<PAGE> 1
<TABLE>
<S> <C>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
0-132
-----
(Commission file number)
THE REYNOLDS AND REYNOLDS COMPANY
---------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-0421120
---- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
115 SOUTH LUDLOW STREET, DAYTON, OHIO 45402
-------------------------------------------
(Address of principal executive offices)
(937) 485-2000
--------------
(Registrant's telephone number)
NONE
----
(Former name, former address and former fiscal year, if changed since last report)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
On August 10, 1998, 77,731,442 Class A common shares and 20,000,000 Class B
common shares were outstanding.
<PAGE> 2
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, 1998 and 1997 3
Condensed Consolidated Balance Sheets
As of June 30, 1998 and September 30, 1997 4
Condensed Statements of Consolidated Cash Flows
For the Nine Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended June 30, 1998 and 1997 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</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, 1998 AND 1997
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales and Revenues
Information systems
Products $270,208 $235,803 $804,073 $710,717
Services 105,789 94,470 310,742 273,416
----------- ----------- ----------- -----------
Total information systems 375,997 330,273 1,114,815 984,133
Financial services 8,788 7,787 25,455 22,436
----------- ----------- ----------- -----------
Total net sales and revenues 384,785 338,060 1,140,270 1,006,569
----------- ----------- ----------- -----------
Costs and Expenses
Information systems
Cost of sales
Products 167,077 145,121 495,292 429,239
Services 43,711 40,602 124,813 109,589
----------- ----------- ----------- -----------
Total cost of sales 210,788 185,723 620,105 538,828
Selling, general and administrative expenses 128,028 127,823 369,308 343,829
Financial services 4,106 3,772 13,038 10,769
----------- ----------- ----------- -----------
Total costs and expenses 342,922 317,318 1,002,451 893,426
----------- ----------- ----------- -----------
Operating Income 41,863 20,742 137,819 113,143
----------- ----------- ----------- -----------
Other Charges (Income)
Interest expense 5,988 2,797 12,597 7,154
Interest income (676) (798) (1,651) (2,033)
Other 502 (380) 2,007 (1,055)
----------- ----------- ----------- -----------
Total other charges 5,814 1,619 12,953 4,066
----------- ----------- ----------- -----------
Income Before Income Taxes 36,049 19,123 124,866 109,077
Provision For Income Taxes 10,000 11,845 48,709 50,032
----------- ----------- ----------- -----------
Net Income $26,049 $7,278 $76,157 $59,045
=========== =========== =========== ===========
Basic Earnings Per Common Share $0.33 $0.09 $0.96 $0.72
=========== =========== =========== ===========
Diluted Earnings Per Common Share $0.32 $0.09 $0.93 $0.70
=========== =========== =========== ===========
Average Number of Common Shares Outstanding 79,435 81,487 79,692 81,882
=========== =========== =========== ===========
Average Number of Common Shares and
Common Share Equivalents Outstanding 81,442 83,734 81,614 84,656
=========== =========== =========== ===========
Cash Dividends Declared Per Common Share $0.09 $0.08 $0.27 $0.24
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND SEPTEMBER 30, 1997
(In thousands)
<TABLE>
<CAPTION>
6/30/98 9/30/97
----------- -----------
<S> <C> <C>
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $31,665 $7,604
Accounts receivable 209,052 197,215
Inventories 70,428 75,645
Other current assets 35,466 47,463
----------- -----------
Total current assets 346,611 327,927
Property, Plant and Equipment, less accumulated depreciation of
$208,223 at 6/30/98 and $193,190 at 9/30/97 176,536 188,501
Goodwill 84,500 94,241
Other Intangible Assets 16,198 22,301
Other Assets 100,635 96,365
----------- -----------
Total Information Systems Assets 724,480 729,335
----------- -----------
FINANCIAL SERVICES ASSETS
Finance Receivables 396,747 372,073
Cash and Other Assets 746 1,102
----------- -----------
Total Financial Services Assets 397,493 373,175
----------- -----------
TOTAL ASSETS $1,121,973 $1,102,510
=========== ===========
INFORMATION SYSTEMS LIABILITIES
Current Liabilities $227,410 $208,579
Long-Term Debt 128,157 170,150
Other Liabilities 77,146 74,662
----------- -----------
Total Information Systems Liabilities 432,713 453,391
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 208,263 198,314
Other Liabilities 93,377 86,575
----------- -----------
Total Financial Services Liabilities 301,640 284,889
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 57,896 53,894
Other Adjustments (6,354) (5,481)
Retained Earnings 336,078 315,817
----------- -----------
Total Shareholders' Equity 387,620 364,230
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,121,973 $1,102,510
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
INFORMATION SYSTEMS
Cash Flows Provided By Operating Activities $ 115,540 $ 125,922
---------- ----------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (1,525) (70,537)
Capital expenditures (25,137) (28,564)
Net proceeds from asset sales 15,665 13,480
Capitalization of software licensed to customers (654) (1,253)
Repayments from (advances to) financial services (5,966) 5,060
---------- ----------
Net cash flows used for investing activities (17,617) (81,814)
---------- ----------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 99,510
Principal payments on debt (18,146) (59,854)
Cash dividends paid (21,518) (19,636)
Capital stock issued 2,260 1,204
Capital stock repurchased (35,584) (40,456)
---------- ----------
Net cash flows used for financing activities (72,988) (19,232)
---------- ----------
Effect of Exchange Rate Changes on Cash (874) (225)
---------- ----------
Increase in Cash and Equivalents 24,061 24,651
Cash and Equivalents, Beginning of Period 7,604 11,130
---------- ----------
Cash and Equivalents, End of Period $ 31,665 $ 35,781
========== ==========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 14,548 $ 14,521
---------- ----------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (110,871) (108,823)
Collections on finance receivables 79,925 67,963
---------- ----------
Net cash flows used for investing activities (30,946) (40,860)
---------- ----------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 53,293 67,150
Principal payments on debt (43,344) (36,255)
Advances from (repayments to) information systems 5,966 (5,060)
---------- ----------
Net cash flows provided by financing activities 15,915 25,835
---------- ----------
Decrease in Cash and Equivalents (483) (504)
Cash and Equivalents, Beginning of Period 920 1,293
---------- ----------
Cash and Equivalents, End of Period $ 437 $ $789
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
THE REYNOLDS AND REYNOLDS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet as of September 30, 1997, is condensed financial information
taken from the audited balance sheet. The interim financial statements are
unaudited. In the opinion of management, the accompanying interim financial
statements contain all significant adjustments (which consist only of normal
recurring adjustments and items mentioned in Note 5) necessary to present fairly
the company's financial position, results of operations and cash flows for the
periods presented.
(2) INVENTORIES
<TABLE>
<CAPTION>
6/30/98 9/30/97
---------- ----------
<S> <C> <C>
Finished products $58,352 $59,683
Work in process 5,311 6,256
Raw materials and supplies 6,765 9,706
---------- ----------
Total inventories $70,428 $75,645
========== ==========
</TABLE>
(3) EARNINGS PER SHARE
In February 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Statement No. 128, "Earnings
per Share." This statement, effective for interim and annual periods ending
after December 15, 1997, requires the company to present basic earnings per
share (EPS) and diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS is computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding during the period. The company's
common share equivalents represent the effect of employee stock options. Prior
year earnings per share amounts have been restated to comply with this
pronouncement.
(4) BUSINESS COMBINATIONS
The company purchased Crain-Drummond Inc. in July 1997. In recording the assets
and liabilities of this business combination the company accrued the estimated
costs to close duplicate facilities of Crain-Drummond. These liabilities
included the costs to close two manufacturing and distribution facilities. At
June 30, 1998, one of the facilities had been closed. In June the company
announced that the remaining facility would be closed in January 1999. During
the third quarter of 1998 the company revised these estimates based on updated
information and accrued $882 of additional liabilities for costs to exit
duplicate facilities. This adjustment was reflected in the allocation of the
purchase price and did not effect net income for the quarter. As of the revised
July 1, 1997 opening balance sheet, key elements of the costs accrued for
exiting duplicate facilities were involuntary termination benefits of $2,665 and
relocation costs of $416. Involuntary termination benefits represent severance
payments and outplacement services for 171 employees, principally manufacturing
employees. Through June 30, 1998, $704 of involuntary termination benefits were
paid to 56 employees and $3 of relocation costs were paid. The company recorded
the assets of the duplicate facilities as current assets held for sale. As of
the revised July 1, 1997 opening balance sheet, these assets of $3,814 were
recorded at estimated fair market value less disposal costs. At June 30, 1998
$1,604 of these assets had been sold.
(5) TAX BENEFITS AND SPECIAL CHARGES
During the third quarter of fiscal year 1998 the company favorably resolved
several open tax audits and recorded a gain of $4,910 or $.06 per share. This
gain resulted principally from the reversal of tax accruals and was reflected in
the income tax provision. The company also reclassified interest accrued for
future tax issues from the tax accrual to the interest accrual. The interest
reclassification had no effect on net income because higher interest expense to
establish the interest accrual was offset by tax benefits from reducing the tax
accruals.
Also during the third quarter of fiscal year 1998 the company recorded a pre-tax
charge of $7,436. This charge represented the write-off of certain assets,
primarily in the automotive systems business, which the company will no longer
use or whose asset value was no longer supported by undiscounted cash flows. The
charge increased computer systems cost of sales $1,308, business forms cost of
sales $505, computer systems selling, general and administrative (SG&A) expenses
$4,579 and business forms SG&A expenses $1,044. After income taxes, the charge
reduced net income by $4,860 or $.06 per
6
<PAGE> 7
share. The income tax benefit on the special charges charge represented a 34.6%
effective tax rate because not all of the charges were tax deductible.
(6) ACCOUNTING STANDARDS
In June 1997 the FASB issued SFAS Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement, effective for
financial statements for fiscal years beginning after December 15, 1997,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.
Upon adoption of this pronouncement, the company's reportable operating segments
will be the Automotive Division, the Business Systems Division and the
Healthcare Systems Division. The company will also continue to present financial
services as a reportable operating segment. The Automotive Division provides
integrated computer systems products and services and business forms to
automobile dealers. The Business Systems Division manufactures and distributes
printed business forms and systems and provides forms management services to
general business markets. The Healthcare Systems Division provides integrated
computer systems products and services to both office-based and hospital-based
physicians. The company plans to elect early compliance with this pronouncement
effective September 30, 1998.
Selected pro forma financial information (including all special charges) for the
three and nine months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Nine Months
----------------------------------- ---------------------------------
1998 1997 1998 1997
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
AUTOMOTIVE DIVISION
Net Sales and Revenues $188,593 $168,852 $540,855 $504,498
Gross Profit $100,866 $87,495 $293,342 $268,472
Operating Income $36,742 $30,321 $116,307 $104,277
BUSINESS SYSTEMS DIVISION
Net Sales and Revenues $174,088 $153,736 $536,738 $452,420
Gross Profit $59,598 $56,007 $187,732 $168,576
Operating Income $7,820 $8,041 $31,616 $33,778
HEALTHCARE SYSTEMS DIVISION
Net Sales and Revenues $13,554 $7,784 $37,665 $27,486
Gross Profit $4,745 $1,048 $13,636 $8,257
Operating Loss $(3,517) $(17,304) $(11,013) $(24,150)
FINANCIAL SERVICES
Net Sales and Revenues $8,788 $7,787 $25,455 $22,436
Operating Income $4,682 $4,015 $12,417 $11,667
ELIMINATION OF INTERSEGMENT SALES $(238) $(99) $(443) $(271)
UNALLOCATED CORPORATE EXPENSES $(3,864) $(4,331) $(11,508) $(12,429)
</TABLE>
7
<PAGE> 8
In May the SEC issued guidance requiring companies that present unaudited SFAS
No. 131 segment data in interim periods earlier than required, to present
information on the same basis for comparable periods of the prior year. Exhibit
99 contains fiscal year 1997 segment data which was not included in previous
Form 10-Q filings.
In October 1997 the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The new SOP will be effective for transactions entered
into in fiscal years beginning after December 15, 1997. The company has not
determined the effect that this pronouncement will have on its revenue
recognition practices.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. Gains or losses
resulting from changes in fair values of derivatives are recorded either as a
separate component of shareholders' equity or in the income statement depending
upon whether the instruments meet the criteria for hedge accounting. This
statement is effective for all fiscal quarters for fiscal years beginning after
June 15, 1999 (fiscal year 2000 as to the company). The company has not yet
determined the effect of this pronouncement. See the Management's Discussion and
Analysis section of this filing for a description of the company's derivative
instruments.
(7) CONTINGENCY
The U.S. Environmental Protection Agency (EPA) has designated the company as one
of a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at an
environmental remediation site. The EPA has contended that any company linked to
a CERCLA site is potentially liable for all response costs under the legal
doctrine of joint and several liability. This environmental remediation site
involves a municipal waste disposal facility owned and operated by four
municipalities. The company joined a PRP coalition and is sharing remedial
investigation and feasibility study costs with other PRPs. During fiscal year
1994, the PRP coalition received an engineering evaluation/cost analysis of the
presumed remedy for the site from its private contractor. However, because the
EPA has not yet selected a remedy, potential remediation costs remain uncertain.
Remediation costs for a typical CERCLA site on the National Priorities List
average about $30,000. The engineering evaluation/cost analysis was consistent
with this average. During fiscal year 1996, an agreement was reached whereby the
state of Connecticut will contribute $8,000 towards remediation costs. The
company believes that the reasonably foreseeable resolution will not have a
material adverse effect on the financial statements.
8
<PAGE> 9
(8) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
INFORMATION SYSTEMS
Net Income $68,752 $52,049
Purchased In-Process Research and Development Costs 11,000
Depreciation and Amortization 46,173 44,374
Deferred Income Taxes (5,067) (344)
Deferred Income Taxes Transferred to Financial Services 1,528 3,945
Gains on Sales of Assets (951) (172)
Changes in Operating Assets and Liabilities
Accounts receivable (7,553) 5,872
Inventories 5,305 7,796
Prepaid expenses and other current assets 2,753 (7,081)
Intangible and other assets 5,323 4,336
Accounts payable 2,257 (3,248)
Accrued liabilities (5,399) 1,154
Other liabilities 2,419 6,241
--------------- ---------------
Net Cash Provided by Operating Activities $115,540 $125,922
=============== ===============
FINANCIAL SERVICES
Net Income $7,405 $6,996
Deferred Income Taxes 5,778 9,563
Deferred Income Taxes Transferred from Information Systems (1,528) (3,945)
Changes in Receivables, Other Assets and Other Liabilities 2,893 1,907
--------------- ---------------
Net Cash Provided by Operating Activities $14,548 $14,521
=============== ===============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1998
AND 1997 (Dollars in thousands except per share data)
TAX BENEFITS AND SPECIAL CHARGES
In the third quarter of fiscal year 1998 the company favorably resolved several
tax audits and recorded a gain of $4,910 or $.06 per share. Recording this gain
caused the company to record a lower tax rate for the quarter. The company also
reclassified interest accrued for tax issues from the tax accrual to the
interest accrual. The interest reclassification had no effect on net income,
because higher interest expense to establish the interest accrual was offset by
tax benefits from reducing the tax accruals.
Also during the third quarter of fiscal year 1998 the company recorded a pre-tax
charge of $7,436. This charge represents the write-off of certain assets,
primarily in the automotive systems business, to streamline product offerings.
The charge increased computer systems cost of sales $1,308, business forms cost
of sales $505, computer systems selling, general and administrative (SG&A)
expenses $4,579 and business forms SG&A expenses $1,044. After income taxes, the
charge
9
<PAGE> 10
reduced net income by $4,860 or $.06 per share. The income tax benefit on the
special charges represented a 34.6% effective tax rate because not all of the
charges were tax deductible. Excluding both the effect of special charges and
the previously mentioned tax benefits, the effective tax rate was 43.7% for the
third quarter and 43.6% for the nine months.
During the third quarter of fiscal 1997 the company recorded a pre-tax charge of
$17,063. The charge included $11,000 of in-process research and development
costs acquired in connection with the 1997 purchases of Advanced Medical
Applications Inc. and Fiscal Information Inc. The balance of the 1997 charge
represented the write-off of certain assets, primarily in the automotive systems
business. The charge increased computer systems cost of sales $3,934, computer
systems SG&A expenses $12,684 and business forms SG&A expenses $445. After
income taxes, the charge reduced net income by $12,573 or $.15 per share. The
income tax benefit on the special charges represented a 26.3% effective tax rate
because not all of the charges were tax deductible.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------------------------------- ---------------------------------------------
1998 1997 Change % Change 1998 1997 Change % Change
-------- -------- ------- ------ ---------- --------- ----------- -----
AS REPORTED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $384,785 $338,060 $46,725 14% $1,140,270 $1,006,569 $ 133,701 13%
Gross profit $165,209 $144,550 $20,659 14% $494,710 $445,305 $49,405 11%
Operating income $41,863 $20,742 $21,121 102% $137,819 $113,143 $24,676 22%
Net income $26,049 $7,278 $18,771 258% $76,157 $59,045 $17,112 29%
Basic earnings per share $0.33 $0.09 $0.24 267% $0.96 $0.72 $0.24 33%
Diluted earnings per share $0.32 $0.09 $0.23 256% $0.93 $0.70 $0.23 33%
EXCLUDING 1998 TAX BENEFITS AND 1998 AND 1997 SPECIAL CHARGES
Revenues $384,785 $338,060 $46,725 14% $1,140,270 $1,006,569 $133,701 13%
Gross profit $167,022 $148,484 $18,538 12% $496,523 $449,239 $47,284 11%
Operating income $49,299 $37,805 $11,494 30% $145,255 $130,206 $15,049 12%
Net income $25,999 $19,851 $6,148 31% $76,107 $71,618 $4,489 6%
Basic earnings per share $0.33 $0.24 $0.09 38% $0.96 $0.87 $0.09 10%
Diluted earnings per share $0.32 $0.24 $0.08 33% $0.93 $0.85 $0.08 9%
</TABLE>
Consolidated revenues increased over last year as a result of growth in
automotive computer systems revenues and sales from 1997 business combinations.
About $32,000 of the third quarter sales growth resulted from the 1997
acquisitions of Crain-Drummond and Fiscal Information. About $117,000 of the
year-to-date sales growth resulted from the 1997 acquisitions of Crain-Drummond,
Vanier Graphics and Fiscal Information. Excluding the effect of business
combinations, sales reflected strong growth in automotive and healthcare systems
revenues, partially offset by a decline in business forms sales.
The consolidated gross profit percentage (excluding the effect of special
charges) was 44.4% of revenues (excluding financial services revenues) in the
third quarter and 44.5% year-to-date, compared to 45.0% and 45.6% last year
(also excluding special charges). Computer systems gross profit percentage
increased over last year because of the growth in automotive recurring service
revenues. Business forms gross profit percentage declined from last year,
reflecting the lower margin products acquired in the Crain-Drummond business
combination. Excluding Crain-Drummond, the business forms gross profit margins
benefited from 1997 restructuring actions, however, this benefit was offset by
the effect of lower sales.
Consolidated operating income (excluding special charges) was 12.8% of revenues
in the third quarter and 12.7% through nine months compared to 11.2% and 12.9%
(also excluding special charges) last year, respectively. Business forms
operating margins (excluding special charges) improved over last year in the
third quarter because of the benefits of the 1997 restructuring actions and
continued progress integrating business combinations. Computer systems operating
margins (excluding special charges) increased over last year as automotive
systems margins remained strong and healthcare systems operating loss declined.
Annualized return on average shareholders' equity was 26.4%, compared to 20.7%
(24.5% excluding 1997 special charges) at June 30, 1997.
10
<PAGE> 11
COMPUTER SYSTEMS (excluding financial services)
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------------------------ ------------------------------------------------
1998 1997 Change % Change 1998 1997 Change % Change
----------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS REPORTED
Revenues $156,442 $133,375 $23,067 17% $444,673 $394,836 $49,837 13%
Gross profit $74,387 $59,649 $14,738 25% $217,879 $186,987 $30,892 17%
% of revenues 47.5% 44.7% 49.0% 47.4%
SG&A expenses $57,744 $60,395 ($2,651) -4% $158,244 $149,890 $8,354 6%
% of revenues 36.9% 45.3% 35.6% 38.0%
Operating income $16,643 ($746) $17,389 $59,635 $37,097 $22,538 61%
% of revenues 10.6% -0.6% 13.4% 9.4%
EXCLUDING 1998 AND 1997 SPECIAL CHARGES
Revenues $156,442 $133,375 $23,067 17% $444,673 $394,836 $49,837 13%
Gross profit $75,695 $63,583 $12,112 19% $219,187 $190,921 $28,266 15%
% of revenues 48.4% 47.7% 49.3% 48.4%
SG&A expenses $53,165 $47,711 $5,454 11% $153,665 $137,206 $16,459 12%
% of revenues 34.0% 35.8% 34.6% 34.8%
Operating income $22,530 $15,872 $6,658 42% $65,522 $53,715 $11,807 22%
% of revenues 14.4% 11.9% 14.7% 13.6%
</TABLE>
Computer systems revenues grew for the third quarter and nine months as both
automotive and healthcare revenues increased over last year. Automotive's third
quarter revenues reflected strong growth in both new systems sales and recurring
service revenues. The year-to-date sales increase resulted primarily from higher
recurring service revenues. Recurring service revenues continued to grow,
primarily because of the increased number of ERA software applications
supported. Healthcare Systems revenues increased for the third quarter and nine
months because of increased new systems sales and the 1997 acquisition of Fiscal
Information.
Computer systems gross profit margins (excluding special charges) increased over
last year's third quarter primarily because of improvement in healthcare systems
gross profit margins as a result of higher sales. Year-to-date the gross profit
margins (excluding special charges) increased primarily because of the strong
growth of automotive recurring service revenues.
Operating margins (excluding special charges) increased over last year for both
the third quarter and the nine months as automotive margins remained strong and
healthcare systems operating loss declined. SG&A expenses declined, as a
percentage of revenues, in part because of benefits from the 1997 restructuring.
BUSINESS FORMS
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------------------------------ ------------------------------------------------
1998 1997 Change % Change 1998 1997 Change % Change
----------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $219,555 $196,898 $22,657 12% $670,142 $589,297 $80,845 14%
Gross profit $90,822 $84,901 $5,921 7% $276,831 $258,318 $18,513 7%
% of revenues 41.4% 43.1% 41.3% 43.8%
SG&A expenses $70,284 $67,428 $2,856 4% $211,064 $193,939 $17,125 9%
% of revenues 32.0% 34.2% 31.5% 32.9%
Operating income $20,538 $17,473 $3,065 18% $65,767 $64,379 $1,388 2%
% of revenues 9.4% 8.9% 9.8% 10.9%
EXCLUDING 1998 AND 1997 SPECIAL CHARGES
Revenues $219,555 $196,898 $22,657 12% $670,142 $589,297 $80,845 14%
Gross profit $91,327 $84,901 $6,426 8% $277,336 $258,318 $19,018 7%
% of revenues 41.6% 43.1% 41.4% 43.8%
SG&A expenses $69,240 $66,983 $2,257 3% $210,020 $193,494 $16,526 9%
% of revenues 31.5% 34.0% 31.4% 32.8%
Operating income $22,087 $17,918 $4,169 23% $67,316 $64,824 $2,492 4%
% of revenues 10.1% 9.1% 10.0% 11.0%
</TABLE>
11
<PAGE> 12
Business forms revenues rose for the third quarter and nine months because of
the 1997 Crain-Drummond and Vanier Graphics business combinations which
contributed about $30,000 to third quarter's sales growth and $108,000 to the
year-to-date sales increase. Excluding the effect of business combinations,
sales volumes declined from last year. During the third quarter paper
manufacturers lowered paper prices several times. While this had little effect
on third quarter sales, it could negatively effect fourth quarter sales as the
lower paper costs are reflected in customer prices.
The decline in gross profit margins from last year resulted primarily from lower
gross profit margins of Crain-Drummond. The company did benefit from 1997
restructuring actions, however, this benefit was largely offset by lower sales
(excluding business combinations). Changes to the cost of paper had little
effect on third quarter gross profit margins. The company expects that the
profit impact of lower paper costs will be offset by lower business forms sales
prices in the fourth quarter.
Business forms operating margin (excluding special charges) exceeded last year
for the third quarter, but remained behind last year through nine months. During
the first nine months of the fiscal year the company closed four manufacturing
plants and incurred relocation and training expenses. These costs could not be
accrued as part of the 1997 restructuring charge under existing accounting
pronouncements. The company also incurred acquisition integration expenses for
Duplex Products, Vanier Graphics and Crain-Drummond. These plant closing and
integration expenses totaled about $500 in the third quarter and $3,300 through
nine months. SG&A expenses declined as a percentage of sales for both the
quarter and nine months primarily because of the effects of the business
combinations which provided revenue growth and lower SG&A expenses as a
percentage of sales. The company further reduced SG&A expenses, as a percentage
of revenues, by eliminating duplicate administrative functions.
<TABLE>
<CAPTION>
FINANCIAL SERVICES
Third Quarter Nine Months
------------------------------------------------ ------------------------------------------------
1998 1997 Change % Change 1998 1997 Change % Change
----------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $8,788 $7,787 $1,001 13% $25,455 $22,436 $3,019 13%
Operating income $4,682 $4,015 $667 17% $12,417 $11,667 $750 6%
% of revenues 53.3% 51.6% 48.8% 52.0%
</TABLE>
Average finance receivables increased 15% over last year because of the
continued high level of new computer systems sales. Financial services revenues
grew because of interest earned on the higher receivables balances. Average
interest rates declined slightly as interest rates on new receivables were less
than those for maturing receivables.
Financial services interest rate spread remained strong, exceeding 3% during the
first nine months of fiscal year 1998. This interest rate spread declined
slightly from last year because of higher borrowing rates in addition to the
previously mentioned change in the receivables portfolio. Operating income grew
at a slower rate than revenues because of the reduced interest rate spread and
higher bad debt expenses recorded to maintain an adequate reserve for the
growing receivables portfolio.
The company has entered into various interest rate management agreements to
limit interest rate exposure on financial services variable rate debt. It is
important to manage this interest rate exposure because the proceeds from these
borrowings were invested in fixed rate finance receivables. The company believes
that over time it has reduced interest expense by using interest rate management
agreements and variable rate debt instead of directly obtaining fixed rate debt.
During the first nine months of fiscal year 1998 the company did not enter into
any new interest rate management agreements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems continued to provide strong cash flow from operating
activities during the first nine months of the fiscal year. Operating cash flow
was $115,540 and resulted primarily from net income, adjusted for noncash
charges. Operating cash flow funded the company's investments for normal
operations including capital expenditures and capitalized software of $25,791.
Capital expenditures in the ordinary course of business are anticipated to be
about $35,000 in fiscal year 1998.
12
<PAGE> 13
Financial services operating cash flows and collections on finance receivables
were invested in new finance receivables for the company's computer systems and
used to make scheduled debt repayments.
CAPITALIZATION
The company's ratio of total debt (total information systems debt) to
capitalization (total information systems debt plus shareholders' equity) was
30.9% at June 30, 1998 and 34.5% at September 30, 1997. Remaining credit
available under existing revolving credit agreements was $105,200 at June 30,
1998. In addition to committed credit agreements, the company also has a variety
of other short-term credit lines available. The company anticipates that cash
flow from operations and cash available from existing credit agreements will be
sufficient to fund fiscal year 1998 normal operations.
During the second quarter of fiscal year 1998 the company issued $70,000 of
medium-term notes and repaid short-term borrowings of financial services. Debt
maturities ranged from one to four years and interest rates ranged from 5.875%
to 6.12%. This debt continues to be reported with financial services notes
payable.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock Exchange.
There is no principal market for the Class B common shares. The company also has
an authorized class of 60 million preferred shares with no par value. As of
August 10, 1998, no preferred shares were outstanding and there were no
agreements or commitments with respect to the sale or issuance of these shares.
Dividends are typically declared each November, February, May and August and
paid in January, April, June and September, respectively. Dividends per Class A
common share must be twenty times the dividends per Class B common share and all
dividend payments must be simultaneous. In November 1997, the company's board of
directors raised the quarterly dividend 13% to $.09 per Class A common share.
The company has increased cash dividends per share twelve times since 1989 and
paid dividends each year since the company's initial public offering in 1961.
The company has conducted an active share repurchase program during recent years
to provide increased returns to shareholders. During the third quarter of fiscal
year 1998, the company repurchased 1,100,000 Class A common shares for $22,120
($20.11 per share). During the first nine months of fiscal year 1998, the
company repurchased 1,800,000 Class A common shares for $35,584 ($19.77 per
share). As of June 30, 1998 the company could repurchase an additional 1,369,800
Class A common shares under existing board of directors' authorizations.
YEAR 2000 COMPLIANCE
The company has assessed potential year 2000 effects on its internal computer
systems, systems provided to customers and other systems such as HVAC and
security systems, including systems provided by third-party vendors. Detailed
plans have been prepared to address year 2000 issues with software development
scheduled to be completed by December 1998 in most instances. As of June 30,
1998, about 40% of the company's internal systems and systems provided to
customers (including software from third party vendors) have been modified and
determined to be year 2000 compliant. In July 1998, the company released a year
2000 compliant version of its ERA system for automobile dealers. Through June
30, 1998 the company has spent about $4,500 on year 2000 compliance efforts. In
fiscal year 1998 these costs, consisting primarily of internal development and
consulting costs, were about $1,400 in the third quarter and $3,600
year-to-date. The company estimates that the total costs (including costs
already incurred) to make all systems year 2000 compliant will be about $15,000.
However, there can be no assurance that the company will not incur unanticipated
costs or systems interruptions which could have a material adverse effect on the
company's business, financial condition or results of operations.
ACCOUNTING STANDARDS
See Note 6 to the Consolidated Financial Statements for a discussion of
accounting pronouncements not yet adopted by the company.
ENVIRONMENTAL MATTER
See Note 7 to the Consolidated Financial Statements for a discussion of an
environmental contingency.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedules
(99) Selected SFAS No. 131 Segment Data
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended June 30, 1998.
14
<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 August 11, 1998 /s/ David R. Holmes
---------------- ----------------------------------
David R. Holmes
Chairman of the Board, President and
Chief Executive Officer
Date August 11, 1998 /s/ Dale L. Medford
---------------- ----------------------------------
Dale L. Medford
Vice President, Corporate Finance and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 31,665
<SECURITIES> 0
<RECEIVABLES> 216,013
<ALLOWANCES> 6,961
<INVENTORY> 70,428
<CURRENT-ASSETS> 346,611
<PP&E> 384,759
<DEPRECIATION> 208,223
<TOTAL-ASSETS> 1,121,973
<CURRENT-LIABILITIES> 227,410
<BONDS> 275,885
0
0
<COMMON> 57,896
<OTHER-SE> 329,724
<TOTAL-LIABILITY-AND-EQUITY> 1,121,973
<SALES> 804,073
<TOTAL-REVENUES> 1,140,270
<CGS> 495,292
<TOTAL-COSTS> 620,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,419
<INCOME-PRETAX> 124,866
<INCOME-TAX> 48,709
<INCOME-CONTINUING> 76,157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,157
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.93
</TABLE>
<PAGE> 1
EXHIBIT 99
THE REYNOLDS AND REYNOLDS COMPANY
SELECTED SFAS NO. 131 SEGMENT DATA
FISCAL YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------- Fiscal Year
12/31/96 3/31/97 6/30/97 9/30/97 1997
----------------------------------------------------------------------
AUTOMOTIVE
<S> <C> <C> <C> <C> <C>
Net Sales and Revenues $165,917 $169,729 $168,852 $176,647 $681,145
Gross Profit $89,805 $91,172 $87,495 $94,745 $363,217
Gross Margin 54.1% 53.7% 51.8% 53.6% 53.3%
Operating Income $36,861 $37,095 $30,321 $20,968 $125,245
Operating Margin 22.2% 21.9% 18.0% 11.9% 18.4%
BUSINESS SYSTEMS
Net Sales and Revenues $132,054 $166,630 $153,736 $181,752 $634,172
Gross Profit $51,567 $61,002 $56,007 $64,648 $233,224
Gross Margin 39.0% 36.6% 36.4% 35.6% 36.8%
Operating Income $12,030 $13,707 $8,041 $6,243 $40,021
Operating Margin 9.1% 8.2% 5.2% 3.4% 6.3%
HEALTHCARE SYSTEMS
Net Sales and Revenues $9,290 $10,412 $7,784 $12,860 $40,346
Gross Profit $2,959 $4,250 $1,048 $4,237 $12,494
Gross Margin 31.9% 40.8% 13.5% 32.9% 31.0%
Operating Loss ($3,625) ($3,221) ($17,304) ($7,905) ($32,055)
Operating Margin -39.0% -30.9% -222.3% -61.5% -79.5%
FINANCIAL SERVICES
Net Sales and Revenues $7,124 $7,525 $7,787 $7,947 $30,383
Operating Income $3,739 $3,913 $4,015 $3,434 $15,101
Operating Margin 52.5% 52.0% 51.6% 43.2% 49.7%
ELIMINATION OF INTERSEGMENT SALES ($78) ($94) ($99) ($90) ($361)
UNALLOCATED CORPORATE EXPENSES ($3,252) ($4,846) ($4,331) ($9,837) ($22,266)
</TABLE>
