<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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________ TO _______________.
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-0421120
(State of Incorporation) (IRS Employer Identification No.)
115 SOUTH LUDLOW STREET
DAYTON, OHIO 45402
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 485-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
CLASS A COMMON SHARES (NO PAR VALUE) NEW YORK STOCK EXCHANGE
(Title of class) (Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in the definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or in any amendment to this Form 10-K. X
The aggregate market value of the Class A Common Shares held by non-affiliates
of the registrant, as of December 1, 1999, was $1,457,867,204.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of December 1, 1999:
Class A Common Shares: 75,740,144 (exclusive of 16,444,556 Treasury shares)
Class B Common Shares: 20,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of Proxy Statement for 2000 Annual Meeting of Shareholders
1
<PAGE> 2
PART I
(Dollars in thousands)
ITEM 1. BUSINESS
The Reynolds and Reynolds Company, founded in 1866 and an Ohio corporation since
1889 (the "company"), operates principally in three business segments: the
Automotive Group, the Information Solutions Group and Financial Services.
AUTOMOTIVE GROUP
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 retail management solutions for automotive retailers and
manufacturers. Today, the Group provides a complete range of automotive
retailing solutions including systems and support, consulting and professional
services, e-business, customer relationship management networking-software and
data communications systems; a complete line of paper-based and electronic
business forms and integrated document management systems. The company also owns
an equity interest in Kalamazoo Computer Group plc, a Great Britain based
leading supplier of information management systems to the automotive retail
market in Europe.
INFORMATION SOLUTIONS GROUP
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 a significant source of revenue, this business today sells a balanced mix
of traditional forms and digital solutions for medium to large-sized
organizations. Key to the Group's offerings is the Internet-based Reynolds
Advantage solution which will allow customers to process document requisitions,
electronic forms distribution, customized reporting and billing using their Web
browsers. It will also include hot links to Reynolds' supplier partners' home
pages so customers can shop multiple supply catalogs without leaving their
offices. The Group is increasingly expanding its customer relationship
management (CRM) services to include strategic direct marketing campaign
development and implementation. The Group is also leveraging its e-business
skills to create e-CRM solutions. The Group operates 22 manufacturing and 32
distribution facilities across North America.
FINANCIAL SERVICES
Through its wholly-owned subsidiary, Reyna Capital Corporation, the company
provides financing services to automotive retailers across North America who
wish to invest in the acquisition of one of the Automotive Group's retail
management systems. Reyna's portfolio also includes a number of finance
receivables for computer systems previously offered by the discontinued
Healthcare Systems segment.
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.
2
<PAGE> 3
NEW PRODUCTS
New products and services introduced by the company's Automotive Group include:
eService Reminders, a Web-enabled service marketing process which will allow
automotive retailers to perform service marketing through direct, online
interaction with their customers; and Managed Connections, a family of
networking services.
New products and services introduced by the company's Information Solutions
Group include: Reynolds' E-Merge(R) interViewer which enables end-users to
quickly view, annotate and print electronic documents through their preferred
Web browser; a major enhancement to the Group's electronic printing and mailing
services that provides high-speed automated verification and quality inspection
for critical mailings like checks and statements; an enhanced eDocument
Repository service, a complete outsourcing solution that provides companies the
flexibility to digitally distribute and archive business critical documents via
a Web browser using the Internet, intranet or an extranet environment; and the
formation of a new electronic Customer Relationship Management group to deliver
technology- and Internet-enabled customer marketing solutions.
RAW MATERIALS
Computer hardware and peripherals are essential to the company's Automotive
Group. 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
major suppliers 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. 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 Group is North America's leading provider of retail
management solutions to automotive retailers. The Group'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.
3
<PAGE> 4
The company's Information Solutions Group 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 Group
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
any of the three business segments, the company does have several significant
customers whose loss, in the aggregate, could be material to the Information
Solutions Group. The company believes that the likelihood of losing all such
customers is remote.
BACKLOG
AUTOMOTIVE GROUP: The backlog represents computer systems or upgrades which have
not been shipped to customers (includes deferred revenues and software license
fees). At December 1, 1999, the dollar value of the backlog, is estimated to be
$41,772 compared with $44,537 last year.
INFORMATION SOLUTIONS GROUP: The company manufactures several thousand different
types of standard and custom business forms. At December 1, 1999, the dollar
value of the printing backlog (includes deferred revenues) is $54,238 compared
with $42,818 last year.
The company expects the backlogs of the Automotive Group and the Information
Solutions Group to be shipped and/or recognized as revenue during the coming
fiscal year.
RESEARCH AND DEVELOPMENT
During fiscal 1999 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 $54,960 in 1999,
$46,588 in 1998 and $43,052 in 1997.
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, 1999, the company and its subsidiaries employed 9,083 persons.
ITEM 2. PROPERTIES
As of September 30, 1999, the company operated 16 forms manufacturing plants in
the United States and 6 in Canada encompassing approximately 2.1 million square
feet. Of those, approximately 1.3 million square feet are owned outright by the
company. The remaining .8 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 .7 million square feet.
In addition, the company leases approximately 179 sales offices and 32
warehouses throughout the country.
4
<PAGE> 5
Most printing and other equipment used in the manufacture of business forms is
owned by the company and its subsidiaries.
In early 1999 the company completed the first phase of a new Dayton facility
(240,000 square feet which is included in the .7 million square feet noted in
the first paragraph) for its operating divisions. The new campus provides an
environment that fosters high-level creative thinking and enhances the company's
ability to attract and retain a very high quality workforce. In the fall of
1999, the company broke ground on phase two (352,000 square feet) of the new
facility. See Note 16 to the Consolidated Financial Statements on page 52.
ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 14 to the Consolidated Financial Statements
on page 52.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
5
<PAGE> 6
PART II
(Dollars in thousands except per share data)
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Class A Common Shares are listed on the New York Stock Exchange.
There is no principal market for the Class B Common Shares. The company also has
an authorized class of 60 million preferred shares with no par value. As of the
filing of this report, the company currently has no agreements or commitments
with respect to the sale or issuance of the preferred shares except as described
in Note 8 to the Consolidated Financial Statements, page 43.
Information on market prices and dividends is set forth below:
CLASS A COMMON SHARES SALE PRICES
1999 1998
----- ----
Fiscal Quarter High Low High Low
-------------- ---- --- ---- ---
First $22.94 $16.50 $21.00 $17.00
Second $23.25 $17.75 $22.25 $17.69
Third $23.44 $18.31 $23.88 $16.88
Fourth $25.13 $20.38 $18.50 $12.63
CASH DIVIDENDS PAID
Class A Common Class B Common
-------------- --------------
Months 1999 1998 1999 1998
------ ----- ----- ----- ----
January $.10 $.09 $.005 $.0045
April $.10 $.09 $.005 $.0045
June $.10 $.09 $.005 $.0045
September $.10 $.09 $.005 $.0045
As of December 1, 1999, there were approximately 3,874 holders of record of
Class A Common Shares and one holder of record of Class B Common Shares.
6
<PAGE> 7
<TABLE>
<CAPTION>
FIVE-YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
For The Years Ended September 30 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
Net Sales and Revenues
Information systems $1,524,357 $1,451,466 $1,314,956 $1,033,369 $856,984
Financial services 38,674 34,497 30,383 26,263 22,311
---------- ---------- ---------- ----------- --------
Total net sales and revenues $1,563,031 $1,485,963 $1,345,339 $1,059,632 $879,295
========== ========== ========== ========== ========
Income from Continuing Operations $ 116,936 $ 113,556 $ 80,491 $ 99,100 $ 81,052
Basic earnings per common share $ 1.49 $ 1.43 $ .99 $ 1.20 $ .97
Diluted earnings per common share $ 1.46 $ 1.40 $ .96 $ 1.16 $ .95
Net Income $ 122,721 $ 103,107 $ 59,219 $ 93,738 $ 78,594
Basic earnings per common share $ 1.57 $ 1.30 $ .73 $ 1.14 $ .94
Diluted earnings per common share $ 1.53 $ 1.27 $ .70 $ 1.10 $ .92
Return on Equity 28.3% 26.8% 16.1% 26.6% 25.1%
Cash Dividends Per Class A Common Share $ .40 $ .36 $ .32 $ .25 $ .20
Book Value Per Outstanding Common Share $ 5.98 $ 5.14 $ 4.55 $ 4.55 $ 4.01
Assets
Information systems $ 834,494 $ 746,561 $ 729,335 $ 610,362 $489,501
Financial services 427,591 411,159 373,175 $ 313,282 265,965
---------- ---------- ---------- ---------- --------
Total assets $1,262,085 $1,157,720 $1,102,510 $ 923,644 $755,466
========== ========== ========== ========== ========
Long-Term Debt
Information systems $ 163,985 $ 161,541 $ 170,150 $ 84,601 $ 41,443
Financial services 154,040 145,460 137,455 93,589 92,425
---------- ---------- ---------- ---------- --------
Total long-term debt $ 318,025 $ 307,001 $ 307,605 $ 178,190 $133,868
========== ========== ========== ========== ========
Number of Employees 9,083 9,152 9,138 7,544 6,036
INFORMATION SYSTEMS (excluding Financial Services)
Current Ratio 2.21 1.88 1.57 1.62 1.50
Net Property, Plant and Equipment $ 187,774 $ 174,226 $ 188,501 $ 167,667 $128,462
Total Debt $ 170,072 $ 168,366 $ 191,526 $ 99,092 $ 51,649
Total Debt to Capitalization 26.8% 29.4% 34.5% 21.0% 13.4%
</TABLE>
7
<PAGE> 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In thousands except per share data)
SIGNIFICANT EVENTS
ACCOUNTING CHANGE
In October 1997, the American Institute of Certified Public Accountants 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 company adopted this pronouncement effective October
1, 1998. The adoption of this pronouncement reduced the Automotive Group's
computer systems products revenues $17,936, gross profit $11,205, operating
income $10,624 and net income $6,204 or $.08 per diluted share during the six
months ended March 31, 1999. The company completed the transition period for the
adoption of SOP 97-2 as of March 31, 1999, and there was no impact on fiscal
year 1999's third or fourth quarter operating results.
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
business segment provided computer systems products and services to
hospital-based and office-based physicians. Net sales and revenues were $48,226
in 1998 and $40,346 in 1997. Operating losses were $16,700 in 1998 and $32,055
in 1997. Operating losses in 1997 included restructuring and special charges of
$13,075. The operating results of the Healthcare Systems segment have been
presented as discontinued operations in the statements of consolidated income.
On October 23, 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
recorded a gain on the sale of $5,785 or $.07 per diluted share in the first
quarter of fiscal year 1999. This gain was presented as discontinued operations
in the statements of consolidated income. See Note 2 to the Consolidated
Financial Statements for more information on discontinued operations.
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. In 1998, the company
determined that its reportable operating segments under the new pronouncement
were Automotive, Information Solutions (previously Business Systems), Healthcare
Systems and Financial Services. Automotive, Information Solutions and Healthcare
Systems operate as independent groups 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
groups. See Note 13 to the Consolidated Financial Statements for more
information on business segments.
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.
8
<PAGE> 9
BUSINESS COMBINATIONS
In fiscal year 1997, the Information Solutions Group 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
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. See Note 4 to the
Consolidated Financial Statements for additional disclosures about the company's
business combinations.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
1999 1998 1997 Change Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AS REPORTED
Net sales and revenues $1,563,031 $1,485,963 $1,345,339 $77,068 5% $140,624 10%
Gross profit $704,598 $651,946 $596,441 $52,652 8% $55,505 9%
Operating income $205,311 $203,355 $158,101 $1,956 1% $45,254 29%
Net income $122,721 $103,107 $59,219 $19,614 19% $43,888 74%
Basic earnings per share $1.57 $1.30 $0.73 $0.27 21% $0.57 78%
Diluted earnings per share $1.53 $1.27 $0.70 $0.26 20% $0.57 81%
EXCLUDING 1999 ACCOUNTING CHANGE AND SALE OF HEALTHCARE SYSTEMS AND 1997 RESTRUCTURING AND SPECIAL CHARGES
Net sales and revenues $1,580,967 $1,485,963 $1,345,339 $95,004 6% $140,624 10%
Gross profit $715,803 $651,946 $600,502 $63,857 10% $51,444 9%
Operating income $215,935 $203,355 $190,417 $12,580 6% $12,938 7%
Net income $123,140 $103,107 $93,297 $20,033 19% $9,810 11%
Basic earnings per share $1.57 $1.30 $1.15 $0.27 21% $0.15 13%
Diluted earnings per share $1.53 $1.27 $1.11 $0.26 20% $0.16 14%
</TABLE>
Consolidated net sales and revenues were a new record for the company in 1999
and grew for the ninth consecutive year. Excluding the previously mentioned
accounting change, consolidated net sales and revenues increased 6% in 1999 with
Automotive revenues growing 9% and Information Solutions sales rising 3%. All
growth was internally generated as no business combinations occurred in 1999 or
1998. About $110,000 of 1998 sales growth resulted from the full year effect of
1997 business combinations. 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 Information Solutions' lower sales.
Consolidated gross profit represented 46.2% of Information Systems revenues
(excluding Financial Services) in 1999, compared to 44.9% in 1998 and 45.4% in
1997. Both Automotive and Information Solutions improved their gross profit
margins in 1999. In 1998, gross profit margins declined primarily as a result of
the full year effect of 1997 business combinations. The acquired businesses had
lower gross profit margins than the company's existing Information Solutions
Group. Automotive gross profit margins were essentially flat in 1998 as compared
to 1997 (excluding restructuring and special charges).
As a percentage of revenues, consolidated operating income was 13.1% in 1999
(13.7% excluding the accounting change) compared to 13.7% in 1998 and 11.8% in
1997 (14.2% excluding 1997 restructuring and special charges). Excluding the
accounting change, operating margins remained consistent in 1999 as the company
increased investment in new businesses, product development and internal
systems. Information Solutions operating margins improved from 5.9% in 1998 to
7.2% in 1999 because of the improvement in gross profit margins. Automotive
operating margins declined slightly from 21.7% in 1998 to 21.2% (excluding the
accounting change) in 1999 because of higher investment in development of new
products and services. The company also invested in an
9
<PAGE> 10
enterprise resource planning (ERP) system and incurred about $.05 cents per
share of ERP related expenses during 1999. The company has refocused its ERP
efforts and now estimates that about $.01 cent per share will be incurred during
each quarter of fiscal year 2000 to complete the initial phase of this
implementation. The 1998 decline in operating profit percentages (excluding 1997
restructuring and special charges) resulted primarily from including the lower
operating margins of the 1997 business combinations.
Interest expense was $13,201 in 1999, $15,196 in 1998 and $10,443 in 1997. In
1998, the company borrowed to finance the July 1997 purchase of Crain-Drummond.
Interest income was $6,971 in 1999, $2,505 in 1998 and $2,306 in 1997. The
increase in 1999 resulted from higher cash balances from strong operating cash
flows and the sale of the Healthcare Systems segment. Other income increased in
1999, compared to 1998 and 1997, primarily because of gains on the sales of
several smaller product lines in 1999. Other income also included the company's
share of losses from its 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 41.3% in 1999, compared to 39.6% in 1998 and
45.5% in 1997. Excluding the following items, the comparable tax rates were
43.0% in 1998 and 42.9% in 1997. The 1999 tax rate was lower than the comparable
1998 and 1997 tax rates because of lower state income tax rates. The 1998 tax
rate reflected a $4,910 gain from the favorable resolution of several tax
audits. The 1997 tax rate included the effect of nondeductible restructuring and
special charges.
In 1999, net income and earnings per common share (diluted) set new records for
the company as net income exceeded $122,000. The effect of the accounting change
was essentially offset by the gain on the sale of the Healthcare Systems
segment. 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 1999, return on average shareholders' equity also reached a new high
of 28.3%, compared to 26.8% in 1998 and 24.2% in 1997 (excluding the effect of
restructuring and special charges).
AUTOMOTIVE
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
1999 1998 1997 Change Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AS REPORTED
Net sales and revenues $793,309 $741,858 $681,145 $51,451 7% $60,713 9%
Gross profit $433,022 $400,521 $363,217 $32,501 8% $37,304 10%
% of revenues 54.6% 54.0% 53.3%
SG&A expenses $271,584 $239,663 $223,077 $31,921 13% $16,586 7%
% of revenues 34.3% 32.3% 32.7%
Restructuring charge $0 $0 $14,895
% of revenues 2.2%
Operating income $161,438 $160,858 $125,245 $580 0% $35,613 28%
% of revenues 20.3% 21.7% 18.4%
EXCLUDING 1999 ACCOUNTING CHANGE AND 1997 RESTRUCTURING AND SPECIAL CHARGES
Net sales and revenues $811,245 $741,858 $681,145 $69,387 9% $60,713 9%
Gross profit $444,227 $400,521 $367,278 $43,706 11% $33,243 9%
% of revenues 54.8% 54.0% 53.9%
SG&A expenses $272,165 $239,663 $219,911 $32,502 14% $19,752 9%
% of revenues 33.6% 32.3% 32.3%
Operating income $172,062 $160,858 $147,367 $11,204 7% $13,491 9%
% of revenues 21.2% 21.7% 21.6%
</TABLE>
In 1999 and 1998, 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 17% in
1999 and 15% in 1998 primarily because of the increased number of software
applications
10
<PAGE> 11
supported. Computer systems products sales increased 5% (excluding the
accounting change) in 1999 and 9% in 1998 primarily because of higher sales of
ERA2 retail management systems. In 1998, increased sales of electronic parts
catalogs also contributed to the sales growth. In 1998, a portion of the higher
sales volume resulted from customers replacing systems that were not year 2000
qualified. 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, software and support revenues in computer
systems products and services, respectively, and related forms and supplies
sales in business forms products. In 1999 and 1998, laser revenues, while still
relatively small, continued to grow rapidly. Management expects the shift from
printed forms to laser printing to continue.
Gross profit margins increased in 1999 because of the growth in higher margin
recurring service revenues. Gross profit percentages were essentially flat in
fiscal year 1998 compared to 1997 (excluding 1997 special charges).
Operating margins remained strong, exceeding 21% for each of the three years
(excluding the 1999 accounting change and the 1997 restructuring and special
charges). In 1999, operating margins declined slightly because of increased
investments in new businesses and product development.
INFORMATION SOLUTIONS
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
1999 1998 1997 Change Change
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AS REPORTED
Net sales and revenues $731,048 $710,221 $634,172 $20,827 3% $76,049 12%
Gross profit $271,576 $251,425 $233,224 $20,151 8% $18,201 8%
% of revenues 37.1% 35.4% 36.8%
SG&A expenses $218,728 $209,227 $189,337 $9,501 5% $19,890 11%
% of revenues 29.9% 29.5% 29.9%
Restructuring charge $0 $0 $3,866
% of revenues 0.6%
Operating income $52,848 $42,198 $40,021 $10,650 25% $2,177 5%
% of revenues 7.2% 5.9% 6.3%
EXCLUDING 1997 RESTRUCTURING AND SPECIAL CHARGES
Net sales and revenues $731,048 $710,221 $634,172 $20,827 3% $76,049 12%
Gross profit $271,576 $251,425 $233,224 $20,151 8% $18,201 8%
% of revenues 37.1% 35.4% 36.8%
SG&A expenses $218,728 $209,227 $188,160 $9,501 5% $21,067 11%
% of revenues 29.9% 29.5% 29.7%
Operating income $52,848 $42,198 $45,064 $10,650 25% ($2,866) -6%
% of revenues 7.2% 5.9% 7.1%
</TABLE>
In fiscal year 1999, Information Solutions sales increased 3% with volume and
price each contributing about half of the increase. In fiscal year 1998,
Information Solutions revenues rose because of the full year effect of 1997
business combinations that contributed about $110,000 of the sales increase.
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
in 1998 to reflect declining paper costs.
In 1999, Information Solutions gross profit margin increased over last year
because of higher sales and the full year benefit of the 1997 restructuring,
which included closing four manufacturing plants. These benefits overcame the
initial negative margin impact of several large new accounts. Information
Solutions gross profit percentage declined in 1998 primarily because of
including lower gross profit margins of businesses acquired (Crain-Drummond and
Vanier Graphics). In 1998, paper costs declined during the year. Gross profit
margins were relatively unaffected by the decline in paper costs because the
company lowered sales prices a comparable amount.
11
<PAGE> 12
Operating income grew 25% in 1999 and operating margins were the highest since
1996. During the last six months of fiscal year 1999, operating margins neared
8%, compared to 5% in the last six months of fiscal year 1998. Operating margins
declined in fiscal year 1998 primarily because businesses acquired in 1997 had
lower operating margins than existing businesses. SG&A expenses were relatively
constant, as a percentage of revenues, during the last three years.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
1999 1998 1997 Change Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues $38,674 $34,497 $30,383 $4,177 12% $4,114 14%
Operating income $20,564 $16,546 $15,101 $4,018 24% $1,445 10%
% of revenues 53.2% 48.0% 49.7%
</TABLE>
Average finance receivables grew 8% in 1999 and 14% in 1998 as a result of
computer systems sales growth. Financial Services revenues grew each of the last
two years because of the increased receivables balances. The average interest
rate earned on the portfolio of finance receivables was relatively stable over
the last three years.
Financial Services' interest rate spread remained strong at 3.7% in 1999,
compared to 3.2% in 1998 and 3.5% in 1997. The 1999 increase in interest rate
spread occurred primarily because of lower borrowing rates on debt. The 1998
decline in the interest rate spread resulted from slightly higher borrowing
rates. Bad debt expenses were $2,550 in 1999, $2,395 in 1998 and $1,600 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
INFORMATION SYSTEMS CASH FLOWS (EXCLUDING FINANCIAL SERVICES)
Information Systems continued to provide strong cash flows from operating
activities in fiscal year 1999. Net cash provided by operating activities was
$145,088 in 1999 compared to $146,248 in 1998. Fiscal year 1999's operating cash
flow resulted primarily from net income adjusted for non-cash charges, such as
depreciation and amortization. This strong cash flow funded the company's
investments for normal operations including capital expenditures of $54,386.
Fiscal year 2000 capital expenditures in the ordinary course of business are
anticipated to be about $65,000 to $70,000. The anticipated increase in fiscal
year 2000 capital expenditures is principally because of the construction of a
new office building near Dayton, Ohio. During fiscal year 1999, the company also
capitalized $16,038 of software licensed to customers, consisting of about
$2,500 of purchased software with the balance representing capitalization of
payroll costs for employees and independent contractors. In October 1998, the
company received about $40,000 of proceeds from the sale of the Healthcare
Systems segment. 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
26.8% at September 30, 1999 and 29.4% at September 30, 1998. Remaining credit
available under a revolving credit agreement was $103,740 at September 30, 1999.
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 2000 normal operations, including the acquisition
of Sterling Direct Inc. See Note 16 to the Consolidated Financial Statements for
additional disclosures regarding this business combination.
The company has consistently produced strong operating cash flows sufficient to
fund normal operations. These cash flows resulted primarily from income, of
which the Automotive Group generates nearly 80% of the total.
12
<PAGE> 13
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 business
combinations and Financial Services' receivables. In fiscal year 1997, the
company filed a shelf registration statement with the Securities and Exchange
Commission whereby the company can issue up to $300,000 of notes. Through
September 30, 1999, 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 2000. 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 16, 1999, none of these preferred shares were 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 $31,316 in 1999, $28,604 in 1998 and $26,056
in 1997. Dividends per Class A common share were $.40 in 1999, $.36 in 1998 and
$.32 in 1997. 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 1999, the board of directors
raised the quarterly dividend 10% to $.11 per Class A common share. The company
has increased cash dividends fourteen times in the ten years since 1989 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 $55,679
of Class A common shares in 1999, $35,583 in 1998 and $46,799 in 1997. Average
prices paid per share were $20.69 in 1999, $19.77 in 1998 and $19.75 in 1997. As
of September 30, 1999, the company could repurchase an additional 2,679 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.
As of November 16, 1999, about 95% of the company's systems were year 2000
qualified. The few remaining systems include non-mission critical internal
systems that are scheduled to be year 2000 qualified by December 31, 1999. In
July 1998, the company released a year 2000 qualified version of its ERA2 retail
management system for automobile dealers. In December 1998, the company
completed the conversion of customers to the new ERA2 software release. 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. The company reinforced this
communication on a number of occasions. The company discontinued 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
13
<PAGE> 14
issues. About 70% of our business partners responded and indicated that their
systems will be year 2000 qualified. 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. As of November 16, 1999, 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. During fiscal year 1999, year 2000 compliance costs were about $7,000
bringing the total amount spent on year 2000 compliance efforts to $14,000. The
company estimates that the total costs (including costs already incurred) to
make all systems year 2000 qualified will be about $15,000. 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
In addition to the year 2000 remediation efforts, the company has also focused
on year 2000 contingency planning. Through a customer-oriented risk assessment
process, the company identified areas where contingency strategies needed to be
developed. Detailed contingency plans have been developed for all identified
areas and testing of these plans will continue through the remainder of calendar
year 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. The company does not use
financial instruments for trading purposes.
Because fixed rate finance receivables are primarily 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 11% of
net sales and revenues in 1999. 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
14
<PAGE> 15
to changes in foreign currency exchange rates. At September 30, 1999, the
company had no foreign currency exchange contracts outstanding. Based on the
company's overall foreign currency exchange rate exposure at September 30, 1999,
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 delay the effective date of the increase. When paper costs increase,
the company typically 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
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age background information and business experience 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 2000 Annual Meeting of
Shareholders captioned "ELECTION OF DIRECTORS."
15
<PAGE> 16
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, 1999, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David R. Holmes 59 Chairman of the Board and Chief Executive Officer
Lloyd G. Waterhouse 48 President and Chief Operating Officer
Richard H. Grant, Jr. 86 Chairman of the Steering Committee and Director
Robert C. Nevin 59 President, Automotive Group
Rodney A. Hedeen 51 President, Information Solutions Group
Dale L. Medford 49 Corporate Vice President, Finance and Chief Financial
Officer, and Director
Adam M. Lutynski 57 General Counsel and Secretary
Michael J. Gapinski 49 Treasurer and Assistant 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. Holmes has been Chairman of the Board and Chief Executive Office since May
1999; prior thereto, Chairman of the Board, President and Chief Executive
Officer.
Mr. Waterhouse has been President and Chief Operating Officer since May 1999;
prior thereto, General Manager of E-Business Services for IBM Corporation from
July 1998 to May 1999; General Manager of Marketing & Business Development for
IBM Global Services from 1996 to July 1998; and Director of Strategy for IBM
from 1994-1995.
Mr. Nevin has been President, Automotive Group (formerly known as Automotive
Division) since January 1997; prior thereto was President, Business Systems
Division.
Mr. Hedeen has been President, Information Solutions Group (formerly known as
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 2000 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, officer and by
all directors and officers as a group as of December 1, 1999 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, 1999, 1998 and 1997
Consolidated Balance Sheets - September 30, 1999 and 1998
Statements of Consolidated Shareholders' Equity and Comprehensive
Income - For The Years Ended
September 30, 1999, 1998 and 1997
Statements of Consolidated Cash Flows - For the Years Ended September
30, 1999, 1998 and 1997
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, 1999 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; incorporated by reference to Exhibit (10)(a) to Form 10-K for the
fiscal year ended September 30, 1998.
------------------ -----------------------------------------------------------------------------------------
(10)(b) * Employment Agreement with Lloyd G. Waterhouse, dated as of May 1, 1999; incorporated by
reference to Exhibit (10)(zz) to the Company's Form 10-Q (File No. 1-10147) for the
quarter ended March 31, 1999.
------------------ -----------------------------------------------------------------------------------------
(10)(c) * 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)(d) * 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)(e) * 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)(f) * 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)(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; incorporated by reference to Exhibit (10)(g) to Form 10-K
for the fiscal year ended September 30, 1998.
------------------ -----------------------------------------------------------------------------------------
(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.
------------------ -----------------------------------------------------------------------------------------
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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; incorporated by reference to Exhibit (10)(ff) to Form
10-K for the fiscal year ended September 30, 1998.
------------------ -----------------------------------------------------------------------------------------
(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.
------------------ -----------------------------------------------------------------------------------------
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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; incorporated by reference to Exhibit (10)(oo) to
Form 10-K for the fiscal year ended September 30, 1998.
------------------ -----------------------------------------------------------------------------------------
(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.
------------------ -----------------------------------------------------------------------------------------
(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.
------------------ -----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
<S> <C>
(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.
(B) REPORTS ON FORM 8-K.
During the quarter ended September 30, 1999, no reports on Form 8-K were filed
by registrant.
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
22
<PAGE> 23
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 1999 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, 1999
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, 1999
By /S/ DAVID R. HOLMES
---------------------------------------
DAVID R. HOLMES
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
23
<PAGE> 24
Date: December 28, 1999
By /S/ DALE L. MEDFORD
---------------------------------------
DALE L. MEDFORD
Corporate Vice President, Finance and Chief
Financial Officer (Principal Financial and
Accounting Officer) and Director
Date: December 28, 1999
By /S/ JAMES L. ARTHUR
---------------------------------------
JAMES L. ARTHUR, Director
Date: December 28, 1999
By /S/ DR. DAVID E. FRY
---------------------------------------
DR. DAVID E. FRY, Director
Date: December 28, 1999
By /S/ RICHARD H. GRANT, JR.
---------------------------------------
RICHARD H. GRANT, JR.
Chairman of the Steering
Committee and Director
Date: December 28, 1999
By /S/ RICHARD H. GRANT, III
---------------------------------------
RICHARD H. GRANT, III, Director
Date: December 28, 1999
By /S/ CLEVE L. KILLINGSWORTH, JR.
---------------------------------------
CLEVE L. KILLINGSWORTH, JR.
Director
Date: December 28, 1999
By /S/ ALLAN Z. LOREN
---------------------------------------
ALLAN Z. LOREN, Director
24
<PAGE> 25
Date: December 28, 1999
By /S/ PHILIP A. ODEEN
---------------------------------------
PHILIP A. ODEEN, Director
Date: December 28, 1999
By /S/ DONALD K. PETERSON
---------------------------------------
DONALD K. PETERSON, Director
Date: December 28, 1999
By /S/ GAYLE B. PRICE, JR.
---------------------------------------
GAYLE B. PRICE, JR., 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, 1999
The Reynolds and Reynolds Company
Dayton, Ohio
26
<PAGE> 27
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
November 16, 1999
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 six 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 and Corporate Vice President, 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, 1999 and 1998 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, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, 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.
As discussed in Note 1 to the Consolidated Financial Statements, the company
changed its method of accounting for software revenue recognition effective
October 1, 1998.
DELOITTE & TOUCHE LLP
Dayton, Ohio
November 16, 1999
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, (12) Registration Statement No. 333-12967 on
Form S-3, (13) Registration Statement No. 333-72639 on Form S-3, (14)
Registration Statement No. 333-85177 on Form S-8, (15) Registration Statement
No. 333-85179 on Form S-8, and (16) Registration Statement No. 333-85551 on Form
S-8, of our report dated November 16, 1999, appearing in this Annual Report on
Form 10-K of The Reynolds and Reynolds Company for the year ended September 30,
1999, 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 28, 1999
29
<PAGE> 30
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share data)
<TABLE>
<CAPTION>
For The Years Ended September 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Net Sales and Revenues
<S> <C> <C> <C>
Information systems
Products $1,042,836 $1,039,626 $ 953,106
Services 481,521 411,840 361,850
---------- ---------- ------------
Total information systems 1,524,357 1,451,466 1,314,956
Financial services 38,674 34,497 30,383
---------- ---------- ------------
Total net sales and revenues 1,563,031 1,485,963 1,345,339
---------- ---------- -----------
Costs and Expenses
Cost of sales
Products 633,244 630,818 569,979
Services 186,515 168,702 148,536
---------- ---------- -----------
Total cost of sales 819,759 799,520 718,515
Selling, general and administrative expenses 519,851 465,137 429,529
Restructuring charge 23,912
Financial services 18,110 17,951 15,282
---------- ---------- -----------
Total costs and expenses 1,357,720 1,282,608 1,187,238
---------- ---------- -----------
Operating Income 205,311 203,355 158,101
---------- ---------- -----------
Other Charges (Income)
Interest expense 13,201 15,196 10,443
Interest income (6,971) (2,505) (2,306)
Other (173) 2,641 2,269
---------- ---------- -----------
Total other charges 6,057 15,332 10,406
---------- ---------- -----------
Income Before Income Taxes 199,254 188,023 147,695
Provision for Income Taxes 82,318 74,467 67,204
---------- ---------- -----------
Income from Continuing Operations 116,936 113,556 80,491
Discontinued Operations 5,785 (10,449) (21,272)
---------- ---------- -----------
Net Income $ 122,721 $ 103,107 $ 59,219
========== ========== ===========
Basic Earnings Per Common Share
Income from continuing operations $1.49 $1.43 $.99
Discontinued operations $ .07 $(.13) $(.26)
Net income $1.57 $1.30 $.73
Average number of common shares outstanding 78,254 79,451 81,462
Diluted Earnings Per Common Share
Income from continuing operations $1.46 $1.40 $.96
Discontinued operations $ .07 $(.13) $(.25)
Net income $1.53 $1.27 $.70
Average number of common shares and
equivalents outstanding 80,340 81,146 84,023
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $ 103,595 $ 39,980
---------- ------------
Accounts receivable (less allowance for doubtful accounts:
1999--$4,959; 1998--$6,781) 244,029 227,158
---------- ------------
Inventories
Finished products 63,647 54,778
Work in process 6,033 5,795
Raw materials and supplies 7,015 5,623
---------- ------------
Total inventories 76,695 66,196
---------- ------------
Deferred income taxes 24,150 17,483
---------- ------------
Prepaid expenses and other assets 19,128 21,230
---------- ------------
Total current assets 467,597 372,047
---------- ------------
Property, Plant and Equipment
Land and improvements 14,236 14,153
Buildings and improvements 92,267 89,804
Computer equipment 134,394 135,328
Machinery and equipment 111,251 101,904
Furniture and other 48,203 39,137
Construction in progress 12,164 9,108
---------- ------------
Total property, plant and equipment 412,515 389,434
Less accumulated depreciation 224,741 215,208
---------- ------------
Net property, plant and equipment 187,774 174,226
---------- ------------
Intangible Assets
Goodwill 65,811 82,280
Software licensed to customers 20,407 11,882
Other 2,708 5,445
---------- ------------
Total intangible assets 88,926 99,607
---------- ------------
Other Assets 90,197 100,681
---------- ------------
Total Information Systems Assets 834,494 746,561
---------- ------------
FINANCIAL SERVICES ASSETS
Finance Receivables 426,751 408,765
Cash and Other Assets 840 2,394
---------- ------------
Total Financial Services Assets 427,591 411,159
---------- ------------
TOTAL ASSETS $1,262,085 $ 1,157,720
========== ============
</TABLE>
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INFORMATION SYSTEMS LIABILITIES
Current Liabilities
Current portion of long-term debt $ 6,087 $ 6,048
Notes payable 777
Accounts payable
Trade 70,846 68,749
Other 6,317 6,193
Accrued liabilities
Compensation and related items 54,453 51,188
Other 49,488 60,479
Deferred revenues 24,768 4,774
----------- ----------
Total current liabilities 211,959 198,208
----------- ----------
Long-Term Debt 163,985 161,541
----------- ----------
Other Liabilities
Postretirement medical 45,758 43,523
Pensions 42,880 37,107
Other 4,999 3,073
----------- ----------
Total other liabilities 93,637 83,703
----------- ----------
Total Information Systems Liabilities 469,581 443,452
----------- ----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 219,423 210,561
Deferred Income Taxes 106,232 96,371
Other Liabilities 3,414 2,885
----------- ----------
Total Financial Services Liabilities 329,069 309,817
----------- ----------
SHAREHOLDERS' EQUITY
Capital Stock
Preferred
Class A common 78,598 57,610
Class B common 625 625
Other Comprehensive Income (9,448) (9,727)
Retained Earnings 393,660 355,943
---------- ----------
Total Shareholders' Equity 463,435 404,451
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,262,085 $1,157,720
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE> 32
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands except per share data)
<TABLE>
<CAPTION>
For The Years Ended September 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Stock
Class A common
Balance, beginning of year $ 57,610 $ 53,269 $ 50,601
Capital stock issued 19,101 5,967 4,039
Capital stock repurchased (1,991) (1,206) (1,481)
Capital stock retired (1,163) (1,463) (1,327)
Tax benefits from stock options 5,041 1,043 1,437
--------- --------- --------
Balance, end of year 78,598 57,610 53,269
--------- --------- --------
Class B common 625 625 625
--------- --------- --------
Other Comprehensive Income
Balance, beginning of year (9,727) (5,481) (6,203)
Foreign currency translation 780 (1,487) (212)
Minimum pension liability (501) (2,759) 934
--------- --------- --------
Balance, end of year (9,448) (9,727) (5,481)
--------- --------- --------
Retained Earnings
Balance, beginning of year 355,943 315,817 327,972
Net income 122,721 103,107 59,219
Cash dividends
Class A common (1999--$.40 PER SHARE;
1998--$.36 per share; 1997--$.32 per share) (30,916) (28,244) (25,736)
Class B common (1999--$.02 PER SHARE;
1998--$.018 per share; 1997--$.016 per share) (400) (360) (320)
Capital stock repurchased (53,688) (34,377) (45,318)
--------- --------- --------
Balance, end of year 393,660 355,943 315,817
--------- --------- --------
Total Shareholders' Equity $463,435 $ 404,451 $364,230
========= ========= ========
Comprehensive Income
Net income $122,721 $ 103,107 $ 59,219
Foreign currency translation 780 (1,487) (212)
Minimum pension liability (501) (2,759) 934
--------- --------- --------
Total comprehensive income $123,000 $ 98,861 $ 59,941
========= ========= ========
</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 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
INFORMATION SYSTEMS
<S> <C> <C> <C>
Cash Flows Provided by Operating Activities $145,088 $ 146,248 $149,325
-------- --------- --------
Cash Flows Provided by (Used for) Investing Activities
Business combinations (1,203) (145,347)
Capital expenditures (54,386) (34,266) (47,707)
Net proceeds from sales of assets 53,073 17,279 18,307
Capitalization of software licensed to customers (16,038) (4,041) (1,465)
(Advances to) repayments from financial services 4,369 (5,375) 6,368
-------- --------- --------
Net cash used for investing activities (12,982) (27,606) (169,844)
-------- --------- --------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 47,204 2,126 145,641
Principal payments on debt (45,547) (25,335) (57,122)
Cash dividends paid (31,316) (28,604) (26,056)
Capital stock issued 16,067 2,617 1,541
Capital stock repurchased (55,679) (35,583) (46,799)
-------- --------- --------
Net cash provided by (used for) financing activities (69,271) (84,779) 17,205
-------- --------- --------
Effect of Exchange Rate Changes on Cash 780 (1,487) (212)
-------- --------- --------
Increase (Decrease) in Cash and Equivalents 63,615 32,376 (3,526)
Cash and Equivalents, Beginning of Year 39,980 7,604 11,130
-------- --------- --------
Cash and Equivalents, End of Year $103,595 $ 39,980 $ 7,604
======== ========= ========
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $ 19,580 $ 19,482 $ 19,875
-------- --------- --------
Cash Flows Provided by (Used for) Investing Activities
Finance receivables originated (152,815) (145,808) (142,588)
Collections on finance receivables 127,315 109,886 92,305
-------- --------- --------
Net cash used for investing activities (25,500) (35,922) (50,283)
-------- --------- --------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 35,760 69,993 91,258
Principal payments on debt (26,898) (57,746) (54,855)
Advances from (repayments to) information systems (4,369) 5,375 (6,368)
-------- --------- --------
Net cash provided by financing activities 4,493 17,622 30,035
-------- --------- --------
Increase (Decrease) in Cash and Equivalents (1,427) 1,182 (373)
Cash and Equivalents, Beginning of Year 2,102 920 1,293
--------- --------- --------
Cash and Equivalents, End of Year $ 675 $ 2,102 $ 920
========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Information Solutions Groups. 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 Information
Solutions and Automotive business forms inventories are determined by the
last-in, first-out (LIFO) method. At September 30, 1999 and 1998, LIFO
inventories were $67,301 and $56,913, respectively. These inventories determined
by the first-in, first-out (FIFO) method would increase by $5,161 in 1999 and
$5,068 in 1998. 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 $9,826 in 1999, $15,258 in 1998 and $15,066 in 1997. Amortization
expense in 1997 included $3,560 from restructuring and special charges. At
September 30, 1999 and 1998, accumulated amortization was $65,005 and $62,626,
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 $1,642 in 1999, $5,872 in 1998
and $9,188 in 1997. Amortization expense in 1997 included $3,920 from
restructuring and special charges. At September 30, 1999 and 1998, accumulated
amortization was $46,572 and $58,025, respectively.
Other intangible assets are amortized over periods ranging from three to fifteen
years. Amortization expense was $866 in 1999, $2,492 in 1998 and $2,885 in 1997.
At September 30, 1999 and 1998, accumulated amortization was $9,697 and $15,728,
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 is accounted for under the
equity method. Accordingly, the investment in Kalamazoo's common stock is
included in the balance sheet as other assets and the company's share of
Kalamazoo's net losses is included in the consolidated income statement as other
charges. The company recorded its share of Kalamazoo's net losses of $3,043 in
1999, $3,225 in 1998 and $3,850 in 1997. At September 30, 1999, the market value
of the company's share of Kalamazoo's stock was about $20,500.
REVENUE RECOGNITION
ACCOUNTING CHANGE
In October 1997, the American Institute of Certified Public Accountants 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 recognizing revenue on
software transactions. The company adopted this pronouncement effective October
1, 1998. The adoption of this pronouncement reduced the Automotive Group
computer systems products revenues $17,936, gross profit $11,205,
35
<PAGE> 36
operating income $10,624 and net income $6,204 or $.08 per diluted share during
the six months ended March 31, 1999. The company completed the transition period
for the adoption of SOP 97-2 as of March 31, 1999, and there was no impact on
third or fourth quarter's operating results.
INFORMATION SYSTEMS
Sales of computer hardware and business forms products 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.
Revenues from software license fees are recorded over the installation period.
Service revenues, which include computer hardware maintenance, software support,
training and forms management services, are recorded ratably over the contract
period or as services are performed. Forms management services represent fees
for inventory management and warehousing services. Forms management services may
be included in product sales or separately billed to customers.
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. Certain of these leases contain renewal and purchase options
and residual value guarantees. As of September 30, 1999, future minimum lease
payments relating to operating lease agreements were $109,191 with annual
payments of $35,347 in 2000, $23,874 in 2001, $17,439 in 2002, $9,160 in 2003
and $5,818 in 2004. Rental expenses were $37,804 in 1999, $37,210 in 1998 and
$36,018 in 1997. 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.
RESEARCH AND DEVELOPMENT COSTS
The company expenses research and development costs as incurred. These costs
were $54,960 in 1999, $46,588 in 1998 and $43,052 in 1997. 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, 1999, were $24,702. 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.
36
<PAGE> 37
2. DISCONTINUED OPERATIONS
On October 23, 1998, the company sold essentially all net assets of its
Healthcare Systems segment to InfoCure Corporation for about $50,000. The
proceeds consisted of about $40,000 of cash with the balance in subordinated
notes. The company recorded a gain on the sale of $5,785 (net of income taxes of
$2,064) or $.07 per diluted share in the first quarter of fiscal year 1999.
About $1,200 of Healthcare Systems operating losses, net of income taxes of
about $800, from October 1, 1998 through October 23, 1998, were included in the
determination of the gain on the sale of the Healthcare Systems segment. As
discontinued operations, the operating results of Healthcare Systems were
segregated from continuing operations and reported as a separate line on the
consolidated statement of income. Revenues reclassified to discontinued
operations were $48,226 in 1998 and $40,346 in 1997. Net assets of about $27,000
at September 30, 1998 were included in the company's consolidated balance sheet.
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 and $23,902 of other special
charges. 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 four businesses in fiscal year 1997 with annual sales of
$271,000. 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. This goodwill is being amortized on a straight-line basis over
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 $2,048 in 1999, $2,071 in 1998 and $3,728 in 1997.
Contingent payments may be made through 2006.
COMPONENTS OF PURCHASE PRICES
1999 1998 1997
- --------------------------------------------------------------------------------
Cash (net of cash and equivalents acquired) $ 565 $142,022
Contingent payments
Cash 638 3,325
Capital stock issued (1999 - 88 SHARES;
1998 - 105 shares; 1997 - 44 shares) $1,871 1,933 1,171
------ ------ --------
Totals $1,871 $3,136 $146,518
====== ====== ========
38
<PAGE> 39
5. INCOME TAXES
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $61,594 $52,647 $49,959
State and local 10,718 9,663 13,095
Foreign 2,081 1,076 647
Deferred 7,925 11,081 3,503
------- ------- -------
Provision for income taxes $82,318 $74,467 $67,204
======= ======= =======
Income taxes paid (net of refunds) $64,903 $63,685 $60,101
======= ======= =======
</TABLE>
RECONCILIATION OF INCOME TAX RATES
<TABLE>
<CAPTION>
1999 1998 1997
AMOUNT PERCENT Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Statutory federal income taxes $69,739 35.0% $65,808 35.0% $51,693 35.0%
State and local taxes less federal
income tax effect 8,266 4.2 8,409 4.5 8,733 5.9
Tax audit settlements (1,058) (.5) (4,910) (2.6)
Goodwill amortization 2,636 1.3 2,458 1.3 3,675 2.5
In-process research and development 1,348 .9
Other 2,735 1.3 2,702 1.4 1,755 1.2
------- ---- ------- ---- ------- ----
Provision for income taxes $82,318 41.3% $74,467 39.6% $67,204 45.5%
======= ==== ======= ==== ======= ====
</TABLE>
INFORMATION SYSTEMS DEFERRED INCOME TAX ASSETS (LIABILITIES)
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Postretirement medical $19,598 $18,421
Pensions 20,330 14,463
Acquired net operating losses 863 3,400
Software revenue recognition 4,572
Capital losses 2,011
Other 24,894 23,313
Deferred income tax liabilities
Depreciation (9,340) (2,611)
Capital losses valuation allowance (2,011)
Other (16,660) (13,501)
------- -------
Totals 44,257 43,485
Current 24,150 17,483
------- -------
Noncurrent $20,107 $26,002
======= =======
</TABLE>
The carryforward of net operating losses expires primarily in 2006.
39
<PAGE> 40
6. FINANCIAL SERVICES
INCOME STATEMENTS
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $38,674 $34,497 $30,383
------- ------- -------
Expenses
Interest expense 13,108 13,241 11,410
Allowance for losses 2,550 2,395 1,600
General and administrative 2,452 2,315 2,272
------- ------- -------
Total expenses 18,110 17,951 15,282
------- ------- -------
Income before income taxes 20,564 16,546 15,101
Provision for income taxes 7,999 6,642 5,972
------- ------- -------
Net income $12,565 $ 9,904 $ 9,129
======= ======= =======
</TABLE>
FINANCE RECEIVABLES
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product financing receivables $474,667 $458,501
Unguaranteed residual values 38,418 33,289
Allowance for losses (6,581) (4,540)
Unearned interest income (82,855) (81,327)
Other 3,102 2,842
-------- --------
Totals $426,751 $408,765
======== ========
</TABLE>
As of September 30, 1999, product financing receivables due for each of the next
five years were $163,921 in 2000, $128,607 in 2001, $95,491 in 2002, $61,410 in
2003 and $24,695 in 2004.
ALLOWANCE FOR LOSSES
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $4,540 $3,571
Provisions
Financial services 2,550 2,395
Information systems 2,005 135
Net losses (2,514) (1,561)
------ ------
Balance, end of year $6,581 $4,540
====== ======
</TABLE>
40
<PAGE> 41
7. FINANCING ARRANGEMENTS
INFORMATION SYSTEMS
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term notes, weighted average interest rate
of 7.3% at September 30, 1998 $ 777
=====
Fixed rate notes, $100,000 face value, interest rate of 7.0%, maturing in 2007 $ 99,647 $ 99,598
Fixed rate notes, weighted average interest rate
of 6.7%, maturing through 2003 22,857 28,571
Variable rate notes, weighted average interest rate of 5.1% at September 30,
1999 and 6.1% at September 30, 1998, maturing through 2001 46,322 37,891
Capital lease obligation, weighted average interest rate of 6.7% at September 30, 1999
and September 30, 1998, maturing through 2002 1,246 1,529
-------- --------
Totals 170,072 167,589
Current portion 6,087 6,048
-------- --------
Long-term portion $163,985 $161,541
======== ========
</TABLE>
Loan agreements limit consolidated indebtedness and require a minimum
consolidated net worth. The fair values of Information Systems financing
arrangements were $161,942 at September 30, 1999 and $169,562 at September 30,
1998. At September 30, 1999, debt maturities were $6,087 in 2000, $52,435 in
2001, $6,189 in 2002 and $5,714 in 2003. Interest paid was $13,250 in 1999,
$11,698 in 1998 and $7,620 in 1997.
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, 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Variable rate instruments, maturing through 2004 $124,659 $60,898
Weighted average interest rate 5.8%
Weighted average pay rate 5.9%
Weighted average receive rate 5.4%
Fixed rate notes, maturing through 2001 94,764
Weighted average interest rate 6.2%
-------- -------
Totals $219,423 $60,898
======== =======
September 30, 1998
- -------------------------------------------------------------------------------------------------------------
Variable rate instruments, maturing through 2002 $ 71,495 $32,246 $1,875
Weighted average interest rate 6.0%
Weighted average pay rate 5.6%
Weighted average receive rate 5.6%
Weighted average ceiling interest rate 7.7%
Fixed rate notes, maturing through 2001 139,066
Weighted average interest rate 6.2%
-------- ------- ------
Totals $210,561 $32,246 $1,875
======== ======= ======
</TABLE>
Loan agreements limit consolidated indebtedness and require a minimum
consolidated net worth. The fair value of Financial Services debt was $218,246
and $211,563 at September 30, 1999 and 1998, respectively. At September 30,
1999, maturities of notes were $65,383 in 2000, $68,655 in 2001, $75,760 in
2002, $7,625 in 2003 and $2,000 in 2004. Interest paid was $13,262 in 1999,
$12,814 in 1998 and $11,178 in 1997.
At September 30, 1999, notional amount maturities of swap agreements were
$19,057 in 2000, $17,716 in 2001, $14,500 in 2002, $7,625 in 2003 and $2,000 in
2004. The fair values of interest rate swap agreements were $(277) and $415 at
September 30, 1999 and 1998, respectively. The fair values of interest rate
ceiling agreements were $0 at September 30, 1998. 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.
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, 1999, available balances under these agreements were $103,740.
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>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred
No par value
Authorized shares 60,000 60,000 60,000
Class A common
No par value
Authorized shares 240,000 240,000 240,000
======= ======= =======
Issued and outstanding shares
Balance, beginning of year 77,757 78,986 80,961
Issued 1,519 644 447
Repurchased (2,691) (1,800) (2,369)
Retired (53) (73) (53)
------- ------ ------
Balance, end of year 76,532 77,757 78,986
======= ====== ======
Class B common
No par value
Authorized shares 40,000 40,000 40,000
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
$20.69 in 1999, $19.77 in 1998 and $19.75 in 1997. The remaining balance of
shares authorized for repurchase by the board of directors was 2,679 at
September 30, 1999. Treasury shares at September 30 were 15,654 in 1999, 14,482
in 1998, and 13,327 in 1997.
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,
1999, only one grant of stock options was made at a price below fair market
value. That nonqualified option grant was for 200 Class A common shares at an
option price of $.01 per share. The company recognized $1,001 of compensation
expense in fiscal year 1999. At September 30, 1999, options to purchase 2,560
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
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
Beginning of year 10,615 8,788 7,605 $16.30 $14.97 $12.16
Granted 5,149 2,735 1,712 18.55 19.61 26.47
Exercised (1,431) (540) (403) 11.33 7.56 8.00
Canceled (658) (368) (126) 20.12 22.07 23.98
------ ------ -----
End of year 13,675 10,615 8,788 17.48 16.30 14.97
====== ====== =====
Exercisable at September 30 5,049 1,441 1,367 13.55 11.52 8.31
===== ===== =====
Outstanding, September 30, 1999 Exercisable, September 30, 1999
</TABLE>
<TABLE>
<CAPTION>
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>
$ .01 200 9.6 $ .01
$ 1.64 - $14.07 3,712 4.0 11.96 3,712 $11.96
$14.69 - $17.44 4,388 7.7 16.88 926 15.66
$18.03 - $21.94 3,806 8.9 20.96 217 20.12
$22.22 - $27.13 1,569 7.4 25.99 194 26.50
----- -----
Totals 13,675 7.0 17.48 5,049 13.55
====== =====
</TABLE>
The company accounts for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and follows the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 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 at fair market value was $4.91 in 1999, $6.05 in 1998 and $7.49
in 1997. The fair value of the company's stock options granted below fair market
value was $23.04 in 1999. Had compensation expense been recognized using these
fair values, the company's net income and diluted earnings per common share
would have decreased by $8,152 or $.10 per share in 1999, $5,885 or $.07 per
share in 1998 and $3,645 or $.04 per share in 1997.
44
<PAGE> 45
OPTION VALUATION ASSUMPTIONS
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life in years 5 5 5
Dividend yield 1.5% 1.4% 1.48%
Risk free interest rate 4.3% 5.9% 6.4%
Volatility 29% 28% 23%
</TABLE>
10. EARNINGS PER COMMON SHARE
Basic earnings per common share (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. Employee stock options to
purchase 2,617, 2,956 and 1,234 of common stock were outstanding during 1999,
1998 and 1997, 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.
COMPUTATION OF BASIC AND DILUTED EPS
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $116,936 $113,556 $80,491
======== ======== =======
Average number of common shares outstanding
(used to determine basic EPS) 78,254 79,451 81,462
Effect of employee stock options 2,086 1,695 2,561
------- ------- -------
Average number of common shares and equivalents
outstanding (used to determine diluted EPS) 80,340 81,146 84,023
====== ====== ======
</TABLE>
45
<PAGE> 46
11. POSTRETIREMENT BENEFITS
PENSION EXPENSE
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net periodic pension cost
Service cost $12,517 $ 8,927 $ 8,119
Interest cost 16,548 14,838 10,886
Estimated return on plan assets (14,863) (12,629) (9,395)
Amortization of unrecognized transitional (liability) asset 147 129 (663)
Amortization of prior service cost 239 268 313
Recognized net acturial losses 2,131 628 982
Plan administration 813 730 729
Special termination benefits 1,971 8,430
------- ------- -------
Net periodic pension cost 19,503 12,891 19,401
Defined contribution plans 9,045 8,715 6,647
Multi-employer plans 175 235 265
------- ------- -------
Totals $28,723 $21,841 $26,313
======= ======= =======
Actuarial assumptions
Discount rate 6.0% - 6.75% 7.12% - 8.0% 7.25% - 8.0%
Rate of compensation increase 3.75% - 5.0% 3.75% - 5.0% 3.75% - 5.0%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
Acturial 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.
The company expensed special termination benefits of $1,971 in 1999 in
connection with the sale of the Healthcare Systems segment and $8,430 in 1997 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.
The company sponsors defined contribution savings plans covering most domestic
employees. Generally, contributions are funded monthly and represent 40% of the
first 3% of compensation contributed to the plan by participating employees. The
company also funds a discretionary contribution. Contributions for this portion
of the plan are funded annually based on the company's return on equity and
contributions are the same for each eligible employee. Forfeitures of nonvested
discretionary contributions are used to reduce contributions required by the
company.
46
<PAGE> 47
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in projected benefit obligation
Projected benefit obligation, beginning of year $243,662 $196,432
Service cost 12,400 8,941
Interest cost 16,595 14,724
Actuarial (gains) losses (2,377) 36,637
Benefits paid (9,602) (9,554)
Plan settlement (3,476)
Employee contributions (168)
Plan merger 886
Foreign currency translation 1,576 (3,518)
-------- --------
Projected benefit obligation, end of year $259,496 $243,662
======== ========
Change in plan assets
Fair value of plan assets, beginning of year $174,578 $148,467
Actual return on plan assets 21,629 25,672
Administrative expenses paid (639) (810)
Employer contributions 8,800 13,832
Plan settlement (3,720)
Employee contributions (205) 54
Plan merger 886
Benefits paid (9,635) (8,713)
Foreign currency translation 1,712 (3,924)
-------- --------
Fair value of plan assets, end of year $193,406 $174,578
======== ========
Net amount recognized
Funded status $ 66,090 $ 69,084
Unrecognized transition obligation (1,343) (1,628)
Unrecognized prior service cost (1,458) (1,753)
Unrecognized net losses (23,590) (36,745)
Multi-employer liability 145 154
Minimum pension liability 12,735 12,385
-------- --------
Net amount recognized $ 52,579 $ 41,497
======== ========
Minimum pension liability
Intangible asset $ 2,509 $ 3,000
Deferred income tax benefit 4,117 3,777
Accumulated other comprehensive income 6,109 5,608
-------- --------
Totals $ 12,735 $ 12,385
======== ========
Actuarial assumptions
Projected benefit obligation discount rate 6.0% - 7.0% 7.0% - 7.25%
Rate of compensation increase 3.75% - 5.0% 3.75% - 5.0%
</TABLE>
At September 30, 1999 and 1998, about 44% and 47% 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.
The company sponsors certain unfunded pension plans. These pension plans have
accumulated benefit obligations exceeding plan assets. The projected benefit
obligations were $53,387 and $49,511 at September 30, 1999 and 1998,
respectively. The accumulated benefit obligations were $50,416 and $44,851 at
September 30, 1999 and 1998, respectively.
47
<PAGE> 48
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $1,311 $1,129 $1,131
Interest cost 3,635 3,456 3,265
Amortization of prior service cost (110) 2
Recognized net acturial losses 285
Special termination benefits 731
------ ------ ------
Totals $5,121 $4,587 $5,127
====== ====== ======
Actuarial assumptions
Discount rate 6.75% 7.0% 8.0%
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. The company also sponsors a
defined benefit life insurance plan for substantially all employees.
The company funds medical and life insurance benefits on a pay-as-you-go basis.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in projected benefit obligation
Benefit obligation, beginning of year $53,512 $44,284
Service cost 1,311 1,129
Interest cost 3,635 3,456
Plan participants' contributions 172 189
Actuarial (gains) losses (5,150) 8,460
Benefits paid (2,591) (2,581)
Change in plan amendments (3,501) (1,425)
--------- ---------
Benefit obligation, end of year $47,388 $53,512
======= =======
Funded status of plans
Net amount recognized $47,388 $53,512
Unrecognized prior service cost 4,816 1,425
Unrecognized net losses (3,507) (8,974)
--------- ---------
Accrued benefit cost $48,697 $45,963
======= =======
Acturial assumptions
Discount rate 7.0% 7.0%
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 1999 postretirement
medical insurance by $202 and the September 30, 1999 accumulated benefit
obligation by $2,641. Similiary, a 1% decrease would have decreased the
components by $161 and the September 30, 1999 accumulated benefit obligation by
$2,538.
48
<PAGE> 49
12. CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
INFORMATION SYSTEMS
<S> <C> <C> <C>
Cash flows provided by (used for) operating activities
Net income $110,156 $ 93,203 $ 50,090
Adjustments to reconcile net income to net cash
provided by operating activities
Purchased in-process research and development costs 14,850
Depreciation and amortization 47,344 59,562 60,636
Deferred income taxes (433) (1,201) (13,173)
Deferred income taxes transferred to
financial services 5,507 5,361 4,001
Loss (gain) on sales of assets (6,664) (627) 4,215
Changes in operating assets and liabilities
Accounts receivable (13,305) (33,074) (9,216)
Inventories (11,925) 9,537 8,525
Prepaid expenses, intangible and other assets (2,180) 3,108 6,619
Accounts payable 3,746 11,473 3,197
Accrued and other liabilities 12,842 (1,094) 19,581
-------- -------- --------
Net cash provided by operating activities $145,088 $146,248 $149,325
======== ======== ========
FINANCIAL SERVICES
Cash flows provided by (used for) operating activities
Net income $ 12,565 $ 9,904 $ 9,129
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes 9,861 12,182 13,008
Deferred income taxes transferred from
information systems (5,507) (5,361) (4,001)
Changes in receivables, other assets
and other liabilities 2,661 2,757 1,739
-------- -------- --------
Net cash provided by operating activities $ 19,580 $ 19,482 $ 19,875
======== ======== ========
</TABLE>
49
<PAGE> 50
13. SEGMENT REPORTING
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>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States
Net sales and revenues $1,400,456 $1,326,454 $1,275,649
Long-lived assets 328,490 330,691 363,423
Canada
Net sales and revenues 172,670 166,507 74,939
Long-lived assets 18,300 17,821 19,240
Elimination of intersegment sales (10,095) (6,998) (5,249)
Totals
Net sales and revenues 1,563,031 1,485,963 1,345,339
Long-lived assets 346,790 348,512 382,663
</TABLE>
BUSINESS SEGMENTS
The Automotive Group provides integrated computer systems products and services,
along with printed business forms to the automotive market. The group'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 Information Solutions Group manufactures and distributes printed business
forms and systems, custom continuous and snap out forms, specialty printed
products and provides forms management services to general business markets.
Financial Services provides financing for the company's computer systems
products primarily to the automotive market.
Discontinued operations represents the company's Healthcare Systems segment 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>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Automotive
Net sales and revenues
Computer services $ 439,427 $ 375,467 $ 325,770
Business forms products 182,333 185,282 189,734
Computer systems products 171,549 181,109 165,641
---------- ---------- ----------
Total net sales and revenues 793,309 741,858 681,145
Operating income 161,438 160,858 125,245
Total assets 251,436 242,259 270,214
Investments in equity method investees 31,908 36,096 38,375
Depreciation and amortization 27,572 35,886 39,535
Capital expenditures 22,535 19,983 24,325
Information solutions
Net sales and revenues
Business forms products 686,585 670,007 593,699
Services and computer systems products 44,463 40,214 40,473
---------- ---------- ----------
Total net sales and revenues 731,048 710,221 634,172
Operating income 52,848 42,198 40,021
Total assets 389,823 360,417 355,671
Depreciation and amortization 16,465 15,017 13,819
Capital expenditures 18,426 10,659 16,983
Financial services
Net sales and revenues 38,674 34,497 30,383
Operating income 20,564 16,546 15,101
Total assets 427,591 411,159 373,175
Corporate
Operating expenses (29,539) (16,247) (22,266)
Total assets 193,235 108,597 65,041
Depreciation and amortization 2,961 2,265 1,695
Capital expenditures 13,411 2,234 5,155
Elimination of intersegment sales (613) (361)
Discontinued operations
Total assets 35,288 38,409
Depreciation and amortization 346 6,394 5,587
Capital expenditures 14 1,390 1,244
Totals
Net sales and revenues 1,563,031 1,485,963 1,345,339
Operating income 205,311 203,355 158,101
Total assets 1,262,085 1,157,720 1,102,510
Depreciation and amortization 47,344 59,562 60,636
Capital expenditures 54,386 34,266 47,707
</TABLE>
51
<PAGE> 52
14. CONTINGENCY
The U.S. Environmental Protection Agency (EPA) has designated the company as one
of a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at 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 continued during fiscal year 1999 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 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 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, 2000 (fiscal year 2001 as to the company). The company has not yet
determined the effect of this pronouncement.
16. SUBSEQUENT EVENTS
In August 1999, the board of directors approved the construction of a new office
building near Dayton, Ohio. In October 1999, the company began site excavation.
The building is expected to be completed in 2002 at an estimated cost of about
$45,000.
On October 1, 1999, the company purchased substantially all net assets of
Sterling Direct Inc. for $22,500 of cash. Sterling, a privately-owned provider
of turnkey direct marketing services, has annual sales of about $28,000.
52
<PAGE> 53
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION> First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenues
Information systems $346,180 $382,362 $391,137 $404,678
Financial services 9,370 9,732 9,942 9,630
-------- -------- -------- --------
Totals $355,550 $392,094 $401,079 $414,308
======== ======== ======== ========
Gross profit $155,577 $176,768 $183,510 $188,743
Income from continuing operations $23,081 $30,429 $31,257 $32,169
Basic earnings per common share $.29 $.39 $.40 $.41
Diluted earnings per common share $.29 $.38 $.39 $.40
Net income $28,866 $30,429 $31,257 $32,169
Basic earnings per common share $.37 $.39 $.40 $.41
Diluted earnings per common share $.36 $.38 $.39 $.40
Cash dividends declared per share
Class A common $.10 $.10 $.10 $.10
Class B common $.005 $.005 $.005 $.005
Closing market prices of Class A common shares
High $22.94 $23.25 $23.44 $25.13
Low $16.50 $17.75 $18.31 $20.38
1998
- -----------------------------------------------------------------------------------------------------------------
Net sales and revenues
Information systems $349,721 $364,986 $362,443 $374,316
Financial services 8,097 8,570 8,788 9,042
-------- -------- -------- --------
Totals $357,818 $373,556 $371,231 $383,358
======== ======== ======== ========
Gross profit $156,197 $164,413 $160,464 $170,872
Income from continuing operations $26,148 $28,819 $28,171 $30,418
Basic earnings per common share $.33 $.36 $.35 $.39
Diluted earnings per common share $.32 $.35 $.35 $.38
Net income $23,748 $26,360 $26,049 $26,950
Basic earnings per common share $.30 $.33 $.33 $.34
Diluted earnings per common share $.29 $.32 $.32 $.34
Cash dividends declared per share
Class A common $.09 $.09 $.09 $.09
Class B common $.0045 $.0045 $.0045 $.0045
Closing market prices of Class A common shares
High $21.00 $22.25 $23.88 $18.50
Low $17.00 $17.69 $16.88 $12.63
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
VALUATION ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
(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 (b) Of Year
- --------------------------------------------------- ------------------ ------------ ---------------- ------------- ----------------
Valuation Accounts - Deducted From Assets to Which They Apply
INFORMATION SYSTEMS
<S> <C> <C> <C> <C> <C> <C>
Reserves for accounts receivable:
Year ended September 30, 1999 6,781 2,746 (865) 2,736 967 4,959
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
Reserves for inventory:
Year ended September 30, 1999 6,054 1,305 89 2,840 221 4,387
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
Reserves for notes receivable:
Year ended September 30, 1999 36 0 0 0 0 36
Year ended September 30, 1998 235 0 0 199 0 36
Year ended September 30, 1997 629 57 (336) 115 0 235
FINANCIAL SERVICES
Reserves for finance receivables:
Year ended September 30, 1999 4,540 2,550 2,005 2,514 0 6,581
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
</TABLE>
(a) Includes adjustments from translation of foreign currency to United States
dollars, the effects of acquisitions of business and transfers between
reserves.
(b) Includes adjustments for disposal of businesses.
54
<PAGE> 1
EXHIBIT (21)
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME INCORPORATION OR ORGANIZATION
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Crain-Drummond Inc. Canada
Dataforms, Inc. Wisconsin
Reyna Capital Corporation Ohio
Reynolds and Reynolds (Canada) Limited Canada
Reynolds and Reynolds (Texas) Ltd., LLP Texas
</TABLE>
55
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 103,595
<SECURITIES> 0
<RECEIVABLES> 248,988
<ALLOWANCES> 4,959
<INVENTORY> 76,695
<CURRENT-ASSETS> 467,597
<PP&E> 412,515
<DEPRECIATION> 224,741
<TOTAL-ASSETS> 1,262,085
<CURRENT-LIABILITIES> 211,959
<BONDS> 318,025
0
0
<COMMON> 79,223
<OTHER-SE> 384,212
<TOTAL-LIABILITY-AND-EQUITY> 1,262,085
<SALES> 1,042,836
<TOTAL-REVENUES> 1,524,357
<CGS> 633,244
<TOTAL-COSTS> 819,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,309
<INCOME-PRETAX> 199,254
<INCOME-TAX> 82,318
<INCOME-CONTINUING> 116,936
<DISCONTINUED> 5,785
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122,721
<EPS-BASIC> 1.57
<EPS-DILUTED> 1.53
</TABLE>
