-----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, MJW298hbJquX/cg5k/Z9hO16+SQxHJX8K2b4cdXFSONEQjHk1OEj+E4j69JxlOok eoubKRgrioYbrsrcF2ToNA== 0000950152-98-006790.txt : 19980817 0000950152-98-006790.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950152-98-006790 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: SEC FILE NUMBER: 001-10147 FILM NUMBER: 98688409 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 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 JUNE 30, 1998 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 of incorporation or organization) (I.R.S. Employer Identification No.) 115 SOUTH LUDLOW STREET, DAYTON, OHIO 45402 ------------------------------------------- (Address of principal executive offices) (937) 485-2000 -------------- (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 August 10, 1998, 77,731,442 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 Nine Months Ended June 30, 1998 and 1997 3 Condensed Consolidated Balance Sheets As of June 30, 1998 and September 30, 1997 4 Condensed Statements of Consolidated Cash Flows For the Nine Months Ended June 30, 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 and Nine Months Ended June 30, 1998 and 1997 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997 (In thousands except per share data)
Three Months Nine Months ---------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net Sales and Revenues Information systems Products $270,208 $235,803 $804,073 $710,717 Services 105,789 94,470 310,742 273,416 ----------- ----------- ----------- ----------- Total information systems 375,997 330,273 1,114,815 984,133 Financial services 8,788 7,787 25,455 22,436 ----------- ----------- ----------- ----------- Total net sales and revenues 384,785 338,060 1,140,270 1,006,569 ----------- ----------- ----------- ----------- Costs and Expenses Information systems Cost of sales Products 167,077 145,121 495,292 429,239 Services 43,711 40,602 124,813 109,589 ----------- ----------- ----------- ----------- Total cost of sales 210,788 185,723 620,105 538,828 Selling, general and administrative expenses 128,028 127,823 369,308 343,829 Financial services 4,106 3,772 13,038 10,769 ----------- ----------- ----------- ----------- Total costs and expenses 342,922 317,318 1,002,451 893,426 ----------- ----------- ----------- ----------- Operating Income 41,863 20,742 137,819 113,143 ----------- ----------- ----------- ----------- Other Charges (Income) Interest expense 5,988 2,797 12,597 7,154 Interest income (676) (798) (1,651) (2,033) Other 502 (380) 2,007 (1,055) ----------- ----------- ----------- ----------- Total other charges 5,814 1,619 12,953 4,066 ----------- ----------- ----------- ----------- Income Before Income Taxes 36,049 19,123 124,866 109,077 Provision For Income Taxes 10,000 11,845 48,709 50,032 ----------- ----------- ----------- ----------- Net Income $26,049 $7,278 $76,157 $59,045 =========== =========== =========== =========== Basic Earnings Per Common Share $0.33 $0.09 $0.96 $0.72 =========== =========== =========== =========== Diluted Earnings Per Common Share $0.32 $0.09 $0.93 $0.70 =========== =========== =========== =========== Average Number of Common Shares Outstanding 79,435 81,487 79,692 81,882 =========== =========== =========== =========== Average Number of Common Shares and Common Share Equivalents Outstanding 81,442 83,734 81,614 84,656 =========== =========== =========== =========== Cash Dividends Declared Per Common Share $0.09 $0.08 $0.27 $0.24 =========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements. 3 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND SEPTEMBER 30, 1997 (In thousands)
6/30/98 9/30/97 ----------- ----------- INFORMATION SYSTEMS ASSETS Current Assets Cash and equivalents $31,665 $7,604 Accounts receivable 209,052 197,215 Inventories 70,428 75,645 Other current assets 35,466 47,463 ----------- ----------- Total current assets 346,611 327,927 Property, Plant and Equipment, less accumulated depreciation of $208,223 at 6/30/98 and $193,190 at 9/30/97 176,536 188,501 Goodwill 84,500 94,241 Other Intangible Assets 16,198 22,301 Other Assets 100,635 96,365 ----------- ----------- Total Information Systems Assets 724,480 729,335 ----------- ----------- FINANCIAL SERVICES ASSETS Finance Receivables 396,747 372,073 Cash and Other Assets 746 1,102 ----------- ----------- Total Financial Services Assets 397,493 373,175 ----------- ----------- TOTAL ASSETS $1,121,973 $1,102,510 =========== =========== INFORMATION SYSTEMS LIABILITIES Current Liabilities $227,410 $208,579 Long-Term Debt 128,157 170,150 Other Liabilities 77,146 74,662 ----------- ----------- Total Information Systems Liabilities 432,713 453,391 ----------- ----------- FINANCIAL SERVICES LIABILITIES Notes Payable 208,263 198,314 Other Liabilities 93,377 86,575 ----------- ----------- Total Financial Services Liabilities 301,640 284,889 ----------- ----------- SHAREHOLDERS' EQUITY Capital Stock 57,896 53,894 Other Adjustments (6,354) (5,481) Retained Earnings 336,078 315,817 ----------- ----------- Total Shareholders' Equity 387,620 364,230 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,121,973 $1,102,510 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 4 5 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997 (In thousands)
1998 1997 ---------- ---------- INFORMATION SYSTEMS Cash Flows Provided By Operating Activities $ 115,540 $ 125,922 ---------- ---------- Cash Flows Provided By (Used For) Investing Activities Business combinations (1,525) (70,537) Capital expenditures (25,137) (28,564) Net proceeds from asset sales 15,665 13,480 Capitalization of software licensed to customers (654) (1,253) Repayments from (advances to) financial services (5,966) 5,060 ---------- ---------- Net cash flows used for investing activities (17,617) (81,814) ---------- ---------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 99,510 Principal payments on debt (18,146) (59,854) Cash dividends paid (21,518) (19,636) Capital stock issued 2,260 1,204 Capital stock repurchased (35,584) (40,456) ---------- ---------- Net cash flows used for financing activities (72,988) (19,232) ---------- ---------- Effect of Exchange Rate Changes on Cash (874) (225) ---------- ---------- Increase in Cash and Equivalents 24,061 24,651 Cash and Equivalents, Beginning of Period 7,604 11,130 ---------- ---------- Cash and Equivalents, End of Period $ 31,665 $ 35,781 ========== ========== FINANCIAL SERVICES Cash Flows Provided By Operating Activities $ 14,548 $ 14,521 ---------- ---------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (110,871) (108,823) Collections on finance receivables 79,925 67,963 ---------- ---------- Net cash flows used for investing activities (30,946) (40,860) ---------- ---------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 53,293 67,150 Principal payments on debt (43,344) (36,255) Advances from (repayments to) information systems 5,966 (5,060) ---------- ---------- Net cash flows provided by financing activities 15,915 25,835 ---------- ---------- Decrease in Cash and Equivalents (483) (504) Cash and Equivalents, Beginning of Period 920 1,293 ---------- ---------- Cash and Equivalents, End of Period $ 437 $ $789 ========== ==========
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, 1997, 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 and items mentioned in Note 5) necessary to present fairly the company's financial position, results of operations and cash flows for the periods presented. (2) INVENTORIES
6/30/98 9/30/97 ---------- ---------- Finished products $58,352 $59,683 Work in process 5,311 6,256 Raw materials and supplies 6,765 9,706 ---------- ---------- Total inventories $70,428 $75,645 ========== ==========
(3) EARNINGS PER SHARE In February 1997 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) Statement No. 128, "Earnings per Share." This statement, effective for interim and annual periods ending after December 15, 1997, requires the company to present basic earnings per share (EPS) and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding during the period. The company's common share equivalents represent the effect of employee stock options. Prior year earnings per share amounts have been restated to comply with this pronouncement. (4) 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. These liabilities included the costs to close two manufacturing and distribution facilities. At June 30, 1998, one of the facilities had been closed. In June the company announced that the remaining facility would be closed in January 1999. During the third quarter of 1998 the company revised these estimates based on updated information and accrued $882 of additional liabilities for costs to exit duplicate facilities. This adjustment was reflected in the allocation of the purchase price and did not effect net income for the quarter. As of the revised July 1, 1997 opening balance sheet, key elements of the costs accrued for exiting duplicate facilities were involuntary termination benefits of $2,665 and relocation costs of $416. Involuntary termination benefits represent severance payments and outplacement services for 171 employees, principally manufacturing employees. Through June 30, 1998, $704 of involuntary termination benefits were paid to 56 employees and $3 of relocation costs were paid. The company recorded the assets of the duplicate facilities as current assets held for sale. As of the revised July 1, 1997 opening balance sheet, these assets of $3,814 were recorded at estimated fair market value less disposal costs. At June 30, 1998 $1,604 of these assets had been sold. (5) TAX BENEFITS AND SPECIAL CHARGES During the third quarter of fiscal year 1998 the company favorably resolved several open tax audits and recorded a gain of $4,910 or $.06 per share. This gain resulted principally from the reversal of tax accruals and was reflected in the income tax provision. The company also reclassified interest accrued for future tax issues from the tax accrual to the interest accrual. The interest reclassification had no effect on net income because higher interest expense to establish the interest accrual was offset by tax benefits from reducing the tax accruals. Also during the third quarter of fiscal year 1998 the company recorded a pre-tax charge of $7,436. This charge represented the write-off of certain assets, primarily in the automotive systems business, which the company will no longer use or whose asset value was no longer supported by undiscounted cash flows. The charge increased computer systems cost of sales $1,308, business forms cost of sales $505, computer systems selling, general and administrative (SG&A) expenses $4,579 and business forms SG&A expenses $1,044. After income taxes, the charge reduced net income by $4,860 or $.06 per 6 7 share. The income tax benefit on the special charges charge represented a 34.6% effective tax rate because not all of the charges were tax deductible. (6) ACCOUNTING STANDARDS In June 1997 the FASB issued SFAS Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement, effective for financial statements for fiscal years beginning after December 15, 1997, requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Upon adoption of this pronouncement, the company's reportable operating segments will be the Automotive Division, the Business Systems Division and the Healthcare Systems Division. The company will also continue to present financial services as a reportable operating segment. The Automotive Division provides integrated computer systems products and services and business forms to automobile dealers. The Business Systems Division manufactures and distributes printed business forms and systems and provides forms management services to general business markets. The Healthcare Systems Division provides integrated computer systems products and services to both office-based and hospital-based physicians. The company plans to elect early compliance with this pronouncement effective September 30, 1998. Selected pro forma financial information (including all special charges) for the three and nine months ended June 30, 1998 and 1997.
Three Months Nine Months ----------------------------------- --------------------------------- 1998 1997 1998 1997 ------------------ --------------- --------------- --------------- AUTOMOTIVE DIVISION Net Sales and Revenues $188,593 $168,852 $540,855 $504,498 Gross Profit $100,866 $87,495 $293,342 $268,472 Operating Income $36,742 $30,321 $116,307 $104,277 BUSINESS SYSTEMS DIVISION Net Sales and Revenues $174,088 $153,736 $536,738 $452,420 Gross Profit $59,598 $56,007 $187,732 $168,576 Operating Income $7,820 $8,041 $31,616 $33,778 HEALTHCARE SYSTEMS DIVISION Net Sales and Revenues $13,554 $7,784 $37,665 $27,486 Gross Profit $4,745 $1,048 $13,636 $8,257 Operating Loss $(3,517) $(17,304) $(11,013) $(24,150) FINANCIAL SERVICES Net Sales and Revenues $8,788 $7,787 $25,455 $22,436 Operating Income $4,682 $4,015 $12,417 $11,667 ELIMINATION OF INTERSEGMENT SALES $(238) $(99) $(443) $(271) UNALLOCATED CORPORATE EXPENSES $(3,864) $(4,331) $(11,508) $(12,429)
7 8 In May the SEC issued guidance requiring companies that present unaudited SFAS No. 131 segment data in interim periods earlier than required, to present information on the same basis for comparable periods of the prior year. Exhibit 99 contains fiscal year 1997 segment data which was not included in previous Form 10-Q filings. In October 1997 the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which supersedes 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 will be effective for transactions entered into in fiscal years beginning after December 15, 1997. The company has not determined the effect that this pronouncement will have on its revenue recognition practices. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Gains or losses resulting from changes in fair values of derivatives are recorded either as a separate component of shareholders' equity or in the income statement depending upon whether the instruments meet the criteria for hedge accounting. This statement is effective for all fiscal quarters for fiscal years beginning after June 15, 1999 (fiscal year 2000 as to the company). The company has not yet determined the effect of this pronouncement. See the Management's Discussion and Analysis section of this filing for a description of the company's derivative instruments. (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 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 9 (8) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities.
1998 1997 --------------- --------------- INFORMATION SYSTEMS Net Income $68,752 $52,049 Purchased In-Process Research and Development Costs 11,000 Depreciation and Amortization 46,173 44,374 Deferred Income Taxes (5,067) (344) Deferred Income Taxes Transferred to Financial Services 1,528 3,945 Gains on Sales of Assets (951) (172) Changes in Operating Assets and Liabilities Accounts receivable (7,553) 5,872 Inventories 5,305 7,796 Prepaid expenses and other current assets 2,753 (7,081) Intangible and other assets 5,323 4,336 Accounts payable 2,257 (3,248) Accrued liabilities (5,399) 1,154 Other liabilities 2,419 6,241 --------------- --------------- Net Cash Provided by Operating Activities $115,540 $125,922 =============== =============== FINANCIAL SERVICES Net Income $7,405 $6,996 Deferred Income Taxes 5,778 9,563 Deferred Income Taxes Transferred from Information Systems (1,528) (3,945) Changes in Receivables, Other Assets and Other Liabilities 2,893 1,907 --------------- --------------- Net Cash Provided by Operating Activities $14,548 $14,521 =============== ===============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997 (Dollars in thousands except per share data) TAX BENEFITS AND SPECIAL CHARGES In the third quarter of fiscal year 1998 the company favorably resolved several tax audits and recorded a gain of $4,910 or $.06 per share. Recording this gain caused the company to record a lower tax rate for the quarter. The company also reclassified interest accrued for tax issues from the tax accrual to the interest accrual. The interest reclassification had no effect on net income, because higher interest expense to establish the interest accrual was offset by tax benefits from reducing the tax accruals. Also during the third quarter of fiscal year 1998 the company recorded a pre-tax charge of $7,436. This charge represents the write-off of certain assets, primarily in the automotive systems business, to streamline product offerings. The charge increased computer systems cost of sales $1,308, business forms cost of sales $505, computer systems selling, general and administrative (SG&A) expenses $4,579 and business forms SG&A expenses $1,044. After income taxes, the charge 9 10 reduced net income by $4,860 or $.06 per share. The income tax benefit on the special charges represented a 34.6% effective tax rate because not all of the charges were tax deductible. Excluding both the effect of special charges and the previously mentioned tax benefits, the effective tax rate was 43.7% for the third quarter and 43.6% for the nine months. During the third quarter of fiscal 1997 the company recorded a pre-tax charge of $17,063. The charge included $11,000 of in-process research and development costs acquired in connection with the 1997 purchases of Advanced Medical Applications Inc. and Fiscal Information Inc. The balance of the 1997 charge represented the write-off of certain assets, primarily in the automotive systems business. The charge increased computer systems cost of sales $3,934, computer systems SG&A expenses $12,684 and business forms SG&A expenses $445. After income taxes, the charge reduced net income by $12,573 or $.15 per share. The income tax benefit on the special charges represented a 26.3% effective tax rate because not all of the charges were tax deductible. RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
Third Quarter Nine Months --------------------------------------------- --------------------------------------------- 1998 1997 Change % Change 1998 1997 Change % Change -------- -------- ------- ------ ---------- --------- ----------- ----- AS REPORTED Revenues $384,785 $338,060 $46,725 14% $1,140,270 $1,006,569 $ 133,701 13% Gross profit $165,209 $144,550 $20,659 14% $494,710 $445,305 $49,405 11% Operating income $41,863 $20,742 $21,121 102% $137,819 $113,143 $24,676 22% Net income $26,049 $7,278 $18,771 258% $76,157 $59,045 $17,112 29% Basic earnings per share $0.33 $0.09 $0.24 267% $0.96 $0.72 $0.24 33% Diluted earnings per share $0.32 $0.09 $0.23 256% $0.93 $0.70 $0.23 33% EXCLUDING 1998 TAX BENEFITS AND 1998 AND 1997 SPECIAL CHARGES Revenues $384,785 $338,060 $46,725 14% $1,140,270 $1,006,569 $133,701 13% Gross profit $167,022 $148,484 $18,538 12% $496,523 $449,239 $47,284 11% Operating income $49,299 $37,805 $11,494 30% $145,255 $130,206 $15,049 12% Net income $25,999 $19,851 $6,148 31% $76,107 $71,618 $4,489 6% Basic earnings per share $0.33 $0.24 $0.09 38% $0.96 $0.87 $0.09 10% Diluted earnings per share $0.32 $0.24 $0.08 33% $0.93 $0.85 $0.08 9%
Consolidated revenues increased over last year as a result of growth in automotive computer systems revenues and sales from 1997 business combinations. About $32,000 of the third quarter sales growth resulted from the 1997 acquisitions of Crain-Drummond and Fiscal Information. About $117,000 of the year-to-date sales growth resulted from the 1997 acquisitions of Crain-Drummond, Vanier Graphics and Fiscal Information. Excluding the effect of business combinations, sales reflected strong growth in automotive and healthcare systems revenues, partially offset by a decline in business forms sales. The consolidated gross profit percentage (excluding the effect of special charges) was 44.4% of revenues (excluding financial services revenues) in the third quarter and 44.5% year-to-date, compared to 45.0% and 45.6% last year (also excluding special charges). Computer systems gross profit percentage increased over last year because of the growth in automotive recurring service revenues. Business forms gross profit percentage declined from last year, reflecting the lower margin products acquired in the Crain-Drummond business combination. Excluding Crain-Drummond, the business forms gross profit margins benefited from 1997 restructuring actions, however, this benefit was offset by the effect of lower sales. Consolidated operating income (excluding special charges) was 12.8% of revenues in the third quarter and 12.7% through nine months compared to 11.2% and 12.9% (also excluding special charges) last year, respectively. Business forms operating margins (excluding special charges) improved over last year in the third quarter because of the benefits of the 1997 restructuring actions and continued progress integrating business combinations. Computer systems operating margins (excluding special charges) increased over last year as automotive systems margins remained strong and healthcare systems operating loss declined. Annualized return on average shareholders' equity was 26.4%, compared to 20.7% (24.5% excluding 1997 special charges) at June 30, 1997. 10 11 COMPUTER SYSTEMS (excluding financial services)
Third Quarter Nine Months ------------------------------------------------ ------------------------------------------------ 1998 1997 Change % Change 1998 1997 Change % Change ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- AS REPORTED Revenues $156,442 $133,375 $23,067 17% $444,673 $394,836 $49,837 13% Gross profit $74,387 $59,649 $14,738 25% $217,879 $186,987 $30,892 17% % of revenues 47.5% 44.7% 49.0% 47.4% SG&A expenses $57,744 $60,395 ($2,651) -4% $158,244 $149,890 $8,354 6% % of revenues 36.9% 45.3% 35.6% 38.0% Operating income $16,643 ($746) $17,389 $59,635 $37,097 $22,538 61% % of revenues 10.6% -0.6% 13.4% 9.4% EXCLUDING 1998 AND 1997 SPECIAL CHARGES Revenues $156,442 $133,375 $23,067 17% $444,673 $394,836 $49,837 13% Gross profit $75,695 $63,583 $12,112 19% $219,187 $190,921 $28,266 15% % of revenues 48.4% 47.7% 49.3% 48.4% SG&A expenses $53,165 $47,711 $5,454 11% $153,665 $137,206 $16,459 12% % of revenues 34.0% 35.8% 34.6% 34.8% Operating income $22,530 $15,872 $6,658 42% $65,522 $53,715 $11,807 22% % of revenues 14.4% 11.9% 14.7% 13.6%
Computer systems revenues grew for the third quarter and nine months as both automotive and healthcare revenues increased over last year. Automotive's third quarter revenues reflected strong growth in both new systems sales and recurring service revenues. The year-to-date sales increase resulted primarily from higher recurring service revenues. Recurring service revenues continued to grow, primarily because of the increased number of ERA software applications supported. Healthcare Systems revenues increased for the third quarter and nine months because of increased new systems sales and the 1997 acquisition of Fiscal Information. Computer systems gross profit margins (excluding special charges) increased over last year's third quarter primarily because of improvement in healthcare systems gross profit margins as a result of higher sales. Year-to-date the gross profit margins (excluding special charges) increased primarily because of the strong growth of automotive recurring service revenues. Operating margins (excluding special charges) increased over last year for both the third quarter and the nine months as automotive margins remained strong and healthcare systems operating loss declined. SG&A expenses declined, as a percentage of revenues, in part because of benefits from the 1997 restructuring. BUSINESS FORMS
Third Quarter Nine Months ------------------------------------------------ ------------------------------------------------ 1998 1997 Change % Change 1998 1997 Change % Change ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Revenues $219,555 $196,898 $22,657 12% $670,142 $589,297 $80,845 14% Gross profit $90,822 $84,901 $5,921 7% $276,831 $258,318 $18,513 7% % of revenues 41.4% 43.1% 41.3% 43.8% SG&A expenses $70,284 $67,428 $2,856 4% $211,064 $193,939 $17,125 9% % of revenues 32.0% 34.2% 31.5% 32.9% Operating income $20,538 $17,473 $3,065 18% $65,767 $64,379 $1,388 2% % of revenues 9.4% 8.9% 9.8% 10.9% EXCLUDING 1998 AND 1997 SPECIAL CHARGES Revenues $219,555 $196,898 $22,657 12% $670,142 $589,297 $80,845 14% Gross profit $91,327 $84,901 $6,426 8% $277,336 $258,318 $19,018 7% % of revenues 41.6% 43.1% 41.4% 43.8% SG&A expenses $69,240 $66,983 $2,257 3% $210,020 $193,494 $16,526 9% % of revenues 31.5% 34.0% 31.4% 32.8% Operating income $22,087 $17,918 $4,169 23% $67,316 $64,824 $2,492 4% % of revenues 10.1% 9.1% 10.0% 11.0%
11 12 Business forms revenues rose for the third quarter and nine months because of the 1997 Crain-Drummond and Vanier Graphics business combinations which contributed about $30,000 to third quarter's sales growth and $108,000 to the year-to-date sales increase. Excluding the effect of business combinations, sales volumes declined from last year. During the third quarter paper manufacturers lowered paper prices several times. While this had little effect on third quarter sales, it could negatively effect fourth quarter sales as the lower paper costs are reflected in customer prices. The decline in gross profit margins from last year resulted primarily from lower gross profit margins of Crain-Drummond. The company did benefit from 1997 restructuring actions, however, this benefit was largely offset by lower sales (excluding business combinations). Changes to the cost of paper had little effect on third quarter gross profit margins. The company expects that the profit impact of lower paper costs will be offset by lower business forms sales prices in the fourth quarter. Business forms operating margin (excluding special charges) exceeded last year for the third quarter, but remained behind last year through nine months. During the first nine months of the fiscal year the company closed four manufacturing plants and incurred relocation and training expenses. These costs could not be accrued as part of the 1997 restructuring charge under existing accounting pronouncements. The company also incurred acquisition integration expenses for Duplex Products, Vanier Graphics and Crain-Drummond. These plant closing and integration expenses totaled about $500 in the third quarter and $3,300 through nine months. SG&A expenses declined as a percentage of sales for both the quarter and nine months primarily because of the effects of the business combinations which provided revenue growth and lower SG&A expenses as a percentage of sales. The company further reduced SG&A expenses, as a percentage of revenues, by eliminating duplicate administrative functions.
FINANCIAL SERVICES Third Quarter Nine Months ------------------------------------------------ ------------------------------------------------ 1998 1997 Change % Change 1998 1997 Change % Change ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Revenues $8,788 $7,787 $1,001 13% $25,455 $22,436 $3,019 13% Operating income $4,682 $4,015 $667 17% $12,417 $11,667 $750 6% % of revenues 53.3% 51.6% 48.8% 52.0%
Average finance receivables increased 15% over last year because of the continued high level of new computer systems sales. Financial services revenues grew because of interest earned on the higher receivables balances. Average interest rates declined slightly as interest rates on new receivables were less than those for maturing receivables. Financial services interest rate spread remained strong, exceeding 3% during the first nine months of fiscal year 1998. This interest rate spread declined slightly from last year because of higher borrowing rates in addition to the previously mentioned change in the receivables portfolio. Operating income grew at a slower rate than revenues because of the reduced interest rate spread and higher bad debt expenses recorded to maintain an adequate reserve for the growing receivables portfolio. 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 nine months of fiscal year 1998 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 nine months of the fiscal year. Operating cash flow was $115,540 and resulted primarily from net income, adjusted for noncash charges. Operating cash flow funded the company's investments for normal operations including capital expenditures and capitalized software of $25,791. Capital expenditures in the ordinary course of business are anticipated to be about $35,000 in fiscal year 1998. 12 13 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 30.9% at June 30, 1998 and 34.5% at September 30, 1997. Remaining credit available under existing revolving credit agreements was $105,200 at June 30, 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 1998 normal operations. During the second quarter of fiscal year 1998 the company issued $70,000 of medium-term notes and repaid short-term borrowings of financial services. Debt maturities ranged from one to four years and interest rates ranged from 5.875% to 6.12%. This debt continues to be reported with financial services notes payable. 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 August 10, 1998, 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 1997, the company's board of directors raised the quarterly dividend 13% to $.09 per Class A common share. The company has increased cash dividends per share twelve times since 1989 and paid dividends each year since the company's initial public offering in 1961. The company has conducted an active share repurchase program during recent years to provide increased returns to shareholders. During the third quarter of fiscal year 1998, the company repurchased 1,100,000 Class A common shares for $22,120 ($20.11 per share). During the first nine months of fiscal year 1998, the company repurchased 1,800,000 Class A common shares for $35,584 ($19.77 per share). As of June 30, 1998 the company could repurchase an additional 1,369,800 Class A common shares under existing board of directors' authorizations. YEAR 2000 COMPLIANCE The company has assessed potential year 2000 effects on its internal computer systems, systems provided to customers and other systems such as HVAC and security systems, including systems provided by third-party vendors. Detailed plans have been prepared to address year 2000 issues with software development scheduled to be completed by December 1998 in most instances. As of June 30, 1998, about 40% of the company's internal systems and systems provided to customers (including software from third party vendors) have been modified and determined to be year 2000 compliant. In July 1998, the company released a year 2000 compliant version of its ERA system for automobile dealers. Through June 30, 1998 the company has spent about $4,500 on year 2000 compliance efforts. In fiscal year 1998 these costs, consisting primarily of internal development and consulting costs, were about $1,400 in the third quarter and $3,600 year-to-date. The company estimates that the total costs (including costs already incurred) to make all systems year 2000 compliant will be about $15,000. However, there can be no assurance that the company will not incur unanticipated costs or systems interruptions which could have a material adverse effect on the company's business, financial condition or results of operations. ACCOUNTING STANDARDS See Note 6 to the Consolidated Financial Statements for a discussion of accounting pronouncements not yet adopted by the company. ENVIRONMENTAL MATTER See Note 7 to the Consolidated Financial Statements for a discussion of an environmental contingency. 13 14 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedules (99) Selected SFAS No. 131 Segment Data (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1998. 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 August 11, 1998 /s/ David R. Holmes ---------------- ---------------------------------- David R. Holmes Chairman of the Board, President and Chief Executive Officer Date August 11, 1998 /s/ Dale L. Medford ---------------- ---------------------------------- Dale L. Medford Vice President, Corporate Finance and Chief Financial Officer 15 EX-27 2 EXHIBIT 27
5 1,000 9-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 31,665 0 216,013 6,961 70,428 346,611 384,759 208,223 1,121,973 227,410 275,885 0 0 57,896 329,724 1,121,973 804,073 1,140,270 495,292 620,105 0 0 22,419 124,866 48,709 76,157 0 0 0 76,157 0.96 0.93
EX-99 3 EXHIBIT 99 1 EXHIBIT 99 THE REYNOLDS AND REYNOLDS COMPANY SELECTED SFAS NO. 131 SEGMENT DATA FISCAL YEAR ENDED SEPTEMBER 30, 1997
Three Months Ended -------------------------------------------------------- Fiscal Year 12/31/96 3/31/97 6/30/97 9/30/97 1997 ---------------------------------------------------------------------- AUTOMOTIVE Net Sales and Revenues $165,917 $169,729 $168,852 $176,647 $681,145 Gross Profit $89,805 $91,172 $87,495 $94,745 $363,217 Gross Margin 54.1% 53.7% 51.8% 53.6% 53.3% Operating Income $36,861 $37,095 $30,321 $20,968 $125,245 Operating Margin 22.2% 21.9% 18.0% 11.9% 18.4% BUSINESS SYSTEMS Net Sales and Revenues $132,054 $166,630 $153,736 $181,752 $634,172 Gross Profit $51,567 $61,002 $56,007 $64,648 $233,224 Gross Margin 39.0% 36.6% 36.4% 35.6% 36.8% Operating Income $12,030 $13,707 $8,041 $6,243 $40,021 Operating Margin 9.1% 8.2% 5.2% 3.4% 6.3% HEALTHCARE SYSTEMS Net Sales and Revenues $9,290 $10,412 $7,784 $12,860 $40,346 Gross Profit $2,959 $4,250 $1,048 $4,237 $12,494 Gross Margin 31.9% 40.8% 13.5% 32.9% 31.0% Operating Loss ($3,625) ($3,221) ($17,304) ($7,905) ($32,055) Operating Margin -39.0% -30.9% -222.3% -61.5% -79.5% FINANCIAL SERVICES Net Sales and Revenues $7,124 $7,525 $7,787 $7,947 $30,383 Operating Income $3,739 $3,913 $4,015 $3,434 $15,101 Operating Margin 52.5% 52.0% 51.6% 43.2% 49.7% ELIMINATION OF INTERSEGMENT SALES ($78) ($94) ($99) ($90) ($361) UNALLOCATED CORPORATE EXPENSES ($3,252) ($4,846) ($4,331) ($9,837) ($22,266)
-----END PRIVACY-ENHANCED MESSAGE-----