<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, 2000
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, 2000, 76,676,147 Class A common shares and 20,000,000 Class B
common shares were outstanding.
<PAGE> 2
THE REYNOLDS AND REYNOLDS COMPANY
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income
For the Three and Nine Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets
As of June 30, 2000 and September 30, 1999 4
Condensed Statements of Consolidated Cash Flows
For the Nine Months Ended June 30, 2000 and 1999 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, 2000 and 1999 10
PART II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE> 3
THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales and Revenues
Automotive Solutions
Services $136,871 $111,905 $377,804 $320,997
Products 89,129 94,319 269,740 259,419
-------- -------- -------- --------
Total Automotive Solutions 226,000 206,224 647,544 580,416
Financial services 9,746 9,942 30,025 29,044
-------- -------- -------- --------
Total net sales and revenues 235,746 216,166 677,569 609,460
-------- -------- -------- --------
Costs and Expenses
Automotive Solutions
Cost of sales
Services 50,670 40,143 136,263 115,564
Products 48,814 52,468 144,813 147,914
-------- -------- -------- --------
Total cost of sales 99,484 92,611 281,076 263,478
Selling, general and administrative expenses 93,045 79,011 258,657 219,538
Financial services 4,149 4,492 13,644 13,420
-------- -------- -------- --------
Total costs and expenses 196,678 176,114 553,377 496,436
-------- -------- -------- --------
Operating Income 39,068 40,052 124,192 113,024
-------- -------- -------- --------
Other Charges (Income)
Interest expense 2,161 2,516 6,254 7,744
Interest income (1,128) (1,907) (3,429) (4,742)
Equity in net losses of affiliated companies 1,979 294 3,116 1,436
Other 306 (667) 18 (1,230)
-------- -------- -------- --------
Total other charges 3,318 236 5,959 3,208
-------- -------- -------- --------
Income Before Income Taxes 35,750 39,816 118,233 109,816
Provision for Income Taxes 14,726 16,379 48,602 45,416
-------- -------- -------- --------
Income From Continuing Operations 21,024 23,437 69,631 64,400
Income From Discontinued Operations 4,269 7,820 19,930 20,367
Gain on Sale of Discontinued Operations 0 0 0 5,785
-------- -------- -------- --------
Net Income $ 25,293 $ 31,257 $ 89,561 $ 90,552
======== ======== ======== ========
Basic Earnings Per Common Share
Income From Continuing Operations $ 0.27 $ 0.30 $ 0.90 $ 0.82
Income From Discontinued Operations $ 0.05 $ 0.10 $ 0.26 $ 0.27
Gain on Sale of Discontinued Operations $ 0.00 $ 0.00 $ 0.00 $ 0.07
Net Income $ 0.32 $ 0.40 $ 1.16 $ 1.16
Average Number of Common Shares Outstanding 78,183 78,014 77,477 78,338
Diluted Earnings Per Common Share
Income From Continuing Operations $ 0.26 $ 0.29 $ 0.87 $ 0.80
Income From Discontinued Operations $ 0.05 $ 0.10 $ 0.25 $ 0.26
Gain on Sale of Discontinued Operations $ 0.00 $ 0.00 $ 0.00 $ 0.07
Net Income $ 0.31 $ 0.39 $ 1.12 $ 1.13
Average Number of Common Shares Outstanding 80,737 80,207 79,921 80,290
Cash Dividends Declared Per Common Share $ 0.11 $ 0.10 $ 0.33 $ 0.30
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND SEPTEMBER 30, 1999
(In thousands)
<TABLE>
<CAPTION>
6/30/00 9/30/99
---------- ----------
<S> <C> <C>
AUTOMOTIVE SOLUTIONS ASSETS
Current Assets
Cash and equivalents $ 36,499 $ 103,595
Accounts receivable 114,030 105,228
Inventories 18,509 17,171
Assets held for sale 270,307 244,783
Other current assets 36,704 38,158
---------- ----------
Total current assets 476,049 508,935
Property, Plant and Equipment, less accumulated depreciation of
$166,099 at 6/30/00 and $162,312 at 9/30/99 138,715 104,106
Goodwill 37,126 21,197
Other Intangible Assets 153,947 22,007
Other Assets 71,006 73,022
---------- ----------
Total Automotive Solutions Assets 876,843 729,267
---------- ----------
FINANCIAL SERVICES ASSETS
Finance Receivables 414,142 426,751
Cash and Other Assets 462 840
---------- ----------
Total Financial Services Assets 414,604 427,591
---------- ----------
TOTAL ASSETS $1,291,447 $1,156,858
========== ==========
AUTOMOTIVE SOLUTIONS LIABILITIES
Current Liabilities $ 228,447 $ 141,390
Long-Term Debt 116,826 163,111
Other Liabilities 63,965 59,853
---------- ----------
Total Automotive Solutions Liabilities 409,238 364,354
---------- ----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 212,914 219,423
Other Liabilities 109,639 109,646
---------- ----------
Total Financial Services Liabilities 322,553 329,069
---------- ----------
SHAREHOLDERS' EQUITY
Capital Stock 130,588 79,223
Other Comprehensive Income (9,686) (9,448)
Retained Earnings 438,754 393,660
---------- ----------
Total Shareholders' Equity 559,656 463,435
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,291,447 $1,156,858
========== ==========
</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, 2000 AND 1999
(In thousands)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
AUTOMOTIVE SOLUTIONS
Cash Flows Provided By Operating Activities $ 100,939 $ 90,055
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (103,344)
Capital expenditures (50,051) (25,143)
Net proceeds from asset sales 3,269 45,280
Capitalization of software licensed to customers (15,989) (11,452)
Repayments from (advances to) financial services 3,323 932
--------- ---------
Net cash flows provided by (used for) investing activities (162,792) 9,617
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 46,000 50,245
Principal payments on debt (9,147) (38,600)
Cash dividends paid (25,612) (23,505)
Capital stock issued 13,354 12,032
Capital stock repurchased (19,885) (37,972)
--------- ---------
Net cash flows provided by (used for) financing activities 4,710 (37,800)
--------- ---------
Effect of Exchange Rate Changes on Cash (238) 633
--------- ---------
Net Cash Provided by (Used for) Discontinued Operations (9,715) 20,496
--------- ---------
Increase (Decrease) in Cash and Equivalents (67,096) 83,001
Cash and Equivalents, Beginning of Period 103,595 39,980
--------- ---------
Cash and Equivalents, End of Period $ 36,499 $ 122,981
========= =========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 14,085 $ 16,585
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (105,915) (112,954)
Collections on finance receivables 101,322 94,554
--------- ---------
Net cash flows used for investing activities (4,593) (18,400)
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 44,600 24,975
Principal payments on debt (51,109) (23,658)
Advances from (repayments to) information systems (3,323) (932)
--------- ---------
Net cash flows provided by (used for) financing activities (9,832) 385
--------- ---------
Decrease in Cash and Equivalents (340) (1,430)
Cash and Equivalents, Beginning of Period 675 2,102
--------- ---------
Cash and Equivalents, End of Period $ 335 $ 672
========= =========
</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, 1999 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
6/30/00 9/30/99
------- -------
Finished Products $17,162 $15,816
Work In Process 746 837
Raw Materials 601 518
------- -------
Total Inventories $18,509 $17,171
======= =======
(3) COMPREHENSIVE INCOME
THREE MONTHS NINE MONTHS
2000 1999 2000 1999
------- ------- ------- -------
Net Income $25,293 $31,257 $89,561 $90,552
Foreign Currency Translation (541) 392 (238) 633
------- ------- ------- -------
Comprehensive Income $24,752 $31,649 $89,323 $91,185
======= ======= ======= =======
(4) DISCONTINUED OPERATIONS
On August 4, 2000, the company sold the assets of its Information Solutions
segment to The Carlyle Group of Washington D.C. for cash of $360,000. The
Information Solutions segment manufactures and distributes printed business
forms and systems, custom continuous and snap out forms, specialty printed
products and forms management services to general business markets. Revenues and
expenses of the Information Solutions segment have been reclassified to
discontinued operations in the company's statements of consolidated income.
Information Solutions assets and liabilities have been reclassified to the line
captioned, assets held for sale, in the company's condensed consolidated balance
sheet. Cash flows from discontinued operations of the Information Solutions
segment have been reported as a single line in the company's statement of
condensed consolidated cash flows. Financial statements for prior periods have
been restated to be consistent with this presentation. The following operating
results of the Information Solutions segment were reported as discontinued
operations.
Three Months Nine Months
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net Sales and Revenues $199,013 $184,912 $602,914 $539,262
Cost of Sales $129,611 $115,015 $391,072 $340,345
SG&A Expenses $ 60,525 $ 55,639 $175,256 $161,727
Operating Income $ 8,877 $ 14,258 $ 36,586 $ 37,190
Other Charges $ 548 $ 565 $ 1,649 $ 1,812
Income Before Income Taxes $ 8,329 $ 13,693 $ 34,937 $ 35,378
Provision for Income Taxes $ 4,060 $ 5,873 $ 15,007 $ 15,011
Net Income $ 4,269 $ 7,820 $ 19,930 $ 20,367
6
<PAGE> 7
Major components of assets held for sale were as follows:
6/30/00 9/30/99
--------- ---------
Accounts receivable $145,594 $138,801
Inventories 60,930 59,524
Other current assets 7,755 5,817
Property, Plant and Equipment 79,510 83,668
Other assets 84,979 62,897
Current liabilities (75,688) (71,266)
Long-term debt (573) (874)
Other liabilities (32,200) (33,784)
-------- --------
Totals $270,307 $244,783
========= ========
On October 23, 1998, the company sold essentially all net assets of its
Healthcare Systems segment to InfoCure Corporation and recorded a gain on the
sale of $5,785 or $.07 per diluted share during the three months ended December
31, 1998.
(5) BUSINESS COMBINATIONS
In May 2000, the company purchased the outstanding membership interests of the
HAC Group LLC, the leading provider of learning, customer relationship
management and Web services to automobile retailers and manufacturers. The
privately-held HAC Group had revenues of $65,000 in 1999. The purchase price of
$129,461 consisted of $97,461 of cash and the issuance of 1,221,840 Class A
common shares. This business combination was accounted for as a purchase and the
accounts of HAC Group were included in the financial statements since the
acquisition date. In connection with this business combination the company
recorded goodwill of $21,037, based on the preliminary allocation of the
purchase price. Goodwill is being amortized on a straight-line basis over 20
years. Under terms of the purchase agreement, the company may be required to
make additional payments over the next three years of up to $60,000 in the
aggregate, contingent on the operating results of the business purchased.
In May 2000, the company, the Dealer Services and Claims Solutions Groups of
Automatic Data Processing, Inc. and CCC Information Services, Inc. signed a
definitive agreement forming a new independent company, named ChoiceParts, LLC,
that will develop an electronic parts network for the automotive parts market.
The company contributed its existing parts locator business and in-process
software development of a web-based parts locator product to ChoiceParts in
exchange for a minority equity consisting of both common and preferred
interests. The company also made a capital contribution to ChoiceParts of
$1,675. The company's existing parts locator business had revenues of nearly
$12,000 in fiscal year 1999. In connection with this transaction, the company
recorded goodwill of $852 which is being amortized on a straight-line basis over
five years.
On October 1, 1999, the company purchased substantially all net assets of
Sterling Direct, Inc. for $26,020 of cash. Sterling Direct, a provider of direct
marketing services located in St. Louis, has annual revenues of about $28,000.
This business combination was accounted for as a purchase and the accounts of
Sterling Direct were included in the financial statements since the acquisition
date. In connection with this business combination the company recorded goodwill
of $23,208 which is being amortized on a straight-line basis over 10 years.
Sterling Direct results were included in discontinued operations and these
assets will be part of the sale of the Information Solutions Group.
(6) MEMORANDUM OF UNDERSTANDING
On May 16, 2000, the company and General Motors Corporation (GM) announced the
signing of a Memorandum of Understanding regarding certain arrangements between
the parties related to (i) the development, testing, implementation and
execution of certain web enabled dealer information systems; (ii) the
endorsement by GM of certain products and services offered by the company; and
(iii) the granting by the company to GM of a 10% equity interest in the company.
This Memorandum of Understanding is subject to (i) completion to the
satisfaction of each party of due diligence investigations; (ii) negotiation and
execution of mutually satisfactory definitive agreements; (iii) compliance with
all applicable laws and regulations; and (iv) receipt by each party of all
necessary corporate and/or board approvals.
(7) 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
7
<PAGE> 8
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 Automotive
Solutions' 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
the third quarter 1999 operating results.
(8) ACCOUNTING STANDARD
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which
provides guidance on applying generally accepted accounting principles for
recognizing revenue. SAB No. 101, as amended, is effective for the fourth
quarter of fiscal year 2001. The company is reviewing the impact of SAB No. 101,
and does not believe that its adoption will have a material effect on the
company's financial statements.
(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.
(10) BUSINESS SEGMENTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
AUTOMOTIVE SOLUTIONS
Net Sales and Revenues
Computer Services $136,871 $111,905 $377,804 $ 320,997
Computer Systems Products 43,382 46,395 131,229 119,396
Business Forms Products 45,747 47,924 138,511 140,023
-------- -------- ---------- ----------
Total Net Sales and Revenues $226,000 $206,224 $ 647,544 $ 580,416
Operating Income $ 33,471 $ 34,602 $ 107,811 $ 97,400
FINANCIAL SERVICES
Net Sales and Revenues $ 9,746 $ 9,942 $ 30,025 $ 29,044
Operating Income $ 5,597 $ 5,450 $ 16,381 $ 15,624
TOTALS
Net Sales and Revenues $235,746 $216,166 $ 677,569 $ 609,460
Operating Income $ 39,068 $ 40,052 $ 124,192 $ 113,024
6/30/00 9/30/99
--------- ----------
ASSETS
Automotive Solutions $ 606,536 $ 484,484
Financial Services 414,604 427,591
Discontinued Operations 270,307 244,783
---------- ----------
Total Assets $1,291,447 $1,156,858
========== ==========
</TABLE>
8
<PAGE> 9
(11) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
AUTOMOTIVE SOLUTIONS
Net Income $ 79,727 $ 81,230
Depreciation and Amortization 26,599 22,553
Deferred Income Taxes 6,459 486
Deferred Income Taxes Transferred to Financial Services (2,336) (2,862)
Income from Discontinued Operations (19,930) (26,152)
Losses (Gains) on Sales of Assets 471 (6,910)
Changes in Operating Assets and Liabilities
Accounts Receivable 22,132 2,309
Inventories (1,338) (2,054)
Prepaid Expenses and Other Current Assets 977 (1,999)
Intangible and Other Assets 3,296 8,636
Accounts Payable 102 2,209
Accrued Liabilities (17,354) 16,016
Other Liabilities 2,134 (3,407)
-------- --------
Net Cash Provided by Operating Activities $100,939 $ 90,055
======== ========
FINANCIAL SERVICES
Net Income $ 9,834 $ 9,322
Deferred Income Taxes (1,076) 1,255
Deferred Income Taxes Transferred from Information Systems 2,336 2,862
Changes in Receivables, Other Assets and Other Liabilities 2,991 3,146
-------- --------
Net Cash Provided by Operating Activities $ 14,085 $ 16,585
======== ========
</TABLE>
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands except per share data)
SIGNIFICANT EVENTS
DISCONTINUED OPERATIONS - INFORMATION SOLUTIONS GROUP
On August 4, 2000, the company sold the assets of its Information Solutions
segment to The Carlyle Group of Washington D.C. for cash of $360,000. The
company expects to record an after-tax gain on the sale in the fourth quarter of
fiscal year 2000. The company expects to use proceeds from the sale to fund
growth initiatives, share repurchases and debt reduction, as well as for general
corporate purposes. The Information Solutions segment manufactures and
distributes printed business forms and systems, custom continuous and snap out
forms, specialty printed products and forms management services to general
business markets. Revenues and expenses of the Information Solutions segment
have been reclassified to discontinued operations in the company's statements of
consolidated income. Information Solutions assets and liabilities have been
reclassified to the line captioned, assets held for sale, in the company's
condensed consolidated balance sheet. Cash flows from discontinued operations of
the Information Solutions segment have been reported as a single line in the
company's statement of condensed consolidated cash flows. Financial statements
for prior periods have been restated to be consistent with this new
presentation.
BUSINESS COMBINATIONS
On May 19, 2000, the company purchased the outstanding membership interests of
the HAC Group LLC, the leading provider of learning, customer relationship
management and Web services to automobile retailers and manufacturers. The
privately-held HAC Group had revenues of $65,000 in 1999. The purchase price of
$129,461 consisted of $97,461 of cash and the issuance of 1,221,840 Class A
common shares. Under terms of the purchase agreement, the company may be
required to make additional payments of up to $60,000 contingent on the
operating results of the business purchased. The company expects about $.01 per
share of earnings dilution from HAC for the next several quarters from
amortization of intangible assets, interest on the cash portion of the purchase
price and the issuance of additional shares.
In May 2000, the company, the Dealer Services and Claims Solutions Groups of
Automatic Data Processing, Inc. and CCC Information Services, Inc. signed a
definitive agreement forming a new independent company, named ChoiceParts, LLC,
that will develop an electronic parts network for the automotive parts market.
The company contributed its existing parts locator business and in-process
software development of a web-based parts locator product to ChoiceParts in
exchange for a 33.5% common equity interest in ChoiceParts and $1,075 of
preferred equity interest. The company also made a capital contribution to
ChoiceParts of $1,675. The company's existing parts locator business had
revenues of nearly $12,000 in fiscal year 1999. The company expects about $.02
per share of earnings dilution for the next several quarters from the
contribution of its existing parts locator business and recognition of the
company's share of ChoiceParts losses.
On October 1, 1999, the company purchased substantially all net assets of
Sterling Direct, Inc. for $26,020 of cash. Sterling Direct, a provider of direct
marketing services located in St. Louis, has annual revenues of about $28,000.
Sterling Direct provides a full range of direct marketing services from
strategic marketing program development to output management and campaign
analysis and reporting. Sterling Direct also provides database management
services, custom programming, telemarketing and billing statement services.
Sterling Direct results were included in discontinued operations and these
assets will be part of the sale of the Information Solutions Group.
DISCONTINUED OPERATIONS - HEALTHCARE SYSTEMS
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. In October 1998, the company sold
essentially all net assets of its Healthcare Systems segment to InfoCure
Corporation for about $50,000. The company recorded a gain on the sale of $5,785
or $.07 per diluted share in the first quarter of fiscal year 1999. The
operating results of the Healthcare Systems segment have been presented as
discontinued operations in the statements of consolidated income.
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
10
<PAGE> 11
company adopted this pronouncement effective October 1, 1998. The adoption of
this pronouncement reduced Automotive Solutions' 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 the third quarter 1999 operating results.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
Three Months Nine Months
----------------------------------------- ---------------------------------------------
2000 1999 Change % 2000 1999 Change %
Change Change
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $235,746 $216,166 $19,580 9% $677,569 $609,460 $68,109 11%
Gross Profit $126,516 $113,613 $12,903 11% $366,468 $316,938 $49,530 16%
Operating Income $ 39,068 $ 40,052 $ (984) -2% $124,192 $113,024 $11,168 10%
Income From Continuing Operations $ 21,024 $ 23,437 $(2,413) -10% $ 69,631 $ 64,400 $ 5,231 8%
Income From Discontinued Operations $ 4,269 $ 7,820 $(3,551) -45% $ 19,930 $ 20,367 $ (437) -2%
Gain on Sale of Discontinued $ 0 $ 0 $ 0 $ 0 $ 5,785 $(5,785)
Operations
Net Income $ 25,293 $ 31,257 $(5,964) -19% $ 89,561 $ 90,552 $ (991) -1%
Earnings Per Common Share (Diluted)
Income From Continuing Operations $ 0.26 $ 0.29 $ (0.03) -10% $ 0.87 $ 0.80 $ 0.07 9%
Income From Discontinued $ 0.05 $ 0.10 $ (0.05) -50% $ 0.25 $ 0.26 $ (0.01) -4%
Operations
Gain on Sale of Discontinued $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.07 $ (0.07)
Operations
Net Income $ 0.31 $ 0.39 $ (0.08) -21% $ 1.12 $ 1.13 $ (0.01) -1%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues $235,746 $216,166 $19,580 9% $677,569 $627,396 $50,173 8%
Gross Profit $126,516 $113,613 $12,903 11% $366,468 $328,143 $38,325 12%
Operating Income $ 39,068 $ 40,052 $ (984) -2% $124,192 $123,648 $ 544 0%
</TABLE>
Consolidated revenues grew 9% in the third quarter and 11% through nine months
with the acquisition of the HAC Group LLC contributing revenues of $13,249.
Revenues from the company's parts locator business, contributed to ChoiceParts,
were $1,804 less than last year in the third quarter and $1,319 less
year-to-date. Excluding the effect of the HAC acquisition and the parts locator
divestiture, revenues grew 4% for the third quarter and 9% for the nine months,
as a result of higher recurring service revenues.
Consolidated operating income was 16.6% of revenues for the third quarter and
18.3% through nine months versus 18.5% for both periods last year (excluding the
accounting change, operating margin was 19.7% last year for the nine months).
The decline in operating margins (excluding last year's accounting change) from
last year primarily resulted from the company's increased investments in
research and development efforts related to product development. The company
also incurred $1,350 of reorganization costs in the third quarter. In the fourth
quarter, the company will record additional reorganization costs necessary to
reduce its cost structure to a level appropriate for the ongoing automotive
business. These costs will include severance and outplacement costs for
employees terminated in July 2000 and plant closing costs related to closing the
Oklahoma City plant, also announced in July 2000.
Equity in net losses of affiliated companies increased $1,685 for the third
quarter and $1,680 for the nine months. The higher losses resulted from new
equity investments in ChoiceParts and e-fin,an internet-based solution that
connects automotive retailers and financial institutions, and additional losses
in Kalamazoo Computer Group. The company's share of Kalamazoo's losses grew by
$1,144 for the quarter and $770 year-to-date because of reorganization costs,
asset write-offs and losses from operations.
Income from continuing operations declined from last year for the third quarter
reflecting additional losses from the
11
<PAGE> 12
equity investment in Kalamazoo, reorganization costs and dilution from the HAC
acquisition. HAC generated positive operating income during the third quarter,
but operating income was less than interest costs. Income from discontinued
operations represents income from the company's Information Solutions segment.
Information Solutions income was less than last year because of lower operating
margins and the write-off of an asset as a result of the divestiture. Last
year's gain on sale of discontinued operations represents the gain on the sale
of the company's Healthcare systems segment.
During the third quarter net earnings per share declined a greater percentage
than net income primarily as a result of the 1,222 shares issued in the HAC
acquisition. Last year's nine months net income included the negative effect of
the accounting change that was essentially offset by the gain on the sale of the
Healthcare Systems segment. Annualized return on average shareholders' equity
was 22.7%, compared to 27.1% at June 30, 1999.
AUTOMOTIVE SOLUTIONS
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------------------------------------------------------------------
2000 1999 Change % 2000 1999 Change %
Change Change
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues
Computer Services $136,871 $111,905 $24,966 22% $377,804 $320,997 $56,807 18%
Computer Systems Products $ 43,382 $ 46,395 $(3,013) -6% $131,229 $119,396 $11,833 10%
Business Forms $ 45,747 $ 47,924 $(2,177) -5% $138,511 $140,023 $(1,512) -1%
--------------------------------- -------------------------------
Total Net Sales and Revenues $226,000 $206,224 $19,776 10% $647,544 $580,416 $67,128 12%
Gross Profit $126,516 $113,613 $12,903 11% $366,468 $316,938 $49,530 16%
Gross Margin 56.0% 55.1% 56.6% 54.6%
SG&A Expenses $ 93,045 $ 79,011 $14,034 18% $258,657 $219,538 $39,119 18%
% of Revenues 41.2% 38.3% 40.0% 37.8%
Operating Income $ 33,471 $ 34,602 $(1,131) -3% $107,811 $ 97,400 $10,411 11%
Operating Margin 14.8% 16.8% 16.6% 16.8%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues
Computer Services $136,871 $111,905 $24,966 22% $377,804 $320,997 $56,807 18%
Computer Systems Products $ 43,382 $ 46,395 $(3,013) -6% $131,229 $137,332 $(6,103) -4%
Business Forms $ 45,747 $ 47,924 $(2,177) -5% $138,511 $140,023 $(1,512) -1%
--------------------------------- -------------------------------
Total Net Sales and Revenues $226,000 $206,224 $19,776 10% $647,544 $598,352 $49,192 8%
Gross Profit $126,516 $113,613 $12,903 11% $366,468 $328,143 $38,325 12%
Gross Margin 56.0% 55.1% 56.6% 54.8%
SG&A Expenses $ 93,045 $ 79,011 $14,034 18% $258,657 $220,119 $38,538 18%
% of Revenues 41.2% 38.3% 40.0% 36.7%
Operating Income $ 33,471 $ 34,602 $(1,131) -3% $107,811 $108,024 $ (213) 0%
Operating Margin 14.8% 16.8% 16.6% 18.1%
</TABLE>
Automotive Solutions revenues increased in third quarter because of growth in
computer services revenues and the acquisition of the HAC Group LLC.
Year-to-date revenues increased primarily because of continued strong growth in
computer services revenues. Computer services revenues, comprised predominately
of recurring software support and equipment maintenance revenues, increased for
both the third quarter and nine months primarily because of the increased number
of ERA dealer management software applications supported and the growth of newer
service offerings. Computer services revenues continued to grow and comprise a
greater portion of total revenues.
One-time sales of computer systems products declined from last year (excluding
the effect of the accounting change), for both the quarter and nine months,
because of a decline in the number of ERA dealer management systems and
electronic parts catalogs (EPC) systems sold. Last year both ERA and EPC sales
benefited from customer conversions to year 2000 compliant products. During the
first nine months of fiscal year 2000, computer systems orders declined from
last year and resulted in lower systems order backlogs.
Automotive business forms sales declined from last year for both the quarter and
nine months as the technology shift to laser printing continued. (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. Growth of laser products
12
<PAGE> 13
revenues continued to be strong during the first nine months of fiscal year
2000.)
Automotive gross profit margins increased over last year primarily as a result
of the growth in higher margin computer services revenues. Gross profit margins
on Automotive business forms continued to be strong.
SG&A expenses, as a percentage of revenues, increased over last year primarily
because of increased research and development (R&D) expenses. R&D expenses
increased $6,906 for the third quarter and $15,574 year-to-date as the company
increased development of new products for the automotive marketplace. The
company also incurred $1,350 of reorganization costs in the third quarter.
Operating margins declined from last year primarily as a result of the higher
R&D expenses. Also impacting operating margins was the acquisition of HAC Group
LLC that lowered operating margins .7% in the third quarter and .3% for the nine
months.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------------------- -----------------------------------------
2000 1999 Change % Change 2000 1999 Change % Change
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $9,746 $9,942 $(196) -2% $30,025 $29,044 $981 3%
Operating Income $5,597 $5,450 $147 3% $16,381 $15,624 $757 5%
Operating Margin 57.4% 54.8% 54.6% 53.8%
</TABLE>
Financial Services interest revenues increased over last year for both the third
quarter and nine months because of higher interest bearing finance receivable
balances. Total finance receivable balances declined slightly from last year
because of the decline in sales of automotive computer systems products.
However, interest bearing finance receivables increased 5% over last year as the
backlog of non-interest bearing finance receivables was reduced. Finance
receivables do not begin earning interest until installation of the computer
system has been completed. The average interest rate earned on the finance
receivable balances was slightly less than last year. Total Financial Services
revenues declined slightly from last year in the third quarter as a result of
lower gains on lease buyouts.
Financial Services' interest rate spread remained strong at 3.2% through nine
months, compared to 3.7% last year. The interest rate spread declined primarily
because of higher interest rates on borrowings. Bad debt expenses were $652 less
than last year in the third quarter and $839 less than last year through nine
months.
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 2000, the company entered into a $20,000 interest rate swap in
connection with obtaining $20,000 of variable rate debt.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Automotive Solutions continued to provide strong cash flows from operating
activities during the first nine months of the fiscal year. Operating cash flows
were $100,939 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 $50,051. During the first nine
months of the fiscal year the company also capitalized $15,989 of software
licensed to customers, representing primarily internal capitalization. Capital
expenditures in the ordinary course of business, including building costs, are
anticipated to be about $65,000 to $70,000 in fiscal year 2000. During fiscal
year 2000, the company began construction of a $40,000 building to be completed
in 2002. This building represents phase two at the company's Dayton campus and
will include a state of the art customer center. The company expects to spend
about $15,000 to $20,000 on this building in fiscal year 2000. In May 2000, the
company purchased the outstanding membership interests of the HAC Group LLC for
cash of $97,461 and the issuance of 1,222 Class A common shares.
Cash flows from discontinued operations represent cash flows from the company's
Information Solutions segment, including the October 1999 purchase of Sterling
Direct for $26,020.
13
<PAGE> 14
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 automotive solutions debt) to
capitalization (total automotive solutions debt plus shareholders' equity) was
27.7% at June 30, 2000 compared to 26.7% at September 30, 1999. Remaining credit
available under committed revolving credit agreements was $42,725 at June 30,
2000. 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, proceeds from the sale of the Information Solutions
segment and cash available from committed credit agreements will be sufficient
to fund normal operations over the next year.
The company has consistently produced strong operating cash flows sufficient to
fund normal operations. These cash flows resulted primarily from income as a
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, 2000, 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 next
year.
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, 2000, 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 1999, the company's board of
directors raised the quarterly dividend 10% to $.11 per Class A common share.
The company has increased cash dividends per share every year since 1989 and
paid dividends every 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 2000, the company repurchased 1,000 Class A common shares for
$19,885 ($19.88 per share). On June 20, 2000 the board of directors authorized
an additional 5,000 shares for repurchase. As of June 30, 2000 the company could
repurchase an additional 6,679 Class A common shares under existing board of
directors' authorizations.
MARKET RISKS
INTEREST RATES
The Automotive Solutions 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
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations in Canada, which accounted for 6% of
net sales and revenues for the nine months ended June 30, 2000. In the conduct
of its foreign operations the company has intercompany sales, charges and
14
<PAGE> 15
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, 2000, the company had no foreign
currency exchange contracts outstanding. Based on the company's overall foreign
currency exchange rate exposure at June 30, 2000, 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 automotive 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 delay the effective date of the increase. When paper
costs increase, historically the company has been able to increase the sales
prices of its automotive business forms products and substantially maintain its
profit margins. 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 substantially 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this Management's Discussion and Analysis of the Financial
Condition and Results of Operations constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on current expectations, estimates,
forecasts and projections of future company or industry performance based on
management's judgment, beliefs, current trends and market conditions.
Forward-looking statements made by the company may be identified by the use of
words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions. Forward-looking statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict. Actual outcomes and results may
differ materially from what is expressed, forecasted or implied in any
forward-looking statement. The company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise. See also the discussion of factors that may affect future
results contained in the company's Current Report on Form 8-K filed with the SEC
on August 11, 2000, which we incorporate herein by reference.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
See Note 4 to the Consolidated Financial Statements for a
discussion of the company's divestiture of its Information
Solutions segment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Material Contracts
Purchase Agreement by and between The Reynolds and
Reynolds Company and ISG Acquisition Corporation dated
June 19, 2000.
27 Financial Data Schedules
(b) Reports on Form 8-K
On April 10, 2000 the company filed a report on Form 8-K
disclosing the intent to sell or spin-off its Information
Solutions Group.
On August 11, 2000 the company filed a report on Form 8-K
updating disclosures regarding certain factors that may
affect future results of the company.
15
<PAGE> 16
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, 2000 /s/ Dale L. Medford
---------------------- -------------------
Dale L. Medford
Corporate Vice President, Finance
and Chief Financial Officer
16
