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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. [FEE REQUIRED]
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. [NO FEE REQUIRED]
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FOR THE TRANSITION PERIOD FROM _______________ TO ______________.
COMMISSION FILE NO. 0-132
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
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(Title of class) (Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
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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 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 1, 1997, was $1,448,247,426.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of December 1, 1997:
Class A Common Shares: 78,637,414 (exclusive of 13,650,309 Treasury shares)
Class B Common Shares: 20,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of Proxy Statement for 1998 Annual Meeting of Shareholders
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PART I
(Dollars in thousands)
ITEM 1. BUSINESS
The Reynolds and Reynolds Company, an Ohio corporation since 1889 (the
"company"), operates principally in two business segments - computer systems and
business forms.
COMPUTER SYSTEMS
AUTOMOTIVE MANAGEMENT SOLUTIONS - The automotive division provides an
extensive portfolio of information management solutions to automotive retailers
and manufacturers. Integrated hardware, software and data communications
systems; e-commerce solutions; ongoing customer service and support; and a full
suite of consulting and training services comprise the automotive-focused
products and services offering.
These products and services are provided through the company's sales
and service personnel located in approximately 250 offices in the United States
and Canada. The September 1997 acquisition of 26.5 percent of the shares of
Kalamazoo Computer Group plc provides the company with the opportunity to market
its products and services into the European automotive retailing market.
HEALTHCARE MANAGEMENT SOLUTIONS - The healthcare systems division
provides fully-integrated, computerized practice management and clinical
management systems plus hardware and software support services that help
physician groups, management service organizations, service bureaus and
integrated healthcare delivery networks control costs, increase revenues, and
improve quality of care and patient satisfaction.
FINANCIAL SERVICES - The company also provides financing for the
computer systems placed with its automotive and healthcare customers throughout
the United States and Canada.
BUSINESS FORMS
DOCUMENT MANAGEMENT SOLUTIONS - The company provides forms and forms
management services to automotive retailers and to a number of Fortune 1000
companies. Products and services include a complete line of paper-based and
electronic business forms and value-added document services including document
procurement services, document management services and work optimization
services. These permit customers to outsource non-strategic activities,
streamline document systems, reduce inventory burdens and improve organizational
efficiency.
The company operates 28 business forms manufacturing facilities in the
United States and Canada
(For additional information, see MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 7.)
NEW PRODUCTS
Computer Systems
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The automotive division cooperated with Microsoft Corporation to launch
a new car buying service and used car classifieds on the Internet (Microsoft(R)
CarPoint(TM)) offering automotive retailers new marketing solutions to consumers
demanding a higher quality car shopping experience.
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The healthcare systems division introduced POWERRprovider(TM), an
integrated clinical information management systeM that focuses on the proactive
management of patients' health. Pilot installations began during the first
quarter of fiscal year 1998.
Business Forms
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During the year, the business systems division introduced in pilot
installations the Reynolds Advantage Network (RAN), an open-system,
client-server-based document management network that integrates document
procurement, document management and work process optimization, and the Customer
Advantage system, an Internet-based interactive document management service
which allows Reynolds customers to purchase or requisition products and services
directly through a web browser interface.
RAW MATERIALS
An adequate supply of paper products is essential to the company's
business forms segment. The company obtains those products from a variety of
sources and historically has not experienced any difficulty in obtaining them.
An adequate supply of paper is expected for the foreseeable future and is not
anticipated to adversely impact the company's ability to fully meet the needs of
its customers.
Computer hardware is essential to the company's automotive and
healthcare systems offerings. This hardware comes from a variety of sources,
principally Silicon Graphics, Inc. in the automotive sector and Hewlett Packard
and IBM in the healthcare sector. Historically, the company has experienced an
ample supply.
In the opinion of the company, loss of one or more of its present
suppliers of either paper products or computer hardware would not have a
significant impact on the company's operations because of the general
availability of alternate sources at competitive prices.
PATENTS, TRADEMARKS AND RELATED RIGHTS
Except as described below, the company does not have any patents,
trademarks, licenses, franchises or concessions which are material to an
understanding of its business.
The company's trademark REYNOLDS & REYNOLDS(R) is associated with many
goods and services provided by the company. In the automotive systems market,
the company has a number of direct and indirect distribution and licensing
arrangements with equipment vendors and software providers relating to certain
components of the company's products, including the principal operating systems.
Such arrangements are in the aggregate, but not individually (except for the
operating systems), material to the company's business.
COMPETITION
In the automotive, business systems and healthcare markets, the company
is subject to competition from a number of other business organizations, some of
which have substantially greater assets and financial resources than the
company. The company believes that it competes by providing high value-added
products, services and solutions that meet customers' changing needs and which
utilize current technology to provide additional value and to improve price and
performance. The company has specialized in selected markets and has emphasized
service and long-term relationships to meet customer needs more effectively.
While no single customer represents 5% or more of the revenues of the two
business segments, the company does have several significant customers whose
loss, in the aggregate, could be material to the business forms segment. The
company believes that the likelihood of losing all of such customers is remote.
BACKLOG
COMPUTER SYSTEMS (INCLUDES PORTIONS OF THE AUTOMOTIVE AND HEALTHCARE SYSTEMS
DIVISIONS): The backlog represents unbilled computer systems or upgrades which
have not yet been shipped to customers. At December 1, 1997, the dollar value of
the product backlog, including software license fees, is estimated to be $23,338
compared with $26,086 last year.
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BUSINESS FORMS (INCLUDES BUSINESS SYSTEMS DIVISION AND PORTIONS OF THE
AUTOMOTIVE DIVISION): The company manufactures several thousand different types
of standard and custom business forms. At December 1, 1997, the dollar value of
the printing backlog is estimated to be $35,804 compared with $22,753 last year.
RESEARCH AND DEVELOPMENT
During fiscal 1997, the company continued its research and development
of in-house computer systems, terminal products, electronic image-based systems,
information exchange products and printing plant automation. In addition to
those programs, the company also had several other development projects of
lesser magnitude. Expenditures for all such activities were approximately
$43,052 in 1997, $24,439 in 1996 and $20,978 in 1995.
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 four environmental remediation
sites. (See Note 12 to the consolidated financial statements, page 43.)
EMPLOYEES
On September 30, 1997, the company and its subsidiaries had 9,138
employees. It is party to a number of collective bargaining agreements with
union locals which represent an aggregate of approximately 260 employees at its
Dayton, Ohio, Hagerstown, Maryland and Lebanon, Indiana plants.
ITEM 2. PROPERTIES
As of September 30, 1997, the company operated 19 forms manufacturing
plants in the United States and 9 in Canada encompassing approximately 2.5
million square feet. Of those, more than 1.5 million square feet are owned
outright by the company. The remaining 1 million square feet are leased.
Corporate headquarters and the respective division headquarters are located in
Dayton, Ohio in several buildings owned by the company which contain more than
.5 million square feet. In addition, the company leases approximately 250 sales
offices and 30 warehouses throughout the country.
Most printing and other equipment used in the manufacture of business
forms is owned by the company and its subsidiaries.
The company believes its properties are in good condition and adequate
for current activities. See Note 3 to the consolidated financial statements on
pages 30-31 regarding assets held for sale.
ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 12 to the consolidated financial
statements on page 43.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
(Dollars in thousands except per share data)
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Class A Common Shares are listed on the New York Stock
Exchange. There is no principal market for the Class B Common Shares. The
company also has an authorized class of 60 million preferred shares with no par
value. As of the filing of this report, the company currently has no agreements
or commitments with respect to the sale or issuance of the preferred shares.
Information on market prices and dividends is set forth below:
CLASS A COMMON SHARES SALE PRICES
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1997 1996
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Fiscal Quarter High Low High Low
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First $27.88 $25.50 $19.69 $16.50
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Second $29.38 $23.88 $20.50 $18.31
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Third $24.75 $15.63 $26.63 $21.38
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Fourth $21.31 $16.38 $27.00 $22.31
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CASH DIVIDENDS PAID
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Class A Common Class B Common
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Months 1997 1996 1997 1996
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January $.08 $.06 $.004 $.003
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April $.08 $.06 $.004 $.003
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June $.08 $.06 $.004 $.003
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September $.08 $.07 $.004 $.0035
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As of December 1, 1997, there were approximately 3,708 holders of
record of Class A Common Shares and one holder of record of Class B Common
Shares.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
For The Years Ended September 30 1997 1996 1995 1994 1993
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CONSOLIDATED
Net Sales and Revenues
Information systems $ 1,355,302 $ 1,074,180 $ 888,580 $ 789,306 $ 677,748
Financial services 30,383 26,263 22,311 19,488 19,218
----------- ----------- ----------- ----------- -----------
Total net sales and revenues $ 1,385,685 $ 1,100,443 $ 910,891 $ 808,794 $ 696,966
=========== =========== =========== =========== ===========
Income Before Effect of Accounting Change $ 59,219 $ 93,738 $ 78,594 $ 66,204 $ 52,522
Effect of Accounting Change(1) (19,106)
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Net Income $ 59,219 $ 93,738 $ 78,594 $ 66,204 $ 33,416
=========== =========== =========== =========== ===========
Earnings Per Common Share
Income before effect of accounting change $ .70 $ 1.10 $ .92 $ .76 $ .60
Effect of accounting change(1) (.22)
----------- ----------- ----------- ----------- -----------
Net income $ .70 $ 1.10 $ .92 $ .76 $ .38
Return on Equity
Income before effect of accounting change 16.1% 26.6% 25.1% 23.8% 20.2%
Net income 16.1% 26.6% 25.1% 23.8% 12.9%
Cash Dividends Per Class A Common Share $ .32 $ .25 $ .20 $ .165 $ .13
Book Value Per Outstanding Common Share $ 4.55 $ 4.55 $ 4.01 $ 3.47 $ 3.07
Assets
Information systems $ 729,335 $ 610,362 $ 489,501 $ 430,592 $ 407,761
Financial services 373,175 313,282 265,965 204,107 162,790
----------- ----------- ----------- ----------- -----------
Total assets $ 1,102,510 $ 923,644 $ 755,466 $ 634,699 $ 570,551
=========== =========== =========== =========== ===========
Long-Term Debt
Information systems $ 170,150 $ 84,601 $ 41,443 $ 41,014 $ 40,000
Financial services 137,455 93,589 92,425 76,638 62,771
----------- ----------- ----------- ----------- -----------
Total long-term debt $ 307,605 $ 178,190 $ 133,868 $ 117,652 $ 102,771
=========== =========== =========== =========== ===========
Number of Employees 9,138 7,544 6,036 5,478 5,636
INFORMATION SYSTEMS (excluding financial services)
Current Ratio 1.57 1.62 1.50 1.95 2.03
Net Property, Plant and Equipment $ 188,501 $ 167,667 $ 128,462 $ 117,485 $ 111,177
Total Debt $ 191,526 $ 99,092 $ 51,649 $ 41,301 $ 40,000
Total Debt to Capitalization 34.5% 21.0% 13.4% 12.4% 13.2%
(1) Represents the cumulative effect of the accounting change for the adoption of Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS ENVIRONMENT
AUTOMOTIVE MANAGEMENT SOLUTIONS
Automobile dealerships represent a significant market for the company's
products and services. At the end of fiscal year 1997 there were about 22,000
automobile dealerships in the U.S. The automotive retail channel is undergoing
significant changes represented by continued consolidation, the continued
emergence of used car superstores and other new entrants, and multiple
manufacturer initiatives created to streamline the existing distribution
channel. Although each of these trends represent long-term growth opportunities
for the company's products and services, the changes caused many dealers to
defer major spending decisions during the second half of fiscal year 1997. The
company believes that it is well positioned to provide products and services to
the larger enterprises which typically have more sophisticated information
management requirements. In addition, a number of the company's customers and
its competitors' customers are operating on computer systems that are not Year
2000 compliant and must be replaced or upgraded.
DOCUMENT MANAGEMENT SOLUTIONS
Companies are increasingly seeking ways to offload nonstrategic
activities and streamline their business processes to reduce costs, improve
organizational efficiencies and increase effectiveness. This trend is favorable
for the company's document management services which simplify, standardize,
automate and integrate customers' information management and document usage. The
traditional business forms market in the U.S. has declined slightly and is
expected to continue to decline in size. The company is targeting related areas
which are enjoying growth including labels, direct mail printing, electronic
print and mail capabilities, electronic forms and other value added products and
services.
The document management industry in the U.S. remains highly fragmented
with a large number of local and regional providers. As a result, the industry
continues to consolidate as larger companies seek economies of scale through
acquisitions.
The company's document management division's results are impacted
slightly by the cost of paper. During periods of rising paper prices, the
increases are typically passed through to customers. Declining paper prices have
a slightly negative effect on the company's document management revenues. During
1997 the company's cost of paper was relatively stable. Paper costs declined in
1996 as paper manufacturers lowered prices because of reduced demand.
HEALTHCARE MANAGEMENT SOLUTIONS
The healthcare market is highly segmented with each segment having
unique information systems requirements. This segmentation reflects the
transition from traditional fee-for-service medical practices to managed care
plans. There has been significant growth in integrated healthcare delivery
networks and large group practices as physicians strive to operate efficiently
in a managed care environment. The information systems needs of this market are
complex as systems must integrate among healthcare providers, claims processors,
insurance companies and regulatory agencies. Physicians have begun implementing
clinical information or electronic patient recordkeeping systems to gain
efficiencies and provide better, more consistent care. In 1997 and 1996, the
company aggressively invested in sales, marketing and product development
resources to provide the information management solutions required by this
market.
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SIGNIFICANT EVENTS
RESTRUCTURING AND SPECIAL CHARGES
During fiscal year 1997 the company recorded pretax charges of $49,241
consisting of a $25,339 restructuring charge (recorded in the fourth quarter)
and $23,902 of other special charges ($17,063 recorded in the third quarter and
$6,839 recorded in the fourth quarter). After income taxes, the restructuring
and special charges reduced net income by $34,078 or $.41 per share ($12,573 or
$.15 per share in the third quarter and $21,505 or $.26 per share in the fourth
quarter). The income tax benefit on the combined charges represented a 30.8%
effective income tax rate because not all of the charges were tax deductible.
See Note 2 to the Consolidated Financial Statements for more information on
restructuring and special charges.
About $31,000 of the restructuring and special charges represented
reductions in the number of employees and write-offs of certain assets. These
actions are expected to lower wage and amortization expenses and increase
earnings by $.09 per share in fiscal year 1998. The improvement in fiscal year
1998 earnings should occur primarily during the last half of the fiscal year. In
the first half of the year, savings from the restructuring will be phased in as
restructuring actions (including the closing of four business forms
manufacturing plants) are implemented. The company will also incur relocation,
training and other expenses, not accrued as part of the restructuring charge,
which will partially offset the savings. The full year earnings benefit of $.12
per share is expected to be realized in fiscal year 1999 when the restructuring
activities are fully implemented. The balance of the restructuring and special
charges consisted primarily of purchased in-process research and development
costs and will avoid future amortization expenses of about $.02 per share
annually. The company did not record any amortization expenses for these items
in fiscal year 1997.
BUSINESS COMBINATIONS
In fiscal year 1997 the company purchased two sizable business forms
and document management services companies. On July 2, 1997, the company
purchased the outstanding shares of Crain-Drummond Inc. from UARCO, a subsidiary
of Settsu Corporation of Osaka, Japan. Effective December 31, 1996, the company
purchased substantially all net assets of Vanier Graphics Corporation from
American Business Products. Crain-Drummond and Vanier Graphics provide document
outsourcing, document management and work optimization services in Canada and
the U.S., respectively. The combined annual revenues of these two businesses
were about $261,000 in fiscal year 1996. The company expects to retain about
$200,000 of these sales. On May 20, 1996, the company purchased the outstanding
shares of Duplex Products Inc. Duplex provides business forms and labels,
electronic printing and mailing services, document management services, forms
automation solutions and process analysis to customers throughout the United
States. Although Duplex reported annual sales of $275,000 in fiscal year 1995,
at the time of the acquisition Duplex annual sales rate was about $230,000. The
company retained about $200,000 of Duplex sales, as expected. The company also
purchased three additional business forms companies in fiscal years 1995 and
1996 with combined annual sales of about $77,000.
From 1995 through 1997 the company purchased twelve additional
businesses in the automotive and healthcare markets. Automotive business
combinations, with about $12,000 in annual revenues, consisted primarily of new
products to supplement the company's existing product offerings. Healthcare
acquisitions resulted in stronger products and services offerings and additional
customers for the company adding about $28,000 in annual revenues. See Note 3 to
the Consolidated Financial Statements for additional disclosures about the
company's business combinations.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS
During fiscal year 1997 the company expensed $14,850 of in-process
research and development (R&D) costs (included in special charges discussed
previously) from three separate business combinations. In-process R&D costs
represented software development costs for which technological feasibility was
not established and for which there was no alternative future use. The company
obtained an outside appraisal in each instance to value in-process R&D costs.
Midway through 1997, the company purchased the assets of Advanced Medical
Applications and expensed $6,700 of in-process R&D costs. These costs related to
the development of an electronic medical records and clinical management system.
The company continued development in 1997 and during the first
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quarter of fiscal 1998 year will pilot its product called POWERRprovider.
General sales release is scheduled for later in fiscal year 1998. On June 30,
1997, the company acquired Fiscal Information Inc. and expensed $4,300 of
in-process R&D costs related to development of a system for hospital-based
physicians. Software development is expected to continue throughout fiscal year
1998. The third in-process R&D charge expensed in 1997 related to the company's
purchase of an equity interest in Kalamazoo Computer Group plc. The company
recorded $3,850 of in-process R&D in the fourth quarter of fiscal year 1997,
representing the company's share of costs for development of software for use
by automobile dealers in Europe. Kalamazoo is continuing to develop this
product.
RESULTS OF OPERATIONS
CONSOLIDATED
1997 vs. 1996 1996 vs. 1995
1997 1996 1995 Change Change
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AS REPORTED
Revenues $1,385,685 $1,100,443 $910,891 $285,242 26% $189,552 21%
Gross profit $608,935 $510,525 $417,935 $98,410 19% $92,590 22%
Operating income $126,046 $164,825 $137,015 ($38,779) -24% $27,810 20%
Net income $59,219 $93,738 $78,594 ($34,519) -37% $15,144 19%
Earnings per share $0.70 $1.10 $0.92 ($0.40) -36% $0.18 20%
EXCLUDING 1997 RESTRUCTURING AND SPECIAL CHARGES
Revenues $1,385,685 $1,100,443 $285,242 26%
Gross profit $613,644 $510,525 $103,119 20%
Operating income $171,437 $164,825 $6,612 4%
Net income $93,297 $93,738 ($441) 0%
Earnings per share $1.11 $1.10 $0.01 1%
Consolidated net sales and revenues increased for the seventh
consecutive year in 1997. About $222,000 of 1997 sales growth and $133,000 of
the 1996 sales increase resulted from business combinations, primarily in the
business forms segment. Excluding the effect of business combinations, revenue
growth was strongest in the computer systems segment which grew about 10%.
Consolidated gross profit (excluding restructuring and special charges)
represented 45.3% of information systems revenues, compared to 47.5% in 1996 and
47.0% in 1995. In fiscal year 1997, consolidated gross profit margin declined
primarily as a result of products acquired in the Duplex Products,
Crain-Drummond and Vanier Graphics business combinations, which have lower
margins than the company's automotive products and services. The gross profit
percentage increased in 1996 primarily as a result of strong growth in computer
systems recurring revenues. Business forms gross profit percentage declined in
1996 as production efficiencies were offset by lower gross profit margins for
Duplex Products.
As a percentage of revenues, consolidated operating income (excluding
restructuring and special charges) was 12.4% in 1997, compared to 15% in both
1996 and 1995. The decline in operating profit percentages resulted primarily
from the lower operating margins of Duplex Products, Crain-Drummond and Vanier
Graphics. Computer systems operating margins also declined from last year as a
result of increased investment in healthcare systems. In fiscal year 1996,
higher business forms margins were offset by lower computer systems margins.
Total other charges were $10,339 in 1997, $2,582 in 1996 and $260 in
1995. Other charges increased in 1997 and 1996 because of higher net interest
expense from debt issued to finance business combinations. In-process R&D costs
of $3,850 were also included in 1997 other charges. These R&D costs were
recorded in the purchase of an equity interest in Kalamazoo Computer Group plc
as previously discussed.
The effective income tax rate was 48.8% in 1997, compared to 42.2% in
1996 and 42.5% in 1995. The 1997 tax rate increased primarily because of
nondeductible restructuring and special charges recorded. Excluding the effect
of restructuring and special charges, the 1997 effective income tax rate was
43.4%. The balance of the tax rate increase resulted from an increase in
nondeductible expenses. The 1996 tax rate included the benefits of certain tax
credits which did not repeat in 1997. The 1996 tax rate would have been 42.8%
excluding these benefits.
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In 1997 the company's earnings per share (excluding restructuring and
special charges) increased slightly over 1996 because of lower average shares
outstanding as a result of shares repurchased by the company. Net income
(excluding restructuring and special charges) declined slightly in 1997
reflecting investments primarily in the healthcare and automotive systems
businesses. In fiscal year 1997 return on average shareholders' equity was 24.2%
(excluding the effect of restructuring and special charges), compared to 26.6%
in 1996 and 25.1% in 1995.
COMPUTER SYSTEMS (excluding financial services)
1997 vs 1996 1996 vs 1995
1997 1996 1995 Change Change
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AS REPORTED
Revenues $536,774 $478,994 $422,678 $57,780 12% $56,316 13%
Gross profit $253,002 $234,280 $198,667 $18,722 8% $35,613 18%
% of revenues 47.1% 48.9% 47.0%
Operating income $35,587 $69,751 $64,138 ($34,164) -49% $5,613 9%
% of revenues 6.6% 14.6% 15.2%
EXCLUDING 1997 RESTRUCTURING AND SPECIAL CHARGES
Revenues $536,774 $478,994 $57,780 12%
Gross profit $257,711 $234,280 $23,431 10%
% of revenues 48.0% 48.9%
Operating income $67,056 $69,751 ($2,695) -4%
% of revenues 12.5% 14.6%
In 1997 and 1996 computer systems revenues grew primarily because of higher
automotive recurring service revenues and increasing sales of newer products in
the automotive business. Recurring service revenues continued to grow primarily
because of the increased number of ERA software applications supported. These
recurring service revenues result from monthly billings for technical support,
software updates and hardware maintenance that allow customers to maximize the
value of their computer systems. Revenues from newer products and services such
as Customer Marketing Services, SalesVision, SalesVision Vehicle Kiosk, Document
Management and laser solutions provided about 25% of 1997 sales growth.
Automotive and healthcare business combinations contributed about $10,000 of the
1997 revenue growth and $12,000 of the 1996 sales increase. Excluding the effect
of business combinations, healthcare systems fiscal year 1997 revenues were
essentially the same as in fiscal year 1996.
Excluding restructuring and special charges, computer systems gross
profit percentage declined in fiscal year 1997 because of increased investment
in the healthcare systems business and to a lesser degree, the inclusion of
Vanier Graphics electronic forms systems which have lower margins. Automotive
computer systems gross profit margins remained strong. In fiscal year 1996
computer systems gross profit percentage increased primarily because the higher
margin recurring service revenues became a greater percentage of the revenue
mix.
Selling, general and administrative (SG&A) expenses (excluding
restructuring and special charges) were 35.5% of revenues in 1997, compared to
34.3% of revenues in 1996 and 31.8% in 1995. The 1997 and 1996 increases in SG&A
expenses, as a percentage of revenues, reflected new investments in both the
automotive and healthcare businesses. In fiscal year 1997, the company invested
in sales resources and product development in both its automotive and healthcare
businesses. In fiscal year 1996 automotive systems investments were focused on
new products and services while healthcare systems investments involved
integrating two acquisitions with the existing business and implementing sales,
marketing and product development strategies for future growth.
In fiscal year 1997, computer systems operating income (excluding
restructuring and special charges) declined primarily because of increased
investment in the healthcare systems business. In 1996 computer systems
operating income grew, but declined as a percentage of sales because of new
investments in healthcare systems. Automotive systems operating margin was
relatively stable during the last three years. Healthcare systems operated at a
loss in each of the last three years because of increased investments in the
organization's products and capabilities.
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BUSINESS FORMS
1997 vs. 1996 1996 vs. 1995
1997 1996 1995 Change Change
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AS REPORTED
Revenues $818,528 $595,186 $465,902 $223,342 38% $129,284 28%
Gross profit $355,933 $276,245 $219,268 $79,688 29% $56,977 26%
% of revenues 43.5% 46.4% 47.1%
Operating income $75,358 $80,629 $59,716 ($5,271) -7% $20,913 35%
% of revenues 9.2% 13.5% 12.8%
EXCLUDING 1997 RESTRUCTURING AND SPECIAL CHARGES
Revenues $818,528 $595,186 $223,342 38%
Gross profit $355,933 $276,245 $79,688 29%
% of revenues 43.5% 46.4%
Operating income $89,280 $80,629 $8,651 11%
% of revenues 10.9% 13.5%
In fiscal years 1997 and 1996 business forms revenues rose primarily
because of the effect of business combinations which contributed $212,000 and
$121,000 of the sales increase in 1997 and 1996, respectively. The remaining
sales increase resulted from growth in sales of document management products and
services, which was partially offset by reduced volume for other custom business
forms sales.
Business forms gross profit percentage declined in 1997 and 1996
because of the effect of lower gross profit margins of businesses acquired
(Duplex Products, Crain-Drummond and Vanier Graphics). Excluding these business
combinations, gross profit margins were 48.9% in 1997 and 48.5% in 1996, as
paper costs were about the same. In fiscal year 1996 lower paper costs which
reduced LIFO inventory adjustments contributed favorably to gross profit.
SG&A expenses (excluding restructuring and special charges) were 32.6%
of revenues in 1997, compared to 32.9% in 1996 and 34.3% in 1995. SG&A expenses
declined, as a percentage of revenues in 1997 and 1996 primarily because
business combinations provided strong revenue growth and lower SG&A expenses as
a percentage of sales. The company also further reduced SG&A expenses by
eliminating duplicate administrative functions of the companies acquired. In
1997 these benefits were partially offset by higher acquisition integration
expenses and software development costs.
Business forms operating income (excluding restructuring and special
charges) increased in both 1997 and 1996 because of higher sales from business
combinations. Operating income margin declined in fiscal year 1997 primarily
because of effects of the business combinations which caused the operating
income percentage for general business forms and document management services to
decline from about 10% in 1996 to about 7% in 1997. Automotive forms operating
income margins were strong for all three years.
FINANCIAL SERVICES
1997 vs. 1996 1996 vs. 1995
1997 1996 1995 Change Change
- -----------------------------------------------------------------------------------------------------------------------
Revenues $30,383 $26,263 $22,311 $4,120 16% $3,952 18%
Operating income $15,101 $14,445 $13,161 $656 5% $1,284 10%
% of revenues 49.7% 55.0% 59.0%
Average finance receivables grew 19% in 1997 and 22% in 1996 as a
result of strong computer systems sales. Financial services revenues grew
significantly each of the last two years because of the increased receivable
11
12
balances. The average interest rate earned on the receivable portfolio declined
slightly in both 1997 and 1996 because interest rates on new receivables were
less than those for maturing receivables.
Financial services interest rate spread remained strong at 3.5% in
1997, compared to 3.8% in 1996 and 4.0% in 1995. The decline in the interest
rate spread resulted from slightly higher borrowing rates in addition to the
previously mentioned change in the receivable portfolio. Operating income grew
at a slower rate in 1997 primarily because of increased bad debt expenses. Bad
debt expenses were a modest .5% of the average receivable balance in 1997, but
still higher than the unusually low bad debts experienced in 1996 and 1995.
The company has entered into a number of interest rate management
agreements to limit interest rate exposure on financial services variable rate
debt. It is important to manage this interest rate exposure because the proceeds
from these borrowings were invested in fixed rate finance receivables. The
company believes that over time it has reduced interest expense by using
interest rate management agreements and variable rate debt instead of directly
obtaining fixed rate debt. During fiscal year 1997, the company entered into two
additional interest rate management agreements with notional amounts totaling
about $18,000. See Note 6 to the Consolidated Financial Statements for
additional disclosures regarding the company's interest rate management
agreements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems continued to provide strong cash flow from
operating activities in fiscal year 1997. Operating cash flow was $149,325 in
1997 compared to $110,345 in 1996. Fiscal year 1997's operating cash flow
resulted primarily from net income adjusted for noncash charges. This strong
cash flow funded the company's investments for normal operations including
capital expenditures of $47,707. Nearly half of capital expenditures were for
computer equipment in 1997. Fiscal year 1998 capital expenditures in the
ordinary course of business are anticipated to be about $50,000 to $55,000. The
company also spent $145,347 on business combinations in fiscal year 1997.
Business combinations are discussed further in Note 3 to the Consolidated
Financial Statements. See the shareholders' equity caption of this analysis
regarding the payment of dividends and share repurchases.
Financial services operating cash flow, collections on finance
receivables and additional borrowings were invested in new finance receivables
for the company's computer systems and used to make scheduled debt repayments.
CAPITALIZATION
The company's ratio of total debt (total information systems debt) to
capitalization (total information systems debt plus shareholders' equity) was
34.5% at September 30, 1997 and 21.0% at September 30, 1996. The increase
reflects the issuance of $100,000 of notes in a public offering with proceeds
used to finance business combinations. In 1997 the company replaced its existing
revolving credit agreements with a new five year, $150,000 agented revolving
credit agreement with a consortium of banks. Remaining credit available under
this revolving credit agreement was $82,000 at September 30, 1997. In addition
to this committed credit agreement, the company also has a variety of other
short-term credit lines available. The company estimates that cash flow from
operations and cash available from existing credit agreements will be sufficient
to fund fiscal year 1998 normal operations. See Note 6 to the Consolidated
Financial Statements for additional disclosures regarding the company's debt
instruments.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock
Exchange. There is no principal market for Class B common shares. The company
also has an authorized class of 60 million preferred shares with no par value.
As of November 12, 1997, none of these preferred shares was outstanding and
there were no agreements or commitments with respect to the sale or issuance of
these shares, except for those described in Note 7 to the Consolidated Financial
Statements.
12
13
The company paid cash dividends of $26,056 in 1997, $20,594 in 1996 and
$16,651 in 1995. Dividends per Class A common share were $.32 in 1997, $.25 in
1996 and $.20 in 1995. Dividends are typically declared each November, February,
May and August and paid in January, April, June and September, respectively.
Dividends per Class A common share must be twenty times the dividends per Class
B common share and all dividend payments must be simultaneous. In November 1997,
the board of directors raised the quarterly dividend 12.5% to $.09 per Class A
common share. The quarterly dividend was last increased by 14% in November 1996.
The company has increased cash dividends twelve times since 1989 and paid
dividends each year since the company's initial public offering in 1961.
The company has conducted an active share repurchase program during
recent years to provide additional returns to shareholders. The company
repurchased $46,799 of Class A common shares in 1997, $33,323 in 1996 and
$35,079 in 1995. Average prices paid per share were $19.75 in 1997, $20.83 in
1996 and $12.93 in 1995. As of September 30, 1997 the company could repurchase
an additional 3,169,800 Class A common shares under existing board of directors'
authorizations.
YEAR 2000 COMPLIANCE
The company has assessed potential Year 2000 effects on its internal
computer systems and systems provided to customers. Detailed plans have been
prepared to address Year 2000 issues with completion of software development
scheduled for December 1998. As of September 30, 1997, the costs to make all
systems Year 2000 compliant were not projected to have a material adverse effect
on the company's financial position, results of operations and cash flows.
ENVIRONMENTAL MATTERS
See Note 12 to the Consolidated Financial Statements for a discussion
of the company's environmental contingencies.
ACCOUNTING STANDARDS
See Note 13 to the Consolidated Financial Statements for a discussion
of the effect of accounting standards which the company has not yet adopted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 14 of
Part IV (pages 15-16) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
13
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and background information for each of the Company's
directors and nominees are incorporated herein by reference to the section of
the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders
captioned "ELECTION OF DIRECTORS."
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are elected by the Board of
Directors at its meeting immediately following the Annual Meeting of
Shareholders to serve generally for a term of one year. The executive officers
of the Company, as of December 1, 1997, are:
NAME AGE POSITION
---------------------------------------------------------------------------------------------------------------
Richard H. Grant, Jr. 84 Chairman of the Steering Committee and Director
David R. Holmes 57 Chairman of the Board, President and Chief
Executive Officer
Robert C. Nevin 57 President, Automotive Division and Director
Dale L. Medford 47 Vice President, Corporate Finance and Chief Financial
Officer, and Director
Rodney A. Hedeen 49 President, Business Systems Division
H. John Proud 49 President, Healthcare Systems Division
Michael J. Gapinski 47 Treasurer and Assistant Secretary
Adam M. Lutynski 55 General Counsel and Secretary
A description of prior positions held by executive officers of the Company
within the past 5 years, to the extent applicable, is as follows:
Mr. Nevin has been President, Automotive Division since February 1997;
prior thereto was President, Business Systems Division.
Mr. Hedeen has been President, Business Systems Division since February
1997; prior thereto was Senior Vice President and General Manager, Forms and
Systems Group.
Mr. Proud has been President, Healthcare Systems Division since February
1995; prior thereto was Senior Vice President and General Manager, Automotive
Computer Systems Group.
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 1998 Annual Meeting of Shareholders captioned "EXECUTIVE
COMPENSATION."
14
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The number of Common Shares of the Company beneficially owned by each five
percent shareholder, director or current nominee for director, and by all
directors and officers as a group as of December 1, 1997 is incorporated herein
by reference to the section of the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders captioned "VOTING SECURITIES OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning transactions with management, certain business
relationships and indebtedness of management is incorporated herein by reference
to the section of the Company's Proxy Statement for its 1998 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 23 through 44.
Statements of Consolidated Income - For The Years Ended
September 30, 1997, 1996 and 1995
Consolidated Balance Sheets - September 30, 1997 and 1996
Statements of Consolidated Shareholders' Equity - For The Years Ended
September 30, 1997, 1996 and 1995
Statements of Consolidated Cash Flows - For The Years Ended
September 30, 1997, 1996 and 1995
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, 1997 ARE ATTACHED HERETO:
Schedule II Valuation Accounts Page 45
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.
(B) REPORTS ON FORM 8-K
None
(C) EXHIBITS
The exhibits as shown in "Index of Exhibits" (pages 46-53) are filed as a
part of this Report.
15
16
(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 1997 Annual Report to
Shareholders upon written request to:
ADAM M. LUTYNSKI, GENERAL COUNSEL & SECRETARY
THE REYNOLDS AND REYNOLDS COMPANY
P. O. BOX 2608
DAYTON, OHIO 45401
----------------------------------------------------------------
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE REYNOLDS AND REYNOLDS COMPANY
By /S/ ADAM M. LUTYNSKI
-----------------------------------
ADAM M. LUTYNSKI
General Counsel and Secretary
Date: December 18, 1997
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 18, 1997 By /S/ DAVID R. HOLMES
-----------------------------------
DAVID R. HOLMES
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
16
17
Date: December 18, 1997 By /S/ DALE L. MEDFORD
-----------------------------------
DALE L. MEDFORD
Vice President, Corporate Finance and Chief
Financial Officer (Principal Financial and
Accounting Officer) and Director
Date: December 18, 1997 By /S/ JOSEPH N. BAUSMAN
-----------------------------------
JOSEPH N. BAUSMAN
Director
Date: December 18, 1997 By /S/ DR. DAVID E. FRY
-----------------------------------
DR. DAVID E. FRY, Director
Date: December 18, 1997 By /S/ RICHARD H. GRANT, JR.
-----------------------------------
RICHARD H. GRANT, JR.
Chairman of the Steering
Committee and Director
Date: December 18, 1997 By /S/ RICHARD H. GRANT, III
-----------------------------------
RICHARD H. GRANT, III, Director
Date: December 18, 1997 By /S/ CLEVE L. KILLINGSWORTH, JR.
-----------------------------------
CLEVE L. KILLINGSWORTH, JR., Director
Date: December 18, 1997 By /S/ ALLAN Z. LOREN
-----------------------------------
ALLAN Z. LOREN, Director
17
18
Date: December 18, 1997 By /S/ ROBERT C. NEVIN
-----------------------------------
ROBERT C. NEVIN
President, Automotive Division
and Director
Date: December 18, 1997 By /S/ GAYLE B. PRICE, JR.
-----------------------------------
GAYLE B. PRICE, JR., Director
Date: December 18, 1997 By /S/ KENNETH W. THIELE
-----------------------------------
KENNETH W. THIELE, Director
Date: December 18, 1997 By /S/ MARTIN D. WALKER
-----------------------------------
MARTIN D. WALKER, Director
18
19
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, 1997
The Reynolds and Reynolds Company
Dayton, Ohio
19
20
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
November 12, 1997
To Our Shareholders:
The management of The Reynolds and Reynolds Company is responsible for
accurately and objectively preparing the company's consolidated financial
statements. These statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's best estimates
and judgments. Management believes that the financial information in this annual
report is free from material misstatement.
The company's management maintains an environment of multilevel controls. The
Company Business Principles, for example, is distributed to all employees and
communicates high standards of integrity that are expected in the company's
day-to-day business activities. The Company Business Principles addresses a
broad range of issues including potential conflicts of interest, business
relationships, accurate and timely reporting of financial information,
confidentiality of proprietary information, insider trading and social
responsibility.
The company also maintains and monitors a system of internal controls designed
to provide reasonable assurances regarding the safeguarding of company assets
and the integrity and reliability of financial records. These internal controls
include the appropriate segregation of duties and the application of formal
policies and procedures. Furthermore, an internal audit department, which has
access to all financial and other corporate records, regularly performs tests to
evaluate the system of internal controls to ensure the system is adequate and
operating effectively. At the date of these financial statements, management
believes the company has an effective internal control system.
The company's independent public auditors, Deloitte & Touche LLP, perform an
independent audit of the company's consolidated financial statements. They have
access to minutes of board meetings, all financial information and other
corporate records. Their audit is conducted in accordance with generally
accepted auditing standards and includes consideration of the system of internal
controls. Their report is included in this annual report on page 21.
Another level of control resides with the audit committee of the company's board
of directors. The committee, comprised of five directors who are not members of
management, oversees the company's financial reporting process. They recommend
to the board, subject to shareholder approval, the selection of the company's
independent public auditors. They discuss the overall audit scope and the
specific audit plans with the independent public auditors and the internal
auditors. This committee also meets regularly (separately and jointly) with the
independent public auditors, the internal auditors and management to discuss the
results of those audits, the evaluation of internal controls, the quality of
financial reporting and specific accounting and reporting issues.
David R. Holmes Dale L. Medford
Chairman, President and Vice President, Corporate Finance
Chief Executive Officer and Chief Financial Officer
20
21
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, 1997 and 1996 and the
related statements of consolidated income, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1997. Our audits
also included the financial statement schedule included at Item 14(a) (2). These
financial statements and financial statement schedule are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Reynolds and Reynolds Company
and its subsidiaries at September 30, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Dayton, Ohio
November 12, 1997
21
22
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in The Reynolds and Reynolds
Company (1) Registration Statement No. 33-56045 on Form S-8 (2) Post-Effective
Amendment No. 1 to Registration Statement No. 33-51895 on Form S-3, (3)
Pre-Effective Amendment No. 1 to Registration Statement No. 33-58877 on Form
S-3, (4) Pre-Effective Amendment No. 1 to Registration Statement No. 33-61725
on Form S-3, (5) Registration Statement No. 33-59615 on Form S-3, (6)
Registration Statement No. 33-59617 on Form S-3 (7) Registration Statement No.
333-12967 on Form S-3, (8) Registration Statement No. 333-12681 on Form S-3,
(9) Registration Statement No. 333-16583 on Form S-3, (10) Registration
Statement No. 333-18585 on Form S-3, (11) Registration Statement No., 333-41983
on Form S-3, and (12) Registration Statement No. 333-41985 on Form S-3 of our
report dated November 12, 1997, appearing in this Annual Report on Form 10-K of
The Reynolds and Reynolds Company for the year ended September 30, 1997, and to
the reference to us under the heading "Experts" in the respective Prospectuses,
which is part of each of the above Registration Statements.
/s/ DELOITTE & TOUCHE LLP
- --------------------------
Dayton, Ohio
December 16, 1997
22
23
STATEMENTS OF CONSOLIDATED INCOME
(In thouands except per share data)
For The Years Ended September 30 1997 1996 1995
- ----------------------------------------------------------------------------
Net Sales and Revenues
Information
Products $ 984,611 $ 756,664 $621,909
Services 370,691 317,516 266,671
---------- ---------- --------
Total information systems 1,355,302 1,074,180 888,580
Financial services 30,383 26,263 22,311
---------- ---------- --------
Total net sales and revenues 1,385,685 1,100,443 910,891
---------- ---------- --------
Costs and Expenses
Cost of sales
Products 596,847 438,041 363,303
Services 149,520 125,614 107,342
---------- ---------- --------
Total cost of sales 746,367 563,655 470,645
Selling, general and administrative
expenses 472,651 360,145 294,081
Restructuring charge 25,339
Financial services 15,282 11,818 9,150
---------- ---------- --------
Total costs and expenses 1,259,639 935,618 773,876
---------- ---------- --------
Operating Income 126,046 164,825 137,015
---------- ---------- --------
Other Charges (Income)
Interest expense 10,446 5,778 3,779
Interest income (2,355) (1,648) (1,674)
Other 2,248 (1,548) (1,845)
---------- ---------- --------
Total other charges 10,339 2,582 260
---------- ---------- --------
Income Before Income Taxes 115,707 162,243 136,755
Provision for Income Taxes 56,488 68,505 58,161
---------- ---------- --------
Net Income $ 59,219 $ 93,738 $ 78,594
========== ========== ========
Earnings Per Common Share $ .70 $ 1.10 $ .92
========== ========== ========
Average Number of Common Shares
Outstanding 84.012 85.228 85.032
========== ========== ========
See Notes to Consolidated Statements.
23
24
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30 1997 1996
- -------------------------------------------------------------------------------
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $ 7,604 $ 11,130
Accounts receivable (less allowance
for doubtful accounts:
1997--7,652; 1996--$5,744) 197,215 161,278
---------- ----------
Inventories
Finished products 59,683 42,953
Work in process 6,256 3,788
Raw materials and supplies 9,706 6,461
---------- ----------
Total inventories 75,645 53,202
---------- ----------
Deferred income taxes 21,699 22,398
---------- ----------
Prepaid expenses and other assets 25,764 23,075
---------- ----------
Total current assets 327,927 271,083
---------- ----------
Property, Plant and Equipment
Land and improvements 14,134 9,521
Buildings and improvements 90,159 84,716
Computer equipment 128,373 110,923
Machinery and equipment 99,155 92,952
Furniture and other 36,916 32,607
Construction in progress 12,954 10,535
---------- ----------
Total property, plant and equipment 381,691 341,254
Less accumulated depreciation 193,190 173,587
---------- ----------
Net property, plant and equipment 188,501 167,667
---------- ----------
Intangible Assets
Goodwill 94,241 94,969
Software licensed to customers 13,713 15,435
Other 8,588 10,349
---------- ----------
Total intangible assets 116,542 120,753
---------- ----------
Other Assets 96,365 50,859
---------- ----------
Total Information Systems Assets 729,335 610,362
---------- ----------
FINANCIAL SERVICES ASSETS
Finance Receivables 372,073 311,576
Cash and Other Assets 1,102 1,706
---------- ----------
Total Financial Services Assets 373,175 313,282
---------- ----------
TOTAL ASSETS $1,102,510 $ 923,644
========== ==========
September 30 1997 1996
- -------------------------------------------------------------------------------
INFORMATION SYSTEMS LIABILITIES
Current Liabilities
Current portion of long-term debt $ 8,131 $ 6,832
Notes payable 13,245 7,659
Accounts payable
Trade 56,159 45,208
Other 7,310 5,331
Accrued liabilities
Compensation and related items 56,379 43,847
Other 58,902 51,484
Deferred revenues 8,453 6,917
----------- -----------
Total current liabilities 208,579 167,278
----------- -----------
Long-Term Debt 170,150 84,601
----------- -----------
Other Liabilities
Postretirement medical 42,247 38,104
Pensions 29,753 23,795
Other 2,662 1,317
----------- -----------
Total other liabilities 74,662 63,216
----------- -----------
Total Information Systems Liabilities 453,391 315,095
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 198,314 161,911
Deferred Income Taxes 84,189 71,181
Other Liabilities 2,386 2,462
----------- -----------
Total Financial Services Liabilities 284,889 235,554
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock
Preferred
Class A common 53,269 50,601
Class B common 625 625
Other Adjustments (5,481) (6,203)
Retained Earnings 315,817 327,972
----------- -----------
Total Shareholders' Equity 364,230 372,995
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,102,510 $ 923,644
=========== ===========
See Notes to Consolidated Financial Statements.
24
25
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands except per share data)
For The Years Ended September 30 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Capital Stock
Class A common
Balance, beginning of year $ 50,601 $ 41,443 $ 28,624
Stock split 6,917
Capital stock issued 4,039 3,693 12,927
Capital stock repurchased (1,481) (1,000) (848)
Capital stock retired (1,327) (1,152) (462)
Tax benefits from stock options 1,437 700 1,202
--------- --------- ---------
Balance, end of year 53,269 50,601 41,443
--------- --------- ---------
Class B common
Balance, beginning of year 625 313 313
Stock split 312
--------- --------- ---------
Balance, end of year 625 625 313
--------- --------- ---------
Other Adjustments
Balance, beginning of year (6,203) (3,581) (2,566)
Foreign currency translation (212) (269) 28
Minimum pension liability 934 (2,353) (1,043)
Balance, end of year --------- --------- ---------
(5,481) (6,203) (3,581)
--------- --------- ---------
Retained Earnings
Balance, beginning of year 327,972 294,380 266,668
Stock split (7,229)
Net income 59,219 93,738 78,594
Cash dividends
Class A common (1997--$.32 PER SHARE;
1996--$.25 per share; 1995--$.20 per share) (25,736) (20,344) (16,451)
Class B common (1997--$.016 PER SHARE;
1996--$.0125 per share; 1995--$.01 per share) (320) (250) (200)
Capital stock repurchased (45,318) (32,323) (34,231)
--------- --------- ---------
Balance, end of year 315,817 327,972 294,380
--------- --------- ---------
Total Shareholders' Equity $ 364,230 $ 372,995 $ 332,555
========= ========= =========
See Notes to Consolidated Financial Statements.
25
26
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
For The Years Ended September 30 1997 1996 1995
- ------------------------------------------------------------------------------------------------
INFORMATION SYSTEMS
Cash Flows Provided by Operating Activities $ 149,325 $ 110,345 $ 107,222
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Business combinations (145,347) (78,039) (20,824)
Capital expenditures (47,707) (39,980) (30,750)
Net proceeds from sales of assets 18,307 10,943 3,744
Proceeds from sale of receivables 6,000
Capitalization of software licensed to customers (1,465) (4,103) (3,471)
(Advances to) repayments from financial services 6,368 4,189 (9,708)
--------- --------- ---------
Net cash used for investing activities (169,844) (106,990) (55,009)
--------- --------- ---------
Cash Flows Provided by (Used for) Financing Activities
Additional borrowings 145,641 50,000 1,254
Principal payments on debt (57,122) (8,159) (5,051)
Cash dividends paid (26,056) (20,594) (16,651)
Capital stock issued 1,541 1,754 1,422
Capital stock repurchased (46,799) (33,323) (35,079)
Net cash provided by (used for) financing --------- -------- ---------
activities 17,205 (10,322) (54,105)
--------- --------- ---------
Effect of Exchange Rate Changes on Cash (212) (269) 28
--------- --------- ---------
Decrease in Cash and Equivalents (3,526) (7,236) (1,864)
Cash and Equivalents, Beginning of Year 11,130 18,366 20,230
--------- --------- ---------
Cash and Equivalents, End of Year $ 7,604 $ 11,130 $ 18,366
========= ========= =========
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $ 19,875 $ 15,449 $ 13,854
--------- --------- ---------
Cash Flows Provided by (Used for) Investing Activities
Finance receivables originated (142,588) (117,040) (115,643)
Collections on finance receivables 92,305 76,174 64,232
Net cash used for investing activities --------- --------- ---------
(50,283) (40,866) (51,411)
--------- --------- ---------
Cash Flows Provided by (Used for)
Financing Activities
Additional borrowings 91,258 72,988 70,000
Principal payments on debt (54,855) (42,752) (42,688)
Advances from (repayments to) information systems (6,368) (4,189) 9,708
--------- --------- ---------
Net cash provided by financing activities 30,035 26,047 37,020
--------- --------- ---------
Increase (Decrease) in Cash and Equivalents (373) 630 (537)
Cash and Equivalents, Beginning of Year 1,293 663 1,200
--------- --------- ---------
Cash and Equivalents, End of Year $ 920 $ 1,293 $ 663
========= ========= =========
See Notes to Consolidated Financial Statements.
26
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the parent company
and its domestic and foreign subsidiaries and present details of revenues,
expenses, assets, liabilities and cash flows for both information systems and
financial services. Information systems is comprised of the company's computer
systems and business forms operations. Financial services is comprised of Reyna
Capital Corporation, the company's wholly-owned financial services subsidiary
and a similar operation in Canada. In accordance with industry practice, the
assets and liabilities of information systems are classified as current or
noncurrent and those of financial services are unclassified. Intercompany
balances and transactions between the consolidated companies are eliminated.
USE OF ESTIMATES
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles and include amounts based on management's best
estimates and judgments. The use of estimates and judgments may affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates.
CASH AND EQUIVALENTS
For purposes of reporting cash flows, cash and equivalents includes cash on
hand, cash deposits and investments with maturities of three months or less at
the time of purchase. The carrying amount of these short-term investments
approximates fair value.
CONCENTRATIONS OF CREDIT RISK
The company is a leading provider of information management systems to
automobile dealerships. A significant portion of finance receivables and
accounts receivable are from automobile dealerships.
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, 1997 and 1996, LIFO inventories were $66,732 and $45,253, respectively.
These inventories determined by the first-in, first-out (FIFO) method would
increase by $5,744 in 1997, $6,232 in 1996 and $7,096 in 1995. For other
inventories, cost is determined by specific identification or the FIFO method.
Market is based on net realizable value.
27
28
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided over the estimated useful service lives of the assets or asset
groups, principally on the straight-line method for financial reporting
purposes. Estimated asset lives are:
Years
- -------------------------------------------------------------------------------
Land improvements 10
Buildings and improvements 3--33
Computer equipment 3---5
Machinery and equipment 3--18
Furniture and other 3--15
INTANGIBLE ASSETS
The excess of cost over net assets of companies acquired is recorded as goodwill
and amortized on a straight-line basis over five to forty years. Amortization
expense was $15,066 in 1997, $10,541 in 1996 and $8,530 in 1995. Amortization
expense in 1997 included $3,560 from restructuring and special charges. At
September 30, 1997 and 1996, accumulated amortization was $49,762 and $36,183,
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 $9,188 in 1997, $3,731 in 1996
and $3,746 in 1995. Amortization expense in 1997 included $3,920 from
restructuring and special charges. At September 30, 1997 and 1996, accumulated
amortization was $52,389 and $43,052, respectively.
Other intangible assets are amortized over periods ranging from three to fifteen
years. Amortization expense was $2,885 in 1997, $2,408 in 1996 and $2,165 in
1995. At September 30, 1997 and 1996, accumulated amortization was $13,264 and
$10,398, respectively.
REVENUE RECOGNITION - INFORMATION SYSTEMS
Information systems revenues consist of both product sales and service revenues.
Product sales, including computer hardware, software licenses and business
forms, are generally recorded upon shipment to customers. Under certain forms
management contractual arrangements, custom forms are stored for future delivery
to customers, and are recognized as revenue when title passes and the customer
has been invoiced. Service revenues, which include computer hardware
maintenance, software support, training and forms management services, are
recorded ratably over the contract period or as services are performed. Forms
management services represent fees for inventory management and warehousing
services. Forms management services may be included in product sales or
separately billed to customers.
REVENUE RECOGNITION - FINANCIAL SERVICES
Financial services revenues consist primarily of interest earned on financing
the company's computer systems product sales. Revenues are recognized over the
lives of financing contracts, generally four to eight years, using the interest
method.
LEASE OBLIGATIONS
The company leases premises and equipment under various capital and operating
lease agreements. As of September 30, 1997, future minimum lease payments
relating to operating lease agreements were $26,480 in 1998, $19,881 in 1999,
$14,186 in 2000, $9,578 in 2001 and $6,699 in 2002. Rental expenses were $36,018
in 1997, $25,660 in 1996 and $19,408 in 1995. As a result of a business
combination, the company acquired a building under capital lease. The debt
associated with the building is discussed in Note 6 to the Consolidated
Financial
28
29
Statements. Under the provisions of purchase accounting, the carrying
value recorded for the building is not significant.
During 1997, the company entered into an agreement for the construction and
lease of a new office building. Construction is estimated to be completed in
1999 at a total cost of $29,000.
RESEARCH AND DEVELOPMENT COSTS
The company expenses research and development costs as incurred. These costs
were $43,052 in 1997, $24,439 in 1996 and $20,978 in 1995. Included in 1997 are
$14,850 of purchased in-process research and development costs. In-process
research and development acquired in business combinations represented software
development costs for which technological feasibility was not established and
for which there was no alternative future use.
INCOME TAXES
The parent company and its domestic subsidiaries file a consolidated U.S.
federal income tax return. Deferred income taxes are provided for temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements. Temporary differences result principally
from financial services product financing activities, postretirement benefits
and different depreciation methods. No deferred income tax liabilities are
recorded on undistributed earnings of the foreign subsidiary because, for the
most part, those earnings are permanently reinvested. Undistributed earnings of
the foreign subsidiary at September 30, 1997, were $13,543. The calculation of
the unrecognized deferred income tax liability on these earnings is not
practicable.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the weighted
average number of Class A common shares and Class A common share equivalents
outstanding during each year. Class A common share equivalents consist of those
shares which would be outstanding, assuming all Class B common shares were
converted into Class A common shares and assuming all dilutive stock options
were exercised and the proceeds used to repurchase Class A common shares at the
average market price. The dilutive effect of stock options is not material.
2. RESTRUCTURING AND SPECIAL CHARGES
During fiscal year 1997 the company recorded a pretax charge of $49,241
consisting of a $25,339 restructuring charge (recorded in the fourth quarter)
and $23,902 of other special charges ($17,063 recorded in the third quarter and
$6,839 recorded in the fourth quarter). After income taxes the combined charges
reduced net income by $34,078 or $.41 per share. The income tax benefit on the
combined charges represented a 30.8% effective income tax rate because not all
of the charges were tax deductible. Major components of the charge are listed in
the following table.
Restructuring Special Total
Charge Charges Charges
- ----------------------------------------------------------------------------
Employee termination benefits $18,779 $ 116 $18,895
In-process research and development 14,850 14,850
Discontinued products 5,418 5,418
Impaired assets 1,142 8,936 10,078
----------------------------------
Totals $25,339 $23,902 $49,241
==================================
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30
RESTRUCTURING CHARGE
Employee termination benefits consisted of involuntary severance benefits and
voluntary retirement benefits for 400 employees, about 75% from closing
manufacturing and distribution facilities. Through September 30, 1997, $411 of
involuntary termination benefits had been paid to 50 employees. See Note 9 to
the Consolidated Financial Statements for a discussion of voluntary retirement
benefits. The company discontinued several automotive computer services products
and wrote off the related intangible assets. Impaired assets represented the
write-off of idle production assets and lease costs related to closing four
manufacturing plants and five distribution facilities.
SPECIAL CHARGES
In-process research and development expenses resulted from three recent computer
services business combinations and represented software development costs for
which technological feasibility was not established and for which there was no
alternative future use. The balance of special charges represented primarily the
write-off of impaired software licensed to customers and internal software which
the company will no longer use. Special charges increased computer systems cost
of sales $4,709, computer systems selling, general and administrative (SG&A)
expenses $13,174, business forms SG&A expenses $2,169 and other charges $3,850.
3. BUSINESS COMBINATIONS
On July 2, 1997, the company purchased the outstanding shares of Crain-Drummond
Inc. from UARCO Inc., a subsidiary of Settsu Corporation of Osaka, Japan.
Crain-Drummond is a leading Canadian provider of business document outsourcing,
document management and work process optimization services, with fiscal year
1996 sales of about $131,000. The purchase price of $43,843 was initially paid
from available cash. In September 1997 the company borrowed funds in Canada to
finance this transaction.
Effective December 31, 1996, the company purchased substantially all net assets
of Vanier Graphics Corporation from American Business Products for $44,654.
Vanier, a provider of business forms and related forms management and workflow
analysis services, had fiscal year 1996 sales of about $130,000. The purchase
price was paid in cash using proceeds from the company's issuance of notes in a
public offering.
In fiscal year 1997, the company also purchased two healthcare systems
businesses for $17,524, paid from available cash. One of the businesses provides
information systems to physician practices with primary emphasis on practice
management systems for hospital-based physicians. The other business has
capabilities in electronic medical records and clinical management. These
businesses had annual sales of about $10,000. Based on an appraisal, $11,000 of
the purchase prices was allocated to in-process research and development,
representing software development costs for which technological feasibility was
not established and for which there was no alternative future use.
Recorded liabilities of acquired companies included the costs to exit duplicate
facilities. These liabilities included the costs of closing fourteen
manufacturing plants, ten distribution facilities and two administrative
buildings. At September 30, 1997, the company had closed eleven manufacturing
plants, seven distribution facilities and both administrative facilities. Key
elements of the costs accrued for exiting duplicate facilities were involuntary
termination benefits of $11,883, relocation costs of $1,526 and exit costs of
$2,118. Involuntary termination benefits represent severance payments and
outplacement services for 931 employees, principally for manufacturing
employees. Exit costs consist primarily of lease costs. Through September 30,
1997, $7,740 of involuntary termination benefits were paid to 623 employees and
$962 of relocation costs and $504 of exit costs were paid. The company recorded
the assets of the duplicate facilities as current assets held for sale. These
assets of $27,155 were recorded at estimated fair market value less disposal
costs. At September 30, 1997, $17,382 of these assets had been sold.
From September 22 through September 29, 1997 the company purchased 16,500 shares
of a public company in the United Kingdom, Kalamazoo Computer Group plc. This
investment represents 26.5% of the outstanding shares and accordingly is
accounted for under the equity method. The stock purchase was accomplished
through a combination of a subscription from Kalamazoo and a tender offer to
Kalamazoo shareholders. Kalamazoo
30
31
provides computer solutions primarily to automobile dealers throughout Europe
and reported fiscal year 1997 sales of $124,000. Solutions include software,
hardware, support services, training, consulting and facilities management. The
purchase price of $36,001 was paid from available cash. A preliminary appraisal
was completed and $3,850 of the purchase price was allocated to in-process
research and development representing software development costs for which
technological feasibility was not established and for which there was no
alternative future use.
The company also purchased thirteen businesses in the automotive, healthcare and
general business forms markets during fiscal years 1996 and 1995 with annual
sales of $337,000 and $56,000, respectively.
All businesses were purchased with a combination of cash, notes payable and
stock as reported in the table titled Components of Purchase Prices. The
issuances of notes payable and capital stock were considered noncash
transactions for accounting purposes and were not included in the statements of
cash flows. All business combinations were accounted for as purchases and the
accounts of the acquired businesses were included in the company's financial
statements since the dates of acquisition. In connection with these business
combinations, the company recorded goodwill of $10,609 in 1997, $859 in 1996 and
$31,367 in 1995. This goodwill is being amortized on a straight-line basis over
five to fifteen years. Under the terms of some of the purchase agreements, the
company may be required to make additional payments, contingent on the sales and
profitability of the business purchased. These payments, if made, will either be
expensed in the period incurred or charged to goodwill. The amount of contingent
payments charged to goodwill was $3,728 in 1997, $3,447 in 1996 and $1,351 in
1995. Contingent payments may be made through 2006.
COMPONENTS OF PURCHASE PRICES
1997 1996 1995
- ---------------------------------------------------------------------------------------------
Cash (net of cash and equivalents acquired) $145,347 $78,039 $20,824
Notes payable 9,492
Capital stock issued (1997 -- 44,220 SHARES;
1996 -- 31,472 shares; 1995 -- 827,576 shares) 1,171 796 11,383
-------- ------- -------
Totals $146,518 $78,835 $41,699
======== ======= =======
Components of purchase prices include cash contingent payments of $3,325 in 1997
and $2,726 in 1996 and $1,171 of capital stock issued in 1997.
PRO FORMA INFORMATION (UNAUDITED)
On a pro forma basis, assuming that the 1997 business combinations were made as
of October 1, 1995, the consolidated revenues of the company would have
increased by about $148,000 in 1997 and $295,000 in 1996. Net earnings would
have increased by about $2,900 or $.04 per share in 1997 and decreased by about
$17,500 or $.21 per share in 1996. These pro forma results of operations include
pre-acquisition results of the businesses acquired and may not be indicative of
the results of operations that actually would have been obtained if the business
combinations had been in effect or that may be obtained in the future.
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4. INCOME TAXES
PROVISION FOR INCOME TAXES 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Current
Federal $ 44,666 $ 50,598 $ 36,800
State and local 11,183 11,112 9,221
Foreign 647 902 (276)
Deferred
Financial services product financing activities 13,040 4,022 15,557
Depreciation (7,044) 690 2,774
Capital losses (1,926) 1,696 2,814
Capital losses valuation allowance 1,588 (1,122) (1,800)
In-process research and development (2,706)
Other (2,960) 607 (6,929)
-------- -------- --------
Provision for income taxes $ 56,488 $ 68,505 $ 58,161
======== ======== ========
Income taxes paid (net of refunds) $ 63,054 $79,616 $ 39,821
======== ======= ========
RECONCILIATION OF INCOME TAX RATES
1997 1996 1995
AMOUNT PERCENT Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------
Statutory federal income taxes $ 40,497 35.0% $ 56,785 35.0% $ 47,864 35.0%
State and local taxes less federal
income tax effect 7,300 6.3 8,996 5.5 7,573 5.5
Goodwill amortization
and write-off 3,997 3.5 2,636 1.6 2,228 1.6
In-process research and development 3,293 2.8
Other 1,401 1.2 88 .1 496 .4
-------- -------- -------- ------ -------- ------
Provision for income taxes $ 56,488 48.8% $ 68,505 42.2% $ 58,161 42.5%
======== ======== ======== ====== ======== ======
INFORMATION SYSTEMS DEFERRED INCOME TAX ASSETS (LIABILITIES)
1997 1996
- ------------------------------------------------------------------------------------------
Deferred income tax assets
Postretirement medical $ 17,684 $ 15,419
Pensions 11,770 9,005
Acquired net operating losses 5,062 6,668
Severance 4,203 3,743
Capital losses 2,083 157
Other 28,883 24,165
Deferred income tax liabilities
Depreciation (9,063) (17,700)
Capital losses valuation allowance (1,631) (43)
Other (18,547) (17,009)
-------- --------
Totals 40,444 24,405
Current 21,699 22,398
-------- --------
Noncurrent $ 18,745 $ 2,007
======== ========
The carryforward of capital losses expires primarily in 1999. The carryforward
of net operating losses expires primarily in 2009.
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5. FINANCIAL SERVICES
INCOME STATEMENTS
1997 1996 1995
- -------------------------------------------------------------------------------
Revenues $ 30,383 $ 26,263 $ 22,311
-------- -------- --------
Expenses
Interest expense 11,410 9,072 7,191
Allowance for losses provision (benefit) 1,600 500 (150)
General and administrative 2,272 2,246 2,109
-------- -------- --------
Total expenses 15,282 11,818 9,150
-------- -------- --------
Income before income taxes 15,101 14,445 13,161
Provision for income taxes 5,972 5,708 5,192
-------- -------- --------
Net income $ 9,129 $ 8,737 $ 7,969
======== ======== ========
FINANCE RECEIVABLES
1997 1996
- -------------------------------------------------------------------------------
Product financing receivables $420,088 $356,387
Unguaranteed residual values 27,575 22,143
Allowance for losses (3,571) (3,314)
Unearned interest income (74,877) (65,933)
Other 2,858 2,293
-------- --------
Totals $372,073 $311,576
======== ========
As of September 30, 1997, product financing receivables due for each of the next
five years were $131,375 in 1998, $114,378 in 1999, $89,152 in 2000, $58,221 in
2001 and $25,886 in 2002.
ALLOWANCE FOR LOSSES
1997 1996
- -------------------------------------------------------------------------------
Balance, beginning of year $3,314 $3,903
Provision 1,600 500
Net losses (1,343) (1,089)
------ ------
Balance, end of year $3,571 $3,314
====== ======
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6. FINANCING ARRANGEMENTS
INFORMATION SYSTEMS
1997 1996
- ----------------------------------------------------------------------------------------------------
Short-term notes, weighted average interest rate
of 6.3% at September 30, 1997 and 6.0% at September 30, 1996 $13,245 $ 7,659
======= =======
Fixed rate notes, interest rate of 7.0%, maturing in 2007 $99,549
Fixed rate notes, weighted average interest rate
of 6.7% at September 30, 1997 and 6.6% at September 30, 1996,
maturing through 2003 34,602 $41,433
Variable rate notes, weighted average interest rate of 4.0%
at September 30, 1997 and 6.1% at September 30, 1996, maturing
through 1999 42,030 50,000
Capital lease obligation, weighted average interest
rate of 10.7%, maturing in 1998 2,100
-------- -------
Totals 178,281 91,433
Current portion 8,131 6,832
-------- -------
Long-term portion $170,150 $84,601
======== =======
Loan agreements limit consolidated indebtedness and require a minimum
consolidated net worth. In December 1996, the company issued $100,000 (face
value) ten year notes at 99.51% of par. At September 30, 1997, the fair values
of information systems financing arrangements were $13,245 for short-term notes,
$134,985 for fixed rate notes, $2,100 for capital lease obligations and $42,030
for variable rate notes. As of September 30, 1996, the fair values of
information systems financing arrangements were $7,659 for short-term notes,
$39,954 for fixed rate notes and $50,000 for variable rate notes. At September
30, 1997, debt maturities were $8,131 in 1998, $47,744 in 1999, $5,714 in 2000,
$5,714 in 2001 and $5,714 in 2002. Interest paid was $7,620 in 1997, $5,882 in
1996 and $3,006 in 1995.
FINANCIAL SERVICES
In the ordinary course of business, the company borrows cash to fund investments
in finance receivables from the sale of the company's products. The company
attempts to limit its interest rate exposure between the interest earned on
fixed rate finance receivables and the interest paid on variable rate financing
agreements through the use of interest rate management agreements. Interest rate
swaps provide for interest to be received on notional amounts at variable rates
and provide for interest to be paid on the same notional amounts at fixed rates.
Ceiling agreements limit the maximum interest rates the company pays on variable
rate financing agreements. Fixed interest rates do not change over the life of
the agreements. Variable interest rates are reset at least every ninety days and
are based on LIBOR or commercial paper indices and are settled with
counterparties at that time. Net interest expense or income on these contracts
is reflected in interest expense. The company is exposed to credit related
losses in the event of nonperformance by counterparties to the interest rate
management agreements. The company attempts to minimize this credit risk by
entering into agreements only with counterparties that have a Standard & Poor's
rating of "A" or higher. The company also diversifies its interest rate
management agreements among several financial institutions. Interest rate
management agreements are accounted for using settlement accounting.
34
35
Notional Amounts
Notes Swaps Ceilings
======================================================================================
SEPTEMBER 30, 1997
- ---------------------------------------------------------------------------------------
Variable rate instruments, maturing through 2002 $ 113,076 $17,066 $10,625
Weighted average interest rate 5.9%
Weighted average pay rate 6.3%
Weighted average receive rate 5.3%
Weighted average ceiling interest rate 7.3%
Fixed rate notes, maturing through 2001 85,238
Weighted average interest rate 6.4%
---------- ------- -------
Totals $ 198,314 $17,066 $10,625
========== ======= =======
September 30, 1996
- --------------------------------------------------------------------------------------
Variable rate instruments, maturing through 2002 $ 76,875 $ 1,875 $20,625
Weighted average interest rate 6.0%
Weighted average pay rate 4.4%
Weighted average receive rate 5.6%
Weighted average ceiling interest rate 7.2%
Fixed rate notes, maturing through 2000 85,036
Weighted average interest rate 6.1%
---------- ------- -------
Totals $ 161,911 $ 1,875 $20,625
========== ======= =======
Loan agreements limit consolidated indebtedness and require a minimum
consolidated net worth. The fair value of financial services debt was $198,124
and $161,367 at September 30, 1997 and 1996, respectively. At September 30,
1997, maturities of notes were $60,859 in 1998, $45,293 in 1999, $25,982 in
2000, $9,180 in 2001 and $57,000 in 2002. Interest paid was $11,178 in 1997,
$9,032 in 1996 and $7,211 in 1995.
At September 30, 1997, notional amount maturities of swap agreements were $4,608
in 1998, $4,608 in 1999, $4,608 in 2000 and $3,242 in 2001 and notional amount
maturities of ceiling agreements were $8,750 in 1998 and $1,875 in 1999. The
fair values of interest rate swap agreements were $96 and $6 at September 30,
1997 and 1996, respectively. The fair values of interest rate ceiling agreements
were $0 and $21 at September 30, 1997 and 1996, respectively. The premiums paid
for interest rate ceiling agreements are amortized to interest expense on a
straight-line basis over the life of the agreement. Unamortized premium costs
were $109 at September 30, 1997 and $219 at September 30, 1996.
REVOLVING CREDIT AGREEMENTS
Information systems and financial services share variable rate revolving credit
agreements which total $150,000 and require commitment fees on unused credit. At
September 30, 1997, available balances under these agreements were $82,000.
FAIR VALUES
Fair values of financial instruments are estimated based on quoted market prices
for debt and interest rate management agreements with the same remaining
maturities. The fair value of interest rate swap agreements represents the cost
if existing agreements had been settled at September 30.
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7. CAPITAL STOCK
1997 1996 1995
- -----------------------------------------------------------------------------------
Preferred
No par value
Authorized shares 60,000,000 60,000,000 60,000,000
Class A common
No par value
Authorized shares 240,000,000 120,000,000 120,000,000
============ ============ ============
Issued and outstanding shares
Balance, beginning of year 80,960,571 82,011,136 83,415,152
Issued 447,253 605,877 1,342,926
Repurchased (2,369,200) (1,600,000) (2,712,600)
Retired (53,094) (56,442) (34,342)
------------ ------------ ------------
Balance, end of year 78,985,530 80,960,571 82,011,136
============ ============ ============
Class B common
No par value
Authorized shares 40,000,000 30,000,000 30,000,000
Issued and outstanding shares 20,000,000 20,000,000 20,000,000
Dividends on Class A common shares must be twenty times the dividends on Class B
common shares and must be paid simultaneously. Each share of Class A common and
Class B common is entitled to one vote. The Class B common shareholder may
convert twenty Class B common shares to one share of Class A common. The company
has reserved sufficient authorized Class A common shares for Class B conversions
and stock option plans.
Each outstanding Class A common share has one preferred share purchase right.
Each outstanding Class B common share has one-twentieth of a right. Rights
become exercisable if a person or group acquires or seeks to acquire, through a
tender or exchange offer, 20% or more of the company's Class A common shares. In
that event, all holders of Class A common shares and Class B common shares,
other than the acquirer, could exercise their rights and purchase preferred
shares at a substantial discount. At the date of these financial statements,
except for the preferred share purchase rights, the company had no agreements or
commitments with respect to the sale or issuance of the preferred shares.
On August 6, 1996, the company's board of directors approved a two-for-one
common stock split. As a result of the split, on September 17, 1996, common
shareholders received one additional share for each share held as of September
3, 1996. The company reclassified $6,917 to Class A common and $312 to Class B
common from retained earnings. Share and per share information presented in the
accompanying financial statements reflects the stock split.
At the annual meeting on February 13, 1997, the company's shareholders approved
an amendment to the Articles of Incorporation increasing the number of
authorized Class A common shares from 120,000,000 to 240,000,000 and Class B
common shares from 30,000,000 to 40,000,000. In addition, the shareholders
declared that the par value of all Class A common shares (previously $.625 per
share) and Class B common shares (previously $.03125 per share) be reclassified
to "no par value" shares. As a result, the company combined par value and
paid-in capital accounts and restated prior years' information.
The company repurchased Class A common shares for treasury at average prices of
$19.75 in 1997, $20.83 in 1996 and $12.93 in 1995. The remaining balance of
shares authorized for repurchase by the board of directors was 3,169,800 at
September 30, 1997. Treasury shares at September 30 were 13,326,535 in 1997,
11,402,821 in 1996 and 10,408,698 in 1995.
36
37
8. EMPLOYEE STOCK OPTION PLANS
The company's stock option plans award incentive stock options and/or
nonqualified stock options to purchase Class A common shares to substantially
all employees. Stock options are generally granted at a price equal to fair
market value on the date of grant. During the three years ended September 30,
1997, no options were granted at a price less than fair market value. At
September 30, 1997, options to purchase 5,188,256 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
1997 1996 1995 1997 1996 1995
------------------------------------------------------------------------------------------------------------------
Outstanding
Beginning of year 7,604,607 7,320,072 7,213,248 $12.16 $10.94 $10.25
Granted 1,712,481 996,710 736,080 26.47 17.27 12.52
Exercised (403,033) (574,405) (547,256) 8.00 5.31 3.82
Canceled (125,879) (137,770) (82,000) 23.98 12.78 12.19
--------- --------- ---------
End of year 8,788,176 7,604,607 7,320,072 14.97 12.16 10.94
========= ========== ==========
Exercisable at September 30 1,367,129 1,242,327 1,427,852 8.31 6.27 4.54
========= ========= =========
Outstanding, September 30, 1997 Exercisable, September 30, 1997
Weighted
Average Weighted
Option Number of Remaining Average Number of Weighted Average
Price Range Options Life in Years Option Price Options Option Price
-----------------------------------------------------------------------------------------------------------------
$1.64 - $5.47 610,944 3.9 $ 3.75 610,944 $ 3.75
$10.00 - $18.03 6,565,070 6.4 13.19 755,585 11.97
$20.47 - $27.19 1,612,162 9.0 26.48 600 25.78
---------- ---------
Totals 8,788,176 6.7 14.97 1,367,129 8.31
========== =========
The company accounts for employee stock options under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under
APB Opinion No. 25, no compensation expense for stock options was recognized in
the financial statements because the option price equals the market price of the
stock on the date of grant. In 1997, the company adopted the disclosure
requirements of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," which requires the valuation of stock
options using option valuation models and the disclosure of the pro forma effect
on earnings. The company valued its stock options using the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of subjective assumptions,
such as expected stock price volatility, which can materially affect the fair
value estimate. Because the company's stock options have characteristics
significantly different from traded options, the fair value determined may not
be reflective of the actual value of the company's stock options. The weighted
average fair value of the company's stock options granted was $7.49 in 1997 and
$4.74 in 1996. Had compensation expense been recognized using these fair values,
the company's net income would have decreased by $3,645 or $.04 per share in
1997 and $1,080 or $.01 per share in 1996. Because compensation expense need
only be determined for options granted after fiscal year 1995, and compensation
expense is amortized to expense over the option vesting period, the full effect
on pro forma earnings will not be reflected until fiscal year 1999.
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OPTION VALUATION ASSUMPTIONS
1997 1996
- -------------------------------------------------------------------------------
Expected life in years 5 5
Dividend yield 1.48% 1.48%
Risk free interest rate 6.4% 6.0%
Volatility 23% 23%
9. POSTRETIREMENT BENEFITS
PENSION EXPENSE
1997 1996 1995
- ----------------------------------------------------------------------------------------
Defined benefit plans
Service cost $ 8,119 $ 6,525 $ 5,384
Interest on projected benefit obligation 11,615 9,524 8,463
Actual return on plan assets (17,241) (13,586) (12,640)
Net amortization and deferral 8,478 6,100 5,535
Special termination benefits 8,430
-------- -------- --------
Net periodic pension cost 19,401 8,563 6,742
Defined contribution plans 6,647 5,930 5,441
Multi-employer plans 265 312 319
-------- -------- --------
Totals $ 26,313 $ 14,805 $ 12,502
======== ======== ========
Actuarial assumptions of defined benefit plans
Discount rate 7.25% - 8.0% 7.875% 8.25%
Rate of compensation increase 3.75% - 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
Actuarial cost method PROJECTED UNIT CREDIT
Measurement period JULY 1 - JUNE 30
The company sponsors contributory and noncontributory, defined benefit pension
plans for most employees. Pension benefits are primarily based on years of
service and compensation. The company's funding policy is to make annual
contributions to the plans sufficient to meet or exceed the minimum statutory
requirements. The company and its actuaries review the pension plans each year.
The actuarial assumptions are intended to reflect expected experience over the
life of the pension liability.
During the fiscal year 1997 the company expensed $8,430 of special termination
benefits in connection with a voluntary early retirement program. These benefits
will be in addition to the employee's regular plan benefits and will be paid
directly from company assets rather than plan assets. These benefits were
accounted for as a curtailment and the present value of the future benefit
payments was accrued by the company. These special termination benefits
consisted primarily of enhanced benefits costing $6,835. The balance of the
charge represented immediate recognition of deferred obligations, consisting of
prior service cost, transition obligations and gains and losses of $2,521. These
costs were partially offset by a $926 reduction of the projected benefit
obligation related to revised compensation assumptions. All employees were fully
vested in their accumulated benefits.
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The company sponsors defined contribution savings plans covering most domestic
employees. Generally, contributions are funded monthly and represent 40% of the
first 3% of compensation contributed to the plan by participating employees.
Effective January 1, 1997, the company merged Retiree Medical Savings Accounts
into the Reynolds and Reynolds 401(k) Savings Plan. Contributions for this
portion of the plan are funded annually based on the company's return on equity
and are the same for each eligible employee. Forfeitures of nonvested savings
accounts are used to reduce contributions required by the company.
FUNDED STATUS OF DEFINED BENEFIT PENSION PLANS
SEPTEMBER 30, 1997 September 30, 1996
ABO ABO
ASSETS EXCEEDS Assets Exceeds
EXCEED ABO ASSETS Exceed ABO Assets
- ---------------------------------------------------------------------------------------------------------------
Defined benefit plans
Vested benefit obligation $ 116,237 $ 34,420 $ 76,069 $ 26,407
========= ========= ========= =========
Accumulated benefit obligation (ABO) $ 118,195 $ 37,207 $ 79,584 $ 29,128
========= ========= ========= =========
Projected benefit obligation (PBO) $ 149,901 $ 40,112 $ 107,505 $ 32,725
Fair market value of plan assets (147,596) (457) (100,621) (2,775)
--------- --------- --------- ---------
PBO greater than plan assets 2,305 39,655 6,884 29,950
Unrecognized net loss (5,792) (7,459) (8,553) ( 9,965)
Unrecognized prior service cost (683) (1,551) (775) (2,500)
Unrecognized net asset (liability)
being amortized over 7 to 15 years 781 (1,860) 1,732 (2,232)
Minimum pension liability 8,196 11,100
Net pension (asset) liability --------- --------- --------- ---------
(3,389) 36,981 (712) 26,353
Multi-employer liability 170 206
--------- --------- --------- ---------
Totals (asset) liability $ (3,389) $ 37,151 $ (712) $ 26,559
========= ========= ========= =========
Minimum pension liability
Intangible asset $ 3,411 $ 4,735
Deferred income tax benefit 1,936 2,582
Charge to shareholders' equity 2,849 3,783
--------- ---------
Totals $ 8,196 $ 11,100
========= ==========
Actuarial assumptions of defined benefit plans
PBO discount rate 7.25% - 8.0% 8.0%
Rate of compensation increase 3.75% - 5.0% 3.75%-5.0%
At September 30, 1997 and 1996, about 45% and 51% 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.
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POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
1997 1996 1995
- ---------------------------------------------------------------------------------------
Service cost $1,131 $1,120 $ 935
Interest on accumulated benefit obligation 3,265 3,150 2,835
Special termination benefits 731
------ ------ ------
Totals $5,127 $4,270 $3,770
====== ====== ======
Actuarial assumptions of defined benefit plans
Discount rate 8.0% 7.875% 8.25%
Healthcare cost trend rate through 2007 6.0% 6.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0% 5.0%
The company sponsors a defined benefit medical plan for employees who retired
before October 1, 1993. Future retirees may purchase postretirement medical
insurance from the company. Discounts from the market price of postretirement
medical insurance will be provided to certain retirees based on age and length
of remaining service as of October 1, 1993. These discounts are included in the
determination of the accumulated benefit obligation. During fiscal year 1997 the
company expensed $731 of special termination benefits in connection with a
voluntary early retirement program. The company also sponsors a defined benefit
life insurance plan for substantially all employees. The company funds medical
and life insurance benefits on a pay-as-you-go basis.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE OBLIGATION
1997 1996
- -----------------------------------------------------------------------------------
Accumulated benefit obligation
Retirees $ 24,076 $21,099
Fully eligible active plan participants 6,499 6,629
Other active plan participants 13,796 13,854
Unrecognized net loss (828) (1,978)
-------- -------
Totals $ 43,543 $39,604
======== =======
Actuarial assumptions
Discount rate 8.0% 8.0%
Healthcare cost trend rate through 2007 6.0% 6.0%
Healthcare cost trend rate thereafter 5.0% 5.0%
The effect of a 1% increase in the assumed healthcare cost trend rate would have
increased the service and interest cost components of postretirement medical
insurance in 1997 by $194 and the accumulated benefit obligation at September
30, 1997, by $2,568.
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10. CASH FLOW STATEMENTS
1997 1996 1995
- --------------------------------------------------------------------------------------------------
INFORMATION SYSTEMS
Cash flows provided by (used for) operating activities
Net income $ 50,090 $ 85,001 $ 70,625
Adjustments to reconcile net income to
net cash provided by operating activities
Purchased in-process research and development costs 14,850
Depreciation and amortization 60,636 44,327 37,348
Deferred income taxes (13,173) 1,605 (3,314)
Deferred income taxes transferred to (from)
financial services 4,001 (1,587) 8,664
Loss (gain) on sales of assets 4,215 (2,677) (617)
Changes in operating assets and liabilities
Accounts receivable (9,216) (22,050) (22,406)
Inventories 8,525 15,038 4,500
Prepaid expenses, intangible and other assets 6,619 (9,209) (6,279)
Accounts payable 3,197 1,785 1,882
Accrued and other liabilities 19,581 (1,888) 16,819
--------- -------- --------
Net cash provided by operating activities $ 149,325 $110,345 $107,222
========= ======== ========
FINANCIAL SERVICES
Cash flows provided by (used for) operating activities
Net income $ 9,129 $ 8,737 $ 7,969
Adjustments to reconcile net income to
net cash provided by operating activities
Deferred income taxes 13,008 4,022 15,557
Deferred income taxes transferred to (from)
information systems (4,001) 1,587 (8,664)
Changes in receivables, other assets
and other liabilities 1,739 1,103 (1,008)
--------- --------- ---------
Net cash provided by operating activities $ 19,875 $ 15,449 $ 13,854
========= ========= =========
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11. SEGMENT REPORTING
The company conducts business primarily throughout the United States and Canada
in three industry segments, computer systems, business forms and financial
services.
The computer systems segment provides integrated computer systems products and
services to automotive and healthcare markets. The segment's products include
integrated software packages, computer hardware and related hardware and
software installation. Services include customer training and consulting,
hardware maintenance, software support and database management.
The business forms segment manufactures and distributes printed business forms
and systems, custom continuous and snap out forms, specialty printed products
and provides forms management services to automotive, healthcare and general
business markets.
The financial services segment provides financing for the company's computer
systems products to the automotive and healthcare markets.
Computer Business Financial
Systems Forms Services Corporate Totals
- ------------------------------------------------------------------------------------------------------------------
1997
==================================================================================================================
Net sales and revenues $536,774 $818,528 $ 30,383 $1,385,685
Operating income 35,587 75,358 15,101 126,046
Income before income taxes 33,775 75,704 15,101 $(8,873) 115,707
Identifiable assets 214,720 449,574 373,175 65,041 1,102,510
Depreciation and amortization 38,419 20,522 1,695 60,636
Capital expenditures 20,056 22,496 5,155 47,707
1996
- ------------------------------------------------------------------------------------------------------------------
Net sales and revenues $478,994 $595,186 $ 26,263 $1,100,443
Operating income 69,751 80,629 14,445 164,825
Income before income taxes 72,123 80,723 14,445 $(5,048) 162,243
Identifiable assets 196,508 363,214 313,282 50,640 923,644
Depreciation and amortization 26,060 16,880 1,387 44,327
Capital expenditures 21,539 11,796 6,645 39,980
1995
- ------------------------------------------------------------------------------------------------------------------
Net sales and revenues $422,678 $465,902 $ 22,311 $910,891
Operating income 64,138 59,716 13,161 137,015
Income before income taxes 66,903 59,500 13,161 $(2,809) 136,755
Identifiable assets 182,727 257,022 265,965 49,752 755,466
Depreciation and amortization 21,832 14,246 1,270 37,348
Capital expenditures 18,462 10,927 1,361 30,750
42
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12. CONTINGENCIES
The U.S. Environmental Protection Agency (EPA) designated the company as one of
a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at four
environmental remediation sites. 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.
During fiscal year 1997 the company paid approximately $100 to settle
obligations regarding three environmental remediation sites.
The remaining site involves a municipal waste disposal facility owned and
operated by four municipalities. The company joined a PRP coalition and shared
remedial investigation and feasibility study costs with other PRPs. During
fiscal year 1994, the PRP coalition received an engineering evaluation/cost
analysis of the presumed remedy for the site from its private contractor.
However, because the EPA has not yet selected a remedy, potential remediation
costs remain uncertain. Remediation costs for a typical CERCLA site on the
National Priorities List average about $30,000. The engineering evaluation/cost
analysis was consistent with this average. During fiscal year 1996, an agreement
was reached whereby the state of Connecticut will contribute $8,000 towards
remediation costs. The company believes that the reasonably foreseeable
resolution will not have a material adverse effect on the financial statements.
13. ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standards Board (FASB) issued SFAS
Statement No. 128, "Earnings Per Share." This statement, effective for both
interim and annual periods ending after December 15, 1997, will require the
company to report basic earnings per share (EPS) and diluted EPS. Basic EPS is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to primary EPS pursuant to APB Opinion No. 15,
"Earnings Per Share." On a pro forma basis, basic EPS would have been $.73 in
1997, $1.14 in 1996 and $.94 in 1995. Diluted EPS was the same as the company's
currently reported primary EPS.
In June 1997 the FASB issued SFAS Statement No. 130, "Reporting Comprehensive
Income." This statement, effective for fiscal years beginning after December 15,
1997, would require the company to report components of comprehensive income in
a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined by Concepts Statement No.
6, "Elements of Financial Statements" as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. On a pro
forma basis, comprehensive income would have been $59,941 in 1997, $91,116 in
1996 and $77,579 in 1995.
In June 1997 the FASB issued SFAS Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement, effective for
financial statements for periods beginning after December 15, 1997, requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. Generally, financial information is
required to be reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
company plans to change its reported business segments, which currently
represent product classifications, to reflect the organizational structure of
the company at the time of adoption.
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14. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
================================================================================================
1997
- ------------------------------------------------------------------------------------------------
Net sales and revenues
Information systems $307,183 $346,677 $330,273 $371,169
Financial services 7,124 7,525 7,787 7,947
-------- -------- -------- --------
Totals $314,307 $354,202 $338,060 $379,116
======== ======== ======== ========
Costs and expenses
Cost of sales $162,852 $190,253 $185,723 $207,539
Selling, general and administrative expenses 102,317 113,689 127,823 128,822
Restructuring charge 25,339
Financial services 3,385 3,612 3,772 4,513
-------- -------- -------- --------
Totals $268,554 $307,554 $317,318 $366,213
======== ======== ======== ========
Net income $ 25,500 $ 26,267 $ 7,278 $ 174
Earnings per common share $ .30 $ .31 $ .09 $ .00
Cash dividends declared per share
Class A common $ .08 $ .08 $ .08 $ .08
Class B common $ .004 $ .004 $ .004 $ .004
Closing market prices of Class A common shares
High $ 27.88 $ 29.38 $ 24.75 $ 21.31
Low $ 25.50 $ 23.88 $ 15.63 $ 16.38
1996
- ------------------------------------------------------------------------------------------------
Net sales and revenues
Information systems $227,133 $250,538 $280,457 $316,052
Financial services 6,234 6,466 6,592 6,971
-------- -------- -------- --------
Totals $233,367 $257,004 $287,049 $323,023
======== ======== ======== ========
Costs and expenses
Cost of sales $115,746 $130,610 $146,636 $170,663
Selling, general and administrative expenses 77,487 83,439 94,314 104,905
Financial services 2,862 2,872 2,871 3,213
-------- -------- -------- --------
Totals $196,095 $216,921 $243,821 $278,781
======== ======== ======== ========
Net income $ 21,386 $ 22,958 $ 24,308 $ 25,086
Earnings per common share $ .25 $ .27 $ .28 $ .29
Cash dividends declared per share
Class A common $ .06 $ .06 $ .06 $ .07
Class B common $ .003 $ .003 $ .003 $ .0035
Closing market prices of Class A common shares
High $ 19.69 $ 20.50 $ 26.63 $ 27.00
Low $ 16.50 $ 18.31 $ 21.38 $ 22.31
44
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Schedule II
VALUATION ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions Deductions
Balance at Charged to Other Write-offs Other Balance
Beginning Costs and Net of at End
Description of Year Expenses (a) Recoveries (a) of Year
- -------------------------------------------------------------------------------------------------------------------------
Valuation Accounts - Deducted From Assets to Which They Apply
INFORMATION SYSTEMS
Reserves for accounts receivable
Year ended September 30, 1997 5,744 3,960 476 2,528 0 7,652
Year ended September 30, 1996 3,166 2,325 2,407 2,154 0 5,744
Year ended September 30, 1995 2,683 1,977 202 1,696 0 3,166
Reserves for inventory:
Year ended September 30, 1997 7,000 2,402 2,368 4,961 0 6,809
Year ended September 30, 1996 1,387 1,926 5,033 1,346 0 7,000
Year ended September 30, 1995 1,503 1,660 0 1,776 0 1,387
Reserves for notes receivable:
Year ended September 30, 1997 629 57 (336) 115 0 235
Year ended September 30, 1996 471 170 203 215 0 629
Year ended September 30, 1995 731 (205) 0 55 0 471
FINANCIAL SERVICES
Reserves for finance receivables:
Year ended September 30, 1997 3,314 1,600 336 1,679 0 3,571
Year ended September 30, 1996 3,903 500 0 1,089 0 3,314
Year ended September 30, 1995 4,854 (150) 0 801 0 3,903
(a) Includes adjustments from translation of foreign currency to United States dollars, the effects
of acquisitions and disposals of businesses and transfers between reserves.
45
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INDEX OF EXHIBITS
Securities Exchange Act of 1934
Page in
Form
Exhibit No. Item 10-K
----------------------------------------------------------------------------------------------------
(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) Consolidated Code of Regulations; incorporated by reference to
Exhibit B to the company's definitive proxy statement dated
January 8, 1990 filed with the Securities and Exchange
Commission.
(4)(a) Loan Agreement with Metropolitan Life Insurance Company dated
September 17, 1986, incorporated by reference to Exhibit
(4)(a) to Form 10-K for the fiscal year ended September 30,
1986.
(4)(b) 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)(c) Shareholder Rights Plan incorporated by reference to Exhibit I
to the company's Form 8-A (File No. 1-10147), which was
adopted on May 6, 1991 and filed with the Securities and
Exchange Commission on May 8, 1991.
(9) Not applicable.
(10)(a) Amended and Restated Employment Agreement with David R. Holmes
dated as of October 1, 1995; incorporated by reference to
Exhibit (10)(a) to Form 10-K for the fiscal year ended
September 30, 1995.
(10)(b) Amended and Restated Employment Agreement with Robert C. Nevin
dated as of February 1, 1997.
(10)(c) Amended and Restated Employment Agreement with Joseph N.
Bausman dated May 31, 1995; incorporated by reference to
Exhibit (10)(e) to Form 10-K for the fiscal year ended
September 30, 1995.
(10)(d) Employment Agreement with H. John Proud dated September 1,
1995; incorporated by reference to Exhibit (10)(f) to Form
10-K for the fiscal year ended September 30, 1995.
(10)(e) Employment Agreement with Rodney A. Hedeen dated February 1,
1997.
(10)(f) Settlement Agreement with Wayne C. Jira dated as of November
9, 1987; incorporated by reference to Exhibit (10)(f) to Form
10-K for the fiscal year ended September 30, 1987.
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Page in
Form
Exhibit No. Item 10-K
----------------------------------------------------------------------------------------------------
(10)(g) 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)(h) Non-Qualified Stock Option Plan -- 1980, Amended and Restated
August 11, 1987; incorporated by reference to Exhibit (10)(h)
to Form 10-K for the fiscal year ended September 30, 1987.
(10)(i) Amendment to Non-Qualified Stock Option Plan -- 1980 dated as
of December 8, 1989; incorporated by reference to Exhibit
(10)(o) to Form 10-K for the fiscal year ended September 30,
1989.
(10)(j) Amended and Restated Stock Option Plan -- 1989, effective
September 29, 1993; incorporated by reference to Exhibit
(10)(l) to Form 10-K for the fiscal year ended September 30,
1993.
(10)(k) Stock Option Plan - 1995; incorporated by reference to Exhibit
B of the company's definitive proxy statement dated January 5,
1995; incorporated by reference to Exhibit (10)(l) to Form
10-K for the fiscal year ended September 30, 1995.
(10)(l) Performance Options Policy of the Compensation Committee of
the Board of Directors of The Reynolds and Reynolds Company
under the Non-Qualified Stock Option Plan -- 1980, effective
October 1, 1986; incorporated by reference to Exhibit (10)(i)
to Form 10-K for the fiscal year ended September 30, 1987.
(10)(m) Amendment and Restatement No. 1 to the Performance Options
Policy of the Compensation Committee of the Board of Directors
of The Reynolds and Reynolds Company under the Non-Qualified
Stock Option Plan -- 1980, effective October 28, 1987;
incorporated by reference to Exhibit (10)(j) to Form 10-K for
the fiscal year ended September 30, 1987.
(10)(n) Amendment and Restatement No. 2 to the Performance Options
Policy of the Compensation Committee of the Board of Directors
of The Reynolds and Reynolds Company under the Non-Qualified
Stock Option Plan -- 1980, effective November 12, 1987;
incorporated by reference to Exhibit (10)(k) to Form 10-K for
the fiscal year ended September 30, 1987.
(10)(o) 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)(p) 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.
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Page in
Form
Exhibit No. Item 10-K
----------------------------------------------------------------------------------------------------
(10)(q) The Reynolds and Reynolds Company Supplemental Retirement
Plan, Amendment No. 3, adopted on August 16, 1983;
incorporated by reference to Exhibit (10)(j) to Form 10-K for
the fiscal year ended September 30, 1983.
(10)(r) 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)(s) 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)(t) 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)(u) 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)(v) 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)(w) 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)(x) 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)(y) 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)(z) 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)(aa) 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.
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Page in
Form
Exhibit No. Item 10-K
----------------------------------------------------------------------------------------------------
(10)(bb) 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)(cc) 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)(dd) The Reynolds and Reynolds Company Supplemental Retirement Plan
Amendment No. 4, adopted March 14, 1997.
(10)(ee) 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)(ff) 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)(gg) 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)(hh) 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)(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.
(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.
(10)(ll) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan), January 1, 1994 Restatement;
incorporated by reference to Exhibit (10)(jj) to Form 10-K for
the fiscal year ended September 30, 1995.
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Exhibit No. Item 10-K
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(10)(mm) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan) First Amendment adopted March
31, 1995; incorporated by reference to Exhibit (10)(kk) to
Form 10-K for the fiscal year ended September 30, 1995.
(10)(nn) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan) Second Amendment adopted March
31, 1995; incorporated by reference to Exhibit (10)(ll) to
Form 10-K for the fiscal year ended September 30, 1995.
(10)(oo) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan ) Third Amendment adopted
August 8, 1995; incorporated by reference to Exhibit (10)(mm)
to Form 10-K for the fiscal year ended September 30, 1995.
(10)(pp) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan) Fourth Amendment adopted
August 8, 1995; incorporated by reference to Exhibit (10)(nn)
to Form 10-K for the fiscal year ended September 30, 1995.
(10)(qq) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan) Fifth Amendment adopted March
1, 1996; incorporated by reference to Exhibit (10)(mm) to Form
10-K for the fiscal year ended September 30, 1996.
(10)(rr) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan) Seventh Amendment adopted
March 14, 1997.
(10)(ss) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan) Eighth Amendment adopted
August 11, 1997.
(10)(tt) The Reynolds and Reynolds Company Tax Deferred Savings and
Protection Plan ("401(k)" Plan) Sixth Amendment adopted
January 23, 1996; incorporated by reference to Exhibit
(10)(nn) to Form 10-K for the fiscal year ended September 30,
1996.
(10)(uu) The Reynolds and Reynolds Company Retiree Medical Savings
Account Plan effective October 1, 1993; incorporated by
reference to Exhibit (10)(oo) for the fiscal year ended
September 30, 1995.
(10)(vv) The Reynolds and Reynolds Company Retiree Medical Savings
Account Plan, Amendment No. 1, adopted August 8, 1995;
incorporated by reference to Exhibit (10)(pp) to Form 10-K for
the fiscal year ended September 30, 1995.
(10)(ww) The Reynolds and Reynolds Company Retiree Medical Savings
Account Plan, Amendment No. 2, adopted March 14, 1997.
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(10)(xx) General Form of Deferred Compensation Agreement between the
company and each of the following officers; incorporated by
reference to Exhibit (10)(p) to Form 10-K for the fiscal year
ended September 30, 1983.
Joseph N. Bausman, R. H. Grant, III, David
R. Holmes, Dale L. Medford and Robert C.
Nevin
(10)(yy) 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; incorporated by reference to Exhibit (10)(fff) to
Form 10-K for the fiscal year ended September 30, 1989.
Joseph N. Bausman, R. H. Grant, III, David
R. Holmes, Dale L. Medford and Robert C.
Nevin
(10)(zz) 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; incorporated by reference to Exhibit
(10)(dd) to Form 10-K for the fiscal year ended September 30,
1985.
Joseph N. Bausman, Michael J. Gapinski, R.
H. Grant, III, David R. Holmes, Adam M.
Lutynski, Dale L. Medford and Robert C.
Nevin.
(10)(aaa) 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; incorporated by reference to
Exhibit (10)(hhh) to Form 10-K for the fiscal year ended
September 30, 1989.
Joseph N. Bausman, Michael J. Gapinski, R.
H. Grant, III, Rodney A. Hedeen, David R.
Holmes, Adam M. Lutynski, Dale L. Medford,
Robert C. Nevin and H. John Proud.
(10)(bbb) 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)(ccc) 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)(ddd) 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.
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(10)(eee) Exchange Agreement dated May 29, 1992 among the company,
Norick Investment Company A Limited Partnership, Frances N.
Lilly and Majorie K. Norick; incorporated by reference to
Exhibit 2(b) to the company's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on June
11, 1992 (Registration Statement No. 33-48546).
(10)(fff) Exchange Agreement dated May 29, 1992 between the company and
Third Generation Leasing Company; incorporated by reference to
Exhibit 2(c) to the company's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on June
11, 1992 (Registration Statement No. 33-48546).
(11) Not applicable
(12) Not applicable
(13) Not applicable
(18) Not applicable
(21) List of subsidiaries 53
(22) Not applicable
(23) Consent of Independent Auditors 22
(24) Not applicable
(27) Financial Data Schedule
(28) Not applicable
(99) Not applicable
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EXHIBIT (21)
LIST OF SUBSIDIARIES
STATE OR OTHER JURISDICTION OF
NAME INCORPORATION OR ORGANIZATION
- -------------------------------------------------------------------------------
Dataforms, Inc. Wisconsin
Fiscal Information, Inc. Delaware
Formcraft, Inc. Texas
Reyna Capital Corporation Ohio
Reynolds and Reynolds (Canada) Limited Canada
Crain-Drummond Inc. Canada
Reynolds Vehicle Registration, Inc. Ohio
53