-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CzpEXH4hhIfrQiW9xwkx89G9x4uNCjnuVWsS8cfu2ddis5wbkXrWzuVgpa4sOAGJ aJHw67ljZHVa0i2iaXEQvQ== 0000950152-99-000974.txt : 19990215 0000950152-99-000974.hdr.sgml : 19990215 ACCESSION NUMBER: 0000950152-99-000974 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS & REYNOLDS CO CENTRAL INDEX KEY: 0000083588 STANDARD INDUSTRIAL CLASSIFICATION: MANIFOLD BUSINESS FORMS [2761] IRS NUMBER: 310421120 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10147 FILM NUMBER: 99536468 BUSINESS ADDRESS: STREET 1: 115 S LUDLOW ST CITY: DAYTON STATE: OH ZIP: 45402 BUSINESS PHONE: 9374852000 MAIL ADDRESS: STREET 1: P.O. BOX 2608 CITY: DAYTON STATE: OH ZIP: 45401 10-Q 1 THE REYNOLDS & REYNOLDS COMPANY 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 1-10147 THE REYNOLDS AND REYNOLDS COMPANY OHIO 31-0421120 (State of incorporation) (IRS Employer Identification No.) 115 SOUTH LUDLOW STREET DAYTON, OHIO 45402 (Address of principal executive offices) (937) 485-2000 (Telephone No.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ On February 10, 1999, 77,392,891 Class A common shares and 20,000,000 Class B common shares were outstanding. 2 THE REYNOLDS AND REYNOLDS COMPANY TABLE OF CONTENTS
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income For the Three Months Ended December 31, 1998 and 1997 3 Condensed Consolidated Balance Sheets As of December 31, 1998 and September 30, 1998 4 Condensed Statements of Consolidated Cash Flows For the Three Months Ended December 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the Three Months Ended December 31, 1998 and 1997 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15
2 3 THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (In thousands except per share data)
1998 1997 --------- ---------- Net Sales and Revenues Information systems Products $ 233,524 $ 250,124 Services 112,656 99,597 --------- --------- Total information systems 346,180 349,721 Financial services 9,370 8,097 --------- --------- Total net sales and revenues 355,550 357,818 --------- --------- Costs and Expenses Information systems Cost of sales Products 147,948 154,472 Services 42,655 39,052 --------- --------- Total cost of sales 190,603 193,524 Selling, general and administrative expenses 118,759 109,984 Financial services 4,535 4,628 --------- --------- Total costs and expenses 313,897 308,136 --------- --------- Operating Income 41,653 49,682 --------- --------- Other Charges (Income) Interest expense 3,336 3,251 Interest income (1,418) (290) Other 131 706 --------- --------- Total other charges 2,049 3,667 --------- --------- Income Before Income Taxes 39,604 46,015 Provision for Income Taxes 16,523 19,867 --------- --------- Income From Continuing Operations 23,081 26,148 Discontinued Operations 5,785 (2,400) --------- --------- Net Income $ 28,866 $ 23,748 ========= ========= Basic Earnings Per Common Share Income From Continuing Operations $0.29 $0.33 Discontinued Operations $0.07 $(0.03) Net Income $0.37 $0.30 Average Number of Common Shares Outstanding 78,613 79,848 Diluted Earnings Per Common Share Income From Continuing Operations $0.29 $0.32 Discontinued Operations $0.07 $(0.03) Net Income $0.36 $0.29 Average Number of Common Shares Outstanding 80,499 81,644 Cash Dividends Declared Per Common Share $0.10 $0.09
See Notes to Condensed Consolidated Financial Statements. 3 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 (In thousands)
12/31/98 9/30/98 ----------- ----------- INFORMATION SYSTEMS ASSETS Current Assets Cash and equivalents $ 81,413 $ 39,980 Accounts receivable 207,345 227,158 Inventories 68,288 66,196 Other current assets 37,647 38,713 ----------- ----------- Total current assets 394,693 372,047 Property, Plant and Equipment, less accumulated depreciation of $217,856 at 12/31/98 and $215,208 at 9/30/98 170,424 174,226 Goodwill 71,446 82,280 Other Intangible Assets 14,380 17,327 Other Assets 106,751 100,681 ----------- ----------- Total Information Systems Assets 757,694 746,561 ----------- ----------- FINANCIAL SERVICES ASSETS Finance Receivables 412,998 408,765 Cash and Other Assets 774 2,394 ----------- ----------- Total Financial Services Assets 413,772 411,159 ----------- ----------- TOTAL ASSETS $ 1,171,466 $ 1,157,720 =========== =========== INFORMATION SYSTEMS LIABILITIES Current Liabilities $ 197,984 $ 198,208 Long-Term Debt 161,508 161,541 Other Liabilities 85,400 83,703 ----------- ----------- Total Information Systems Liabilities 444,892 443,452 ----------- ----------- FINANCIAL SERVICES LIABILITIES Notes Payable 210,623 210,561 Other Liabilities 102,779 99,256 ----------- ----------- Total Financial Services Liabilities 313,402 309,817 ----------- ----------- SHAREHOLDERS' EQUITY Capital Stock 64,003 58,235 Other Adjustments (9,707) (9,727) Retained Earnings 358,876 355,943 ----------- ----------- Total Shareholders' Equity 413,172 404,451 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,171,466 $ 1,157,720 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 4 5 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (In thousands)
1998 1997 -------- -------- INFORMATION SYSTEMS Cash Flows Provided By Operating Activities $ 22,157 $ 34,075 -------- -------- Cash Flows Provided By (Used For) Investing Activities Business combinations (1,393) Capital expenditures (8,716) (7,619) Net proceeds from asset sales 44,072 5,459 Capitalization of software licensed to customers (5,033) (254) Repayments from (advances to) financial services 1,161 (5,701) -------- -------- Net cash flows provided by (used for) used for investing activities 31,484 (9,508) -------- -------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 1,775 Principal payments on debt (83) (13,629) Capital stock issued 4,836 581 Capital stock repurchased (18,756) (9,158) -------- -------- Net cash flows used for financing activities (12,228) (22,206) -------- -------- Effect of Exchange Rate Changes on Cash 20 (476) -------- -------- Increase in Cash and Equivalents 41,433 1,885 Cash and Equivalents, Beginning of Period 39,980 7,604 -------- -------- Cash and Equivalents, End of Period $ 81,413 $ 9,489 ======== ======== FINANCIAL SERVICES Cash Flows Provided By Operating Activities $ 5,865 $ 4,026 -------- -------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (36,549) (38,079) Collections on finance receivables 30,230 23,876 -------- -------- Net cash flows used for investing activities (6,319) (14,203) -------- -------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 14,625 18,700 Principal payments on debt (14,563) (14,588) Advances from (repayments to) information systems (1,161) 5,701 -------- -------- Net cash flows provided by (used for) financing activities (1,099) 9,813 -------- -------- Decrease in Cash and Equivalents (1,553) (364) Cash and Equivalents, Beginning of Period 2,102 921 -------- -------- Cash and Equivalents, End of Period $ 549 $ 557 ======== ========
See Notes to Condensed Consolidated Financial Statements. 5 6 THE REYNOLDS AND REYNOLDS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The balance sheet as of September 30, 1998 is condensed financial information taken from the audited balance sheet. The interim financial statements are unaudited. In the opinion of management, the accompanying interim financial statements contain all significant adjustments (which consist only of normal recurring adjustments) necessary to present fairly the company's financial position, results of operations and cash flows for the periods presented. (2) INVENTORIES
12/31/98 9/30/98 -------- ------- Finished Products $55,404 $54,778 Work In Process 6,357 5,795 Raw Materials 6,527 5,623 ------- ------- Total Inventories $68,288 $66,196 ======= =======
(3) ACCOUNTING CHANGE In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The new SOP was effective for transactions entered into in fiscal years beginning after December 15, 1997. The company adopted this pronouncement effective October 1, 1998. The adoption of this pronouncement reduced the Automotive Division computer systems products revenues $15,736, gross profit $10,479, operating income $9,992 and net income $5,825 or $.07 per diluted share for the first fiscal quarter ended December 31, 1998. (4) DISCONTINUED OPERATIONS On October 23, 1998, the company sold essentially all net assets of its Healthcare Systems segment to InfoCure Corporation for about $50,000. The proceeds consisted of about $40,000 in cash with the balance in subordinated notes. The company recorded a gain on the sale of $5,785 or $.07 per diluted share in the first quarter of fiscal year 1999. About $1,200 of Healthcare Systems after-tax operating losses, from October 1, 1998 through October 23, 1998, were included in the determination of the gain on the sale of the Healthcare Systems segment. (5) BUSINESS COMBINATIONS The company purchased Crain-Drummond Inc. in July 1997. In recording the assets and liabilities of this business combination the company accrued the estimated costs to close duplicate facilities of Crain-Drummond. During the first fiscal quarter of 1999, the company closed the second of two manufacturing facilities scheduled for closure. As of July 1, 1997, key elements of the costs accrued for exiting duplicate facilities of Crain-Drummond were involuntary termination benefits of $2,665 and relocation costs of $416. Involuntary termination benefits represent severance payments and outplacement services for about 170 employees, principally manufacturing employees. Through December 31, 1998, $1,300 of involuntary termination benefits were paid to 85 employees and $111 of relocation costs were paid. The company recorded the assets of the duplicate facilities as current assets held for sale. As of July 1, 1997, these assets of $4,972 were recorded at estimated fair market value less disposal costs. At December 31, 1998 $2,146 of these assets had been sold. (6) COMPREHENSIVE INCOME
1998 1997 ------- ------- Net Income $28,866 $23,748 Foreign Currency Translation 20 477 ------- ------- Comprehensive Income $28,886 $24,225 ======= =======
6 7 (7) BUSINESS SEGMENTS
1998 1997 --------- ---------- AUTOMOTIVE Net Sales and Revenues Computer Services $ 103,297 $ 90,840 Computer Systems Products 28,359 35,442 Business Forms Products 43,617 45,013 --------- --------- Total Net Sales and Revenues $ 175,273 $ 171,295 Operating Income $ 31,390 $ 39,190 BUSINESS SYSTEMS Net Sales and Revenues Business Forms Products $ 160,578 $ 168,587 Services and Computer Systems Products 10,329 9,946 --------- --------- Total Net Sales and Revenues $ 170,907 $ 178,533 Operating Income $ 9,402 $ 10,778 FINANCIAL SERVICES Net Sales and Revenues $ 9,370 $ 8,097 Operating Income $ 4,835 $ 3,469 CORPORATE Operating Expenses $ (3,974) $ (3,755) ELIMINATION OF INTERSEGMENT SALES $ 0 $ (107) TOTALS Net Sales and Revenues $ 355,550 $ 357,818 Operating Income $ 41,653 $ 49,682
12/31/98 9/30/98 ----------- ----------- ASSETS Automotive $ 246,122 $ 242,259 Business Systems 351,565 360,417 Financial Services 413,772 411,159 Corporate 160,007 108,597 Discontinued Operations 0 35,288 ----------- ----------- Total Assets $ 1,171,466 $ 1,157,720 =========== ===========
(8) CONTINGENCY The U.S. Environmental Protection Agency (EPA) has designated the company as one of a number of potentially responsible parties (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at an environmental remediation site. The EPA has contended that any company linked to a CERCLA site is potentially liable for all response costs under the legal doctrine of joint and several liability. This environmental remediation site involves a municipal waste disposal facility owned and operated by four municipalities. The company joined a PRP coalition and is sharing remedial investigation and feasibility study costs with other PRPs. During fiscal year 1994, the PRP coalition received an engineering evaluation/cost analysis of the presumed remedy for the site from its private contractor. However, because the EPA has not yet selected a remedy, potential remediation costs remain uncertain. Remediation costs for a typical CERCLA site on the National Priorities List average about $30,000. The engineering evaluation/cost analysis was consistent with this average. During fiscal year 1996, an agreement was 7 8 reached whereby the state of Connecticut will contribute $8,000 towards remediation costs. The company believes that the reasonably foreseeable resolution will not have a material adverse effect on the financial statements. (9) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities.
1998 1997 -------- -------- INFORMATION SYSTEMS Net Income $ 25,982 $ 21,680 Depreciation and Amortization 11,917 13,932 Deferred Income Taxes (582) 970 Deferred Income Taxes Transferred to Financial Services 389 (184) Losses (Gains) on Sales of Assets (6,919) 67 Changes in Operating Assets and Liabilities Accounts Receivable 14,176 4,494 Inventories (3,518) 16 Prepaid Expenses and Other Current Assets (2,299) 481 Intangible and Other Assets 2,432 915 Accounts Payable (12,635) (715) Accrued Liabilities (1,143) (10,218) Other Liabilities (5,643) 2,637 -------- -------- Net Cash Provided by Operating Activities $ 22,157 $ 34,075 ======== ======== FINANCIAL SERVICES Net Income $ 2,884 $ 2,068 Deferred Income Taxes 1,464 1,763 Deferred Income Taxes Transferred from Information Systems (389) 184 Changes in Receivables, Other Assets and Other Liabilities 1,906 11 -------- -------- Net Cash Provided by Operating Activities $ 5,865 $ 4,026 ======== ========
8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (In thousands except per share data) SIGNIFICANT EVENTS DISCONTINUED OPERATIONS In September 1998, the company's board of directors approved a plan to discontinue operations of the company's Healthcare Systems segment. This separate segment provided computer systems products and services to hospital-based and office-based physicians. Net sales and revenues were $48,226 in fiscal year 1998 and related operating losses were $16,700. Prior financial statements have been restated to report the operating results of Healthcare Systems as discontinued operations in the consolidated statements of income. In October 1998, the company sold essentially all net assets of its Healthcare Systems segment to InfoCure Corporation for about $50,000. The proceeds consisted of about $40,000 in cash with the balance in subordinated notes. The company recorded a gain on the sale of $5,785 or $.07 per diluted share in the first quarter of fiscal year 1999. ACCOUNTING CHANGE In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The new SOP was effective for transactions entered into in fiscal years beginning after December 15, 1997. The company adopted this pronouncement effective October 1, 1998. The adoption of this pronouncement reduced the Automotive Division computer systems products revenues $15,736, gross profit $10,479, operating income $9,992 and net income $5,825 or $.07 per diluted share for the first fiscal quarter ended December 31, 1998. The company estimates revenues will be reduced by about $3,000 and earnings will be lowered by about $.02 per share in the second fiscal quarter ended March 31, 1999. After the second quarter, the company does not expect the effect to be material. RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
1998 1997 Change % Change -------- -------- ------- -------- Net Sales and Revenues $355,550 $357,818 $(2,268) -1% Gross Profit $155,577 $156,197 $(620) 0% Operating Income $41,653 $49,682 $(8,029) -16% Income From Continuing Operations $23,081 $26,148 $(3,067) -12% Discontinued Operations $5,785 $(2,400) $8,185 Net Income $28,866 $23,748 $5,118 22% Earnings Per Common Share (Diluted) $0.36 $0.29 $0.07 24% EXCLUDING EFFECT OF ACCOUNTING CHANGE Net Sales and Revenues $371,286 $357,818 $13,468 4% Gross Profit $166,056 $156,197 $9,859 6% Operating Income $51,645 $49,682 $1,963 4% Income From Continuing Operations $28,906 $26,148 $2,758 11%
Consolidated revenues declined slightly because of the effect of the accounting change. Excluding the effect of the accounting change, revenues increased over last year as a result of growth in revenues of Automotive computer systems services and products which overcame declines in Automotive forms and Business Systems sales. The consolidated gross profit percentage was 44.9% of revenues (excluding financial services revenues) compared to 44.6% last year. Excluding the effect of the accounting change, consolidated gross profit margin was 45.9%. The increase over last year resulted from growth in Automotive revenues and improvement in Business Systems gross profit margins. 9 10 Consolidated operating income (excluding the effect of the accounting change) was 13.9% of revenues, the same as last year. Automotive operating margins (excluding the effect of the accounting change) declined from last year because of both lower gross profit margins and higher investment in new products and services. Business Systems operating margins declined from last year, in part, because of startup expenses associated with the Kaiser Permanente account. (In August 1998 the company and Kaiser signed a five-year, $200 million contract.) Interest income rose over last year because of higher cash balances and notes receivable as a result of the sale of the Healthcare Systems segment. The effective income tax rate declined to 41.7% from 43.2% last year because of the sale of Healthcare Systems, which reduced nondeductible goodwill amortization, and lower state income taxes. Annualized return on average shareholders' equity was 22.7%, compared to 24.1% at December 31, 1997. AUTOMOTIVE
1998 1997 Change % Change -------- -------- ------- -------- Net Sales and Revenues Computer Services $103,297 $90,840 $12,457 14% Computer Systems Products $28,359 $35,442 $(7,083) -20% Business Forms $43,617 $45,013 $(1,396) -3% -------- -------- ------- Total Net Sales and Revenues $175,273 $171,295 $3,978 2% Gross Profit $93,652 $94,193 $(541) -1% Gross Margin 53.4% 55.0% SG&A Expenses $62,262 $55,003 $7,259 13% % of Revenues 35.5% 32.1% Operating Income $31,390 $39,190 $(7,800) -20% Operating Margin 17.9% 22.9% EXCLUDING EFFECT OF ACCOUNTING CHANGE Net Sales and Revenues Computer Services $103,297 $90,840 $12,457 14% Computer Systems Products $44,095 $35,442 $8,653 24% Business Forms $43,617 $45,013 $(1,396) -3% -------- -------- ------- Total Net Sales and Revenues $191,009 $171,295 $19,714 12% Gross Profit $104,131 $94,193 $9,938 11% Gross Margin 54.5% 55.0% SG&A Expenses $62,749 $55,003 $7,746 14% % of Revenues 32.8% 32.1% Operating Income $41,382 $39,190 $2,192 6% Operating Margin 21.7% 22.9%
Excluding the effect of the accounting change, Automotive revenues increased 12% because of growth in computer services and systems products which more than offset a slight decline in Automotive business forms sales. Computer services revenues increased 14% primarily because of the increased number of software applications supported. Computer systems products sales grew 24% over last year (excluding the effect of the accounting change) primarily because of higher sales volumes of ERA dealer management systems and electronic parts catalogs. A portion of the higher sales volumes resulted from customers replacing systems that were not year 2000 qualified, as well as competitive wins. As of December 31, 1998, essentially all customers have converted to year 2000 qualified systems. Automotive business forms sales declined slightly because of lower volumes, primarily caused by the shift to laser printing. The company includes its laser printing equipment and support revenues in computer systems products and services, and related forms and supplies sales in business forms products. Laser revenues, while still relatively small, continued to grow. Management expects the shift from printed forms to laser printing to continue. The company expects continued revenue growth throughout the year. However, revenue growth in the second quarter will likely be at a high single digit rate, slightly under the 12% rate in the first quarter of 1999. This lower revenue growth rate is anticipated because of a number of items, including the completion of customer conversions to year 2000 qualified systems and lower sales activity among large enterprise accounts. 10 11 Automotive gross profit margins declined primarily as a result of the accounting change. Excluding the effect of the accounting change, gross profit margins declined slightly because of a slight decline in computer systems products gross margins and a shift in the revenue mix because of the strong growth in computer systems products (excluding the accounting change). Operating margins declined from last year primarily because of the effect of the accounting change. Excluding this impact, operating margins declined primarily because of higher SG&A expenses for new business and product development. BUSINESS SYSTEMS
1998 1997 Change % Change -------- -------- ------- -------- Net Sales and Revenues $170,907 $178,533 $(7,626) -4% Gross Profit $61,925 $62,004 $(79) 0% Gross Margin 36.2% 34.7% SG&A Expenses $52,523 $51,226 $1,297 3% % of revenues 30.7% 28.7% Operating Income $9,402 $10,778 $(1,376) -13% Operating Margin 5.5% 6.0%
Business Systems sales declined because of reduced volumes and lower sales prices. Sales prices were lowered to reflect lower paper costs. Gross profit nearly equaled last year on lower sales as the gross profit margin rose one and one-half percentage points. First quarter results reflect the full benefit of the 1997 restructuring which resulted in the closing of four manufacturing plants. During the first quarter the company closed Crain-Drummond's Ottawa, Ontario manufacturing facility and incurred about $500 of period costs. These period costs essentially accounted for the decline in gross profit margin from the fourth quarter of fiscal year 1998. Business Systems operating margin was less than last year because of higher SG&A expenses. About $600 of these expenses represented startup costs associated with the Kaiser Permanente account. (In August 1998 the company and Kaiser signed a five-year, $200 million contract.) SG&A expenses were essentially the same percentage of sales as the fourth quarter of fiscal year 1998. FINANCIAL SERVICES
1998 1997 Change % Change -------- -------- ------- -------- Net Sales and Revenues $9,370 $8,097 $1,273 16% Operating Income $4,835 $3,469 $1,366 39% Operating Margin 51.6% 42.8%
Average finance receivables increased 11% over last year because of strong automotive systems sales. Financial Services revenues grew because of interest earned on the higher receivables balances. Average interest rates were slightly higher than last year. Financial Services' interest rate spread remained strong at 3.4%, compared to 3.1% last year. This interest rate spread increased over last year because of lower borrowing rates, in addition to the previously mentioned increase in the receivables portfolio. Bad debt expenses were $650 compared to $873 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 the first quarter of fiscal year 1999 the company did not enter into any new interest rate management agreements. 11 12 LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Information systems continued to provide strong cash flow from operating activities during the first quarter of the fiscal year. Operating cash flow was $22,157 and resulted primarily from net income, adjusted for noncash charges. Operating cash flow funded the company's investments for normal operations including capital expenditures of $8,716. During the first quarter the company also capitalized $5,033 of software licensed to customers, consisting of about $2,500 of purchased software with the balance representing internal capitalization. Capital expenditures in the ordinary course of business are anticipated to be about $45,000 in fiscal year 1999. In October 1998, the company received about $40,000 of proceeds from the sale of the Healthcare Systems segment. Financial services operating cash flows, collections on finance receivables and additional borrowings were invested in new finance receivables for the company's automotive 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 29.2% at December 31, 1998 and 29.4% at September 30, 1998. Remaining credit available under existing revolving credit agreements was $114,875 at December 31, 1998. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. The company anticipates that cash flow from operations and cash available from existing credit agreements will be sufficient to fund fiscal year 1999 normal operations. The company has consistently produced strong operating cash flows sufficient to fund normal operations. These cash flows resulted primarily from income, of which Automotive generates about 75 to 80 percent of the total. Automotive's strong cash flows are the result of stable operating margins and a high percentage of recurring service revenues, which require relatively low capital investment. Debt instruments have been used primarily to fund Financial Services' receivables and business combinations. In fiscal year 1997, the company filed a shelf registration statement with the SEC whereby the company can issue up to $300,000 of notes. Through December 31, 1998, the company has issued $170,000 of notes under this arrangement. Management believes that its strong balance sheet and cash flows should help maintain an investment grade credit rating that should provide access to capital sufficient to meet the company's cash requirements beyond fiscal year 1999. SHAREHOLDERS' EQUITY The company lists its Class A common shares on the New York Stock Exchange. There is no principal market for the Class B common shares. The company also has an authorized class of 60 million preferred shares with no par value. As of February 10, 1999, no preferred shares were outstanding and there were no agreements or commitments with respect to the sale or issuance of these shares. Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. In November 1998, the company's board of directors raised the quarterly dividend 11% to $.10 per Class A common share. The company has increased cash dividends per share thirteen times in the last nine years 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. During the first quarter of fiscal year 1999, the company repurchased 900 Class A common shares for $18,756 ($20.84 per share). As of December 31, 1998 the company could repurchase an additional 4,470 Class A common shares under existing board of directors' authorizations. YEAR 2000 COMPLIANCE STATE OF READINESS The company has assessed potential year 2000 effects on its internal computer systems, computer systems provided to customers and other non-information technology systems. The assessment included not only the company's systems, but also systems of outside parties such as key suppliers and business partners. Detailed plans were prepared to address year 2000 issues. These plans covered software applications, operating systems, hardware and embedded technology in other equipment. The plans called for a determination of whether effected systems should be modified, replaced or retired. Management reviews progress against these plans with the Audit Committee of the Board of Directors at its regularly scheduled meetings. 12 13 About 80% of the company's systems were year 2000 qualified as of December 31, 1998. The remaining systems are scheduled to be year 2000 qualified on or before June 1999. In July 1998, the company released a year 2000 qualified version of its ERA2 dealer management system for automobile dealers. In December 1998, the company completed the conversion of customers to the new ERA2 software release. The company decided late in 1997 to retire several older product lines by December 1998 rather than make these systems year 2000 qualified. Early in fiscal year 1998 the company communicated this decision to affected customers and presented them with various product alternatives. During the year the company reinforced this communication on a number of occasions. As of December 31, 1998, the vast majority of customers have purchased a year 2000 qualified system from the company. The company discontinued support of non-year 2000 qualified systems on January 1, 1999. The company has contacted significant suppliers, customers and critical business partners to determine the extent to which the company may be vulnerable in the event those parties fail to properly remediate their own year 2000 issues. About 70% of our business partners have responded and indicated that their systems will be year 2000 qualified. The company has performed testing where applicable to determine that the third party systems are year 2000 qualified and function properly with the company's systems. To date the company has not experienced material adverse results from third party systems. While the company has taken significant actions to help ensure that these systems will be able to process and store dates into the next century, no amount of testing or contractual assurances will guarantee that errors or systems failures will not occur. COSTS The company's year 2000 efforts have been undertaken largely with existing personnel. In some instances, consultants have been engaged to perform specific services. Through December 31, 1998, the company has spent about $9,000 on year 2000 compliance efforts. In the first quarter of fiscal year 1999, year 2000 compliance costs were about $2,000. Prior to fiscal year 1999, the company spent an additional $7,000 on year 2000 compliance. The company estimates that the total costs (including costs already incurred) to make all systems year 2000 qualified will be about $13,000 to $15,000. However, there can be no assurance that the company will not incur unanticipated costs, which could have a material adverse effect on the company's financial statements. RISKS Management believes that the reasonably likely worst case scenario, with respect to year 2000 issues, is the failure of a supplier (including energy or communications suppliers) to be year 2000 qualified. Such a failure could temporarily interrupt the supply of needed products or services to the company or its customers, which could effect the company's ability to deliver products and services and have a material adverse effect on the company's financial statements. CONTINGENCY PLANS The company has focused its year 2000 compliance efforts on assessing potential year 2000 effects, developing or purchasing year 2000 qualified solutions and implementing and testing year 2000 qualified solutions. The company continually assesses known, potential risks remaining and has begun to develop contingency plans to mitigate any significant risks identified. The company anticipates that contingency plans will be developed during 1999. MARKET RISKS INTEREST RATES The information systems portion of the business borrows money, as needed, primarily to fund business combinations. Generally the company borrows under fixed rate agreements with terms of ten years or less. The Financial Services segment of the business obtains borrowings to fund the investment in finance receivables. These fixed rate receivables have repayment terms of four to eight years, with five years being the most common term. The company funds finance receivables with debt that has repayment terms consistent with the maturities of the finance receivables. Generally the company attempts to lock in the interest spread on the fixed rate finance receivables by borrowing under fixed rate agreements or using interest rate management agreements to manage variable interest rate exposure. The company does not use financial instruments for trading purposes. Because fixed rate finance receivables are directionally funded with fixed rate debt or its equivalent (variable rate debt that has been fixed with interest rate swaps), management believes that a 100 basis point change in interest rates would not have a material effect on the company's financial statements. 13 14 FOREIGN CURRENCY EXCHANGE RATES The company has foreign-based operations in Canada, which accounted for 12% of net sales and revenues in the three months ended December 31, 1998. In the conduct of its foreign operations the company has intercompany sales, charges and loans between the U.S. and Canada and may receive dividends denominated in different currencies. These transactions expose the company to changes in foreign currency exchange rates. At December 31, 1998, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at December 31, 1998, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. COMMODITIES The company is exposed to changes in the cost of paper, a key raw material in the production of business forms. The company has attempted to limit this exposure by consolidating its purchases among a few suppliers and negotiating longer-term contracts that limit the amount and frequency of price increases and generally delays the effective date of the increase. When paper costs increase, historically the company has been able to increase the sales prices of its business forms products and maintain its profit margins. Conversely, when paper costs decline, the company generally lowers its sales prices to meet competitive pressures. Historically, the company has not used financial instruments to manage its exposure to changes to the cost of paper. Because the company has historically been able to raise sales prices to offset higher paper costs, management believes that a 10% change in paper costs would not have a material effect on the company's financial statements. ENVIRONMENTAL MATTER See Note 8 to the Consolidated Financial Statements for a discussion of an environmental contingency. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedules (b) Reports on Form 8-K On November 9, 1998 the company filed a report on Form 8-K regarding the sale of substantially all assets of its Healthcare Systems segment. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE REYNOLDS AND REYNOLDS COMPANY Date February 11, 1999 /s/ DAVID R. HOLMES ------------------------------- --------------------------------- David R. Holmes Chairman of the Board, President and Chief Executive Officer Date February 11, 1999 /s/ DALE L. MEDFORD ------------------------------- --------------------------------- Dale L. Medford Corporate Vice President, Finance and Chief Financial Officer 15 EX-27 2 EXHIBIT 27
5 1,000 3-MOS SEP-30-1998 OCT-01-1998 DEC-31-1998 81,413 0 213,434 6,089 68,288 394,693 388,280 217,856 1,171,466 197,984 311,177 0 0 64,003 349,169 1,171,466 233,524 355,550 147,948 190,603 0 0 6,678 39,604 16,523 23,081 5,785 0 0 28,866 0.37 0.36
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