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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, 2000
[ ] 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
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(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.
The aggregate market value of the Class A Common Shares held by non-affiliates
of the registrant, as of December 18, 2000, was $1,428,783,698.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of December 18, 2000:
Class A Common Shares: 71,734,015 (exclusive of 20,417,380 Treasury shares)
Class B Common Shares: 20,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Proxy Statement for 2001 Annual Meeting of Shareholders
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PART I
(Dollars in thousands)
ITEM 1. BUSINESS
The Reynolds and Reynolds Company (the "company") was founded in 1866 and has
been an Ohio corporation since 1889. The company's services include a full range
of retail and enterprise management systems, networking and support, e-business
applications, Web services, learning and consulting services, customer
relationship management solutions and leasing services. During the year, the
company underwent a major transformation on several fronts.
First, the company focused its strategies and efforts on the rapidly
transforming automotive retailing technology marketplace. A significant element
of that strategy was the sale of the Information Solutions Group, the company's
document business.
Second, the company embarked on a multi-faceted plan to expand the scope of its
solutions and to augment existing offerings. As part of this plan, the company
joined forces with other industry leaders to form ChoiceParts LLC, an
independent B2B company that provides an online parts exchange which enables
buyers and sellers in the parts supply chain to instantly locate, order and
sell repair parts. In addition, the company also acquired HAC Group, LLC, the
world's leading provider of learning, customer relationship management (CRM)
and e-business services to automotive retailers and manufacturers, and, in a
transaction concluded in November, 2000, the company acquired DealerKid, a
premier provider of electronic customer marketing and relationship management
software and services for automotive retailers in the U.S. and Canada.
Third, the company effected an internal transformation to streamline the
organization and position the business and support units to move at the pace
required to be the leading provider of integrated information management
solutions to the automotive retailing marketplace. This effort included staffing
reductions and a company-wide reorganization around solutions business units
(SBUs). For reporting purposes, the company aggregated similar SBUs into four
segments.
The Dealer Management Solutions segment consists of the Retail Management
Solutions, Information Output Services systems and Info-Structure Services SBUs.
These SBUs provide integrated computer systems products and related services.
Products include integrated software packages, computer hardware and
installation of hardware and software. Services include customer training,
hardware maintenance and software support.
The Documents segment represents the Information Output Services' documents SBU.
This segment manufactures and distributes printed business forms to automotive
retailers.
The Professional Services segment consists of the Reynolds Transformation
Services, eMarkets and Consumer Loyalty Solutions SBUs and the Information
Output Services IntelliPath system business line. This segment provides
specialized training, consulting services, Web services and customer
relationship management products and services.
The Financial Services segment provides financing for the company's computer
systems products through the company's wholly-owned subsidiary, Reyna Capital
Corporation. Reyna's portfolio also includes a number of finance receivables for
computer systems previously offered by the Healthcare Systems division that was
sold in 1998.
FINANCIAL INFORMATION ABOUT SEGMENTS
AND FOREIGN AND DOMESTIC OPERATIONS
See Note 12 to the Consolidated Financial Statements on page 44 for financial
and descriptive information about the business segments described above.
NEW PRODUCTS
The company introduced a number of new products and services during the past
year. Those new products included:
- - The company added Internet connectivity and bi-directional access to its
ERA2 retail management system data through a secure online network,
transforming the industry's leading retail management system into a
powerful e-marketing tool.
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- - The company launched Cyber Car e-business marketing, technology and
consulting services in Canada. Cyber Car provides Internet retailing
solutions to dealers in more than 20 countries.
- - The company introduced AutoNotice.com, an Internet-based customer
relationship management system that sends personalized service reminders
and special promotional offers to automotive retailers' customers via
e-mail.
- - The company seamlessly plugged automobile retailers into the Internet with
the introduction of ERA3(TM) featuring ConsumerReach(TM), the most
enhanced, integrated set of retail management capabilities in the
industry.
RAW MATERIALS
Computer hardware and peripherals are essential to the company. It purchases
these products from a variety of suppliers. The hardware platform for the ERA
system is supplied by Hewlett-Packard. 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.
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. These
arrangements are in the aggregate, but not individually (except for the
operating systems), material to the company's business.
COMPETITION
The company is North America's leading provider of integrated retail management
solutions to automotive retailers.
The company's main competitor in the Dealer Management Solutions segment is the
Dealer Services division of Automatic Data Processing, Inc. ("ADP"). ADP's
assets and financial resources substantially exceed those of the company.
Together, the two suppliers provide a significant share of the information
management systems for automotive retailers in the United States and Canada.
The company's Documents segment has a leading market share position but
experiences energetic competition from local printing brokers and regional
printers across the United States and Canada.
The company is expanding and supplementing its solutions in the Professional
Services segment. That segment experiences competition from hundreds of
providers.
The company believes it competes 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 company has emphasized reliable and responsive
service, broad industry knowledge and long-term relationships to meet customer
needs more effectively.
No single customer accounts for five percent or more of the company's revenues.
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BACKLOG
The backlog represents orders for computer systems or documents which have not
yet been shipped to customers, and deferred revenues (orders which have been
shipped but not yet recognized in revenues). At December 1, 2000, the dollar
value of the product backlog including software license fees is estimated to be
$28,066 compared to $41,773 last year. The company anticipates the backlog to be
recognized as revenue during fiscal year 2001.
RESEARCH AND DEVELOPMENT
During fiscal 2000, the company continued its substantial investment in research
and development to deliver new and enhanced solutions for customers.
Expenditures for those activities were $75,925 in 2000, $52,232 in 1999 and
$43,584 in 1998.
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 and the
company has also been named as a defendant in a cost recovery lawsuit in Dayton,
Ohio, regarding another environmental remediation site. (See Note 13 to the
Consolidated Financial Statements, page 45.)
EMPLOYEES
On September 30, 2000, the company and its subsidiaries employed 4,945 persons.
ITEM 2. PROPERTIES
As of September 30, 2000, the company owned and operated three forms
manufacturing plants in the United States encompassing approximately 543,000
square feet. Corporate headquarters is located in Dayton, Ohio, in several
buildings owned by the company which contain more than 700,000 square feet. In
addition, the company leases approximately 30 sales offices throughout the
country.
In early 1999 the company completed the first phase of a new Dayton facility
(240,000 square feet which is included in the 700,000 square feet noted in the
first paragraph). 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 1 to the
Consolidated Financial Statements on page 29.
The company is scheduled to close its Oklahoma City manufacturing facility
during the first quarter of fiscal 2001. In addition, eight sales offices will
be closed effective December 31, 2000.
ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 13 to the Consolidated Financial Statements
on page 45.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
(Dollars in thousands except per share data)
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Class A Common Shares are listed on the New York Stock Exchange.
There is no principal market for the Class B Common Shares. The company also has
an authorized class of 60 million preferred shares with no par value. As of the
filing of this report, the company currently has no agreements or commitments
with respect to the sale or issuance of the preferred shares except as described
in Note 8 to the Consolidated Financial Statements, page 38.
Information on market prices and dividends is set forth below:
CLASS A COMMON SHARES SALE PRICES
2000 1999
----- ----
Fiscal Quarter High Low High Low
-------------- ---- --- ---- ---
First $22.88 $17.88 $22.94 $16.50
Second $29.81 $19.31 $23.25 $17.75
Third $27.81 $18.25 $23.44 $18.31
Fourth $19.81 $16.19 $25.13 $20.38
CASH DIVIDENDS PAID
Class A Common Class B Common
-------------- --------------
Months 2000 1999 2000 1999
------ ----- ----- ----- ----
January $.11 $.10 $.0055 $.005
April $.11 $.10 $.0055 $.005
June $.11 $.10 $.0055 $.005
September $.11 $.10 $.0055 $.005
As of December 18, 2000, there were approximately 3,444 holders of record of
Class A Common Shares and one holder of record of Class B Common Shares.
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FIVE-YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
For The Years Ended September 30 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net Sales and Revenues
Automotive solutions $884,175 $798,747 $746,348 $687,980 $637,337
Financial services 40,206 38,674 34,497 30,383 26,263
---------- ---------- ---------- ---------- ----------
Total net sales and revenues $924,381 $837,421 $780,845 $718,363 $663,600
========== ========== ========== ========== ==========
Income from Continuing Operations $88,440 $87,891 $91,703 $53,668 $77,113
Basic earnings per common share $1.14 $1.12 $1.15 $.66 $.94
Diluted earnings per common share $1.11 $1.09 $1.13 $.64 $.91
Net Income $116,596 $122,721 $103,107 $59,219 $93,738
Basic earnings per common share $1.50 $1.57 $1.30 $.73 $1.14
Diluted earnings per common share $1.47 $1.53 $1.27 $.70 $1.10
Return on Equity 24.2% 28.3% 26.8% 16.1% 26.6%
Cash Dividends Per Class A Common Share $.44 $.40 $.36 $.32 $.25
Book Value Per Outstanding Common Share $6.68 $5.98 $5.14 $4.55 $4.55
Assets
Automotive solutions $ 796,164 $ 752,599 $ 666,584 $ 644,714 $534,697
Financial services 421,129 427,591 411,159 373,175 313,282
---------- ---------- ---------- ---------- ----------
Total assets $1,217,293 $1,180,190 $1,077,743 $1,017,889 $847,979
========== ========== ========== ========== ========
Long-Term Debt
Automotive solutions $111,124 $163,111 $160,346 $170,150 $ 84,601
Financial services 126,868 154,040 145,460 137,455 93,589
---------- ---------- ---------- ---------- ----------
Total long-term debt $237,992 $317,151 $305,806 $307,605 $178,190
========== ========== ========== ========== ========
Number of Employees 4,945 9,083 9,152 9,138 7,544
AUTOMOTIVE SOLUTIONS (excluding Financial Services)
Current Ratio 1.97 1.87 1.41 1.05 1.26
Net Property, Plant and Equipment $138,108 $104,106 $93,900 $104,066 $100,764
Total Debt $116,838 $168,825 $166,837 $189,426 $99,092
Total Debt to Capitalization 19.0% 26.7% 29.2% 34.2% 21.0%
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In thousands except per share data)
SIGNIFICANT EVENTS
During fiscal year 2000, the company undertook several initiatives to sharpen
its focus on the opportunities within automotive retailing, including the sale
of its Information Solutions segment and the acquisition of HAC Group, LLC. As a
result of these initiatives, the company believes it is well positioned to lead
the transformation of automotive retailing with a broad array of information
technology products and services.
DISCONTINUED OPERATIONS
On August 4, 2000, the company sold the assets of its Information Solutions
segment to The Carlyle Group for $360,000 cash. This segment manufactured and
distributed printed business forms and provided forms management services to
general business markets. The company recorded an after-tax gain on the sale of
$10,853 or $.14 per diluted share in the fourth quarter of fiscal year 2000. The
company expects to use proceeds from the sale to fund growth initiatives, share
repurchases and debt reduction, as well as for general corporate purposes.
Revenues and expenses of the Information Solutions segment were reclassified to
discontinued operations in the company's statements of consolidated income. Cash
flows from discontinued operations of the Information Solutions segment have
been reported as a single line in the company's statements of condensed
consolidated cash flows. Financial statements for prior periods have been
reclassified to be consistent with this new presentation.
In September 1998, the company's board of directors approved a plan to
discontinue operations of the Healthcare Systems segment. This separate segment
provided computer systems products and services to hospital-based and
office-based physicians. In October 1998, the company sold essentially all net
assets of its Healthcare Systems segment to InfoCure Corporation for about
$50,000. The company recorded an after-tax gain on the sale of $5,785 or $.07
per diluted share in the first quarter of fiscal year 1999. The operating
results of the Healthcare Systems segment have been presented as discontinued
operations in the statements of consolidated income. See Note 2 to the
Consolidated Financial Statements for more information on discontinued
operations.
RESTRUCTURING CHARGES
During the fourth quarter of fiscal year 2000, the company approved a plan of
restructuring and recorded a pre-tax charge of $10,560 or $6,230 after taxes
($.08 per diluted share). This charge consisted of $4,751 of employee
termination benefits, $4,715 of retirement costs and $1,094 of lease
obligations. Employee termination benefits represent severance and outplacement
benefits for 252 employees, 135 of which were in administrative positions. The
remaining 117 employees worked at the Oklahoma City manufacturing facility that
will be closed during the first quarter of fiscal year 2001. Retirement costs
represent pension and other postretirement benefits in excess of regular plan
benefits. Lease obligations represent remaining lease payments in excess of
sublease rentals for sales offices vacated by the company. See Note 3 to the
Consolidated Financial Statements for more information on restructuring charges.
SEGMENT REPORTING
In the fourth quarter of fiscal year 2000, the company reorganized into a number
of solutions business units (SBUs) to serve the automotive market. The company
aggregated these SBUs into four reportable segments. See Note 12 to the
Consolidated Financial Statements for more information on segment reporting.
BUSINESS COMBINATIONS
In May 2000, the company purchased the outstanding membership interests of HAC
Group, LLC, the leading provider of learning, customer relationship management
and Web services to automobile retailers and manufacturers. The privately-held
HAC Group had revenues of $65,000 in 1999. The purchase price of $124,660
consisted of $97,460 of cash and the issuance of 1,222 restricted Class A common
shares.
In May 2000, the company and other industry partners formed a new independent
company, named ChoiceParts LLC, that is developing an electronic parts exchange
for the automotive parts market. The company contributed its existing parts
locator business, which had annual revenues of nearly $12,000, and in-process
software development of a Web-based parts locator product to ChoiceParts in
exchange for a minority equity interest, consisting of both common and preferred
interests. The company also made a capital contribution to ChoiceParts of
$1,675. See Note 4 to the Consolidated Financial Statements for more information
on business combinations.
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
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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 Dealer
Management Solutions' 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 the second half of fiscal year 1999 operating results.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
2000 vs. 1999 1999 vs. 1998
2000 1999 1998 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $924,381 $837,421 $780,845 $86,960 10% $56,576 7%
Gross profit $498,737 $433,369 $400,079 $65,368 15% $33,290 8%
Operating income $155,209 $153,922 $162,685 $1,287 1% ($8,763) -5%
Income from continuing operations $88,440 $87,891 $91,703 $549 1% ($3,812) -4%
Discontinued operations $28,156 $34,830 $11,404 ($6,674) -19% $23,426 205%
Net income $116,596 $122,721 $103,107 ($6,125) -5% $19,614 19%
Basic earnings per share
Income from continuing $1.14 $1.12 $1.15 $0.02 2% ($0.03) -3%
operations
Net income $1.50 $1.57 $1.30 ($0.07) -4% $0.27 21%
Diluted earnings per share
Income from continuing $1.11 $1.09 $1.13 $0.02 2% ($0.04) -4%
operations
Net income $1.47 $1.53 $1.27 ($0.06) -4% $0.26 20%
Consolidated net sales and revenues grew 10% in fiscal year 2000 and 7% in
fiscal year 1999. The acquisition of HAC Group contributed $32,000 of revenues
in fiscal year 2000. Excluding the effect of the HAC acquisition, consolidated
net sales and revenues increased 7% in fiscal year 2000. Consolidated revenues
increased each year primarily as a result of growth in recurring computer
services revenues.
Consolidated gross profit represented 56.4% of Automotive Solutions revenues
(excluding Financial Services revenues) in 2000, compared to 54.3% in 1999 and
53.6% in 1998. Gross profit margins increased in both years, primarily as a
result of growth in Dealer Management Solutions' recurring computer services
revenues.
As a percentage of revenues, consolidated operating income was 16.8% in 2000
(17.9% excluding restructuring charges) compared to 18.4% in 1999 (19.2%
excluding the accounting change) and 20.8% in 1998. Excluding restructuring
charges, fiscal year 2000 operating margins declined from fiscal year 1999,
primarily because of increased research and development (R&D) expenses for new
products and services. R&D expenses were $75,925 in 2000, $52,232 in 1999 and
$43,584 in 1998. Fiscal year 1999 operating margins declined from 1998 primarily
because of higher R&D expenses for new products and services and investments in
internal systems. The company invested in an enterprise resource planning (ERP)
system and incurred ERP related expenses of about three cents per share during
fiscal year 2000 and about five cents per share in fiscal year 1999.
Interest expense was $7,441 in 2000, $10,282 in 1999 and $12,795 in 1998.
Interest expense declined over the three years because of debt repayments and
capitalization of interest expense for software development and construction of
an office building. Interest income was $6,736 in 2000, $6,737 in 1999 and
$2,269 in 1998. The increase in 1999 interest income over 1998 resulted from
higher cash balances from strong operating cash flows and the sale of the
Healthcare Systems segment. Equity in net losses of affiliated companies was
$4,416 in 2000, $1,520 in 1999 and $1,984 in 1998. The higher losses in fiscal
year 2000 resulted from new equity investments in ChoiceParts and e-fin LLC, an
Internet-based solution that connects automotive retailers and financial
institutions, and additional losses from Kalamazoo Computer Group. See Note 1 to
the Consolidated Financial Statements for additional disclosures about the
company's investment in Kalamazoo. Other income was greater in 1999 because of
gains from the sales of several smaller product lines.
The effective income tax rate was 41.1% in 2000, compared to 41.5% in 1999 and
38.9% in 1998. The 1998 tax rate reflected a $4,971 gain from the favorable
resolution of several tax audits. Excluding this gain, the 1998 tax rate would
have been 42.2%. The effective tax rate has declined over the three years
because of lower state income tax rates.
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Income from continuing operations reflected $6,230 of after-tax restructuring
charges in 2000 and $6,204 of after-tax accounting change in 1999. Excluding
these items, income from continuing operations was $94,670 in 2000, $94,095 in
1999 and $91,703 in 1998. Related earnings per share amounts were $1.19 in 2000,
$1.17 in 1999 and $1.13 in 1998. In fiscal year 2000, return on average
shareholders' equity was 24.2%, compared to 28.3% in 1999 and 26.8% in 1998.
DEALER MANAGEMENT SOLUTIONS
2000 vs. 1999 1999 vs. 1998
2000 1999 1998 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Net sales and revenues
Computer services $389,151 $355,238 $318,223 $33,913 10% $37,015 12%
Computer systems products $165,952 $171,057 $181,109 ($5,105) -3% ($10,052) -6%
----------- ---------- ---------- ----------- ----------
Total net sales and revenues $555,103 $526,295 $499,332 $28,808 5% $26,963 5%
Gross profit $320,502 $282,098 $257,043 $38,404 14% $25,055 10%
% of revenues 57.7% 53.6% 51.5%
SG&A expenses $219,485 $202,195 $157,155 $17,290 9% $45,040 29%
% of revenues 39.5% 38.4% 31.5%
Operating income $101,017 $79,903 $99,888 $21,114 26% ($19,985) -20%
% of revenues 18.2% 15.2% 20.0%
Dealer Management Solutions revenues grew 5% in both fiscal years 2000 and 1999
as growth in computer services revenues more than offset declines in computer
systems products sales. Computer services revenues, comprised predominately of
recurring software support and equipment maintenance revenues, increased for
both years primarily because of the increased number of ERA retail management
software applications supported. The company also increased sales prices to
offset inflation each year. Fiscal year 2000 sales of computer systems products
declined from last year (which included the $17,936 negative effect of the
accounting change) primarily because of a decline in the number of ERA retail
management systems sold. The backlog of new orders for computer systems products
and deferred revenues (orders shipped, but not yet recognized in revenues) was
$31,000 at September 30, 2000 compared to $44,000 last year. In fiscal year
1999, sales of computer systems products increased 5%, excluding the effect of
the accounting change, because of higher revenues from sales of ERA systems and
revenues related to several car company programs.
Gross profit margins increased in both fiscal years 2000 and 1999 because of the
growth in higher margin recurring service revenues. Gross margins on recurring
service revenues also increased each year because of economies of scale in
supporting the greater number of software applications. In the fourth quarter of
fiscal year 2000, the company recorded a $4,264 obligation related to a software
development contract. Excluding this expense, selling, general and
administrative (SG&A) expenses were 38.8% of revenues in fiscal year 2000,
compared to 38.4% last year. In fiscal year 1999, SG&A expenses increased from
31.5% of revenues in fiscal year 1998. In fiscal year 1999, the company
increased R&D expenses for product development and also invested in an ERP
system for internal use.
DOCUMENTS
2000 vs. 1999 1999 vs. 1998
2000 1999 1998 Change Change
- ----------------------------------------------------------------------------------------------------------------------
Net sales and revenues $184,280 $187,771 $189,772 ($3,491) -2% ($2,001) -1%
Gross profit $115,295 $119,684 $122,259 ($4,389) -4% ($2,575) -2%
% of revenues 62.6% 63.7% 64.4%
SG&A expenses $75,710 $69,711 $69,354 $5,999 9% $357 1%
% of revenues 41.1% 37.1% 36.5%
Operating income $39,585 $49,973 $52,905 ($10,388) -21% ($2,932) -6%
% of revenues 21.5% 26.6% 27.9%
Documents sales volumes have declined each of the last two years because of the
technology shift to laser printing. The company expects the shift toward laser
printing to continue. Revenues from sales of laser printing equipment and
services were included in the Dealer Management Solutions and Professional
Services segments. The company also raised sales prices during the last two
years to offset higher paper costs. Gross profit margins remained very strong
over the three-year period. In fiscal year 2000, SG&A expenses increased over
1999 and 1998 primarily as a result of software development costs related to
Web-enabled products and processes.
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PROFESSIONAL SERVICES
2000 vs. 1999 1999 vs. 1998
2000 1999 1998 Change Change
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Net sales and revenues $144,792 $84,681 $57,244 $60,111 71% $27,437 48%
Gross profit $62,940 $31,587 $20,777 $31,353 99% $10,810 52%
% of revenues 43.5% 37.3% 36.3%
SG&A expenses $58,768 $28,105 $27,431 $30,663 109% $674 2%
% of revenues 40.6% 33.2% 47.9%
Operating income $4,172 $3,482 ($6,654) $690 20% $10,136
% of revenues 2.9% 4.1% -11.6%
Professional Services revenues grew in fiscal year 2000, in part, because of the
acquisition of HAC Group, which contributed $32,000 of revenues. Excluding HAC
revenues, Professional Services revenues increased 33% in 2000 and 48% in 1999.
This strong internal sales growth resulted primarily from growth in revenues of
newer products such as CarPoint, IntelliPath and CreditMaster. Consumer Loyalty
Solutions revenues declined in 2000 because of lower volume, after recording
strong growth in 1999.
Gross profit margins increased in fiscal year 2000 because of the strong growth
in IntelliPath revenues. In fiscal year 1999 gross profit margins increased
slightly. In fiscal year 2000, SG&A expenses increased because of higher R&D
expenses. The amortization of intangible assets from the HAC acquisition was
also included in fiscal year 2000 SG&A expenses. SG&A expenses increased
slightly in fiscal year 1999.
Operating income has increased each of the last two years even as the company
has invested in R&D and completed the acquisition of HAC Group.
FINANCIAL SERVICES
2000 vs. 1999 1999 vs. 1998
2000 1999 1998 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $40,206 $38,674 $34,497 $1,532 4% $4,177 12%
Operating income $20,995 $20,564 $16,546 $431 2% $4,018 24%
% of revenues 52.2% 53.2% 48.0%
In fiscal year 2000, Financial Services revenues grew because average interest
bearing finance receivables increased 4% as non-interest bearing receivables
were converted into interest bearing receivables. In fiscal year 1999, Financial
Services revenues increased primarily because average interest bearing finance
receivables grew 8% as a result of computer systems sales growth (excluding the
accounting change). In fiscal year 1999, higher gains on lease buyouts also
contributed to the revenue increase. 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 3.1% in 2000,
compared to 3.7% in 1999 and 3.2% in 1998. The change in the interest rate
spread was primarily the result of changes in borrowing rates on debt that
increased in fiscal year 2000, after declining in fiscal year 1999. Bad debt
expenses were $2,360 in 2000, $2,550 in 1999 and $2,395 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
AUTOMOTIVE SOLUTIONS CASH FLOWS (EXCLUDING FINANCIAL SERVICES)
Automotive Solutions continued to provide strong cash flows from operating
activities in fiscal year 2000. Net cash provided by operating activities was
$107,114 in 2000. In fiscal year 2000, operating cash flow resulted primarily
from income from continuing operations adjusted for noncash charges, such as
depreciation and amortization. This strong cash flow funded the company's
investments for normal operations and capital expenditures of $65,677, which
included $15,763 for the construction of a new office building near Dayton,
Ohio. During fiscal year 2000, the company also capitalized $20,258 of software
licensed to customers, representing capitalization of payroll and related costs
for employees and independent contractors. Fiscal year 2001 capital expenditures
and capitalized software licensed to customers in the ordinary course of
business are anticipated to be about $70,000. Fiscal year 2001 capital
expenditures include about $30,000 for the new office building. In August 2000,
the company received about $360,000 of proceeds from the sale of the Information
Solutions segment. These proceeds will be used to fund growth initiatives, share
repurchases and debt reduction, as well as for general corporate purposes. See
the shareholders' equity caption of this analysis regarding the payment of
dividends and share repurchases.
10
11
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 Automotive Solutions debt) to
capitalization (total Automotive Solutions debt plus shareholders' equity) was
19.0% at September 30, 2000 and 26.8% at September 30, 1999. During fiscal year
2000, the company retired debt associated with the Information Solutions segment
with proceeds from the sale. Remaining credit available under a revolving credit
agreement was $111,000 at September 30, 2000. In addition to this committed
credit agreement, the company also has a variety of other short-term credit
lines available. Management estimates that cash balances of $205,455 at
September 30, 2000, cash flow from operations and cash available from existing
credit agreements will be sufficient to fund fiscal year 2001 normal operations.
Cash balances are placed in short-term investments until such time as needed.
See Note 1 to the Consolidated Financial Statements for a description of cash
investments.
The company has consistently produced strong operating cash flows sufficient to
fund normal operations. Strong operating 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, 2000, 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 2001. 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 14, 2000, 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 $34,130 in 2000, $31,316 in 1999 and $28,604
in 1998. Dividends per Class A common share were $.44 in 2000, $.40 in 1999 and
$.36 in 1998. 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. The company has paid dividends each year
since its initial public offering in 1961.
The company repurchased $101,018 of Class A common shares in 2000, $55,679 in
1999 and $35,583 in 1998. Average prices paid per share were $18.41 in 2000,
$20.69 in 1999 and $19.77 in 1998. As of September 30, 2000, the company could
repurchase an additional 6,190 Class A common shares under existing board of
directors' authorizations.
MARKET RISKS
INTEREST RATES
The Automotive Solutions 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.
11
12
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations, primarily in Canada, which accounted
for 6% of net sales and revenues in 2000. In the conduct of its foreign
operations, the company has intercompany sales, expenses and loans between the
U.S. and Canada and may receive dividends denominated in different currencies.
These transactions expose the company to changes in foreign currency exchange
rates. At September 30, 2000, the company had no foreign currency exchange
contracts outstanding. Based on the company's overall foreign currency exchange
rate exposure at September 30, 2000, management believes that a 10% change in
currency rates would not have a material effect on the company's financial
statements.
ENVIRONMENTAL MATTERS
See Note 13 to the Consolidated Financial Statements for a discussion of the
company's environmental contingencies.
ACCOUNTING STANDARDS
See Note 14 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 11 and 12).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 14 of Part IV
(pages 13) 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 2001 Annual Meeting of
Shareholders captioned "PROPOSAL I - ELECTION OF DIRECTORS."
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the company are elected by the Board of Directors at
its meeting immediately following the Annual Meeting of Shareholders to serve
generally for a term of one year. The executive officers of the company, as of
December 18, 2000, are:
NAME AGE POSITION
- ------- --- --------
David R. Holmes 60 Chairman of the Board
Lloyd G. Waterhouse 49 President and Chief Executive Officer
Dale L. Medford 50 Vice President, Finance and Chief Financial Officer,
and Director
Douglas M. Ventura 40 General Counsel and Secretary
Michael J. Gapinski 50 Treasurer and Assistant Secretary
12
13
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 since November 2000; prior thereto,
Chairman of the Board and Chief Executive Office from May 1999 to November 2000;
and prior thereto Chairman of the Board, President and Chief Executive Officer.
Mr. Waterhouse has been President and Chief Executive Officer since November
2000; prior thereto President and Chief Operating Officer from May 1999 to
November 2000; prior thereto General Manager of E-Business Services for IBM
Corporation from July 1998 to May 1999; prior thereto General Manager of
Marketing & Business Development for IBM Global Services from 1996 to July
1998; and prior thereto Director of Strategy for IBM from 1994-1995.
Mr. Ventura has been General Counsel and Secretary since September 2000; prior
thereto was Associate General Counsel and Assistant Secretary from September
1996 to September 2000; prior thereto partner, Coolidge Wall Womsley & Lombard
Co., LPA.
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 2001 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 18, 2000 is incorporated
herein by reference to the section of the company's Proxy Statement for its
2001 Annual Meeting of Shareholders captioned "STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
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 2001 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 25 through 48.
Statements of Consolidated Income - For The Years Ended
September 30, 2000, 1999 and 1998
Consolidated Balance Sheets - September 30, 2000 and 1999
Statements of Consolidated Shareholders' Equity and Comprehensive
Income - For The Years Ended September 30, 2000, 1999 and 1998
Statements of Condensed Consolidated Cash Flows - For the Years Ended
September 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements (Including Supplementary
Data)
13
14
(a)(2) FINANCIAL STATEMENT SCHEDULES FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED SEPTEMBER 30, 2000 ARE ATTACHED HERETO:
Schedule II Valuation Accounts Page 49
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(a)(3) EXHIBITS
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
(3)(a) Amended Articles of Incorporation, Restatement effective February 9, 1995; incorporated
by reference to Exhibit A of the company's definitive proxy statement dated January 5,
1995 filed with the Securities and Exchange Commission.
------------------ -----------------------------------------------------------------------------------------
(3)(b) Amendment to Amended and Restated Articles of Incorporation, effective April 25, 1997;
incorporated by reference to Exhibit 2 of the company's Form 8A/A dated October 20, 1998
filed with the Securities and Exchange Commission.
------------------ -----------------------------------------------------------------------------------------
(3)(c) Consolidated Code of Regulations; incorporated by reference to Exhibit B to the
company's definitive proxy statement dated January 8, 1990 filed with the Securities
and Exchange Commission.
------------------ -----------------------------------------------------------------------------------------
(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) * 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)(e) * 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 and
Douglas M. Ventura, effective August 17, 1998; incorporated by reference to Exhibit
(10)(g) to Form 10-K for the fiscal year ended September 30, 1998.
------------------ -----------------------------------------------------------------------------------------
(10)(f) * General form of Indemnification Agreement between the company and each of its directors
dated as of December 1, 1989; incorporated by reference to Exhibit (10)(m) to Form 10-K
for the fiscal year ended September 30, 1989.
------------------ -----------------------------------------------------------------------------------------
14
15
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
(10)(g) * Amended and Restated Stock Option Plan -- 1989, effective September 29, 1993;
incorporated by reference to Exhibit (10)(l) to Form 10-K for the fiscal year ended
September 30, 1993.
------------------ -----------------------------------------------------------------------------------------
(10)(h) * 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)(i) * 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)(j) * 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)(k) * 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)(l) * 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)(m) * 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)(n) * 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)(o) * 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)(p) * 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)(q) * The Reynolds and Reynolds Company Supplemental Retirement Plan, Amendment No. 9,
adopted on August 11, 1987; incorporated by reference to Exhibit (10)(t) to Form 10-K
for the fiscal year ended September 30, 1987.
------------------ -----------------------------------------------------------------------------------------
(10)(r) * 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)(s) * 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)(t) * 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)(u) * 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.
------------------ -----------------------------------------------------------------------------------------
15
16
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
(10)(v) * 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)(w) * 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)(x) * 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)(y) * 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)(z) * 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)(aa) * 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)(bb) * 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)(cc) * 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)(dd) * A performance-based incentive compensation plan for the Chief Executive Officer and those
other officers permitted under Internal Revenue Code Section 162(m) incorporated by
reference to Proposal II within the company's definitive proxy statement dated January 4,
2000 filed with the Securities and Exchange Commission.
------------------ -----------------------------------------------------------------------------------------
(10)(ee) * 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)(ff) * 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)(gg) * 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)(hh)* 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.
------------------ -----------------------------------------------------------------------------------------
16
17
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
(10)(ii) * 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)(jj) * 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)(kk) 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)(ll) * 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 and Robert C. Nevin;
incorporated by reference to Exhibit (10)(hhh) to Form 10-K for the fiscal year ended
September 30, 1989.
------------------ -----------------------------------------------------------------------------------------
(10)(mm) 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)(nn) Amendment dated February 14, 1984 to Richard H. Grant, Jr.'s Agreement restricting
transfer of Class B Common Stock of the company dated March 11, 1963; incorporated by
reference to Exhibit (10)(u) to Form 10-K for the fiscal year ended September 30, 1984.
------------------ -----------------------------------------------------------------------------------------
(10)(oo) 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)(pp) 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)
------------------ -----------------------------------------------------------------------------------------
(10)(qq) Purchase Agreement dated as of June 19, 2000, by and between The Reynolds and Reynolds
Company and ISG Acquisition Corp.; incorporated by reference to the company's Form 10-Q
filed August 14, 2000.
------------------ -----------------------------------------------------------------------------------------
(11) Not applicable
------------------ -----------------------------------------------------------------------------------------
(12) Not applicable
------------------ -----------------------------------------------------------------------------------------
(13) Not applicable
------------------ -----------------------------------------------------------------------------------------
(18) Not applicable
------------------ -----------------------------------------------------------------------------------------
(21) List of subsidiaries (See Page 50)
------------------ -----------------------------------------------------------------------------------------
17
18
------------------ -----------------------------------------------------------------------------------------
Exhibit No. Item
------------------ -----------------------------------------------------------------------------------------
(22) Not applicable
------------------ -----------------------------------------------------------------------------------------
(23) Consent of Independent Auditors (See Page 24)
------------------ -----------------------------------------------------------------------------------------
(24) Not Applicable
------------------ -----------------------------------------------------------------------------------------
(27) Financial Data Schedule
------------------ -----------------------------------------------------------------------------------------
(28) Not applicable
------------------ -----------------------------------------------------------------------------------------
(99) Not applicable
------------------ -----------------------------------------------------------------------------------------
* Management contracts or compensatory plans or
arrangements required to be filed as an exhibit to
this form pursuant to Item 14(c) of this report.
(b) REPORTS ON FORM 8-K.
During the quarter ended September 30, 2000, we reported items under Item 5 of
Form 8-K on July 11, 2000 and August 11, 2000.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
Please refer to Part IV, Item 14(a)(3) beginning on page 14.
(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 2000 Annual Report to
Shareholders upon written request to:
DOUGLAS M. VENTURA, GENERAL COUNSEL & SECRETARY
THE REYNOLDS AND REYNOLDS COMPANY
P. O. BOX 2608
DAYTON, OHIO 45401
Or by calling: 1-888-4REYREY (473-9739)
---------------------------------------------------------------------------
18
19
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/ DOUGLAS M. VENTURA
------------------------------------------------
DOUGLAS M. VENTURA
General Counsel and Secretary
Date: December 29, 2000
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 29, 2000
By /S/ DAVID R. HOLMES
------------------------------------------------
DAVID R. HOLMES
Chairman of the Board
Date: December 29, 2000
By /S/ LLOYD G. WATERHOUSE
------------------------------------------------
LLOYD G. WATERHOUSE
President and Chief Executive Officer
and Director
(Principal Executive Officer)
Date: December 29, 2000
By /S/ DALE L. MEDFORD
------------------------------------------------
DALE L. MEDFORD
Vice President, Finance and Chief
Financial Officer (Principal Financial and
Accounting Officer) and Director
Date: December 29, 2000
By /S/ JAMES L. ARTHUR
------------------------------------------------
JAMES L. ARTHUR, Director
Date: December 29, 2000
By /S/ DR. DAVID E. FRY
------------------------------------------------
DR. DAVID E. FRY, Director
19
20
Date: December 29, 2000
By /S/ RICHARD H. GRANT, III
------------------------------------------------
RICHARD H. GRANT, III, Director
Date: December 29, 2000
By /S/ CLEVE L. KILLINGSWORTH, JR.
------------------------------------------------
CLEVE L. KILLINGSWORTH, JR.
Director
Date: December 29, 2000
By /S/ ALLAN Z. LOREN
------------------------------------------------
ALLAN Z. LOREN, Director
Date: December 29, 2000
By /S/ EUSTACE W. MITA
------------------------------------------------
EUSTACE W. MITA
General Manager, Sales and Reynolds'
Transformation Services and Director
Date: December 29, 2000
By /S/ PHILIP A. ODEEN
------------------------------------------------
PHILIP A. ODEEN, Director
Date: December 29, 2000
By /S/ DONALD K. PETERSON
------------------------------------------------
DONALD K. PETERSON, Director
20
21
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, 2000
The Reynolds and Reynolds Company
Dayton, Ohio
21
22
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
November 14, 2000
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 accounting
principles generally accepted in the United States of America 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 auditing
standards generally accepted in the United States of America and includes
consideration of the system of internal controls. Their report is included in
this annual report on page 23.
Another level of control resides with the audit committee of the company's board
of directors. The committee, comprised of five directors who are not members of
management and are "independent" as defined by our policy and NYSE listing
standards, 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.
Lloyd G. "Buzz" Waterhouse Dale L. Medford
President and Vice President, Finance
Chief Executive Officer and Chief Financial Officer
22
23
INDEPENDENT AUDITORS' REPORT
To 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, 2000 and 1999, and the
related statements of consolidated income, shareholders' equity, comprehensive
income and cash flows for each of the three years in the period ended September
30, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Dayton, Ohio
November 14, 2000
23
24
INDEPENDENT AUDITORS' CONSENT
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, (16) Registration Statement No. 333-85551 on Form
S-8, (17) Registration Statement No. 333-94687 on Form S-3, and (18)
Registration Statement No. 333-30090 on Form S-8, of our report dated November
14, 2000, appearing in this Annual Report on Form 10-K of The Reynolds and
Reynolds Company for the year ended September 30, 2000, and to the reference to
Deloitte & Touche LLP under the heading "Experts" in the respective
Prospectuses, which is part of each of the above Registration Statements.
DELOITTE & TOUCHE LLP
Dayton, Ohio
December 28, 2000
24
25
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share data)
For The Years Ended September 30 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Net Sales and Revenues
Automotive solutions
Services $521,032 $439,427 $375,467
Products 363,143 359,320 370,881
----------- ----------- -----------
Total automotive solutions 884,175 798,747 746,348
Financial services 40,206 38,674 34,497
----------- ----------- -----------
Total net sales and revenues 924,381 837,421 780,845
----------- ----------- -----------
Costs and Expenses
Cost of sales
Services 188,971 159,218 146,311
Products 196,467 206,160 199,958
----------- ----------- -----------
Total cost of sales 385,438 365,378 346,269
Selling, general and administrative expenses 353,963 300,011 253,940
Restructuring charges 10,560
Financial services 19,211 18,110 17,951
----------- ----------- -----------
Total costs and expenses 769,172 683,499 618,160
----------- ----------- -----------
Operating Income 155,209 153,922 162,685
----------- ----------- -----------
Other Charges (Income)
Interest expense 7,441 10,282 12,795
Interest income (6,736) (6,737) (2,269)
Equity in net losses of affiliated companies 4,416 1,520 1,984
Other (54) (1,498) 83
----------- ----------- -----------
Total other charges 5,067 3,567 12,593
----------- ----------- -----------
Income Before Income Taxes 150,142 150,355 150,092
Income Taxes 61,702 62,464 58,389
----------- ----------- -----------
Income from Continuing Operations 88,440 87,891 91,703
Income from Discontinued Operations 17,303 29,045 11,404
Gains on Sales of Discontinued Operations 10,853 5,785
----------- ----------- -----------
Net Income $116,596 $122,721 $103,107
=========== =========== ===========
Basic Earnings Per Common Share
Income from continuing operations $1.14 $1.12 $1.15
Income from discontinued operations $.22 $.37 $.14
Gains on sales of discontinued operations $.14 $.07
Net income $1.50 $1.57 $1.30
Average number of common shares outstanding 77,474 78,254 79,451
Diluted Earnings Per Common Share
Income from continuing operations $1.11 $1.09 $1.13
Income from discontinued operations $.22 $.36 $.14
Gains on sales of discontinued operations $.14 $.07
Net income $1.47 $1.53 $1.27
Average number of common shares and
equivalents outstanding 79,499 80,340 81,146
See Notes to Consolidated Financial Statements.
25
26
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 2000 1999
- --------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS ASSETS
---------------------------
Current Assets
Cash and equivalents $ 205,455 $ 103,595
---------- ----------
Accounts receivable (less allowance for
doubtful accounts: 2000--$2,324;
1999--$2,056) 127,314 105,228
---------- ----------
Inventories
Finished products 14,360 15,816
Work in process 480 837
Raw materials and supplies 447 518
---------- ----------
Total inventories 15,287 17,171
---------- ----------
Deferred income taxes 23,438 23,733
---------- ----------
Prepaid expenses and other assets 12,052 14,008
---------- ----------
Total current assets 383,546 263,735
---------- ----------
Property, Plant and Equipment
Land and improvements 10,109 10,057
Buildings and improvements 66,429 64,103
Computer equipment 119,352 109,904
Machinery and equipment 42,693 37,451
Furniture and other 33,982 35,880
Construction in progress 31,778 9,023
---------- ----------
Total property, plant and equipment 304,343 266,418
Less accumulated depreciation 166,235 162,312
---------- ----------
Net property, plant and equipment 138,108 104,106
---------- ----------
Intangible Assets
Goodwill 31,061 21,197
Software licensed to customers 39,479 20,326
Other 118,575 1,681
---------- ----------
Total intangible assets 189,115 43,204
---------- ----------
Other Assets 85,395 80,794
---------- ----------
Net Assets of Discontinued Operations 260,760
----------
Total Automotive Solutions Assets 796,164 752,599
---------- ----------
FINANCIAL SERVICES ASSETS
-------------------------
Finance Receivables 420,588 426,751
Cash and Other Assets 541 840
---------- ----------
Total Financial Services Assets 421,129 427,591
---------- ----------
TOTAL ASSETS $1,217,293 $1,180,190
========== ==========
See Notes to Consolidated Financial Statements.
AUTOMOTIVE SOLUTIONS LIABILITIES
--------------------------------
Current Liabilities
Current portion of long-term debt $ 5,714 $ 5,714
Accounts payable
Trade 42,514 37,974
Other 4,862 5,835
Accrued liabilities
Compensation and related items 59,282 45,623
Income taxes 29,748
Other 36,941 22,544
Deferred revenues 15,604 23,700
---------- ----------
Total current liabilities 194,665 141,390
---------- ----------
Long-Term Debt 111,124 163,111
---------- ----------
Other Liabilities
Postretirement medical 41,317 40,218
Pensions 48,627 42,229
Other 3,406 738
---------- ----------
Total other liabilities 93,350 83,185
---------- ----------
Total Automotive Solutions Liabilities 399,139 387,686
---------- ----------
FINANCIAL SERVICES LIABILITIES
------------------------------
Notes Payable 212,176 219,423
Deferred Income Taxes 103,591 106,232
Other Liabilities 3,893 3,414
---------- ----------
Total Financial Services Liabilities 319,660 329,069
---------- ----------
SHAREHOLDERS' EQUITY
--------------------
Capital Stock
Preferred
Class A common 124,247 78,598
Class B common 625 625
Other Comprehensive Income (7,139) (9,448)
Retained Earnings 380,761 393,660
---------- ----------
Total Shareholders' Equity 498,494 463,435
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,217,293 $1,180,190
========== ==========
See Notes to Consolidated Financial Statements.
26
27
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands except per share data)
For The Years Ended September 30 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Capital Stock
Class A common
Balance, beginning of year $ 78,598 $ 57,610 $ 53,269
Capital stock issued 46,842 19,101 5,967
Capital stock repurchased (5,653) (1,991) (1,206)
Capital stock retired (808) (1,163) (1,463)
Tax benefits from stock options 5,268 5,041 1,043
---------- ---------- ---------
Balance, end of year 124,247 78,598 57,610
---------- ---------- ---------
Class B common 625 625 625
---------- ---------- ---------
Other Comprehensive Income
Balance, beginning of year (9,448) (9,727) (5,481)
Foreign currency translation (645) 780 (1,487)
Minimum pension liability 2,954 (501) (2,759)
---------- ---------- ---------
Balance, end of year (7,139) (9,448) (9,727)
---------- ---------- ---------
Retained Earnings
Balance, beginning of year 393,660 355,943 315,817
Net income 116,596 122,721 103,107
Cash dividends
Class A common (2000--$.44 PER SHARE;
1999--$.40 per share; 1998--$.36 per share) (33,690) (30,916) (28,244)
Class B common (2000--$.022 PER SHARE;
1999--$.02 per share; 1998--$.018 per share) (440) (400) (360)
Capital stock repurchased (95,365) (53,688) (34,377)
---------- ---------- ---------
Balance, end of year 380,761 393,660 355,943
---------- ---------- ---------
Total Shareholders' Equity $498,494 $463,435 $404,451
========== ========== =========
Comprehensive Income
Net income $116,596 $122,721 $103,107
Foreign currency translation (645) 780 (1,487)
Minimum pension liability 2,954 (501) (2,759)
---------- ---------- ---------
Total comprehensive income $118,905 $123,000 $ 98,861
========== ========== =========
See Notes to Consolidated Financial Statements.
27
28
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(In thousands)
For The Years Ended September 30 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided by Operating Activities $107,114 $116,249 $130,347
---------- ---------- ---------
Cash Flows Provided by (Used for) Investing Activities
Business combinations (101,635) (1,132)
Capital expenditures (65,677) (35,944) (17,909)
Net proceeds from sales of assets 8,872 1,308 3,411
Capitalization of software licensed to customers (20,258) (16,038) (4,048)
(Advances to) repayments from financial services 13,051 4,369 (5,375)
---------- ---------- ---------
Net cash used for investing activities (165,647) (46,305) (25,053)
---------- ---------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 47,145
Principal payments on debt (61,036) (45,206) (22,637)
Cash dividends paid (34,130) (31,316) (28,604)
Capital stock issued 16,786 16,067 2,617
Capital stock repurchased (101,018) (55,679) (35,583)
---------- ---------- ---------
Net cash used for financing activities (179,398) (68,989) (84,207)
---------- ---------- ---------
Effect of Exchange Rate Changes on Cash (645) 780 (1,487)
---------- ---------- ---------
Net Cash Provided by Discontinued Operations 340,436 61,880 12,776
---------- ---------- ---------
Increase in Cash and Equivalents 101,860 63,615 32,376
Cash and Equivalents, Beginning of Year 103,595 39,980 7,604
---------- ---------- ---------
Cash and Equivalents, End of Year $205,455 $103,595 $ 39,980
========== ========== =========
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $ 20,858 $ 19,580 $ 19,482
---------- ---------- ---------
Cash Flows Provided by (Used for) Investing Activities
Finance receivables originated (132,633) (152,815) (145,808)
Collections on finance receivables 131,854 127,315 109,886
---------- ---------- ---------
Net cash used for investing activities (779) (25,500) (35,922)
---------- ---------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 63,887 35,760 69,993
Principal payments on debt (71,134) (26,898) (57,746)
Advances from (repayments to) automotive solutions (13,051) (4,369) 5,375
---------- ---------- ---------
Net cash provided by (used for) financing activities (20,298) 4,493 17,622
---------- ---------- ---------
Increase (Decrease) in Cash and Equivalents (219) (1,427) 1,182
Cash and Equivalents, Beginning of Year 675 2,102 920
---------- ---------- ---------
Cash and Equivalents, End of Year $ 456 $ 675 $ 2,102
========== ========== =========
See Notes to Consolidated Financial Statements.
28
29
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 Automotive Solutions and
Financial Services. Automotive Solutions is comprised of the company's Dealer
Management Solutions, Documents and Professional Services segments. 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 Automotive Solutions are
classified as current or noncurrent and those of Financial Services are
unclassified. Intercompany balances and transactions are eliminated.
USE OF ESTIMATES
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America 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 and services
to automotive retailers. Substantially all finance receivables and accounts
receivable are from automotive retailers.
ALLOWANCE FOR LOSSES
An allowance for losses on finance receivables is established based on
historical loss experience, portfolio profile, industry averages and current
economic conditions. Finance receivables are charged to the allowance for losses
when an account is deemed to be uncollectible, taking into consideration the
financial condition of the customer and the value of the collateral. Recoveries
of finance receivables, previously charged off as uncollectible, are credited to
the allowance for losses.
INVENTORIES
Inventories are stated at the lower of cost or market. Costs of business forms
inventories are determined by the last-in, first-out (LIFO) method. At September
30, 2000 and 1999, LIFO inventories were $5,360 and $7,776, respectively. These
inventories determined by the first-in, first-out (FIFO) method would increase
by $4,067 in 2000 and $3,606 in 1999. For other inventories, comprised primarily
of computer equipment, cost is determined by specific identification or the FIFO
method. Market is based on net realizable value.
29
30
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--20
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 twenty years. Amortization
expense was $7,003 in 2000, $7,278 in 1999 and $12,710 in 1998. At September 30,
2000 and 1999, accumulated amortization was $44,238 and $42,406, 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 $1,105 in 2000, $1,308 in 1999
and $5,539 in 1998. September 30, 2000 and 1999, accumulated amortization was
$46,696 and $45,654, respectively. During the fourth quarter of fiscal year
2000, the company recorded a $4,264 obligation related to a software development
contract.
Other intangible assets are amortized over periods ranging from three to twenty
years. Amortization expense was $4,777 in 2000, $483 in 1999 and $1,998 in 1998.
At September 30, 2000 and 1999, accumulated amortization was $7,113 and 3,095,
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
The company owns 16,500 shares of Kalamazoo Computer Group plc of the United
Kingdom, representing about 26% of the outstanding shares. This investment is
accounted for under the equity method and the carrying value of $21,628 at
September 30, 2000, was included with other assets in the company's consolidated
balance sheets. The company recorded charges of $4,362 in 2000, $3,043 in 1999
and $3,225 in 1998, representing amortization of intangible assets and its share
of Kalamazoo's net losses.
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 Dealer Management Solutions'
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.
30
31
AUTOMOTIVE SOLUTIONS
Sales of computer hardware and business forms products are recorded when title
passes upon shipment to customers. Revenues from software license fees are
recorded over the installation period. Service revenues, which include computer
hardware maintenance, software support and training are recorded ratably over
the contract period or as services are performed.
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 operating lease agreements.
Certain of these leases contain renewal and purchase options and residual value
guarantees. As of September 30, 2000, future minimum lease payments relating to
operating lease agreements were $49,266 with annual payments of $20,976 in 2001,
$11,627 in 2002, $6,859 in 2003, $5,218 in 2004 and $2,233 in 2005. Rental
expenses were $25,188 in 2000, $19,868 in 1999 and $19,650 in 1998.
PURCHASE COMMITMENTS
At September 30, 2000, the company had a purchase commitment of about $18,000
for the construction of a new office building near Dayton, Ohio. The building is
expected to be completed in 2002 at an estimated cost of about $45,000.
RESEARCH AND DEVELOPMENT COSTS
The company expenses research and development costs as incurred. These costs
were $75,925 in 2000, $52,232 in 1999 and $43,584 in 1998.
INCOME TAXES
The parent company and its domestic subsidiaries file a consolidated U.S.
federal income tax return. 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, 2000, were $31,896. 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 income by the
weighted average number of common shares outstanding during the year. Diluted
EPS is computed by dividing 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.
2000 1999 1998
- --------------------------------------------------------------------------------
Average number of common shares outstanding
(used to determine basic EPS) 77,474 78,254 79,451
Effect of employee stock options 2,025 2,086 1,695
------ ------ ------
Average number of common shares and equivalents
outstanding (used to determine diluted EPS) 79,499 80,340 81,146
====== ====== ======
Employee stock options to purchase 4,092, 2,617 and 2,956 of common stock were
outstanding during 2000, 1999 and 1998, 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.
31
32
2. DISCONTINUED OPERATIONS
On August 4, 2000, the company sold the net assets of its Information Solutions
segment to The Carlyle Group for cash of $360,000 and recorded an after-tax gain
of $10,853 (net of income taxes of $31,181) or $.14 per diluted share. The
Information Solutions segment manufactured and distributed printed business
forms and provided forms management services to general business markets.
Revenues and expenses of the Information Solutions segment have been
reclassified to discontinued operations in the company's statements of
consolidated income. Revenues reclassified to discontinued operations were
$661,570 in 2000, $725,610 in 1999 and $705,118 in 1998. Income from
discontinued operations of $17,303 in 2000, $29,045 in 1999 and $21,853 in 1998
has been presented net of income taxes of $13,022 in 2000, $19,853 in 1999 and
$15,897 in 1998. Cash flows from discontinued operations have been reported as a
single line in the company's statements of condensed consolidated cash flows.
Information Solutions' assets and liabilities have been reclassified to the line
captioned, net assets of discontinued operations, in the company's September 30,
1999 consolidated balance sheet.
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. 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. Revenues and expenses of the Healthcare Systems
segment have been reclassified to discontinued operations in the company's
statement of consolidated income. Revenues reclassified to discontinued
operations were $48,226 in 1998. Losses from discontinued operations of $10,449
in 1998 were presented net of income tax benefits of $6,177. Cash flows from
discontinued operations have been reported as a single line in the company's
statement of condensed consolidated cash flows.
3. RESTRUCTURING CHARGES
During the fourth quarter of fiscal year 2000, the company completed the sale of
the Information Solutions segment (see Note 2 to the Consolidated Financial
Statements) and approved a plan for restructuring the rest of the company. In
connection with this plan, the company recorded a pretax restructuring charge of
$10,560. This charge consisted of $4,751 of employee termination benefits,
$4,715 of retirement costs and $1,094 of lease obligations. Employee termination
benefits represent severance and outplacement benefits for 252 employees, 135 of
which were in administrative positions. The remaining 117 employees worked at
the Oklahoma City manufacturing facility that will be closed during the first
quarter of fiscal year 2001. Through September 30, 2000, 61 former employees
began receiving severance payments. Retirement costs represent pension and other
postretirement benefits in excess of regular plan benefits for 20 employees,
including several executives. These incremental benefits will be paid along with
normal pension and other postretirement benefits. See Note 10 to the
Consolidated Financial Statements for additional disclosures about
postretirement benefits. Lease obligations represent remaining lease payments in
excess of sublease rentals for 38 sales offices vacated by the company.
Activity related to restructuring accruals was as follows:
Restructuring 9/30/00
Charges Payments Balance
- --------------------------------------------------------------------------------
Severance and related costs $4,751 $791 $3,960
Lease obligations 1,094 88 1,006
32
33
4. BUSINESS COMBINATIONS
In May 2000, the company purchased the outstanding membership interests of HAC
Group, LLC, the leading provider of learning, customer relationship management
and Web services to automobile retailers and manufacturers. The privately-held
HAC Group had revenues of $65,000 in 1999. The purchase price of $124,660
consisted of $97,460 of cash and the issuance of 1,222 restricted Class A common
shares. The issuance of capital stock was considered a noncash transaction for
accounting purposes and was not included in the statements of cash flows. This
business combination was accounted for as a purchase and the accounts of HAC
Group were included in the financial statements since the acquisition date. In
connection with this business combination, the company recorded goodwill of
$16,221 and various other intangible assets of $118,500 related to customer
relationships and acquired contracts, based on the preliminary allocation of the
purchase price. Goodwill and other intangible assets are being amortized on a
straight-line basis over three to twenty years. Under terms of the purchase
agreement, the company may be required to make additional payments over the next
three years of up to $60,000 in the aggregate, contingent on the operating
results of the business purchased.
In May 2000, the company and other industry partners formed a new independent
company, named ChoiceParts, LLC, that will develop an electronic parts exchange
for the automotive parts market. The company contributed its existing parts
locator business, which had annual revenues of nearly $12,000 and in-process
software development of a Web-based parts locator product to ChoiceParts in
exchange for a minority equity interest, consisting of both common and preferred
interests. The company also made a capital contribution to ChoiceParts of
$1,675. This investment is accounted for under the equity method and the
carrying value is included with other assets in the company's consolidated
balance sheets. In connection with this transaction, the company recorded
goodwill of $852 that is being amortized on a straight-line basis over five
years. During fiscal year 2000, the company recorded charges of $959
representing amortization of goodwill and its share of the losses of
ChoiceParts.
Under the terms of certain purchase agreements, the company may be required to
make additional payments, contingent on the operating results of the businesses
purchased. Contingent payments increased goodwill by $728 in 2000, $2,048 in
1999 and $2,071 in 1998.
COMPONENTS OF PURCHASE PRICES
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Cash (net of cash and equivalents acquired) $101,635 $ 565
Capital stock issued (1,222 shares) 27,200
Contingent payments made
Cash 638
Capital stock issued (2000 - 109 SHARES; 1999 - 88 shares;
1998 - 105 shares) 2,048 $1,871 1,933
-------- ------ ------
Totals $130,883 $1,871 $3,136
======== ====== ======
33
34
5. INCOME TAXES
PROVISION FOR INCOME TAXES
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Current
Federal $47,831 $47,209 $42,722
State and local 8,598 7,895 5,798
Foreign 1,695 2,430 152
Deferred 3,578 4,930 9,717
--------- --------- ---------
Provision for income taxes $61,702 $62,464 $58,389
========= ========= =========
Income taxes paid (net of refunds) $72,651 $64,903 $63,685
========= ========= =========
RECONCILIATION OF INCOME TAX RATES
2000 1999 1998
AMOUNT PERCENT Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------
Statutory federal income taxes $52,550 35.0% $52,624 35.0% $52,532 35.0%
State and local taxes less federal
income tax effect 5,840 3.9 6,396 4.3 6,354 4.3
Tax audit settlements (1,058) (.7) (4,971) (3.3)
Goodwill amortization 1,924 1.3 2,135 1.4 1,958 1.3
Other 1,388 .9 2,367 1.5 2,516 1.6
------- ------ ------- ---- ------- ----
Provision for income taxes $61,702 41.1% $62,464 41.5% $58,389 38.9%
======= ====== ======= ==== ======= ====
AUTOMOTIVE SOLUTIONS DEFERRED INCOME TAX ASSETS (LIABILITIES)
2000 1999
- ------------------------------------------------------------------------------------------------------------------
Deferred income tax assets
Postretirement medical $17,811 $19,311
Pensions 23,475 21,665
Acquired net operating losses 563
Software revenue recognition 2,176 4,572
Other 26,789 23,857
Deferred income tax liabilities
Depreciation (15,272) (9,766)
Other (13,658) (15,335)
-------- --------
Totals 41,321 44,867
Current 23,438 23,733
-------- --------
Noncurrent $17,883 $21,134
======== ========
34
35
6. FINANCIAL SERVICES
INCOME STATEMENTS
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Revenues $40,206 $38,674 $34,497
------- ------- -------
Expenses
Interest expense 14,224 13,108 13,241
Allowance for losses 2,360 2,550 2,395
General and administrative 2,627 2,452 2,315
------- ------- -------
Total expenses 19,211 18,110 17,951
------- ------- -------
Income before income taxes 20,995 20,564 16,546
Provision for income taxes 8,466 7,999 6,642
------- ------- -------
Net income $12,529 $12,565 $ 9,904
======= ======= =======
FINANCE RECEIVABLES
2000 1999
- ----------------------------------------------------------------------------------------------------------------
Product financing receivables $462,134 $474,667
Unguaranteed residual values 40,475 38,418
Allowance for losses (5,846) (6,581)
Unearned interest income (79,193) (82,855)
Other 3,018 3,102
-------- --------
Totals $420,588 $426,751
======== ========
As of September 30, 2000, product financing receivables due for each of the next five years were $161,562 in 2001,
$128,869 in 2002, $94,748 in 2003, $55,650 in 2004 and $20,879 in 2005.
ALLOWANCE FOR LOSSES
2000 1999
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $6,581 $4,540
Provisions
Financial services 2,360 2,550
Automotive solutions 520 2,005
Net losses (3,615) (2,514)
------ -------
Balance, end of year $5,846 $6,581
====== ======
35
36
7. FINANCING ARRANGEMENTS
AUTOMOTIVE SOLUTIONS
2000 1999
- ------------------------------------------------------------------------------------------------------------------
Fixed rate notes, $100,000 face value, interest rate of 7.0%, maturing in 2007 $ 99,696 $ 99,647
Fixed rate notes, weighted average interest rate
of 6.7%, maturing through 2003 17,142 22,857
Variable rate notes, weighted average interest rate of
5.1% at September 30, 1999 46,321
---------- ----------
Totals 116,838 168,825
Current portion 5,714 5,714
---------- ----------
Long-term portion $111,124 $163,111
========== ==========
Loan agreements limit consolidated indebtedness and require a minimum
consolidated net worth. The fair values of Automotive Solutions financing
arrangements were $111,844 at September 30, 2000 and $160,692 at September 30,
1999. At September 30, 2000, debt maturities were $5,714 in 2001, $5,714 in 2002
and $5,714 in 2003. Interest paid was $11,048 in 2000, $13,250 in 1999 and
$11,698 in 1998. Interest capitalized was $2,643 in 2000, $613 in 1999 and $3 in
1998.
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.
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.
36
37
Notional
Amounts
NOTES SWAPS
- ---------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000
- ---------------------------------------------------------------------------------------------------------------
Variable rate instruments, maturing through 2005 $116,457 $70,582
Weighted average interest rate 7.1%
Weighted average pay rate 6.5%
Weighted average receive rate 6.6%
Fixed rate notes, maturing through 2004 95,719
Weighted average interest rate 6.5%
-------- -------
Totals $212,176 $70,582
======== =======
September 30, 1999
- ---------------------------------------------------------------------------------------------------------------
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
======== =======
Loan agreements limit consolidated indebtedness and require a minimum
consolidated net worth. The fair value of Financial Services debt was $211,216
and $218,246 at September 30, 2000 and 1999, respectively. At September 30,
2000, maturities of notes were $89,683 in 2001, $46,163 in 2002, $63,289 in
2003, $12,416 in 2004 and $625 in 2005. Interest paid was $14,301 in 2000,
$13,262 in 1999 and $12,814 in 1998.
At September 30, 2000, notional amount maturities of swap agreements were
$17,082 in 2001, $24,500 in 2002, $17,625 in 2003, $10,750 in 2004 and $625 in
2005. The fair values of interest rate swap agreements were $25 and $(277) at
September 30, 2000 and 1999, respectively.
REVOLVING CREDIT AGREEMENTS
Automotive Solutions and Financial Services share variable rate revolving credit
agreements which total $150,000 and require commitment fees on unused credit. At
September 30, 2000, available balances under these agreements were $111,000.
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.
37
38
8. CAPITAL STOCK
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
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 76,532 77,757 78,986
Issued 2,611 1,519 644
Repurchased (5,488) (2,691) (1,800)
Retired (33) (53) (73)
------- ------- -------
Balance, end of year 73,622 76,532 77,757
======= ======= =======
Class B common
No par value
Authorized shares 40,000 40,000 40,000
Issued and outstanding shares 20,000 20,000 20,000
Dividends on Class A common shares must be twenty times the dividends on Class B
common shares and must be paid simultaneously. Each share of Class A common and
Class B common is entitled to one vote. The Class B common shareholder may
convert twenty Class B common shares to one share of Class A common. The company
has reserved sufficient authorized Class A common shares for Class B conversions
and stock option plans.
Each outstanding Class A common share has one preferred share purchase right.
Each outstanding Class B common share has one-twentieth of a right. Rights
become exercisable if a person or group acquires or seeks to acquire, through a
tender or exchange offer, 20% or more of the company's Class A common shares. In
that event, all holders of Class A common shares and Class B common shares,
other than the acquirer, could exercise their rights and purchase preferred
shares at a substantial discount. At the date of these financial statements,
except for the preferred share purchase rights, the company had no agreements or
commitments with respect to the sale or issuance of the preferred shares.
The company repurchased Class A common shares for treasury at average prices of
$18.41 in 2000, $20.69 in 1999 and $19.77 in 1998. The remaining balance of
shares authorized for repurchase by the board of directors was 6,190 at
September 30, 2000. Treasury shares at September 30 were 18,531 in 2000, 15,654
in 1999 and 14,482 in 1998.
38
39
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 of the common stock on the date of grant. During the three years
ended September 30, 2000, the company granted a nonqualified stock option for
200 Class A common shares at an option price of $.01 per share and recognized
compensation expense of $1,921 in 2000 and $1,001 in 1999. At September 30,
2000, options to purchase 1,480 additional Class A common shares were available
for future awards to certain key employees. Under a broad-based stock option
plan, the board of directors may award options at its discretion.
Weighted Average
Shares Under Option Option Prices Per Share
2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Outstanding
Beginning of year 13,675 10,615 8,788 $17.48 $16.30 $14.97
Granted 6,493 5,149 2,735 18.61 18.55 19.61
Exercised (1,276) (1,431) (540) 12.19 11.33 7.56
Canceled (1,272) (658) (368) 20.85 20.12 22.07
------ ------ ------
End of year 17,620 13,675 10,615 18.04 17.48 16.30
====== ====== ======
Exercisable at September 30 5,719 5,049 1,441 16.56 13.55 11.52
====== ====== ======
Outstanding, September 30, 2000 Exercisable, September 30, 2000
Weighted
Weighted Average Average Weighted
Option Number of Remaining Option Number of Average
PRICE RANGE Options Life in Years Price Options Option Price
- --------------------------------------------------------------------------------------------------------------------
$ .01 150 8.6 $ .01
$ 1.64 - $17.00 6,677 6.4 14.75 3,303 $12.62
$17.25 - $20.10 7,641 7.3 18.78 1,317 18.58
$20.47 - $27.13 3,152 7.3 24.10 1,099 25.99
------ -----
TOTALS 17,620 6.9 18.04 5,719 16.56
====== =====
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 $5.23 in 2000, $4.91 in 1999 and $6.05
in 1998. The fair value of the company's stock options granted below fair market
value was $23.04 in 1999. There were no options granted below fair market value
in 2000 or 1998. Had compensation expense been recognized using these fair
values, the company's net income and diluted earnings per common share would
have decreased by $11,695 or $.15 per share in 2000, $8,152 or $.10 per share in
1999 and $5,885 or $.07 per share in 1998.
OPTION VALUATION ASSUMPTIONS
2000 1999 1998
- -----------------------------------------------------------------------------
Expected life in years 5 5 5
Dividend yield 1.7% 1.5% 1.4%
Risk free interest rate 6.1% 4.3% 5.9%
Volatility 33% 29% 28%
39
40
10. POSTRETIREMENT BENEFITS
PENSION EXPENSE
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Net periodic pension cost
Service cost $12,747 $12,517 $ 8,927
Interest cost 17,677 16,548 14,838
Estimated return on plan assets (15,840) (14,863) (12,629)
Amortization of unrecognized transitional asset 144 147 129
Amortization of prior service cost 523 239 268
Recognized net actuarial losses 830 2,131 628
Plan administration 791 813 730
Special termination benefits 4,526 1,971
Settlement - discontinued operations 533
-------- -------- --------
Net periodic pension cost 21,931 19,503 12,891
Defined contribution plans 10,435 9,045 8,715
Multi-employer plans 154 175 235
-------- -------- --------
Totals $32,520 $28,723 $21,841
======== ======== ========
Actuarial assumptions
Discount rate 6.5%-7.75% 6.0% - 6.75% 7.12%-8.0%
Rate of compensation increase 3.75%-6.0% 3.75% - 5.0% 3.75%-5.0%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
Actuarial cost method PROJECTED UNIT CREDIT
Measurement period JULY 1 - JUNE 30
The company sponsors contributory and noncontributory, defined benefit pension
plans for most employees. Pension benefits are primarily based on years of
service and compensation. The company's funding policy is to make annual
contributions to the plans sufficient to meet or exceed the minimum statutory
requirements. The company and its actuaries review the pension plans each year.
The actuarial assumptions are intended to reflect expected experience over the
life of the pension liability.
The company expensed special termination benefits of $4,526 in 2000 and $1,971
in 1999 in connection with the restructuring in 2000 and the sale of the
Healthcare Systems segment in 1999. 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.
40
41
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
2000 1999
- ----------------------------------------------------------------------------------------------------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $259,496 $ 243,662
Service cost 12,945 12,400
Interest cost 17,633 16,595
Actuarial gains (8,014) (2,377)
Benefits paid (13,415) (9,602)
Liabilities transferred (59,807) (3,476)
Special termination benefits 4,526
Employee contributions (213) (168)
Plan merger 886
Foreign currency translation (856) 1,576
--------- --------
Projected benefit obligation, end of year $212,295 $259,496
========= ========
Change in plan assets
Fair value of plan assets, beginning of year $193,406 $174,578
Actual return on plan assets 17,409 21,629
Administrative expenses paid (710) (639)
Employer contributions 6,029 6,122
Employee contributions (213) (205)
Plan merger 886
Assets transferred (58,451) (3,720)
Benefits paid (7,349) (6,957)
Foreign currency translation (955) 1,712
--------- --------
Fair value of plan assets, end of year $149,166 $193,406
========= ========
Net amount recognized
Funded status $63,129 $66,090
Unrecognized transition obligation (685) (1,343)
Unrecognized prior service cost (3,954) (1,458)
Unrecognized net losses (6,515) (23,590)
Multi-employer liability 3 145
Minimum pension liability 10,000 12,735
--------- --------
Net amount recognized $61,978 $52,579
========= ========
Minimum pension liability
Intangible asset $ 4,718 $ 2,509
Deferred income tax benefit 2,127 4,117
Accumulated other comprehensive income 3,155 6,109
--------- --------
Totals $ 10,000 $ 12,735
========= ========
Actuarial assumptions
Projected benefit obligation discount rate 6.5% - 7.75% 6.0% - 7.0%
Rate of compensation increase 3.75% - 5.0% 3.75% - 5.0%
At September 30, 2000 and 1999, about 46% and 44% 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.
As part of the sale of the Information Solutions segment, the company settled
its pension obligations by transferring the liability and plan assets to the
purchaser.
The company sponsors certain unfunded pension plans. These pension plans have
accumulated benefit obligations exceeding plan assets. The projected benefit
obligations were $54,132 and $53,387 at September 30, 2000 and 1999,
respectively. The accumulated benefit obligations were $52,410 and $50,416 at
September 30, 2000 and 1999, respectively.
41
42
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $1,127 $1,311 $1,129
Interest cost 3,209 3,635 3,456
Amortization of prior service cost (391) (110) 2
Recognized net actuarial losses 3 285
Special termination benefits 189
Settlement - discontinued operations (865)
------ ------ ------
Totals $3,272 $5,121 $4,587
====== ====== ======
Actuarial assumptions
Discount rate 7.0% - 7.75% 6.75% 7.0%
Healthcare cost trend rate through 2007 6.0% 6.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0% 5.0%
The company sponsors a defined benefit medical plan for employees who retired
before October 1, 1993. Future retirees may purchase postretirement medical
insurance from the company. Discounts from the market price of postretirement
medical insurance will be provided to certain retirees based on age and length
of remaining service as of October 1, 1993. These discounts are included in the
determination of the accumulated benefit obligation. 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
2000 1999
- -------------------------------------------------------------------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $47,388 $53,512
Service cost 1,124 1,311
Interest cost 3,209 3,635
Plan participants' contributions 165 172
Actuarial gains (4,602) (5,150)
Benefits paid (2,972) (2,591)
Liability transferred (4,205)
Change in plan amendments 3,501)
------- -------
Projected benefit obligation, end of year $40,107 $47,388
======= =======
Net amount recognized
Projected benefit obligation, end of year $40,107 $47,388
Unrecognized prior service cost 3,371 4,816
Unrecognized net gains (losses) 989 (3,507)
------- -------
Net amount recognized $44,467 $48,697
======= =======
Actuarial assumptions
Discount rate 7.75% 7.0%
Healthcare cost trend rate through 2007 6.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0%
The effect of a 1% increase in the assumed healthcare cost trend rate would have
increased fiscal year 2000 service and interest costs by $177 and the September
30, 2000 accumulated benefit obligation by $2,256. Similarly, a 1% decrease
would have decreased fiscal year 2000 service and interest costs by $141 and the
September 30, 2000 accumulated benefit obligation by $2,168.
42
43
11. CASH FLOW STATEMENTS
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash flows provided by (used for) operating activities
Net income $104,067 $110,156 $ 93,203
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 38,676 32,071 45,787
Deferred income taxes 1,557 (3,394) (2,896)
Deferred income taxes transferred to (from)
financial services (7,886) 5,507 5,361
Income from discontinued operations (28,156) (34,830) (11,404)
Loss (gain) on sales of assets 523 279 (795)
Changes in operating assets and liabilities
Accounts receivable (1,955) (4,501) (13,990)
Inventories 1,884 (1,971) (761)
Prepaid expenses, intangible and other assets (2,132) (1,285) 1,568
Accounts payable (1,443) 346 10,980
Accrued and other liabilities 1,979 13,871 3,294
-------- -------- --------
Net cash provided by operating activities $107,114 $116,249 $130,347
======== ======== ========
FINANCIAL SERVICES
Cash flows provided by (used for) operating activities
Net income $12,529 $12,565 $ 9,904
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes (2,641) 9,861 12,182
Deferred income taxes transferred to (from)
automotive solutions 7,886 (5,507) (5,361)
Changes in receivables, other assets
and other liabilities 3,084 2,661 2,757
-------- -------- --------
Net cash provided by operating activities $20,858 $19,580 $19,482
======== ======== ========
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44
12. SEGMENT REPORTING
During the fourth quarter of fiscal year 2000, the company reorganized into a
number of solutions business units (SBUs) to serve the automotive market. The
company aggregated similar SBUs into four reportable segments.
Dealer Management Solutions consists of Retail Management Solutions, Information
Output Services systems and Info-Structure Services. These SBUs provide
integrated computer systems products and related services. Products include
integrated software packages, computer hardware and installation of hardware and
software. Services include customer training, hardware maintenance and software
support.
The Documents segment represents the Information Output Services' documents SBU.
This segment manufactures and distributes printed business forms to automotive
retailers.
Professional Services consists of Reynolds Transformation Services, eMarkets,
Consumer Loyalty Solutions and the Information Output Services IntelliPath
system. This segment provides specialized training, consulting services, Web
services and customer relationship management products and services.
The Financial Services segment provides financing for the company's computer
systems products.
Total assets were not allocated by segment except for Financial Services'
assets. Investments in equity method investees and capital expenditures were not
allocated by segment. Depreciation and amortization were reflected in
determining segment operating income, however, it is not practicable to present
this information by segment. Prior years' financial information has been
reclassified to reflect the reorganized business segments.
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Net sales and revenues
Dealer management solutions
Computer services $389,151 $ 355,238 $318,223
Computer systems products 165,952 171,057 181,109
---------- ----------- -----------
Total dealer management solutions 555,103 526,295 499,332
Documents 184,280 187,771 189,772
Professional services 144,792 84,681 57,244
Financial services 40,206 38,674 34,497
---------- ----------- -----------
Total net sales and revenues $924,381 $ 837,421 $780,845
========== =========== ===========
Operating income (loss)
Dealer management solutions $101,017 $ 79,903 $99,888
Documents 39,585 49,973 52,905
Professional services 4,172 3,482 (6,654)
Financial services 20,995 20,564 16,546
Restructuring charges (10,560)
---------- ----------- -----------
Total operating income $155,209 $ 153,922 $162,685
========== =========== ===========
Assets
Automotive solutions $ 796,164 $ 491,839 $ 379,203
Financial services 421,129 427,591 411,159
Discontinued operations 260,760 287,381
---------- ----------- -----------
Total assets $1,217,293 $ 1,180,190 $ 1,077,743
========== =========== ===========
Investments in equity method investees $33,260 $31,908 $36,096
Capital expenditures 65,677 35,944 17,909
Depreciation and amortization 38,676 32,071 45,787
44
45
13. CONTINGENCIES
The U.S. Environmental Protection Agency (EPA) has designated the company as one
of a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at 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 2000 utilizing
Connecticut's contribution. The company was also recently named a defendant in a
cost recovery lawsuit in Dayton, Ohio regarding another environmental
remediation site. Discovery in that lawsuit is in its early stages, too early to
determine the company's liability exposure. The company believes that the
reasonably foreseeable resolution of these two matters will not have a material
adverse effect on the financial statements.
45
46
14. ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and in June 2000, amended certain
provisions of that statement by issuing SFAS Statement No. 138, "Accounting for
Certain Derivative Instruments and Certain 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 identified its derivative contracts and based on its review has determined
that the effect of adopting these statements will not have a material effect on
the company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which
provides guidance on applying generally accepted accounting principles for
recognizing revenue. SAB No. 101, as amended, is effective for the fourth
quarter of fiscal year 2001. The company is reviewing the impact of SAB No. 101,
and does not believe that its adoption will have a material effect on the
company's consolidated financial statements.
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15. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
2000
- -----------------------------------------------------------------------------------------------------------------
Net sales and revenues
Automotive solutions $211,319 $210,225 $226,000 $236,631
Financial services 9,764 10,515 9,746 10,181
-------- -------- -------- --------
Totals $221,083 $220,740 $235,746 $246,812
======== ======== ======== ========
Gross profit $120,126 $118,143 $125,719 $134,749
Income from continuing operations $25,059 $23,548 $21,024 $18,809
Basic earnings per common share $.32 $.31 $.27 $.24
Diluted earnings per common share $.32 $.29 $.26 $.24
Net income $31,300 $32,968 $25,293 $27,035
Basic earnings per common share $.41 $.42 $.32 $.35
Diluted earnings per common share $.40 $.41 $.31 $.35
Cash dividends declared per share
Class A common $.11 $.11 $.11 $.11
Class B common $.0055 $.0055 $.0055 $.0055
Closing market prices of Class A common shares
High $22.88 $29.81 $27.81 $19.81
Low $17.88 $19.31 $18.25 $16.19
1999
- -----------------------------------------------------------------------------------------------------------------
Net sales and revenues
Automotive solutions $176,454 $197,738 $206,224 $218,331
Financial services 9,370 9,732 9,942 9,630
-------- -------- -------- --------
Totals $185,824 $207,470 $216,166 $227,961
======== ======== ======== ========
Gross profit $93,667 $108,034 $112,714 $118,954
Income from continuing operations $18,338 $22,625 $23,437 $23,491
Basic earnings per common share $.23 $.29 $.30 $.30
Diluted earnings per common share $.23 $.28 $.29 $.29
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
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FINANCIAL SUMMARY
(Dollars in thousands except per share data)
For The Years Ended September 30 2000 1999 % Change
- -------------------------------------------------------------------------------
Net Sales and Revenues $924,381 $837,421 10%
Income from Continuing Operations $88,440 $87,891 1%
Basic earnings per common share $1.14 $1.12 2%
Diluted earnings per common share $1.11 $1.09 2%
Net Income $116,596 $122,721 (5)%
Basic earnings per common share $1.50 $1.57 (4)%
Diluted earnings per common share $1.47 $1.53 (4)%
Cash Dividends Per Class A Common Share $.44 $.40 10%
Return on Equity 24.2% 28.3%
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VALUATION ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
(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
AUTOMOTIVE SOLUTIONS
Reserves for accounts receivable:
Year ended September 30, 2000 2,056 3,197 (697) 2,232 0 2,324
Year ended September 30, 1999 3,382 2,449 (902) 1,906 967 2,056
Year ended September 30, 1998 3,936 2,750 (343) 2,961 0 3,382
Reserves for inventory:
Year ended September 30, 2000 2,336 2,809 (2,694) 807 0 1,644
Year ended September 30, 1999 3,749 1,088 13 2,293 221 2,336
Year ended September 30, 1998 1,750 1,568 2,108 1,677 0 3,749
FINANCIAL SERVICES
Reserves for finance receivables:
Year ended September 30, 2000 6,581 2,360 520 3,615 0 5,846
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
(a) Includes adjustments from translation of foreign currency to United States
dollars, the effects of acquisitions of businesses and transfers between
reserves.
(b) Includes adjustments for disposal of businesses.
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