ITEM 1. BUSINESS GENERAL
The Reynolds and Reynolds Company, an Ohio corporation, incorporated in 1889, operates principally in two business segments -- computer systems and business forms.
COMPUTER SYSTEMS
The computer systems segment offers its products and services to the automotive and healthcare markets. The company markets turnkey information management systems and professional services primarily to automobile dealers. The hardware portion of the systems come from manufacturers who specialize in platforms for industry-standard operating systems. The application software products are either owned by the company or obtained from third parties and licensed to end users. Some of the software products offered include standard programs for accounting, payroll, vehicle and parts inventory control, service merchandising and scheduling, leasing, finance and insurance, parts and vehicle locators, manufacturer communications, new and used vehicle retailing, and electronic document imaging. Other applications link dealerships to credit bureaus to verify the credit worthiness of prospective customers, process and approve credit documentation and electronically process vehicle registrations in five states. The company also markets computer products and services directly to automobile manufacturers.
Hardware maintenance, software support and training and other professional services are integral parts of the company's turnkey approach to marketing computer systems. These services are provided by service and support personnel located in nearly 200 offices in the United States and Canada.
The Healthcare Systems Division markets a similar array of turnkey computer systems and services to physician groups and integrated healthcare delivery networks. Products include software and services that address the administrative and clinical processes that enhance the practice of medicine.
The company also provides financial services to automotive and healthcare customers throughout the United States and Canada. Financial services typically consist of financing sales of the companies' computer systems products.
BUSINESS FORMS
The business forms segment offers its products and services to customers in the automotive, healthcare and general business markets. It operates 19 manufacturing facilities in the United States and Canada.
In the automotive market, the company offers its products and services to all departments of automobile, truck and recreational vehicle dealerships including sales, parts, service, finance and insurance, and accounting. The company also markets its products and services to related-automotive businesses such as repair garages, auto parts stores, service stations and body shops. The products and services include standard and custom business forms (including dealer image products), forms management services, promotional items, custom designed filing systems, dealership customer satisfaction measurement and management services, customer prospecting services, and promotional mailing services.
In the healthcare market, the company offers standard and custom forms and forms management services to hospitals and large healthcare organizations.
In the general business markets, the company offers a wide variety of paper-based and electronic business document solutions to value-seeking businesses. Solutions offered include standard and custom business forms, electronic business forms, on-demand printing services, checks, labels, mailers, stationery, envelopes and tickets. Many of these business documents incorporate a broad range of security features to help deter fraudulent document
reproduction and counterfeiting. The company also offers a wide variety of forms management solutions to help customers improve their productivity: forms survey and analysis, inventory management and reporting, cost center reporting, low stock reporting, distribution services and process work flow reengineering services. Additionally, pegboard accounting systems are sold to smaller businesses through a network of office supply dealers and independent forms distributors.
NEW PRODUCTS
In the computer systems segment, the company introduced SalesVision, an advanced ERA(R) application which employs the latest multimedia and client server technology to aid auto dealership salespeople to prospect for customers and to make sales presentations. The company also added ERA Customer Loyalty Management, an integrated tool to monitor the customer service experience.
Using its DealerNet(R) service, the company introduced an on-line credit application service for automotive consumers over the Internet. It also released a new entry level document storage solution and, through acquisition, enhanced its consulting services by adding specialized service, parts and body shop operations.
In the business forms segment, the company expanded document solutions and outsourcing capability through two strategic acquisitions and by internal product development. The acquisitions added electronic print and mail services, labels and integrated product capability, an electronic catalog and requisitioning tool and expanded forms and documents management services. Internal developments included digital publishing services, fulfillment services, process consulting capability and expanded electronic forms and workflow automation capability.
In healthcare, the company expanded its product line with major software enhancement releases designed to extend overall functionality, marketability and customer value.
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 customers.
Computer hardware is essential to the company's computer systems segment. 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 if 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 the company's business.
The company's trademark REYNOLDS & REYNOLDS(R) is associated with many goods and services provided by the company. In the computer systems segment, the company has a number of direct and indirect distribution and licensing arrangements with equipment vendors and software providers relating to certain components of Reynolds' products, including the principal operating systems. Such arrangements are in the aggregate, but not individually (except for the operating systems), material to Reynolds' business.
COMPETITION
Both in the provision of computer systems products and services and in the manufacture and sale of business forms, 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 products and services 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 either principal business segment, 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: The backlog represents unbilled computer systems or terminals which have not yet been shipped to customers. At November 1, 1996, the dollar value of the product backlog, including software license fees, is estimated to be $30,100 compared with $25,600 last year.
BUSINESS SYSTEMS: The company manufactures several thousand different types of standard and custom business forms. At November 1, 1996, the dollar value of the printing backlog is estimated to be $26,200 compared with $18,900 last year.
RESEARCH AND DEVELOPMENT
During fiscal 1996, 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 $24,400 in 1996, $21,000 in 1995 and $18,100 in 1994.
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 11 to the consolidated financial statements, page 52.)
EMPLOYEES
On October 1, 1996, the company and its subsidiaries had 7,544 employees. It is party to a number of collective bargaining agreements with union locals which represent an aggregate of approximately 264 employees at its Dayton, Ohio, Hagerstown, Maryland and Lebanon, Indiana plants.
ITEM 2.

ITEM 2. PROPERTIES
As of September 30, 1996, the company operated 18 forms manufacturing plants in the United States and one in Canada encompassing approximately 2 million square feet. Of those, more than 1.5 million square feet are owned outright by the company. The remaining .5 million square feet are leased. Corporate headquarters and the respective headquarters of the business forms segment and the computer systems segment 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 200 sales offices and more than 29 warehouses throughout the country.
The company has no encumbrances securing long-term debt as of September 30, 1996, on its owned facilities.
Substantially all printing and other equipment used in the manufacture of business forms and systems is owned by the company and its subsidiaries.
The company believes its properties are in good condition and adequate for current activities. See Note 2 to the consolidated financial statements on pages 39-40 regarding assets held for sale..
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Relevant information appears in Note 11 to the consolidated financial statements on page 52.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II (Dollars In Thousands Except Per Share Data)
ITEM 5.

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. 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*
As of November 1, 1996, there were approximately 2,750 holders of record of Class A Common Shares and one holder of record of Class B Common Shares. See Note 5 to the consolidated financial statements on pages 43 and 44 regarding the amount of retained earnings available for dividends.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SELECTED FINANCIAL DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
AUTOMOTIVE MARKET
Automobile dealerships represent a significant number of customers for the company's products and services. The number of automobile dealerships remained about the same as last year as the automotive business environment was stable in 1996. In October 1996, economists projected calendar year 1996 new vehicle sales to be over 15 million units for the third year in a row. Those same economists also projected about 15 million new vehicle sales in calendar year 1997. Automobile dealerships generate revenues and profits from a variety of products and services. Sales of used vehicles, replacement parts and maintenance services are the major sources of a typical dealership's profits. Strong used vehicle sales are expected to continue because of the increased supply of previously leased vehicles. The trend of franchises consolidating into megadealerships is expected to continue, in part, in response to increased competition from used car superstores. Used car superstores represent a small but growing segment of the automobile retail channel. A few megadealerships have raised capital through public equity offerings to fund the acquisition of additional dealerships. These superstores and megadealerships have sophisticated information management needs for which the company's products and services provide solutions.
GENERAL BUSINESS MARKET
Companies are continuing to seek ways to offload non-strategic activities and streamline their document systems to improve organizational efficiency and increase effectiveness. This growing trend is favorable for the company's forms management programs which simplify, standardize, automate and integrate customers' information management and document usage.
In calendar year 1995 paper manufacturers increased prices several times because of increased demand for paper. As a result, the company's cost of paper increased significantly in 1995 and the company raised business forms sales prices accordingly. The company's cost of paper declined in 1996 as paper manufacturers lowered paper prices because of reduced demand for paper.
HEALTHCARE MARKET
The healthcare market continued to move toward managed care in 1996. This industry is experiencing 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. In 1996, the company aggressively invested in sales, marketing and product development resources to provide the information management solutions required by this market.
SIGNIFICANT EVENTS
BUSINESS COMBINATIONS
On April 22, 1996 the company announced a cash tender offer to acquire the outstanding shares of Duplex Products Inc. (Duplex) for $12 per share. On May 20, 1996 the company purchased the tendered shares of Duplex for a total price of $89,800. Duplex provides business forms and labels, electronic printing and mailing services, document management programs, 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 per year. The company expects Duplex sales to decline further to about $200,000 as the business is integrated with existing operations and sales of lower margin products are deemphasized.
From 1994 through 1996 the company purchased fifteen additional businesses in the automotive, healthcare and general business forms markets. Automotive business combinations consisted primarily of new products to supplement the company's existing product offerings. Healthcare and general business forms acquisitions resulted
in stronger products and services offerings and additional customers for the company. See Note 2 to the Consolidated Financial Statements for additional disclosures about the company's business combinations.
STOCK SPLIT
On August 6, 1996, the company's board of directors approved a two-for-one common stock split. As a result of the split, common shareholders received one additional share for each share held as of September 3, 1996. This split was the third such split since November 1992 and the seventh split since the company's initial public offering in 1961. All share and per share information presented in this annual report reflects the stock split.
BUSINESS FORMS RESTRUCTURING
In 1994, the company recorded a $12,400 restructuring charge for costs to be incurred in the disposal of part of its computer paper product line and the consolidation of certain custom business forms printing operations. General business forms operations restructured to focus on value-added solutions for customers and to improve profitability. The company discontinued the manufacture of certain low-margin computer paper products and closed its Chambersburg, Pennsylvania plant. The company also closed its custom business forms plant in Chestertown, Maryland and several distribution facilities and sales offices. This transaction generated $11,500 of income tax benefits which more than offset the negative after-tax effect of the restructuring charge. See Note 1 to the Consolidated Financial Statements for additional disclosures about the restructuring.
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated net sales and revenues set a record for the fourth consecutive year in 1996. Computer systems, business forms and financial services revenues all grew significantly in 1996 and 1995. The net effect of business combinations and divestitures was to increase consolidated sales $133,000 in 1996 and $9,000 in 1995.
Consolidated gross profit represented 47.5% of information systems sales, compared to 47.0% in 1995 and 45.5% in 1994. 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. Gross profit increased in 1995 primarily because of business forms improvement as a result of the 1994 restructuring. Computer systems gross profit percentage also rose in 1995.
Consolidated operating income grew significantly in 1996 and 1995 primarily because of higher business forms operating income. Computer systems and financial services operating income also rose in 1996 and 1995. In 1994, the company recorded a $12,400 restructuring charge and $2,793 of business forms restructuring related costs and environmental expenses. As a percentage of sales, operating income was 15% in 1996 and 1995, and 12% in 1994 (14% excluding restructuring and related charges).
Total other charges were $2,582 in 1996, $260 in 1995 and $745 in 1994. Other charges increased in 1996 because of higher net interest expense related to the Duplex transaction. Net interest expense was relatively flat during 1995 and 1994 as information systems debt balances and interest rates remained relatively stable.
The effective income tax rate was 42.2% in 1996, compared to 42.5% in 1995 and 32.0% in 1994. The 1996 tax rate included the benefits of certain tax credits which will not repeat in 1997. The 1996 tax rate would have been 42.8% excluding these benefits. In 1994, the company recorded an $11,500 tax benefit associated with the computer paper divestiture. The company also recorded $581 of tax expense related to the sale of the French subsidiary. The 1994 effective tax rate was 41.8%, excluding the effect of the computer paper and French divestitures.
The company's 1996 net income and earnings per share set a record for the fifth straight year and significantly exceeded last year's strong results. The after-tax effect of 1994's restructuring charge, restructuring related costs and environmental expenses increased 1994's net income by $840 or $.01 per share. In 1996, return on average shareholders' equity was 26.6% compared to 25.1% in 1995 and 23.8% in 1994.
COMPUTER SYSTEMS (excluding financial services)
In 1996 computer systems revenues grew primarily because of higher recurring service revenues, growing sales of newer products and the effect of fiscal year 1995 business combinations. Recurring service revenues continued to grow primarily because of the increased number of 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. Sales of newer products and services such as Customer Marketing Services, SalesVision, consulting services and a document management system continued to grow. Automotive and healthcare business combinations contributed about $12,000 of the segment's revenue growth in 1996. In 1995 computer systems revenues increased because of higher unit sales of the company's ERA(R) computer systems to automobile dealers, higher recurring service revenues and the net effect of acquisitions and the 1994 divestiture of operations in France. Recurring service revenues continued to grow because strong systems sales increased the number of software applications supported. Automotive and healthcare business combinations, net of the effect of the divestiture in France, contributed about $13,000 of the segment's revenue growth in 1995.
Computer systems gross profit percentage increased primarily because the higher margin recurring service revenues became a greater part of the revenue mix.
Selling, general and administrative (SG&A) expenses were 34.3% of revenues in 1996, compared to 31.8% of revenues in 1995 and 30.2% in 1994. The 1996 and 1995 increases in SG&A expenses, as a percentage of revenues, reflected new investments in both the automotive and healthcare businesses. Automotive investments were new products and services oriented. Healthcare investments involved integrating two acquisitions with the existing business and implementing sales, marketing and product development strategies for future growth.
Computer systems operating income grew, but declined as a percentage of sales in both 1996 and 1995 because of new investments in healthcare systems. Automotive's operating margin was relatively constant during the last three years. Healthcare systems continued to operate at a loss in 1996 because of the aggressive investments in the organization's products and capabilities.
BUSINESS FORMS
In 1996 business forms revenues rose primarily because of the effect of 1995 and 1996 business combinations which contributed $121,000 of the sales increase. The remaining sales increase resulted from strong growth in sales of forms management products and services, which was partially offset by reduced volume for other custom forms sales. In 1995 business forms revenues increased primarily because of growth in forms management products and services and the effect of sales price increases on both automotive and general business forms. In 1995 sales of businesses acquired were less than sales lost in the 1994 divestiture of certain low margin products. The company raised sales prices in 1995 in response to rising paper costs.
Business forms gross profit percentage declined in 1996 because of the effect of lower gross profit margins of Duplex. Excluding the effect of Duplex, gross profit margins were 48.5% in 1996. Also favorably contributing to gross profit margins were lower paper costs which reduced LIFO inventory adjustments. In 1995 business forms gross profit percentage increased primarily because of the successful completion of the 1994 restructuring which improved the sales mix and reduced operating expenses. In 1995, the company experienced significantly higher paper costs accounted for under the LIFO method. The effect of the higher paper costs reported in cost of sales was offset by higher sales prices.
SG&A expenses were 32.9% of revenues in 1996, compared to 34.3% in 1995 and 35.8% in 1994. SG&A expenses declined, as a percentage of revenues in 1996 primarily because of business combinations which 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. SG&A expenses in 1994 included restructuring related costs and environmental expenses.
Business forms operating income increased significantly in 1996 because of higher sales and the successful integration of 1995 and 1996 business combinations. In 1995 business forms operating income grew substantially over 1994 which included a $12,400 restructuring charge, $1,043 of restructuring related costs and $1,750 of environmental expenses. Excluding these expenses from 1994, operating income increased $18,782 or 46% over 1994. Operating income was $40,934 (excluding the aforementioned expenses) or 10% of sales in 1994.
FINANCIAL SERVICES
Average finance receivables grew 22% in 1996 and 27% in 1995 as a result of strong computer systems sales. Financial services revenues grew significantly each of the last two years because of the increased receivable balances. The average interest rate earned on the receivable portfolio declined slightly in both 1996 and 1995 because interest rates on new receivables were less than those for maturing receivables.
Financial services operating income grew solidly in 1996 because of the revenue growth. In 1995 operating income increased only slightly because the revenue growth was largely offset by higher interest expense as a result of rising interest rates on borrowings. In 1996 average interest rates on borrowings were about the same as last year.
The company has entered into various 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 1996 the company did not enter into any new interest rate management agreements because current market conditions made fixed rate debt more attractive. See Note 5 to the Consolidated Financial Statements for additional disclosures regarding the company's interest rate management agreements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems strong cash flow from operating activities of $110,345 resulted primarily from record net income. During the third quarter of fiscal year 1996, the company completed the purchase of Duplex which accounted for the majority of cash spent on business combinations and cash received from new borrowings. See the business combinations section of this analysis and Note 2 to the Consolidated Financial Statements for additional information regarding these transactions. Capital expenditures of $39,980 occurred in the normal course of business. Capital expenditures in the ordinary course of business are anticipated to be about $45,000 to $50,000 in fiscal year 1997. The company also paid cash dividends of $20,594 and repurchased $33,323 of capital stock in fiscal year 1996. See the shareholders' equity caption of this analysis for a further discussion 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 21.0% at September 30, 1996 and 13.4% at September 30, 1995. Available credit under existing revolving credit agreements was $33,580 at September 30, 1996. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. In fiscal year 1997, the company expects to obtain new long-term financing to permanently fund the Duplex purchase and repay the related revolving credit borrowings. The company estimates that cash flow from operations and cash available from existing credit agreements will be sufficient to fund fiscal year 1997 normal operations.
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 11, 1996, none of these preferred shares was outstanding and there were no agreements or commitments with respect to the sale or issuance of these shares.
The company paid cash dividends of $20,594 in 1996, $16,651 in 1995 and $14,226 in 1994. Dividends per Class A common share were $.25 in 1996, $.20 in 1995 and $.165 in 1994. 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 1996, the board of directors raised the quarterly dividend 14% to $.08 per Class A common share. The quarterly dividend was also increased 17% in August 1996. The company has increased cash dividends eleven 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 $33,323 of Class A common shares in 1996, $35,079 in 1995 and $39,083 in 1994. Average prices paid per share were $20.83 in 1996, $12.93 in 1995 and $11.80 in 1994. As of September 30, 1996 the company could repurchase an additional 3,539,000 Class A common shares under existing board of directors' authorizations.
ENVIRONMENTAL MATTERS
See Note 11 to the Consolidated Financial Statements for a discussion of the company's environmental contingencies.
ACCOUNTING STANDARDS
See Note 12 to the Consolidated Financial Statements for a discussion of the effect of accounting standards which the company has not yet adopted.
SUBSEQUENT EVENT
See Note 13 to the Consolidated Financial Statements for a discussion of a proposed business combination.
ITEM. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, background information and term for each of the company's directors and nominees are as follows:
(1) Also executive officer of the company. (2) Mr. Holmes also serves as a director of The Dayton Power & Light Company. (3) Mr. Walker also serves as a director of Textron, Inc., Comerica Inc. and The Timken Company. (4) Mr. Loren also serves as a director of U.S. Cellular Corporation.
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, other than those shown above as of November 1, 1996 are:
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following tables and narrative text discuss the compensation paid to the company's Chief Executive Officer and the company's four other most highly compensated executive officers during the fiscal year ended September 30, 1996, and the two prior fiscal years.
(1) Option Awards reflect the company's September 3, 1996 two-for-one stock split.
(2) The 1996 amounts disclosed in this column include:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
EMPLOYMENT AGREEMENTS
Effective October 1, 1995, Mr. Holmes entered into an amended and restated agreement by which he agrees to remain employed by the company as its President and Chief Executive Officer until October 3, 2000, at an annual base salary of $436,300 which may not be reduced without his consent or resolution by arbitration. This base salary may be increased from time to time consistent with the recommendations of the Compensation Committee and as approved by the Board of Directors. The retirement benefit at age 59 is 65% of final average annual compensation. The age 55 early retirement benefit is 61% of final average annual compensation which thereafter increases by an additional 1% of final average annual compensation for each additional twelve month period of employment, including retirement after age 59.
Mr. Holmes' agreement also provides for special grants of non-qualified stock options on October 1, 1995 and October 1, 1996, of 400,000 shares and 200,000 shares, respectively. (Reflects the September 3, 1996,
two-for-one stock split.) Both grants are at fair market value on the date of the grant. These grants are in addition to the customary annual awards made under the company's stock option plan in which Mr. Holmes is a participant.
Messrs. Bausman, Nevin and Proud have Employment Agreements by which they each agree to remain employed by the company until, respectively, May 31, 2000, September 30, 1997, and September 1, 1999, at respective annual base salaries of $280,160, $252,000 and $210,000 which may not be reduced without the individual's consent or resolution by arbitration. These base salaries may be increased from time to time consistent with the recommendations of the Compensation Committee and as approved by the Board of Directors.
Age 65 retirement benefits for Messrs. Bausman and Nevin are 65% of final average annual compensation. Early retirement benefits for them are 55% of final average annual compensation (reduced by 1/15 for each year of service, as defined in the company's pension plan, less than 15) if they retire after reaching age 55 and before reaching age 58. If they elect early retirement after reaching age 58, their respective annual retirement benefits shall be 55% of final average annual compensation plus 1% for each additional twelve-month period of service after age 58, but before reaching age 65, with no reduction if their respective years of service are fewer than 15. Mr. Proud's retirement benefits are those provided under the company-sponsored qualified and non-qualified programs in which he participates.
The Employment Agreements of Messrs. Holmes, Nevin and Bausman also provide for certain disability and death benefits, including retirement benefits as described above in case of permanent disability. The Agreements also provide for continued medical coverage of the surviving spouses for a period which ends at the earlier of the spouse's death or 42 months after the employee's death. During the terms of the Agreements and for two years after the respective terminations of them, or the cessation of payments made under them (whichever is later), each employee shall not compete directly or indirectly with the company. Mr. Proud's coverage in the case of death or disability is that provided under the company-sponsored programs in which he participates. However, if Mr. Proud's Agreement is not renewed, his non-competition restriction shall continue for only one year.
All four Agreements generally provide that if the employee is discharged by the company before the expiration date other than for cause (as defined in the Agreements), or if the company fails to renew the Agreements other than for cause, the employee shall be entitled to receive (i) payments equal to the employee's Annual Compensation Value (as defined in the Agreements), reduced by 70% of compensation from subsequent employment (reduction does not apply to Mr. Proud) (a) for two years from the date of termination of employment with respect to discharge before the expiration of the Agreements, or (b) for one year from the expiration of the Agreements in the case of non-renewal; (ii) credit for certain amounts of additional service under the Supplemental Plan (iii) continuing coverage under company-sponsored medical benefits programs ending at the earlier of employee's securing other employment or two years from termination; (iv) reimbursement of up to $20,000 in out-placement fees; and (v) required payments under the employee's (except for Mr. Proud) Deferred Compensation Agreement.
These Employment Agreements also contain provisions which may require the company to fund an escrow immediately in the event of a "change in control" (as defined in such Agreements) of the company. Funding is required upon the occurrence of any "escrow funding event," as defined in such Agreements. The company estimates that if Messrs. Holmes, Nevin, Bausman and Proud had been terminated on November 1, 1996, following a change in control of the company, the total severance payments by the company to the officers under their Agreements would have been $9,877,501. If such termination were to occur, the non-competition restrictions in the respective Employment Agreements are void and non-binding.
These Employment Agreements also provide that: (i) the employee will be entitled to receive the escrowed amount upon a Change in Control Termination that occurs within 24 months of a change in control; (ii) the employee will receive an additional 24 months of service credit under the Supplemental Plan following a Change in Control Termination; (iii) the payments to be made upon a Change in Control Termination include a payment equal to three times the employee's annual salary in effect at the date of termination or immediately prior to the change in control (whichever is higher) and his average bonus with respect to the three calendar years preceding the year in which his termination of employment occurs; (iv) if the total amount of any payments payable to the employee upon the termination of the employee's employment or upon a change in control (whether or not pursuant to the severance provisions) would be subject to an excise tax as "parachute payments" pursuant to Sections 280G and 4999 of
the Internal Revenue Code of 1986, the amount of the severance payments under the severance provisions will be reduced to avoid such excise tax, but only if the net effect of such reduction is to increase the net after tax income to the executive; and (v) the amount paid into escrow shall be the amount described in clause (iii) as may be limited pursuant to clause (iv) and for periodic adjustment of such amount. The Employment Agreements of Messrs. Holmes and Nevin further provide that (i) if the employee voluntarily terminates employment or is discharged by the company other than for "cause" (as defined therein) prior to attainment of age 55, he will be entitled to receive, commencing at age 55, a portion of his annual retirement benefits prorated to reflect his service with the company; and (ii) upon a Change in Control Termination prior to the date he attains age 55, the employee will be entitled to receive, commencing at age 55, retirement benefits equal to 61% and 55% of his final average compensation, respectively. Mr. Bausman's Employment Agreement further provides that (i) if he voluntarily terminates his employment or is discharged by the company prior to his attainment of age 55, he will be entitled to receive under the Supplemental Plan a portion of his age 55 benefit prorated to reflect his service with the company after November 9, 1987, in excess of his vested Pension Plan benefit and the Officer's Life Insurance and Compensation Program benefits; and (ii) upon a Change in Control Termination prior to the date he attains age 55, he will be entitled to receive, commencing at age 55, retirement benefits equal to 55% of his Final Average Compensation.
PERFORMANCE GRAPH FISCAL YEARS 1992 THROUGH 1996
Comparison of Five Year Cumulative Total Return Among The Reynolds and Reynolds company, S&P 500 Index and a Composite of Two Indices
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Illustrates the value of $100 invested at Sept. 30, 1991 assuming reinvestment of dividends.
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The graph compares the cumulative total shareholder return on a $100 investment in the company's Class A Shares for the last five fiscal years with the cumulative total return on $100 invested in each of (i) the S&P 500 Index and (ii) a composite of two indices. The composite index is comprised of the S&P Computer Software and Services Index and a self-constructed business forms index and is adjusted each year to reflect the percent of the company's business segments' revenues represented by each index. The company selected the following business forms companies for its self-constructed index: American Business Products, Inc., Ennis Business Forms, Inc., Moore, Ltd., New England Business Services, Inc., Standard Register Company and Wallace Computer Services, Inc. Duplex Products Inc. ("Duplex") previously reported in the self-constructed business forms index was excluded for
all years presented as Duplex was acquired by the company in May 1996. The graph assumes all investments were made at market value on September 30, 1991, and the reinvestment of all dividends.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
COMMITTEE
The Compensation Committee of the Board of Directors consists entirely of nonemployee, independent Directors. The Committee reviews, recommends and approves changes to the company's compensation policies and programs applicable to the company's officers and senior personnel.
COMPENSATION POLICY AND OBJECTIVES
Our primary goal as members of the Compensation Committee is unchanged from last year: to assure that the compensation provided to executives is linked to the company's business strategies and objectives, thereby aligning the financial interests of senior management with those of the shareholders. Beyond that, our priorities are to assure that the executive compensation programs enable the company to attract, retain and motivate the high caliber executives required for the success of the business. These objectives are achieved through a variety of compensation programs, summarized below, which support both the current and long-term performance of the business.
BASE SALARY
Base salaries for executive officers are determined by evaluating the responsibilities of the position and comparing it with other executive positions in the marketplace. From time to time the company's compensation consultant surveys senior executive salaries from a representative sampling (approximately 20) of companies in the computer services and business forms industries. The company's pay grade levels are then set at approximately the competitive mid-range. Each of the executive officers is assigned a pay grade based on that competitive marketplace data. Individual salaries may then vary somewhat below or above the mid-range, based upon the individual's performance and contribution to company success, tenure on the job and internal equity. Annual salary adjustments are determined by individual performance within an officer salary increase budget approved by the Committee. Base salary levels for executive officers increased an average of 4% effective January 1, 1996. The provisions of this paragraph apply to all executives except those whose employment agreements may contain terms which vary from these provisions. See pages 17-19 of this report.
ANNUAL INCENTIVES
At the Annual Meeting of Shareholders on February 15, 1996, a significant majority of shareholders approved a separate performance-based, incentive plan ("CEO Plan") for the company's Chief Executive Officer ("CEO"), the terms of which are substantially similar to the annual and intermediate compensation plans for the other officers. The purpose of this separate CEO Plan was to qualify all CEO compensation in excess of $1 million for deductibility under the applicable provisions of the Internal Revenue Code.
Officers have an opportunity to earn annual bonuses ("Annual Plan") based on performance against financial targets established by the Committee. Since 1987, the company has used corporate return on equity ("ROE") as its primary measure of corporate performance. During fiscal 1996, the Committee introduced growth in sales and growth in earnings as additional measures for determining annual bonuses. ROE is weighted more heavily (75%) than the growth components (25%) in determining annual bonuses. Also, the ROE performance level which must be achieved before any bonus is paid was raised as was the maximum bonus achievable. At the divisional level, other measures of performance for the annual bonus include sales, operating income and return on net assets. In addition, the Committee approves adjustments to the bonus formula as may be necessary from time to time to insure against unmerited windfalls or penalties due to accounting changes or other non-operating factors. Over time, the company believes it has found that linking executive pay principally to corporate ROE directly ties the
executive's interests and rewards to those of the shareholder. Under the structure of the Annual Plan in effect for fiscal 1996, no bonus is paid until a threshold corporate ROE of 10% is achieved; maximum payout requires a combination of a 28% ROE and a 15% growth factor in sales and earnings. The annual bonus payout can range between 0% of annual salary to 90% of annual salary. For fiscal 1996, because the company achieved a 26.6% ROE and healthy growth of both sales and earnings (which varied by division), the annual bonus payout for the executive officers (including Mr. Holmes under his substantially similar but separate plan) averaged 77.4% of annual salary.
Another annual incentive plan is the personal performance bonus. This plan is designed to reward all officers for the achievement of financial and non-financial goals which are agreed upon by the officer and the officer's superior. In the case of Mr. Holmes, his annual goals are agreed upon by this Committee in consultation with Mr. Holmes. Examples of financial goals have been ROE, sales, return on net assets and operating income. Examples of non-financial goals have been market share growth, total quality measures, customer satisfaction and the strengthening of a key organizational process. With the exception of Mr. Holmes and the three division presidents, whose personal performance bonuses are determined by the Compensation Committee during its year-end review, all other executive officers have their personal performance bonus determined by the respective individual to whom they report during year-end evaluations. Depending on an individual's performance against goals, this bonus can range between 0% to 20% of annual salary. For fiscal 1996 this personal performance bonus for the named executive officers ranged from 15% to 20% of annual salary.
LONG-TERM INCENTIVES
STOCK OPTIONS
To further align the interests of shareholders and management, the company grants incentive stock options annually to approximately 300 officer and director-level employees. The number of shares awarded is driven by a pay grade level formula which is established and reviewed from time to time by the Compensation Committee. The Committee assigns a percentage to each pay grade level. That percentage is multiplied by the salary mid-point for that grade level and the result is divided by the fair market value of the Company's stock on October 1. For all officers during fiscal year 1996, the percentage of annual salary used in determining stock option grants ranged from 40% to 125%. The exercise price is the fair market value of the stock on the date of the grant. The options, which have a ten year life, are not exercisable during the first year after the grant. Thereafter, on each of the first four anniversaries of the grant, twenty-five percent of the options become exercisable.
Such stock options provide incentive for the creation of shareholder value, since the full benefit of the compensation package cannot be realized unless an appreciation in the price of the company's common shares occurs over a specified number of years.
STOCK OWNERSHIP GUIDELINES (Share information reflects September, 1996, two-for-one stock split)
During fiscal year 1994, the Compensation Committee established suggested stock ownership guidelines for all officers of the company. These guidelines specify an appropriate level of ownership of company stock as a multiple of the officer's annual base salary. These multiples range from a high of 4.25 times annual salary (in the case of Mr. Holmes) to a low of 1.5 times annual salary. The Committee thought it appropriate to permit the officers to achieve these ownership guidelines over a ten year period in increments of 10% per year. To encourage the officers to make steady progress toward meeting the guidelines, the Committee determined that if an officer owns a quantity of shares sufficient to meet the ownership guidelines for that year the officer would be granted options on 20% more shares in addition to the officer's standard stock option grant for that year. If, for example, the standard stock option grant for that year were one hundred shares, the officer would receive options on twenty additional shares of stock for having met the guidelines for that year. As of September 1, 1996, stock ownership among the fifty officers stood at approximately 1,710,300 shares representing a market value of approximately $42.5 million. The Committee believes that these guidelines will have the positive effect of further aligning the interests of the officer group with those of all shareholders.
INTERMEDIATE INCENTIVE COMPENSATION
Certain senior officers, including all named executive officers (except Mr. Holmes), also participate in an Intermediate Incentive Compensation Plan. This plan, which is paid annually, is based on a three-year average return on equity, and is designed to focus and reward senior management on producing consistent longer-term financial results. For fiscal 1996 the payout from the CEO Plan (for Mr. Holmes) and from the Intermediate Incentive Compensation Plan for the other named executive officers ranged from 70% to 100% of annual salary.
CEO COMPENSATION (Share information reflects September, 1996, two-for-one stock split)
Mr. Holmes has served as Chairman, President and Chief Executive Officer since August 1990, and President and Chief Executive Officer since January 1989. The Performance Graph on page 19 illustrates the company's accomplishments during much of this period. In fiscal 1996 the company achieved record revenues and earnings and exceeded a 26% ROE. Shareholders realized a 52% increase in share value during the year. Mr. Holmes' 1996 compensation of $1,458,477 (as shown in the Summary Compensation Table on page 14) included a market-priced base salary of $466,575. Under the CEO Plan he is eligible for annual and intermediate incentive compensation the performance standards of which are substantially similar to those in the annual and intermediate compensation plans for other named executive officers. The Committee awarded a personal performance bonus of $93,315 to Mr. Holmes following its year-end evaluation. On October 2, 1995, the Committee awarded Mr. Holmes an annual stock option grant for 39,600 Class A Shares which was based on the formula (explained above) applicable to his position. In addition Mr. Holmes received a grant of 400,000 non-qualified stock options pursuant to the terms of his Employment Agreement described on pages 17 through 19.
SUMMARY
The Committee believes that a high caliber, motivated management team is critical to sustained business success.
As in prior years, in 1996 a significant portion (approximately 66%) of the total compensation potential for the named executive officers was "at risk" and payable based on individual and corporate performance-based variables that will motivate and focus management on those issues that drive the success of the company. The Committee intends to continue its performance-based pay policy which links executive rewards to shareholder returns.
THE COMPENSATION COMMITTEE
Dr. David E. Fry Allan Z. Loren Gayle B. Price, Jr. Martin D. Walker, Chairman
DIRECTOR COMPENSATION
Non-employee Directors receive an annual fee of $22,500 plus $1,000 for each Board of Directors Meeting attended. In addition, on October 1 of each year non-employee Directors receive options to purchase that number of Class A Shares which represent a fair market value of $40,000. Non-employee Directors who serve on a committee receive an additional $500 for each committee meeting attended. Committee Chairmen receive an additional $1,500 per year. No Director who is an employee of the company receives any compensation for services as a Director or committee member.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The shares beneficially owned on November 1, 1996 by each Director and Nominee for Director other than for Richard H. Grant, III who is shown above were:
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No Executive Officer or Director is or has been indebted to the company during the last fiscal year in excess of $60,000.
PART IV (Dollars in thousands)
ITEM 14.

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 33 through 54.
Statements of Consolidated Income - For The Years Ended September 30, 1996, 1995 and 1994
Consolidated Balance Sheets - September 30, 1996 and 1995
Statements of Consolidated Shareholders' Equity - For The Years Ended September 30, 1996, 1995 and 1994
Statements of Consolidated Cash Flows - For The Years Ended September 30, 1996, 1995 and 1994
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, 1996 ARE ATTACHED HERETO:
Schedule II - Valuation Accounts Page 55
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
On June 3, 1996, the company filed a Report on Form 8-K under Item 2 which set forth the completion of the tender offer for all outstanding shares of the common stock of Duplex Products Inc. On August 2, 1996, the company filed a Current Report Amendment on Form 8-K under Item 7(b) which set forth the combined pro forma financial information required of the company and Duplex Products Inc.
(c) EXHIBITS
The exhibits as shown in "Index of Exhibits" (pages 56-63) are filed as a part of this Report.
(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.
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The Company will provide a copy of its 1996 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.
Date: November 19, 1996
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.
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, 1996 The Reynolds and Reynolds Company Dayton, Ohio
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
November 11, 1996
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 31.
Another level of control resides with the audit committee of the company's board of directors. The committee, comprised of four directors who are not members of management, oversees the company's financial reporting process. They recommend to the board, subject to shareholder approval, the selection of the company's independent 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
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, 1996 and 1995, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. Our audits also included the financial statement schedules included at Item 14(a) (2). These financial statements and financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, 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.
/s/ DELOITTE & TOUCHE LLP - --------------------------
Dayton, Ohio November 11, 1996 (November 19, 1996 as to Note 13)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No. 33-56045 of The Reynolds and Reynolds Company on Form S-8, Post-Effective Amendments No. 1 and No. 2 to Registration Statement No. 33-48546 of The Reynolds and Reynolds Company on Form S-3, Post-Effective Amendment No. 1 to Registration Statement No. 33-51895 of The Reynolds and Reynolds Company on Form S-3, Pre-Effective Amendment No. 1 to Registration Statement No. 33-58877 of The Reynolds and Reynolds Company on Form S-3, Pre-Effective Amendment No. 1 to Registration Statement No. 33-61725 of The Reynolds and Reynolds Company on Form S-3, Registration Statement No. 33-59615 of The Reynolds and Reynolds Company on Form S-3 and Registration Statement No. 33-59617 of The Reynolds and Reynolds Company on Form S-3 of our report dated November 11, 1996 (November 19, 1996 as to Note 13), appearing in this Annual Report on Form 10-K of The Reynolds and Reynolds Company for the year ended September 30, 1996, and to the reference to us under the heading "Experts" in the Prospectus, which is part of Registration Statement No. 333-12967 of The Reynolds and Reynolds Company on Form S-3, and Registration Statement No. 333-19681 of The Reynolds and Reynolds Company on Form S-8.
/s/ DELOITTE & TOUCHE LLP - --------------------------
Dayton, Ohio November 19, 1996
STATEMENTS OF CONSOLIDATED INCOME (In thousands except per share data)
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (In thousands)
See Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands except per share data)
See Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands)
See Notes to Consolidated Financial Statements.
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 Financial 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 non-current 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.
TRANSFER OF RECEIVABLES
The company has entered into an agreement to transfer a percentage interest in a pool of accounts receivable. The transferee's recourse is limited to certain circumstances. Under terms of the agreement, which is accounted for as a sale of receivables, the transferee advances the company funds equal to the face value of the receivables transferred. Monthly, the company pays the transferee a discount, based on market interest rates, on the uncollected receivable balances. The company may transfer up to $10,000 of receivables under this agreement, which expires September 30, 1998. The balance of receivables transferred was $6,000 at September 30, 1996 and 1995. The transferee also has a collateral interest in $1,500 of other receivables at September 30, 1996.
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 domestic business forms inventories are determined by the last-in, first-out (LIFO) method. At September 30, 1996 and 1995, LIFO inventories were $45,253 and $27,928, respectively. These inventories determined by the first-in, first-out (FIFO) method would increase by $6,232 in 1996, $7,096 in 1995 and $4,256 in 1994. For other inventories, cost is determined by specific identification or the FIFO method. Market is based on net realizable value.
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:
INTANGIBLE ASSETS
The excess of cost over net assets of companies acquired is recorded as goodwill and amortized on a straight-line basis typically over five to forty years. Amortization expense was $10,541 in 1996, $8,530 in 1995 and $5,707 in 1994. At September 30, 1996 and 1995, the accumulated amortization was $36,183 and $25,644, 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 $3,731 in 1996, $3,746 in 1995 and $4,059 in 1994. At September 30, 1996 and 1995, the accumulated amortization was $43,052 and $39,347, respectively.
Other intangible assets are amortized over periods ranging from three to fifteen years. Amortization expense was $2,408 in 1996, $2,165 in 1995 and $1,688 in 1994. At September 30, 1996 and 1995, the accumulated amortization was $10,398 and $8,099, respectively.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This statement also requires that long-lived assets and certain intangible assets to be disposed of be reported at the lower of their carrying amount or fair value less costs to sell. The adoption of this statement had no material effect on the financial statements of the company.
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. In certain instances, computer systems sales are not recognized until installation is completed. 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 operating lease agreements. As of September 30, 1996, future minimum lease payments relating to these agreements were $20,916 in 1997, $15,214 in 1998, $9,367 in 1999, $6,439 in 2000 and $4,704 in 2001. Rental expenses were $25,660 in 1996, $19,408 in 1995 and $19,577 in 1994.
RESEARCH AND DEVELOPMENT COSTS
The company expenses research and development costs as incurred. These costs were $24,439 in 1996, $20,978 in 1995 and $18,115 in 1994.
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, 1996 were $16,722. 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.
BUSINESS FORMS RESTRUCTURING
In 1994, the company recorded a restructuring charge of $12,400 for costs to be incurred in the disposal of part of its computer paper product line and the consolidation of certain custom business forms printing operations. This transaction generated $11,500 of income tax benefits which more than offset the negative after-tax effect of the restructuring charge. During 1995 this restructuring was completed and the costs incurred approximated those originally accrued.
2. BUSINESS COMBINATIONS
On April 22, 1996 the company announced a cash tender offer to acquire the outstanding shares of Duplex Products Inc. (Duplex) for $12 per share. On May 20, 1996 the company purchased the tendered shares of Duplex for $89,800. Duplex, a provider of business forms and labels, electronic printing and mailing services, document management programs, forms automation solutions and process analysis to customers throughout the United States, reported sales of $275,000 in 1995. The company initially financed this transaction through existing revolving credit agreements. Ultimately, the company expects to obtain new long-term financing and repay the revolving credit agreement borrowings.
The company recorded liabilities for the costs to exit duplicate manufacturing, distribution and administrative facilities of Duplex. These liabilities included the costs of closing seven Duplex manufacturing plants, five distribution facilities and an administrative building. At September 30, 1996 the company had closed three of the manufacturing plants, one distribution facility and the administrative building. The company plans to exit the remaining facilities during fiscal year 1997. As of May 20, 1996 key elements of the costs accrued for exiting duplicate facilities were involuntary termination benefits of $8,620, relocation costs of $1,346 and lease costs of $1,760. Involuntary termination benefits represent severance payments and outplacement services for 550 employees, comprised principally of manufacturing employees. Through September 30, 1996, 255 employees were terminated and $2,086 of involuntary termination benefits, $302 of relocation costs and $46 of lease costs were paid.
The company recorded the assets of the duplicate Duplex facilities as current assets held for sale. At May 20, 1996, these assets of $14,397 were recorded at their fair market value less costs to dispose. At September 30, 1996, $4,305 of these assets had been sold.
The company also purchased fifteen other businesses in the automotive, healthcare and general business forms markets during the last three years. The other businesses purchased in 1996 had annual sales of about $50,000. Businesses acquired in 1995 and 1994 had annual sales of $56,000 and $32,000, respectively.
The businesses were purchased with a combination of cash, notes payable and stock as reported in the table below. The issuances of notes payable and capital stock were considered non-cash transactions for accounting purposes and were not included in the statements of cash flows. These 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 $859 in 1996, $31,367 in 1995 and $18,979 in 1994. This goodwill is being amortized on a straight-line basis over five to fifteen years. No goodwill was recorded for the Duplex transaction. 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 $4,270 in 1996 and $1,351 in 1995. Contingent payments may be made through 2006.
COMPONENTS OF PURCHASE PRICES
PRO FORMA INFORMATION (UNAUDITED)
On a pro forma basis, assuming that the 1996 business combinations were made as of October 1, 1994, the consolidated revenues of the company would have increased by about $174,000 in 1996 and $337,000 in 1995. Net earnings would have decreased by $2,600 or $.03 per share in 1996 and $4,000 or $.04 per share in 1995. 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.
3. INCOME TAXES
The carryforward of net operating losses expires primarily in 2009.
4. FINANCIAL SERVICES
As of September 30, 1996, product financing receivables due for each of the next five years were $110,598 in 1997, $93,464 in 1998, $76,829 in 1999, $51,997 in 2000 and $22,033 in 2001.
5. FINANCING ARRANGEMENTS
Loan agreements limit consolidated indebtedness and require a minimum current ratio of 1.50. Loan agreements also limit dividend payments to $39,000 as of September 30, 1996. 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, 1995, the fair values of information systems financing arrangements were $9,525 for short-term notes and $41,148 for fixed rate notes. At September 30, 1996, debt maturities were $6,832 in 1997, $8,531 in 1998, $19,048 in 1999, $21,298 in 2000 and $21,548 in 2001. Interest paid was $5,882 in 1996, $3,006 in 1995 and $3,153 in 1994.
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 received or paid 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 only entering into agreements 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.
Loan agreements require financial services to maintain a minimum ratio of income before income taxes and interest expense to interest expense of 1.25. The fair value of financial services debt was $161,367 and $131,293 at September 30, 1996 and 1995, respectively. At September 30, 1996, maturities of notes were $68,322 in 1997, $38,010 in 1998, $32,364 in 1999, $14,299 in 2000 and $6,667 in 2001. Interest paid was $9,032 in 1996, $7,211 in 1995 and $5,141 in 1994.
The interest rate swap agreement matures in 1997. At September 30, 1996, notional amount maturities of ceiling agreements were $10,000 in 1997, $8,750 in 1998 and $1,875 in 1999. The fair values of interest rate swap agreements were $6 and $62 at September 30, 1996 and 1995, respectively. The fair values of interest rate ceiling agreements were $21 and $83 at September 30, 1996 and 1995, respectively. The premiums paid for an interest rate ceiling agreement is amortized on a straight-line basis over the life of the agreement. Unamortized premium costs were $219 at September 30, 1996 and $329 at September 30, 1995.
REVOLVING CREDIT AGREEMENTS
Information systems and financial services share variable rate revolving credit agreements which total $110,000 and require commitment fees on unused credit. At September 30, 1996, available balances under these agreements were $33,580.
FAIR VALUES
Fair values of financial instruments are determined using interest rates available to the company for debt and interest rate management agreements with the same remaining maturities.
6. CAPITAL STOCK
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. In 1994, 4,000,000 Class B common shares were converted into 200,000 Class A common shares. 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, 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. Par value remained $.625 per Class A common share and $.03125 per Class B common share. The company reclassified $25,629 to Class A common and $312 to Class B common from additional paid-in capital and retained earnings for the par value of the additional shares. Share and per share information presented in the accompanying financial statements reflects the stock split.
The company repurchased Class A common shares for treasury at average prices of $20.83 in 1996, $12.93 in 1995 and $11.80 in 1994. The remaining balance of shares authorized for repurchase by the board of directors was 3,539,000 at September 30, 1996. Treasury shares at September 30 were 11,402,821 in 1996, 10,408,698 in 1995 and 9,039,024 in 1994.
7. EMPLOYEE STOCK OPTION PLANS
The company's stock option plans consist of incentive stock options and non-qualified stock options to purchase Class A common shares which are awarded to certain key employees. Stock options are generally granted at a price equal to fair market value on the date of grant. Options may be granted at any price not less than par value ($.625 at September 30, 1996). During the three years ended September 30, 1996, no options were granted at a price less than fair market value. At September 30, 1996, options to purchase 1,242,327 Class A common shares were exercisable and options to purchase 2,648,232 additional Class A common shares were available for future awards.
On August 7, 1996, the company's board of directors approved a non-qualified stock option plan for substantially all employees not covered by an existing stock option plan. Stock options to purchase Class A common shares may be awarded each year at the discretion of the board of directors. The number of options, terms and conditions of options are also determined by the board of directors. Options may be granted at any price not less than par value ($.625 at September 30, 1996). No options have been awarded as of September 30, 1996.
8. POSTRETIREMENT BENEFITS
The company sponsors non-contributory, defined benefit pension plans for most employees. Pension benefits are based on years of service and compensation during an employee's final ten years of employment. 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. In 1996 the company revised actuarial assumptions regarding retirement age and incentive compensation to better reflect expectations.
The company sponsors defined contribution savings plans covering most domestic employees. Generally, contributions are funded monthly and represent 40% of the first 3% of compensation contributed to the plan by participating employees. The company also participates in several multi-employer plans which provide defined benefits to union employees.
At September 30, 1996 and 1995, about 51% and 53% of the plans' assets were invested in cash and equivalents, government bonds and investment grade corporate bonds. The balance of the plans' assets were invested in equities.
The company funds a defined contribution plan, which covers substantially all employees. This plan, known as Retiree Medical Savings Accounts, will enable future retirees to purchase postretirement medical insurance from the company. Contributions are funded annually based on the company's return on equity and are the same for each eligible employee. Forfeitures of non-vested savings accounts are used to reduce contributions required by the company.
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 using Retiree Medical Savings Accounts. Discounts from the market price of postretirement medical insurance will be provided to certain retirees based on age and length of remaining service as of October 1, 1993. These discounts are included in the determination of the accumulated benefit obligation. The company also sponsors a defined benefit life insurance plan for substantially all employees. The company funds medical and life insurance benefits on a pay-as-you-go basis.
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 1996 by $188 and the accumulated benefit obligation at September 30, 1996 by $2,297.
9. CASH FLOW STATEMENTS
10. SEGMENT REPORTING
The company conducts business 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.
11. CONTINGENCIES
The U.S. Environmental Protection Agency (EPA) has designated the company as one of a number of potentially responsible parties (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at 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.
The first site relates to a privately owned and operated solid waste disposal facility. The EPA has issued a record of decision mandating certain remediation activities. The company has shared costs with other PRPs for the remedial investigation and feasibility study of the site. During the fourth quarter of fiscal year 1996, the company accepted a de minimis settlement offer and has no future obligation with respect to this site.
The second site involves a municipal waste disposal facility owned and operated by four municipalities. The company joined a PRP coalition and is sharing remedial investigation and feasibility study costs with other PRPs. In 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 for this site 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 the fourth quarter of fiscal year 1996, an agreement was reached whereby the state of Connecticut will contribute $8,000 towards remediation costs.
In January 1994, by means of a special notice letter, the EPA notified the company that it was considered to be one of more than three hundred PRPs at a former drum reconditioning facility. A remedial investigation and feasibility study is complete. A record of decision has been issued, and a statement of work for the remedial design and remedial action is in circulation. The company was unable to substantiate any previous involvement with this facility. During the fourth quarter of fiscal year 1996, the company accepted a de minimis settlement offer and is awaiting final approval. Upon final approval, the company will have no further obligation with respect to this site.
In connection with the acquisition of Duplex, the company became involved in one additional environmental remediation site. In 1994, Duplex was named a PRP as one of several thousand users of a solid waste landfill. At September 30, 1996 potential remediation costs are uncertain.
The company has accrued its estimated share of response costs for all four environmental remediation sites as of September 30, 1996 and believes that the reasonably foreseeable resolution will not have a material adverse effect on the financial statements.
12. ACCOUNTING STANDARDS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement encourages, but does not require, stock options to be accounted for under a fair value method. Companies are permitted to continue accounting for stock options under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." If APB Opinion No. 25 is followed, SFAS No. 123 requires disclosure of the pro forma effect of the new standard on net income and earnings per share. The company will continue to follow the accounting prescribed by APB Opinion No. 25. This statement will be effective for the fiscal year ending September 30, 1997.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement will be effective for transactions occurring after December 31, 1996 and may not be applied earlier. The company believes this statement will not have a material effect on the financial statements.
13. SUBSEQUENT EVENT
On November 19, 1996 the company signed a letter of intent to purchase Vanier Graphics Corporation, a national provider of business forms and forms management services. Vanier, a subsidiary of American Business Products, Inc., had annual sales of about $150,000 in 1995. This transaction is expected to be finalized in late December 1996, after the completion of the company's due diligence process.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Schedule II
VALUATION ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (Dollars in Thousands)
INDEX OF EXHIBITS Securities Exchange Act of 1934


ITEM 1. BUSINESS.
Not Applicable.
ITEM 2.

ITEM 2. PROPERTIES.
Not Applicable.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The registrant knows of no material pending legal proceedings with respect to the Trust, involving the Trust, the Trustee, the Trust Assets or Capital One Bank.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fiscal year covered by this report to a vote of Certificateholders.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) To the best knowledge of the registrant, there is no established public trading market for the Certificates.
(b) As of February 28, 1997, there were 15 investor Certificateholders of record. For purposes of this report, "Certificateholders" includes Class A Certificateholders, Class B Certificateholders and holders of any Collateral Indebtedness Interest.
c) Not Applicable.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Not Applicable
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Not Applicable.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Not Applicable.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
Not Applicable.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) The Public Certificates representing investors' interests in the Trust are represented by a single Certificate registered in the name of Cede & Co., the nominee of the Depository Trust Company ("DTC"), and an investor holding an interest in the Trust is not entitled to receive a Certificate representing such interest except in certain limited circumstances. Accordingly, Cede & Co. is the sole holder of record of the Public Certificates, which it held on behalf of brokers, dealers, banks and other direct participants in the DTC system at December 31, 1996. Such direct participants may hold Certificates for their own accounts or for the accounts of their customers. At February 28, 1997, the following direct DTC participants held positions in Public Certificates representing interests in the Trust equal to or exceeding 5% of the $8,420,067,012.58 total principal amount of Certificates outstanding on that date:
The address of each of the above participants is:
c/o The Depository Trust Company 55 Water Street New York, NY 10041
The Series 1996-1 Class A Certificates are held solely by Salomon Brothers International Limited. On February 28, 1997, Salomon Brothers International Limited held interest in the Trust of 8.03% of the total principal amount of Certificates outstanding. The address of Salomon Brothers International Limited is as follows:
Victoria Plaza 111 Buckingham Palace Road London, SW1W 0SB England
The Series 1994-A Certificates are held solely by Eiger Capital Corporation. On February 28, 1997, Eiger Capital Corporation held interest in the Trust of 7.66% of the total principal amount of Certificates outstanding. The address of Eiger Capital Corporation is as follows:
c/o Lord Securities Corporation 2 Wall Street New York, NY 10005 Attention: Mr. Andrew L. Stidd, President
No other owner holds more than a 5% interest in the Trust.
(b) Not Applicable.
(c) Not Applicable.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) The registrant knows of no transaction or series of transactions during 1996, or any currently proposed transaction or series of transactions, in an amount exceeding $60,000, involving the Trust in which any Certificateholder identified in item 12(a) or any other beneficial owner of more than five percent of the Certificates known to the registrant had or will have a direct or indirect material interest. There are no persons of the types described in Item 404(a)(1), (2) and (4) of Regulation S-K.
(b) Not Applicable.
(c) Not Applicable.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits.
- -----------
(b) Reports on Form 8-K. The following Current Reports on Form 8-K were filed by the registrant relating to 1996: Current Reports on Form 8-K dated February 15, 1996, March 15, 1996, April 15, 1996, May 15, 1996, June 17, 1996, July 15, 1996, August 15, 1996, September 16, 1996, October 15, 1996, November 15, 1996, December 16, 1996 and January 15, 1997.
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.
Capital One Master Trust ------------------------- (Registrant)
By: Capital One Bank ------------------------- (Seller and Servicer)
Dated: March 31, 1997 By: /s/ David M. Willey ------------------------- David M. Willey Vice President and Treasurer
EXHIBIT INDEX