-----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, QDrSLeqJVGCy3P8y4HKZgZQq6pBERP0NruhyRk1S571LaV1W4OHAJ+di8jcgKVvb AVScJIK7rJ6HlBJKk9w6NA== 0001021408-01-505071.txt : 20010814 0001021408-01-505071.hdr.sgml : 20010814 ACCESSION NUMBER: 0001021408-01-505071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS & REYNOLDS CO CENTRAL INDEX KEY: 0000083588 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] 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: 1706408 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 d10q.txt FORM 10-Q 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, 2001 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 9, 2001, 71,665,259 Class A common shares and 20,000,000 Class B common shares were outstanding. 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, 2001 and 2000 3 Condensed Consolidated Balance Sheets As of June 30, 2001 and September 30, 2000 4 Condensed Statements of Consolidated Cash Flows For the Nine Months Ended June 30, 2001 and 2000 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, 2001 and 2000 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15
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THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands except per share data) THREE MONTHS NINE MONTHS 2001 2000 2001 2000 --------------------------------------------------------- Net Sales and Revenues Automotive Solutions Services $148,460 $136,871 $441,302 $377,804 Products 83,044 89,129 254,320 269,740 -------- -------- -------- -------- Total Automotive Solutions 231,504 226,000 695,622 647,544 Financial Services 10,651 9,746 31,340 30,025 -------- -------- -------- -------- Total net sales and revenues 242,155 235,746 726,962 677,569 -------- -------- -------- -------- Costs and Expenses Automotive Solutions Cost of sales Services 51,885 50,671 156,849 136,263 Products 45,595 49,610 139,578 147,293 -------- -------- -------- -------- Total cost of sales 97,480 100,281 296,427 283,556 Selling, general and administrative expenses 93,500 92,248 292,268 256,177 Financial Services 4,882 4,149 13,835 13,644 -------- -------- -------- -------- Total costs and expenses 195,862 196,678 602,530 553,377 -------- -------- -------- -------- Operating Income 46,293 39,068 124,432 124,192 -------- -------- -------- -------- Other Charges (Income) Interest expense 1,390 2,161 4,401 6,254 Interest income (1,594) (1,128) (6,640) (3,429) Equity in net losses of affiliated companies 5,091 1,979 8,630 3,116 Other 169 306 (464) 18 -------- -------- -------- -------- Total other charges 5,056 3,318 5,927 5,959 -------- -------- -------- -------- Income Before Income Taxes 41,237 35,750 118,505 118,233 Income Taxes 16,518 14,726 47,708 48,602 -------- -------- -------- -------- Income From Continuing Operations 24,719 21,024 70,797 69,631 Income From Discontinued Operations 0 4,269 1,623 19,930 -------- -------- -------- -------- Net Income $ 24,719 $ 25,293 $ 72,420 $ 89,561 ======== ======== ======== ======== Basic Earnings Per Common Share Income From Continuing Operations $ 0.34 $ 0.27 $ 0.97 $ 0.90 Income From Discontinued Operations $ 0.00 $ 0.05 $ 0.02 $ 0.26 Net Income $ 0.34 $ 0.32 $ 0.99 $ 1.16 Average Number of Common Shares Outstanding 73,237 78,183 73,361 77,477 Diluted Earnings Per Common Share Income From Continuing Operations $ 0.33 $ 0.26 $ 0.94 $ 0.87 Income From Discontinued Operations $ 0.00 $ 0.05 $ 0.02 $ 0.25 Net Income $ 0.33 $ 0.31 $ 0.97 $ 1.12 Average Number of Common Shares Outstanding 75,033 80,737 74,966 79,921 Cash Dividends Declared Per Common Share $ 0.11 $ 0.11 $ 0.33 $ 0.33
See Notes to Condensed Consolidated Financial Statements. 3 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND SEPTEMBER 30, 2000 (In thousands)
6/30/01 9/30/00 ---------- ---------- AUTOMOTIVE SOLUTIONS ASSETS Current Assets Cash and equivalents $ 119,805 $ 205,455 Accounts receivable 131,703 127,314 Inventories 11,682 15,287 Other current assets 41,633 35,490 ---------- ---------- Total current assets 304,823 383,546 Property, Plant and Equipment, less accumulated depreciation of $178,534 at 6/30/01 and $166,235 at 9/30/00 155,294 138,108 Goodwill 36,542 31,061 Software Licensed to Customers 52,533 39,479 Other Intangible Assets 110,652 118,575 Other Assets 88,119 85,395 ---------- ---------- Total Automotive Solutions Assets 747,963 796,164 ---------- ---------- FINANCIAL SERVICES ASSETS Finance Receivables 421,129 420,588 Cash and Other Assets 812 541 ---------- ---------- Total Financial Services Assets 421,941 421,129 ---------- ---------- TOTAL ASSETS $1,169,904 $1,217,293 ========== ========== AUTOMOTIVE SOLUTIONS LIABILITIES Current Liabilities Current portion of long-term debt $ 6,135 $ 5,714 Notes payable 50 Accounts payable 43,290 47,376 Accrued liabilities 78,871 125,971 Deferred revenues 19,007 15,604 ---------- ---------- Total current liabilities 147,353 194,665 Long-Term Debt 111,507 111,124 Other Liabilities 97,491 93,350 ---------- ---------- Total Automotive Solutions Liabilities 356,351 399,139 ---------- ---------- FINANCIAL SERVICES LIABILITIES Notes Payable 206,146 212,176 Other Liabilities 108,249 107,484 ---------- ---------- Total Financial Services Liabilities 314,395 319,660 ---------- ---------- SHAREHOLDERS' EQUITY Capital Stock 154,608 124,872 Other Comprehensive Income (Losses) (8,832) (7,139) Retained Earnings 353,382 380,761 ---------- ---------- Total Shareholders' Equity 499,158 498,494 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,169,904 $1,217,293 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands)
2001 2000 --------- --------- Automotive Solutions Cash Flows Provided By Operating Activities $ 91,573 $ 92,671 --------- --------- Cash Flows Provided By (Used For) Investing Activities Business combinations (11,684) (103,344) Capital expenditures (39,540) (50,051) Net proceeds from asset sales 2,697 3,239 Capitalization of software licensed to customers (12,453) (15,989) Repayments from (advances to) financial services (977) 3,323 --------- --------- Net cash flows used for investing activities (61,957) (162,822) --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 46,000 Principal payments on debt (2,165) (9,147) Cash dividends paid (24,110) (25,612) Capital stock issued 29,281 13,354 Capital stock repurchased (82,533) (19,885) --------- --------- Net cash flows provided by (used for) financing activities (79,527) 4,710 --------- --------- Effect of Exchange Rate Changes on Cash (656) (238) --------- --------- Net Cash Used for Discontinued Operations (35,083) (1,417) --------- --------- Decrease in Cash and Equivalents (85,650) (67,096) Cash and Equivalents, Beginning of Period 205,455 103,595 --------- --------- Cash and Equivalents, End of Period $ 119,805 $ 36,499 ========= ========= Financial Services Cash Flows Provided By Operating Activities $ 14,860 $ 14,085 --------- --------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (134,330) (105,915) Collections on finance receivables 124,556 101,322 --------- --------- Net cash flows used for investing activities (9,774) (4,593) --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 70,383 44,600 Principal payments on debt (76,413) (51,109) Advances from (repayments to) automotive solutions 977 (3,323) --------- --------- Net cash flows used for financing activities (5,053) (9,832) --------- --------- Increase (Decrease) in Cash and Equivalents 33 (340) Cash and Equivalents, Beginning of Period 456 675 --------- --------- Cash and Equivalents, End of Period $ 489 $ 335 ========= =========
See Notes to Condensed Consolidated Financial Statements. 5 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, 2000 is condensed financial information taken from the annual audited financial statements. 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 6/30/01 9/30/00 -------- -------- Finished products $ 11,267 $ 14,360 Work in process 205 480 Raw materials 210 447 -------- -------- Total inventories $ 11,682 $ 15,287 ======== ======== (3) OTHER INTANGIBLE ASSETS
Useful Life (years) 6/30/01 9/30/00 ---------- -------- -------- Customer relationship - Trade Cycle Technology 20 $ 65,352 $ 67,954 Customer relationship - CyberCar 10 14,045 15,238 Other intangible assets 3 - 20 31,255 35,383 -------- -------- Total other intangible assets $110,652 $118,575 ======== ========
Other intangible assets related to Trade Cycle Technology and CyberCar were acquired in the May 2000 purchase of HAC Group LLC. These assets are being amortized on a straight-line basis over their useful lives because this method of amortization best matches expected future revenues. The useful lives for the Trade Cycle Technology and CyberCar intangible assets reflect a strong relationship between HAC Group and the customer that began in 1983. This relationship is expected to continue over the remaining useful life of the Trade Cycle Technology and CyberCar assets. At each balance sheet date the company evaluates the recoverability of intangible assets acquired in the purchase of HAC Group by considering whether cash flows and other factors are consistent with the assumptions used to allocate the purchase price. (4) EQUITY INVESTMENT The company owns 16,500 shares of Kalamazoo Computer Group plc (Kalamazoo) of the United Kingdom, representing about 26% of the outstanding shares. In addition, two of the company's officers are members of the board of directors of Kalamazoo. At June 30, 2001, the market value of the company's Kalamazoo shares was $3,227 based on the closing sale price reported by the London Stock Exchange. This investment is accounted for under the equity method and the carrying value of $18,900 at June 30, 2001, was included with other assets in the company's consolidated balance sheets. Quarterly, the company evaluates the recoverability of its investment in Kalamazoo as required by Statement of Financial Accounting Standards Statement No. 121 and Staff Accounting Bulletin No. 59. As part of its evaluation, management considered the market value and carrying value of its investment, management's likelihood of holding or selling its investment and potential sales proceeds and related tax benefits. Projected future cash flows over periods up to ten years assumed revenues grow at a 6% average rate and operating margins reach 9%. These assumptions assume the successful completion of current product development efforts and market acceptance of the new product by both new and existing customers. Based on this evaluation, no adjustment to the carrying value of the company's investment in Kalamazoo was required. 6 (5) COMPREHENSIVE INCOME
THREE MONTHS NINE MONTHS 2001 2000 2001 2000 ------------- ------------- ------------- ------------ Net income $24,719 $25,293 $72,420 $89,561 Foreign currency translation adjustment 944 (541) (656) (238) Cumulative effect of accounting change 15 Net unrealized gains (losses) on derivative contracts 75 (1,052) ------- ------- ------- ------- Comprehensive income $25,738 $24,752 $70,727 $89,323 ======= ======= ======= =======
(6) RESTRUCTURING CHARGES During fiscal year 2000, the company recorded a pre-tax restructuring charge of $10,560. This charge consisted of $4,751 of employee termination benefits, $4,715 of retirement costs and $1,094 of lease obligations. Employee termination benefits represent severance and outplacement benefits for 252 employees, 135 of which were in administrative positions. The remaining 117 employees worked at the Oklahoma City manufacturing facility that was closed during the first quarter of fiscal year 2001. Through June 30, 2001, all of the identified employees have begun receiving severance payments. Retirement costs represent pension and other postretirement benefits in excess of regular plan benefits for 20 employees, including several executives. These incremental benefits will be paid along with normal pension and other postretirement benefits. Lease obligations represent remaining lease payments in excess of sublease rentals for 38 sales offices vacated by the company. Activity related to restructuring accruals was as follows:
Severance Leases ------------ ------------ Balances 9/30/00 $ 3,960 $1,006 Payments (1,459) (81) --------- --------- Balances 12/31/00 2,501 925 Payments (1,304) (138) Expense (Income) Adjustments 109 (96) --------- --------- Balances 3/31/01 1,306 691 Payments (607) (100) Expense (Income) Adjustments (428) 0 --------- --------- Balances 6/30/01 $ 271 $ 591 ========= =========
(7) BUSINESS COMBINATION In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a. DealerKid, a provider of electronic customer marketing and relationship management software and services for automotive retailers in the United States and Canada. Privately held DealerKid had revenues of about $2,000 in 2000. The purchase price of $10,452 was paid with $9,509 of cash from existing balances and the issuance of a $943 note payable. This business combination was accounted for as a purchase and the accounts of DealerKid were included in the financial statements since the acquisition date. In connection with this business combination the company recorded goodwill of $11,307, based on an allocation of the purchase price. Goodwill is being amortized on a straight-line basis over five years. (8) ACCOUNTING CHANGE In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB amended certain provisions of that statement by issuing SFAS Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements require 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. Effective October 1, 2000, the company adopted the provisions of these statements. The company has determined that its derivative instruments meet the criteria for cash flow hedge accounting. In the ordinary course of business, the 7 company borrows cash to fund investments in finance receivables from the sale of the company's products. The company attempts to limit its interest rate exposure between the interest earned on fixed rate finance receivables and the interest paid on variable rate financing agreements through the use of interest rate management agreements. Interest rate swaps provide for interest to be received on notional amounts at variable rates and provide for interest to be paid on the same notional amounts at fixed rates. Fixed interest rates do not change over the life of the agreements. Variable interest rates are reset at least every 90 days and are based on LIBOR or commercial paper indices and are settled with counterparties at that time. The fair value of the company's derivative instruments was a $25 asset at October 1, 2000, which was recorded as a cumulative effect of accounting change, and a $1,734 liability at June 30, 2001. This liability was included in Financial Services' other liabilities on the consolidated balance sheet. The adjustments to record the cumulative effect of accounting change and the net change in the fair value during the periods presented was recorded, net of income taxes, in other comprehensive income. All existing cash flow hedges were 100% effective. As a result, there was no current impact to earnings because of hedge ineffectiveness. (9) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities. 2001 2000 ------- -------- AUTOMOTIVE SOLUTIONS Net Income $61,901 $ 79,727 Depreciation and Amortization 36,729 27,855 Deferred Income Taxes 1,505 (1,752) Deferred Income Taxes Transferred to Financial Services (3,263) (2,336) Income from Discontinued Operations (1,623) (19,930) Losses (Gains) on Sales of Assets (335) 425 Changes in Operating Assets and Liabilities Accounts receivable 3,268 22,132 Inventories 3,605 (1,338) Prepaid expenses and other current assets (9,329) 977 Intangible and other assets (1,230) 2,042 Accounts payable (4,140) 102 Accrued liabilities 41 (17,354) Other liabilities 4,444 2,121 ------- -------- Net Cash Provided by Operating Activities $91,573 $ 92,671 ======= ======== FINANCIAL SERVICES Net Income $10,519 $ 9,834 Deferred Income Taxes (5,434) (1,076) Deferred Income Taxes Transferred from Automotive Solutions 3,263 2,336 Changes in Receivables, Other Assets and Other Liabilities 6,512 2,991 ------- -------- Net Cash Provided by Operating Activities $14,860 $ 14,085 ======= ========
8 (10) BUSINESS SEGMENTS
THREE MONTHS NINE MONTHS 2001 2000 2001 2000 -------- -------- ---------- ---------- NET SALES AND REVENUES Retail Management Solutions $142,812 $137,247 $ 425,017 $ 414,239 Transformation Solutions 45,988 43,004 141,180 94,792 Documents 42,704 45,749 129,425 138,513 Financial Services 10,651 9,746 31,340 30,025 -------- -------- ---------- ---------- Total Net Sales and Revenues $242,155 $235,746 $ 726,962 $ 677,569 ======== ======== ========== ========== OPERATING INCOME (LOSS) Retail Management Solutions $ 32,372 $ 23,638 $ 83,593 $ 77,390 Transformation Solutions ($1,746) $ 1,388 ($4,708) $ 1,621 Documents $ 9,898 $ 8,445 $ 28,042 $ 28,800 Financial Services $ 5,769 $ 5,597 $ 17,505 $ 16,381 -------- -------- ---------- ---------- Total Operating Income $ 46,293 $ 39,068 $ 124,432 $ 124,192 ======== ======== ========== ========== 6/30/01 9/30/00 ---------- ---------- ASSETS Automotive Solutions $ 747,963 $ 796,164 Financial Services 421,941 421,129 ---------- ---------- Total Assets $1,169,904 $1,217,293 ========== ==========
(11) 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 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. During fiscal year 1996, an agreement was reached whereby the state of Connecticut contributed $8,000 towards remediation costs. Preliminary remediation continued through June 30, 2001, using Connecticut's contribution. Also in June 2001, the EPA proposed a long-term remedy at the site with a proposed cost of $950 to $1,200. The PRP coalition is studying this proposal and expects to comment on it and enter into negotiations with the EPA in the near future concerning the proposed remedy. During the fourth quarter of fiscal year 2000, the company was also named a defendant in a cost recovery lawsuit in Dayton, Ohio, regarding another environmental remediation site. Discovery in that lawsuit is in its early stages. Consequently, it is too early to determine the company's liability exposure. The company believes that the reasonably foreseeable resolution of these two matters will not have a material adverse effect on the financial statements. During the quarter ended March 31, 2001, the company ceased certain software development efforts. While the contract has not been formally cancelled, it is unlikely that development covered by this contract will be resumed. Based on ongoing discussions between the contract parties, the Company does not believe that the final resolution will have a material adverse effect on the financial statements. (12) ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which provides guidance on applying generally accepted accounting principles for recognizing revenue. SAB No. 101, as amended, is effective for the fourth quarter of fiscal year 2001. The company is reviewing the impact of SAB No. 101, and does not believe that its adoption will have a material effect on the company's financial statements. 9 In June 2001, the FASB voted in favor of SFAS Statement No. 141, "Business Combinations" and SFAS Statement No. 142, "Goodwill and Other Intangible Assets." SFAS Statement No. 141 prohibits the pooling of interests method of accounting and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS Statement No. 142 will require that goodwill no longer be amortized, but instead tested for impairment at least annually. The statement will also require recognized intangible assets with finite useful lives to be amortized over their useful lives and reviewed for impairment in accordance with SFAS Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The company is permitted to adopt the provisions of SFAS Statement No. 142 on either October 1, 2001 or October 1, 2002. Management is currently assessing the impact of these pronouncements and has not determined the impact on the company's financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands except per share data) RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
Three Months Nine Months ------------------------------------------------ ----------------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change ------------------------------------------------ ----------------------------------------------- Net sales and revenues $242,155 $235,746 $ 6,409 3% $726,962 $677,569 $ 49,393 7% Gross profit $134,024 $125,719 $ 8,305 7% $399,195 $363,988 $ 35,207 10% Operating income $ 46,293 $ 39,068 $ 7,225 18% $124,432 $124,192 $ 240 0% % of revenues 19.1% 16.6% 17.1% 18.3% Income from continuing operations $ 24,719 $ 21,024 $ 3,695 18% $ 70,797 $ 69,631 $ 1,166 2% Discontinued operations $ 0 $ 4,269 ($4,269) $ 1,623 $ 19,930 ($18,307) Net income $ 24,719 $ 25,293 ($574) -2% $ 72,420 $ 89,561 ($17,141) -19% Basic earnings per share Income from continuing operations $ 0.34 $ 0.27 $ 0.07 26% $ 0.97 $ 0.90 $ 0.07 8% Net income $ 0.34 $ 0.32 $ 0.02 6% $ 0.99 $ 1.16 ($0.17) -15% Diluted earnings per share Income from continuing operations $ 0.33 $ 0.26 $ 0.07 27% $ 0.94 $ 0.87 $ 0.07 8% Net income $ 0.33 $ 0.31 $ 0.02 6% $ 0.97 $ 1.12 ($0.15) -13%
Consolidated revenues grew 3% in the third quarter and 7% year-to-date. Excluding the net effect of acquisitions and divestitures, sales increased 1% over last year for the third quarter and 2% over last year for the nine months ended June 30, 2001. Internal sales growth for the quarter and nine months reflected growth in Retail Management Solutions' computer services revenues and Transformation Solutions' IntelliPath sales. This internal growth was partially offset by lower sales of documents. Consolidated operating income was 19.1% of revenues in the third quarter versus 16.6% last year and 17.1% for nine months compared to 18.3% last year. The third quarter operating income, as a percentage of revenues, increased over last year because of higher gross profit margins from growth in Retail Management Solutions' computer services revenues. Year-to-date operating income, as a percentage of revenues, was less than last year, in part, because of $4,228 of costs incurred in the second quarter of fiscal year 2001 related to a work stoppage of a software development contract. See Note 11 to the Consolidated Financial Statements for more information on this software development contract. Year-to-date operating income, as a percentage of revenues, also reflected the impact of the fiscal year 2000 acquisition of HAC Group and the November 2000 acquisition of DealerKid. These businesses had lower operating margins than the existing business. Research and development expenses were $15,000 in the third quarter and $54,000 year-to-date, compared to $20,000 and $53,000 last year. 10 Interest expense declined from last year because of lower debt balances as the company repaid Information Solutions segment related debt in August 2000. Interest income was higher than last year because of higher investments as a result of the cash proceeds received in August 2000 for the sale of the Information Solutions segment. Equity in net losses of affiliated companies increased $3,112 in the third quarter and $5,514 through nine months, as compared to last year, as a result of a $3,200 write-off of the company's investment in Consumer Car Club Inc. and the equity in net losses of the company's investment in ChoiceParts LLC. During the third quarter of fiscal 2001, Consumer Car Club Inc. announced that its carclub.com service had been closed. Earnings per share benefited from lower shares outstanding as a result of shares repurchased during fiscal years 2000 and 2001. Share repurchases are discussed further under the Shareholders' Equity caption. Discontinued operations included about $.01 per share from the collection of notes receivable obtained in the October 1998 sale of Healthcare Systems segment and about $.01 per share from tax benefits related to the August 2000 sale of the Information Solutions segment. RETAIL MANAGEMENT SOLUTIONS
Three Months Nine Months -------------------------------------------- ------------------------------------------ 2001 2000 Change % Change 2001 2000 Change % Change -------------------------------------------- ------------------------------------------- Net sales and revenues $142,812 $137,247 $5,565 4% $425,017 $414,239 $10,778 3% Gross profit $ 86,774 $ 78,294 $8,480 11% $255,706 $236,386 $19,320 8% % of revenues 60.8% 57.0% 60.2% 57.1% SG&A expenses $ 54,402 $ 54,656 ($254) 0% $172,113 $158,996 $13,117 8% % of revenues 38.1% 39.8% 40.5% 38.4% Operating income $ 32,372 $ 23,638 $8,734 37% $ 83,593 $ 77,390 $ 6,203 8% % of revenues 22.7% 17.2% 19.7% 18.7%
Retail Management Solutions revenues increased over last year for both the third quarter and nine months as computer service revenues continued to grow. Computer services revenues, comprised predominately of recurring software support and equipment maintenance revenues, continued to grow because of the increased number of ERA retail management systems supported. This revenue growth was partially offset by a decline in the number of new ERA retail management systems sold. The backlog of new orders for computer systems products and deferred revenues (orders shipped, but not yet recognized in revenues) was $34,000 at June 30, 2001 compared to $31,000 at September 30, 2000. Gross profit margins increased over last year primarily as a result of the growth in higher margin computer services revenues. Third quarter operating margins reflect the higher gross profit margins and control of SG&A expenses. Last year's SG&A expenses included $1,350 of reorganization costs. Year-to-date operating margins also include the effect of costs incurred in the second quarter of fiscal year 2001 from the work stoppage on a software development contract. See Note 11 to the Consolidated Financial Statements for more information on this software development contract. TRANSFORMATION SOLUTIONS
Three Months Nine Months ----------------------------------------------- -------------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change ----------------------------------------------- --------------------------------------------- Net sales and revenues $ 45,988 $43,004 $ 2,984 7% $141,180 $94,792 $ 46,388 49% Gross profit $ 19,957 $18,875 $ 1,082 6% $ 61,637 $40,337 $ 21,300 53% % of revenues 43.4% 43.9% 43.7% 42.6% SG&A expenses $ 21,703 $17,487 $ 4,216 24% $ 66,345 $38,716 $ 27,629 71% % of revenues 47.2% 40.7% 47.0% 40.9% Operating income ($1,746) $ 1,388 ($3,134) ($4,708) $ 1,621 ($6,329) (losses) % of revenues -3.8% 3.2% -3.3% 1.7%
Transformation Solutions revenues grew, in large part, as a result of the May 2000 acquisition of HAC Group LLC. Excluding the impact of acquisitions, sales declined 7% in the third quarter and grew 6% year-to-date. The decline in the third quarter reflected lower CarPoint revenues, which declined to $6,600 in the third quarter, compared to $9,100 last year. CarPoint revenues are expected to continue to decline during the fiscal year as the contract with Microsoft winds down. Year-to-date revenues grew primarily because of strong growth in the number of IntelliPath systems sold. Third quarter revenues and operating losses reflect a decline in HAC Group revenues from the first and second quarters as a result of lower consulting revenues. Operating losses also reflect the decline in Carpoint revenues and operating losses of DealerKid, acquired in November 2000. 11 DOCUMENTS
Three Months Nine Months ----------------------------------------------------------------------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change ----------------------------------------------------------------------------------------------------- Net sales and revenues $42,704 $45,749 ($3,045) -7% $129,425 $138,513 ($9,088) -7% Gross profit $27,293 $28,550 ($1,257) -4% $ 81,852 $ 87,265 ($5,413) -6% % of revenues 63.9% 62.4% 63.2% 63.0% SG&A expenses $17,395 $20,105 ($2,710) -13% $ 53,810 $ 58,465 ($4,655) -8% % of revenues 40.7% 43.9% 41.5% 42.2% Operating income $ 9,898 $ 8,445 $ 1,453 17% $ 28,042 $ 28,800 ($758) -3% % of revenues 23.2% 18.5% 21.7% 20.8%
Documents sales declined from last year as a result of a decline in the volume of business forms sold. About $2,000 of the year-to-date decline reflected prior year sales activity which was not repeated in the current year. In other segments, revenues from laser printing solutions increased and substantially offset the decline in document sales. Gross profit and operating income remained strong for the quarter and nine months. During the third quarter of fiscal year 2001, the company completed the sales of Oklahoma City manufacturing facilities and reported gains of about $600, which was included in gross profit. FINANCIAL SERVICES
Three Months Nine Months ---------------------------------------------------------------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change ---------------------------------------------------------------------------------------------- Net sales and revenues $10,651 $9,746 $905 9% $31,340 $30,025 $1,315 4% Operating income $ 5,769 $5,597 $172 3% $17,505 $16,381 $1,124 7% % of revenues 54.2% 57.4% 55.9% 54.6%
Financial Services interest revenues grew 4% for the third quarter and 1% year- to-date. The remainder of the sales increase related to growth in revenues from buyouts upon contract maturity. Average finance receivable balances and interest rates on finance receivables changed very little as compared to last year. Financial Services' interest rate spread remained strong at 3.3% year-to- date, compared to 3.2% last year. Bad debt expenses increased $1,002 over last year in third quarter and $1,098 year-to-date. 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 March 2001, the company entered into a $20,000 interest rate swap in connection with obtaining $20,000 of variable rate debt. See Note 8 to the Consolidated Financial Statements for additional discussion of interest rate management agreements. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Automotive Solutions continued to provide strong cash flows from operating activities during the first nine months of the fiscal year. Operating cash flows were $91,573 and resulted primarily from net income, adjusted for noncash charges. Operating cash flow funded the company's investments for normal operations including capital expenditures of $39,540. Capital expenditures included $20,828 for the construction of a new office building near Dayton, Ohio. During the first nine months of the fiscal year, the company also capitalized $12,453 of software licensed to customers, representing primarily capitalization of internal costs. Capital expenditures and capitalized software in the ordinary course of business are anticipated to be about $70,000 in fiscal year 2001, which includes about $38,000 for the new office building. Cash used for business combinations related primarily to the November 2000 purchase of DealerKid. See Note 7 to the Consolidated Financial Statements for more information on DealerKid. Fiscal year 2001 cash flows for discontinued operations represent primarily the payment of taxes associated with the sale of the Information Solutions segment in fiscal year 2000. 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. 12 CAPITALIZATION The company's ratio of total debt (total automotive solutions debt) to capitalization (total automotive solutions debt plus shareholders' equity) was 19.1% at June 30, 2001 compared to 19.0% at September 30, 2000. Remaining credit available under committed revolving credit agreements was $55,730 at June 30, 2001. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. The company anticipates that cash balances, cash flow from operations and cash available from committed credit agreements will be sufficient to fund normal operations over the next year. The company has consistently produced strong operating cash flows sufficient to fund normal operations. Strong operating 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 business combinations and Financial Services receivables. In fiscal year 1997, the company filed a shelf registration statement with the Securities and Exchange Commission whereby the company can issue up to $300,000 of notes. As of June 30, 2001, the company could issue an additional $130,000 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 the next year. 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 9, 2001, except for preferred share purchase rights, the company had no agreements or commitments with respect to the sale or issuance of preferred shares and no preferred shares were outstanding. 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. The company has paid dividends every year since the company's initial public offering in 1961. During the third quarter ended June 30, 2001, the company repurchased 1,539 Class A common shares for $33,879 ($22.02 per share). During the nine months ended June 30, 2001, the company repurchased 4,050 Class A common shares for $82,533 ($20.38 per share). As of June 30, 2001 the company could repurchase an additional 2,140 Class A common shares under existing board of directors' authorizations. On August 7, 2001, the board of directors approved an increase of 5,000 shares to the company's share repurchase authorization. MARKET RISKS INTEREST RATES The Automotive Solutions 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 generally have repayment terms of five years. 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. See Note 8 to the Consolidated Financial Statements for additional discussion of interest rate management agreements. 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 FOREIGN CURRENCY EXCHANGE RATES The company has foreign-based operations in Canada, which accounted for 6% of net sales and revenues for the nine months ended June 30, 2001. 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 13 expose the company to changes in foreign currency exchange rates. At June 30, 2001, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at June 30, 2001, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. ENVIRONMENTAL MATTER See Note 11 to the Consolidated Financial Statements for a discussion of the company's environmental contingencies. ACCOUNTING STANDARDS See Note 12 to the Consolidated Financial Statements for a discussion of the effect of accounting standards that the company has not yet adopted. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Management's Discussion and Analysis of the Financial Condition and Results of Operations constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on current expectations, estimates, forecasts and projections of future company or industry performance based on management's judgment, beliefs, current trends and market conditions. Forward- looking statements made by the company may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in any forward- looking statement. The company undertakes no obligation to update any forward- looking statements, whether as a result of new information, future events or otherwise. See also the discussion of factors that may affect future results contained in the company's Current Report on Form 8-K filed with the SEC on August 11, 2000, which we incorporate herein by reference. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K On April 18, 2001, the company filed a report on Form 8-K disclosing that the company's board of directors had approved a new shareholder rights plan to replace the previous plan that expired May 6, 2001. On May 2, 2001, the company filed a report on Form 8-K disclosing that Consumer Car Club Inc. closed its carclub.com service and the company would write off its $3.2 million equity investment during the quarter ended June 30, 2001. On August 7, 2001, the company filed a report on Form 8-K disclosing the retirement of Chairman David R. Holmes, effective January 1, 2002. 14 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 10, 2001 /s/ Dale L. Medford ---------------- ------------------------------------- Dale L. Medford Executive Vice President and Chief Financial Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----