<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 DECEMBER 31, 1998
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 February 10, 1999, 77,392,891 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 Months Ended December 31, 1998 and 1997 3
Condensed Consolidated Balance Sheets
As of December 31, 1998 and September 30, 1998 4
Condensed Statements of Consolidated Cash Flows
For the Three Months Ended December 31, 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 Months Ended December 31, 1998 and 1997 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 MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In thousands except per share data)
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Net Sales and Revenues
Information systems
Products $ 233,524 $ 250,124
Services 112,656 99,597
--------- ---------
Total information systems 346,180 349,721
Financial services 9,370 8,097
--------- ---------
Total net sales and revenues 355,550 357,818
--------- ---------
Costs and Expenses
Information systems
Cost of sales
Products 147,948 154,472
Services 42,655 39,052
--------- ---------
Total cost of sales 190,603 193,524
Selling, general and administrative expenses 118,759 109,984
Financial services 4,535 4,628
--------- ---------
Total costs and expenses 313,897 308,136
--------- ---------
Operating Income 41,653 49,682
--------- ---------
Other Charges (Income)
Interest expense 3,336 3,251
Interest income (1,418) (290)
Other 131 706
--------- ---------
Total other charges 2,049 3,667
--------- ---------
Income Before Income Taxes 39,604 46,015
Provision for Income Taxes 16,523 19,867
--------- ---------
Income From Continuing Operations 23,081 26,148
Discontinued Operations 5,785 (2,400)
--------- ---------
Net Income $ 28,866 $ 23,748
========= =========
Basic Earnings Per Common Share
Income From Continuing Operations $0.29 $0.33
Discontinued Operations $0.07 $(0.03)
Net Income $0.37 $0.30
Average Number of Common Shares Outstanding 78,613 79,848
Diluted Earnings Per Common Share
Income From Continuing Operations $0.29 $0.32
Discontinued Operations $0.07 $(0.03)
Net Income $0.36 $0.29
Average Number of Common Shares Outstanding 80,499 81,644
Cash Dividends Declared Per Common Share $0.10 $0.09
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
(In thousands)
<TABLE>
<CAPTION>
12/31/98 9/30/98
----------- -----------
<S> <C> <C>
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $ 81,413 $ 39,980
Accounts receivable 207,345 227,158
Inventories 68,288 66,196
Other current assets 37,647 38,713
----------- -----------
Total current assets 394,693 372,047
Property, Plant and Equipment, less accumulated depreciation of
$217,856 at 12/31/98 and $215,208 at 9/30/98 170,424 174,226
Goodwill 71,446 82,280
Other Intangible Assets 14,380 17,327
Other Assets 106,751 100,681
----------- -----------
Total Information Systems Assets 757,694 746,561
----------- -----------
FINANCIAL SERVICES ASSETS
Finance Receivables 412,998 408,765
Cash and Other Assets 774 2,394
----------- -----------
Total Financial Services Assets 413,772 411,159
----------- -----------
TOTAL ASSETS $ 1,171,466 $ 1,157,720
=========== ===========
INFORMATION SYSTEMS LIABILITIES
Current Liabilities $ 197,984 $ 198,208
Long-Term Debt 161,508 161,541
Other Liabilities 85,400 83,703
----------- -----------
Total Information Systems Liabilities 444,892 443,452
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 210,623 210,561
Other Liabilities 102,779 99,256
----------- -----------
Total Financial Services Liabilities 313,402 309,817
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 64,003 58,235
Other Adjustments (9,707) (9,727)
Retained Earnings 358,876 355,943
----------- -----------
Total Shareholders' Equity 413,172 404,451
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,171,466 $ 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 THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
INFORMATION SYSTEMS
Cash Flows Provided By Operating Activities $ 22,157 $ 34,075
-------- --------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (1,393)
Capital expenditures (8,716) (7,619)
Net proceeds from asset sales 44,072 5,459
Capitalization of software licensed to customers (5,033) (254)
Repayments from (advances to) financial services 1,161 (5,701)
-------- --------
Net cash flows provided by (used for) used for investing activities 31,484 (9,508)
-------- --------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 1,775
Principal payments on debt (83) (13,629)
Capital stock issued 4,836 581
Capital stock repurchased (18,756) (9,158)
-------- --------
Net cash flows used for financing activities (12,228) (22,206)
-------- --------
Effect of Exchange Rate Changes on Cash 20 (476)
-------- --------
Increase in Cash and Equivalents 41,433 1,885
Cash and Equivalents, Beginning of Period 39,980 7,604
-------- --------
Cash and Equivalents, End of Period $ 81,413 $ 9,489
======== ========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 5,865 $ 4,026
-------- --------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (36,549) (38,079)
Collections on finance receivables 30,230 23,876
-------- --------
Net cash flows used for investing activities (6,319) (14,203)
-------- --------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 14,625 18,700
Principal payments on debt (14,563) (14,588)
Advances from (repayments to) information systems (1,161) 5,701
-------- --------
Net cash flows provided by (used for) financing activities (1,099) 9,813
-------- --------
Decrease in Cash and Equivalents (1,553) (364)
Cash and Equivalents, Beginning of Period 2,102 921
-------- --------
Cash and Equivalents, End of Period $ 549 $ 557
======== ========
</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>
12/31/98 9/30/98
-------- -------
<S> <C> <C>
Finished Products $55,404 $54,778
Work In Process 6,357 5,795
Raw Materials 6,527 5,623
------- -------
Total Inventories $68,288 $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 new SOP was effective for transactions entered into
in fiscal years beginning after December 15, 1997. The company adopted this
pronouncement effective October 1, 1998. The adoption of this pronouncement
reduced the Automotive Division computer systems products revenues $15,736,
gross profit $10,479, operating income $9,992 and net income $5,825 or $.07 per
diluted share for the first fiscal quarter ended December 31, 1998.
(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) 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. During the first fiscal
quarter of 1999, the company closed the second of two manufacturing facilities
scheduled for closure. As of July 1, 1997, key elements of the costs accrued for
exiting duplicate facilities of Crain-Drummond were involuntary termination
benefits of $2,665 and relocation costs of $416. Involuntary termination
benefits represent severance payments and outplacement services for about 170
employees, principally manufacturing employees. Through December 31, 1998,
$1,300 of involuntary termination benefits were paid to 85 employees and $111 of
relocation costs were paid. The company recorded the assets of the duplicate
facilities as current assets held for sale. As of July 1, 1997, these assets of
$4,972 were recorded at estimated fair market value less disposal costs. At
December 31, 1998 $2,146 of these assets had been sold.
(6) COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net Income $28,866 $23,748
Foreign Currency Translation 20 477
------- -------
Comprehensive Income $28,886 $24,225
======= =======
</TABLE>
6
<PAGE> 7
(7) BUSINESS SEGMENTS
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
AUTOMOTIVE
Net Sales and Revenues
Computer Services $ 103,297 $ 90,840
Computer Systems Products 28,359 35,442
Business Forms Products 43,617 45,013
--------- ---------
Total Net Sales and Revenues $ 175,273 $ 171,295
Operating Income $ 31,390 $ 39,190
BUSINESS SYSTEMS
Net Sales and Revenues
Business Forms Products $ 160,578 $ 168,587
Services and Computer Systems Products 10,329 9,946
--------- ---------
Total Net Sales and Revenues $ 170,907 $ 178,533
Operating Income $ 9,402 $ 10,778
FINANCIAL SERVICES
Net Sales and Revenues $ 9,370 $ 8,097
Operating Income $ 4,835 $ 3,469
CORPORATE
Operating Expenses $ (3,974) $ (3,755)
ELIMINATION OF INTERSEGMENT SALES $ 0 $ (107)
TOTALS
Net Sales and Revenues $ 355,550 $ 357,818
Operating Income $ 41,653 $ 49,682
</TABLE>
<TABLE>
<CAPTION>
12/31/98 9/30/98
----------- -----------
<S> <C> <C>
ASSETS
Automotive $ 246,122 $ 242,259
Business Systems 351,565 360,417
Financial Services 413,772 411,159
Corporate 160,007 108,597
Discontinued Operations 0 35,288
----------- -----------
Total Assets $ 1,171,466 $ 1,157,720
=========== ===========
</TABLE>
(8) 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
7
<PAGE> 8
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.
(9) 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 $ 25,982 $ 21,680
Depreciation and Amortization 11,917 13,932
Deferred Income Taxes (582) 970
Deferred Income Taxes Transferred to Financial Services 389 (184)
Losses (Gains) on Sales of Assets (6,919) 67
Changes in Operating Assets and Liabilities
Accounts Receivable 14,176 4,494
Inventories (3,518) 16
Prepaid Expenses and Other Current Assets (2,299) 481
Intangible and Other Assets 2,432 915
Accounts Payable (12,635) (715)
Accrued Liabilities (1,143) (10,218)
Other Liabilities (5,643) 2,637
-------- --------
Net Cash Provided by Operating Activities $ 22,157 $ 34,075
======== ========
FINANCIAL SERVICES
Net Income $ 2,884 $ 2,068
Deferred Income Taxes 1,464 1,763
Deferred Income Taxes Transferred from Information Systems (389) 184
Changes in Receivables, Other Assets and Other Liabilities 1,906 11
-------- --------
Net Cash Provided by Operating Activities $ 5,865 $ 4,026
======== ========
</TABLE>
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(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 new SOP was effective for transactions entered into
in fiscal years beginning after December 15, 1997. The company adopted this
pronouncement effective October 1, 1998. The adoption of this pronouncement
reduced the Automotive Division computer systems products revenues $15,736,
gross profit $10,479, operating income $9,992 and net income $5,825 or $.07 per
diluted share for the first fiscal quarter ended December 31, 1998. The company
estimates revenues will be reduced by about $3,000 and earnings will be lowered
by about $.02 per share in the second fiscal quarter ended March 31, 1999. After
the second quarter, the company does not expect the effect to be material.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
1998 1997 Change % Change
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Sales and Revenues $355,550 $357,818 $(2,268) -1%
Gross Profit $155,577 $156,197 $(620) 0%
Operating Income $41,653 $49,682 $(8,029) -16%
Income From Continuing Operations $23,081 $26,148 $(3,067) -12%
Discontinued Operations $5,785 $(2,400) $8,185
Net Income $28,866 $23,748 $5,118 22%
Earnings Per Common Share (Diluted) $0.36 $0.29 $0.07 24%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues $371,286 $357,818 $13,468 4%
Gross Profit $166,056 $156,197 $9,859 6%
Operating Income $51,645 $49,682 $1,963 4%
Income From Continuing Operations $28,906 $26,148 $2,758 11%
</TABLE>
Consolidated revenues declined slightly because of the effect of the accounting
change. Excluding the effect of the accounting change, revenues increased over
last year as a result of growth in revenues of Automotive computer systems
services and products which overcame declines in Automotive forms and Business
Systems sales.
The consolidated gross profit percentage was 44.9% of revenues (excluding
financial services revenues) compared to 44.6% last year. Excluding the effect
of the accounting change, consolidated gross profit margin was 45.9%. The
increase over last year resulted from growth in Automotive revenues and
improvement in Business Systems gross profit margins.
9
<PAGE> 10
Consolidated operating income (excluding the effect of the accounting change)
was 13.9% of revenues, the same as last year. Automotive operating margins
(excluding the effect of the accounting change) declined from last year because
of both lower gross profit margins and higher investment in new products and
services. Business Systems operating margins declined from last year, in part,
because of startup expenses associated with the Kaiser Permanente account. (In
August 1998 the company and Kaiser signed a five-year, $200 million contract.)
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. The
effective income tax rate declined to 41.7% from 43.2% last year because of the
sale of Healthcare Systems, which reduced nondeductible goodwill amortization,
and lower state income taxes. Annualized return on average shareholders' equity
was 22.7%, compared to 24.1% at December 31, 1997.
AUTOMOTIVE
<TABLE>
<CAPTION>
1998 1997 Change % Change
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Sales and Revenues
Computer Services $103,297 $90,840 $12,457 14%
Computer Systems Products $28,359 $35,442 $(7,083) -20%
Business Forms $43,617 $45,013 $(1,396) -3%
-------- -------- -------
Total Net Sales and Revenues $175,273 $171,295 $3,978 2%
Gross Profit $93,652 $94,193 $(541) -1%
Gross Margin 53.4% 55.0%
SG&A Expenses $62,262 $55,003 $7,259 13%
% of Revenues 35.5% 32.1%
Operating Income $31,390 $39,190 $(7,800) -20%
Operating Margin 17.9% 22.9%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues
Computer Services $103,297 $90,840 $12,457 14%
Computer Systems Products $44,095 $35,442 $8,653 24%
Business Forms $43,617 $45,013 $(1,396) -3%
-------- -------- -------
Total Net Sales and Revenues $191,009 $171,295 $19,714 12%
Gross Profit $104,131 $94,193 $9,938 11%
Gross Margin 54.5% 55.0%
SG&A Expenses $62,749 $55,003 $7,746 14%
% of Revenues 32.8% 32.1%
Operating Income $41,382 $39,190 $2,192 6%
Operating Margin 21.7% 22.9%
</TABLE>
Excluding the effect of the accounting change, Automotive revenues increased 12%
because of growth in computer services and systems products which more than
offset a slight decline in Automotive business forms sales. Computer services
revenues increased 14% primarily because of the increased number of software
applications supported. Computer systems products sales grew 24% over last year
(excluding the effect of the accounting change) primarily because of higher
sales volumes of ERA dealer management systems and electronic parts catalogs. A
portion of the higher sales volumes resulted from customers replacing systems
that were not year 2000 qualified, as well as competitive wins. As of December
31, 1998, essentially all customers have converted to year 2000 qualified
systems. Automotive business forms sales declined slightly because of lower
volumes, primarily caused by the shift to laser printing. The 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. Management
expects the shift from printed forms to laser printing to continue. The company
expects continued revenue growth throughout the year. However, revenue growth in
the second quarter will likely be at a high single digit rate, slightly under
the 12% rate in the first quarter of 1999. This lower revenue growth rate is
anticipated because of a number of items, including the completion of customer
conversions to year 2000 qualified systems and lower sales activity among large
enterprise accounts.
10
<PAGE> 11
Automotive gross profit margins declined primarily as a result of the accounting
change. Excluding the effect of the accounting change, gross profit margins
declined slightly because of a slight decline in computer systems products gross
margins and a shift in the revenue mix because of the strong growth in computer
systems products (excluding the accounting change).
Operating margins declined from last year primarily because of the effect of the
accounting change. Excluding this impact, operating margins declined primarily
because of higher SG&A expenses for new business and product development.
BUSINESS SYSTEMS
<TABLE>
<CAPTION>
1998 1997 Change % Change
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Sales and Revenues $170,907 $178,533 $(7,626) -4%
Gross Profit $61,925 $62,004 $(79) 0%
Gross Margin 36.2% 34.7%
SG&A Expenses $52,523 $51,226 $1,297 3%
% of revenues 30.7% 28.7%
Operating Income $9,402 $10,778 $(1,376) -13%
Operating Margin 5.5% 6.0%
</TABLE>
Business Systems sales declined because of reduced volumes and lower sales
prices. Sales prices were lowered to reflect lower paper costs.
Gross profit nearly equaled last year on lower sales as the gross profit margin
rose one and one-half percentage points. First quarter results reflect the full
benefit of the 1997 restructuring which resulted in the closing of four
manufacturing plants. During the first quarter the company closed
Crain-Drummond's Ottawa, Ontario manufacturing facility and incurred about $500
of period costs. These period costs essentially accounted for the decline in
gross profit margin from the fourth quarter of fiscal year 1998.
Business Systems operating margin was less than last year because of higher SG&A
expenses. About $600 of these expenses represented startup costs associated with
the Kaiser Permanente account. (In August 1998 the company and Kaiser signed a
five-year, $200 million contract.) SG&A expenses were essentially the same
percentage of sales as the fourth quarter of fiscal year 1998.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
1998 1997 Change % Change
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net Sales and Revenues $9,370 $8,097 $1,273 16%
Operating Income $4,835 $3,469 $1,366 39%
Operating Margin 51.6% 42.8%
</TABLE>
Average finance receivables increased 11% over last year because of strong
automotive systems sales. Financial Services revenues grew because of interest
earned on the higher receivables balances. Average interest rates were slightly
higher than last year.
Financial Services' interest rate spread remained strong at 3.4%, compared to
3.1% 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 compared to $873 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 the first quarter of fiscal year 1999 the company did not enter into any
new interest rate management agreements.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems continued to provide strong cash flow from operating
activities during the first quarter of the fiscal year. Operating cash flow was
$22,157 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 $8,716. During the first quarter the company
also capitalized $5,033 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 $45,000 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
29.2% at December 31, 1998 and 29.4% at September 30, 1998. Remaining credit
available under existing revolving credit agreements was $114,875 at December
31, 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 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 December 31, 1998, 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
February 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 quarter of
fiscal year 1999, the company repurchased 900 Class A common shares for $18,756
($20.84 per share). As of December 31, 1998 the company could repurchase an
additional 4,470 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
About 80% of the company's systems were year 2000 qualified as of December 31,
1998. The remaining systems are scheduled to be year 2000 qualified on or before
June 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 December
31, 1998, 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 December 31, 1998, the company has spent about $9,000 on year
2000 compliance efforts. In the first quarter of fiscal year 1999, year 2000
compliance costs were about $2,000. 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 $13,000 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
The company has focused its year 2000 compliance efforts on assessing potential
year 2000 effects, developing or purchasing year 2000 qualified solutions and
implementing and testing year 2000 qualified solutions. The company continually
assesses known, potential risks remaining and has begun to develop contingency
plans to mitigate any significant risks identified. The company anticipates that
contingency plans will be developed during 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 12% of
net sales and revenues in the three months ended December 31, 1998. 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 December 31, 1998, the company had no
foreign currency exchange contracts outstanding. Based on the company's overall
foreign currency exchange rate exposure at December 31, 1998, 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 8 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
On November 9, 1998 the company filed a report on
Form 8-K regarding the sale of substantially all
assets of its Healthcare Systems segment.
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 February 11, 1999 /s/ DAVID R. HOLMES
------------------------------- ---------------------------------
David R. Holmes
Chairman of the Board, President
and Chief Executive Officer
Date February 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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 81,413
<SECURITIES> 0
<RECEIVABLES> 213,434
<ALLOWANCES> 6,089
<INVENTORY> 68,288
<CURRENT-ASSETS> 394,693
<PP&E> 388,280
<DEPRECIATION> 217,856
<TOTAL-ASSETS> 1,171,466
<CURRENT-LIABILITIES> 197,984
<BONDS> 311,177
0
0
<COMMON> 64,003
<OTHER-SE> 349,169
<TOTAL-LIABILITY-AND-EQUITY> 1,171,466
<SALES> 233,524
<TOTAL-REVENUES> 355,550
<CGS> 147,948
<TOTAL-COSTS> 190,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,678
<INCOME-PRETAX> 39,604
<INCOME-TAX> 16,523
<INCOME-CONTINUING> 23,081
<DISCONTINUED> 5,785
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,866
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
