-----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, IDqjY+LtQxHwgSnB4jgeYYSbPDByWtAqFnf6VCinfQt7sfqOsGBzLOP+Q1UxUHun SGNMgh+YI0JCpFcUzAfQhQ== 0000950152-97-003993.txt : 19970520 0000950152-97-003993.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950152-97-003993 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-10147 FILM NUMBER: 97607969 BUSINESS ADDRESS: STREET 1: 115 S LUDLOW ST CITY: DAYTON STATE: OH ZIP: 45402 BUSINESS PHONE: 5134432000 MAIL ADDRESS: STREET 1: P.O. BOX 2608 CITY: DAYTON STATE: OH ZIP: 45401 10-Q 1 REYNOLDS & REYNOLDS 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, 1997 0-132 ----- (Commission file number) THE REYNOLDS AND REYNOLDS COMPANY --------------------------------- (Exact name of registrant as specified in its charter) OHIO 31-0421120 ---- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 115 SOUTH LUDLOW STREET, DAYTON, OHIO 45402 ------------------------------------------- (Address of principal executive offices) (513) 443-2000 -------------- (Registrant's telephone number) NONE ---- (Former name, former address and former fiscal year, if changed since last report) 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 13, 1997, 80,324,102 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, 1997 and 1996 3 Condensed Consolidated Balance Sheets As of March 31, 1997 and September 30, 1996 4 Condensed Statements of Consolidated Cash Flows For the Six Months Ended March 31, 1997 and 1996 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, 1997 and 1996 8 PART II. OTHER INFORMATION Item 4. Results of Votes of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996 (In thousands except per share data)
Three Months Six Months ------------------------- ---------------------------- 1997 1996 1997 1996 -------- --------- --------- ---------- Net Sales and Revenues Information systems Products $254,577 $173,180 $474,914 $324,725 Services 92,100 77,358 178,946 152,946 -------- -------- -------- -------- Total information systems 346,677 250,538 653,860 477,671 Financial services 7,525 6,466 14,649 12,700 -------- -------- -------- -------- Total net sales and revenues 354,202 257,004 668,509 490,371 -------- -------- -------- -------- Costs and Expenses Information systems Cost of sales Products 154,265 98,849 284,118 185,803 Services 35,988 31,761 68,987 60,553 -------- -------- -------- -------- Total cost of sales 190,253 130,610 353,105 246,356 Selling, general and administrative expenses 113,689 83,439 216,006 160,926 Financial services 3,612 2,872 6,997 5,734 -------- -------- -------- -------- Total costs and expenses 307,554 216,921 576,108 413,016 -------- -------- -------- -------- Operating Income 46,648 40,083 92,401 77,355 -------- -------- -------- -------- Other Charges (Income) Interest expense 2,708 941 4,357 1,959 Interest income (822 (326) (1,235) (986) Other (387 (463) (675) (738) -------- -------- -------- -------- Total other charges 1,499 152 2,447 235 -------- -------- -------- -------- Income Before Income Taxes 45,149 39,931 89,954 77,120 Provision For Income Taxes 18,882 16,973 38,187 32,776 -------- -------- -------- -------- Net Income $ 26,267 $ 22,958 $ 51,767 $ 44,344 ======== ======== ======== ======== Earnings Per Common Share $ 0.31 $ 0.27 $ 0.61 $ 0.52 ======== ======== ======== ======== Average Number of Common Shares Outstanding 85,150 84,870 85,094 85,127 ======== ======== ======== ======== Cash Dividends Declared Per Common Share $ 0.08 $ 0.06 $ 0.16 $ 0.12 ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 3 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997 AND SEPTEMBER 30, 1996 (In thousands)
3/31/97 9/30/96 --------- -------- INFORMATION SYSTEMS ASSETS Current Assets Cash and equivalents $49,389 $11,130 Accounts receivable 181,431 161,278 Inventories 56,244 53,202 Other current assets 48,317 45,473 ---------- -------- Total current assets 335,381 271,083 Property, Plant and Equipment, less accumulated depreciation of $187,408 at 3/31/97 and $173,587 at 9/30/96 185,266 167,667 Goodwill 102,092 94,969 Other Intangible Assets 31,563 25,784 Other Assets 43,702 50,859 ---------- -------- Total Information Systems Assets 698,004 610,362 ---------- -------- FINANCIAL SERVICES ASSETS Finance Receivables 343,216 311,576 Cash and Other Assets 1,270 1,706 ---------- -------- Total Financial Services Assets 344,486 313,282 ---------- -------- Total Assets $1,042,490 $923,644 ========== ======== INFORMATION SYSTEMS LIABILITIES Current Liabilities $166,832 $167,278 Long-Term Debt 134,752 84,601 Other Liabilities 68,883 63,216 ---------- -------- Total Information Systems Liabilities 370,467 315,095 ---------- -------- FINANCIAL SERVICES LIABILITIES Notes Payable 184,665 161,911 Other Liabilities 81,018 73,643 ---------- -------- Total Financial Services Liabilities 265,683 235,554 ---------- -------- SHAREHOLDERS' EQUITY Capital Stock 53,824 51,226 Other Adjustments (6,477) (6,203) Retained Earnings 358,993 327,972 ---------- -------- Total Shareholders' Equity 406,340 372,995 ---------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,042,490 $923,644 ========== ========
See Notes to Condensed Consolidated Financial Statements. 4 5 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996 (In thousands)
1997 1996 -------- --------- INFORMATION SYSTEMS Cash Flows Provided By Operating Activities $76,891 $43,806 -------- -------- Cash Flows Provided By (Used For) Investing Activities Business combinations (54,634) (10,318) Capital expenditures (21,277) (19,251) Net proceeds from asset sales 9,027 1,223 Capitalization of software licensed to customers (970) (2,486) Repayments from (advances to) financial services 2,009 (1,802) -------- -------- Net cash flows used for investing activities (65,845) (32,634) -------- -------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 99,510 Principal payments on debt (58,106) (1,834) Cash dividends paid (6,567) (4,955) Capital stock issued 1,400 707 Capital stock repurchased (8,750) (16,666) -------- -------- Net cash flows provided by (used for) financing activities 27,487 (22,748) -------- -------- Effect of Exchange Rate Changes on Cash (274) (233) -------- -------- Increase (Decrease) in Cash and Equivalents 38,259 (11,809) Cash and Equivalents, Beginning of Period 11,130 18,366 -------- -------- Cash and Equivalents, End of Period $49,389 $6,557 ======== ======== FINANCIAL SERVICES Cash Flows Provided By Operating Activities $9,815 $8,167 -------- -------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (75,540) (58,147) Collections on finance receivables 44,655 36,628 -------- -------- Net cash flows used for investing activities (30,885) (21,519) -------- -------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 47,125 29,950 Principal payments on debt (24,371) (19,063) Advances from (repayments to) information systems (2,009) 1,802 -------- -------- Net cash flows provided by financing activities 20,745 12,689 -------- -------- Decrease in Cash and Equivalents (325) (663) Cash and Equivalents, Beginning of Period 1,293 663 -------- -------- Cash and Equivalents, End of Period $968 $0 ======== ========
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, 1996, 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
1997 1996 --------------- --------------- Finished products $45,656 $42,953 Work in process 2,827 3,788 Raw materials and supplies 7,761 6,461 --------------- --------------- Total inventories $56,244 $53,202 =============== ===============
3) BUSINESS COMBINATIONS Effective December 31, 1996, the company purchased substantially all net assets of Vanier Graphics Corporation from American Business Products for about $47,000, subject to finalization of the purchase price. Vanier, a provider of business forms and related forms management and workflow analysis services, had 1996 sales of about $130,000. The purchase price was paid in cash using proceeds from the Company's issuance of notes in a public offering. This business combination was accounted for as a purchase. The total purchase price was preliminarily allocated to the assets and liabilities of the acquired company. Estimated goodwill recorded in accounting for the Vanier transaction is being amortized on a straight-line basis over fifteen years. Recorded liabilities included the costs to exit duplicate manufacturing facilities of Vanier. These liabilities included the cost of closing four Vanier manufacturing plants, twelve distribution facilities and an administrative building. At March 31, 1997 the company had closed one manufacturing plant and eight distribution facilities. As of December 31, 1996 key elements of the costs accrued for exiting duplicate facilities were involuntary termination benefits of $2,125 and lease costs of $700. Involuntary termination benefits represent severance payments and outplacement services for 201 employees, comprised principally of manufacturing employees. Through March 31, 1997, $262 of involuntary termination benefits were paid to 31 employees and $12 of lease costs were paid. The company recorded the assets of the duplicate Vanier facilities as current assets held for sale. At December 31, 1996, these assets of $2,700 were recorded at estimated fair market value less disposal costs. At March 31, 1997, $1,865 of these assets had been sold. During March 1997 the company completed the purchase of a small healthcare systems company with electronic medical records and clinical management capabilities. The purchase price of about $7,500 was preliminarily allocated to the assets acquired and liabilities assumed pending the outcome of an appraisal. It is estimated that no goodwill will be recorded for this transaction. In fiscal year 1996, the company purchased Duplex Products Inc. and recorded liabilities for the costs to exit duplicate manufacturing, distribution and administrative facilities of Duplex. These liabilities included the cost of closing seven Duplex manufacturing plants, five distribution facilities and an administrative building. At March 31, 1997 the company had closed six of the manufacturing plants, three distribution facilities and the administrative building. 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 March 31, 1997, $4,877 of involuntary termination benefits were paid to 340 employees and $638 of relocation costs and $178 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 estimated fair market value less disposal costs. At March 31, 1997, $9,293 of these assets had been sold. 6 7 (4) FINANCING ARRANGEMENTS In December 1996, the company received proceeds of $99,510 in connection with the issuance of $100,000 of notes in a public offering. Interest on the notes is payable each June and December at an annual interest rate of 7%. Principal is due at the end of the ten year life of the notes. The proceeds were used to retire debt incurred in the purchase of Duplex Products and to fund the purchase of Vanier Graphics. (5) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities.
1997 1996 -------------- --------------- INFORMATION SYSTEMS Net Income $47,179 $40,170 Depreciation and Amortization 25,482 20,657 Deferred Income Taxes 2,485 (3,463) Deferred Income Taxes Transferred to Financial Services 3,273 555 Losses on Sales of Assets (240) (56) Changes in Operating Assets and Liabilities Accounts receivable (2,240) (2,749) Inventories 6,781 2,417 Prepaid expenses and other current assets (6,958) (3,581) Intangible and other assets 5,295 (4,365) Accounts payable (2,942) 832 Accrued liabilities (6,052) (7,976) Other liabilities 4,828 1,365 -------------- --------------- Net Cash Provided by Operating Activities $76,891 $43,806 ============== =============== FINANCIAL SERVICES Net Income $4,588 $4,174 Deferred Income Taxes 6,818 2,754 Deferred Income Taxes Transferred from Information Systems (3,273) (555) Changes in Receivables, Other Assets and Other Liabilities 1,682 1,794 -------------- --------------- Net Cash Provided by Operating Activities $9,815 $8,167 ============== ===============
6) 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. 7 8 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. During the quarter ended June 30, 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 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 March 31, 1997 potential remediation costs are uncertain. The company has accrued its estimated share of response costs for environmental remediation sites as of March 31, 1997 and believes that the reasonably foreseeable resolution will not have a material adverse effect on the financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE REYNOLDS AND REYNOLDS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996 (Dollars in thousands except per share data) BUSINESS COMBINATIONS During 1997 and 1996 the company purchased two large business forms and forms management companies. Effective December 31, 1996 the company purchased substantially all net assets of Vanier Graphics Corporation from American Business Products. On May 20, 1996 the company purchased the stock of Duplex Products Inc. in a cash tender offer. The company expects to retain about $100,000 of sales from Vanier and about $200,000 of sales from Duplex. These businesses were purchased at favorable prices because these businesses had not performed at optimum levels in recent years. The addition of these businesses to the company's own business forms and forms management offerings reduced gross profit percentages and operating margins because of the lower earnings these businesses were generating. As these businesses are successfully integrated into existing operations margins should improve to the level of the company's other general business forms and forms management offerings. RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
Second Quarter Six Months --------------------------------------- ----------------------------------------- 1997 1996 Change % Change 1997 1996 Change % Change -------- -------- ------- -------- -------- -------- -------- -------- Revenues $354,202 $257,004 $97,198 38% $668,509 $490,371 $178,138 36% Gross profit $156,424 $119,928 $36,496 30% $300,755 $231,315 $69,440 30% Operating income $46,648 $40,083 $6,565 16% $92,401 $77,355 $15,046 19% Net income $26,267 $22,958 $3,309 14% $51,767 $44,344 $7,423 17% Earnings per share $0.31 $0.27 $0.04 15% $0.61 $0.52 $0.09 17%
Consolidated revenues increased significantly over last year in both the second quarter and six months. About $81,000 of the second quarter's sales growth and $138,000 of the year-to-date sales increase was the result of the 1997 purchase of 8 9 Vanier Graphics and the 1996 acquisitions of Duplex Products. The balance of the revenue increase came from growth in computer systems, forms management and financial services. The consolidated gross profit percentage was 45.1% of information systems revenues in the second quarter, compared to 47.9% last year. Through six months the consolidated gross profit margin was 46.0% versus 48.4% a year ago. The decline in gross profit percentages resulted almost entirely from the lower margin business forms products acquired in the Vanier and Duplex business combinations. These forms management and general printing businesses have lower margins than the company's automotive forms and computer systems businesses. Over time, as the newly acquired businesses are fully integrated with existing operations, the gross profit margins of the acquired businesses should improve to the same 35% - 40% level as the company's other forms management and general printing businesses. Computer systems gross profit percentage was nearly the same as last year for both the second quarter and six months. Selling, general and administrative (SG&A) expenses declined to 32.8% of revenues in the second quarter from 33.3% last year. Year-to-date SG&A expenses were 33.0% of sales, compared to 33.7% last year. SG&A expenses declined as a percentage of sales for both business forms and computer systems. Business forms SG&A percentage fell primarily as a result of the business combinations and the integration of acquired businesses. Computer systems SG&A expenses declined in spite of the continued investment in healthcare systems. The consolidated operating income percentage was 13.2% of revenues in the second quarter, compared to 15.6% last year. Through six months the consolidated operating margin was 13.8% versus 15.8% a year ago. The decline in operating profit percentages resulted primarily from the lower operating margins of the Vanier and Duplex. These forms management and general printing businesses have lower margins than the company's automotive forms and computer systems businesses. Over time, as the newly acquired businesses are fully integrated with existing operations, the operating income margins of the acquired businesses should improve to the 10% range, consistent with the company's other forms management and general printing businesses. The company adjusted its effective income tax rate in the second quarter to better reflect its estimated annual effective rate. Through six months the effective income tax rate was 42.5%, compared to 42.2% for the twelve months of fiscal year 1996. Annualized return on average shareholders' equity was 25.3%, compared to 24.7% at March 31, 1996. COMPUTER SYSTEMS (excluding financial services)
Second Quarter Six Months ---------------------------------------- ---------------------------------------- 1997 1996 Change % Change 1997 1996 Change % Change -------- -------- ------- -------- ------- -------- ------ -------- Revenues $135,049 $117,086 $17,963 15% $261,461 $227,553 $33,908 15% Gross profit $65,900 $56,564 $9,336 17% $127,338 $111,669 $15,669 14% % of revenues 48.8% 48.3% 48.7% 49.1% Operating income $19,814 $16,532 $3,282 20% $37,843 $33,166 $4,677 14% % of revenues 14.7% 14.1% 14.5% 14.6%
Computer systems revenues grew for the second quarter and six months primarily because of higher recurring service revenues and growing sales of newer products in the automotive businesses. Recurring service revenues continued to grow, primarily because of the increased number of ERA software applications supported. Sales of newer products and services such as SalesVision, the SalesVision Vehicle Kiosk, Customer Marketing Services, laser solutions and a document management system provided about 25% of the sales growth. Healthcare systems sales represented a double digit percentage increase over last year for both the second quarter and six months. Business combinations, primarily electronic forms systems acquired as part of the purchase of Vanier Graphics, contributed about $3,000 of sales in the quarter. Computer systems gross profit and operating income grew consistent with the sales growth . The slight fluctuations in gross profit percentages resulted from variations in healthcare systems margins as automotive gross profit margins remained stable. SG&A expenses grew slightly slower than revenues in both the quarter and six months. Healthcare systems continued to operate at a loss because of continued investments in the organization's products and capabilities. 9 10 BUSINESS FORMS
Second Quarter Six Months ---------------------------------------- ---------------------------------------- 1997 1996 Change % Change 1997 1996 Change % Change -------- -------- ------- -------- ------- -------- ------ -------- Revenues $211,628 $133,452 $78,176 59% $392,399 $250,118 $142,281 57% Gross profit $90,524 $63,364 $27,160 43% $173,417 $119,646 $53,771 45% % of revenues 42.8% 47.5% 44.2% 47.8% Operating income $22,921 $19,957 $2,964 15% $46,906 $37,223 $9,683 26% % of revenues 10.8% 15.0% 12.0% 14.9%
Business forms revenues rose for the second quarter and six months primarily because of 1997 and 1996 business combinations which contributed about $77,000 of the second quarter revenue growth and $134,000 of the year-to-date sales increase. In the second quarter forms management revenues increased over last year excluding the effect of business combinations. However this increase was substantially offset by lower sales of non-forms management products and automotive forms. Year-to-date forms management revenues grew more than 10% over last year. Automotive forms also increased over last year through six months. These sales increases were partially reduced by declines in sales of non-forms management products. The decline in the gross profit percentage from last year resulted from lower gross profit margins of Vanier and Duplex, as previously discussed. Excluding Vanier and Duplex, gross profit margins improved to 48.7% in the second quarter and 48.9% year-to-date. The company's cost of paper was stable in the second quarter and is expected to remain stable during the third quarter of fiscal year 1997. Business forms operating income grew significantly, primarily as a result of higher sales. SG&A expenses declined slightly as a percentage of sales because of the Vanier and Duplex business combinations. These businesses have lower SG&A expenses, as a percentage of sales, than the company's other businesses. The decline in the operating income percentage from last year resulted from lower operating income margins of Vanier and Duplex. Once the integration process is completed, Vanier and Duplex operating income margins should improve to about 10%, consistent with the company's existing forms management and general printing businesses. FINANCIAL SERVICES
Second Quarter Six Months ----------------------------------------- ---------------------------------------- 1997 1996 Change % Change 1997 1996 Change % Change ------- ------- ------- -------- ------- ------- ------- -------- Revenues $7,525 $6,466 $1,059 16% $14,649 $12,700 $1,949 15% Operating income $3,913 $3,594 $319 9% $7,652 $6,966 $686 10% % of revenues 52.0% 55.6% 52.2% 54.9%
Average finance receivables increased 19% over last year because of growing computer systems sales financed by the company. Financial services revenues grew because of interest earned on the higher receivable balances. Revenues grew slightly slower than the receivable balances because other non interest income declined slightly. Financial services operating income grew solidly because of higher revenues and a slight decline in interest rates on borrowings. The operating income percentage declined slightly because of the reduced other income and slightly higher bad debt expenses. 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 1997 the company did not enter into any new interest rate management agreements because current market conditions made fixed rate debt more attractive. 10 11 LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Information systems continued to provide strong cash flows from operating activities. Through the first six months of fiscal year 1997 operating cash flow was $76,891 compared to $43,806 last year. Fiscal year 1997's cash flow resulted primarily from information systems net income, adjusted for non-cash charges. This strong cash flow funded the company's investments for normal operations including capital expenditures of $21,277. About sixty percent of the capital expenditures related to business forms operations with the balance related to computer systems. Fiscal year 1997 capital expenditures in the ordinary course of business are anticipated to be about $45,000 to $50,000. Please read the Shareholders' Equity section regarding the payment of dividends and share repurchases. The first quarter purchase of Vanier Graphics accounted for the majority of cash spent on business combinations. The balance related to the second quarter purchase of a small healthcare systems company with electronic medical records and clinical management capabilities. Please read the capitalization section of this report regarding the financing of these business combinations. Financial services operating cash flows and collections on finance receivables 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 25.9% at March 31, 1997 and 21.0% at September 30, 1996. The increase reflects the issuance of $100,000 of notes in a public offering and the retirement of outstanding debt issued to initially finance the Duplex transaction. The balance of the proceeds was used to finance 1997 business combinations including Vanier. Remaining credit available under existing revolving credit agreements was $39,375 at March 31, 1997. This amount declined from December 1996 as credit lines were phased down subsequent to the public debt offering. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. The company estimates that cash flow from operations and cash available from existing credit agreements will be sufficient to fund fiscal year 1997 normal operations. Financial services' debt balances increased $22,754 during the first six months of fiscal year 1997. Proceeds were used for new finance receivables which increased $31,640 year-to-date. The company structures debt maturities to approximate the maturities of finance receivables. The company expects finance receivables to continue to increase because of growth in computer systems sales. 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 13, 1997, 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, 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 company's board of directors raised the quarterly dividend 14% to $.08 per Class A common share. The company has increased cash dividends per share 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 increased returns to shareholders. During the first half of fiscal year 1997, the company repurchased 319,200 Class A common shares for $8,750, an average price of $27.41 per share. As of March 31, 1997 the company could repurchase an additional 3,219,800 Class A common shares under existing board of directors' authorizations. After March 31, 1997 and through May 13, 1997 the company purchased 697,200 Class A common shares at an average price of $20.55 per share. ENVIRONMENTAL MATTERS See Note 6 to the Consolidated Financial Statements for a discussion of the company's environmental contingencies. 11 12 PART II - OTHER INFORMATION ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS At the Annual Meeting of Shareholders on February 13, 1997, 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 2000 --------------------------------- Cleve L. Killingsworth, Jr. 91,939,718 270,488 Dale L. Medford 91,987,643 222,563 Gayle B. Price, Jr. 90,867,209 1,342,997 Kenneth W. Thiele 90,787,858 1,422,348 One-year term expiring in 1998 ------------------------------ Robert C. Nevin 91,977,366 232,840 The following individuals' terms of office as directors continued after the meeting; Joseph N. Bausman, Dr. David E. Fry, Richard H. Grant, Jr., Richard H. Grant, III, David R. Holmes, Allan Z. Loren, Martin D. Walker Issue 2 Proposal to Increase the Number of Authorized Class A and Class B Common Shares Shares For 86,802,777 Shares Against 5,140,467 Shares Abstain 266,962 Issue 3 Proposal to Reclassify Common Shares to "No Par Value" Shares Class A Proposal Class B Proposal Shares For 70,047,596 Shares For 20,000,000 Shares Against 1,530,348 Shares Against 0 Shares Abstain 632,266 Shares Abstain 0 Issue 4 Appointment of Deloitte & Touche LLP as Independent Auditors Shares For 90,899,238 Shares Against 1,172,168 Shares Abstain 138,800 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1997. 12 13 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 13, 1997 /s/ David R. Holmes ------------ --------------------------------------- David R. Holmes Chairman of the Board, President and Chief Executive Officer Date May 13, 1997 /s/ Dale L. Medford ------------ --------------------------------------- Dale L. Medford Vice President, Corporate Finance and Chief Financial Officer 13 EX-27 2 EXHIBIT 27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 U.S. 6-MOS SEP-30-1997 OCT-01-1996 MAR-31-1997 49,389 0 187,719 6,288 56,244 335,381 372,674 187,408 1,042,490 166,832 264,797 53,824 0 0 352,516 1,042,490 474,914 668,509 284,118 353,105 0 0 9,687 89,954 38,187 51,767 0 0 0 51,767 $0.61 $0.61
-----END PRIVACY-ENHANCED MESSAGE-----