-----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, CPoFkTMH3ZqgtXsQR7B3pLyUPmWD1j3Drvg0SKhtrLWDCl+rkbEz9QIj34p2oaTd 599ARJQm1swcbbce30E1ig== 0000950152-99-006761.txt : 19990816 0000950152-99-006761.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950152-99-006761 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99686876 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 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, 1999 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 August 10, 1999, 77,239,290 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, 1999 and 1998 3 Condensed Consolidated Balance Sheets As of June 30, 1999 and September 30, 1998 4 Condensed Statements of Consolidated Cash Flows For the Nine Months Ended June 30, 1999 and 1998 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, 1999 and 1998 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15
2 3 THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (In thousands except per share data)
THREE MONTHS NINE MONTHS 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net Sales and Revenues Information systems Products $ 267,896 $ 259,210 $ 767,644 $ 773,826 Services 123,241 103,233 352,035 303,324 ----------- ----------- ----------- ----------- Total information systems 391,137 362,443 1,119,679 1,077,150 Financial services 9,942 8,788 29,044 25,455 ----------- ----------- ----------- ----------- Total net sales and revenues 401,079 371,231 1,148,723 1,102,605 ----------- ----------- ----------- ----------- Costs and Expenses Information systems Cost of sales Products 158,401 158,375 467,559 471,303 Services 49,226 43,604 136,265 124,773 ----------- ----------- ----------- ----------- Total cost of sales 207,627 201,979 603,824 596,076 Selling, general and administrative expenses 134,650 119,766 381,265 344,659 Financial services 4,492 4,106 13,420 13,038 ----------- ----------- ----------- ----------- Total costs and expenses 346,769 325,851 998,509 953,773 ----------- ----------- ----------- ----------- Operating Income 54,310 45,380 150,214 148,832 ----------- ----------- ----------- ----------- Other Charges (Income) Interest expense 3,248 5,988 9,888 12,597 Interest income (1,955) (674) (4,895) (1,605) Other (492) 493 27 2,009 ----------- ----------- ----------- ----------- Total other charges 801 5,807 5,020 13,001 ----------- ----------- ----------- ----------- Income Before Income Taxes 53,509 39,573 145,194 135,831 Provision for Income Taxes 22,252 11,402 60,427 52,693 ----------- ----------- ----------- ----------- Income From Continuing Operations 31,257 28,171 84,767 83,138 Discontinued Operations 0 (2,122) 5,785 (6,981) ----------- ----------- ----------- ----------- Net Income $ 31,257 $ 26,049 $ 90,552 $ 76,157 =========== =========== =========== =========== Basic Earnings Per Common Share Income From Continuing Operations $ 0.40 $ 0.35 $ 1.08 $ 1.04 Discontinued Operations $ 0.00 ($ 0.03) $ 0.07 ($ 0.09) Net Income $ 0.40 $ 0.33 $ 1.16 $ 0.96 Average Number of Common Shares Outstanding 78,014 79,435 78,338 79,692 Diluted Earnings Per Common Share Income From Continuing Operations $ 0.39 $ 0.35 $ 1.06 $ 1.02 Discontinued Operations $ 0.00 ($ 0.03) $ 0.07 ($ 0.09) Net Income $ 0.39 $ 0.32 $ 1.13 $ 0.93 Average Number of Common Shares Outstanding 80,207 81,442 80,290 81,614 Cash Dividends Declared Per Common Share $ 0.10 $ 0.09 $ 0.30 $ 0.27
See Notes to Condensed Consolidated Financial Statements. 3 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND SEPTEMBER 30, 1998 (In thousands)
6/30/99 9/30/98 ---------- ---------- INFORMATION SYSTEMS ASSETS Current Assets Cash and equivalents $122,981 $39,980 Accounts receivable 228,802 227,158 Inventories 73,647 66,196 Other current assets 33,479 38,713 ---------- ---------- Total current assets 458,909 372,047 Property, Plant and Equipment, less accumulated depreciation of $226,406 at 6/30/99 and $215,208 at 9/30/98 182,690 174,226 Goodwill 67,542 82,280 Other Intangible Assets 19,606 17,327 Other Assets 98,937 100,681 ---------- ---------- Total Information Systems Assets 827,684 746,561 ---------- ---------- FINANCIAL SERVICES ASSETS Finance Receivables 421,104 408,765 Cash and Other Assets 891 2,394 ---------- ---------- Total Financial Services Assets 421,995 411,159 ---------- ---------- TOTAL ASSETS $1,249,679 $1,157,720 ========== ========== INFORMATION SYSTEMS LIABILITIES Current Liabilities $227,204 $198,208 Long-Term Debt 169,623 161,541 Other Liabilities 87,779 83,703 ---------- ---------- Total Information Systems Liabilities 484,606 443,452 ---------- ---------- FINANCIAL SERVICES LIABILITIES Notes Payable 211,878 210,561 Other Liabilities 101,329 99,256 ---------- ---------- Total Financial Services Liabilities 313,207 309,817 ---------- ---------- SHAREHOLDERS' EQUITY Capital Stock 74,543 58,235 Other Adjustments (9,094) (9,727) Retained Earnings 386,417 355,943 ---------- ---------- Total Shareholders' Equity 451,866 404,451 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,249,679 $1,157,720 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 4 5 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (In thousands)
1999 1998 --------- --------- INFORMATION SYSTEMS Cash Flows Provided By Operating Activities $ 118,546 $ 115,540 --------- --------- Cash Flows Provided By (Used For) Investing Activities Business combinations (1,525) Capital expenditures (40,230) (25,137) Net proceeds from asset sales 52,577 15,665 Capitalization of software licensed to customers (11,452) (654) Repayments from (advances to) financial services 932 (5,966) --------- --------- Net cash flows provided by (used for) investing activities 1,827 (17,617) --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 50,300 Principal payments on debt (38,860) (18,146) Cash dividends paid (23,505) (21,518) Capital stock issued 12,032 2,260 Capital stock repurchased (37,972) (35,584) --------- --------- Net cash flows used for financing activities (38,005) (72,988) --------- --------- Effect of Exchange Rate Changes on Cash 633 (874) --------- --------- Increase in Cash and Equivalents 83,001 24,061 Cash and Equivalents, Beginning of Period 39,980 7,604 --------- --------- Cash and Equivalents, End of Period $ 122,981 $ 31,665 ========= ========= FINANCIAL SERVICES Cash Flows Provided By Operating Activities $ 16,585 $ 14,548 --------- --------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (112,954) (110,871) Collections on finance receivables 94,554 79,925 --------- --------- Net cash flows used for investing activities (18,400) (30,946) --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 24,975 69,993 Principal payments on debt (23,658) (60,044) (Repayments to) advances from information systems (932) 5,966 --------- --------- Net cash flows provided by financing activities 385 15,915 --------- --------- Decrease in Cash and Equivalents (1,430) (483) Cash and Equivalents, Beginning of Period 2,102 920 --------- --------- Cash and Equivalents, End of Period $ 672 $ 437 ========= =========
See Notes to Condensed Consolidated Financial Statements 5 6 THE REYNOLDS AND REYNOLDS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The balance sheet as of September 30, 1998 is condensed financial information taken from the audited balance sheet. The interim financial statements are unaudited. In the opinion of management, the accompanying interim financial statements contain all significant adjustments (which consist only of normal recurring adjustments) necessary to present fairly the company's financial position, results of operations and cash flows for the periods presented. (2) INVENTORIES
6/30/99 9/30/98 ------------- -------------- Finished Products $59,408 $54,778 Work In Process 6,404 5,795 Raw Materials 7,835 5,623 ------- ------- Total Inventories $73,647 $66,196 ======= =======
(3) ACCOUNTING CHANGE In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The company adopted this pronouncement effective October 1, 1998. The adoption of this pronouncement reduced the Automotive Division computer systems products revenues $17,936, gross profit $11,205, operating income $10,624 and net income $6,204 or $.08 per diluted share during the six months ended March 31, 1999. The company completed the transition period for the adoption of SOP 97-2 as of March 31, 1999, and there was no impact on third quarter's operating results. (4) DISCONTINUED OPERATIONS On October 23, 1998, the company sold essentially all net assets of its Healthcare Systems segment to InfoCure Corporation for about $50,000. The proceeds consisted of about $40,000 in cash with the balance in subordinated notes. The company recorded a gain on the sale of $5,785 or $.07 per diluted share in the first quarter of fiscal year 1999. About $1,200 of Healthcare Systems after-tax operating losses, from October 1, 1998 through October 23, 1998, were included in the determination of the gain on the sale of the Healthcare Systems segment. (5) COMPREHENSIVE INCOME
THREE MONTHS NINE MONTHS 1999 1998 1999 1998 ------- ------- ------- ------- Net Income $31,257 $26,049 $90,552 $76,157 Foreign Currency Translation 392 (524) 633 (873) ------- ------- ------- ------- Comprehensive Income $31,649 $25,525 $91,185 $75,284 ======= ======= ======= =======
(6) 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. After income taxes, the charge reduced net income by $4,860 or $.06 per share. The income tax benefit on the special charges represented a 34.6% 6 7 effective tax rate because not all of the charges were tax deductible. (7) BUSINESS SEGMENTS
THREE MONTHS NINE MONTHS 1999 1998 1999 1998 -------- -------- ---------- ---------- AUTOMOTIVE Net Sales and Revenues Computer Services $111,905 $94,838 $320,997 $276,219 Computer Systems Products 46,396 46,835 119,397 126,056 Business Forms Products 46,484 46,920 136,036 138,580 -------- -------- ---------- ---------- Total Net Sales and Revenues $204,785 $188,593 $576,430 $540,855 Operating Income $43,291 $36,742 $116,494 $116,307 BUSINESS SYSTEMS Net Sales and Revenues Business Forms Products $174,574 $165,046 $510,049 $506,772 Services and Computer Systems Products 11,778 9,042 33,200 29,966 -------- -------- ---------- ---------- Total Net Sales and Revenues $186,352 $174,088 $543,249 $536,738 Operating Income $14,636 $7,820 $38,235 $31,616 FINANCIAL SERVICES Net Sales and Revenues $9,942 $8,788 $29,044 $25,455 Operating Income $5,450 $4,682 $15,624 $12,417 CORPORATE EXPENSES ($9,067) ($3,864) ($20,139) ($11,508) ELIMINATION OF INTERSEGMENT SALES $0 ($238) $0 ($443) TOTALS Net Sales and Revenues $401,079 $371,231 $1,148,723 $1,102,605 Operating Income $54,310 $45,380 $150,214 $148,832
6/30/99 9/30/98 ---------- ---------- ASSETS Automotive $234,646 $242,259 Business Systems 390,408 360,417 Financial Services 421,995 411,159 Corporate 202,630 108,597 Discontinued Operations 0 35,288 ---------- ---------- Total Assets $1,249,679 $1,157,720 ========== ==========
7 8 (8) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities.
1999 1998 -------- -------- INFORMATION SYSTEMS Net Income $81,230 $68,752 Depreciation and Amortization 35,366 46,173 Deferred Income Taxes 919 (5,067) Deferred Income Taxes Transferred to Financial Services (2,862) 1,528 Losses (Gains) on Sales of Assets (6,781) (951) Changes in Operating Assets and Liabilities Accounts Receivable (7,781) (7,553) Inventories (8,877) 5,305 Prepaid Expenses and Other Current Assets (1,695) 2,753 Intangible and Other Assets 7,496 5,323 Accounts Payable 4,742 2,257 Accrued Liabilities 20,028 (5,399) Other Liabilities (3,239) 2,419 ======== ======== Net Cash Provided by Operating Activities $118,546 $115,540 ======== ======== FINANCIAL SERVICES Net Income $9,322 $7,405 Deferred Income Taxes 1,255 5,778 Deferred Income Taxes Transferred from Information Systems 2,862 (1,528) Changes in Receivables, Other Assets and Other Liabilities 3,146 2,893 ======== ======== Net Cash Provided by Operating Activities $16,585 $14,548 ======== ========
(9) 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (In thousands except per share data) SIGNIFICANT EVENTS DISCONTINUED OPERATIONS In September 1998, the company's board of directors approved a plan to discontinue operations of the company's Healthcare Systems segment. This separate segment provided computer systems products and services to hospital-based and office-based physicians. Net sales and revenues were $48,226 in fiscal year 1998 and related operating losses were $16,700. Prior financial statements have been restated to report the operating results of Healthcare Systems as discontinued operations in the consolidated statements of income. In October 1998, the company sold essentially all net assets of its Healthcare Systems segment to InfoCure Corporation for about $50,000. The proceeds consisted of about $40,000 in cash with the balance in subordinated notes. The company recorded a gain on the sale of $5,785 or $.07 per diluted share in the first quarter of fiscal year 1999. ACCOUNTING CHANGE In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The company adopted this pronouncement effective October 1, 1998. The adoption of this pronouncement reduced the Automotive Division computer systems products revenues $17,936, gross profit $11,205, operating income $10,624 and net income $6,204 or $.08 per diluted share during the six months ended March 31, 1999. The company completed the transition period for the adoption of SOP 97-2 as of March 31, 1999, and there was no impact on third quarter's operating results. 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. After income taxes, the charge 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. RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
Three Months Nine Months ----------------------------------------- ------------------------------------------- % 1999 1998 Change % Change 1999 1998 Change Change --------- --------- --------- ---------------------- ---------- --------- ------- Net Sales and Revenues $401,079 $371,231 $29,848 8% $1,148,723 $1,102,605 $46,118 4% Gross Profit $183,510 $160,464 $23,046 14% $515,855 $481,074 $34,781 7% Operating Income $54,310 $45,380 $8,930 20% $150,214 $148,832 $1,382 1% Income From Continuing Operations $31,257 $28,171 $3,086 11% $84,767 $83,138 $1,629 2% Discontinued Operations $0 ($2,122) $2,122 $5,785 ($6,981) $12,766 Net Income $31,257 $26,049 $5,208 20% $90,552 $76,157 $14,395 19% Earnings Per Common Share (Diluted) $0.39 $0.32 $0.07 22% $1.13 $0.93 $0.20 22% EXCLUDING EFFECT OF ACCOUNTING CHANGE Net Sales and Revenues $401,079 $371,231 $29,848 8% $1,166,659 $1,102,605 $64,054 6% Gross Profit $183,510 $160,464 $23,046 14% $527,060 $481,074 $45,986 10% Operating Income $54,310 $45,380 $8,930 20% $160,838 $148,832 $12,006 8% Income From Continuing Operations $31,257 $28,171 $3,086 11% $90,967 $83,138 $7,829 9%
Third quarter's consolidated revenues exceeded $400,000 for the first time in the company's history as both Automotive and 9 10 Business Systems divisions grew sales over last year. Automotive revenues increased as strong growth in computer services revenues overcame slight declines in both computer systems products sales and Automotive forms sales. Year-to-date consolidated revenues exceeded last year as growth in Automotive computer services revenues and computer systems products sales (excluding the effect of the accounting change) and higher Business Systems sales overcame a slight decline in Automotive forms sales. The consolidated gross profit percentage was 46.9% of revenues (excluding financial services revenues) in the third quarter and 46.1% through nine months compared to last year's 44.3% and 44.7%, respectively. Gross profit margins increased over last year in both Automotive and Business Systems, largely because of the revenue growth. Consolidated operating income was 13.5% of revenues for the third quarter and 13.8% through nine months (excluding the accounting change), versus 12.2% and 13.5% last year. Excluding 1998's special charges operating margins were about 14% for both the third quarter and nine months. Automotive operating margins (excluding the effect of the accounting change) declined from last year (excluding the special charges) because of higher investment in new products and services. Business Systems operating margins exceeded last year in both third quarter and nine months primarily because of higher sales. A primary reason for the decline in consolidated operating margins (as compared to last year excluding special charges) was the company's investment in an enterprise resource planning (ERP) system. The company incurred about two cents per share of ERP related expenses during the third quarter of 1999 and estimates that about two cents per share will be incurred during each of the next five to seven quarters to complete the initial phase of this implementation. Interest expense was less than last year for both the third quarter and nine months because of the previously explained reclassifications. Interest income rose over last year because of higher cash balances and notes receivable as a result of the sale of the Healthcare Systems segment. Other income included about $600 from assets sales in the third quarter of 1999. The year-to-date effective income tax rate declined to 41.6% from 43.6% last year (excluding the previously mentioned tax benefits) because of the sale of Healthcare Systems, which reduced nondeductible goodwill amortization, and lower state income taxes. Annualized return on average shareholders' equity was 27.1%, compared to 26.4% at June 30, 1998. AUTOMOTIVE
Three Months Nine Months ------------------------------------------ ------------------------------------------ 1999 1998 Change % Change 1999 1998 Change % Change --------- ---------- ---------- --------------------- ---------- ---------- --------- Net Sales and Revenues Computer Services $111,905 $94,838 $17,067 18% $320,997 $276,219 $44,778 16% Computer Systems Products $46,396 $46,835 ($439) -1% $119,397 $126,056 ($6,659) -5% Business Forms $46,484 $46,920 ($436) -1% $136,036 $138,580 ($2,544) -2% --------- ---------- ---------- --------- ---------- ---------- Total Net Sales and Revenues $204,785 $188,593 $16,192 9% $576,430 $540,855 $35,575 7% Gross Profit $112,659 $100,866 $11,793 12% $314,212 $293,342 $20,870 7% Gross Margin 55.0% 53.5% 54.5% 54.2% SG&A Expenses $69,368 $64,124 $5,244 8% $197,718 $177,035 $20,683 12% % of Revenues 33.9% 34.0% 34.3% 32.7% Operating Income $43,291 $36,742 $6,549 18% $116,494 $116,307 $187 0% Operating Margin 21.1% 19.5% 20.2% 21.5% EXCLUDING EFFECT OF ACCOUNTING CHANGE Net Sales and Revenues Computer Services $111,905 $94,838 $17,067 18% $320,997 $276,219 $44,778 16% Computer Systems Products $46,396 $46,835 ($439) -1% $137,333 $126,056 $11,277 9% Business Forms $46,484 $46,920 ($436) -1% $136,036 $138,580 ($2,544) -2% --------- ---------- ---------- --------- ---------- ---------- Total Net Sales and Revenues $204,785 $188,593 $16,192 9% $594,366 $540,855 $53,511 10% Gross Profit $112,659 $100,866 $11,793 12% $325,417 $293,342 $32,075 11% Gross Margin 55.0% 53.5% 54.8% 54.2% SG&A Expenses $69,368 $64,124 $5,244 8% $198,299 $177,035 $21,264 12% % of Revenues 33.9% 34.0% 33.4% 32.7% Operating Income $43,291 $36,742 $6,549 18% $127,118 $116,307 $10,811 9% Operating Margin 21.1% 19.5% 21.4% 21.5%
Automotive's revenues increased for both the third quarter and nine months primarily because of continued strong growth in computer services revenues. Computer services revenues increased 18% for the quarter and 16% year-to-date, primarily because of the increased number of software applications supported and the growth of newer service offerings. Computer systems products sales were down slightly in the third quarter, but increased solidly through nine months. The prior year had particularly strong computer systems products sales because of year 2000 related system conversions. Year-to-date, sales of computer systems products grew because of higher sales volume for the ERA dealer management system. Automotive business forms sales declined slightly because of lower volumes, primarily caused by the shift to laser printing. The 10 11 company includes its laser printing equipment and support revenues in computer systems products and services, and related forms and supplies sales in business forms products. Laser revenues, while still relatively small, continued to grow at a rapid rate. Management expects the shift from printed forms to laser printing to continue. Revenue growth in the near term will likely be at a mid to high single digit rate, slightly under the rate of the first nine months of 1999. This lower revenue growth rate is anticipated because of a number of items, including the high level of year 2000 related systems conversions in the prior year and lower purchases by large enterprise customers. Automotive gross profit margins increased in both the third quarter and year-to-date primarily as a result of the growth in higher margin computer services revenues. Excluding both 1999's accounting change and 1998's special charges, operating margins declined from last year for both the third quarter and nine months primarily because of continued higher SG&A expenses for new business and product development. BUSINESS SYSTEMS
Three Months Nine Months ---------------------------------------------- ---------------------------------------------- 1999 1998 Change % Change 1999 1998 Change % Change ----------- ----------- ---------- --------- ---------- ---------- ---------- ---------- Net Sales and Revenues $186,352 $174,088 $12,264 7% $543,249 $536,738 $6,511 1% Gross Profit $70,851 $59,598 $11,253 19% $201,643 $187,732 $13,911 7% Gross Margin 38.0% 34.2% 37.1% 35.0% SG&A Expenses $56,215 $51,778 $4,437 9% $163,408 $156,116 $7,292 5% % of revenues 30.1% 29.7% 30.1% 29.1% Operating Income $14,636 $7,820 $6,816 87% $38,235 $31,616 $6,619 21% Operating Margin 7.9% 4.5% 7.0% 5.9%
Business Systems sales increased over last year for both the third quarter and nine months because of higher sales volume. Directionally, sales prices were lower than last year, reflecting lower paper costs. Gross profit margins increased over last year for both the quarter and nine months, primarily because of higher sales volume. The year-to-date increase also reflected the full benefit of the 1997 restructuring which resulted in the closing of four manufacturing plants. Business Systems operating margin exceeded last year for both the third quarter and nine months as higher sales volume and gross profit margin overcame higher SG&A expenses. These results include about one cent per share negative impact year-to-date from the startup of the Kaiser Permanente account. In the third quarter of 1999 the Kaiser account was essentially at breakeven. In August 1998 the company and Kaiser signed a five-year, $200 million contract. FINANCIAL SERVICES
Three Months Nine Months ---------------------------------------------- ---------------------------------------------- 1999 1998 Change % Change 1999 1998 Change % Change ----------- ----------- ---------- --------- ---------- ---------- ---------- ---------- Net Sales and Revenues $9,942 $8,788 $1,154 13% $29,044 $25,455 $3,589 14% Operating Income $5,450 $4,682 $768 16% $15,624 $12,417 $3,207 26% Operating Margin 54.8% 53.3% 53.8% 48.8%
Average finance receivables increased 7% over last year because of strong automotive systems sales. Financial Services revenues grew primarily because of interest earned on the higher receivables balances. Average interest rates were slightly higher than last year. Also contributing to higher revenues and income were gains on lease rollovers and terminations. Financial Services' interest rate spread remained strong at 3.7%, compared to 3.2% last year. This interest rate spread increased over last year because of lower borrowing rates, in addition to the previously mentioned increase in the receivables portfolio. Bad debt expenses were $650 in the third quarter, compared to $175 last year and $1,950 year-to-date versus $1,521 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 May 1999, the company entered into a $10,000 interest rate swap in connection with obtaining $10,000 of floating rate debt. 11 12 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 $118,546 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 $40,230. During the first nine months of the fiscal year the company also capitalized $11,452 of software licensed to customers, consisting of about $2,500 of purchased software with the balance representing internal capitalization. Capital expenditures in the ordinary course of business are anticipated to be about $50,000 in fiscal year 1999. In October 1998, the company received about $40,000 of proceeds from the sale of the Healthcare Systems segment. Financial services operating cash flows, collections on finance receivables and additional borrowings were invested in new finance receivables for the company's automotive systems and used to make scheduled debt repayments. CAPITALIZATION The company's ratio of total debt (total information systems debt) to capitalization (total information systems debt plus shareholders' equity) was 28.5% at June 30, 1999 and 29.4% at September 30, 1998. Remaining credit available under existing revolving credit agreements was $112,025 at June 30, 1999. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. The company anticipates that cash flow from operations and cash available from existing credit agreements will be sufficient to fund fiscal year 1999 normal operations. The company has consistently produced strong operating cash flows sufficient to fund normal operations. These cash flows resulted primarily from income, of which Automotive generates about 75 to 80 percent of the total. Automotive's strong cash flows are the result of stable operating margins and a high percentage of recurring service revenues, which require relatively low capital investment. Debt instruments have been used primarily to fund Financial Services' receivables and business combinations. In fiscal year 1997, the company filed a shelf registration statement with the SEC whereby the company can issue up to $300,000 of notes. Through June 30, 1999, the company has issued $170,000 of notes under this arrangement. Management believes that its strong balance sheet and cash flows should help maintain an investment grade credit rating that should provide access to capital sufficient to meet the company's cash requirements beyond fiscal year 1999. SHAREHOLDERS' EQUITY The company lists its Class A common shares on the New York Stock Exchange. There is no principal market for the Class B common shares. The company also has an authorized class of 60 million preferred shares with no par value. As of August 10, 1999, no preferred shares were outstanding and there were no agreements or commitments with respect to the sale or issuance of these shares. Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. In November 1998, the company's board of directors raised the quarterly dividend 11% to $.10 per Class A common share. The company has increased cash dividends per share thirteen times in the last nine years and paid dividends each year since the company's initial public offering in 1961. The company has conducted an active share repurchase program during recent years to provide additional returns to shareholders. During the first nine months of fiscal year 1999, the company repurchased 1,891 Class A common shares for $37,972 ($20.08 per share). As of June 30, 1999 the company could repurchase an additional 3,479 Class A common shares under existing board of directors' authorizations. YEAR 2000 COMPLIANCE STATE OF READINESS The company has assessed potential year 2000 effects on its internal computer systems, computer systems provided to customers and other non-information technology systems. The assessment included not only the company's systems, but also systems of outside parties such as key suppliers and business partners. Detailed plans were prepared to address year 2000 issues. These plans covered software applications, operating systems, hardware and embedded technology in other equipment. The plans called for a determination of whether effected systems should be modified, replaced or retired. Management reviews progress against these plans with the Audit Committee of the Board of Directors at its regularly scheduled meetings. 12 13 As of August 10, 1999, over 90% of the company's systems were year 2000 qualified. The remaining systems are scheduled to be year 2000 qualified on or before September 1999. In July 1998, the company released a year 2000 qualified version of its ERA2 dealer management system for automobile dealers. In December 1998, the company completed the conversion of customers to the new ERA2 software release. The company decided late in 1997 to retire several older product lines by December 1998 rather than make these systems year 2000 qualified. Early in fiscal year 1998 the company communicated this decision to affected customers and presented them with various product alternatives. During the year the company reinforced this communication on a number of occasions. As of June 30, 1999, the vast majority of customers have purchased a year 2000 qualified system from the company. The company discontinued support of non-year 2000 qualified systems on January 1, 1999. The company has contacted significant suppliers, customers and critical business partners to determine the extent to which the company may be vulnerable in the event those parties fail to properly remediate their own year 2000 issues. About 70% of our business partners have responded and indicated that their systems will be year 2000 qualified. The company has performed testing where applicable to determine that the third party systems are year 2000 qualified and function properly with the company's systems. To date the company has not experienced material adverse results from third party systems. While the company has taken significant actions to help ensure that these systems will be able to process and store dates into the next century, no amount of testing or contractual assurances will guarantee that errors or systems failures will not occur. COSTS The company's year 2000 efforts have been undertaken largely with existing personnel. In some instances, consultants have been engaged to perform specific services. Through June 30, 1999, the company has spent about $12,000 on year 2000 compliance efforts. In the first nine months of fiscal year 1999, year 2000 compliance costs were about $5,000. Prior to fiscal year 1999, the company spent an additional $7,000 on year 2000 compliance. The company estimates that the total costs (including costs already incurred) to make all systems year 2000 qualified will be about to $15,000. However, there can be no assurance that the company will not incur unanticipated costs, which could have a material adverse effect on the company's financial statements. RISKS Management believes that the reasonably likely worst case scenario, with respect to year 2000 issues, is the failure of a supplier (including energy or communications suppliers) to be year 2000 qualified. Such a failure could temporarily interrupt the supply of needed products or services to the company or its customers, which could effect the company's ability to deliver products and services and have a material adverse effect on the company's financial statements. CONTINGENCY PLANS In addition to the year 2000 remediation efforts, the company has also focused on year 2000 contingency planning. Through a customer-oriented risk assessment process, the company identified areas where contingency strategies needed to be developed. Detailed contingency plan development is underway and will be finalized before the end of the calendar year. The actions necessary to make the plans executable if needed, and plan testing efforts will be completed during the remainder of calendar year 1999. MARKET RISKS INTEREST RATES The information systems portion of the business borrows money, as needed, primarily to fund business combinations. Generally the company borrows under fixed rate agreements with terms of ten years or less. The Financial Services segment of the business obtains borrowings to fund the investment in finance receivables. These fixed rate receivables have repayment terms of four to eight years, with five years being the most common term. The company funds finance receivables with debt that has repayment terms consistent with the maturities of the finance receivables. Generally the company attempts to lock in the interest spread on the fixed rate finance receivables by borrowing under fixed rate agreements or using interest rate management agreements to manage variable interest rate exposure. The company does not use financial instruments for trading purposes. Because fixed rate finance receivables are directionally funded with fixed rate debt or its equivalent (variable rate debt that has been fixed with interest rate swaps), management believes that a 100 basis point change in interest rates would not have a material effect on the company's financial statements 13 14 FOREIGN CURRENCY EXCHANGE RATES The company has foreign-based operations in Canada, which accounted for 11% of net sales and revenues for the nine months ended June 30, 1999. 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 June 30, 1999, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at June 30, 1999, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. COMMODITIES The company is exposed to changes in the cost of paper, a key raw material in the production of business forms. The company has attempted to limit this exposure by consolidating its purchases among a few suppliers and negotiating longer-term contracts that limit the amount and frequency of price increases and generally delays the effective date of the increase. When paper costs increase, historically the company has been able to increase the sales prices of its business forms products and maintain its profit margins. Conversely, when paper costs decline, the company generally lowers its sales prices to meet competitive pressures. Historically, the company has not used financial instruments to manage its exposure to changes to the cost of paper. Because the company has historically been able to raise sales prices to offset higher paper costs, management believes that a 10% change in paper costs would not have a material effect on the company's financial statements. ENVIRONMENTAL MATTER See Note 9 to the Consolidated Financial Statements for a discussion of an environmental contingency. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedules (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1999. 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, 1999 /s/ David R. Holmes ----------------- ------------------- David R. Holmes Chairman of the Board and Chief Executive Officer Date August 11, 1999 /s/ Dale L. Medford ----------------- ------------------- Dale L. Medford Corporate Vice President, Finance and Chief Financial Officer 15 EX-27 2 EXHIBIT 27
5 1,000 U.S. 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 1 122,981 0 234,619 5,817 73,647 458,909 409,096 226,406 1,249,679 227,204 316,530 0 0 74,543 377,323 1,249,679 767,644 1,148,723 467,559 603,824 0 0 19,619 145,194 60,427 84,767 5,785 0 0 90,552 1.16 1.13
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