<PAGE> 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
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(State of Incorporation) (IRS Employer Identification No.)
115 SOUTH LUDLOW STREET
DAYTON, OHIO 45402
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(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
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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.)
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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.
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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.
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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.
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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:
<TABLE>
<CAPTION>
CLASS A COMMON SHARES SALE PRICES
1998 1997
---- ----
Fiscal Quarter High Low High Low
- -------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
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
</TABLE>
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.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
FIVE-YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
<CAPTION>
For The Years Ended September 30 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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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
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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
<TABLE>
<CAPTION>
CONSOLIDATED SUMMARY
1998 vs. 1997 1997 vs. 1996
1998 1997 1996 Change Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
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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.
<TABLE>
<CAPTION>
AUTOMOTIVE
1998 vs. 1997 1997 vs. 1996
1998 1997 1996 Change Change
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
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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.
<TABLE>
<CAPTION>
BUSINESS SYSTEMS
1998 vs. 1997 1997 vs. 1996
1998 1997 1996 Change Change
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
FINANCIAL SERVICES
1998 vs. 1997 1997 vs. 1996
1998 1997 1996 Change Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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
------------------ -----------------------------------------------------------------------------------------
</TABLE>
* 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 30
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share data)
For The Years Ended September 30 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE> 31
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 1998 1997
- ------------ ---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE> 32
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands except per share data)
For The Years Ended September 30 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE> 33
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
For The Years Ended September 30 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ======== =======
</TABLE>
38
<PAGE> 39
5. INCOME TAXES
<TABLE>
<CAPTION>
PROVISION FOR INCOME TAXES
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF INCOME TAX RATES
1998 1997 1996
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
======== ==== ======= ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
INFORMATION SYSTEMS DEFERRED INCOME TAX ASSETS (LIABILITIES)
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
The carryforward of capital losses expires primarily in 1999. The carryforward
of net operating losses expires primarily in 2009.
39
<PAGE> 40
6. FINANCIAL SERVICES
<TABLE>
<CAPTION>
INCOME STATEMENTS
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FINANCE RECEIVABLES
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
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
========= =========
</TABLE>
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.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOSSES
1998 1997
- -------------------------------------------------------
<S> <C> <C>
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
======= =======
</TABLE>
40
<PAGE> 41
7. FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
INFORMATION SYSTEMS
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 42
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS
NOTES SWAPS CEILINGS
- ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
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
<PAGE> 43
8. CAPITAL STOCK
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Weighted Average
Shares Under Option Option Prices Per Share
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
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
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
====== =====
</TABLE>
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
<PAGE> 45
<TABLE>
<CAPTION>
OPTION VALUATION ASSUMPTIONS
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
COMPUTATION OF BASIC AND DILUTED EPS
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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
<PAGE> 46
11. POSTRETIREMENT BENEFITS
<TABLE>
<CAPTION>
PENSION EXPENSE
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 47
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 48
<TABLE>
<CAPTION>
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION
1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
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%
</TABLE>
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
<PAGE> 49
12. CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
49
<PAGE> 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.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 51
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
51
<PAGE> 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
<PAGE> 53
<TABLE>
<CAPTION>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE> 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,
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
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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.
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<PAGE> 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
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<PAGE> 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
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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.
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(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
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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)
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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:
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<PAGE> 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.
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(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
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<PAGE> 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
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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.
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(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
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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.
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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.
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(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
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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
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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__________________________________
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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 __________________________
<PAGE> 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
------------------------------------------
<PAGE> 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.
<PAGE> 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:
----------------------------------
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 39,980
<SECURITIES> 0
<RECEIVABLES> 233,939
<ALLOWANCES> 6,781
<INVENTORY> 66,196
<CURRENT-ASSETS> 372,047
<PP&E> 389,434
<DEPRECIATION> 215,208
<TOTAL-ASSETS> 1,157,720
<CURRENT-LIABILITIES> 198,208
<BONDS> 307,001
0
0
<COMMON> 58,235
<OTHER-SE> 346,216
<TOTAL-LIABILITY-AND-EQUITY> 1,157,720
<SALES> 1,039,626
<TOTAL-REVENUES> 1,485,963
<CGS> 630,818
<TOTAL-COSTS> 799,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,437
<INCOME-PRETAX> 188,023
<INCOME-TAX> 74,467
<INCOME-CONTINUING> 113,556
<DISCONTINUED> (10,449)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,107
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.27
</TABLE>
