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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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________ TO _______________.
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-0421120
(State of Incorporation) (IRS Employer
Identification No.)
115 SOUTH LUDLOW STREET
DAYTON, OHIO 45402
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 485-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
CLASS A COMMON SHARES (NO PAR VALUE) NEW YORK STOCK EXCHANGE
- ------------------------------------- -----------------------
(Title of class) (Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
----
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in the definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or in any amendment to this Form 10-K.
The aggregate market value of the Class A Common Shares held by non-affiliates
of the registrant, as of December 18, 2001, was $1,800,257,950.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of December 18, 2001:
Class A Common Shares: 69,593,719 (exclusive of 22,534,520 Treasury shares)
Class B Common Shares: 20,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Proxy Statement for 2002 Annual Meeting of Shareholders
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, document management and leasing services for
automotive retailers and manufacturers.
In fiscal 2001, the company continued its transformation. Fiscal 2001
represented the first full year since the company's sale of its non-automotive
documents business. Fueled by a business model built on a strong recurring
revenue base, the company delivered quarterly and annual earnings that met or
exceeded analysts' estimates and also invested significantly in people,
processes and new products. During fiscal 2001, the company:
- Strengthened its core product platform and added new offerings
in network services. Automark(TM) Web Services and
ReySource(TM), a new Internet procurement solution for
automotive retailers, made significant contributions.
"Automark(TM) gives automotive retailers and customers
complete control over their website's content and appearance,
allows them to fit e-commerce into the way they prefer to
operate and ensures that every employee understands the
special requirements and protocols for doing business online."
- Invested in new businesses ranging from Internet-based
customer relationship management ("CRM") solutions to advanced
wireless technology.
- Earned, for the third consecutive year, recognition from the
Software Professionals Association for the excellence of the
company's Technical Assistance Center ("TAC"). The TAC
received the prestigious STAR (Software Technical Assistance
Recognition) award in the high volume category. The award
recognizes outstanding accomplishments and superior
performance in the delivery of technical support to external
customers.
- Added significant new leadership talent, new perspectives and
increased the numbers of minorities in executive positions.
- Reorganized the sales organization and implemented a new human
resources information system that provides the technological
foundation for an enterprise-wide system that will improve
organizational efficiencies.
- Consolidated manufacturing facilities, creating a more
efficient, effective manufacturing system.
Reynolds is comprised of four segments, each containing allied solutions
business units.
The Software Solutions segment, formerly Retail Management Solutions, consists
of the Software Solutions and the Info-Structure Services business units. This
segment provides 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 as well as consulting services.
The Transformation Solutions segment includes the Transformation Solutions
business unit and the Software Solutions Intellipath business unit. This segment
provides specialized training, Web services and customer relationship management
products and services.
The Documents segment manufactures and distributes printed business forms to
automotive retailers.
The Financial Services segment provides financing for the company's computer
systems products through the company's wholly-owned subsidiary, Reyna Capital
Corporation.
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FINANCIAL INFORMATION ABOUT SEGMENTS
AND FOREIGN AND DOMESTIC OPERATIONS
See Note 12 to the Consolidated Financial Statements on page 46 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:
- - ReySource(TM), a new Internet procurement solution for automotive retailers
which exceeded $20 million in sales during its first seven months in
operation;
- - A new ERA(TM)3 retail management solution, ConsumerReach(TM), featuring an
Internet-ready set of retail management capabilities for automotive
retailers that expands Reynolds' integrated suite of services; and
- - Significantly expanded services offerings, introducing 22 new services
including a number of industry-leading Distance Learning solutions.
The company also announced a shift in emphasis to application service provider
(ASP) services for front office dealership applications.
RAW MATERIALS
Computer hardware and peripherals are essential to the company. It purchases
these products from a variety of suppliers. Hewlett-Packard supplies the
hardware platform for the ERA system. 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 software solutions
to automotive retailers.
The company's main competitor in the Software 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 is expanding and supplementing its solutions in the Transformation
Solutions segment. This segment experiences competition from hundreds of
providers.
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.
3
The company believes it competes by providing value-added products, services and
solutions that satisfy market needs and uses 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.
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, 2001, the dollar
value of the product backlog including software license fees is estimated to be
$37,000 compared to $30,000 last year. The company anticipates the backlog to be
recognized as revenue during fiscal year 2002.
RESEARCH AND DEVELOPMENT
During fiscal 2001, the company continued its substantial investment in research
and development to deliver new and enhanced solutions for customers.
Expenditures for those activities were $71,080 in 2001, $75,925 in 2000 and
$52,232 in 1999.
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 47.)
EMPLOYEES
On September 30, 2001, the company and its subsidiaries employed 4,763 persons.
ITEM 2. PROPERTIES
As of September 30, 2001, the company owned and operated two forms manufacturing
plants in the United States encompassing approximately 427,000 square feet.
Corporate headquarters are located in the Dayton, Ohio area in several buildings
owned by the company which contain approximately 1,050,000 square feet. In
addition, the company leases approximately 31 offices throughout the United
States and Canada.
In December 2001, the company commenced occupancy of the second phase of its new
351,000 square foot Dayton area facility. 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. See Note 1 to the Consolidated
Financial Statements on page 30.
ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 13 to the Consolidated Financial Statements
on page 47.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
(Dollars in thousands except per share data)
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Class A Common Shares are listed on the New York Stock Exchange.
There is no principal market for the Class B Common Shares. The company also has
an authorized class of 60 million preferred shares with no par value. 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 40.
Information on market prices and dividends is set forth below:
CLASS A COMMON SHARES SALE PRICES
2001 2000
----- ----
Fiscal Quarter High Low High Low
-------------- ---- --- ---- ---
First $20.50 $16.94 $22.88 $17.88
Second $22.97 $19.25 $29.81 $19.31
Third $23.00 $18.25 $27.81 $18.25
Fourth $25.14 $21.26 $19.81 $16.19
CASH DIVIDENDS PAID
Class A Common Class B Common
-------------- --------------
Months 2001 2000 2001 2000
------ ----- ----- ----- ----
January $.11 $.11 $.0055 $.0055
April $.11 $.11 $.0055 $.0055
June $.11 $.11 $.0055 $.0055
September $.11 $.11 $.0055 $.0055
As of December 18, 2001, there were approximately 3,325 holders of record of
Class A Common Shares and one holder of record of Class B Common Shares.
5
FIVE-YEAR SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
For The Years Ended September 30 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net Sales and Revenues
Automotive solutions $ 962,094 $ 914,481 $ 829,354 $ 771,156 $ 711,629
Financial services 41,918 40,206 38,674 34,497 30,383
---------- ---------- ---------- ---------- ----------
Total net sales and revenues $1,004,012 $ 954,687 $ 868,028 $ 805,653 $ 742,012
========== ========== ========== ========== ==========
Income from Continuing Operations $ 97,934 $ 88,440 $ 87,891 $ 91,703 $ 57,780
Basic earnings per common share $ 1.34 $ 1.14 $ 1.12 $ 1.15 $ .71
Diluted earnings per common share $ 1.31 $ 1.11 $ 1.09 $ 1.13 $ .69
Net Income $ 99,557 $ 116,596 $ 122,721 $ 103,107 $ 59,219
Basic earnings per common share $ 1.36 $ 1.50 $ 1.57 $ 1.30 $ .73
Diluted earnings per common share $ 1.33 $ 1.47 $ 1.53 $ 1.27 $ .70
Return on Equity 20.4% 24.2% 28.3% 26.8% 16.1%
Cash Dividends Per Class A Common Share $ .44 $ .44 $ .40 $ .36 $ .32
Book Value Per Outstanding Common Share $ 6.69 $ 6.68 $ 5.98 $ 5.14 $ 4.55
Assets
Automotive solutions $ 720,016 $ 796,164 $ 752,599 $ 666,584 $ 644,714
Financial services 422,334 421,129 427,591 411,159 373,175
---------- ---------- ---------- ---------- ----------
Total assets $1,142,350 $1,217,293 $1,180,190 $1,077,743 $1,017,889
========== ========== ========== ========== ==========
Long-Term Debt
Automotive solutions $ 105,805 $ 111,124 $ 163,111 $ 160,346 $ 170,150
Financial services 147,429 126,868 154,040 145,460 137,455
---------- ---------- ---------- ---------- ----------
Total long-term debt $ 253,234 $ 237,992 $ 317,151 $ 305,806 $ 307,605
========== ========== ========== ========== ==========
Number of Employees 4,763 4,945 9,083 9,152 9,138
AUTOMOTIVE SOLUTIONS (excluding Financial Services)
Current Ratio 1.94 2.02 1.87 1.41 1.05
Net Property, Plant and Equipment $ 159,051 $ 138,108 $ 104,106 $ 93,900 $104,066
Total Debt $ 111,866 $ 116,838 $ 168,825 $ 166,837 $189,426
Total Debt to Capitalization 19.0% 19.0% 26.7% 29.2% 34.2%
Certain reclassifications have been made to prior years' consolidated financial
statements to conform with the presentation used in 2001, including
reclassifications to comply with Emerging Issues Task Force Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs". The company reclassified
freight, postage and handling fees billed to customers from cost of sales to net
sales and revenues.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In thousands except per share data)
Certain statements in this report constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on current expectations, estimates,
forecasts and projections of future company or industry performance based on
management's judgment, beliefs, current trends and market conditions.
Forward-looking statements made or to be made by or on behalf of the company may
be identified by the use of words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions.
Forward-looking statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict.
Actual outcomes and results may differ materially from what is expressed,
forecasted or implied in the forward-looking statements. See also the discussion
of factors that may affect future results contained in the company's Current
Report on Form 8-K filed with the SEC on August 11, 2000, which we incorporate
herein by reference. The company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
SIGNIFICANT EVENTS
BUSINESS COMBINATIONS
In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a.
DealerKid, a provider of electronic customer marketing and relationship
management software and services for automotive retailers in the United States
and Canada. Privately-held DealerKid had revenues of about $2,000 in 2000.
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.
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. See Note 4 to the Consolidated Financial Statements for more
information on business combinations.
DISCONTINUED OPERATIONS
In August 2000, the company sold the assets of its Information Solutions segment
to The Carlyle Group for cash of $360,000 and recorded an after-tax gain on the
sale of $10,853 or $.14 per diluted share. Operating results of the Information
Solutions segment have been presented as discontinued operations in the
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.
In October 1998, the company sold essentially all net assets of its Healthcare
Systems segment to InfoCure Corporation for about $50,000 and recorded an
after-tax gain on the sale of $5,785 or $.07 per diluted share. 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 represented costs for 272 former employees
and included closing of the Oklahoma City manufacturing facility and vacating 38
leased facilities. See Note 3 to the Consolidated Financial Statements for more
information on restructuring charges.
7
RECLASSIFICATIONS
Certain reclassifications were made to prior years' financial information to
conform with the presentation used in 2001, including reclassifications to
comply with Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs." The company reclassified freight, postage and
handling fees billed to customers from cost of sales to net sales and revenues.
ACCOUNTING CHANGE
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The company adopted this pronouncement effective October
1, 1998. The adoption of this pronouncement reduced Software 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 fiscal year 1999.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
2001 vs. 2000 2000 vs. 1999
2001 2000 1999 Change Change
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales and revenues $1,004,012 $954,687 $868,028 $49,325 5% $86,659 10%
Gross profit $537,440 $498,737 $433,369 $38,703 8% $65,368 15%
Operating income $171,732 $155,209 $153,922 $16,523 11% $1,287 1%
Income from continuing operations $97,934 $88,440 $87,891 $9,494 11% $549 1%
Discontinued operations $1,623 $28,156 $34,830 ($26,533) -94% ($6,674) -19%
Net income $99,557 $116,596 $122,721 ($17,039) -15% ($6,125) -5%
Basic earnings per share
Income from continuing operations $1.34 $1.14 $1.12 $0.20 18% $0.02 2%
Net income $1.36 $1.50 $1.57 ($0.14) -9% ($0.07) -4%
Diluted earnings per share
Income from continuing operations $1.31 $1.11 $1.09 $0.20 18% $0.02 2%
Net income $1.33 $1.47 $1.53 ($0.14) -10% ($0.06) -4%
Consolidated net sales and revenues grew 5% in fiscal year 2001 and 10% in
fiscal year 2000. Excluding the effect of acquisitions and divestitures,
consolidated net sales and revenues increased 2% in fiscal year 2001 and 7% in
fiscal year 2000, primarily as a result of growth in computer services revenues.
Consolidated gross profit represented 55.9% of Automotive Solutions revenues
(excluding Financial Services revenues) in 2001, compared to 54.5% in 2000 and
52.3% in 1999. Gross profit margins increased in both years, primarily as a
result of growth in Software Solutions' computer services revenues.
As a percentage of revenues, consolidated operating income was 17.1% in 2001
compared to 16.3% in 2000 and 17.7% in 1999. Fiscal year 2000 included a
restructuring charge and fiscal year 1999 included the effect of an accounting
change. In fiscal year 2001, operating margins reflected a full year of the
fiscal year 2000 acquisition of HAC Group LLC, the fiscal year 2001 purchase of
DealerKid and costs related to a work stoppage of a software development
contract. These acquired businesses had lower operating margins than the
existing business. Research and development expenses were $71,080 in 2001,
$75,925 in 2000 and $52,232 in 1999. Fiscal year 2000 operating margins reflect
the growth of R&D expenses.
Interest expense declined over the last three years because of debt repayments
and capitalization of interest expense for software development and construction
of an office building. Interest income increased in fiscal year 2001 because of
higher investments as a result of the cash proceeds from the August 2000 sale of
the Information Solutions segment. Equity in net losses of affiliated companies
increased in 2001 and 2000 because of greater losses from the company's
investment in Kalamazoo Computer Group, the May 2000 investment in ChoiceParts
and the May 2001 $3,200 write-off of the company's investment in Consumer Car
Club. See Note 1 to the Consolidated Financial Statements for additional
disclosures about the company's investment in Kalamazoo and Note 4 for
additional disclosures about the company's investment in ChoiceParts.
8
The effective income tax rate was 39.7% in 2001, compared to 41.1% in 2000 and
41.5% in 1999. The effective tax rate declined in fiscal year 2001 primarily
because of higher R&D tax credits.
SOFTWARE SOLUTIONS
2001 vs. 2000 2000 vs. 1999
2001 2000 1999 Change Change
- -----------------------------------------------------------------------------------------------------------------
Net sales and revenues
Computer services $439,657 $400,727 $365,394 $38,930 10% $35,333 10%
Computer systems products $146,586 $164,270 $167,167 ($17,684) -11% ($2,897) -2%
-------------------------------------------------- --------------------
Total net sales and revenues $586,243 $564,997 $532,561 $21,246 4% $32,436 6%
Gross profit $350,615 $324,086 $282,843 $26,529 8% $41,243 15%
% of revenues 59.8% 57.4% 53.1%
SG&A expenses $226,893 $218,016 $198,133 $8,877 4% $19,883 10%
% of revenues 38.7% 38.6% 37.2%
Operating income $123,722 $106,070 $84,710 $17,652 17% $21,360 25%
% of revenues 21.1% 18.8% 15.9%
Software Solutions revenues grew 4% in fiscal year 2001 and 6% in fiscal year
2000 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. Sales of computer systems products
declined in both fiscal years 2001 and 2000 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 $38,000 at September 30, 2001 compared to $33,000
last year. In fiscal year 1999, sales of computer systems products also reflect
a $17,936 negative effect of an accounting change related to software revenue
recognition.
Gross profit margins and operating income margins increased in both fiscal years
2001 and 2000 because of growth in higher margin computer service revenues.
Gross margins on computer service revenues also increased each year because of
economies of scale in supporting the greater number of software applications.
TRANSFORMATION SOLUTIONS
2001 vs. 2000 2000 vs. 1999
2001 2000 1999 Change Change
- ---------------------------------------------------------------------------------------------------------------------
Net sales and revenues $188,798 $153,142 $97,437 $35,656 23% $55,705 57%
Gross profit $76,157 $59,356 $30,842 $16,801 28% $28,514 92%
% of revenues 40.3% 38.8% 31.7%
SG&A expenses $91,593 $60,237 $32,167 $31,356 52% $28,070 87%
% of revenues 48.5% 39.4% 33.1%
Operating income (loss) ($15,436) ($881) ($1,325) ($14,555) $444
% of revenues -8.2% -0.6% -1.4%
Transformation Solutions revenues grew in fiscal years 2001 and 2000, in large
part, because of the May 2000 acquisition of HAC Group LLC. Excluding the impact
of acquisitions and divestitures, Transformation Solutions revenues declined 3%
in fiscal year 2001 primarily because of a decline in CarPoint revenues and a
slowdown in consulting revenues. CarPoint revenues declined about $12,000 in
fiscal year 2001 because of a change in the CarPoint business model. In fiscal
year 2002, it is anticipated that these revenues will decline an additional
$19,000. Consulting revenues declined in the fourth quarter reflecting the
overall economy. In fiscal year 2001, IntelliPath sales and CreditMaster
revenues continued to grow because of higher volume. Excluding the impact of
acquisitions and divestitures, Transformation Solutions revenues grew 27% in
fiscal year 2000 reflecting strong internal sales growth of newer products such
as CarPoint, IntelliPath and CreditMaster. Campaign Management Services revenues
declined in 2000 because of lower volume.
9
Operating losses increased substantially in fiscal year 2001 because of the
decline in CarPoint revenues, costs related to the DealerKid acquisition, the
slowdown in consulting revenues and higher R&D expenses related to product
development. In fiscal year 2000, gross profit margins increased because of the
strong growth in IntelliPath revenues. SG&A expenses increased in fiscal year
2000 also because of higher R&D expenses. SG&A expenses also include
amortization expenses from both the DealerKid and HAC Group LLC acquisitions.
DOCUMENTS
2001 vs. 2000 2000 vs. 1999
2001 2000 1999 Change Change
- ---------------------------------------------------------------------------------------------------
Net sales and revenues $187,053 $196,342 $199,356 ($9,289) -5% ($3,014) -2%
Gross profit $110,668 $115,295 $119,684 ($4,627) -4% ($4,389) -4%
% of revenues 59.2% 58.7% 60.0%
SG&A expenses $ 70,877 $ 75,710 $ 69,711 ($4,833) -6% $5,999 9%
% of revenues 37.9% 38.5% 34.9%
Operating income $ 39,791 $ 39,585 $ 49,973 $206 1% ($10,388) -21%
% of revenues 21.3% 20.2% 25.1%
Documents sales volumes have declined each of the last two years as a result of
a decline in the volume of business forms sold. In other reporting segments,
revenues from laser printing solutions increased and substantially offset the
decline in document sales. Gross profit and operating margins remained strong
over the three-year period. In fiscal year 2000, SG&A expenses increased over
1999 primarily as a result of software development costs related to Web-enabled
products and processes.
FINANCIAL SERVICES
2001 vs. 2000 2000 vs. 1999
2001 2000 1999 Change Change
- --------------------------------------------------------------------------------------------------
Net sales and revenues $41,918 $40,206 $38,674 $1,712 4% $1,532 4%
Operating income $23,655 $20,995 $20,564 $2,660 13% $ 431 2%
% of revenues 56.4% 52.2% 53.2%
In fiscal year 2001, Financial Services revenues grew 4% with about half of the
increase from higher interest revenues and the other half related to realization
of residual values at contract maturity. Interest revenues grew 2% in 2001
because of slightly higher average interest rates on finance receivables as
average finance receivable balances were about the same as last year. 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. 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 3.4% in 2001,
compared to 3.1% in 2000 and 3.7% in 1999. In 2001, the interest spread
increased because of slightly higher average interest rates on finance
receivables. In 2000, the interest spread declined because of higher borrowing
rates on debt. Bad debt expenses were $2,500 in 2001, $2,360 in 2000 and $2,550
in 1999.
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 2001. Net cash provided by operating activities was
$165,548 in fiscal year 2001 and resulted primarily from income from continuing
operations adjusted for noncash charges. This operating cash flow funded the
company's investments for normal operations and capital expenditures of $51,383,
which included $27,789 for the construction of a new office building near
Dayton, Ohio. During fiscal year 2001, the company also capitalized $20,310 of
software licensed to customers. Fiscal year 2002 capital expenditures and
capitalized software licensed to customers in the ordinary course of business
are anticipated to be about $65,000, which includes about $20,000 for the new
office building and related contents. See the shareholders' equity caption of
this analysis regarding the payment of dividends and share repurchases.
10
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% as of both September 30, 2001 and September 30, 2000. During fiscal year
2001, the company negotiated a new $150,000 three-year revolving credit
agreement to replace an expiring arrangement. Remaining credit available under
this revolving credit agreement was $67,300 at September 30, 2001. 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, cash
flow from operations and cash available from existing credit agreements will be
sufficient to fund fiscal year 2002 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. As
of September 30, 2001, the company can issue an additional $130,000 of notes
under a 1997 shelf registration statement on file with the Securities and
Exchange Commission. 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 2002. 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 60,000 preferred shares with no par value. As of November
13, 2001, no 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 $32,121 in 2001, $34,130 in 2000 and $31,316
in 1999. Dividends per Class A common share were $.44 in both 2001 and 2000, and
$.40 in 1999. 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 $140,816 of Class A common shares in 2001, $101,018 in
2000 and $55,679 in 1999. Average prices paid per share were $21.70 in 2001,
$18.41 in 2000 and $20.69 in 1999. As of September 30, 2001, the company could
repurchase an additional 4,700 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 generally have
repayment terms of five years. 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.
11
Because fixed rate finance receivables are primarily funded with fixed rate debt
or its equivalent (variable rate debt that has been fixed with interest rate
swaps), management believes that a 100 basis point change in interest rates
would not have a material effect on the company's financial statements. See Note
7 to the Consolidated Financial Statements for additional disclosures regarding
the company's debt instruments and interest rate management agreements.
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations, primarily in Canada, which accounted
for 6% of net sales and revenues in 2001. 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, 2001, the company had no foreign currency exchange
contracts outstanding. Based on the company's overall foreign currency exchange
rate exposure at September 30, 2001, 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 15 to the Consolidated Financial Statements for a discussion of the
effect of accounting standards that the company has not yet adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risks" section in Management Discussion and Analysis (Part II, Item
7 of this report on pages 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
(page 14) 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 2002 Annual Meeting of
Shareholders captioned "PROPOSAL I - ELECTION OF DIRECTORS."
12
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, 2001, are:
NAME AGE POSITION
- ------- --- --------
David R. Holmes 61 Chairman of the Board
Lloyd G. Waterhouse 50 President and Chief Executive Officer
Dale L. Medford 51 Executive Vice President and Chief
Financial Officer, and Director
Douglas M. Ventura 41 General Counsel and Secretary
Michael J. Gapinski 51 Treasurer and Assistant Secretary
A description of prior positions held by executive officers of the company
within the past 5 years, to the extent applicable, is as follows:
Mr. Holmes has been Chairman of the Board since November 2000; prior thereto,
Chairman of the Board and Chief Executive Officer from May 1999 to November
2000; and prior thereto Chairman of the Board, President and Chief Executive
Officer. Mr. Holmes will retire from the company effective January 1, 2002.
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. Waterhouse
will become Chairman of the Board, President and Chief Executive Officer
effective January 1, 2002.
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.
All other executive officers of the company have held their positions for at
least 5 years.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Compliance with the filings required under Section 16(a) of the Securities
Exchange Act of 1934 is herein incorporated by reference to the section of the
company's Proxy Statement for its 2002 Annual Meeting of Shareholders captioned
"Section 16(a) Beneficial Ownership Reporting Compliance."
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 2002 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, 2001 is incorporated
herein by reference to the section of the company's Proxy Statement for its 2002
Annual Meeting of Shareholders captioned "STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
13
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 2002 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 26-50.
Statements of Consolidated Income - For The Years Ended
September 30, 2001, 2000 and 1999
Consolidated Balance Sheets - September 30, 2001 and 2000
Statements of Consolidated Shareholders' Equity - For The Years Ended
September 30, 2001, 2000 and 1999
Statements of Condensed Consolidated Cash Flows - For the Years Ended
September 30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements (Including Supplementary
Data)
(a)(2) FINANCIAL STATEMENT SCHEDULES FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED SEPTEMBER 30, 2001 ARE ATTACHED HERETO:
Schedule II Valuation Accounts Page 51
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) Amendment to Amended and Restated Articles of
Incorporation, effective April 18, 2001.
------------------ ------------------------------------------------------
(3)(d) Amended and Restated Consolidated Code of Regulations;
incorporated by reference to Exhibit A to the
company's definitive proxy statement dated January 8,
2001 filed with the Securities and Exchange
Commission.
------------------ ------------------------------------------------------
14
------------------ ------------------------------------------------------
Exhibit No. Item
------------------ ------------------------------------------------------
(4)(a) Copies of the agreements relating to long-term debt,
which are not required as exhibits to this Form 10-K,
will be provided to the Securities and Exchange
Commission upon request.
------------------ ------------------------------------------------------
(4)(b) Amended and Restated Rights Agreement between The
Reynolds and Reynolds Company and Mellon Investor
Services LLC as Rights Agent dated as of December 1,
2001.
------------------ ------------------------------------------------------
(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)* Amendment Number 1 to the Second Amended and Restated
Employment Agreement of David R. Holmes effective as
of August 7, 2001.
------------------ ------------------------------------------------------
(10)(c)* Amended and Restated Employment Agreement with Lloyd
G. Waterhouse, as of December 1, 2001.
------------------ ------------------------------------------------------
(10)(d)* Employment Agreement with Dale L. Medford dated as of
May 7, 2001.
------------------ ------------------------------------------------------
(10)(e)* Employment Agreement with Timothy J. Bailey dated as
of December 1, 2001
------------------ ------------------------------------------------------
(10)(f)* Employment Agreement with Douglas M. Ventura dated as
of December 1, 2001.
------------------ ------------------------------------------------------
(10)(g)* Consulting Agreement with Eustace W. Mita effective
October 1, 2001.
------------------ ------------------------------------------------------
(10)(h)* 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)(i)* 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)(j)* General form of Indemnification Agreement between the
company and each of its directors dated as of December
1, 1989; incorporated by reference to Exhibit (10)(m)
to Form 10-K for the fiscal year ended September 30,
1989.
------------------ ------------------------------------------------------
(10)(k)* Amended and Restated Stock Option Plan -- 1989,
effective November 13, 2001.
------------------ ------------------------------------------------------
(10)(l)* Restated Stock Option Plan - 1995, effective November
13, 2001.
------------------ ------------------------------------------------------
(10)(m)* 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)(n)* 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)(o)* 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.
------------------ ------------------------------------------------------
15
------------------ ------------------------------------------------------
Exhibit No. Item
------------------ ------------------------------------------------------
(10)(p)* 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)(q)* 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)(r)* 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)(s)* 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)(t)* 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)(u)* 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)(v)* 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)(w)* 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)(x)* 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)(y)* Resolution of the Board of Directors amending The
Reynolds and Reynolds Company Supplemental Retirement
Plan (Amendment No. 1), dated as of November 13, 1990;
incorporated by reference to Exhibit (10)(ff) to Form
10-K for the fiscal year ended September 30, 1990.
------------------ ------------------------------------------------------
(10)(z)* 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)(aa)* 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)(bb)* 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.
------------------ ------------------------------------------------------
16
------------------ ------------------------------------------------------
Exhibit No. Item
------------------ ------------------------------------------------------
(10)(cc)* The Reynolds and Reynolds Company Supplemental
Retirement Plan Amendment No. 5, adopted November 12,
2001.
------------------ ------------------------------------------------------
(10)(dd)* 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)(ee)* 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)(ff)* 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)(gg)* 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)(hh)* 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)(ii)* 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)(jj)* 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)(kk)* 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)(ll)* The Reynolds and Reynolds Company Retirement Plan
(formerly The Reynolds and Reynolds Company Salaried
Retirement Plan) October 1, 1995 Restatement Amendment
No. 3, adopted September 22, 1998, as filed herewith;
incorporated by reference to Exhibit (10)(oo) to Form
10-K for the fiscal year ended September 30, 1998.
------------------ ------------------------------------------------------
(10)(mm)* General Form of Deferred Compensation Agreement
between the company and each of the following
officers: R. H. Grant, III, David R. Holmes and Dale
L. Medford; incorporated by reference to Exhibit
(10)(p) to Form 10-K for the fiscal year ended
September 30, 1983.
------------------ ------------------------------------------------------
(10)(nn)* 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.
------------------ ------------------------------------------------------
17
------------------ ------------------------------------------------------
Exhibit No. Item
------------------ ------------------------------------------------------
(10)(oo)* 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, 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)(pp)* 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, David
R. Holmes and Dale L. Medford; incorporated by
reference to Exhibit (10)(hhh) to Form 10-K for the
fiscal year ended September 30, 1989.
------------------ ------------------------------------------------------
(10)(qq)* General Form of Non-Qualified Deferred Compensation
and Disability Agreement between the Company and each
of its officers effective December 1, 2001.
------------------ ------------------------------------------------------
(10)(rr) 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)(ss) 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)(tt) 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)(uu) 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)(vv) 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 52)
------------------ ------------------------------------------------------
(22) Not applicable
------------------ ------------------------------------------------------
(23) Consent of Independent Auditors (See Page 25)
------------------ ------------------------------------------------------
(24) Not Applicable
------------------ ------------------------------------------------------
18
------------------ ------------------------------------------------------
Exhibit No. Item
------------------ ------------------------------------------------------
(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, 2001, we reported items under Item 5 of
Form 8-K on August 7, 2001.
(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 2001
Annual Report to Shareholders upon
written request to:
DOUGLAS M. VENTURA, GENERAL COUNSEL AND SECRETARY
THE REYNOLDS AND REYNOLDS COMPANY
P. O. BOX 2608
DAYTON, OHIO 45401
Or by calling: 1-888-4REYREY (473-9739)
-----------------------------------------------------------------------------
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE REYNOLDS AND REYNOLDS COMPANY
By /S/ DOUGLAS M. VENTURA
--------------------------------------
DOUGLAS M. VENTURA
General Counsel and Secretary
Date: December 21, 2001
19
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 21, 2001
By /S/ DAVID R. HOLMES
-------------------------------------------
DAVID R. HOLMES
Chairman of the Board
Date: December 21, 2001
By /S/ LLOYD G. WATERHOUSE
-------------------------------------------
LLOYD G. WATERHOUSE
President and Chief Executive Officer
and Director
(Principal Executive Officer)
Date: December 21, 2001
By /S/ DALE L. MEDFORD
-------------------------------------------
DALE L. MEDFORD
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer) and Director
Date: December 21, 2001
By /S/ JAMES L. ARTHUR
-------------------------------------------
JAMES L. ARTHUR, Director
Date: December 21, 2001
By /S/ DR. DAVID E. FRY
-------------------------------------------
DR. DAVID E. FRY, Director
Date: December 21, 2001
By /S/ RICHARD H. GRANT, III
-------------------------------------------
RICHARD H. GRANT, III, Director
Date: December 21, 2001
By /S/ CLEVE L. KILLINGSWORTH, JR.
-------------------------------------------
CLEVE L. KILLINGSWORTH, JR.
Director
20
Date: December 21, 2001
By /S/ EUSTACE W. MITA
-------------------------------------------
EUSTACE W. MITA, Director
Date: December 21, 2001
By /S/ PHILIP A. ODEEN
-------------------------------------------
PHILIP A. ODEEN, Director
Date: December 21, 2001
By /S/ DONALD K. PETERSON
-------------------------------------------
DONALD K. PETERSON, Director
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, 2001
The Reynolds and Reynolds Company
Dayton, Ohio
22
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
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.
Another level of control resides with the audit committee of the company's board
of directors. The committee, comprised of four directors who are not members of
management, oversees the company's financial reporting process. They recommend
to the board, subject to shareholder approval, the selection of the company's
independent 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 Executive Vice President
Chief Executive Officer and Chief Financial Officer
23
INDEPENDENT AUDITORS' REPORT
The Shareholders of The Reynolds and Reynolds Company:
We have audited the accompanying consolidated balance sheets of The Reynolds and
Reynolds Company and its subsidiaries as of September 30, 2001 and 2000 and the
related statements of consolidated income, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 2001. Our audits
also included the financial statement schedule included as 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, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001, 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, presents fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
Dayton, Ohio
November 13, 2001
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) Post-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, (18) Registration
Statement No. 333-30090 on Form S-8, (19) Registration Statement No. 333-53798
on Form S-3, (20) Registration Statement No. 333-57272 on Form S-8 and (21)
Registration Statement No. 333-70630 on Form S-8 of our report dated November
13, 2001, appearing in this Annual Report on Form 10-K of The Reynolds and
Reynolds Company for the year ended September 30, 2001, 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 20, 2001
25
STATEMENTS OF CONSOLIDATED INCOME
(In thousands except per share data)
For The Years Ended September 30 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Net Sales and Revenues
Automotive solutions
Services $ 600,681 $ 535,372 $ 454,581
Products 361,413 379,109 374,773
----------- ----------- -----------
Total automotive solutions 962,094 914,481 829,354
Financial services 41,918 40,206 38,674
----------- ----------- -----------
Total net sales and revenues 1,004,012 954,687 868,028
----------- ----------- -----------
Costs and Expenses
Cost of sales
Services 220,721 203,311 174,372
Products 203,933 212,433 221,613
----------- ----------- -----------
Total cost of sales 424,654 415,744 395,985
Selling, general and administrative expenses 389,363 353,963 300,011
Restructuring charges 10,560
Financial services 18,263 19,211 18,110
----------- ----------- -----------
Total costs and expenses 832,280 799,478 714,106
----------- ----------- -----------
Operating Income 171,732 155,209 153,922
----------- ----------- -----------
Other Charges (Income)
Interest expense 5,303 7,441 10,282
Interest income (7,818) (6,736) (6,737)
Equity in net losses of affiliated companies 13,019 4,416 1,520
Other (1,296) (54) (1,498)
----------- ----------- -----------
Total other charges 9,208 5,067 3,567
----------- ----------- -----------
Income Before Income Taxes 162,524 150,142 150,355
Income Taxes 64,590 61,702 62,464
----------- ----------- -----------
Income from Continuing Operations 97,934 88,440 87,891
Income from Discontinued Operations 1,623 28,156 34,830
----------- ----------- -----------
Net Income $ 99,557 $ 116,596 $ 122,721
=========== =========== ===========
Basic Earnings Per Common Share
Income from continuing operations $ 1.34 $ 1.14 $ 1.12
Income from discontinued operations $ .02 $ .36 $ .45
Net income $ 1.36 $ 1.50 $ 1.57
Average number of common shares outstanding 73,183 77,474 78,254
Diluted Earnings Per Common Share
Income from continuing operations $ 1.31 $ 1.11 $ 1.09
Income from discontinued operations $ .02 $ .35 $ .43
Net income $ 1.33 $ 1.47 $ 1.53
Average number of common shares and
equivalents outstanding 74,919 79,499 80,340
See Notes to Consolidated Financial Statements
26
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 2001 2000
- --------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS ASSETS
---------------------------
Current Assets
Cash and equivalents $ 110,511 $ 205,455
------------ ------------
Accounts receivable (less allowance for
doubtful accounts:
2001--$3,662; 2000--$2,324) 124,954 127,314
------------ ------------
Inventories
Finished products 10,271 14,360
Work in process 398 480
Raw materials and supplies 177 447
------------ ------------
Total inventories 10,846 15,287
------------ -------------
Deferred income taxes 23,437 23,438
------------ -------------
Prepaid expenses and other assets 16,465 12,052
------------ ------------
Total current assets 286,213 383,546
------------ ------------
Property, Plant and Equipment
Land and improvements 9,921 10,109
Buildings and improvements 64,668 66,429
Computer equipment 135,256 119,352
Machinery and equipment 42,004 42,693
Furniture and other 34,405 33,982
Construction in progress 51,859 31,778
------------ ------------
Total property, plant and equipment 338,113 304,343
Less accumulated depreciation 179,062 166,235
------------ ------------
Net property, plant and equipment 159,051 138,108
------------ ------------
Intangible Assets
Goodwill 34,663 31,061
Software licensed to customers 59,690 39,479
Other 107,262 118,575
------------ ------------
Total intangible assets 201,615 189,115
------------ ------------
Other Assets 73,137 85,395
------------ ------------
Total Automotive Solutions Assets 720,016 796,164
------------ ------------
FINANCIAL SERVICES ASSETS
-------------------------
Finance Receivables 421,370 420,588
Cash and Other Assets 964 541
------------ ------------
Total Financial Services Assets 422,334 421,129
------------ ------------
TOTAL ASSETS $1,142,350 $1,217,293
============ ============
September 30 2001 2000
- --------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS LIABILITIES
--------------------------------
Current Liabilities
Current portion of long-term debt $ 6,061 $ 5,714
Accounts payable
Trade 41,258 42,514
Other 3,380 4,862
Accrued liabilities
Compensation and related items 43,321 54,913
Income taxes 6,961 29,748
Other 28,519 36,942
Deferred revenues 18,362 15,604
------------ ------------
Total current liabilities 147,862 190,297
------------ ------------
Long-Term Debt 105,805 111,124
------------ ------------
Other Liabilities
Postretirement medical 42,742 41,317
Pensions 56,192 52,995
Other 5,066 3,406
------------ ------------
Total other liabilities 104,000 97,718
------------ ------------
Total Automotive Solutions Liabilities 357,667 399,139
------------ ------------
FINANCIAL SERVICES LIABILITIES
------------------------------
Notes Payable 203,512 212,176
Deferred Income Taxes 97,169 103,591
Other Liabilities 7,219 3,893
------------ ------------
Total Financial Services Liabilities 307,900 319,660
------------ ------------
SHAREHOLDERS' EQUITY
--------------------
Capital Stock
Preferred
Class A common 167,356 124,247
Class B common 625 625
Other Comprehensive Losses (9,547) (7,139)
Retained Earnings 318,349 380,761
------------ ------------
Total Shareholders' Equity 476,783 498,494
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,142,350 $1,217,293
========== ==========
See Notes to Consolidated Financial Statements.
27
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands except per share data)
For The Years Ended September 30 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Capital Stock
Class A common
Balance, beginning of year $124,247 $78,598 $57,610
Capital stock issued 44,455 46,842 19,101
Capital stock repurchased (10,968) (5,653) (1,991)
Capital stock retired (459) (808) (1,163)
Tax benefits from stock options 10,081 5,268 5,041
--------- --------- ---------
Balance, end of year 167,356 124,247 78,598
--------- --------- ---------
Class B common 625 625 625
--------- --------- ---------
Other Comprehensive Income (Losses)
Balance, beginning of year (7,139) (9,448) (9,727)
Foreign currency translation (1,591) (645) 780
Minimum pension liability 847 2,954 (501)
Cumulative effect of accounting change 15
Net unrealized losses on derivative contracts (1,679)
--------- --------- ---------
Balance, end of year (9,547) (7,139) (9,448)
--------- --------- ---------
Retained Earnings
Balance, beginning of year 380,761 393,660 355,943
Net income 99,557 116,596 122,721
Cash dividends
Class A common (2001--$.44 PER SHARE;
2000--$.44 per share; 1999--$.40 per share) (31,681) (33,690) (30,916)
Class B common (2001--$.022 PER SHARE;
2000--$.022 per share; 1999--$.02 per share) (440) (440) (400)
Capital stock repurchased (129,848) (95,365) (53,688)
--------- --------- ---------
Balance, end of year 318,349 380,761 393,660
--------- --------- ---------
Total Shareholders' Equity $476,783 $498,494 $463,435
========= ========= =========
Comprehensive Income
Net income $99,557 $116,596 $122,721
Foreign currency translation (1,591) (645) 780
Minimum pension liability 847 2,954 (501)
Cumulative effect of accounting change 15
Net unrealized losses on derivative contracts (1,679)
--------- --------- ---------
Total comprehensive income $97,149 $118,905 $123,000
========= ========= =========
See Notes to Consolidated Financial Statements.
28
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(In thousands)
For The Years Ended September 30 2001 2000 1999
- ---------------------------------------------------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash Flows Provided by Operating Activities $165,548 $118,948 $116,249
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Business combinations (12,008) (101,635)
Capital expenditures (51,383) (65,677) (35,944)
Net proceeds from sales of assets 3,770 9,157 1,308
Capitalization of software licensed to customers (20,310) (20,258) (16,038)
Repayments from (advances to) financial services (4,321) 13,051 4,369
--------- --------- ---------
Net cash used for investing activities (84,252) (165,362) (46,305)
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 47,145
Principal payments on debt (7,930) (61,036) (45,206)
Cash dividends paid (32,121) (34,130) (31,316)
Capital stock issued 43,996 16,786 16,067
Capital stock repurchased (140,816) (101,018) (55,679)
--------- --------- ---------
Net cash used for financing activities (136,871) (179,398) (68,989)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash (1,591) (645) 780
--------- --------- ---------
Net Cash Provided by (Used for) Discontinued Operations (37,778) 328,317 61,880
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents (94,944) 101,860 63,615
Cash and Equivalents, Beginning of Year 205,455 103,595 39,980
--------- --------- ---------
Cash and Equivalents, End of Year $110,511 $205,455 $103,595
========= ========= =========
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $14,019 $20,858 $19,580
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Finance receivables originated (178,268) (132,633) (152,815)
Collections on finance receivables 168,577 131,854 127,315
--------- --------- ---------
Net cash used for investing activities (9,691) (779) (25,500)
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 78,813 63,887 35,760
Principal payments on debt (87,477) (71,134) (26,898)
Advances from (repayments to) automotive solutions 4,321 (13,051) (4,369)
--------- --------- ---------
Net cash provided by (used for) financing activities (4,343) (20,298) 4,493
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents (15) (219) (1,427)
Cash and Equivalents, Beginning of Year 456 675 2,102
--------- --------- ---------
Cash and Equivalents, End of Year $441 $456 $675
========= ========= =========
See Notes to Consolidated Financial Statements.
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 Software
Solutions, Transformation Solutions and Documents 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 include 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, 2001 and 2000, LIFO inventories were $4,634 and $5,360, respectively. These
inventories determined by the first-in, first-out (FIFO) method would increase
by $3,784 in 2001 and $4,067 in 2000. 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.
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 $7,122 in 2001, $7,003 in 2000 and $7,278 in 1999. At September 30,
2001 and 2000, accumulated amortization was $51,344 and $44,238, 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 $1,967 in 2001, $1,105 in 2000
and $1,308 in 1999. September 30, 2001 and 2000, accumulated amortization was
$48,032 and $46,696, respectively.
Other intangible assets are amortized over periods ranging from three to twenty
years. Amortization expense was $11,292 in 2001, $4,777 in 2000 and $483 in
1999. At September 30, 2001 and 2000, accumulated amortization was $18,387 and
$7,113, respectively.
Other intangible assets related to Trade Cycle Technology and CyberCar were
acquired in the May 2000 purchase of HAC Group LLC. These assets are being
amortized on a straight-line basis over their useful lives because this method
of amortization best matches expected future revenues. The useful lives for the
Trade Cycle Technology and CyberCar intangible assets reflect the relationship
between HAC Group and the customer that began in 1983. This relationship is
expected to continue over the remaining useful life of the Trade Cycle
Technology and CyberCar assets.
Useful
Life
(years) 9/30/01 9/30/00
- --------------------------------------------------------------------------------------
Customer relationship - Trade Cycle Technology 20 $ 64,484 $ 67,954
Customer relationship - CyberCar 10 13,648 15,238
Other intangible assets 3 - 20 29,130 35,383
--------- --------
Total other intangible assets $107,262 $118,575
========= ========
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."
31
EQUITY INVESTMENT
The company owns 16,500 shares of Kalamazoo Computer Group plc (Kalamazoo) of
the United Kingdom, representing about 26% of the outstanding shares. In
addition, two of the company's officers are members of Kalamazoo's board of
directors. At September 30, 2001, the market value of the company's Kalamazoo
shares was $1,705 based on the closing sale price reported by the London Stock
Exchange. This investment is accounted for under the equity method and the
carrying value of $13,910 at September 30, 2001, was included with other assets
in the company's consolidated balance sheets. Quarterly, the company evaluates
the recoverability of its investment in Kalamazoo as required by SFAS No. 121
and Staff Accounting Bulletin No. 59. As part of its evaluation, management
considered the market value and carrying value of its investment, management's
likelihood of holding or selling its investment and potential sales proceeds and
related tax benefits. Based on this evaluation a charge of $3,507 was recorded
in the fourth quarter of 2001.
The company recorded losses of $7,718 in 2001, $4,362 in 2000 and $3,043 in
1999, representing amortization of intangible assets, its share of Kalamazoo's
net losses and the fourth quarter 2001 charge. These losses were recorded as
equity in net losses of affiliated companies in the statements of consolidated
income.
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 Software 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.
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 sales. Revenues are recognized over the lives of
financing contracts, generally five 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, 2001, future minimum lease payments relating to
operating lease agreements were $33,950 with annual payments of $18,082 in 2002,
$6,204 in 2003, $4,528 in 2004, $2,829 in 2005 and $1,188 in 2006. Rental
expenses were $24,939 in 2001, $25,188 in 2000 and $19,868 in 1999.
PURCHASE COMMITMENTS
At September 30, 2001, the company had a purchase commitment of about $7,400 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.
During 2001, the company entered into an agreement to outsource certain computer
services. This agreement requires annual payments of about $18,000 over the
eight year term of the agreement.
32
RESEARCH AND DEVELOPMENT COSTS
The company expenses research and development costs as incurred. These costs,
primarily representing software development costs, were $71,080 in 2001, $75,925
in 2000 and $52,232 in 1999.
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, 2001, were $28,137. 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.
2001 2000 1999
- --------------------------------------------------------------------------------
Average number of common shares outstanding
(used to determine basic EPS) 73,183 77,474 78,254
Effect of employee stock options 1,736 2,025 2,086
------ ------ ------
Average number of common shares and equivalents
outstanding (used to determine diluted EPS) 74,919 79,499 80,340
====== ====== ======
Employee stock options to purchase 3,705, 4,092 and 2,617 of common stock were
outstanding during 2001, 2000 and 1999, 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' consolidated financial
statements to conform with the presentation used in 2001, including
reclassifications to comply with Emerging Issues Task Force Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs". The company reclassified
freight, postage and handling fees billed to customers from cost of sales to net
sales and revenues.
33
2. DISCONTINUED OPERATIONS
During the second quarter of fiscal year 2001, the company recorded income from
discontinued operations of $1,623. Income from discontinued operations included
about $.01 per share from the collection of notes receivable obtained in the
October 1998 sale of the Healthcare Systems segment and about $.01 per share
from tax benefits related to the August 2000 sale of the Information Solutions
segment.
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.
Additional income from discontinued operations was $17,303 (net of $13,022 of
income taxes) in 2000 and $29,045 (net of $19,853 of income taxes) in 1999. The
Information Solutions segment manufactured and distributed printed business
forms and provided forms management services to general business markets.
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.
3. RESTRUCTURING CHARGES
During fiscal year 2000, the company recorded a pre-tax 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 represented 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 was closed during the first
quarter of fiscal year 2001. As of September 30, 2001, all of the identified
employees have begun 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:
Severance and Lease
Related Costs Obligations
- -----------------------------------------------------------------------------
Restructuring charges $4,751 $1,094
Payments (791) (88)
------- -------
Balances at September 30, 2000 3,960 1,006
Payments (3,482) (422)
Adjustments to income (318) (96)
------- -------
Balances at September 30, 2001 $160 $488
======= =======
34
4. BUSINESS COMBINATIONS
In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a.
DealerKid, a provider of electronic customer marketing and relationship
management software and services for automotive retailers in the United States
and Canada. Privately held DealerKid had revenues of about $2,000 in 2000. The
purchase price of $10,452 was paid with $9,758 of cash from existing balances
and the issuance of a $694 note payable. This business combination was accounted
for as a purchase and the accounts of DealerKid were included in the financial
statements since the acquisition date. In connection with this business
combination the company recorded goodwill of $11,307. Goodwill is being
amortized on a straight-line basis over five years.
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. 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 two 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, to 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 years
2001 and 2000, the company recorded losses of $4,191 and $959, respectively
representing amortization of goodwill and its share of the losses of
ChoiceParts. These losses were recorded as equity in net losses of affiliated
companies in the statements of consolidated income.
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. The effect of contingent arrangements reduced goodwill $728 in 2001
and increased goodwill $728 in 2000 and $2,048 in 1999.
COMPONENTS OF PURCHASE PRICES
2001 2000 1999
- --------------------------------------------------------------------------------
Cash (net of cash and equivalents acquired) $12,008 $101,635
Capital stock issued (1,222 shares) 27,200
Note payable issued 694
Contingent payments made
Capital stock issued 2000 - 109 shares
1999 - 88 shares) 2,048 $1,871
-------- -------- --------
Totals $12,702 $130,883 $1,871
======== ======== ========
35
5. INCOME TAXES
PROVISION FOR INCOME TAXES
2001 2000 1999
- --------------------------------------------------------------------------------
Current
Federal $50,055 $47,831 $47,209
State and local 8,543 8,598 7,895
Foreign 1,502 1,695 2,430
Deferred 4,490 3,578 4,930
------- ------- -------
Provision for income taxes $64,590 $61,702 $62,464
======= ======= =======
Income taxes paid (net of refunds) $56,404 $72,651 $64,903
======= ======= =======
RECONCILIATION OF INCOME TAX RATES
2001 2000 1999
AMOUNT PERCENT Amount Percent Amount Percent
- --------------------------------------------------------------------------------
Statutory federal
income taxes $56,884 35.0% $52,550 35.0% $52,624 35.0%
State and local taxes
less federal income
tax effect 6,611 4.1 5,840 3.9 6,396 4.3
Tax audit settlements (1,058) (.7)
Goodwill amortization 1,199 .7 1,924 1.3 2,135 1.4
Other (104) (.1) 1,388 .9 2,367 1.5
-------- ---- -------- ---- -------- ----
Provision for
income taxes $64,590 39.7% $61,702 41.1% $62,464 41.5%
======== ==== ======== ==== ======== ====
AUTOMOTIVE SOLUTIONS DEFERRED INCOME TAX ASSETS (LIABILITIES)
2001 2000
- --------------------------------------------------------------------------------
Deferred income tax assets
Postretirement medical $18,280 $17,811
Pensions 24,550 23,475
Software revenue recognition 51 2,176
Other 24,904 26,789
Deferred income tax liabilities
Depreciation (21,833) (15,272)
Other (13,042) (13,658)
-------- --------
Totals 32,910 41,321
Current 23,437 23,438
-------- --------
Noncurrent $9,473 $17,883
======== ========
36
6. FINANCIAL SERVICES
INCOME SUMMARY
2001 2000 1999
- --------------------------------------------------------------------------------
Revenues $41,918 $40,206 $38,674
------- ------- -------
Expenses
Interest expense 13,258 14,224 13,108
Allowance for losses 2,500 2,360 2,550
General and administrative 2,505 2,627 2,452
------- ------- -------
Total expenses 18,263 19,211 18,110
------- ------- -------
Operating Income $23,655 $20,995 $20,564
======= ======= =======
FINANCE RECEIVABLES
2001 2000
- --------------------------------------------------------------------------------
Product financing receivables $462,950 $462,134
Unguaranteed residual values 40,434 40,475
Allowance for losses (5,956) (5,846)
Unearned interest income (78,939) (79,193)
Other 2,881 3,018
--------- ---------
Totals $421,370 $420,588
========= =========
As of September 30, 2001, product financing receivables due for each of the next
five years were $171,581 in 2002, $133,796 in 2003, $88,332 in 2004, $48,920 in
2005 and $20,194 in 2006.
ALLOWANCE FOR LOSSES
2001 2000
- --------------------------------------------------------------------------------
Balance, beginning of year $5,846 $6,581
Provisions
Financial services 2,500 2,360
Automotive solutions 500 520
Net losses (2,890) (3,615)
------- -------
Balance, end of year $5,956 $5,846
======= =======
37
7. FINANCING ARRANGEMENTS
AUTOMOTIVE SOLUTIONS
2001 2000
- ----------------------------------------------------------------------------------------------------
Fixed rate notes, $100,000 face value, interest rate of 7.0%, maturing in 2007 $99,745 $99,696
Fixed rate notes, weighted average interest rate
of 6.7%, maturing through 2003 12,121 17,142
-------- --------
Totals 111,866 116,838
Current portion 6,061 5,714
-------- --------
Long-term portion $105,805 $111,124
======== ========
Loan agreements limit consolidated indebtedness and require a minimum interest
coverage ratio. The fair values of Automotive Solutions financing arrangements
were $117,917 at September 30, 2001 and $111,844 at September 30, 2000. At
September 30, 2001, debt maturities were $6,061 in 2002 and $6,060 in 2003.
Interest paid was $4,484 in 2001, $11,048 in 2000 and $13,250 in 1999. Interest
capitalized was $4,016 in 2001, $2,643 in 2000 and $613 in 1999.
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.
38
Notional
Amounts
NOTES SWAPS
- -------------------------------------------------------------------------
SEPTEMBER 30, 2001
- -------------------------------------------------------------------------
Variable rate instruments, maturing through 2005 $146,200 $63,500
Weighted average interest rate 4.2%
Weighted average pay rate 6.3%
Weighted average receive rate 3.0%
Fixed rate notes, maturing through 2005 57,312
Weighted average interest rate 6.4%
---------- -------
Totals $203,512 $63,500
========== =======
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
========== =======
Loan agreements limit consolidated indebtedness and require a minimum
consolidated net worth and interest coverage ratio. The fair value of Financial
Services debt was $204,632 and $211,216 at September 30, 2001 and 2000,
respectively. At September 30, 2001, maturities of notes were $56,083 in 2002,
$34,208 in 2003, $105,096 in 2004, and $8,125 in 2005. Interest paid was $13,476
in 2001, $14,301 in 2000 and $13,262 in 1999.
At September 30, 2001, notional amount maturities of swap agreements were
$27,000 in 2002, $20,125 in 2003, $13,250 in 2004, and $3,125 in 2005. The fair
values of interest rate swap agreements were $(2,724) and $25 at September 30,
2001 and 2000, 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, 2001, available balances under these agreements were $67,300.
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.
39
8. CAPITAL STOCK
2001 2000 1999
- --------------------------------------------------------------------------------
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 73,622 76,532 77,757
Issued 3,119 2,611 1,519
Repurchased (6,490) (5,488) (2,691)
Retired (21) (33) (53)
-------- -------- --------
Balance, end of year 70,230 73,622 76,532
======== ======== ========
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, 15% 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 specified amount. 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
$21.70 in 2001, $18.41 in 2000 and $20.69 in 1999. The remaining balance of
shares authorized for repurchase by the board of directors was 4,700 at
September 30, 2001. Treasury shares at September 30 were 21,903 in 2001, 18,531
in 2000 and 15,654 in 1999.
40
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, 2001, 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 $1,009 in 2001, $1,921 in 2000 and $1,001 in 1999. At
September 30, 2001, options to purchase 3,259 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
2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------
Outstanding
Beginning of year 17,620 13,675 10,615 $18.04 $17.48 $16.30
Granted 281 6,493 5,149 19.99 18.61 18.55
Exercised (3,090) (1,276) (1,431) 13.89 12.19 11.33
Canceled (870) (1,272) (658) 19.96 20.85 20.12
------- ------- -------
End of year 13,941 17,620 13,675 18.88 18.04 17.48
======= ======= =======
Exercisable at September 30 5,090 5,719 5,049 18.96 16.56 13.55
======= ======= =======
Outstanding, September 30, 2001 Exercisable, September 30, 2001
Weighted Weighted
Average Average Weighted
Option Number of Remaining Option Number of Average
Price Range Options Life in Years Price Options Option Price
- --------------------------------------------------------------------------------
$.01 100 7.6 $.01
$5.47 - $17.25 4,770 6.7 15.98 2,181 $14.91
$17.44 - $20.07 4,652 7.6 18.59 447 18.23
$20.10 - $27.13 4,419 6.4 22.73 2,462 22.69
------ -----
Totals 13,941 6.9 18.88 5,090 18.96
====== =====
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 $6.47 in 2001, $5.23 in 2000 and $4.91
in 1999. 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 2001 or 2000. Had compensation expense been recognized using these fair
values, the company's net income and diluted earnings per common share would
have decreased by $11,948 or $.16 per share in 2001, $11,695 or $.15 per share
in 2000 and $8,152 or $.10 per share in 1999.
OPTION VALUATION ASSUMPTIONS
2001 2000 1999
- --------------------------------------------------------------------------------
Expected life in years 5 5 5
Dividend yield 1.9% 1.7% 1.5%
Risk free interest rate 5.9% 6.1% 4.3%
Volatility 33% 33% 29%
41
10. POSTRETIREMENT BENEFITS
PENSION EXPENSE
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Net periodic pension cost
Service cost $8,794 $12,747 $12,517
Interest cost 15,918 17,677 16,548
Estimated return on plan assets (12,893) (15,840) (14,863)
Amortization of unrecognized transitional asset 147 144 147
Amortization of prior service cost 427 523 239
Recognized net actuarial losses 153 830 2,131
Plan administration 767 791 813
Special termination benefits 4,526 1,971
Settlement - discontinued operations 533
------- ------- -------
Net periodic pension cost 13,313 21,931 19,503
Defined contribution plans 6,258 10,435 9,045
Multi-employer plans 37 154 175
------- ------- -------
Totals $19,608 $32,520 $28,723
======= ======= =======
Actuarial assumptions
Discount rate 6.5%-7.75% 6.5%-7.75% 6.0%-6.75%
Rate of compensation increase 3.75%-5.0% 3.75%-6.0% 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. Pension expense for fiscal years 2000 and 1999, was not
separately disclosed for continuing and discontinuing operations because it is
not practicable to present this information.
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.
42
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
2001 2000
- -----------------------------------------------------------------------------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $212,295 $259,496
Service cost 8,672 12,945
Interest cost 15,905 17,633
Actuarial gains (3,976) (8,014)
Benefits paid (11,021) (13,415)
Liabilities transferred (59,807)
Special termination benefits 4,526
Change in plan provisions 71
Employee contributions (109) (213)
Foreign currency translation (330) (856)
-------- --------
Projected benefit obligation, end of year $221,507 $212,295
======== ========
Change in plan assets
Fair value of plan assets, beginning of year $149,166 $193,406
Actual return (losses) on plan assets (9,770) 17,409
Administrative expenses paid (809) (710)
Employer contributions 3,927 6,029
Employee contributions (109) (213)
Assets transferred (58,451)
Benefits paid (6,179) (7,349)
Foreign currency translation (344) (955)
-------- --------
Fair value of plan assets, end of year $135,882 $149,166
======== ========
Net amount recognized
Funded status $85,625 $63,129
Unrecognized transition obligation (552) (685)
Unrecognized prior service cost (3,592) (3,954)
Unrecognized net losses (24,937) (6,515)
Multi-employer liability 94 3
Minimum pension liability 8,012 10,000
-------- --------
Net amount recognized $64,650 $61,978
======== ========
Minimum pension liability
Intangible asset $4,158 $4,718
Deferred income tax benefit 1,546 2,127
Accumulated other comprehensive income 2,308 3,155
-------- --------
Totals $8,012 $10,000
======== ========
Actuarial assumptions
Projected benefit obligation discount rate 7.0% - 7.5% 6.5% - 7.75%
Rate of compensation increase 3.75% - 5.0% 3.75% - 5.0%
At September 30, 2001 and 2000, about 30% and 46% 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.
In 2000, 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 $52,529 and $54,132 at September 30, 2001 and 2000,
respectively. The accumulated benefit obligations were $51,143 and $52,410 at
September 30, 2001 and 2000, respectively.
43
POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Service cost $752 $1,127 $1,311
Interest cost 3,773 3,209 3,635
Amortization of prior service cost (337) (391) (110)
Recognized net actuarial losses 260 3 285
Special termination benefits 189
Settlement - discontinued operations (865)
------- ------- -------
Totals $4,448 $3,272 $5,121
======= ======= =======
Actuarial assumptions
Discount rate 7.75% 7.0% - 7.75% 6.75%
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. In 2001, the
company revised its actuarial assumptions for future retiree medical costs to
better reflect historical experience.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION
2001 2000
- ----------------------------------------------------------------------------------------
Change in projected benefit obligation
Projected benefit obligation, beginning of year $40,107 $47,388
Service cost 751 1,124
Interest cost 3,773 3,209
Plan participants' contributions 138 165
Actuarial (gains) losses 16,362 (4,602)
Benefits paid (3,402) (2,972)
Change in plan provisions (2,335)
Liability transferred (4,205)
-------- --------
Projected benefit obligation, end of year $55,394 $40,107
======== ========
Net amount recognized
Projected benefit obligation, end of year $55,394 $40,107
Unrecognized prior service cost 5,369 3,371
Unrecognized net gains (losses) (15,121) 989
-------- --------
Net amount recognized $45,642 $44,467
======== ========
Actuarial assumptions
Discount rate 7.50% 7.75%
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 2001 service and interest costs by $183 and the September
30, 2001 accumulated benefit obligation by $2,446. Similiary, a 1% decrease
would have decreased fiscal year 2001 service and interest costs by $160 and the
September 30, 2001 accumulated benefit obligation by $2,137.
44
11. CASH FLOW STATEMENTS
2001 2000 1999
-------------------------------------------------
AUTOMOTIVE SOLUTIONS
Cash flows provided by (used for) operating activities
Net income $85,019 $104,067 $110,156
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 49,901 38,676 32,071
Deferred income taxes 7,829 1,557 (3,394)
Deferred income taxes transferred to (from)
financial services (2,647) (7,886) 5,507
Income from discontinued operations (1,623) (28,156) (34,830)
Loss (gain) on sales of assets (337) 557 279
Changes in operating assets and liabilities
Accounts receivable 9,249 (1,955) (4,501)
Inventories 4,441 1,884 (1,971)
Prepaid expenses, intangible and other assets (1,249) (2,451) (1,285)
Accounts payable (2,792) (1,443) 346
Accrued and other liabilities 17,757 14,098 13,871
--------- --------- ---------
Net cash provided by operating activities $165,548 $118,948 $116,249
========= ========= =========
FINANCIAL SERVICES
Cash flows provided by (used for) operating activities
Net income $14,538 $12,529 $12,565
Adjustments to reconcile net income to net cash
provided by operating activities
Deferred income taxes (6,422) (2,641) 9,861
Deferred income taxes transferred to (from)
automotive solutions 2,647 7,886 (5,507)
Changes in receivables, other assets
and other liabilities 3,256 3,084 2,661
--------- --------- ---------
Net cash provided by operating activities $14,019 $20,858 $19,580
========= ========= =========
45
12. SEGMENT REPORTING
The company's six solutions business units have been aggregated into four
segments for reporting purposes.
The Software Solutions, formerly Retail Management Solutions, segment consists
of the Software Solutions business unit and the Info-Structure Services business
unit. This segment provides 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 as well as consulting services.
The Transformation Solutions segment includes the Transformation Solutions
business unit and the Software Solutions Intellipath business unit. This segment
provides specialized training, Web services and customer relationship management
products and services.
The Documents segment manufactures and distributes printed business forms to
automotive retailers.
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.
2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Net sales and revenues
Software solutions
Computer services $439,657 $400,727 $365,394
Computer systems products 146,586 164,270 167,167
----------- ----------- -----------
Total software solutions 586,243 564,997 532,561
Transformation solutions 188,798 153,142 97,437
Documents 187,053 196,342 199,356
Financial services 41,918 40,206 38,674
----------- ----------- -----------
Total net sales and revenues $1,004,012 $954,687 $868,028
=========== =========== ===========
Operating income (loss)
Software solutions $123,722 $106,070 $84,710
Transformation solutions (15,436) (881) (1,325)
Documents 39,791 39,585 49,973
Financial services 23,655 20,995 20,564
Restructuring charges (10,560)
----------- ----------- -----------
Total operating income $171,732 $155,209 $153,922
=========== =========== ===========
Assets
Automotive solutions $720,016 $796,164 $491,839
Financial services 422,334 421,129 427,591
Discontinued operations 260,760
----------- ----------- -----------
Total assets $1,142,350 $1,217,293 $1,180,190
=========== =========== ===========
Investments in equity method investees $20,531 $32,906 $31,908
Capital expenditures 51,383 65,677 35,944
Depreciation and amortization 49,901 38,676 32,071
46
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
1996, an agreement was reached whereby the state of Connecticut contributed
$8,000 towards remediation costs. Preliminary remediation continued during
fiscal year 2001 utilizing Connecticut's contribution. The EPA issued a Record
of Decision on September 28, 2001 which selects a remedy at the site involving
"monitored natural attenuation." The EPA's estimated future remedial costs are
approximately $2,000. The company was also 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.
During the quarter ended March 31, 2001, the company ceased certain software
development efforts. During the quarter ended September 30, 2001, the company
settled this contract with no additional impact on the financial statements. 14.
47
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." In
September 2000, the FASB amended certain provisions of that statement by issuing
SFAS Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." These statements require 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.
Effective October 1, 2000, the company adopted the provisions of these
statements. The company has determined that its derivative instruments meet the
criteria for cash flow hedge accounting. 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 90
days and are based on LIBOR or commercial paper indices and are settled with
counterparties at that time. The fair value of the company's derivative
instruments was a $25 asset at October 1, 2000, which was recorded as a
cumulative effect of accounting change, and a $2,724 liability at September 30,
2001. This liability was included in Financial Services' other liabilities on
the consolidated balance sheet. The adjustments to record the cumulative effect
of accounting change and the net change in the fair value during the periods
presented was recorded, net of income taxes, in other comprehensive income. All
existing cash flow hedges were 100% effective. As a result, there was no current
impact to earnings because of hedge ineffectiveness.
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 was effective for the quarter ended
September 30, 2001. The company was already in compliance with the provisions of
SAB No. 101 and there was no effect from the adoption of SAB No. 101.
48
15. ACCOUNTING STANDARDS
In June 2001, the FASB voted in favor of SFAS Statement No. 141, "Business
Combinations" and SFAS Statement No. 142, "Goodwill and Other Intangible
Assets." SFAS Statement No. 141 prohibits the pooling of interests method of
accounting and requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS Statement No. 142 will
require that goodwill no longer be amortized, but instead tested for impairment
at least annually. The statement will also require recognized intangible assets
with finite useful lives to be amortized over their useful lives and reviewed
for impairment in accordance with SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The company is permitted to adopt the provisions of SFAS Statement No. 142 on
either October 1, 2001 or October 1, 2002. Management has chosen to adopt the
provisions of SFAS Statement No. 142 effective October 1, 2001. This statement
will require certain intangible assets, that do not meet the criteria for
recognition apart from goodwill, to be reclassified to goodwill. Management
estimates the effect of ceasing goodwill amortization will be to increase
earnings by about $.12 per share. This statement will also require that goodwill
be tested for impairment, initially as of October 1, 2001, and thereafter at
least annually. The company has six months to perform the first step of the
goodwill impairment test and until the end of the fiscal year to measure any
impairment. Management is currently preparing its initial impairment analysis
and has not determined the impact on the company's financial statements.
In August 2001, the FASB issued SFAS Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement establishes a
single accounting model, based on the framework established in SFAS Statement
No. 121, for long-lived assets to be disposed of by sale. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management does not believe the adoption of
this pronouncement will have a material impact on the company's financial
statement.
49
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales and revenues
Automotive solutions $241,516 $239,623 $239,799 $241,156
Financial services 10,218 10,471 10,651 10,578
------------- ------------- ------------- -------------
Totals $251,734 $250,094 $250,450 $251,734
============= ============= ============= =============
Gross profit $135,519 $129,652 $134,024 $138,245
Income from continuing operations $23,879 $22,199 $24,719 $27,137
Basic earnings per common share $.32 $.31 $.34 $.37
Diluted earnings per common share $.32 $.30 $.33 $.36
Net income $23,879 $23,822 $24,719 $27,137
Basic earnings per common share $.32 $.33 $.34 $.37
Diluted earnings per common share $.32 $.32 $.33 $.36
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 $20.50 $22.97 $23.00 $25.14
Low $16.94 $19.25 $18.25 $21.26
- ----------------------------------------------------------------------------------------------------------------------------------
2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales and revenues
Automotive solutions $218,863 $217,872 $233,570 $244,176
Financial services 9,764 10,515 9,746 10,181
------------- ------------- ------------- -------------
Totals $228,627 $228,387 $243,316 $254,357
============= ============= ============= =============
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 $.43 $.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
50
VALUATION ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000, AND 1999
(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, 2001 2,324 5,340 (978) 3,024 0 3,662
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
Reserves for inventory:
Year ended September 30, 2001 1,644 77 (8) 743 0 970
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
FINANCIAL SERVICES Reserves for finance receivables:
Year ended September 30, 2001 5,846 2,500 493 2,883 0 5,956
Year ended September 30, 2000 6,581 2,360 517 3,612 0 5,846
Year ended September 30, 1999 4,540 2,550 2,005 2,514 0 6,581
(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.
51