<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, 1999
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
OHIO 31-0421120
(State of incorporation) (IRS Employer Identification No.)
115 SOUTH LUDLOW STREET
DAYTON, OHIO 45402
(Address of principal executive offices)
(937) 485-2000
(Telephone No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
On August 10, 1999, 77,239,290 Class A common shares and 20,000,000 Class B
common shares were outstanding.
<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, 1999 and 1998 3
Condensed Consolidated Balance Sheets
As of June 30, 1999 and September 30, 1998 4
Condensed Statements of Consolidated Cash Flows
For the Nine Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three and Nine Months Ended June 30, 1999 and 1998 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
<PAGE> 3
THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales and Revenues
Information systems
Products $ 267,896 $ 259,210 $ 767,644 $ 773,826
Services 123,241 103,233 352,035 303,324
----------- ----------- ----------- -----------
Total information systems 391,137 362,443 1,119,679 1,077,150
Financial services 9,942 8,788 29,044 25,455
----------- ----------- ----------- -----------
Total net sales and revenues 401,079 371,231 1,148,723 1,102,605
----------- ----------- ----------- -----------
Costs and Expenses
Information systems
Cost of sales
Products 158,401 158,375 467,559 471,303
Services 49,226 43,604 136,265 124,773
----------- ----------- ----------- -----------
Total cost of sales 207,627 201,979 603,824 596,076
Selling, general and administrative expenses 134,650 119,766 381,265 344,659
Financial services 4,492 4,106 13,420 13,038
----------- ----------- ----------- -----------
Total costs and expenses 346,769 325,851 998,509 953,773
----------- ----------- ----------- -----------
Operating Income 54,310 45,380 150,214 148,832
----------- ----------- ----------- -----------
Other Charges (Income)
Interest expense 3,248 5,988 9,888 12,597
Interest income (1,955) (674) (4,895) (1,605)
Other (492) 493 27 2,009
----------- ----------- ----------- -----------
Total other charges 801 5,807 5,020 13,001
----------- ----------- ----------- -----------
Income Before Income Taxes 53,509 39,573 145,194 135,831
Provision for Income Taxes 22,252 11,402 60,427 52,693
----------- ----------- ----------- -----------
Income From Continuing Operations 31,257 28,171 84,767 83,138
Discontinued Operations 0 (2,122) 5,785 (6,981)
----------- ----------- ----------- -----------
Net Income $ 31,257 $ 26,049 $ 90,552 $ 76,157
=========== =========== =========== ===========
Basic Earnings Per Common Share
Income From Continuing Operations $ 0.40 $ 0.35 $ 1.08 $ 1.04
Discontinued Operations $ 0.00 ($ 0.03) $ 0.07 ($ 0.09)
Net Income $ 0.40 $ 0.33 $ 1.16 $ 0.96
Average Number of Common Shares Outstanding 78,014 79,435 78,338 79,692
Diluted Earnings Per Common Share
Income From Continuing Operations $ 0.39 $ 0.35 $ 1.06 $ 1.02
Discontinued Operations $ 0.00 ($ 0.03) $ 0.07 ($ 0.09)
Net Income $ 0.39 $ 0.32 $ 1.13 $ 0.93
Average Number of Common Shares Outstanding 80,207 81,442 80,290 81,614
Cash Dividends Declared Per Common Share $ 0.10 $ 0.09 $ 0.30 $ 0.27
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND SEPTEMBER 30, 1998
(In thousands)
<TABLE>
<CAPTION>
6/30/99 9/30/98
---------- ----------
<S> <C> <C>
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $122,981 $39,980
Accounts receivable 228,802 227,158
Inventories 73,647 66,196
Other current assets 33,479 38,713
---------- ----------
Total current assets 458,909 372,047
Property, Plant and Equipment, less accumulated depreciation of
$226,406 at 6/30/99 and $215,208 at 9/30/98 182,690 174,226
Goodwill 67,542 82,280
Other Intangible Assets 19,606 17,327
Other Assets 98,937 100,681
---------- ----------
Total Information Systems Assets 827,684 746,561
---------- ----------
FINANCIAL SERVICES ASSETS
Finance Receivables 421,104 408,765
Cash and Other Assets 891 2,394
---------- ----------
Total Financial Services Assets 421,995 411,159
---------- ----------
TOTAL ASSETS $1,249,679 $1,157,720
========== ==========
INFORMATION SYSTEMS LIABILITIES
Current Liabilities $227,204 $198,208
Long-Term Debt 169,623 161,541
Other Liabilities 87,779 83,703
---------- ----------
Total Information Systems Liabilities 484,606 443,452
---------- ----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 211,878 210,561
Other Liabilities 101,329 99,256
---------- ----------
Total Financial Services Liabilities 313,207 309,817
---------- ----------
SHAREHOLDERS' EQUITY
Capital Stock 74,543 58,235
Other Adjustments (9,094) (9,727)
Retained Earnings 386,417 355,943
---------- ----------
Total Shareholders' Equity 451,866 404,451
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,249,679 $1,157,720
========== ==========
</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, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
INFORMATION SYSTEMS
Cash Flows Provided By Operating Activities $ 118,546 $ 115,540
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (1,525)
Capital expenditures (40,230) (25,137)
Net proceeds from asset sales 52,577 15,665
Capitalization of software licensed to customers (11,452) (654)
Repayments from (advances to) financial services 932 (5,966)
--------- ---------
Net cash flows provided by (used for) investing activities 1,827 (17,617)
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 50,300
Principal payments on debt (38,860) (18,146)
Cash dividends paid (23,505) (21,518)
Capital stock issued 12,032 2,260
Capital stock repurchased (37,972) (35,584)
--------- ---------
Net cash flows used for financing activities (38,005) (72,988)
--------- ---------
Effect of Exchange Rate Changes on Cash 633 (874)
--------- ---------
Increase in Cash and Equivalents 83,001 24,061
Cash and Equivalents, Beginning of Period 39,980 7,604
--------- ---------
Cash and Equivalents, End of Period $ 122,981 $ 31,665
========= =========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 16,585 $ 14,548
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (112,954) (110,871)
Collections on finance receivables 94,554 79,925
--------- ---------
Net cash flows used for investing activities (18,400) (30,946)
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 24,975 69,993
Principal payments on debt (23,658) (60,044)
(Repayments to) advances from information systems (932) 5,966
--------- ---------
Net cash flows provided by financing activities 385 15,915
--------- ---------
Decrease in Cash and Equivalents (1,430) (483)
Cash and Equivalents, Beginning of Period 2,102 920
--------- ---------
Cash and Equivalents, End of Period $ 672 $ 437
========= =========
</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, 1998 is condensed financial information
taken from the audited balance sheet. The interim financial statements are
unaudited. In the opinion of management, the accompanying interim financial
statements contain all significant adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the company's financial
position, results of operations and cash flows for the periods presented.
(2) INVENTORIES
<TABLE>
<CAPTION>
6/30/99 9/30/98
------------- --------------
<S> <C> <C>
Finished Products $59,408 $54,778
Work In Process 6,404 5,795
Raw Materials 7,835 5,623
------- -------
Total Inventories $73,647 $66,196
======= =======
</TABLE>
(3) ACCOUNTING CHANGE
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The company adopted this pronouncement effective October
1, 1998. The adoption of this pronouncement reduced the Automotive Division
computer systems products revenues $17,936, gross profit $11,205, operating
income $10,624 and net income $6,204 or $.08 per diluted share during the six
months ended March 31, 1999. The company completed the transition period for the
adoption of SOP 97-2 as of March 31, 1999, and there was no impact on third
quarter's operating results.
(4) DISCONTINUED OPERATIONS
On October 23, 1998, the company sold essentially all net assets of its
Healthcare Systems segment to InfoCure Corporation for about $50,000. The
proceeds consisted of about $40,000 in cash with the balance in subordinated
notes. The company recorded a gain on the sale of $5,785 or $.07 per diluted
share in the first quarter of fiscal year 1999. About $1,200 of Healthcare
Systems after-tax operating losses, from October 1, 1998 through October 23,
1998, were included in the determination of the gain on the sale of the
Healthcare Systems segment.
(5) COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $31,257 $26,049 $90,552 $76,157
Foreign Currency Translation 392 (524) 633 (873)
------- ------- ------- -------
Comprehensive Income $31,649 $25,525 $91,185 $75,284
======= ======= ======= =======
</TABLE>
(6) TAX BENEFITS AND SPECIAL CHARGES
During the third quarter of fiscal year 1998 the company favorably resolved
several open tax audits and recorded a gain of $4,910 or $.06 per share. This
gain resulted principally from the reversal of tax accruals and was reflected in
the income tax provision. The company also reclassified interest accrued for
future tax issues from the tax accrual to the interest accrual. The interest
reclassification had no effect on net income because higher interest expense to
establish the interest accrual was offset by tax benefits from reducing the tax
accruals.
Also during the third quarter of fiscal year 1998 the company recorded a pre-tax
charge of $7,436. This charge represented the write-off of certain assets,
primarily in the automotive systems business, which the company will no longer
use or whose asset value was no longer supported by undiscounted cash flows.
After income taxes, the charge reduced net income by $4,860 or $.06 per share.
The income tax benefit on the special charges represented a 34.6%
6
<PAGE> 7
effective tax rate because not all of the charges were tax deductible.
(7) BUSINESS SEGMENTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
AUTOMOTIVE
Net Sales and Revenues
Computer Services $111,905 $94,838 $320,997 $276,219
Computer Systems Products 46,396 46,835 119,397 126,056
Business Forms Products 46,484 46,920 136,036 138,580
-------- -------- ---------- ----------
Total Net Sales and Revenues $204,785 $188,593 $576,430 $540,855
Operating Income $43,291 $36,742 $116,494 $116,307
BUSINESS SYSTEMS
Net Sales and Revenues
Business Forms Products $174,574 $165,046 $510,049 $506,772
Services and Computer Systems Products 11,778 9,042 33,200 29,966
-------- -------- ---------- ----------
Total Net Sales and Revenues $186,352 $174,088 $543,249 $536,738
Operating Income $14,636 $7,820 $38,235 $31,616
FINANCIAL SERVICES
Net Sales and Revenues $9,942 $8,788 $29,044 $25,455
Operating Income $5,450 $4,682 $15,624 $12,417
CORPORATE EXPENSES ($9,067) ($3,864) ($20,139) ($11,508)
ELIMINATION OF INTERSEGMENT SALES $0 ($238) $0 ($443)
TOTALS
Net Sales and Revenues $401,079 $371,231 $1,148,723 $1,102,605
Operating Income $54,310 $45,380 $150,214 $148,832
</TABLE>
<TABLE>
<CAPTION>
6/30/99 9/30/98
---------- ----------
<S> <C> <C>
ASSETS
Automotive $234,646 $242,259
Business Systems 390,408 360,417
Financial Services 421,995 411,159
Corporate 202,630 108,597
Discontinued Operations 0 35,288
---------- ----------
Total Assets $1,249,679 $1,157,720
========== ==========
</TABLE>
7
<PAGE> 8
(8) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
INFORMATION SYSTEMS
Net Income $81,230 $68,752
Depreciation and Amortization 35,366 46,173
Deferred Income Taxes 919 (5,067)
Deferred Income Taxes Transferred to Financial Services (2,862) 1,528
Losses (Gains) on Sales of Assets (6,781) (951)
Changes in Operating Assets and Liabilities
Accounts Receivable (7,781) (7,553)
Inventories (8,877) 5,305
Prepaid Expenses and Other Current Assets (1,695) 2,753
Intangible and Other Assets 7,496 5,323
Accounts Payable 4,742 2,257
Accrued Liabilities 20,028 (5,399)
Other Liabilities (3,239) 2,419
======== ========
Net Cash Provided by Operating Activities $118,546 $115,540
======== ========
FINANCIAL SERVICES
Net Income $9,322 $7,405
Deferred Income Taxes 1,255 5,778
Deferred Income Taxes Transferred from Information Systems 2,862 (1,528)
Changes in Receivables, Other Assets and Other Liabilities 3,146 2,893
======== ========
Net Cash Provided by Operating Activities $16,585 $14,548
======== ========
</TABLE>
(9) CONTINGENCY
The U.S. Environmental Protection Agency (EPA) has designated the company as one
of a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at an
environmental remediation site. The EPA has contended that any company linked to
a CERCLA site is potentially liable for all response costs under the legal
doctrine of joint and several liability. This environmental remediation site
involves a municipal waste disposal facility owned and operated by four
municipalities. The company joined a PRP coalition and is sharing remedial
investigation and feasibility study costs with other PRPs. During fiscal year
1994, the PRP coalition received an engineering evaluation/cost analysis of the
presumed remedy for the site from its private contractor. However, because the
EPA has not yet selected a remedy, potential remediation costs remain uncertain.
Remediation costs for a typical CERCLA site on the National Priorities List
average about $30,000. The engineering evaluation/cost analysis was consistent
with this average. During fiscal year 1996, an agreement was reached whereby the
state of Connecticut will contribute $8,000 towards remediation costs. The
company believes that the reasonably foreseeable resolution will not have a
material adverse effect on the financial statements.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands except per share data)
SIGNIFICANT EVENTS
DISCONTINUED OPERATIONS
In September 1998, the company's board of directors approved a plan to
discontinue operations of the company's Healthcare Systems segment. This
separate segment provided computer systems products and services to
hospital-based and office-based physicians. Net sales and revenues were $48,226
in fiscal year 1998 and related operating losses were $16,700. Prior financial
statements have been restated to report the operating results of Healthcare
Systems as discontinued operations in the consolidated statements of income.
In October 1998, the company sold essentially all net assets of its Healthcare
Systems segment to InfoCure Corporation for about $50,000. The proceeds
consisted of about $40,000 in cash with the balance in subordinated notes. The
company recorded a gain on the sale of $5,785 or $.07 per diluted share in the
first quarter of fiscal year 1999.
ACCOUNTING CHANGE
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
superseded SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The company adopted this pronouncement effective October
1, 1998. The adoption of this pronouncement reduced the Automotive Division
computer systems products revenues $17,936, gross profit $11,205, operating
income $10,624 and net income $6,204 or $.08 per diluted share during the six
months ended March 31, 1999. The company completed the transition period for the
adoption of SOP 97-2 as of March 31, 1999, and there was no impact on third
quarter's operating results.
TAX BENEFITS AND SPECIAL CHARGES
In the third quarter of fiscal year 1998 the company favorably resolved several
tax audits and recorded a gain of $4,910 or $.06 per share. Recording this gain
caused the company to record a lower tax rate for the quarter. The company also
reclassified interest accrued for tax issues from the tax accrual to the
interest accrual. The interest reclassification had no effect on net income,
because higher interest expense to establish the interest accrual was offset by
tax benefits from reducing the tax accruals.
Also during the third quarter of fiscal year 1998 the company recorded a pre-tax
charge of $7,436. This charge represents the write-off of certain assets,
primarily in the automotive systems business, to streamline product offerings.
After income taxes, the charge reduced net income by $4,860 or $.06 per share.
The income tax benefit on the special charges represented a 34.6% effective tax
rate because not all of the charges were tax deductible. Excluding both the
effect of special charges and the previously mentioned tax benefits, the
effective tax rate was 43.7% for the third quarter and 43.6% for the nine
months.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
Three Months Nine Months
----------------------------------------- -------------------------------------------
%
1999 1998 Change % Change 1999 1998 Change Change
--------- --------- --------- ---------------------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $401,079 $371,231 $29,848 8% $1,148,723 $1,102,605 $46,118 4%
Gross Profit $183,510 $160,464 $23,046 14% $515,855 $481,074 $34,781 7%
Operating Income $54,310 $45,380 $8,930 20% $150,214 $148,832 $1,382 1%
Income From Continuing Operations $31,257 $28,171 $3,086 11% $84,767 $83,138 $1,629 2%
Discontinued Operations $0 ($2,122) $2,122 $5,785 ($6,981) $12,766
Net Income $31,257 $26,049 $5,208 20% $90,552 $76,157 $14,395 19%
Earnings Per Common Share (Diluted) $0.39 $0.32 $0.07 22% $1.13 $0.93 $0.20 22%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues $401,079 $371,231 $29,848 8% $1,166,659 $1,102,605 $64,054 6%
Gross Profit $183,510 $160,464 $23,046 14% $527,060 $481,074 $45,986 10%
Operating Income $54,310 $45,380 $8,930 20% $160,838 $148,832 $12,006 8%
Income From Continuing Operations $31,257 $28,171 $3,086 11% $90,967 $83,138 $7,829 9%
</TABLE>
Third quarter's consolidated revenues exceeded $400,000 for the first time in
the company's history as both Automotive and
9
<PAGE> 10
Business Systems divisions grew sales over last year. Automotive revenues
increased as strong growth in computer services revenues overcame slight
declines in both computer systems products sales and Automotive forms sales.
Year-to-date consolidated revenues exceeded last year as growth in Automotive
computer services revenues and computer systems products sales (excluding the
effect of the accounting change) and higher Business Systems sales overcame a
slight decline in Automotive forms sales.
The consolidated gross profit percentage was 46.9% of revenues (excluding
financial services revenues) in the third quarter and 46.1% through nine months
compared to last year's 44.3% and 44.7%, respectively. Gross profit margins
increased over last year in both Automotive and Business Systems, largely
because of the revenue growth.
Consolidated operating income was 13.5% of revenues for the third quarter and
13.8% through nine months (excluding the accounting change), versus 12.2% and
13.5% last year. Excluding 1998's special charges operating margins were about
14% for both the third quarter and nine months. Automotive operating margins
(excluding the effect of the accounting change) declined from last year
(excluding the special charges) because of higher investment in new products and
services. Business Systems operating margins exceeded last year in both third
quarter and nine months primarily because of higher sales. A primary reason for
the decline in consolidated operating margins (as compared to last year
excluding special charges) was the company's investment in an enterprise
resource planning (ERP) system. The company incurred about two cents per share
of ERP related expenses during the third quarter of 1999 and estimates that
about two cents per share will be incurred during each of the next five to seven
quarters to complete the initial phase of this implementation.
Interest expense was less than last year for both the third quarter and nine
months because of the previously explained reclassifications. Interest income
rose over last year because of higher cash balances and notes receivable as a
result of the sale of the Healthcare Systems segment. Other income included
about $600 from assets sales in the third quarter of 1999. The year-to-date
effective income tax rate declined to 41.6% from 43.6% last year (excluding the
previously mentioned tax benefits) because of the sale of Healthcare Systems,
which reduced nondeductible goodwill amortization, and lower state income taxes.
Annualized return on average shareholders' equity was 27.1%, compared to 26.4%
at June 30, 1998.
AUTOMOTIVE
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------------------ ------------------------------------------
1999 1998 Change % Change 1999 1998 Change % Change
--------- ---------- ---------- --------------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues
Computer Services $111,905 $94,838 $17,067 18% $320,997 $276,219 $44,778 16%
Computer Systems Products $46,396 $46,835 ($439) -1% $119,397 $126,056 ($6,659) -5%
Business Forms $46,484 $46,920 ($436) -1% $136,036 $138,580 ($2,544) -2%
--------- ---------- ---------- --------- ---------- ----------
Total Net Sales and Revenues $204,785 $188,593 $16,192 9% $576,430 $540,855 $35,575 7%
Gross Profit $112,659 $100,866 $11,793 12% $314,212 $293,342 $20,870 7%
Gross Margin 55.0% 53.5% 54.5% 54.2%
SG&A Expenses $69,368 $64,124 $5,244 8% $197,718 $177,035 $20,683 12%
% of Revenues 33.9% 34.0% 34.3% 32.7%
Operating Income $43,291 $36,742 $6,549 18% $116,494 $116,307 $187 0%
Operating Margin 21.1% 19.5% 20.2% 21.5%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues
Computer Services $111,905 $94,838 $17,067 18% $320,997 $276,219 $44,778 16%
Computer Systems Products $46,396 $46,835 ($439) -1% $137,333 $126,056 $11,277 9%
Business Forms $46,484 $46,920 ($436) -1% $136,036 $138,580 ($2,544) -2%
--------- ---------- ---------- --------- ---------- ----------
Total Net Sales and Revenues $204,785 $188,593 $16,192 9% $594,366 $540,855 $53,511 10%
Gross Profit $112,659 $100,866 $11,793 12% $325,417 $293,342 $32,075 11%
Gross Margin 55.0% 53.5% 54.8% 54.2%
SG&A Expenses $69,368 $64,124 $5,244 8% $198,299 $177,035 $21,264 12%
% of Revenues 33.9% 34.0% 33.4% 32.7%
Operating Income $43,291 $36,742 $6,549 18% $127,118 $116,307 $10,811 9%
Operating Margin 21.1% 19.5% 21.4% 21.5%
</TABLE>
Automotive's revenues increased for both the third quarter and nine months
primarily because of continued strong growth in computer services revenues.
Computer services revenues increased 18% for the quarter and 16% year-to-date,
primarily because of the increased number of software applications supported and
the growth of newer service offerings. Computer systems products sales were down
slightly in the third quarter, but increased solidly through nine months. The
prior year had particularly strong computer systems products sales because of
year 2000 related system conversions. Year-to-date, sales of computer systems
products grew because of higher sales volume for the ERA dealer management
system. Automotive business forms sales declined slightly because of lower
volumes, primarily caused by the shift to laser printing. The
10
<PAGE> 11
company includes its laser printing equipment and support revenues in computer
systems products and services, and related forms and supplies sales in business
forms products. Laser revenues, while still relatively small, continued to grow
at a rapid rate. Management expects the shift from printed forms to laser
printing to continue. Revenue growth in the near term will likely be at a mid to
high single digit rate, slightly under the rate of the first nine months of
1999. This lower revenue growth rate is anticipated because of a number of
items, including the high level of year 2000 related systems conversions in the
prior year and lower purchases by large enterprise customers.
Automotive gross profit margins increased in both the third quarter and
year-to-date primarily as a result of the growth in higher margin computer
services revenues.
Excluding both 1999's accounting change and 1998's special charges, operating
margins declined from last year for both the third quarter and nine months
primarily because of continued higher SG&A expenses for new business and product
development.
BUSINESS SYSTEMS
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------------------------- ----------------------------------------------
1999 1998 Change % Change 1999 1998 Change % Change
----------- ----------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $186,352 $174,088 $12,264 7% $543,249 $536,738 $6,511 1%
Gross Profit $70,851 $59,598 $11,253 19% $201,643 $187,732 $13,911 7%
Gross Margin 38.0% 34.2% 37.1% 35.0%
SG&A Expenses $56,215 $51,778 $4,437 9% $163,408 $156,116 $7,292 5%
% of revenues 30.1% 29.7% 30.1% 29.1%
Operating Income $14,636 $7,820 $6,816 87% $38,235 $31,616 $6,619 21%
Operating Margin 7.9% 4.5% 7.0% 5.9%
</TABLE>
Business Systems sales increased over last year for both the third quarter and
nine months because of higher sales volume. Directionally, sales prices were
lower than last year, reflecting lower paper costs.
Gross profit margins increased over last year for both the quarter and nine
months, primarily because of higher sales volume. The year-to-date increase also
reflected the full benefit of the 1997 restructuring which resulted in the
closing of four manufacturing plants.
Business Systems operating margin exceeded last year for both the third quarter
and nine months as higher sales volume and gross profit margin overcame higher
SG&A expenses. These results include about one cent per share negative impact
year-to-date from the startup of the Kaiser Permanente account. In the third
quarter of 1999 the Kaiser account was essentially at breakeven. In August 1998
the company and Kaiser signed a five-year, $200 million contract.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------------------------- ----------------------------------------------
1999 1998 Change % Change 1999 1998 Change % Change
----------- ----------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $9,942 $8,788 $1,154 13% $29,044 $25,455 $3,589 14%
Operating Income $5,450 $4,682 $768 16% $15,624 $12,417 $3,207 26%
Operating Margin 54.8% 53.3% 53.8% 48.8%
</TABLE>
Average finance receivables increased 7% over last year because of strong
automotive systems sales. Financial Services revenues grew primarily because of
interest earned on the higher receivables balances. Average interest rates were
slightly higher than last year. Also contributing to higher revenues and income
were gains on lease rollovers and terminations.
Financial Services' interest rate spread remained strong at 3.7%, compared to
3.2% last year. This interest rate spread increased over last year because of
lower borrowing rates, in addition to the previously mentioned increase in the
receivables portfolio. Bad debt expenses were $650 in the third quarter,
compared to $175 last year and $1,950 year-to-date versus $1,521 last year.
The company has entered into various interest rate management agreements to
limit interest rate exposure on financial services variable rate debt. It is
important to manage this interest rate exposure because the proceeds from these
borrowings were invested in fixed rate finance receivables. The company believes
that over time it has reduced interest expense by using interest rate management
agreements and variable rate debt instead of directly obtaining fixed rate debt.
During May 1999, the company entered into a $10,000 interest rate swap in
connection with obtaining $10,000 of floating rate debt.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems continued to provide strong cash flow from operating
activities during the first nine months of the fiscal year. Operating cash flow
was $118,546 and resulted primarily from net income, adjusted for noncash
charges. Operating cash flow funded the company's investments for normal
operations including capital expenditures of $40,230. During the first nine
months of the fiscal year the company also capitalized $11,452 of software
licensed to customers, consisting of about $2,500 of purchased software with the
balance representing internal capitalization. Capital expenditures in the
ordinary course of business are anticipated to be about $50,000 in fiscal year
1999. In October 1998, the company received about $40,000 of proceeds from the
sale of the Healthcare Systems segment.
Financial services operating cash flows, collections on finance receivables and
additional borrowings were invested in new finance receivables for the company's
automotive systems and used to make scheduled debt repayments.
CAPITALIZATION
The company's ratio of total debt (total information systems debt) to
capitalization (total information systems debt plus shareholders' equity) was
28.5% at June 30, 1999 and 29.4% at September 30, 1998. Remaining credit
available under existing revolving credit agreements was $112,025 at June 30,
1999. In addition to committed credit agreements, the company also has a variety
of other short-term credit lines available. The company anticipates that cash
flow from operations and cash available from existing credit agreements will be
sufficient to fund fiscal year 1999 normal operations.
The company has consistently produced strong operating cash flows sufficient to
fund normal operations. These cash flows resulted primarily from income, of
which Automotive generates about 75 to 80 percent of the total. Automotive's
strong cash flows are the result of stable operating margins and a high
percentage of recurring service revenues, which require relatively low capital
investment. Debt instruments have been used primarily to fund Financial
Services' receivables and business combinations. In fiscal year 1997, the
company filed a shelf registration statement with the SEC whereby the company
can issue up to $300,000 of notes. Through June 30, 1999, the company has issued
$170,000 of notes under this arrangement. Management believes that its strong
balance sheet and cash flows should help maintain an investment grade credit
rating that should provide access to capital sufficient to meet the company's
cash requirements beyond fiscal year 1999.
SHAREHOLDERS' EQUITY
The company lists its Class A common shares on the New York Stock Exchange.
There is no principal market for the Class B common shares. The company also has
an authorized class of 60 million preferred shares with no par value. As of
August 10, 1999, no preferred shares were outstanding and there were no
agreements or commitments with respect to the sale or issuance of these shares.
Dividends are typically declared each November, February, May and August and
paid in January, April, June and September. Dividends per Class A common share
must be twenty times the dividends per Class B common share and all dividend
payments must be simultaneous. In November 1998, the company's board of
directors raised the quarterly dividend 11% to $.10 per Class A common share.
The company has increased cash dividends per share thirteen times in the last
nine years and paid dividends each year since the company's initial public
offering in 1961.
The company has conducted an active share repurchase program during recent years
to provide additional returns to shareholders. During the first nine months of
fiscal year 1999, the company repurchased 1,891 Class A common shares for
$37,972 ($20.08 per share). As of June 30, 1999 the company could repurchase an
additional 3,479 Class A common shares under existing board of directors'
authorizations.
YEAR 2000 COMPLIANCE
STATE OF READINESS
The company has assessed potential year 2000 effects on its internal computer
systems, computer systems provided to customers and other non-information
technology systems. The assessment included not only the company's systems, but
also systems of outside parties such as key suppliers and business partners.
Detailed plans were prepared to address year 2000 issues. These plans covered
software applications, operating systems, hardware and embedded technology in
other equipment. The plans called for a determination of whether effected
systems should be modified, replaced or retired. Management reviews progress
against these plans with the Audit Committee of the Board of Directors at its
regularly scheduled meetings.
12
<PAGE> 13
As of August 10, 1999, over 90% of the company's systems were year 2000
qualified. The remaining systems are scheduled to be year 2000 qualified on or
before September 1999. In July 1998, the company released a year 2000 qualified
version of its ERA2 dealer management system for automobile dealers. In December
1998, the company completed the conversion of customers to the new ERA2 software
release. The company decided late in 1997 to retire several older product lines
by December 1998 rather than make these systems year 2000 qualified. Early in
fiscal year 1998 the company communicated this decision to affected customers
and presented them with various product alternatives. During the year the
company reinforced this communication on a number of occasions. As of June 30,
1999, the vast majority of customers have purchased a year 2000 qualified system
from the company. The company discontinued support of non-year 2000 qualified
systems on January 1, 1999.
The company has contacted significant suppliers, customers and critical business
partners to determine the extent to which the company may be vulnerable in the
event those parties fail to properly remediate their own year 2000 issues. About
70% of our business partners have responded and indicated that their systems
will be year 2000 qualified. The company has performed testing where applicable
to determine that the third party systems are year 2000 qualified and function
properly with the company's systems. To date the company has not experienced
material adverse results from third party systems. While the company has taken
significant actions to help ensure that these systems will be able to process
and store dates into the next century, no amount of testing or contractual
assurances will guarantee that errors or systems failures will not occur.
COSTS
The company's year 2000 efforts have been undertaken largely with existing
personnel. In some instances, consultants have been engaged to perform specific
services. Through June 30, 1999, the company has spent about $12,000 on year
2000 compliance efforts. In the first nine months of fiscal year 1999, year 2000
compliance costs were about $5,000. Prior to fiscal year 1999, the company spent
an additional $7,000 on year 2000 compliance. The company estimates that the
total costs (including costs already incurred) to make all systems year 2000
qualified will be about to $15,000. However, there can be no assurance that the
company will not incur unanticipated costs, which could have a material adverse
effect on the company's financial statements.
RISKS
Management believes that the reasonably likely worst case scenario, with respect
to year 2000 issues, is the failure of a supplier (including energy or
communications suppliers) to be year 2000 qualified. Such a failure could
temporarily interrupt the supply of needed products or services to the company
or its customers, which could effect the company's ability to deliver products
and services and have a material adverse effect on the company's financial
statements.
CONTINGENCY PLANS
In addition to the year 2000 remediation efforts, the company has also focused
on year 2000 contingency planning. Through a customer-oriented risk assessment
process, the company identified areas where contingency strategies needed to be
developed. Detailed contingency plan development is underway and will be
finalized before the end of the calendar year. The actions necessary to make the
plans executable if needed, and plan testing efforts will be completed during
the remainder of calendar year 1999.
MARKET RISKS
INTEREST RATES
The information systems portion of the business borrows money, as needed,
primarily to fund business combinations. Generally the company borrows under
fixed rate agreements with terms of ten years or less.
The Financial Services segment of the business obtains borrowings to fund the
investment in finance receivables. These fixed rate receivables have repayment
terms of four to eight years, with five years being the most common term. The
company funds finance receivables with debt that has repayment terms consistent
with the maturities of the finance receivables. Generally the company attempts
to lock in the interest spread on the fixed rate finance receivables by
borrowing under fixed rate agreements or using interest rate management
agreements to manage variable interest rate exposure. The company does not use
financial instruments for trading purposes.
Because fixed rate finance receivables are directionally funded with fixed rate
debt or its equivalent (variable rate debt that has been fixed with interest
rate swaps), management believes that a 100 basis point change in interest rates
would not have a material effect on the company's financial statements
13
<PAGE> 14
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations in Canada, which accounted for 11% of
net sales and revenues for the nine months ended June 30, 1999. In the conduct
of its foreign operations the company has intercompany sales, charges and loans
between the U.S. and Canada and may receive dividends denominated in different
currencies. These transactions expose the company to changes in foreign currency
exchange rates. At June 30, 1999, the company had no foreign currency exchange
contracts outstanding. Based on the company's overall foreign currency exchange
rate exposure at June 30, 1999, management believes that a 10% change in
currency rates would not have a material effect on the company's financial
statements.
COMMODITIES
The company is exposed to changes in the cost of paper, a key raw material in
the production of business forms. The company has attempted to limit this
exposure by consolidating its purchases among a few suppliers and negotiating
longer-term contracts that limit the amount and frequency of price increases and
generally delays the effective date of the increase. When paper costs increase,
historically the company has been able to increase the sales prices of its
business forms products and maintain its profit margins. Conversely, when paper
costs decline, the company generally lowers its sales prices to meet competitive
pressures. Historically, the company has not used financial instruments to
manage its exposure to changes to the cost of paper. Because the company has
historically been able to raise sales prices to offset higher paper costs,
management believes that a 10% change in paper costs would not have a material
effect on the company's financial statements.
ENVIRONMENTAL MATTER
See Note 9 to the Consolidated Financial Statements for a discussion of an
environmental contingency.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedules
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
14
<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, 1999 /s/ David R. Holmes
----------------- -------------------
David R. Holmes
Chairman of the Board
and Chief Executive Officer
Date August 11, 1999 /s/ Dale L. Medford
----------------- -------------------
Dale L. Medford
Corporate Vice President, Finance
and Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 122,981
<SECURITIES> 0
<RECEIVABLES> 234,619
<ALLOWANCES> 5,817
<INVENTORY> 73,647
<CURRENT-ASSETS> 458,909
<PP&E> 409,096
<DEPRECIATION> 226,406
<TOTAL-ASSETS> 1,249,679
<CURRENT-LIABILITIES> 227,204
<BONDS> 316,530
0
0
<COMMON> 74,543
<OTHER-SE> 377,323
<TOTAL-LIABILITY-AND-EQUITY> 1,249,679
<SALES> 767,644
<TOTAL-REVENUES> 1,148,723
<CGS> 467,559
<TOTAL-COSTS> 603,824
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,619
<INCOME-PRETAX> 145,194
<INCOME-TAX> 60,427
<INCOME-CONTINUING> 84,767
<DISCONTINUED> 5,785
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,552
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.13
</TABLE>
