-----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, RQCEyaqfvClLBFNIyq8P40r+1xXRG6c9k0AvvCHJq8uEqgfHe8DGWpdL8fK8C0y8 RH+JzcYFliuFKgb1hos7YQ== 0000950152-00-004081.txt : 20000516 0000950152-00-004081.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950152-00-004081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 631136 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 AND REYNOLDS COMPANY FORM 10-Q 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 MARCH 31, 2000 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 May 10, 2000, 76,594,027 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 and Six Months Ended March 31, 2000 and 1999 3 Condensed Consolidated Balance Sheets As of March 31, 2000 and September 30, 1999 4 Condensed Statements of Consolidated Cash Flows For the Six Months Ended March 31, 2000 and 1999 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 and Six Months Ended March 31, 2000 and 1999 9 PART II. OTHER INFORMATION Item 4. Results of Votes of Security Holders 14 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 3 THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999 (In thousands except per share data)
THREE MONTHS SIX MONTHS 2000 1999 2000 1999 ----------- ------------ ----------- ------------ Net Sales and Revenues Information systems Products $272,845 $266,224 $541,520 $499,748 Services 144,348 116,138 283,925 228,794 ----------- ------------ ----------- ------------ Total information systems 417,193 382,362 825,445 728,542 Financial services 10,515 9,732 20,279 19,102 ----------- ------------ ----------- ------------ Total net sales and revenues 427,708 392,094 845,724 747,644 ----------- ------------ ----------- ------------ Costs and Expenses Information systems Cost of sales Products 167,139 161,210 331,097 309,158 Services 57,734 44,384 111,956 87,039 ----------- ------------ ----------- ------------ Total cost of sales 224,873 205,594 443,053 396,197 Selling, general and administrative expenses 140,768 127,856 280,344 246,615 Financial services 4,646 4,393 9,495 8,928 ----------- ------------ ----------- ------------ Total costs and expenses 370,287 337,843 732,892 651,740 ----------- ------------ ----------- ------------ Operating Income 57,421 54,251 112,832 95,904 ----------- ------------ ----------- ------------ Other Charges (Income) Interest expense 2,753 3,304 5,679 6,640 Interest income (1,211) (1,522) (2,515) (2,940) Other (16) 388 577 519 ----------- ------------ ----------- ------------ Total other charges 1,526 2,170 3,741 4,219 ----------- ------------ ----------- ------------ Income Before Income Taxes 55,895 52,081 109,091 91,685 Provision for Income Taxes 22,927 21,652 44,823 38,175 ----------- ------------ ----------- ------------ Income From Continuing Operations 32,968 30,429 64,268 53,510 Discontinued Operations 0 0 0 5,785 ----------- ------------ ----------- ------------ Net Income $ 32,968 $ 30,429 $ 64,268 $ 59,295 =========== ============ =========== ============ Basic Earnings Per Common Share Income From Continuing Operations $ 0.43 $ 0.39 $ 0.83 $ 0.68 Discontinued Operations $ 0.00 $ 0.00 $ 0.00 $ 0.07 Net Income $ 0.43 $ 0.39 $ 0.83 $ 0.76 Average Number of Common Shares Outstanding 77,094 78,385 77,125 78,500 Diluted Earnings Per Common Share Income From Continuing Operations $ 0.41 $ 0.38 $ 0.81 $ 0.67 Discontinued Operations $ 0.00 $ 0.00 $ 0.00 $ 0.07 Net Income $ 0.41 $ 0.38 $ 0.81 $ 0.74 Average Number of Common Shares Outstanding 80,246 80,170 79,515 80,331 Cash Dividends Declared Per Common Share $ 0.11 $ 0.10 $ 0.22 $ 0.20
See Notes to Condensed Consolidated Financial Statements. 3 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND SEPTEMBER 30, 1999 (In thousands)
3/31/00 9/30/99 ---------------- ---------------- INFORMATION SYSTEMS ASSETS Current Assets Cash and equivalents $102,659 $103,595 Accounts receivable 243,654 244,029 Inventories 88,165 76,695 Other current assets 45,107 43,278 -------- -------- Total current assets 479,585 467,597 Property, Plant and Equipment, less accumulated depreciation of $237,460 at 3/31/00 and $224,741 at 9/30/99 206,562 187,774 Goodwill 82,897 65,811 Other Intangible Assets 34,073 23,115 Other Assets 89,371 90,197 -------- -------- Total Information Systems Assets 892,488 834,494 -------- -------- FINANCIAL SERVICES ASSETS Finance Receivables 413,961 426,751 Cash and Other Assets 538 840 -------- -------- Total Financial Services Assets 414,499 427,591 -------- -------- TOTAL ASSETS $1,306,987 $1,262,085 ========== ========== INFORMATION SYSTEMS LIABILITIES Current Liabilities $209,681 $211,959 Long-Term Debt 162,347 163,985 Other Liabilities 96,593 93,637 -------- -------- Total Information Systems Liabilities 468,621 469,581 -------- -------- FINANCIAL SERVICES LIABILITIES Notes Payable 218,894 219,423 Other Liabilities 110,037 109,646 -------- -------- Total Financial Services Liabilities 328,931 329,069 -------- -------- SHAREHOLDERS' EQUITY Capital Stock 96,446 79,223 Other Comprehensive Income (9,145) (9,448) Retained Earnings 422,134 393,660 -------- -------- Total Shareholders' Equity 509,435 463,435 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,306,987 $1,262,085 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 5 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999 (In thousands)
2000 1999 -------------- ------------- INFORMATION SYSTEMS Cash Flows Provided By Operating Activities $92,836 $65,256 ------- ------- Cash Flows Provided By (Used For) Investing Activities Business combinations (28,520) Capital expenditures (39,464) (26,404) Net proceeds from asset sales 2,589 50,234 Capitalization of software licensed to customers (11,027) (7,701) Repayments from (advances to) financial services 3,462 (237) ------- ------- Net cash flows provided by (used for) investing activities (72,960) 15,892 ------- ------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 626 45,720 Principal payments on debt (5,429) (38,297) Cash dividends paid (8,422) (7,839) Capital stock issued 11,995 6,295 Capital stock repurchased (19,885) (33,313) ------- ------- Net cash flows used for financing activities (21,115) (27,434) ------- ------- Effect of Exchange Rate Changes on Cash 303 241 ------- ------- Increase (Decrease) in Cash and Equivalents (936) 53,955 Cash and Equivalents, Beginning of Period 103,595 39,980 ------- ------- Cash and Equivalents, End of Period $102,659 $93,935 ======== ======= FINANCIAL SERVICES Cash Flows Provided By Operating Activities $10,335 $10,547 ------- ------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (72,395) (73,521) Collections on finance receivables 65,740 62,283 ------- ------- Net cash flows used for investing activities (6,655) (11,238) ------- ------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 34,963 38,353 Principal payments on debt (35,492) (39,542) Advances from (repayments to) information systems (3,462) 237 ------- ------- Net cash flows used for financing activities (3,991) (952) ------- ------- Decrease in Cash and Equivalents (311) (1,643) Cash and Equivalents, Beginning of Period 675 2,102 ------- ------- Cash and Equivalents, End of Period $364 $459 ======== =======
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, 1999 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
3/31/00 9/30/99 ------------- -------------- Finished Products $76,148 $63,647 Work In Process 5,639 6,033 Raw Materials 6,378 7,015 ------------- -------------- Total Inventories $88,165 $76,695 ============= ==============
(3) COMPREHENSIVE INCOME
THREE MONTHS SIX MONTHS 2000 1999 2000 1999 -------------- ------------- -------------- ------------- Net Income $32,968 $30,429 $64,268 $59,295 Foreign Currency Translation (65) 221 303 241 -------------- ------------- -------------- ------------- Comprehensive Income $32,903 $30,650 $64,571 $59,536 ============== ============= ============== =============
(4) BUSINESS COMBINATIONS On October 1, 1999, the company purchased substantially all net assets of Sterling Direct, Inc. for $26,020 of cash. Sterling Direct, a provider of direct marketing services located in St. Louis, has annual revenues of about $28,000. This business combination was accounted for as a purchase and the accounts of Sterling Direct were included in the financial statements since the acquisition date. In connection with this business combination the company recorded goodwill of $23,187 which is being amortized on a straight-line basis over 10 years. (5) ACCOUNTING CHANGE In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The company adopted this pronouncement effective October 1, 1998. The adoption of this pronouncement reduced the Automotive Group's computer systems products revenues $2,200, gross profit $725, operating income $632 and net income $369 or $.005 per diluted share for the three months ended March 31, 1999. For the six months ended March 31, 1999, the adoption of SOP 97-2 reduced the Automotive Group's computer systems products revenues $17,936, gross profit $11,205, operating income $10,624 and net income $6,204 or $.08 per diluted share. (6) DISCONTINUED OPERATIONS On October 23, 1998, the company sold essentially all net assets of its Healthcare Systems segment to InfoCure Corporation and recorded a gain on the sale of $5,785 or $.07 per diluted share during the three months ended December 31, 1998. (7) 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 6 7 its private contractor. However, because the EPA has not yet selected a remedy, potential remediation costs remain uncertain. Remediation costs for a typical CERCLA site on the National Priorities List average about $30,000. The engineering evaluation/cost analysis was consistent with this average. During fiscal year 1996, an agreement was reached whereby the state of Connecticut will contribute $8,000 towards remediation costs. The company believes that the reasonably foreseeable resolution will not have a material adverse effect on the financial statements. (8) BUSINESS SEGMENTS
THREE MONTHS SIX MONTHS 2000 1999 2000 1999 -------------- -------------- --------------- --------------- AUTOMOTIVE Net Sales and Revenues Computer Services $121,302 $105,795 $240,933 $ 209,092 Computer Systems Products 41,485 44,642 87,847 73,001 Business Forms Products 46,006 45,935 90,005 89,552 -------------- -------------- --------------- --------------- Total Net Sales and Revenues $208,793 $196,372 $ 418,785 $ 371,645 Operating Income $ 43,778 $ 41,813 $ 90,322 $ 73,203 INFORMATION SOLUTIONS Net Sales and Revenues Business Forms Products $185,028 $174,897 $ 363,090 $ 335,475 Services and Computer Systems Products 23,372 11,093 43,570 21,422 -------------- -------------- --------------- --------------- Total Net Sales and Revenues $208,400 $185,990 $ 406,660 $ 356,897 Operating Income $ 16,878 $ 14,197 $ 27,699 $ 23,599 FINANCIAL SERVICES Net Sales and Revenues $ 10,515 $ 9,732 $ 20,279 $ 19,102 Operating Income $ 5,869 $ 5,339 $ 10,784 $ 10,174 CORPORATE ($ 9,104) ($ 7,098) ($ 15,973) ($ 11,072) TOTALS Net Sales and Revenues $427,708 $392,094 $ 845,724 $ 747,644 Operating Income $ 57,421 $ 54,251 $ 112,832 $ 95,904
3/31/00 9/30/99 --------------- --------------- ASSETS Automotive $ 307,306 $ 251,436 Information Solutions 394,721 389,823 Financial Services 414,499 427,591 Corporate 190,461 193,235 --------------- --------------- Total Assets $1,306,987 $1,262,085 =============== ===============
7 8 (9) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities.
2000 1999 -------------- ------------- INFORMATION SYSTEMS Net Income $57,794 $53,225 Depreciation and Amortization 26,004 23,441 Deferred Income Taxes 4,158 1,226 Deferred Income Taxes Transferred to Financial Services (1,805) (3,175) Losses (Gains) on Sales of Assets 194 (6,889) Changes in Operating Assets and Liabilities Accounts Receivable 25,917 799 Inventories (11,077) (5,286) Prepaid Expenses and Other Current Assets (1,373) (5,324) Intangible and Other Assets (843) 6,759 Accounts Payable (1,059) (1,494) Accrued Liabilities (8,055) 5,751 Other Liabilities 2,981 (3,777) ------- ------- Net Cash Provided by Operating Activities $92,836 $65,256 ======= ======= FINANCIAL SERVICES Net Income $ 6,474 $ 6,070 Deferred Income Taxes 48 (297) Deferred Income Taxes Transferred from Information Systems 1,805 3,175 Changes in Receivables, Other Assets and Other Liabilities 2,008 1,599 ------- ------- Net Cash Provided by Operating Activities $10,335 $10,547 ======= =======
(10) SUBSEQUENT EVENTS On April 10, 2000, the company announced that it engaged Credit Suisse First Boston to assist in the sale or spin-off its Information Solutions segment. The company expressed its intent to complete a transaction within three to six months. On April 17, 2000, the company signed a definitive agreement to acquire HAC Group LLC, the leading provider of learning, customer relationship management and Web services to automobile retailers and manufacturers. The privately-held HAC Group had revenues of $65,000 in 1999. The purchase price of $140,000 will consist of $108,000 of cash and the issuance of 1,221,840 Class A common shares. Under terms of the purchase agreement, the company may be required to make additional payments of up to $60,000 contingent on the operating results of the business purchased. On May 4, 2000, the company, the Dealer Services and Claims Solutions Groups of Automatic Data Processing, Inc. and CCC Information Services, Inc. signed a definitive agreement forming a new independent company, named ChoiceParts, LLC, that will develop an electronic parts network for the automotive parts market. 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999 (In thousands except per share data) SIGNIFICANT EVENTS SUBSEQUENT EVENTS On April 10, 2000, the company announced that it engaged Credit Suisse First Boston to assist in the sale or spin-off its Information Solutions segment. The company expressed its intent to complete a transaction within three to six months. On April 17, 2000, the company signed a definitive agreement to acquire HAC Group LLC, the leading provider of learning, customer relationship management and Web services to automobile retailers and manufacturers. The privately-held HAC Group had revenues of $65,000 in 1999. The purchase price of $140,000 will consist of $108,000 of cash and the issuance of 1,221,840 Class A common shares. Under terms of the purchase agreement, the company may be required to make additional payments of up to $60,000 contingent on the operating results of the business purchased. While HAC has strong profitability, the company expects about $.01 per share of earnings dilution for the first several quarters. This dilution from the HAC acquisition will be caused by amortization of intangible assets, interest on the cash purchase price and the issuance of additional shares. On May 4, 2000, the company, the Dealer Services and Claims Solutions Groups of Automatic Data Processing, Inc. and CCC Information Services, Inc. signed a definitive agreement forming a new independent company, named ChoiceParts, LLC, that will develop an electronic parts network for the automotive parts market. The company will contribute its profitable One Touch Parts Locator business to this new enterprise. One Touch had annual revenues of over $11,000 in fiscal year 1999. The company initially expects about $.02 per share of earnings dilution per quarter from the contribution of One Touch and recognition of the company's share of ChoiceParts losses. BUSINESS COMBINATIONS On October 1, 1999, the company purchased substantially all net assets of Sterling Direct, Inc. for $26,020 of cash. Sterling Direct, a provider of direct marketing services located in St. Louis, has annual revenues of about $28,000. Sterling Direct provides a full range of direct marketing services from strategic marketing program development to output management and campaign analysis and reporting. Sterling Direct also provides database management services, custom programming, telemarketing and billing statement services. 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. In October 1998, the company sold essentially all net assets of its Healthcare Systems segment to InfoCure Corporation for about $50,000. The company recorded a gain on the sale of $5,785 or $.07 per diluted share in the first quarter of fiscal year 1999. The operating results of the Healthcare Systems segment have been presented as discontinued operations in the statements of consolidated income. ACCOUNTING CHANGE In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The company adopted this pronouncement effective October 1, 1998. The adoption of this pronouncement reduced the Automotive Group's computer systems products revenues $2,200, gross profit $725, operating income $632 and net income $369 or $.005 per diluted share for the three months ended March 31, 1999. For the six months ended March 31, 1999, the adoption of SOP 97-2 reduced the Automotive Group's computer systems products revenues $17,936, gross profit $11,205, operating income $10,624 and net income $6,204 or $.08 per diluted share. 9 10 RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
Three Months Six Months ----------------------------------------- ----------------------------------------- 2000 1999 Change % Change 2000 1999 Change % Change ------------------------------------------------------------------------------------ Net Sales and Revenues $427,708 $392,094 $35,614 9% $845,724 $747,644 $98,080 13% Gross Profit $192,320 $176,768 $15,552 9% $382,392 $332,345 $50,047 15% Operating Income $ 57,421 $ 54,251 $ 3,170 6% $112,832 $ 95,904 $16,928 18% Income From Continuing Operations $ 32,968 $ 30,429 $ 2,539 8% $ 64,268 $ 53,510 $10,758 20% Discontinued Operations $ 0 $ 0 $ 0 $ 0 $ 5,785 ($ 5,785) Net Income $ 32,968 $ 30,429 $ 2,539 8% $ 64,268 $ 59,295 $ 4,973 8% Earnings Per Common Share (Diluted) $ 0.41 $ 0.38 $ 0.03 8% $ 0.81 $ 0.74 $ 0.07 9% EXCLUDING EFFECT OF ACCOUNTING CHANGE Net Sales and Revenues $427,708 $394,294 $33,414 8% $845,724 $765,580 $80,144 10% Gross Profit $192,320 $177,493 $14,827 8% $382,392 $343,550 $38,842 11% Operating Income $ 57,421 $ 54,883 $ 2,538 5% $112,832 $106,528 $ 6,304 6% Income From Continuing Operations $ 32,968 $ 30,799 $ 2,169 7% $ 64,268 $ 59,710 $ 4,558 8%
Second quarter's consolidated revenues of $427,708 were the highest quarterly total in the company's history. Automotive's revenues grew 6% over last year in the second quarter and 13% year-to-date (5% and 7%, respectively, excluding for last year's accounting change). Information Solutions' sales increased 12% for the three months and 14% through six months. Excluding the effect of the Sterling business combination, Information Solutions sales grew 7% in the second quarter and 9% year-to-date. The consolidated gross profit percentage was 46.1% of revenues (excluding financial services' revenues) in the second quarter and 46.3% year-to-date compared to last year's 46.2% and 45.6%, respectively. Gross profit margins increased over last year in Automotive and declined versus last year for Information Solutions. Consolidated operating income was 13.4% of revenues for the second quarter and 13.3% through six months versus 13.8% and 12.8% last year (13.9% for both periods last year excluding last year's accounting change). Excluding last year's accounting change, consolidated operating margins declined from last year primarily because of the company's investments in an enterprise resource planning (ERP) system and new product development. The company's research and development (R&D) expenses increased 37% to about $18,000 in the second quarter from about $13,000 last year. Year-to-date R&D expenses grew 38% to about $35,000, up from about $25,000 last year. The company expects R&D expenses to continue to exceed last year throughout the balance of fiscal year 2000. Net income grew 8% over last year for both the three and six months ended March 31, 2000 while earnings per share increased 8% for the quarter and 9% year-to-date. Last year's six months net income included the negative effect of the accounting change that was essentially offset by the gain on the sale of the Healthcare Systems segment. Annualized return on average shareholders' equity was 25.2%, compared to 26.0% at March 31, 1999. 10 11 AUTOMOTIVE
Three Months Six Months ---------------------------------------- ---------------------------------------- 2000 1999 Change % Change 2000 1999 Change % Change ------------------------------------------------------------------------------------- Net Sales and Revenues Computer Services $121,302 $105,795 $15,507 15% $240,933 $209,092 $31,841 15% Computer Systems Products $ 41,485 $ 44,642 ($ 3,157) -7% $ 87,847 $ 73,001 $14,846 20% Business Forms $ 46,006 $ 45,935 $ 71 0% $ 90,005 $ 89,552 $ 453 1% ------------------------------- ------------------------------- Total Net Sales and Revenues $208,793 $196,372 $12,421 6% $418,785 $371,645 $47,140 13% Gross Profit $118,041 $107,901 $10,140 9% $238,141 $201,553 $36,588 18% Gross Margin 56.5% 54.9% 56.9% 54.2% SG&A Expenses $ 74,263 $ 66,088 $ 8,175 12% $147,819 $128,350 $19,469 15% % of Revenues 35.5% 33.6% 35.3% 34.5% Operating Income $ 43,778 $ 41,813 $ 1,965 5% $ 90,322 $ 73,203 $17,119 23% Operating Margin 21.0% 21.3% 21.6% 19.7% EXCLUDING EFFECT OF ACCOUNTING CHANGE Net Sales and Revenues Computer Services $121,302 $105,795 $15,507 15% $240,933 $209,092 $31,841 15% Computer Systems Products $ 41,485 $ 46,842 ($ 5,357) -11% $ 87,847 $ 90,937 ($ 3,090) -3% Business Forms $ 46,006 $ 45,935 $ 71 0% $ 90,005 $ 89,552 $ 453 1% ------------------------------- ------------------------------- Total Net Sales and Revenues $208,793 $198,572 $10,221 5% $418,785 $389,581 $29,204 7% Gross Profit $118,041 $108,626 $ 9,415 9% $238,141 $212,758 $25,383 12% Gross Margin 56.5% 54.7% 56.9% 54.6% SG&A Expenses $ 74,263 $ 66,181 $ 8,082 12% $147,819 $128,931 $18,888 15% % of Revenues 35.5% 33.3% 35.3% 33.1% Operating Income $ 43,778 $ 42,445 $ 1,333 3% $ 90,322 $ 83,827 $ 6,495 8% Operating Margin 21.0% 21.4% 21.6% 21.5%
Automotive revenues increased for both the second quarter and six months primarily because of continued strong growth in computer services revenues. Computer services revenues, comprised predominately of recurring maintenance and support revenues, increased 15% for both the second quarter and six months primarily because of the increased number of ERA software applications supported and the growth of newer service offerings. Sales of computer systems products declined from last year (excluding the effect of the accounting change) because of a decline in the number of ERA and electronic parts catalogs (EPC) systems sold. Last year both ERA and EPC sales benefited from customer conversions to year 2000 compliant products. Automotive business forms sales were essentially flat for the quarter and increased slightly through six months even as the technology shift to laser printing continued. (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. Growth of laser products revenues continued to be strong during the first half of fiscal year 2000.) Included in computer services and products revenues were e-business and customer relationship management (CRM) revenues of $15,695 for the second quarter and $31,983 through six months, up 40% and 50% over last year, respectively. During the first six months of fiscal year 2000, computer systems orders declined from last year causing order backlogs to decline from last year. Internal sales growth is expected to remain at mid-single digit rates in the near term. Including the HAC Group acquisition, Automotive Group's revenues should grow at double digit rates. Automotive gross profit margins increased over last year primarily as a result of the growth in higher margin computer services revenues. Gross profit margins on Automotive business forms continued to be strong. SG&A expenses, as a percentage of revenues, increased over last year primarily because of the increased research and development expenses for new product development. Operating margins were in the same range as last year for both the quarter and six months reflecting the higher R&D expenses. Operating margins will likely be negatively affected in the third quarter reflecting the acquisition of the HAC Group and the launch of ChoiceParts. 11 12 INFORMATION SOLUTIONS
Three Months Six Months ----------------------------------------- ----------------------------------------- 2000 1999 Change % Change 2000 1999 Change % Change --------------------------------------------------------------------------------------- Net Sales and Revenues $208,400 $185,990 $22,410 12% $406,660 $356,897 $49,763 14% Gross Profit $ 74,279 $ 68,867 $ 5,412 8% $144,251 $130,792 $13,459 10% Gross Margin 35.6% 37.0% 35.5% 36.6% SG&A Expenses $ 57,401 $ 54,670 $ 2,731 5% $116,552 $107,193 $ 9,359 9% % of revenues 27.5% 29.4% 28.7% 30.0% Operating Income $ 16,878 $ 14,197 $ 2,681 19% $ 27,699 $ 23,599 $ 4,100 17% Operating Margin 8.1% 7.6% 6.8% 6.6%
Information solutions sales were higher than any prior quarter and included sales from the Sterling Direct business combination. Excluding Sterling's sales, revenues increased 7% for the second quarter and 9% year-to-date. The higher revenue growth resulted from increased volume and reflected sales growth in several large new accounts. Sales prices were slightly higher than last year, reflecting higher paper costs. Information solutions sales included e-business and CRM revenues of $21,172 in the quarter and $38,801 year-to-date, up 141% and 121%, respectively. Sterling Direct sales were included with e-business and CRM revenues. Gross profit margins declined from last year primarily because of the initial lower margin impact of several large new accounts. Higher paper costs also had a negative impact on gross margins versus last year. Information Solutions operating margins increased over last year as lower SG&A expenses, as a percentage of revenues, offset the gross margin decline. SG&A expenses declined, as a percentage of revenues, even as research and development expenses increased. Operating margins exceeded 8% in the second quarter, representing the first quarter above 8% in three years. FINANCIAL SERVICES
Three Months Six Months ----------------------------------------- ----------------------------------------- 2000 1999 Change % Change 2000 1999 Change % Change --------------------------------------------------------------------------------------- Net Sales and Revenues $10,515 $9,732 $783 8% $20,279 $19,102 $1,177 6% Operating Income $ 5,869 $5,339 $530 10% $10,784 $10,174 $ 610 6% Operating Margin 55.8% 54.9% 53.2% 53.3%
Financial Services revenues grew because of greater interest earned on finance receivables, which offset slightly lower average interest rates. Finance receivables declined slightly from last year because of the decline in sales of automotive computer systems products. However, interest bearing finance receivables increased 5% over last year as the backlog of non interest bearing finance receivables was reduced. Finance receivables do not begin earning interest until installation of the computer system has been completed. Financial Services' interest rate spread remained strong at 3.2% through six months, compared to 3.6% last year. The interest rate spread declined primarily because of higher interest rates on borrowings. Bad debt expenses were $400 in the second quarter, compared to $650 last year and $1,113 through six months versus $1,300 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 six months of fiscal year 2000, the company did not enter into any new interest rate management agreements. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Information systems continued to provide strong cash flow from operating activities during the first six months of the fiscal year. Operating cash flows were $92,836 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 $39,464. During the first six months of the fiscal year the company also capitalized $11,027 of software licensed to customers, 12 13 representing primarily internal capitalization. Capital expenditures in the ordinary course of business are anticipated to be about $65,000 to $70,000 in fiscal year 2000. In October 1999, the company purchased substantially all of the assets of Sterling Direct for $26,020 of cash. 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 24.9% at March 31, 2000 and 26.8% at September 30, 1999. Remaining credit available under committed revolving credit agreements was $84,818 at March 31, 2000. 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 committed credit agreements will be sufficient to fund fiscal year 2000 normal operations and the HAC Group business combination. 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 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 March 31, 2000, the company has issued $170,000 of notes under this arrangement. Management believes that its strong balance sheet and cash flows should help maintain an investment grade credit rating that should provide access to capital sufficient to meet the company's cash requirements beyond fiscal year 2000. 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 May 10, 2000, 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 1999, the company's board of directors raised the quarterly dividend 10% to $.11 per Class A common share. The company has increased cash dividends per share every year since 1989 and paid dividends every 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 six months of fiscal year 2000, the company repurchased 1,000 Class A common shares for $19,885 ($19.88 per share). As of March 31, 2000 the company could repurchase an additional 1,679 Class A common shares under existing board of directors' authorizations. 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 11% of net sales and revenues for the six months ended March 31, 2000. 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 March 31, 2000, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at March 31, 2000, 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 delay 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 substantially 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 substantially 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 7 to the Consolidated Financial Statements for a discussion of an environmental contingency. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Management's Discussion and Analysis of the Financial Condition and Results of Operations constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on current expectations, estimates, forecasts and projections of future company or industry performance based on management's judgment, beliefs, current trends and market conditions. Forward-looking statements made by the company may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in any forward-looking statement. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. See also the discussion of factors that may affect future results contained in the company's Current Report on Form 8-K filed with the SEC on February 9, 2000, which we incorporate herein by reference. PART II - OTHER INFORMATION ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS At the Annual Meeting of Shareholders on February 10, 2000, the shareholders of the company voted on and approved the following issues. Issue 1 Election of Directors
Shares Shares For Withheld --------------- --------------- Three-year terms Expiring in 2003 James L. Arthur 84,769,289 1,075,259 Cleave L. Killingsworth, Jr. 84,732,267 1,112,281 Dale L. Medford 84,754,623 1,089,925 Lloyd G. Waterhouse 84,765,477 1,079,071
14 15 Issue 2 Proposal to approve material terms of a performance-based incentive plan to ensure deductibility of officer compensation exceeding one million dollars. Shares For 83,916,021 Shares Against 1,727,443 Shares Abstain 201,084 Issue 3 Appointment of Deloitte & Touche LLP as Independent Auditors Shares For 85,464,033 Shares Against 321,942 Shares Abstain 58,573 ITEM 5. OTHER INFORMATION On May 9, 2000, the board of directors elected Eustace W. Mita, general manager, Reynolds' Transformation Services, as a director of the company. Mita, whose term expires in 2001, fills a vacancy created in February when Richard H. Grant Jr. announced his retirement. Mita was previously chief executive officer of the HAC Group LLC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedules (b) Reports on Form 8-K On February 9, 2000 the company filed a report on Form 8-K disclosing certain factors that may affect future results of the company. On April 10, 2000 the company filed a report on Form 8-K disclosing the intent to sell or spin-off its Information Solutions Group. 15 16 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 May 11, 2000 /s/ David R. Holmes ----------------- ------------------- David R. Holmes Chairman of the Board and Chief Executive Officer Date May 11, 2000 /s/ Dale L. Medford ----------------- ------------------- Dale L. Medford Corporate Vice President, Finance and Chief Financial Officer 16 EX-27 2 EXHIBIT 27
5 U.S. 6-MOS SEP-30-2000 OCT-01-1999 MAR-31-2000 1 102,659 0 248,256 4,602 88,165 479,585 444,022 237,460 1,306,987 209,681 295,834 0 0 96,446 412,989 1,306,987 541,520 845,724 331,097 443,053 0 0 12,766 109,091 44,823 64,268 0 0 0 64,268 0.83 0.81
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