<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1994
-----------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ____________________ to _____________________
Commission file number 0-132
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THE REYNOLDS AND REYNOLDS COMPANY
- - ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0421120
- - ----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
115 South Ludlow Street, Dayton, Ohio 45402
- - ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 443-2000
-------------------------
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
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 9, 1994:
Class A Common shares, 42,177,487 net of 4,052,541 treasury shares;
Class B Common shares, 10,000,000.
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<TABLE>
THE REYNOLDS AND REYNOLDS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Consolidated Income (Unaudited)
Three and Nine Months Ended June 30, 1994 and 1993 3
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1994 and September 30, 1993 4
Statements of Consolidated Cash Flows (Unaudited)
Nine Months Ended June 30, 1994 and 1993 5
Notes to Financial Statements (Unaudited) 6
Independent Accountants' Review Report 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three and Nine Months Ended June 30, 1994 and 1993 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
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<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE REYNOLDS AND REYNOLDS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(In thousands except per share data)
<CAPTION>
THREE MONTHS NINE MONTHS
------------------- ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales and Revenues:
Information systems:
Business forms $107,135 $ 98,581 $319,505 $291,978
Computer systems 90,342 66,316 266,448 198,064
-------- -------- -------- --------
Total information systems 197,477 164,897 585,953 490,042
Financial services 4,836 4,873 14,461 14,390
-------- -------- -------- --------
Total net sales and revenues 202,313 169,770 600,414 504,432
-------- -------- -------- --------
Costs and Expenses:
Information systems:
Cost of sales:
Business forms 59,200 55,020 178,655 166,008
Computer systems 47,449 34,534 143,278 102,127
-------- -------- -------- --------
Total cost of sales 106,649 89,554 321,933 268,135
-------- -------- -------- --------
Selling, general and administrative expenses:
Business forms 40,578 33,716 114,278 99,549
Computer systems 26,609 21,434 80,839 63,559
-------- -------- -------- --------
Total selling, general and administrative expenses 67,187 55,150 195,117 163,108
-------- -------- -------- --------
Restructuring charge 12,400 12,400
-------- --------
Financial services 1,762 1,823 4,719 7,014
-------- -------- -------- --------
Total costs and expenses 187,998 146,527 534,169 438,257
-------- -------- -------- --------
Operating Income 14,315 23,243 66,245 66,175
-------- -------- -------- --------
Other Charges (Income):
Interest expense 853 1,008 2,615 2,826
Interest income (303) (393) (918) (1,401)
Other (1,043) (152) (1,395) (372)
-------- -------- -------- --------
Total other charges (income) (493) 463 302 1,053
-------- -------- -------- --------
Income Before Income Taxes 14,808 22,780 65,943 65,122
Provision for (Benefit from) Income Taxes (3,289) 9,355 17,968 26,583
-------- -------- -------- --------
Income Before Effect of Accounting Change 18,097 13,425 47,975 38,539
Effect of Accounting Change (19,106)
-------- -------- -------- --------
Net Income $ 18,097 $ 13,425 $ 47,975 $ 19,433
======== ======== ======== ========
Earnings Per Common Share:
Income before effect of accounting change $.41 $.31 $1.09 $.88
Effect of accounting change (.44)
---- ---- ---- ----
Net income $.41 $.31 $1.09 $.44
==== ==== ===== ====
Average Number of Common Shares Outstanding 43,759 43,658 43,916 43,832
====== ====== ====== ======
Cash Dividends Declared Per Common Share $.085 $.065 $.245 $.195
===== ===== ===== =====
<FN>
See Independent Accountants' Review Report and Notes to Financial Statements.
</TABLE>
3
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<TABLE>
THE REYNOLDS AND REYNOLDS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1994 AND SEPTEMBER 30, 1993
(In thousands)
<CAPTION>
6/30/94 9/30/93
--------- --------
<S> <C> <C>
ASSETS
INFORMATION SYSTEMS
Current Assets:
Cash and equivalents $ 13,495 $ 9,437
-------- --------
Accounts receivable (less allowance for doubtful accounts:
6/30/94----$3,094; 9/30/93----$6,090) 104,022 105,713
-------- --------
Inventories:
Finished products 34,230 29,478
Work in process 2,817 1,851
Raw materials and supplies 5,759 6,977
-------- --------
Total inventories 42,806 38,306
-------- --------
Deferred income taxes 8,467 8,576
-------- --------
Prepaid expenses and other assets 13,571 6,880
-------- --------
Total current assets 182,361 168,912
-------- --------
Property, Plant and Equipment 253,426 247,262
Less Accumulated Depreciation 141,201 136,085
-------- --------
Net Property, Plant and Equipment 112,225 111,177
-------- --------
Intangible Assets - Net:
Excess of cost over net assets of companies acquired 79,508 71,760
Software licensed to customers 15,043 17,500
Other 9,019 11,195
-------- --------
Total intangible assets - net 103,570 100,455
-------- --------
Other Assets 33,504 27,217
-------- --------
Total Information Systems Assets 431,660 407,761
-------- --------
FINANCIAL SERVICES
Finance Receivables - Net 185,127 161,711
Cash and Other Assets 964 1,079
-------- --------
Total Financial Services Assets 186,091 162,790
-------- --------
Total Assets $617,751 $570,551
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INFORMATION SYSTEMS
Current Liabilities:
Accounts payable $ 27,886 $ 28,138
Accrued liabilities 58,680 55,271
-------- --------
Total current liabilities 86,566 83,409
Long-Term Debt 41,092 40,000
Retirement and Other Liabilities 51,165 52,086
-------- --------
Total Information Systems Liabilities 178,823 175,495
-------- --------
FINANCIAL SERVICES
Notes Payable 95,275 87,688
Deferred Income Taxes 47,793 42,064
Other Liabilities 1,687 1,979
-------- --------
Total Financial Services Liabilities 144,755 131,731
-------- --------
CONTINGENCIES
MINORITY INTEREST 4,030
--------
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred
Class A common 26,355 13,199
Class B common 313 188
Additional Paid-In Capital 1,734 2,693
Other Adjustments (3,953) (3,316)
Retained Earnings 265,694 250,561
-------- --------
Total Shareholders' Equity 290,143 263,325
-------- --------
Total Liabilities and Shareholders' Equity $617,751 $570,551
======== ========
<FN>
See Independent Accountants' Review Report and Notes to Financial Statements.
</TABLE>
4
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<TABLE>
THE REYNOLDS AND REYNOLDS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(In thousands)
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
INFORMATION SYSTEMS
Cash Flows Provided by (Used for) Operating Activities:
Net income $42,134 $14,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Effect of accounting change 19,106
Depreciation and amortization 26,839 17,261
Deferred income taxes (1,129) (192)
Deferred income taxes transferred
to financial services 3,493 1,651
Loss on sales of assets 2,693 76
Changes in operating assets and liabilities:
Accounts receivable (7,707) (4,549)
Inventories (2,846) 2,485
Prepaid expenses, intangible and other assets (11,033) (5,536)
Accounts payable 602 (4,264)
Accrued and other liabilities 4,531 (675)
------- -------
Net cash provided by operating activities 57,577 40,245
------- -------
Cash Flows Provided by (Used for) Investing Activities:
Acquisitions (9,943) (40,072)
Capital expenditures (16,074) (11,148)
Proceeds from sales of assets 9,752 905
Capitalization of software licensed to customers (2,520) (859)
Repayments from financial services 796 3,390
------- -------
Net cash used for investing activities (17,989) (47,784)
------- -------
Cash Flows Provided by (Used for) Financing Activities:
Additional borrowings 1,250 13,850
Principal payments on debt (2,007)
Cash dividends paid (10,599) (8,357)
Capital stock issued 1,439 3,205
Capital stock repurchased (25,112) (17,130)
------- -------
Net cash used for financing activities (35,029) (8,432)
------- -------
Effect of Exchange Rate Changes on Cash (501) (1,248)
------- -------
Increase (Decrease) in Cash and Equivalents 4,058 (17,219)
Cash and Equivalents - Beginning of Period 9,437 23,838
------- -------
Cash and Equivalents - End of Period $13,495 $ 6,619
======= =======
FINANCIAL SERVICES
Cash Flows Provided by Operating Activities $ 7,453 $6,067
Cash Flows Used for Investing Activities (14,612) (3,728)
Cash Flows Provided by (Used for) Financing Activities 6,791 (2,277)
------- ------
Increase (Decrease) in Cash and Equivalents (368) 62
Cash and Equivalents - Beginning of Period 996 963
------- ------
Cash and Equivalents - End of Period $ 628 $1,025
======= ======
<FN>
See Independent Accountants' Review Report and Notes to Financial Statements.
</TABLE>
5
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THE REYNOLDS AND REYNOLDS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying consolidated financial
statements contain all significant adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the financial position
(unaudited) of the company as of June 30, 1994 and September 30, 1993, the
results of operations (unaudited) for the three and nine months ended June 30,
1994 and 1993 and cash flows (unaudited) for the nine months ended June 30,
1994 and 1993.
(2) BUSINESS FORMS RESTRUCTURING
During the third quarter, the company recorded a restructuring charge of
$12,400. This restructuring charge reflected costs to be incurred in the
disposal of part of a product line and the consolidation of certain printing
operations. The company will discontinue the manufacture of certain low-margin
stock tab products and will close its Chambersburg, Pennsylvania plant. To
facilitate this process, the company sold a minority interest in a subsidiary
to Willamette Industries, Inc. for $4,000 in cash. Willamette, based in
Oregon, is a forest products company and a leading supplier of stock tab
products. It is anticipated that Willamette and the company will jointly own
and operate this subsidiary during the transition of manufacturing operations
to ensure continuous quality customer service. At the completion of this
transition period (anticipated to be less than one year), the minority interest
will be liquidated with no effect on net income. This transaction generated
about $11,500 of income tax benefits which more than offset the negative
after-tax effect of the restructuring charge.
The company also decided to consolidate its east coast custom business forms
manufacturing operations to maximize plant efficiencies. The company will
close its Chestertown, Maryland plant and consolidate those operations
primarily into the Hagerstown, Maryland plant. In addition, a number of
distribution facilities and sales offices will also be closed and related sales
and administrative positions will be eliminated.
Significant components of the restructuring charge are included in the
following table.
Severance and outplacement $ 3,692
Plant closure 4,011
Goodwill write-off 4,000
Other 697
-------
Total $12,400
=======
The severance and outplacement accruals represent benefits for 311 employees,
comprised principally of manufacturing employees but also including sales and
administrative employees. Through June 30, 1994, 99 employees were terminated
and $369 of severance and outplacement benefits were paid.
(3) BUSINESS CHANGES
On January 3, 1994, the company acquired substantially all of the assets and
assumed certain liabilities of Law Printing Company Inc. for $13,075. The
purchase price was paid by issuing 612,692 Class A common shares. Law, a
manufacturer of business forms primarily for automobile dealerships, had annual
sales of about $11,000 in 1993. The acquisition was accounted for as a
purchase and the accounts of Law were included in the company's financial
statements since January 3, 1994. The excess of the acquisition cost over the
fair value of net assets acquired is being amortized on a straight-line basis
over ten years. The acquisition of Law was considered a non-cash transaction
for accounting purposes and, accordingly, is not included in the statement of
6
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cash flows.
On January 5, 1994, the company acquired all outstanding shares of Formcraft
Inc. for $5,107 of cash. Formcraft, a manufacturer of general business forms
with strong forms management services, had annual sales of about $17,000 in
1993. The acquisition was financed with internally generated cash. The
acquisition was accounted for as a purchase and the accounts of Formcraft were
included in the company's financial statements since January 5, 1994. The
excess of the acquisition cost over the fair value of net assets acquired is
being amortized on a straight-line basis over ten years.
On May 9, 1994, the company acquired all outstanding shares of Management
Computer Services, Inc. (MCS) for $4,836 of cash. MCS, a leading provider of
parts locator services to automobile dealers under the name of One Touch, has
annual sales of about $4,000. The acquisition was accounted for as a purchase
and the accounts of MCS were included in the company's financial statements
since May 9, 1994. The excess of the acquisition cost over the fair value of
net assets acquired is being amortized on a straight-line basis over seven
years.
Allocation of Purchase Prices
<TABLE>
<CAPTION>
Law Formcraft MCS Total
------- --------- ------ -------
<S> <C> <C> <C> <C>
Current assets $ 2,112 $3,565 $ 453 $ 6,130
Property, plant and equipment 613 4,007 323 4,943
Other assets 58 177 235
Excess of cost over
net assets acquired 13,129 1,425 4,858 19,412
Liabilities assumed (2,779) (3,948) (975) (7,702)
------- ------ ------ -------
Totals $13,075 $5,107 $4,836 $23,018
======= ====== ====== =======
</TABLE>
On June 10, 1994, the company completed the sale of its French subsidiary,
Reynolds and Reynolds S.A., to Turbodata N.V., of Belgium. The sales proceeds
of about $8,000 approximated the net asset investment. In 1993, this
subsidiary reported sales of $18,000 and a net loss of $500.
(4) RECONCILIATION OF INCOME TAX RATES
<TABLE>
<CAPTION>
Three Months Nine Months
---------------- ----------------
1994 1993 1994 1993
------- ------ ------- -------
<S> <C> <C> <C> <C>
Statutory federal income taxes $ 5,183 $7,745 $23,080 $22,141
Federal income tax rates 35.0% 34.0% 35.0% 34.0%
State taxes and permanent items 919 1,610 4,279 4,442
Divestiture of stock tab business (11,500) (11,500)
Write-off of nondeductible goodwill 1,400 1,400
Sale of French subsidiary 709 709
------- ------ ------- ------
Income tax provision (benefit) $(3,289) $9,355 $17,968 $26,583
======= ====== ======= =======
Effective income tax rates (22.2%) 41.1% 27.2% 40.8%
</TABLE>
(5) CASH FLOW STATEMENTS
The following supplemental information has been presented to aid in the
analysis of the statements of consolidated cash flows for the nine months ended
June 30, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
------- --------
<S> <C> <C>
Income Taxes Paid:
Information systems $20,666 $25,844
Financial services 1,690 2,880
Interest Paid:
Information systems $1,815 $1,317
Financial services 3,683 4,176
</TABLE>
7
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(6) STOCK SPLIT
On February 17, 1994, the company's board of directors approved a two-for-one
common stock split. As a result of the split, on March 15, 1994, common
shareholders received one additional share for each share held as of March 1,
1994. Par value remained $.625 per Class A common share and $.03125 per Class
B common share. The company reclassified $13,199 to Class A common and $187 to
Class B common from additional paid-in capital because par value did not
change. Share and per share information presented in the accompanying
financial statements was restated to reflect the stock split.
(7) 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 three environmental remediation sites. The EPA has contended that any
company linked to a CERCLA site is potentially liable for all response costs
under the legal doctrine of joint and several liability.
The first site relates to a privately owned and operated solid waste disposal
facility. The EPA has issued a Record of Decision mandating certain
remediation activities. The company has shared costs with other PRPs for the
remedial investigation and feasibility study of the site. The company believes
it is a minor participant, and has accrued its estimated share of response
costs as of June 30, 1994.
The second site involves a municipal waste disposal facility owned and operated
by four municipalities. The company joined a PRP coalition and is sharing
remedial investigation and feasibility study costs with other PRPs. During the
quarter ended June 30, 1994, the PRP coalition received an engineering
evaluation/cost analysis of the presumed remedy for the site from its private
contractor. However, because the EPA has not yet selected a remedy, potential
remediation costs remain uncertain. Remediation costs for a typical CERCLA
site on the National Priorities List average about $30,000. The engineering
evaluation/cost analysis was consistent with this average. During the quarter
ended June 30, 1994, the company determined that its share of remediation costs
may increase because contribution litigation has not yet resulted in additional
members joining the PRP coalition. Additionally, certain members of the PRP
coalition may not be able to meet future remediation obligations. Based on
this new information, the company increased its accrual by $1,750 during the
quarter bringing the total amount accrued to $2,500 as of June 30, 1994.
Management believes that the reasonably foreseeable resolution will not have a
material effect on the financial statements.
In January, 1994, by means of a special notice letter, the EPA notified the
company that it was considered to be one of more than three hundred PRPs at a
former drum reconditioning facility in Hillsborough County, Florida. A
remedial investigation and feasibility study is complete. A record of decision
has been issued, and a statement of work for the remedial design and remedial
action is in circulation. Following an investigation by the company into its
possible past connection with or use of the facility in question, the company
believes that it did not have any involvement with the facility. Management
believes that the reasonably foreseeable resolution of this matter will not
have a material effect on the financial statements.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors,
The Reynolds and Reynolds Company:
We have reviewed the accompanying condensed consolidated balance sheet of The
Reynolds and Reynolds Company and subsidiaries as of June 30, 1994, and the
related statements of consolidated income for the three and nine months ended
June 30, 1994 and 1993 and consolidated cash flows for the nine months ended
June 30, 1994 and 1993. These financial statements are the responsibility of
the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope than
an audit in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Reynolds and Reynolds Company
and subsidiaries as of September 30, 1993 and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated November 15, 1993, we
expressed an unqualified opinion, with an explanatory paragraph as to the
company's change in method of accounting for postretirement benefits other than
pensions to conform with Statement of Financial Accounting Standards No. 106,
on those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of
September 30, 1993 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE
Dayton, Ohio
August 10, 1994
9
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ITEM 2.
THE REYNOLDS AND REYNOLDS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(Dollars in thousands except per share data)
RESTRUCTURING CHARGE AND MINORITY INTEREST
During the third quarter, the company announced a restructuring of its general
printing business to focus on value-added products and to improve
profitability. The company will cease manufacturing low margin single-part
stock continuous computer paper and close the Chambersburg, Pennsylvania plant.
The company has begun a relationship with Willamette Industries, Inc. to
provide customers with these products. The company will also discontinue
certain low-margin wholesale stock continuous business. During this transition
period, the company and Willamette will jointly own and operate the
Chambersburg facility. This joint ownership was accomplished through the sale
of a minority interest in a subsidiary to Willamette for $4,000.
The company is also consolidating its east coast custom printing manufacturing
operations to improve plant efficiencies. The company will close its
Chestertown, Maryland plant and move those operations primarily to the
Hagerstown, Maryland plant. Additionally, a number of distribution facilities
and sales offices will be closed and related sales and administrative positions
will be eliminated.
In total, about 300 positions will be eliminated, however, about 50 new
positions will be created at the Hagerstown facility. Once the restructuring
is fully implemented, operating income is expected to increase about $4,300 on
an annual basis. The estimated cost of these actions of $12,400 was recorded
as a restructuring charge and reported as a separate line on the income
statement. Of the $12,400 restructuring charge, $5,794 related to cost of
sales and $6,606 related to selling, general and administrative expenses. (See
Notes to Financial Statements for additional information regarding
restructuring costs.) The negative effect of this restructuring charge was
more than offset by income tax benefits associated with the divestiture of the
stock tab business.
STOCK SPLIT
On February 17, 1994, the company's board of directors approved a two-for-one
common stock split. As a result of the split, on March 15, 1994, common
shareholders received one additional share for each share held as of March 1,
1994. Par value remained $.625 per Class A common share and $.03125 per Class
B common share. This split represented the sixth time the company has split
its stock two-for-one since the initial public offering in 1961. The last such
split occurred in November 1992. The accompanying financial information was
restated to reflect the latest stock split.
BUSINESS CHANGES
On June 10, 1994, the company completed the sale of its French subsidiary,
Reynolds and Reynolds S.A., to Turbodata N.V., of Belgium. The sales proceeds
of about $8,000 approximated the net asset investment. In 1993, this
subsidiary reported sales of $18,000 and a net loss of $500.
On May 9, 1994, the company acquired all outstanding shares of Management
Computer Services, Inc. (MCS) for $4,836 of cash. MCS, a leading provider of
parts locator services to automobile dealers under the name of One Touch, has
annual sales of about $4,000.
On January 5, 1994, the company purchased Formcraft Inc. for $5,107 in cash.
Formcraft, a Houston-based manufacturer of general business forms with strong
forms management services, had annual sales of about $17,000 in 1993.
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<PAGE> 11
On January 3, 1994, the company purchased certain net assets of Law Printing
Company Inc. for $13,075 of stock. Law, a California-based manufacturer of
business forms primarily for automobile dealerships, had annual sales of about
$11,000 in 1993.
On June 29, 1993, the company purchased COIN Inc. for $29,633 in cash. COIN,
based in Atlanta, had one of the larger installed bases of customers in the
automobile dealership systems industry, and had historically been a leader in
automating the finance and insurance function of the dealership. Revenues of
the acquired COIN business were about $55,000 in 1992.
On May 4, 1993, the company purchased certain net assets of BVI Information
Systems Ltd., a small Montreal-based provider of computer systems for
automobile dealerships.
On March 3, 1993, the company purchased certain net assets of Woodbury Business
Systems, an Atlanta-based sales organization for a regional business forms
supplier. Woodbury sales were about $15,000 in 1992.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
Consolidated net sales and revenues increased $32,543 or 19% in the third
quarter and $95,982 or 19% through nine months. Excluding the effect of
acquisitions, revenues grew $13,907 or 8% in the third quarter and $42,199 or
8% for nine months primarily because of a significant increase in computer
systems products revenues. Computer systems order backlogs were exceptionally
strong at June 30, 1994 and should support strong fourth quarter sales.
Information systems gross profit increased $15,485 or 21% in the third quarter
and $42,113 or 19% year-to-date, consistent with the sales growth.
Selling, general and administrative (SG&A) expenses increased as a percent of
sales in the third quarter primarily because of a $1,750 expense related to an
Environmental Protection Agency (EPA) Superfund site. See Notes to Financial
Statements for a further discussion of this contingency.
Consolidated operating income decreased $8,928 in the third quarter because of
the negative pre-tax effect of the $12,400 restructuring charge and other
one-time expenses of $2,793. These one-time expenses include the $1,750
environmental expense and $1,043 of period expenses related to the
restructuring. Excluding these one-time expenses, operating income would have
been $29,508, an increase of 27%. This increase resulted from strong growth of
computer systems revenues and operating income. Excluding the one-time
charges, year-to-date operating income of $81,438 increased $15,263 or 23% with
computer systems, business forms and financial services all contributing
significantly.
Other income was $1,043 in the quarter compared to $152 last year. The
majority of this increase related to a pre-tax gain on the third quarter 1994
sale of the French subsidiary. After income taxes, however, the effect of this
disposal was near breakeven.
During the quarter, the company reported an income tax benefit of $3,289
because of the combined effect of several unusual items. See Notes to
Financial Statements for a reconciliation of federal statutory rates to
effective income tax rates.
Third quarter net income of $18,097 or $.41 per share increased $4,672 or 35%
over last year. Year-to-date net income of $47,975 or $1.09 per share
increased $9,436 or 24% before the effect of accounting change. Earnings
growth caused annualized return on equity to reach 22.6% compared to 20.1% last
year, before the effect of accounting change.
The company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
recorded a transition charge of $19,106 or $.44 per share in the first quarter
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of 1993.
BUSINESS FORMS SEGMENT
Net sales increased $8,554 or 9% in the third quarter. This increase resulted
from $7,104 from acquisitions and an 8% increase in value-added automotive
forms and forms management services. These increases were partially offset by
a 22% decline in sales of commodity paper products. The decision to exit the
manufacture of certain stock tab products and discontinue the sale of certain
wholesale products should cause sales of these low margin products to decline
further. Year-to-date sales increased $27,527 or 9% because of $19,828 from
acquisitions and an 8% increase in value added automotive forms and forms
management services. A decline in paper products sales partially offset this
sales growth.
In the third quarter, gross profit increased $4,374 or 10% to 44.7% of sales
compared to 44.2% last year. Year-to-date, gross profit increased $14,880 or
12% to 44.1% of sales versus 43.1% last year. Gross profit increased primarily
because of strong growth in value-added automotive forms sales. Paper costs
increased twice during the third quarter as paper manufacturers raised prices.
Since these increases occurred relatively late in the quarter, there was no
impact on net income. However, fourth quarter income could be affected as
these higher paper costs move out of inventory. The company will attempt to
minimize this effect through efficiencies and pricing.
SG&A expenses were 37.9% and 35.8% of sales for the third quarter and nine
months, respectively. This compares to 34.2% and 34.1% last year. The primary
reasons for this increase were a $1,750 EPA Superfund site expense and
additional investment in marketing and selling activities.
Operating income decreased $14,888 in the quarter and $12,249 for nine months
because of the $12,400 restructuring charge and $2,793 of one-time expenses.
Excluding these charges, operating income was $10,150 for the quarter compared
to $9,845 last year. Year-to-date operating income of $29,365 excluding the
one-time charges, increased 11% because of a strong increase in automotive
forms. General printing profitability is expected to improve in fiscal year
1995, once the restructuring is fully implemented. However, fourth quarter
benefits of the restructuring are expected to be offset by additional period
costs to be incurred to implement the restructuring.
COMPUTER SYSTEMS PRODUCTS
Revenues increased $24,026 or 36% in the quarter and $68,384 or 35% for nine
months with about half of the increase as a result of acquisitions. Revenues
increased primarily because of ERA computer systems sales and recurring
revenues. ERA computer systems sales increased significantly as a result of
greater unit sales as new orders remained very strong. Unit sales increased
15% over the second quarter 1994 as additional installation employees hired
earlier in the fiscal year increased our installation capacity. These
employees completed training and began installing computer systems in the third
quarter. The backlog of new orders for automotive computer systems remained
exceptionally strong at June 30, 1994. This backlog should support strong
computer systems sales in the fourth quarter. Recurring revenues grew steadily
because of the continued increase in the number of ERA and electronic parts
catalog software applications supported. This trend in recurring revenues
should continue throughout 1994. Medical computer sales and operating income
were relatively flat with last year for the quarter. Year-to-date medical
operating results remained behind last year because of continued uncertainty in
the healthcare industry, which first affected operations in the second quarter
of fiscal 1993.
Gross profit increased $11,111 or 35% in the quarter, consistent with the sales
increase. The gross profit percentage of 47.5% of sales represented a
significant increase over 1994's second quarter of 44.8%. The improved gross
margin resulted from the additional installation personnel becoming more
productive upon completion of training. These employees were hired earlier
this fiscal year to help the company satisfy greater demand for its products.
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During the training period, which typically lasts four to five months, the
company incurs expenses without additional revenues being generated.
Year-to-date gross profit increased $27,233 and represented 46.2% of revenues,
compared to 48.4% last year. This decline, as a percent of revenues, occurred
in spite of reduced computer equipment costs, because of competition in the
marketplace and the aforementioned hiring of installation resources.
As a percent of revenues, SG&A expenses were 29.5% in the third quarter and
30.3% for nine months. This compares to 32.3% and 32.1% last year. SG&A
expenses grew at a slower rate than revenues because of increased software
capitalization from product development activities and the effect of the COIN
acquisition. The COIN acquisition allowed the company to add revenues and
leverage its existing SG&A investment.
Operating income increased $5,936 or 57% in the third quarter and $9,953 or 31%
through nine months. Strong operating income from automotive computers was the
primary reason operating income rose significantly. As a percent of sales,
operating income was 18% in the third quarter compared to 16% last year and 14%
in 1994's second quarter. The significant increase over the second quarter
occurred primarily because of higher sales as a result of strong orders and
greater installation capacity.
FINANCIAL SERVICES
Revenues were relatively flat for both the quarter and nine months compared to
last year. The lease portfolio grew because of strong computer systems sales.
However, interest income remained about the same as last year because of lower
interest rates on new leases as compared to leases maturing.
Operating income increased slightly in the third quarter and $2,366 or 32%
year-to-date. The increase for nine months resulted from favorable bad debt
experience and improved interest rate spreads. Bad debt expenses declined
$1,550 through nine months because of a reduction in lease defaults. The
allowance for losses was also lowered slightly because of the improved default
experience. Additionally, interest expense declined $610 year-to-date because
of lower borrowing rates.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems strong operating cash flow resulted from record net income.
Cash flow was used to fund investments in working capital, acquisitions and
capital expenditures. Working capital increased because of the timing of
income tax payments and higher sales, which increased accounts receivable.
During the year, the company invested cash to acquire Formcraft for $5,107 and
Management Computer Services for $4,836. The Law acquisition was reported as a
non-cash transaction because its net assets were exchanged for $13,075 of the
company's stock. As such, this transaction was not included in the cash flow
statement. Capital expenditures of $9,800 in computer systems and $6,300 in
business forms occurred in the normal course of business. The company received
proceeds of $4,000 related to the sale of minority interest in a subsidiary and
about $5,000, net of subsidiary cash balances, from the sale of the French
subsidiary. The company also received notes receivable of $1,645 from the sale
of the French subsidiary, which were excluded from the cash flow statement as a
non-cash transaction. Cash was also returned to shareholders as $10,599 of
dividends and $25,112 of share repurchases. See the shareholders' equity
section for a discussion of dividends and share repurchases.
Financial services operating cash flow and collections on finance receivables
were invested in new leases of the company's products and used to make
scheduled debt repayments.
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CAPITALIZATION
The company's ratio of total debt (total information systems debt) to
capitalization (total information systems debt plus shareholders' equity) was
12.5% at June 30, 1994 and 13.2% at September 30, 1993. The company maintains
revolving credit agreements, of which $40,000 was available at June 30, 1994.
The company also has a variety of short-term credit lines available. The
company expects cash balances and internally generated cash to be sufficient to
fund 1994 normal operations, which include anticipated capital expenditures of
about $18,000.
SHAREHOLDERS' EQUITY
The company's Class A common shares are listed 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, 1994, none of these preferred shares were outstanding and the
company had no agreements or commitments with respect to the sale or issuance
of these shares.
During 1993, the board of directors authorized the repurchase of up to two
million Class A common shares for treasury of which 418,800 were repurchased.
On May 2, 1994, the board of directors authorized the repurchase of up to an
additional two million Class A common shares for treasury. The company
repurchased 1,106,700 Class A common shares at an average price of $22.69 per
share during the nine months ended June 30, 1994. In early July 1994, the
company repurchased 52,000 additional Class A common shares at an average price
of $23.19. This brings the remaining balance of shares authorized for
repurchase to 2,422,500 at August 9, 1994.
In February 1994, the board of directors raised the quarterly dividend to $.085
per Class A common share, an increase of 13%. This action followed increases
of 15% in November 1993 and 18% in 1992. Cash dividends have been raised seven
times since 1989 and paid each quarter since the company's initial public
offering in 1961.
ENVIRONMENTAL MATTERS
See Notes to Financial Statements (Note 7 - Contingencies).
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No exhibits are required to be filed for the quarter ended
June 30, 1994.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
June 30, 1994.
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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, 1994 /S/David R. Holmes
----------------- ---------------------------------------
David R. Holmes, Chairman, President
and Chief Executive Officer
Date August 10, 1994 /S/Dale L. Medford
----------------- ---------------------------------------
Dale L. Medford, Vice President,
Corporate Finance and Chief Financial
Officer
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