cause the question shall be submitted to arbitration in accordance with Section 10 below. 14 15 (c) Termination Due to Disability. If, by reason of illness, disability, or other incapacity certified by two (2) physicians competent to do so in the opinion of Reynolds' Board of Directors, Holmes is unable to perform the duties required of him under this Agreement for a period of six (6) consecutive months, Reynolds, following the giving of thirty (30) days' written notice to Holmes and the failure of Holmes by reason of illness, disability, or other incapacity to resume his duties within such thirty (30) days and thereafter perform the same for a period of two (2) consecutive months, may terminate Holmes' employment by giving Holmes written notice thereof; and in that event all obligations of Reynolds hereunder shall cease on the date such notice of termination is given except for payment of the Retirement Benefits under Section 6 above. (d) Benefits Upon Termination Under Certain Circumstances. If Holmes voluntarily terminates his employment or Holmes is discharged by Reynolds and such discharge is not a Discharge For Cause, and if such voluntary termination or involuntary discharge takes place within eighteen (18) months after the occurrence of any of the following events: (i) Holmes is required by Reynolds, prior to a Change in Control, to perform duties or services which differ significantly from those performed by him on the effective date hereof [provided, however, that the relinquishment by Holmes voluntarily or at the request of the Board of one or two of his present titles shall not entitle him to the benefits of this Section 8(d)(i)], or which are not ordinarily and generally performed by a Chairman of the Board, President or Chief Executive Officer (or any one of the foregoing positions) of a corporation similar in size and scope to Reynolds; or 15 16 (ii) The nature of the duties or services which Reynolds, prior to a Change in Control, requires him to perform necessitates absence overnight from his place of residence on the effective date hereof, because of travel involving the business or affairs of Reynolds, for more than ninety (90) days during any period of twelve (12) consecutive months; Holmes shall be entitled to receive from Reynolds all of the severance benefits set forth in Section 8(a) above, except that Holmes' right to receive his Retirement Benefits shall be based upon his Final Annual Compensation, as the same may be adjusted pursuant to Section 8(a)(iii) above. Holmes shall remain subject to and bound by the restrictive provisions of Section 9 below. (e) Benefits Upon a Change in Control. Reynolds recognizes that the threat of a Change in Control would be of significant concern to Holmes. The following provisions provide termination protection for Holmes in the event of a Change in Control. These provisions, among other purposes, are intended to foster and encourage Holmes' continued attention and dedication to his duties in the event of such potentially disturbing and disruptive circumstances. Reynolds, therefore, agrees to do the following: (i) If Reynolds terminates Holmes' employment for any reason other than a Discharge for Cause, or if Holmes terminates his employment with Reynolds voluntarily for any reason other than disability or retirement within the twenty-four (24) month period following a Change in Control, Holmes shall be entitled to receive from Reynolds the following benefits: 16 17 (A) A lump sum severance payment (the "Severance Payment"), in cash, equal to three (3) times the sum of (i) the higher of Holmes' annual Base Compensation in effect immediately prior to the occurrence of the event or circumstance upon which such termination of employment is based or in effect immediately prior to the Change in Control, and (ii) the average of Holmes' Bonuses during the three (3) calendar years immediately preceding the year in which the date of termination occurs. (B) Holmes shall be entitled, during the period expiring on the earlier of Holmes' securing other employment or twenty-four (24) months from the date of such termination of employment (or such longer period as required by law), to continued coverage under the Reynolds sponsored medical benefits program in existence on such date of termination or, if such continued coverage is barred, Reynolds shall provide equivalent medical benefit coverage through the purchase of insurance or otherwise. (C) For purposes of determining Holmes' benefits under the Supplemental Plan, Holmes shall receive credit toward his Years of Service under the Supplemental Plan for the two (2) year period following such termination of employment. In addition, with respect to the two (2) year period following such termination of employment, Holmes' Base Compensation shall be deemed to be increased by the annual economic range adjustment for Reynolds' salaried employees announced in October of each year (or, if there is no such announced economic range adjustment in a given year, by an assumed five percent (5%) increase for that year) in order to calculate his highest earnings during five (5) consecutive years out of the last ten (10) years prior to retirement under the Supplemental Plan. 17 18 (D) Holmes shall be reimbursed for up to $20,000 for outplacement fees if he chooses to seek other employment following his discharge by Reynolds. Holmes shall not be obligated to seek other employment in order to mitigate his damages resulting from his discharge. (E) In addition to all of the foregoing, Holmes shall be entitled to receive the payments required of Reynolds under his then-existing deferred compensation agreement(s) with Reynolds in accordance with the terms of such agreement(s), and the retirement benefit provided for in Section 6 of this Agreement. The benefits provided in this Section 8(e) shall be in lieu of any benefits provided under Section 8(d) of this Agreement. (ii) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by Holmes in connection with a Change in Control or the termination of Holmes' employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Reynolds, any person whose actions result in a Change in Control or any person affiliated with Reynolds or such person) (all such payments and benefits, including the Severance Payment, being hereinafter called "Total Payments") would be subject (in whole or part), to an excise tax pursuant to Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (such tax hereinafter referred to as the "Excise Tax"), then the Severance Payment shall be reduced to the extent necessary so that no portion of the Total Payments is subject to Excise Tax (after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement) if (A) the net 18 19 amount of such Total Payments, as so reduced, (and after deduction of the net amount of federal, state and local income tax on such Total Payments), is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after deduction of the net amount of federal, state and local income tax on such Total Payments), over (ii) the amount of Excise Tax to which Holmes would be subject in respect of such Total Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which Holmes shall have effectively waived in writing prior to the date of this termination of employment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by Reynolds does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, (including by reason of Section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payment shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the base amount as defined in Section 280G(b)(3) of the Code allowable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by Reynolds in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. Prior to the fifth day following the date of Holmes' termination of employment, Reynolds shall provide Holmes with its calculation of the amounts referred to in this Section and such supporting materials as are reasonably necessary for Holmes to evaluate Reynolds' calculations. If Holmes objects to Reynolds' calculations, he shall notify Reynolds of his 19 20 objections prior to the initial payment date set forth in Section 8(e)(vi) hereof, and Reynolds shall pay to Holmes such portion of the Severance Payment (up to one hundred percent (100%) thereof) as Holmes determines is necessary to result in Holmes' receiving the greater of clauses (A) and (B) of this Section. (iii) Upon the occurrence of an Escrow Funding Event, Reynolds shall pay into an escrow account at the Escrow Agent an amount equal to three (3) times the sum of (i) Holmes' Base Compensation in effect immediately prior to the Escrow Funding Event and (ii) the average of Holmes' Bonuses during the three (3) calendar years immediately preceding the year in which the Escrow Funding Event occurs. Subsequent to the delivery to the Escrow Agent of the Escrow Amount, Reynolds shall, in the event that either Holmes' Base Compensation is increased (or decreased) or he receives a Bonus that affects the amount described in Section 8(e)(i)(A), unless the Escrow Amount shall theretofore have been released pursuant to this subsection, recalculate the Escrow Amount as of the date such change in Base Compensation or receipt of Bonus occurs, treating the Escrow Funding Event as having occurred on such date. If the amount so calculated exceeds the fair market value of the Escrow Amount, Reynolds shall promptly (and in no event later than seven (7) days from such date) pay to the Escrow Agent an amount in cash (or marketable securities or any combination thereof) equal to such excess. If the Escrow Amount so calculated is less than the fair market value of the Escrow Amount then held in the escrow account, the Escrow Agent, upon receipt of a written request from Reynolds, shall distribute to Reynolds such difference in cash; provided, however, that this sentence shall not apply after the occurrence of a Change in Control. 20 21 (iv) Unless the parties otherwise agree, Reynolds may withdraw the Escrow Amount when and only when two (2) years have expired from the date of deposit and no proper demand pursuant to Section 8(e)(vi) below has been made during the time, or when the conditions requiring the deposit have ceased to exist for a period of ninety (90) days without a demand right having been created, or when Holmes' right to a payment under this Section 8(e) has been forfeited, whichever occurs first. If, before the expiration of such period or forfeiture, there shall occur another Escrow Funding Event, Reynolds will not be required to make an additional deposit, but the two (2) year period shall then be measured from the date of the last such event. Notwithstanding a deposit with the Escrow Agent pursuant to subsection (iii) of this Section 8(e), Holmes shall continue to be entitled to receive all of the benefits from Reynolds under this Agreement until a termination of employment shall occur. (v) Reynolds shall pay the charges of the Escrow Agent for its services under the Escrow Agreement, and Reynolds will be entitled to any interest or other income arising from the date of the deposit of the Escrow Amount until all payments have been made under the Escrow Agreement to Holmes. All interest or other income arising from the Escrow Amount deposited with the Escrow Agent shall be paid monthly to Reynolds. (vi) If Reynolds terminates Holmes' employment for any reason but a Discharge for Cause, or if Holmes terminates his employment with Reynolds voluntarily for any reason other than disability or retirement within the twenty-four (24) month period following the date of a Change in Control, the Escrow Agent, upon written demand made on or after the tenth (10th) day following such termination of employment, shall pay the Escrow 21 22 Amount in accordance with this Section and Holmes shall no longer be subject to the restrictive provisions of Section 9 below, except for Section 9(e). Holmes shall notify the Escrow Agent prior to the tenth (10th) day following his termination of employment as to whether he has accepted the determination of Reynolds of the amount of the Severance Payments pursuant to Section 8(e) (iii). If he has accepted such determination, Reynolds shall provide the Escrow Agent with Reynolds' written determination as set forth in Section 8(e) (iii) and the Escrow Agent shall pay to Holmes all or a portion of the Escrow Amount as provided in such determination, and any remaining amount shall be paid to Reynolds. If Holmes does not accept Reynolds' determination, Holmes shall provide to the Escrow Agent his determination of the Severance Payment, and the Escrow Agent shall pay to Holmes all or a portion of the Escrow Amount as provided in Holmes' determination and any remaining amount shall be paid to Reynolds. (vii) In the event that, following the creation of a demand right pursuant to Section 8(e)(vi) above, Holmes incurs any costs or expenses, including attorneys' fees, in the enforcement of rights under this Section 8(e) or under any plan for the benefit of employees of Reynolds, including without limitation the stock option plan, pension plans, payroll-based stock ownership plan, tax deferred savings and protection plan, bonus arrangements, supplemental pension plan, deferred compensation agreements, incentive compensation plans, and life insurance and compensation program, then, unless Reynolds or the consolidated, surviving or transferee entity in the event of a consolidation, merger or sale of assets, is wholly successful in defending against the enforcement of such rights, Reynolds, or such consolidated, surviving or transferee entity, shall promptly pay to Holmes all such costs and expenses. 22 23 9. NON-COMPETITION; CONFIDENTIALITY. -------------------------------- (a) In order to protect Reynolds, it is understood that a covenant not to compete is a necessary and appropriate adjunct to the other provisions of this Agreement. Therefore, should Holmes at any time determine prior to the expiration of this Agreement that he does not desire to remain an employee of Reynolds and shall terminate his employment for any reason other than the grounds specified in Section 8(e) above, or should he be Discharged For Cause by Reynolds, Holmes shall remain subject to the restrictive provisions hereinafter set forth. In addition, these restrictive provisions shall remain in full force and effect at any other time during which payments are required to be made by Reynolds pursuant to the retirement (Section 6), severance (Section 8, except for Section 8(e)(vi)) or disability (Section 7) provisions of this Agreement. These restrictive provisions are as follows: (b) For a period of two (2) years from and after Holmes' employment with Reynolds shall have terminated and after he shall have ceased receiving retirement, severance or disability benefits under this Agreement, whichever shall last occur, he shall not, directly or indirectly, compete with Reynolds or any of its related or affiliated companies. For purposes of this Agreement, competition with Reynolds or any of its related or affiliated companies shall include the manufacture, distribution, and sale of business forms and computer hardware and software and the furnishing of EDP services which are similar in nature or function to the products and/or services then being furnished by Reynolds for sale in the same vertical markets in which Reynolds' products and/or services are then being marketed at the time of Holmes' termination of employment or upon the cessation of any retirement, severance or disability benefits under this Agreement. 23 24 (c) From and after the execution of this Agreement and for a period of two (2) years after termination of his employment with Reynolds and after he shall have ceased receiving retirement, severance or disability benefits under this Agreement, whichever shall last occur, Holmes shall not, directly or indirectly, by direct participation, by purchase of stocks or bonds or other evidences of indebtedness, by loaning of money, by guarantee of loans of others, by gift to establish or assist others, or in any other manner or fashion, engage in any such restricted activity in competition with Reynolds or any of its related or affiliated companies, nor shall he assist any present employees of Reynolds or any other person similarly to engage in such competing business for the full two-year prohibition period set forth in this Agreement. (d) The restrictive provisions of this Section 9, however, are in no way intended to prohibit Holmes from acquiring in open market transactions investments in equity stock or evidences of indebtedness of a corporation if the said stock or if the said evidence of indebtedness is traded on a national or regional securities exchange or in the over-the-counter market and the investment therein represents no more than five percent (5%) of the outstanding securities of the issue being acquired. Moreover, it is not the intention of this Section 9 to limit in any way Holmes' ability to invest in businesses not competitive with Reynolds. (e) Holmes shall keep secret and inviolate all knowledge or information of a confidential nature (which is not then nor later, through no breach of this Agreement, in the public domain), including all unpublished matters related to, without limitation thereof, the 24 25 business, properties, accounts, books and records, research and development information, processes, procedures, products, know-how, trade secrets, memoranda, devices, suppliers, and customers of Reynolds which he may now know or hereafter come to know as a result of his affiliation in business with Reynolds. (f) All copyrights, improvements, discoveries and inventions and all claims, interest and rights thereto relating to any part of the business of Reynolds conceived, developed or made by Holmes, either alone or with others, during the period of his employment, and whether conceived, developed or made during his regular working hours or at any other time during such period, shall be and are the sole property of Reynolds and Holmes hereby assigns to Reynolds all right, title and interest in and to such copyrights, improvements, discoveries and inventions. Further, Holmes will, at any time in the future upon Reynolds' request, execute specific assignments of any said copyrights, improvements, discoveries and inventions as well as execute all documents and perform all lawful acts which Reynolds deems necessary or advisable to vest full ownership thereof in Reynolds, to register same in the name of Reynolds or its designee or otherwise to provide legal protection for Reynolds' ownership interests therein. (g) This Agreement shall be without geographical limitation in continental North America and, in addition, in any other areas of the world in which Reynolds or any of its related or affiliated companies shall be doing business at the time of the proposed competing entry into business by Holmes, it being agreed that the contacts of Holmes and the potential scope of operation of Reynolds is without any limitation within the area of prohibition. Any violation of this covenant may be enforced by specific performance in any court of 25 26 competent jurisdiction within the area of limitation imposed by this provision. If any court of competent jurisdiction shall determine that either the period or the territory covered by this provision against competition in unreasonable, said provision shall not be determined to be null, void, and of no effect but shall be reformed by said court to impose a reasonable period or a reasonable geographical limitation, as the case may be. 10. RESOLUTION OF DISPUTES; ARBITRATION. ----------------------------------- (a) Except for the breach or threatened breach by Holmes of the noncompetition provisions of this Agreement which may be enforced by appropriate injunctive relief at the option of Reynolds, any dispute or controversy arising out of or relating to this Agreement, including, but not limited to, whether Holmes has been Discharged for Cause, shall be submitted to and settled by arbitration in Dayton, Ohio in accordance with the rules then pertaining of the American Arbitration Association. (b) Should Holmes disagree that his termination was due to a Discharge for Cause, the question shall, within thirty (30) days after the termination, be submitted to arbitration by three (3) arbitrators, one of whom shall be selected by Reynolds, another of whom shall be selected by Holmes, and the third of whom shall be selected by the two arbitrators so appointed. The decision of these arbitrators on the question shall be final and conclusive upon Reynolds and upon Holmes and his wife or widow, personal representatives, designated beneficiaries and heirs, and shall be enforceable in any court having competent jurisdiction thereof. A discharge which is eventually determined under arbitration to have been a Discharge for Cause, or no arbitration having been requested and the discharge being one which Reynolds had determined was for a Discharge for Cause, shall extinguish any and all liability of Reynolds under this Agreement from and after the date of termination. 26 27 (c) The arbitrators for all other disputes or controversies under this Agreement shall be selected as set forth above and the parties shall select the arbitrators within thirty (30) days after demand from Holmes or Reynolds to the other to settle matters by arbitration. As stated above, the decision of the arbitrators shall be final and conclusive. 11. NONASSIGNABLE RIGHTS. -------------------- Holmes, his wife, or his widow after his death, or his personal representatives, designated beneficiaries and heirs, shall not have the right to anticipate or commute, or to sell, assign, transfer, or otherwise alienate or convey the right to receive any payments hereunder, whether by his, her or their voluntary or involuntary act, or by operation of law and, in particular, that any payments due hereunder shall not be subject to attachment or garnishment or any other legal proceedings by any creditor, or be in any way responsible for the debts or liabilities of Holmes or his wife or his widow after his death or his personal representatives, designated beneficiaries and heirs. Should Holmes or his wife or his widow after his death or his personal representatives, designated beneficiaries and heirs, voluntarily attempt to breach this Section of this Agreement, Reynolds' liability to make payments hereunder from and after the date of said attempt shall be extinguished; and should any attempt be made to reach the payments by other than Holmes or his wife or his widow after his death or his personal representatives, designated beneficiaries and heirs, Reynolds shall make each payment as it becomes due to such person or persons for the sole benefit of Holmes or his wife or his widow or his personal representatives, designated beneficiaries and heirs, as the case may be, as Reynolds may deem expedient. 27 28 12. UNFUNDED AGREEMENT. ------------------ (a) Reynolds' obligation under this Agreement shall be unfunded, but Reynolds reserves the right to provide for its liability under this Agreement in any manner it deems advisable, including the purchasing of such assets (including an insurance policy or policies on Holmes' life) as it may deem necessary or proper; provided, however, that Holmes' insurability or non-insurability shall in no way affect Reynolds' obligations pursuant to this Agreement. Any asset so purchased by Reynolds shall be the sole property of Reynolds and shall not be deemed to provide funding of Reynolds' obligations under this Agreement. (b) In the event Reynolds determines to purchase any insurance policy or policies on Holmes' life, Holmes agrees to submit to such examination and to supply information as may be required by the insurer. (c) Any policy so purchased by Reynolds shall be issued so that Reynolds is the sole, full, and complete owner of the policy or policies, with the right and power to exercise any and all privileges and options thereof or available under the rules of the issuing insurer without the consent of any other persons. (d) Holmes, his wife, or his widow after his death, or his designated beneficiaries, personal representatives, heirs, successors and assigns shall have no claim or rights with respect to, and shall have no property or equitable interests whatsoever in, any specific funds or assets of Reynolds and shall have only the status of a general creditor with respect to Reynolds hereunder. 28 29 13. FACILITY OF PAYMENT. ------------------- In the event of a physical or mental illness or disability of Holmes or of his widow after his death or of his designated beneficiaries at a time when he or she (or they) is (are) entitled to payments hereunder, such payments as may be due shall be paid to such person or persons for the benefit of Holmes or his widow or his designated beneficiaries, as the case may be, as Reynolds or, if applicable, the Escrow Agent may deem proper. In the event of Holmes' death after he has made demand pursuant to Section 8(e)(v) above, the Escrow Agent shall pay such amounts as thereafter are due to such beneficiary or beneficiaries as Holmes shall have designated in writing, or failing such writing, to his estate. No liability shall accrue to Reynolds or Escrow Agent for any alleged payment to an improper person or representative if so made after such reasonable investigation and Reynolds and Escrow Agent shall have no responsibility to see to the proper application of such payments. 14. MISCELLANEOUS PROVISIONS. ------------------------ (a) All notices required or permitted to be given under this Agreement shall be in writing and shall be mailed, postage prepaid, by registered or certified mail or personally delivered, if to Reynolds, addressed to: The Reynolds and Reynolds Company Attention: Vice President, Corporate Finance and Chief Financial Officer 115 South Ludlow St. Dayton, Ohio 45402 and, if to Holmes, addressed to: David R. Holmes 5 Volusia Avenue Dayton, Ohio 45409 Either party may change the address to which notices to such party are to be sent by giving written notice of such change to the other party in the manner specified in this provision. 29 30 (b) (i) This Agreement shall be binding upon Holmes, his wife, and upon his or her heirs, executors, administrators, designated beneficiaries and upon anyone claiming under him or his wife or widow, and upon Reynolds and its successor or assigns. (ii) Reynolds shall not merge or consolidate with any other entity unless and until such other entity shall expressly assume Reynolds' obligations under this Agreement or Reynolds has provided an appropriate alternative arrangement covering its contingent liabilities under this Agreement, and Reynolds shall not voluntarily dissolve without first providing an appropriate arrangement covering its contingent liabilities under this Agreement. (c) This Agreement may be amended, but only with the consent of Holmes during his lifetime and, after his death only with the consent of his widow during her lifetime or his other designated beneficiaries during their lifetime, as the case may be. Any agreement of amendment shall be executed with the same formality as this Agreement. (d) This Agreement supersedes any prior agreements or understandings covering the subject matter hereof, either written or oral, between the parties. (e) This Agreement shall be construed under the laws of the State of Ohio. 30 31 (f) The paragraph headings used in this Agreement are for convenience of reference only and shall not be considered in construing this Agreement. IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands the year and date first above written. THE REYNOLDS AND REYNOLDS COMPANY By__________________________________ ____________________________________ DAVID R. HOLMES 31 32 EXHIBIT A ESCROW AGREEMENT DATED NOVEMBER 9, 1987 BETWEEN THE REYNOLDS AND REYNOLDS COMPANY AND BANK ONE N.A., AS AMENDED AS OF OCTOBER 1, 1995 and August 17, 1998 33 AMENDMENT NO. 2 TO ESCROW AGREEMENT THIS AMENDMENT NO. 2 TO ESCROW AGREEMENT ("Amendment") is made and entered into as of this 17th day of August, 1998 by and between THE REYNOLDS AND REYNOLDS COMPANY, an Ohio corporation (hereinafter referred to as "Reynolds"), and BANK ONE, NA (hereinafter referred to as the "Escrow Agent"). WITNESSETH: WHEREAS, Reynolds and the Bank have entered into an Escrow Agreement dated November 9, 1987 and amended October 1, 1995 (as so amended, the "Escrow Agreement") pursuant to an Employment Agreement dated as of November 9, 1987, as amended effective May 8, 1989 and December 1, 1989, and as amended and restated in its entirety October, 1995 (as so amended and as amended and restated in its entirety the "October 1, 1995 Agreement") between Reynolds and David R. Holmes ("Holmes"), an employee of Reynolds; and WHEREAS, Holmes and Reynolds have entered into a Second Amended and Restated Employment Agreement effective August 17, 1998 (the "Employment Agreement"), pursuant to which Reynolds has agreed to continue to provide termination pay protection for Holmes and which provides that the required protective payments under the Employment Agreement are to continue to be paid into an escrow account at the Escrow Agent; and WHEREAS, the parties hereto desire that the Escrow Agreement shall continue in full force and effect and for the benefit of Holmes and with full applicability to the Employment Agreement; NOW, THEREFORE, in consideration of the covenants and agreements contained in this Amendment, the parties hereby agree as follows: 1. All references to the October 1, 1995 Agreement between Reynolds and Holmes contained in the Escrow Agreement shall include and apply with full force and effect to the Employment Agreement. 2. Except as set forth herein, the Escrow Agreement shall remain unchanged and continue in full force and effect. 34 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. THE REYNOLDS AND REYNOLDS COMPANY By_________________________________ BANK ONE, NA By__________________________________ 35 EXHIBIT D SCHEDULE OF FRINGE BENEFITS PURSUANT TO SECTION 4(d) ------------------------ Benefit Amount ------- ------ Annual Physical Exam Local Clinic, maximum of $600 Auto/Gas Allowance $916 monthly Charitable Allowance $1,000 annually to charities of his choice Income Tax Planning and $1,000 annually Preparation Estate Planning and Will Preparation Initial Service $900 Updates $300 annually Country Club Dues 50% annually, including initiation fee up to $3,500 Luncheon Club Dues 100% annually Corporate aircraft (personal use) Yes; in connection with company business use Holmes may include personal passengers, subject to seat availability. Holmes shall receive W-2 for personal use value per IRS regulations Vacation Five (5) weeks annually at mutually agreed times. EX-10.G 3 EXHIBIT 10(G) 1 Exhibit (10)(g) AGREEMENT AGREEMENT made and entered into the 17th day of August, 1998, by and between THE REYNOLDS AND REYNOLDS COMPANY, a corporation existing under the laws of the State of Ohio (hereinafter referred to as the "Employer"), and (hereinafter referred to as "Employee") WITNESSETH: WHEREAS, Employee is currently an employee of the Employer; and WHEREAS, the Employer considers Employee a key member of the management team of the Employer and recognizes that a major change in the control of the Employer would be of significant concern to Employee; and WHEREAS, the parties hereto desire to set forth their mutual agreement regarding the terms of Employee's employment under certain specified circumstances in order to foster and encourage continued attention and dedication to Employee's assigned duties in the event of such circumstances; NOW, THEREFORE, in consideration of the foregoing premises, Employee's continued employment for any period after execution of this Agreement, and the mutual promises set forth herein, the parties hereby agree as follows: 1. DEFINITIONS For purposes of this Agreement: (a) "Base Compensation" shall mean the then-current annual base salary (exclusive of Bonuses) of Employee, as the same may be fixed from time to time by the Board of Directors or its Compensation Committee or, if applicable, by the appropriate executive officer of Employer. (b) "Bonuses" shall mean bonus payments earned by Employee under Employer's Incentive Compensation Plans and under any future bonus or incentive compensation plans of Employer for its executive officers in which Employee participates. (c) "Change in Control" shall mean the occurrence of any of the following events: (i) Any "person," as such term is used in Sections 13(d) and 14(d) of the 2 Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than Richard H. Grant, Jr., his children or his grandchildren, Employer, any trustee or other fiduciary holding securities under an employee benefit plan of Employer, or any company owned, directly or indirectly, by the shareholders of Employer in substantially the same proportions as their ownership of stock of Employer), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Employer representing fifty percent (50%) or more of the combined voting power of Employer's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, any new director (other than a director designated by a person who has entered into an agreement with Employer to effect a transaction described in clause (i), (iii) or (iv) of this Section whose election by the Board of Directors or nomination for election by Employer's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election was previously so approved) cease for any reason to constitute at least a majority thereof; (iii) the shareholders of Employer approve a merger or consolidation of Employer with any other company, other than (1) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting security of Employer or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no "person" (as hereinabove defined) acquires more than fifty percent (50%) of the combined voting power of Employer's then outstanding securities; or (iv) the shareholders of Employer approve a plan of liquidation, dissolution or winding up of Reynolds or an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. (d) "Disability" shall mean the inability of Employee, because of any mental or physical illness or incapacity, to perform substantially the duties of his employment with the Employer as determined under the Employer's long-term disability program. (e) "Discharge For Cause" shall be construed to have occurred whenever occasioned by reason of felonious acts on the part of Employee, actions by Employee involving serious moral turpitude or his misconduct in such manner as to bring substantial and material discredit upon Employer, following the giving of thirty (30) days' written notice to Employee specifying the respect in which Employer claims Employee has violated this provision and the failure, inability or unwillingness of Employee to remedy the situation to the satisfaction of Employer within said 2 3 thirty-day period. In establishing whether a Discharge For Cause shall have occurred, the standard for judgment shall be the level of conduct by Employee and by other comparably situated executive officers prior to the alleged improper activity of Employee for which the Discharge For Cause has been made. (f) "Escrow Agreement" shall mean the agreement entered into simultaneously herewith between Employer and Bank One, N.A., a copy of which is attached hereto and made a part hereof as Exhibit A. (g) "Escrow Agent" shall mean Bank One, N.A. (h) "Escrow Amount" shall mean the amounts placed in escrow by Employer pursuant to subsection (a) of Section 2 of this Agreement. (i) "Escrow Funding Event" shall mean the occurrence of any of the following events: (i) Class A Common Shares of Employer have been acquired other than directly from Employer in exchange for cash or property by any person (other than Richard H. Grant, Jr., his children or his grandchildren, Employer, any trustee or other fiduciary holding securities under an employee benefit plan of Employer, or any company owned directly or indirectly by the shareholders of Employer in substantially the same proportions as their ownership of the stock of Employer) who either thereby becomes the owner of more than nine and one-half percent (9.5%) of Employer's outstanding Class A Common Shares, or having directly or indirectly become the owner of more than five percent (5%) of Employer's Class A Common Shares either alone or in conjunction with another person has expressed an intent to continue acquiring Employer's outstanding Class A Common Shares so as to become thereby the owner of more than nine and one-half percent (9.5%) of such stock either directly or indirectly; (ii) Any person (other than Richard H. Grant, Jr., his children or grandchildren, Employer any trustee or other fiduciary holding securities under an employee benefit plan of Employer, or any company owned directly or indirectly by the shareholders of Employer in substantially the same proportions as their ownership of the stock of Employer) has made a tender offer for, or a request for invitations for tenders of, Class A Common Shares of Employer; (iii) Any person forwards or causes to be forwarded to shareholders of Employer proxy statement(s) in any period of twenty-four (24) consecutive months, soliciting proxies, to elect to the Board of Directors of Employer two (2) or more candidates who were not nominated as candidates in proxy statements forwarded to shareholders during such period by the Board of Directors of Employer; or (iv) The Board of Directors of the Employer adopts a resolution to the effect that, 3 4 for purposes of this Agreement, an Escrow Funding Event has occurred. 2. PAYMENTS INTO ESCROW. (a) Upon the occurrence of an Escrow Funding Event within five (5) years after the date of this Agreement, Employer shall pay into an escrow account at the Escrow Agent an amount equal to two and ninety-nine one hundredths (2.99) times the sum of the (i) higher of Employee's annual Base Compensation in effect immediately prior to the occurrence of the event or circumstance upon which such termination of employment is based or in effect immediately prior to the Change in Control, and (ii) the average of Employee's Bonuses during the three (3) calendar years immediately preceding the year in which the date of termination occurs. Subsequent to the delivery to the Escrow Agent of the Escrow Amount, Employer shall, in the event that either Employee's Base Compensation is increased (or decreased) or he receives a Bonus that affects the amount described in this subsection, unless the Escrow Amount shall theretofore have been released pursuant to subsection (b) of this Section, recalculate the Escrow Amount as of the date such change in Base Compensation or receipt of Bonus occurs, treating the Escrow Funding Event as having occurred on such date. If the amount so calculated exceeds the fair market value of the Escrow Amount, Employer shall promptly (and in no event later than seven (7) days from such date) pay to the Escrow Agent an amount in cash (or marketable securities or any combination thereof) equal to such excess. If the Escrow Amount so calculated is less than the fair market value of the Escrow Amount then held in the escrow account, the Escrow Agent, upon receipt of a written request from Employer, shall distribute to Employer such difference in cash; provided, however, that this sentence shall not apply after the occurrence of a Change in Control. The Escrow Amount shall be governed by the terms and conditions of this Agreement and the Escrow Agreement. (b) Unless the parties otherwise agree, the Employer may withdraw the Escrow Amount when and only when two (2) years have expired from the date of deposit and no proper demand pursuant to subsection (b) (i) of Section 3 of this Agreement has been made during that time, or when the conditions requiring the deposit have ceased to exist for a period of ninety (90) days without a demand right having been created, or when Employee's right to a payment under this Agreement has been forfeited, whichever occurs first. If, before the expiration of such periods or forfeiture, there shall occur another Escrow Funding Event, the Employer will not be required to make an additional deposit, but the two (2) year period shall then be measured from the date of the last such event. Notwithstanding a deposit with the Escrow Agent pursuant to subsection (a) of this Section, Employee shall continue to be entitled to receive all of the normal and usual benefits from Employer until a termination of employment shall occur. (c) The Employer shall pay the charges of the Escrow Agent for its services under the Escrow Agreement, and the Employer will be entitled to any interest or other income arising from the date of the deposit of the Escrow Amount until all payments have been made under the Escrow Agreement to Employee. All interest or other income arising from the Escrow Amount deposited with the Escrow Agent shall be paid monthly to Employer. 4 5 (d) In the event that, following the creation of a demand right pursuant to Section 3 of this Agreement, Employee incurs any costs or expenses, including attorneys' fees, in the enforcement of rights under this Agreement or under any plan for the benefit of employees of the Employer, including without limitation the stock option plan, pension plans, payroll-based stock ownership plan, tax deferred savings and protection plan, bonus arrangements, supplemental pension plan, deferred compensation agreements, incentive compensation plans, and life insurance and compensation program, then, unless the Employer or the consolidated, surviving or transferee entity in the event of a consolidation, merger or sale of assets, is wholly successful in defending against the enforcement of such rights, the Employer, or such consolidated, surviving or transferee entity, shall promptly pay to Employee all such costs and expenses. 3. EMPLOYMENT TERMS AND SEVERANCE BENEFITS AFTER CHANGE IN CONTROL. (a) After a Change in Control has occurred: (i) The Employer shall not reduce Employee's Base Compensation below the amount of such Base Compensation in effect immediately preceding the Change in Control without Employee's written consent; (ii) The Employer shall continue to provide Employee with fringe benefits (including bonuses, vacation, health and disability insurance, etc.) at least equivalent to those of other similarly situated executive officers of the Employer; (iii) Employee shall not be required by the Employer to perform duties or services which differ significantly from those performed by him prior to the Change in Control, or which are not ordinarily and generally performed by a similarly situated executive of a corporation; (iv) The nature of the duties or services which the Employer requires him to perform shall not necessitate absence overnight from his place of residence on the effective date hereof, because of travel involving the business affairs of the Employer for more than ninety (90) days during any period of twelve (12) consecutive months. (b) (i) If the Employer terminates Employee's employment or if Employee terminates his employment with Employer for any of the reasons specified in subsection (a) of this Section within the twenty-four (24) month period following the date of a Change in Control, the Escrow Agent upon written demand from Employee shall pay promptly to the Employee the Escrow Amount in one (1) lump sum in cash. (ii) Employee shall also be entitled to the following benefits commencing as of the date of the payment of the Escrow Amount to Employee: A. During the period expiring on the earlier of Employee securing other employment or twenty-four (24) months from date of payment of the Escrow Amount (or such longer period as required by law) to continued coverage under the Employer's sponsored medical benefits program in existence on such date of payment, or, if such continued coverage is barred, Employer shall provide equivalent medical benefit coverage through the purchase of insurance or otherwise. 5 6 B. For purposes of determining Employee's benefits under Employer's Supplemental Plan, Employee shall reeive credit toward his Years of Service under the Supplemental Plan for the two (2) year period following his termination of employment. In addition, with respect to the two (2) year period following such termination of employment, Employee's Base Compensation shall be deemed to be increased by the annual economic range adjustment for Employer's salaried employees announced in October of each year (or, if there is no such announced economic range adjustment in a given year, by an assumed five percent (5%) increase for that year) in order to calculate his highest earnings during five (5) consecutive years out of the last ten (10) years prior to retirement under the Supplemental Plan. C. Employee shall be reimbursed for up to $20,000 for outplacement fees if he chooses to seek other employment following his termination of employment with Employer. (c) Notwithstanding anything to the contrary in this Section, Employee shall not be entitled to any payments pursuant to subsection (b) (i) of this Section if Employee dies prior to making a demand for payment pursuant to subsection (b) (i) of this Section, or if the Employer terminates Employee's employment because of a Discharge for Cause, because of Employee's Disability, or if Employee voluntarily terminates his employment with the Employer for reasons other than as set forth in subsection (a) of this Section. (d) Employee shall not be required to mitigate damages with respect to the amount of any payments provided for in subsection (b) of this Section by seeking other employment or otherwise. Employee's sole remedy under this Agreement for a breach by the Employer of subsection (a) of this Section shall be to terminate employment and receive any payments to which he is entitled under subsection (b) of this Section. (e) Should Employee disagree that his termination was due to a Discharge For Cause, the question shall, within thirty (30) days after the termination of employment, be submitted to arbitration by three (3) arbitrators, one of whom shall be selected by Employer, another of whom shall be selected by Employee, and the third of whom shall be selected by the two arbitrators so appointed. The arbitration shall take place in Dayton, Ohio in accordance with the then rules of the American Arbitration Association. The decision of these arbitrators on the question shall be final and conclusive upon Employer and upon Employee and his wife or widow, personal representatives, designated beneficiaries and heirs, and shall be enforceable in any court having competent jurisdiction thereof. A termination which is eventually determined under arbitration to have been a Discharge For Cause, or no arbitration having been requested and the termination being one which Employer has determined was a Discharge For Cause, shall extinguish any and all liability of Employer under this Agreement from and after the date of the termination of employment. 6 7 4. CONFIDENTIALITY; ENFORCEMENT. (a) Employee shall keep secret and inviolate all knowledge or information of a confidential nature (which is not then nor later, through no breach of this Agreement, in the public domain), including all unpublished matters related to, without limitation thereof, the business, properties, accounts, books and records, research and development information, processes, procedures, products, know-how, trade secrets, memoranda, devices, suppliers, and customers of Employer which he may now know or hereafter come to know as a result of his affiliation in business with Employer. (b) All copyrights, improvements, discoveries and inventions and all claims, interests and rights thereto relating to any part of the business of Employer conceived, developed or made by Employee, either alone or with others, during the period of his employment, and whether conceived, developed or made during his regular working hours or at any other time during such period, shall be and are the sole property of Employer and Employee hereby assigns to Employer all right, title and interest in and to such copyrights, improvements, discoveries and inventions. Further, Employee will, at any time in the future upon Employer's request, execute specific assignments of any said copyrights, improvements, discoveries and inventions as well as execute all documents and perform all lawful acts which Employer deems necessary or advisable to vest full ownership thereof in Employer, to register same in the name of Employer or its designee or otherwise to provide legal protection for Employer's ownership interests therein. (c) Any violation of this Section 4 by Employee may be enforced by Employer by specific performance or appropriate injunctive relief in any court of competent jurisdiction. Any other dispute or controversy arising under this Agreement shall be settled by arbitration in the manner set forth in subsection (e) of Section 3 of this Agreement. 5. UNFUNDED AGREEMENT The Employer's obligations under this Agreement are unfunded other than from the date of deposit of the Escrow Amount, but the Employer reserves the right to provide for its liability under this Agreement in any manner it deems advisable, including the purchasing of such assets as it may deem necessary or proper. Any asset so purchased by the Employer shall be the sole property of the Employer and shall not be deemed to provide funding of the Employer's obligations under this Agreement. Any other provision in this Agreement to the contrary notwithstanding, Employee shall be only an unsecured general creditor of the Employer with respect to all payments to be made under the terms of this Agreement and shall have no claim, equity, interest, or right in or to any specific assets or funds of the Employer as security for said payments other than the Escrow Amount. 6. NON-ASSIGNABLE RIGHTS Employee shall not have the right to anticipate or commute with any third party, or to sell, assign, transfer, or otherwise alienate or convey the right to receive any payments hereunder, whether by his voluntary or involuntary act, or by operation of law and, in particular, that any 7 8 payments due hereunder shall not be subject to attachment or garnishment or any other legal proceedings by any creditor, or be in any way responsible for the debts or liabilities of Employee. Should any attempt be made to reach any payments hereunder by other than Employee, the Escrow Agent shall make each payment as it becomes due to such person or persons, for the sole benefit of Employee as the Escrow Agent may deem expedient. 7. FACILITY OF PAYMENT; LIMITATION In the event of a Disability of Employee after Employee has made demand hereunder, such payments as may thereafter be due shall be paid to such person or persons for the benefit of Employee as the Escrow Agent may deem proper after reasonable investigation. In the event of Employee's death after he has made demand, the Escrow Agent shall pay such amounts as thereafter are due to such beneficiary or beneficiaries as Employee shall have designated in writing on Exhibit B attached hereto and made a part hereof, or failing such writing, to his estate. No liability shall accrue to the Employer or Escrow Agent for any alleged payment to an improper person or representative if so made after such reasonable investigation and the Employer and Escrow Agent shall have no responsibility to see to the proper application of such payments. Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by Employee in connection with a Change in Control or the termination of Employee's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions result in a Change in Control or any person affiliated with Employer or such person)(all such payments and benefits, including the Escrow Amount, being hereinafter called "Total Payments") would be subject (in whole or part), to an excise tax pursuant to Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (such tax hereinafter referred to as the "Excise Tax"), then the Escrow Amount shall be reduced to the extent necessary so that no portion of the Total Payments is subject to Excise Tax (after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement) if (A) the net amount of such Total Payments, as so reduced, (and after deduction of the net amount of federal, state and local income tax on such Total Payments), is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after deduction of the net amount of federal, state and local income tax on such Total Payments), over (ii) the amount of Excise Tax to which Employee would be subject in respect of such Total Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which Employee shall have effectively waived in writing prior to the date of this termination of employment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by Employer does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, (including by reason of Section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payment shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess 8 9 of the base amount as defined in Section 280G(b)(3) of the Code allowable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by Employer in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. Prior to the fifth day following the date of Employee's termination of employment, Employer shall provide Employee with its calculation of the amounts referred to in this paragraph and such supporting materials as are reasonably necessary for Employee to evaluate Employer's calculations. If Employee objects to Employer's calculations, he shall notify Employer of his objections prior to the initial payment date set forth in Section 3 hereof, and Employer shall pay to Employee such portion of the Total Payments (up to one hundred percent (100%) thereof) as Employee determines is necessary to result in Employee receiving the greater of clauses (A) and (B) of this paragraph. 8. RESPONSIBILITY FOR LEGAL EFFECT Neither party hereto makes any representations or warranties, express or implied, or assumes any responsibility concerning the legal, tax, or other implications or effects of this Agreement. The Employer and the Escrow Agent shall take all actions required by law with respect to any payments due hereunder including but not limited to, withholding of tax from such payments. 9. INDEPENDENCE OF AGREEMENT; EMPLOYMENT TERMINATION This Agreement shall be independent of any other contract or agreement that may exist between the parties hereto from time to time. This Agreement shall not restrict the Employer's rights to terminate Employee's employment with the Employer nor Employee's rights to terminate employment with the Employer; provided, however, that the Employer shall not terminate Employee's employment prior to a Change in Control solely to avoid its obligations under this Agreement. No merger or consolidation with any other entity, or sale of all or substantially all of Employer's assets constituting an Escrow Funding Event, or thereafter a Change in Control shall occur without assumption of the Agreement by the purchaser or payment by purchaser or Employer of the sums set forth in subsection (a) of Section 2 of this Agreement. 10. SECTION HEADINGS The Section headings used in this Agreement are for convenience of reference only and shall not be considered in construing this Agreement. 11. NOTICES Any notices required o r permitted to be given under this Agreement shall be sufficient if in writing and if personally delivered or sent by certified or registered mail to his residence as last shown on the employment records of the Employer in the case of Employee, or to the corporate headquarters to the attention of the President in the case of the Employer. 9 10 12. NON-WAIVER The waiver by the Employer or Employee of a breach of any provision of this Agreement by Employee or the Employer shall not operate or be construed as a waiver of any subsequent breach by Employee or the Employer of the same or any other provision hereof. 13. ENTIRE AGREEMENT; AMENDMENT This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. Any amendment to this Agreement shall be executed in writing with the same formality as this Agreement. 14. BINDING EFFECT This Agreement shall be binding upon Employee and the Employee's heirs, executors, administrators, successors and assigns and upon the Employer and its successors and assigns. 15. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the year and date first hereinabove written. THE REYNOLDS AND REYNOLDS COMPANY By ------------------------------------ David R. Holmes Chairman of the Board, President and Chief Executive Officer ------------------------------------ 10 11 Exhibit A ESCROW AGREEMENT This Escrow Agreement made and entered into as of this 17th day of August, 1998, by and between THE REYNOLDS AND REYNOLDS COMPANY, an Ohio corporation (hereinafter referred to as "REYNOLDS") and BANK ONE, N.A. (hereinafter referred to as the "ESCROW AGENT"), WITNESSETH: WHEREAS, REYNOLDS, has adopted a policy of providing termination pay protection for certain of its key management personnel under conditions set forth in an agreement dated August 17, 1998 (hereinafter referred to as the "Agreement"); and WHEREAS, REYNOLDS has identified (hereinafter referred to as "Employee") as key management personnel and has entered into the Agreement with him; and WHEREAS, the required protective payments under the Agreement are to be paid to an escrow account at the ESCROW AGENT; NOW, THEREFORE, in consideration of the covenants and agreements contained in this ESCROW AGREEMENT, the parties hereby do agree as follows: 1. Acceptance of Escrow. The ESCROW AGENT shall serve as ESCROW AGENT in accordance with the provisions of this ESCROW AGREEMENT, and the duties of the ESCROW AGENT shall be solely those imposed by this ESCROW AGREEMENT. 2. Terms. The ESCROW AGENT shall receive, hold and disburse funds as ESCROW AGENT in accordance with the Agreement, in the form attached hereto as Exhibit A and made a part hereof. The ESCROW AGENT acknowledges that it has reviewed and is familiar with the Agreement and shall be bound by the obligations, terms and conditions therein relating to the ESCROW AGENT and its duties. However, the ESCROW AGENT is not a party to or bound by the Agreement, except as specifically provided for therein and as provided in Sections 2, 4, 6, 7 and 8 of this ESCROW AGREEMENT. The ESCROW AGENT shall be liable for only such funds and items as are actually deposited and received by it for the purposes of said escrow. 3. Indemnification. So long as the ESCROW AGENT shall follow the terms of this ESCROW AGREEMENT and any instructions issued hereunder in good faith, relying upon documents which it believes to be genuine and properly signed and executed, it shall be held free, clear and harmless and shall incur no liability hereunder. REYNOLDS shall indemnify and hold the ESCROW AGENT harmless from any loss, liability, cost, or expense, including 12 reasonable legal fees, which may arise or be incurred by reason of this ESCROW AGREEMENT or the ESCROW AGENT's performance in good faith of any duty or obligation hereunder. The ESCROW AGENT shall not be liable for any error of judgment or for any act done or omitted by it in good faith, or for anything which it may in good faith do or refrain from doing in connection with said escrow; nor will any liability be incurred by the ESCROW AGENT if, in the event of any dispute or question as to the construction of this ESCROW AGREEMENT or any demand or notice hereunder, the ESCROW AGENT acts in accordance with the opinion of its legal counsel. 4. Investments by ESCROW AGENT; Income. The ESCROW AGENT shall invest escrow funds in federally-insured interest bearing accounts selected by the ESCROW AGENT or in any one or more of the following investments, selected by the ESCROW AGENT: (a) Certificates of Deposit of United States commercial banks holding membership in the Federal Reserve System. Such U.S. banks shall have minimum total assets of $1,000,000,000 and shall not be currently listed on any publicly-disclosed report of U.S. banks having financial problems warranting close monitoring by the Federal Reserve Board. (b) Euro-dollar Certificates of Deposit issued by the twenty-five (25) largest United States commercial banks, which banks shall have minimum total assets of $1,000,000,000 and shall not be currently listed on any publicly-disclosed report of U.S. banks having financial problems warranting close monitoring by the Federal Reserve Board. (c) Bankers Acceptances of United States commercial banks holding membership in the Federal Reserve System. Such U.S. banks shall have minimum total assets of $1,000,000,000 and shall not be currently listed on any publicly-disclosed report of U.S. banks having financial problems warranting close monitoring by the Federal Reserve Board. (d) United States Treasury Bills. (e) United States Treasury Notes. (f) United States Government Guaranteed "Project Notes" and/or Tax-Exempt Notes rated MIG 1 by Moody's rating agency. 2 13 (g) Debt instruments issued by the following five United States Government agencies: Federal Intermediate Credit Banks Banks for Cooperatives Federal Land Banks Federal Home Loan Banks Federal National Mortgage Association (h) Commercial Paper rated Prime-1 by Moody's rating agency or rated A-1 by Standard & Poors rating agency. In addition, with respect to any corporation's commercial paper being purchased, such corporation's long-term debt, if any, must be rated either A by Moody's rating agency or A by Standard & Poors rating agency. The total investments in the above-described approved Certificates of Deposit, Bankers Acceptances, Commercial Paper, and/or Tax-Exempt Notes shall be limited to a maximum of $1,000,000 at any one time in any one single bank, corporation, state and/or municipality. With respect to funds deposited in escrow by REYNOLDS pursuant to the terms of the Agreement, principal shall be used only for the payments to the Employee. Any and all income on invested funds shall be paid to REYNOLDS in accordance with subsection (c) of Section 2 of the Agreement. Fees of the Escrow Agent shall be paid by REYNOLDS in accordance with subsection (c) of Section 2 of the Agreement. With respect to funds deposited pursuant to the Agreement, the ESCROW AGENT shall be authorized to invest such funds. The ESCROW AGENT will maintain such liquidity in the investments as will permit them to be cashed when necessary to fund the required distributions to Employee. 5. Termination. This ESCROW AGREEMENT and all obligations of the ESCROW AGENT shall terminate upon satisfaction by the ESCROW AGENT of all of its obligations under this ESCROW AGREEMENT and the Agreement. 6. Adverse Claims. ESCROW AGENT shall make delivery or disbursement of the funds deposited hereunder in accordance with the terms of the ESCROW AGREEMENT and the Agreement, regardless of any disagreement or the presentation of any adverse claims or demands of any person, unless such person shall have obtained an injunction from a court having proper jurisdiction, enjoining ESCROW AGENT from making such delivery or disbursement. ESCROW AGENT shall not become liable to REYNOLDS or to any other person, for or because of such delivery or disbursement of such funds, even with knowledge of a disagreement or adverse claim or demand. 3 14 7. Demands. Except in cases where demand or notice by a single party is specifically provided for in this ESCROW AGREEMENT or in the Agreement, the ESCROW AGENT shall not be bound to recognize any notice, demand or change of instructions as having any effect on this escrow unless given in writing and signed by all parties considered by the ESCROW AGENT to be affected thereby. 8. Notices. Any notice required or permitted to be given hereunder shall be given in writing and shall be sufficiently delivered if sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: _______________________,Trust Officer Trust Division Bank One, NA Kettering Tower Dayton, Ohio 45423 The Reynolds and Reynolds Company 115 S. Ludlow Street Dayton, Ohio 45401 Attn: Chief Financial Officer Should the address of any party identified above change for the purposes herein, such party shall give written notice of the new address to the other parties identified above. All notice hereunder to the ESCROW AGENT shall be given in writing to an officer of the ESCROW AGENT. Unless written notice shall so be given, the ESCROW AGENT shall not be required to take or be bound by said notice or to take action concerning such notice. If written notice be properly given and the ESCROW AGENT is required upon receipt thereof to take any action hereunder and such action involves any expense or liability, the ESCROW AGENT shall not be required to take any such action unless it is indemnified against such expense or liability in a manner reasonably satisfactory to the ESCROW AGENT. At the time of depositing funds into escrow on behalf of Employee, REYNOLDS shall deliver to the ESCROW AGENT a written notice setting forth such person's name and address, and social security number identifying the amounts being deposited on such person's behalf, and the conditions of the Agreement, which have been met and which, therefore, require that such deposit be made. 9. Record Keeping. The ESCROW AGENT shall maintain records showing the amount and date of all deposits made by REYNOLDS for the benefit of Employee and the amount and date of all disbursements made to Employee, his heirs, successors and assigns. REYNOLDS shall be given access to said records at reasonable times upon request. 10. Escrow Fee. REYNOLDS shall pay to the ESCROW AGENT for its services 4 15 hereunder an escrow fee based upon the then-current schedule of charges for such services promulgated by the ESCROW AGENT and shall pay additional reasonable compensation for any further or extraordinary service which the ESCROW AGENT may be required to render pursuant to the terms of this ESCROW AGREEMENT. 11. Binding Effect. This ESCROW AGREEMENT shall be binding upon and inure to the heirs, executors, administrators, personnel representatives, successors and assigns of all parties hereto. 12. Miscellaneous. Employee is acknowledged to be third party beneficiary upon the deposit of any amounts under this ESCROW AGREEMENT for his benefit. This ESCROW AGREEMENT may be modified or amended only by a writing signed (i) by all parties hereto, (ii) by the third party beneficiary and (iii) by any other person the ESCROW AGENT considers to be affected by said modification or amendment. This ESCROW AGREEMENT shall be construed and enforced in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, the parties hereto have set their respective hands the year and date first hereinabove written. THE REYNOLDS AND REYNOLDS COMPANY By ---------------------------------- "REYNOLDS" BANK ONE, N.A. By ---------------------------------- "ESCROW AGENT" 5 16 Exhibit B BENEFICIARY DESIGNATION TO: The President of The Reynolds and Reynolds Company Pursuant to the Agreement dated August 17, 1998 the undersigned hereby designates the following beneficiary (beneficiaries) to receive any benefits which may be payable under said Agreement subsequent to the undersigned's death: (1)_____________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (2) If the beneficiary (beneficiaries) named in (1) above is not living or is no longer in existence, as the case may be, then to: ________________________________________________________________________________ ________________________________________________________________________________ This Beneficiary Designation revokes all prior designations made by the undersigned and is subject to all the terms of the Agreement. Dated: August 17, 1998 __________________________ EX-10.FF 4 EXHIBIT 10(FF) 1 Exhibit (10)(ff) AMENDMENT NUMBER 5 TO THE REYNOLDS AND REYNOLDS COMPANY SUPPLEMENTAL RETIREMENT PLAN The Reynolds and Reynolds Company (the "Company") adopted The Reynolds and Reynolds Company Supplemental Retirement Plan (the "Plan") originally effective October 1, 1978. Thereafter, the Company amended and restated the Plan effective October 1, 1986. The Company has reserved the right under Section 8.5 of the Plan to amend the Plan at any time and from time to time. The last amendment to the Plan was amendment Number 4. The Company desires to further amend the Plan as follows: 1. Effective March 1, 1998, Section 4.6 shall be added to the Plan and shall read as follows: Section 4.7 - Benefit Splitting Resulting from Divorce ------------------------------------------------------ A Participant may have his accrued benefit divided in a divorce property settlement pursuant to a binding divorce decree or in connection with a child support order. The Participant is responsible for advising the Company of any such order. The dividable accrued benefit shall not exceed the amount of the benefit accrued based upon the benefit formula and calculation factors as of the date of the order. Unless otherwise provided by the Company, the non-employee participant is eligible for a distribution from such account in accordance with the terms of this Plan. IN WITNESS WHEREOF, this Amendment is executed as of this 18th day of May, 1998. THE REYNOLDS AND REYNOLDS COMPANY By /s/ Thomas J. Momchilov --------------------------------------------- Title Vice President Corporate Human Resources ------------------------------------------ EX-10.OO 5 EXHIBIT 10(OO) 1 Exhibit (10)(oo) THIRD AMENDMENT TO THE REYNOLDS AND REYNOLDS COMPANY RETIREMENT PLAN OCTOBER 1, 1994 RESTATEMENT The Reynolds and Reynolds Company hereby amends effective October 1, 1997, The Reynolds and Reynolds Company Retirement Plan (October 1, 1994 Restatement) (the "Plan"), as follows: 1. Article VI shall be amended by removing the first sentence of the first paragraph of Section 6.4 and replacing it with the following: If any benefit payable pursuant to this Article shall, prior to the commencement or distribution thereof have an Actuarial Equivalent lump sum value not in excess of $5,000 (and did not exceed $5,000 at the time of any prior distribution), the Plan Administrator shall direct the Trustee to make a lump sum cash settlement of such benefit. 2. Article VI shall be amended by removing the fist sentence of the second paragraph of Section 6.4 and replacing with the following: If any benefit payable pursuant to this Article shall, prior to the commencement or distribution thereof have an Actuarial Equivalent lump sum value greater than $5,000 (or greater than $5,000 at the time of any prior distribution) but not in excess of $10,000, the Participant may elect, subject to the provisions of Section 7.2 and Section 7.4 hereof, to receive a lump sum cash settlement of such benefit. 3. Article VIII shall be amended by removing Section 8.10 and replacing it with the following: If any benefit payable pursuant to this Article shall, prior to the commencement or distribution thereof have an Actuarial Equivalent lump sum value not in excess of $5,000 (and did not exceed $5,000 at the time of any prior distribution), the Plan Administrator shall direct the Trustee to make a lump sum cash settlement of the Actuarial Equivalent lump sum value of such benefit as soon as practicable after the Plan Administrator is notified of the Participant's death. If any benefit payable pursuant to this Article shall, prior to the commencement or distribution thereof have an Actuarial Equivalent lump sum value greater than $5,000 (or greater than $5,000 at the time of any prior distribution) but not in excess of $10,000, the Eligible Spouse or other beneficiary, as the case may be, may elect to receive a lump sum cash settlement of the Actuarial Equivalent lump sum value of such benefit, which shall be paid as soon as practicable after the Plan Administrator receives written notice of such election. 2 IN WITNESS WHEREOF, The Reynolds and Reynolds Company ahs caused this Amendment to be executed by its duly authorized officers on this _____ day of __________________, 1997. THE REYNOLDS AND REYNOLDS COMPANY By: ------------------------------------- Title: ---------------------------------- EX-21 6 EXHIBIT 21 1 EXHIBIT (21) LIST OF SUBSIDIARIES STATE OR OTHER JURISDICTION OF NAME INCORPORATION OR ORGANIZATION - -------------------------------------------------------------------------------- Dataforms, Inc. Wisconsin Formcraft, Inc. Texas Reyna Capital Corporation Ohio Reynolds and Reynolds (Canada) Limited Canada Crain-Drummond Inc. Canada Reynolds Vehicle Registration, Inc. Ohio 55 EX-27 7 EXHIBIT 27
5 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 39,980 0 233,939 6,781 66,196 372,047 389,434 215,208 1,157,720 198,208 307,001 0 0 58,235 346,216 1,157,720 1,039,626 1,485,963 630,818 799,520 0 0 28,437 188,023 74,467 113,556 (10,449) 0 0 103,107 1.30 1.27
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