<PAGE> 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, 1997
0-132
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(Commission file number)
THE REYNOLDS AND REYNOLDS COMPANY
---------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-0421120
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
115 SOUTH LUDLOW STREET, DAYTON, OHIO 45402
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(Address of principal executive offices)
(937) 485-2000
--------------
(Registrant's telephone number)
NONE
----
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
On July 30, 1997, 79,235,980 Class A common shares and 20,000,000 Class B common
shares were outstanding.
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THE REYNOLDS AND REYNOLDS COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income
For the Three and Nine Months Ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets
As of June 30, 1997 and September 30, 1996 4
Condensed Statements of Consolidated Cash Flows
For the Nine Months Ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended June 30, 1997 and 1996 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales and Revenues
Information systems
Products $ 235,803 $ 199,312 $ 710,717 $ 524,037
Services 94,470 81,145 273,416 234,091
----------- ----------- ----------- -----------
Total information systems 330,273 280,457 984,133 758,128
Financial services 7,787 6,592 22,436 19,292
----------- ----------- ----------- -----------
Total net sales and revenues 338,060 287,049 1,006,569 777,420
----------- ----------- ----------- -----------
Costs and Expenses
Information systems
Cost of sales
Products 145,121 114,728 429,239 300,531
Services 40,602 31,908 109,589 92,461
----------- ----------- ----------- -----------
Total cost of sales 185,723 146,636 538,828 392,992
Selling, general and administrative expenses 127,823 94,314 343,829 255,240
Financial services 3,772 2,871 10,769 8,605
----------- ----------- ----------- -----------
Total costs and expenses 317,318 243,821 893,426 656,837
----------- ----------- ----------- -----------
Operating Income 20,742 43,228 113,143 120,583
----------- ----------- ----------- -----------
Other Charges (Income)
Interest expense 2,797 1,332 7,154 3,291
Interest income (798) (416) (2,033) (1,402)
Other (380) (370) (1,055) (1,108)
----------- ----------- ----------- -----------
Total other charges 1,619 546 4,066 781
----------- ----------- ----------- -----------
Income Before Income Taxes 19,123 42,682 109,077 119,802
Provision For Income Taxes 11,845 18,374 50,032 51,150
----------- ----------- ----------- -----------
Net Income $ 7,278 $ 24,308 $ 59,045 $ 68,652
=========== =========== =========== ===========
Earnings Per Common Share $ 0.09 $ 0.28 $ 0.70 $ 0.81
=========== =========== =========== ===========
Average Number of Common Shares Outstanding 83,734 85,437 84,641 85,231
=========== =========== =========== ===========
Cash Dividends Declared Per Common Share $ 0.08 $ 0.06 $ 0.24 $ 0.18
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND SEPTEMBER 30, 1996
(In thousands)
<TABLE>
<CAPTION>
6/30/97 9/30/96
----------- -----------
<S> <C> <C>
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $ 35,781 $ 11,130
Accounts receivable 170,561 161,278
Inventories 56,408 53,202
Other current assets 49,468 45,473
----------- -----------
Total current assets 312,218 271,083
Property, Plant and Equipment, less accumulated depreciation of
$194,465 at 6/30/97 and $173,587 at 9/30/96 176,477 167,667
Goodwill 102,400 94,969
Other Intangible Assets 22,361 25,784
Other Assets 47,878 50,859
----------- -----------
Total Information Systems Assets 661,334 610,362
----------- -----------
FINANCIAL SERVICES ASSETS
Finance Receivables 358,901 311,576
Cash and Other Assets 1,033 1,706
----------- -----------
Total Financial Services Assets 359,934 313,282
----------- -----------
TOTAL ASSETS $ 1,021,268 $ 923,644
=========== ===========
INFORMATION SYSTEMS LIABILITIES
Current Liabilities $ 165,042 $ 167,278
Long-Term Debt 133,821 84,601
Other Liabilities 70,563 63,216
----------- -----------
Total Information Systems Liabilities 369,426 315,095
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 192,806 161,911
Other Liabilities 83,718 73,643
----------- -----------
Total Financial Services Liabilities 276,524 235,554
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 49,561 51,226
Other Adjustments (6,428) (6,203)
Retained Earnings 332,185 327,972
----------- -----------
Total Shareholders' Equity 375,318 372,995
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,021,268 $ 923,644
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
INFORMATION SYSTEMS
Cash Flows Provided By Operating Activities $ 125,922 $ 75,310
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (70,537) (77,523)
Capital expenditures (28,564) (27,787)
Net proceeds from asset sales 13,480 5,958
Capitalization of software licensed to customers (1,253) (3,307)
Repayments from financial services 5,060 3,518
--------- ---------
Net cash flows used for investing activities (81,814) (99,141)
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 99,510 47,491
Principal payments on debt (59,854) (6,159)
Cash dividends paid (19,636) (14,837)
Capital stock issued 1,204 1,469
Capital stock repurchased (40,456) (16,666)
--------- ---------
Net cash flows provided by (used for) financing activities (19,232) 11,298
--------- ---------
Effect of Exchange Rate Changes on Cash (225) (290)
--------- ---------
Increase (Decrease) in Cash and Equivalents 24,651 (12,823)
Cash and Equivalents, Beginning of Period 11,130 18,366
--------- ---------
Cash and Equivalents, End of Period $ 35,781 $ 5,543
========= =========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 14,521 $ 10,634
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (108,823) (87,184)
Collections on finance receivables 67,963 56,025
--------- ---------
Net cash flows used for investing activities (40,860) (31,159)
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 67,150 54,033
Principal payments on debt (36,255) (29,862)
Repayments to information systems (5,060) (3,518)
--------- ---------
Net cash flows provided by financing activities 25,835 20,653
--------- ---------
Increase (Decrease) in Cash and Equivalents (504) 128
Cash and Equivalents, Beginning of Period 1,293 663
--------- ---------
Cash and Equivalents, End of Period $ 789 $ 791
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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THE REYNOLDS AND REYNOLDS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet as of September 30, 1996, is condensed financial information
taken from the audited balance sheet. The interim financial statements are
unaudited. In the opinion of management, the accompanying interim financial
statements contain all significant adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the company's financial
position, results of operations and cash flows for the periods presented.
(2) INVENTORIES
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Finished products $46,287 $42,953
Work in process 3,448 3,788
Raw materials and supplies 6,673 6,461
------- -------
Total inventories $56,408 $53,202
======= =======
</TABLE>
(3) BUSINESS COMBINATIONS
The following business combinations were accounted for as purchases and the
accounts of the acquired businesses were included in the company's financial
statements since the dates of acquisition.
Effective June 30, 1997, the company purchased the net assets of Fiscal
Information Inc. of Daytona Beach, Florida and the stock of Fiscal Information
Inc. of Loveland, Colorado. These related companies provide information systems
to physician practices with primary emphasis on practice management systems for
radiologists. The combined Fiscal companies had 1996 sales of about $10,000. The
purchase price of about $14,000 was paid in cash from existing cash balances.
During the third quarter of fiscal year 1997 a preliminary appraisal was
completed and $4,300 of the purchase price was allocated to in-process research
and development.
During March 1997, the company purchased the net assets of Advanced Medical
Applications, a healthcare systems company with electronic medical records and
clinical management capabilities. The purchase price of about $7,500 was paid in
cash from existing cash balances and preliminarily allocated to the assets
acquired and liabilities assumed, pending the outcome of an appraisal. During
the third quarter of fiscal year 1997 a preliminary appraisal was completed and
$6,700 of the purchase price was allocated to in-process research and
development.
The in-process research and development acquired in the Fiscal Information and
Advanced Medical Applications business combinations represents software
development costs for which technological feasibility was not established and
for which there was no alternative future use. The costs of in-process research
and development of both Fiscal Information Inc. and Advanced Medical
Applications were charged to selling, general and administrative expenses during
the third quarter of fiscal year 1997.
Effective December 31, 1996, the company purchased substantially all net assets
of Vanier Graphics Corporation from American Business Products for about
$47,000, subject to finalization of the purchase price. Vanier, a provider of
business forms and related forms management and workflow analysis services, had
1996 sales of about $130,000. The purchase price was paid in cash using proceeds
from the Company's issuance of notes in a public offering. The total purchase
price was allocated to the assets and liabilities of the acquired company.
Goodwill of $9,570 was recorded in accounting for this transaction and is being
amortized on a straight-line basis over fifteen years. Recorded liabilities
included the costs to exit duplicate facilities of Vanier. These liabilities
included the cost of closing four Vanier manufacturing plants, twelve
distribution facilities and an administrative building. At June 30, 1997 the
company had closed one manufacturing plant and eight distribution facilities. As
of December 31, 1996 key elements of the costs accrued for exiting duplicate
facilities were estimated. During the third quarter of fiscal year 1997 the
company revised these estimates based on updated information and accrued $275 of
additional liabilities for costs to exit duplicate facilities. This adjustment
was reflected in the allocation of the purchase price and did not effect net
income for the quarter. As of the revised December 31, 1996 opening balance
sheet, key elements of the costs accrued for exiting duplicate facilities were
involuntary termination
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benefits of $2,000, relocation costs of $200 and exit costs of $900. Involuntary
termination benefits represent severance payments and outplacement services for
239 employees, principally for manufacturing employees. Plant closing costs
consist primarily of lease costs. Through June 30, 1997, $1,019 of involuntary
termination benefits were paid to 150 employees and $33 of relocation costs and
$203 of exit costs were paid. The company recorded the assets of the duplicate
Vanier facilities as current assets held for sale. As of the revised December
31, 1996 opening balance sheet, these assets of $7,372 were recorded at
estimated fair market value less disposal costs. At June 30, 1997, $3,684 of
these assets had been sold.
In fiscal year 1996, the company purchased Duplex Products Inc. and recorded
liabilities for the costs to exit duplicate manufacturing, distribution and
administrative facilities of Duplex. These liabilities included the cost of
closing seven Duplex manufacturing plants, five distribution facilities and an
administrative building. The company has closed all seven of the manufacturing
plants, three distribution facilities and the administrative building. The two
remaining distribution facilities will not be closed. As of May 20, 1996 key
elements of the costs accrued for exiting duplicate facilities were estimated.
During the third quarter of fiscal year 1997 the company revised these estimates
based on updated information and reduced accrued liabilities for costs to exit
duplicate facilities by $2,356. This adjustment was reflected in the allocation
of the purchase price and did not effect net income for the quarter. As of the
revised May 20, 1996 opening balance sheet, key elements of the costs accrued
for exiting duplicate facilities were involuntary termination benefits of
$7,324, relocation costs of $1,296 and exit costs of $750. Involuntary
termination benefits represent severance payments and outplacement services for
457 employees, principally for manufacturing employees. Exit costs consist
primarily of lease costs. Through June 30, 1997, $5,525 of involuntary
termination benefits were paid to 368 employees and $721 of relocation costs and
$352 of exit costs were paid. The company recorded the assets of the duplicate
Duplex facilities as current assets held for sale. As of the revised May 20,
1996 opening balance sheet, these assets of $13,878 were recorded at estimated
fair market value less disposal costs. At June 30, 1997, $11,307 of these assets
had been sold.
(4) THIRD QUARTER CHARGE
During the third fiscal quarter the company recorded a pre-tax charge of
$17,063. The charge included $11,000 of in-process research and development
costs acquired in connection with the recent purchases of Advanced Medical
Applications Inc. and Fiscal Information Inc. The balance of the third quarter
charge represented the write-off of certain assets, primarily in the automotive
systems business. About $4,500 of the assets written off represented the
company's investment in software licensed to customers and goodwill related to a
used vehicle locator system and the 1995 acquisition of Dealer Internet Services
Corporation. During the third quarter of fiscal year 1997 the company finalized
a strategic alliance with Microsoft Corporation to offer the company's new car
buying service and a used vehicle locator service on Microsoft's CarPoint
on-line automotive service. The company will promote this alliance instead of
its existing products. The remainder of the intangible asset write-offs
represented internal use software and software licensed to customers which the
company will no longer use or whose asset value was no longer supported by
undiscounted cash flows. The charge increased computer systems cost of sales
$3,934, computer systems selling, general and administrative (SG&A) expenses
$12,684 and business forms SG&A expenses $445. After income taxes, the charge
reduced net income by $12,573 or $.15 per share. The income tax benefit on the
third quarter charge represented a 26.3% effective tax rate because not all of
the charges were tax deductible.
(5) FOURTH QUARTER CHARGE
During the fourth quarter of fiscal year 1997, the company expects to record
additional charges of between $18,000 and $25,000 related primarily to closing
certain manufacturing and distribution facilities and streamlining other
functions. On July 22, 1997 the company announced plans to close business forms
manufacturing facilities in Dayton, Ohio, Salt Lake City, Utah and Winsted,
Connecticut. As of July 30, 1997 management has not yet finalized the
restructuring plan.
(6) SUBSEQUENT EVENT
On July 2, 1997 the company purchased the outstanding shares of Crain-Drummond
Inc. from UARCO Inc., a subsidiary of Settsu Corporation of Osaka, Japan.
Crain-Drummond, a Canadian provider of business document outsourcing, document
management and work process optimization services, had 1996 sales of about
$130,000. This acquisition will be accounted for as a purchase. The purchase
price of about $47,000 will be paid in cash from existing cash balances and
borrowings from existing credit lines.
7
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(7) FINANCING ARRANGEMENTS
In December 1996, the company received proceeds of $99,510 in connection with
the issuance of $100,000 of notes in a public offering. Interest on the notes is
payable each June and December at an annual interest rate of 7%. Principal is
due at the end of the ten year life of the notes. The proceeds were used to
retire debt incurred in the purchase of Duplex Products and to fund the purchase
of Vanier Graphics.
On July 16, 1997 the company replaced its existing revolving credit agreements
with a new five year, $150,000 agented revolving credit agreement with a
consortium of banks.
(8) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities for
the nine months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
INFORMATION SYSTEMS
Net Income $ 52,049 $ 62,250
Depreciation and Amortization 44,374 32,097
Purchased In-Process Research and Development Costs 11,000
Deferred Income Taxes (344) (3,110)
Deferred Income Taxes Transferred to Financial Services 3,945 225
Gains on Sales of Assets (172) (2,909)
Changes in Operating Assets and Liabilities
Accounts receivable 5,872 (19,716)
Inventories 7,796 9,820
Prepaid expenses and other current assets (7,081) (3,870)
Intangible and other assets 4,336 (1,313)
Accounts payable (3,248) (2,300)
Accrued liabilities 1,154 2,366
Other liabilities 6,241 1,770
--------- ---------
Net Cash Provided by Operating Activities $ 125,922 $ 75,310
========= =========
FINANCIAL SERVICES
Net Income $ 6,996 $ 6,402
Deferred Income Taxes 9,563 3,482
Deferred Income Taxes Transferred from Information Systems (3,945) (225)
Changes in Receivables, Other Assets and Other Liabilities 1,901 975
--------- ---------
Net Cash Provided by Operating Activities $ 14,521 $ 10,634
========= =========
</TABLE>
(9) CONTINGENCIES
The U.S. Environmental Protection Agency (EPA) designated the company as one of
a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at four
environmental remediation sites. The EPA has contended that any company linked
to a CERCLA site is potentially liable for all response costs under the legal
doctrine of joint and several liability.
The first site relates to a privately owned and operated solid waste disposal
facility. The EPA has issued a record of decision mandating certain remediation
activities. The company has shared costs with other PRPs for the remedial
investigation and feasibility study of the site. During the fourth quarter of
fiscal year 1996, the company accepted a de minimis settlement offer and has no
future obligation with respect to this site.
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
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engineering
evaluation/cost analysis was consistent with this average. During the fourth
quarter of fiscal year 1996, an agreement was reached whereby the state of
Connecticut will contribute $8,000 towards remediation costs.
In January 1994, by means of a special notice letter, the EPA notified the
company that it was considered to be one of more than three hundred PRPs at a
former drum reconditioning facility. A remedial investigation and feasibility
study is complete. A record of decision has been issued, and a statement of work
for the remedial design and remedial action is in circulation. The company was
unable to substantiate any previous involvement with this facility. During the
fourth quarter of fiscal year 1996, the company accepted a de minimis settlement
offer and is awaiting final approval. Upon final approval, the company will have
no further obligation with respect to this site.
In connection with the acquisition of Duplex, the company became involved in one
additional environmental remediation site. In 1994 Duplex was named a PRP as one
of several thousand users of a solid waste landfill. At June 30, 1997 potential
remediation costs are uncertain.
The company has accrued its estimated share of response costs for environmental
remediation sites as of June 30, 1997 and believes that the reasonably
foreseeable resolution will not have a material adverse effect on the financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE REYNOLDS AND REYNOLDS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollars in thousands except per share data)
THIRD QUARTER CHARGE
During the third fiscal quarter the company recorded a pre-tax charge of
$17,063. The charge included $11,000 of in-process research and development
costs acquired in connection with the recent purchases of Advanced Medical
Applications Inc. and Fiscal Information Inc. The balance of the third quarter
charge represents the write-off of certain assets, primarily in the automotive
systems business. The charge increased computer systems cost of sales $3,934,
computer systems selling, general and administrative (SG&A) expenses $12,684 and
business forms SG&A expenses $445. After income taxes, the charge reduced net
income by $12,573 or $.15 per share. The income tax benefit on the third quarter
charge represented a 26.3% effective tax rate because not all of the charges
were tax deductible. Please see Notes to Condensed Consolidated Financial
Statements for additional information regarding third quarter charges. The
following discussion of results of operations and related tables excludes the
effect of the charge.
FOURTH QUARTER CHARGE
During the fourth quarter of fiscal year 1997, the company expects to record
additional charges of between $18,000 and $25,000 related primarily to closing
certain manufacturing and distribution facilities and streamlining other
functions. On July 22, 1997 the company announced plans to close business forms
manufacturing facilities in Dayton, Ohio, Salt Lake City, Utah and Winsted,
Connecticut. As of July 30, 1997 management has not yet finalized the
restructuring plan.
BUSINESS FORMS BUSINESS COMBINATIONS
During 1997 and 1996 the company purchased two large business forms and forms
management companies. Effective December 31, 1996 the company purchased
substantially all net assets of Vanier Graphics Corporation from American
Business Products. On May 20, 1996 the company purchased the stock of Duplex
Products Inc. in a cash tender offer. The company expects to retain about
$100,000 of sales from Vanier. Duplex sales were about $200,000 during the last
four quarters. The addition of these businesses to the company's own business
forms and forms management offerings reduced gross profit percentages and
operating margins because of the lower earnings these businesses were
generating. As these businesses are successfully integrated into existing
operations margins should improve to the level of the company's other general
business forms and forms management offerings. Business combinations of this
size take approximately twenty-four months to fully integrate into existing
operations.
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RESULTS OF OPERATIONS (Excluding the third quarter charge)
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
Third Quarter Nine Months
----------------------------------------------- -------------------------------------------------
1997 1996 Change % Change 1997 1996 Change % Change
----------- ---------- ---------- ----------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $338,060 $287,049 $51,011 18% $1,006,569 $777,420 $229,149 29%
Gross profit $148,484 $133,821 $14,663 11% $ 449,239 $365,136 $ 84,103 23%
Operating income $ 37,805 $ 43,228 ($5,423) -13% $ 130,206 $120,583 $ 9,623 8%
Net income $ 19,851 $ 24,308 ($4,457) -18% $ 71,618 $ 68,652 $ 2,966 4%
Earnings per share $ 0.24 $ 0.28 ($0.04) -14% $ 0.85 $ 0.81 $ 0.04 5%
</TABLE>
Consolidated revenues increased significantly over last year in both the third
quarter and nine months, primarily because of the business forms acquisitions.
About $38,000 of the third quarter's sales growth and $176,000 of the
year-to-date sales increase were the result of the 1997 purchase of Vanier
Graphics and the 1996 acquisition of Duplex Products. The balance of the revenue
increase came primarily from growth in computer systems, which grew 9% during
the quarter.
The consolidated gross profit percentage was 45.0% of information systems
revenues in the third quarter, compared to 47.7% last year. Through nine months
the consolidated gross profit margin was 45.6% versus 48.2% a year ago. The
decline in gross profit percentages resulted primarily from the lower margin
business forms products acquired in the Vanier and Duplex business combinations.
These forms management and general printing businesses have lower margins than
the company's automotive forms and computer systems businesses. Over time, as
the newly acquired businesses are fully integrated with existing operations, the
gross profit margins of the acquired businesses should improve to the same 35% -
40% level as the company's other forms management and general printing
businesses.
Selling, general and administrative (SG&A) expenses increased to 34.8% of
revenues in the third quarter from 33.6% last year. Year-to-date SG&A expenses
were 33.6% of sales, compared to 33.7% last year. SG&A expenses increased as a
percentage of sales for both business forms and computer systems in the third
quarter.
The consolidated operating income percentage was 11.2% of revenues in the third
quarter, compared to 15.1% last year. Through nine months the consolidated
operating margin was 12.9% versus 15.5% a year ago. The decline in operating
profit percentages resulted primarily from the lower operating margins of Vanier
and Duplex. Computer systems operating margins also declined from last year as a
result of increased investment in healthcare systems.
The company adjusted its effective income tax rate in the third quarter to
better reflect its estimated annual effective rate. Through nine months the
effective income tax rate was 43.2%, compared to 42.2% for the twelve months of
fiscal year 1996. This increase resulted from an increase in non deductible
expenses such as goodwill amortization.
Annualized return on average shareholders' equity was 24.5%, compared to 25.3%
at June 30, 1996.
COMPUTER SYSTEMS (excluding financial services)
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------------------------ ------------------------------------------------
1997 1996 Change % Change 1997 1996 Change % Change
----------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $133,375 $121,843 $11,532 9% $394,836 $349,396 $45,440 13%
Gross profit $ 63,583 $ 59,589 $ 3,994 7% $190,921 $171,258 $19,663 11%
% of revenues 47.7% 48.9% 48.4% 49.0%
Operating income $ 15,872 $ 17,412 ($1,540) -9% $ 53,715 $ 50,578 $ 3,137 6%
% of revenues 11.9% 14.3% 13.6% 14.5%
</TABLE>
Computer systems revenues grew for the third quarter and nine months primarily
because of higher recurring service revenues and growing sales of newer products
in the automotive businesses. Recurring service revenues continued to grow,
primarily because of the increased number of ERA software applications
supported. Revenues from newer products and services such as SalesVision, the
SalesVision Vehicle Kiosk, Customer Marketing Services, laser solutions and a
document management system provided about 25% of the sales growth. Healthcare
systems sales decreased from last year for the
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third quarter and were essentially flat with last year through nine months.
Business combinations, primarily Electronic Forms Systems acquired as part of
the purchase of Vanier Graphics, contributed about $2,000 of sales in the third
quarter and $5,000 of sales year-to-date.
Computer systems gross profit grew at a slower rate than sales for both the
third quarter and nine months. Operating income declined from last year in the
third quarter and grew at a slower rate than sales year-to-date. The gross
profit and operating margins declined primarily because of the increased
investment in healthcare systems, and to a lesser degree the inclusion of Vanier
Graphics electronic forms systems which have lower margins. Automotive gross
profit and operating margins remained strong and essentially unchanged from a
year ago. SG&A expenses increased as a percentage of revenues reflecting the
healthcare systems investment. Healthcare systems continued to operate at a loss
because of continued investments in the organizations products and capabilities.
BUSINESS FORMS
<TABLE>
<CAPTION>
Third Quarter Nine Months
----------------------------------------------- ------------------------------------------------
1997 1996 Change % Change 1997 1996 Change % Change
----------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $196,898 $158,614 $38,284 24% $589,297 $408,732 $180,565 44%
Gross profit $ 84,901 $74,232 $10,669 14% $258,318 $193,878 $64,440 33%
% of revenues 43.1% 46.8% 43.8% 47.4%
Operating income $ 17,918 $22,095 ($4,177) -19% $64,824 $59,318 $5,506 9%
% of revenues 9.1% 13.9% 11.0% 14.5%
</TABLE>
Business forms revenues rose for the third quarter and nine months primarily
because of 1997 and 1996 business combinations which contributed about $36,000
of the third quarter revenue growth and $170,000 of the year-to-date sales
increase. In the third quarter forms management revenues increased over last
year excluding the effect of business combinations. However this increase was
substantially offset by lower sales of non-forms management products and
automotive forms, which declined about 5% in the third quarter. Year-to-date
forms management revenues grew about 10% over last year and automotive forms
sales increased slightly over last year.
The decline in the gross profit percentage from last year resulted primarily
from lower gross profit margins of Vanier and Duplex, as previously discussed.
Automotive forms also contributed to lower gross profit margins as their sales
comprised a lower percentage of the total. The company's cost of paper was
stable in the third quarter and is expected to remain stable during the fourth
quarter of fiscal year 1997.
Business forms operating income, as a percentage of revenues, declined from last
year primarily because of the decline in gross profit margins. SG&A expenses, as
a percentage of sales, increased slightly in the third quarter and were
essentially the same as last year. The third quarter increase resulted primarily
from higher integration costs related to the Duplex and Vanier business
combinations. Once the integration process is completed, Vanier and Duplex
operating income margins should improve to about 10%.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------------------------ ------------------------------------------------
1997 1996 Change % Change 1997 1996 Change % Change
----------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $7,787 $6,592 $1,195 18% $22,436 $19,292 $3,144 16%
Operating income $4,015 $3,721 $294 8% $11,667 $10,687 $980 9%
% of revenues 51.6% 56.4% 52.0% 55.4%
</TABLE>
Average finance receivables increased 19% over last year because of growing
computer systems sales financed by the company. Financial services revenues grew
because of interest earned on the higher receivable balances. Revenues grew at a
slower rate than the receivable balances because other income declined slightly.
Financial services operating income grew solidly because of higher revenues and
a slight decline in interest rates on borrowings. The operating income
percentage declined slightly because of the reduced other income and slightly
higher bad debt expenses.
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<PAGE> 12
The company has entered into various interest rate management agreements to
limit interest rate exposure on financial services variable rate debt. It is
important to manage this interest rate exposure because the proceeds from these
borrowings were invested in fixed rate finance receivables. The company believes
that over time it has reduced interest expense by using interest rate management
agreements and variable rate debt instead of directly obtaining fixed rate debt.
During the first six months of fiscal year 1997 the company did not enter into
any new interest rate management agreements. During the third quarter of fiscal
year 1997 the company entered into two additional interest rate management
agreements totaling about $18,000. These interest rate management agreements
were obtained to reduce the interest rate exposure on variable rate borrowings
obtained during the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems continued to provide strong cash flows from operating
activities. Through the first nine months of fiscal year 1997 operating cash
flow was $125,922 compared to $75,310 last year. Fiscal year 1997's cash flow
resulted primarily from information systems net income, adjusted for non-cash
charges. This strong cash flow funded the company's investments for normal
operations including capital expenditures of $28,564. About fifty-five percent
of the capital expenditures related to business forms operations with the
balance related to computer systems. Fiscal year 1997 capital expenditures in
the ordinary course of business are anticipated to be between $40,000 and
$45,000. Please read the Shareholders' Equity section regarding the payment of
dividends and share repurchases.
The first quarter purchase of Vanier Graphics accounted for the majority of cash
spent on business combinations. The balance relates primarily to healthcare
systems business combinations completed during the second and third quarters.
Please read the Capitalization section of this report regarding the financing of
these business combinations.
Financial services operating cash flows and collections on finance receivables
were invested in new finance receivables for the company's computer systems and
used to make scheduled debt repayments.
CAPITALIZATION
The company's ratio of total debt (total information systems debt) to
capitalization (total information systems debt plus shareholders' equity) was
27.2% at June 30, 1997 and 21.0% at September 30, 1996. The increase reflects
the issuance of $100,000 of notes in a public offering and the retirement of
outstanding debt issued to initially finance the Duplex transaction. The balance
of the proceeds was used to finance 1997 business combination of Vanier.
Remaining credit available under existing revolving credit agreements was
$34,350 at June 30, 1997. On July 16, 1997 the company replaced its existing
revolving credit agreements with a new five year, $150,000 agented revolving
credit agreement with a consortium of banks. In addition to this committed
credit agreement, the company also has a variety of other short-term credit
lines available. The company estimates that cash flow from operations and cash
available from existing credit agreements will be sufficient to fund fiscal year
1997 normal operations.
Financial services' debt balances increased $30,895 during the first nine months
of fiscal year 1997. Proceeds were used for new finance receivables which
increased $47,325 year-to-date. The company structures debt maturities to
approximate the maturities of finance receivables. The company expects finance
receivables to continue to increase because of growth in computer systems sales.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock Exchange.
There is no principal market for the Class B common shares. The company also has
an authorized class of 60 million preferred shares with no par value. As of July
31, 1997, no preferred shares were outstanding and there were no agreements or
commitments with respect to the sale or issuance of these shares.
Dividends are typically declared each November, February, May and August and
paid in January, April, June and September, respectively. Dividends per Class A
common share must be twenty times the dividends per Class B common share and all
dividend payments must be simultaneous. In November 1996, the company's board of
directors raised the quarterly dividend 14% to $.08 per Class A common share.
The company has increased cash dividends per share eleven times since 1989 and
paid dividends each year since the company's initial public offering in 1961.
12
<PAGE> 13
The company has conducted an active share repurchase program during recent years
to provide increased returns to shareholders. During the first nine months of
fiscal year 1997, the company repurchased 2,069,200 Class A common shares for
$40,456, an average price of $19.55 per share. As of June 30, 1997 the company
could repurchase an additional 1,469,800 Class A common shares under existing
board of directors' authorizations.
ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This
statement, effective for both interim and annual periods ending after December
15, 1997, will require the company to report basic earnings per share (EPS) and
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Accounting Principle Board Opinion
No. 15, "Earnings Per Share." As it effects the company, basic EPS will be
higher than the primary EPS currently reported. Diluted EPS will be similar to
the company's currently reported EPS.
In June 1997 the FASB issued SFAS Statement No. 130, "Reporting Comprehensive
Income." This statement, effective for fiscal years beginning after December 15,
1997, would require the company to report components of comprehensive income in
a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined by Concepts Statement No.
6, "Elements of Financial Statements" as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
company has not yet determined its comprehensive income.
In June 1997 the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement, effective
for financial statements for periods beginning after December 15, 1997,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. The company plans to change its business segments from ones
reflecting product classifications to ones reflecting the organizational
structure of the company.
ENVIRONMENTAL MATTERS
See Note 9 to the Consolidated Financial Statements for a discussion of the
company's environmental contingencies.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1997.
14
<PAGE> 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 July 31, 1997 /s/ David R. Holmes
------------- --------------------------------
David R. Holmes
Chairman of the Board, President and
Chief Executive Officer
Date July 31, 1997 /s/ Dale L. Medford
------------- --------------------------------
Dale L. Medford
Vice President, Corporate Finance and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 35,781
<SECURITIES> 0
<RECEIVABLES> 175,970
<ALLOWANCES> 5,409
<INVENTORY> 56,408
<CURRENT-ASSETS> 312,218
<PP&E> 370,942
<DEPRECIATION> 194,465
<TOTAL-ASSETS> 1,021,268
<CURRENT-LIABILITIES> 165,042
<BONDS> 268,700
0
0
<COMMON> 49,561
<OTHER-SE> 325,757
<TOTAL-LIABILITY-AND-EQUITY> 1,021,268
<SALES> 710,717
<TOTAL-REVENUES> 1,006,569
<CGS> 429,239
<TOTAL-COSTS> 538,828
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,470
<INCOME-PRETAX> 109,077
<INCOME-TAX> 50,032
<INCOME-CONTINUING> 59,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,045
<EPS-PRIMARY> $0.70
<EPS-DILUTED> $0.70
</TABLE>
