<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 MARCH 31, 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 May 10, 2000, 76,594,027 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 Six Months Ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheets
As of March 31, 2000 and September 30, 1999 4
Condensed Statements of Consolidated Cash Flows
For the Six Months Ended March 31, 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 Six Months Ended March 31, 2000 and 1999 9
PART II. OTHER INFORMATION
Item 4. Results of Votes of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE> 3
THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
2000 1999 2000 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Sales and Revenues
Information systems
Products $272,845 $266,224 $541,520 $499,748
Services 144,348 116,138 283,925 228,794
----------- ------------ ----------- ------------
Total information systems 417,193 382,362 825,445 728,542
Financial services 10,515 9,732 20,279 19,102
----------- ------------ ----------- ------------
Total net sales and revenues 427,708 392,094 845,724 747,644
----------- ------------ ----------- ------------
Costs and Expenses
Information systems
Cost of sales
Products 167,139 161,210 331,097 309,158
Services 57,734 44,384 111,956 87,039
----------- ------------ ----------- ------------
Total cost of sales 224,873 205,594 443,053 396,197
Selling, general and administrative expenses 140,768 127,856 280,344 246,615
Financial services 4,646 4,393 9,495 8,928
----------- ------------ ----------- ------------
Total costs and expenses 370,287 337,843 732,892 651,740
----------- ------------ ----------- ------------
Operating Income 57,421 54,251 112,832 95,904
----------- ------------ ----------- ------------
Other Charges (Income)
Interest expense 2,753 3,304 5,679 6,640
Interest income (1,211) (1,522) (2,515) (2,940)
Other (16) 388 577 519
----------- ------------ ----------- ------------
Total other charges 1,526 2,170 3,741 4,219
----------- ------------ ----------- ------------
Income Before Income Taxes 55,895 52,081 109,091 91,685
Provision for Income Taxes 22,927 21,652 44,823 38,175
----------- ------------ ----------- ------------
Income From Continuing Operations 32,968 30,429 64,268 53,510
Discontinued Operations 0 0 0 5,785
----------- ------------ ----------- ------------
Net Income $ 32,968 $ 30,429 $ 64,268 $ 59,295
=========== ============ =========== ============
Basic Earnings Per Common Share
Income From Continuing Operations $ 0.43 $ 0.39 $ 0.83 $ 0.68
Discontinued Operations $ 0.00 $ 0.00 $ 0.00 $ 0.07
Net Income $ 0.43 $ 0.39 $ 0.83 $ 0.76
Average Number of Common Shares Outstanding 77,094 78,385 77,125 78,500
Diluted Earnings Per Common Share
Income From Continuing Operations $ 0.41 $ 0.38 $ 0.81 $ 0.67
Discontinued Operations $ 0.00 $ 0.00 $ 0.00 $ 0.07
Net Income $ 0.41 $ 0.38 $ 0.81 $ 0.74
Average Number of Common Shares Outstanding 80,246 80,170 79,515 80,331
Cash Dividends Declared Per Common Share $ 0.11 $ 0.10 $ 0.22 $ 0.20
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND SEPTEMBER 30, 1999
(In thousands)
<TABLE>
<CAPTION>
3/31/00 9/30/99
---------------- ----------------
<S> <C> <C>
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $102,659 $103,595
Accounts receivable 243,654 244,029
Inventories 88,165 76,695
Other current assets 45,107 43,278
-------- --------
Total current assets 479,585 467,597
Property, Plant and Equipment, less accumulated depreciation of
$237,460 at 3/31/00 and $224,741 at 9/30/99 206,562 187,774
Goodwill 82,897 65,811
Other Intangible Assets 34,073 23,115
Other Assets 89,371 90,197
-------- --------
Total Information Systems Assets 892,488 834,494
-------- --------
FINANCIAL SERVICES ASSETS
Finance Receivables 413,961 426,751
Cash and Other Assets 538 840
-------- --------
Total Financial Services Assets 414,499 427,591
-------- --------
TOTAL ASSETS $1,306,987 $1,262,085
========== ==========
INFORMATION SYSTEMS LIABILITIES
Current Liabilities $209,681 $211,959
Long-Term Debt 162,347 163,985
Other Liabilities 96,593 93,637
-------- --------
Total Information Systems Liabilities 468,621 469,581
-------- --------
FINANCIAL SERVICES LIABILITIES
Notes Payable 218,894 219,423
Other Liabilities 110,037 109,646
-------- --------
Total Financial Services Liabilities 328,931 329,069
-------- --------
SHAREHOLDERS' EQUITY
Capital Stock 96,446 79,223
Other Comprehensive Income (9,145) (9,448)
Retained Earnings 422,134 393,660
-------- --------
Total Shareholders' Equity 509,435 463,435
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,306,987 $1,262,085
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 5
THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands)
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
INFORMATION SYSTEMS
Cash Flows Provided By Operating Activities $92,836 $65,256
------- -------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (28,520)
Capital expenditures (39,464) (26,404)
Net proceeds from asset sales 2,589 50,234
Capitalization of software licensed to customers (11,027) (7,701)
Repayments from (advances to) financial services 3,462 (237)
------- -------
Net cash flows provided by (used for) investing activities (72,960) 15,892
------- -------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 626 45,720
Principal payments on debt (5,429) (38,297)
Cash dividends paid (8,422) (7,839)
Capital stock issued 11,995 6,295
Capital stock repurchased (19,885) (33,313)
------- -------
Net cash flows used for financing activities (21,115) (27,434)
------- -------
Effect of Exchange Rate Changes on Cash 303 241
------- -------
Increase (Decrease) in Cash and Equivalents (936) 53,955
Cash and Equivalents, Beginning of Period 103,595 39,980
------- -------
Cash and Equivalents, End of Period $102,659 $93,935
======== =======
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $10,335 $10,547
------- -------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (72,395) (73,521)
Collections on finance receivables 65,740 62,283
------- -------
Net cash flows used for investing activities (6,655) (11,238)
------- -------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 34,963 38,353
Principal payments on debt (35,492) (39,542)
Advances from (repayments to) information systems (3,462) 237
------- -------
Net cash flows used for financing activities (3,991) (952)
------- -------
Decrease in Cash and Equivalents (311) (1,643)
Cash and Equivalents, Beginning of Period 675 2,102
------- -------
Cash and Equivalents, End of Period $364 $459
======== =======
</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
<TABLE>
<CAPTION>
3/31/00 9/30/99
------------- --------------
<S> <C> <C>
Finished Products $76,148 $63,647
Work In Process 5,639 6,033
Raw Materials 6,378 7,015
------------- --------------
Total Inventories $88,165 $76,695
============= ==============
</TABLE>
(3) COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
2000 1999 2000 1999
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Income $32,968 $30,429 $64,268 $59,295
Foreign Currency Translation (65) 221 303 241
-------------- ------------- -------------- -------------
Comprehensive Income $32,903 $30,650 $64,571 $59,536
============== ============= ============== =============
</TABLE>
(4) BUSINESS COMBINATIONS
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 $23,187 which is being amortized on a straight-line basis over 10 years.
(5) 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 Group's
computer systems products revenues $2,200, gross profit $725, operating income
$632 and net income $369 or $.005 per diluted share for the three months ended
March 31, 1999. For the six months ended March 31, 1999, the adoption of SOP
97-2 reduced the Automotive Group's computer systems products revenues $17,936,
gross profit $11,205, operating income $10,624 and net income $6,204 or $.08 per
diluted share.
(6) DISCONTINUED OPERATIONS
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.
(7) CONTINGENCY
The U.S. Environmental Protection Agency (EPA) has designated the company as one
of a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at an
environmental remediation site. The EPA has contended that any company linked to
a CERCLA site is potentially liable for all response costs under the legal
doctrine of joint and several liability. This environmental remediation site
involves a municipal waste disposal facility owned and operated by four
municipalities. The company joined a PRP coalition and is sharing remedial
investigation and feasibility study costs with other PRPs. During fiscal year
1994, the PRP coalition received an engineering evaluation/cost analysis of the
presumed remedy for the site from
6
<PAGE> 7
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) BUSINESS SEGMENTS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
2000 1999 2000 1999
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
AUTOMOTIVE
Net Sales and Revenues
Computer Services $121,302 $105,795 $240,933 $ 209,092
Computer Systems Products 41,485 44,642 87,847 73,001
Business Forms Products 46,006 45,935 90,005 89,552
-------------- -------------- --------------- ---------------
Total Net Sales and Revenues $208,793 $196,372 $ 418,785 $ 371,645
Operating Income $ 43,778 $ 41,813 $ 90,322 $ 73,203
INFORMATION SOLUTIONS
Net Sales and Revenues
Business Forms Products $185,028 $174,897 $ 363,090 $ 335,475
Services and Computer Systems Products 23,372 11,093 43,570 21,422
-------------- -------------- --------------- ---------------
Total Net Sales and Revenues $208,400 $185,990 $ 406,660 $ 356,897
Operating Income $ 16,878 $ 14,197 $ 27,699 $ 23,599
FINANCIAL SERVICES
Net Sales and Revenues $ 10,515 $ 9,732 $ 20,279 $ 19,102
Operating Income $ 5,869 $ 5,339 $ 10,784 $ 10,174
CORPORATE ($ 9,104) ($ 7,098) ($ 15,973) ($ 11,072)
TOTALS
Net Sales and Revenues $427,708 $392,094 $ 845,724 $ 747,644
Operating Income $ 57,421 $ 54,251 $ 112,832 $ 95,904
</TABLE>
<TABLE>
<CAPTION>
3/31/00 9/30/99
--------------- ---------------
<S> <C> <C>
ASSETS
Automotive $ 307,306 $ 251,436
Information Solutions 394,721 389,823
Financial Services 414,499 427,591
Corporate 190,461 193,235
--------------- ---------------
Total Assets $1,306,987 $1,262,085
=============== ===============
</TABLE>
7
<PAGE> 8
(9) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
INFORMATION SYSTEMS
Net Income $57,794 $53,225
Depreciation and Amortization 26,004 23,441
Deferred Income Taxes 4,158 1,226
Deferred Income Taxes Transferred to Financial Services (1,805) (3,175)
Losses (Gains) on Sales of Assets 194 (6,889)
Changes in Operating Assets and Liabilities
Accounts Receivable 25,917 799
Inventories (11,077) (5,286)
Prepaid Expenses and Other Current Assets (1,373) (5,324)
Intangible and Other Assets (843) 6,759
Accounts Payable (1,059) (1,494)
Accrued Liabilities (8,055) 5,751
Other Liabilities 2,981 (3,777)
------- -------
Net Cash Provided by Operating Activities $92,836 $65,256
======= =======
FINANCIAL SERVICES
Net Income $ 6,474 $ 6,070
Deferred Income Taxes 48 (297)
Deferred Income Taxes Transferred from Information Systems 1,805 3,175
Changes in Receivables, Other Assets and Other Liabilities 2,008 1,599
------- -------
Net Cash Provided by Operating Activities $10,335 $10,547
======= =======
</TABLE>
(10) SUBSEQUENT EVENTS
On April 10, 2000, the company announced that it engaged Credit Suisse First
Boston to assist in the sale or spin-off its Information Solutions segment. The
company expressed its intent to complete a transaction within three to six
months.
On April 17, 2000, the company signed a definitive agreement to acquire 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 $140,000 will
consist of $108,000 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.
On May 4, 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.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands except per share data)
SIGNIFICANT EVENTS
SUBSEQUENT EVENTS
On April 10, 2000, the company announced that it engaged Credit Suisse First
Boston to assist in the sale or spin-off its Information Solutions segment. The
company expressed its intent to complete a transaction within three to six
months.
On April 17, 2000, the company signed a definitive agreement to acquire 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 $140,000 will
consist of $108,000 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. While HAC has strong profitability, the company expects
about $.01 per share of earnings dilution for the first several quarters. This
dilution from the HAC acquisition will be caused by amortization of intangible
assets, interest on the cash purchase price and the issuance of additional
shares.
On May 4, 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 will contribute its profitable One Touch Parts Locator business to
this new enterprise. One Touch had annual revenues of over $11,000 in fiscal
year 1999. The company initially expects about $.02 per share of earnings
dilution per quarter from the contribution of One Touch and recognition of the
company's share of ChoiceParts losses.
BUSINESS COMBINATIONS
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.
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. 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 company adopted this pronouncement effective October
1, 1998. The adoption of this pronouncement reduced the Automotive Group's
computer systems products revenues $2,200, gross profit $725, operating income
$632 and net income $369 or $.005 per diluted share for the three months ended
March 31, 1999. For the six months ended March 31, 1999, the adoption of SOP
97-2 reduced the Automotive Group's computer systems products revenues $17,936,
gross profit $11,205, operating income $10,624 and net income $6,204 or $.08 per
diluted share.
9
<PAGE> 10
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
Three Months Six Months
----------------------------------------- -----------------------------------------
2000 1999 Change % Change 2000 1999 Change % Change
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $427,708 $392,094 $35,614 9% $845,724 $747,644 $98,080 13%
Gross Profit $192,320 $176,768 $15,552 9% $382,392 $332,345 $50,047 15%
Operating Income $ 57,421 $ 54,251 $ 3,170 6% $112,832 $ 95,904 $16,928 18%
Income From Continuing Operations $ 32,968 $ 30,429 $ 2,539 8% $ 64,268 $ 53,510 $10,758 20%
Discontinued Operations $ 0 $ 0 $ 0 $ 0 $ 5,785 ($ 5,785)
Net Income $ 32,968 $ 30,429 $ 2,539 8% $ 64,268 $ 59,295 $ 4,973 8%
Earnings Per Common Share (Diluted) $ 0.41 $ 0.38 $ 0.03 8% $ 0.81 $ 0.74 $ 0.07 9%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues $427,708 $394,294 $33,414 8% $845,724 $765,580 $80,144 10%
Gross Profit $192,320 $177,493 $14,827 8% $382,392 $343,550 $38,842 11%
Operating Income $ 57,421 $ 54,883 $ 2,538 5% $112,832 $106,528 $ 6,304 6%
Income From Continuing Operations $ 32,968 $ 30,799 $ 2,169 7% $ 64,268 $ 59,710 $ 4,558 8%
</TABLE>
Second quarter's consolidated revenues of $427,708 were the highest quarterly
total in the company's history. Automotive's revenues grew 6% over last year in
the second quarter and 13% year-to-date (5% and 7%, respectively, excluding for
last year's accounting change). Information Solutions' sales increased 12% for
the three months and 14% through six months. Excluding the effect of the
Sterling business combination, Information Solutions sales grew 7% in the second
quarter and 9% year-to-date.
The consolidated gross profit percentage was 46.1% of revenues (excluding
financial services' revenues) in the second quarter and 46.3% year-to-date
compared to last year's 46.2% and 45.6%, respectively. Gross profit margins
increased over last year in Automotive and declined versus last year for
Information Solutions.
Consolidated operating income was 13.4% of revenues for the second quarter and
13.3% through six months versus 13.8% and 12.8% last year (13.9% for both
periods last year excluding last year's accounting change). Excluding last
year's accounting change, consolidated operating margins declined from last year
primarily because of the company's investments in an enterprise resource
planning (ERP) system and new product development. The company's research and
development (R&D) expenses increased 37% to about $18,000 in the second quarter
from about $13,000 last year. Year-to-date R&D expenses grew 38% to about
$35,000, up from about $25,000 last year. The company expects R&D expenses to
continue to exceed last year throughout the balance of fiscal year 2000.
Net income grew 8% over last year for both the three and six months ended March
31, 2000 while earnings per share increased 8% for the quarter and 9%
year-to-date. Last year's six 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 25.2%, compared to 26.0% at March 31, 1999.
10
<PAGE> 11
AUTOMOTIVE
<TABLE>
<CAPTION>
Three Months Six Months
---------------------------------------- ----------------------------------------
2000 1999 Change % Change 2000 1999 Change % Change
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues
Computer Services $121,302 $105,795 $15,507 15% $240,933 $209,092 $31,841 15%
Computer Systems Products $ 41,485 $ 44,642 ($ 3,157) -7% $ 87,847 $ 73,001 $14,846 20%
Business Forms $ 46,006 $ 45,935 $ 71 0% $ 90,005 $ 89,552 $ 453 1%
------------------------------- -------------------------------
Total Net Sales and Revenues $208,793 $196,372 $12,421 6% $418,785 $371,645 $47,140 13%
Gross Profit $118,041 $107,901 $10,140 9% $238,141 $201,553 $36,588 18%
Gross Margin 56.5% 54.9% 56.9% 54.2%
SG&A Expenses $ 74,263 $ 66,088 $ 8,175 12% $147,819 $128,350 $19,469 15%
% of Revenues 35.5% 33.6% 35.3% 34.5%
Operating Income $ 43,778 $ 41,813 $ 1,965 5% $ 90,322 $ 73,203 $17,119 23%
Operating Margin 21.0% 21.3% 21.6% 19.7%
EXCLUDING EFFECT OF ACCOUNTING CHANGE
Net Sales and Revenues
Computer Services $121,302 $105,795 $15,507 15% $240,933 $209,092 $31,841 15%
Computer Systems Products $ 41,485 $ 46,842 ($ 5,357) -11% $ 87,847 $ 90,937 ($ 3,090) -3%
Business Forms $ 46,006 $ 45,935 $ 71 0% $ 90,005 $ 89,552 $ 453 1%
------------------------------- -------------------------------
Total Net Sales and Revenues $208,793 $198,572 $10,221 5% $418,785 $389,581 $29,204 7%
Gross Profit $118,041 $108,626 $ 9,415 9% $238,141 $212,758 $25,383 12%
Gross Margin 56.5% 54.7% 56.9% 54.6%
SG&A Expenses $ 74,263 $ 66,181 $ 8,082 12% $147,819 $128,931 $18,888 15%
% of Revenues 35.5% 33.3% 35.3% 33.1%
Operating Income $ 43,778 $ 42,445 $ 1,333 3% $ 90,322 $ 83,827 $ 6,495 8%
Operating Margin 21.0% 21.4% 21.6% 21.5%
</TABLE>
Automotive revenues increased for both the second quarter and six months
primarily because of continued strong growth in computer services revenues.
Computer services revenues, comprised predominately of recurring maintenance and
support revenues, increased 15% for both the second quarter and six months
primarily because of the increased number of ERA software applications supported
and the growth of newer service offerings. Sales of computer systems products
declined from last year (excluding the effect of the accounting change) because
of a decline in the number of ERA and electronic parts catalogs (EPC) systems
sold. Last year both ERA and EPC sales benefited from customer conversions to
year 2000 compliant products. Automotive business forms sales were essentially
flat for the quarter and increased slightly through six months even 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 revenues continued to be strong during the first half
of fiscal year 2000.) Included in computer services and products revenues were
e-business and customer relationship management (CRM) revenues of $15,695 for
the second quarter and $31,983 through six months, up 40% and 50% over last
year, respectively. During the first six months of fiscal year 2000, computer
systems orders declined from last year causing order backlogs to decline from
last year. Internal sales growth is expected to remain at mid-single digit rates
in the near term. Including the HAC Group acquisition, Automotive Group's
revenues should grow at double digit rates.
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 the increased research and development expenses for new product
development. Operating margins were in the same range as last year for both the
quarter and six months reflecting the higher R&D expenses. Operating margins
will likely be negatively affected in the third quarter reflecting the
acquisition of the HAC Group and the launch of ChoiceParts.
11
<PAGE> 12
INFORMATION SOLUTIONS
<TABLE>
<CAPTION>
Three Months Six Months
----------------------------------------- -----------------------------------------
2000 1999 Change % Change 2000 1999 Change % Change
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $208,400 $185,990 $22,410 12% $406,660 $356,897 $49,763 14%
Gross Profit $ 74,279 $ 68,867 $ 5,412 8% $144,251 $130,792 $13,459 10%
Gross Margin 35.6% 37.0% 35.5% 36.6%
SG&A Expenses $ 57,401 $ 54,670 $ 2,731 5% $116,552 $107,193 $ 9,359 9%
% of revenues 27.5% 29.4% 28.7% 30.0%
Operating Income $ 16,878 $ 14,197 $ 2,681 19% $ 27,699 $ 23,599 $ 4,100 17%
Operating Margin 8.1% 7.6% 6.8% 6.6%
</TABLE>
Information solutions sales were higher than any prior quarter and included
sales from the Sterling Direct business combination. Excluding Sterling's sales,
revenues increased 7% for the second quarter and 9% year-to-date. The higher
revenue growth resulted from increased volume and reflected sales growth in
several large new accounts. Sales prices were slightly higher than last year,
reflecting higher paper costs. Information solutions sales included e-business
and CRM revenues of $21,172 in the quarter and $38,801 year-to-date, up 141% and
121%, respectively. Sterling Direct sales were included with e-business and CRM
revenues.
Gross profit margins declined from last year primarily because of the initial
lower margin impact of several large new accounts. Higher paper costs also had a
negative impact on gross margins versus last year.
Information Solutions operating margins increased over last year as lower SG&A
expenses, as a percentage of revenues, offset the gross margin decline. SG&A
expenses declined, as a percentage of revenues, even as research and development
expenses increased. Operating margins exceeded 8% in the second quarter,
representing the first quarter above 8% in three years.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
Three Months Six Months
----------------------------------------- -----------------------------------------
2000 1999 Change % Change 2000 1999 Change % Change
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues $10,515 $9,732 $783 8% $20,279 $19,102 $1,177 6%
Operating Income $ 5,869 $5,339 $530 10% $10,784 $10,174 $ 610 6%
Operating Margin 55.8% 54.9% 53.2% 53.3%
</TABLE>
Financial Services revenues grew because of greater interest earned on finance
receivables, which offset slightly lower average interest rates. Finance
receivables 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.
Financial Services' interest rate spread remained strong at 3.2% through six
months, compared to 3.6% last year. The interest rate spread declined primarily
because of higher interest rates on borrowings. Bad debt expenses were $400 in
the second quarter, compared to $650 last year and $1,113 through six months
versus $1,300 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 six months of fiscal year 2000, the company did not enter into
any new interest rate management agreements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Information systems continued to provide strong cash flow from operating
activities during the first six months of the fiscal year. Operating cash flows
were $92,836 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 $39,464. During the first six
months of the fiscal year the company also capitalized $11,027 of software
licensed to customers,
12
<PAGE> 13
representing primarily internal capitalization. Capital expenditures in the
ordinary course of business are anticipated to be about $65,000 to $70,000 in
fiscal year 2000. In October 1999, the company purchased substantially all of
the assets of Sterling Direct for $26,020 of cash.
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
24.9% at March 31, 2000 and 26.8% at September 30, 1999. Remaining credit
available under committed revolving credit agreements was $84,818 at March 31,
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 and cash available from committed credit agreements will be
sufficient to fund fiscal year 2000 normal operations and the HAC Group business
combination.
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 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 March 31, 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 fiscal year 2000.
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 May
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 six months of
fiscal year 2000, the company repurchased 1,000 Class A common shares for
$19,885 ($19.88 per share). As of March 31, 2000 the company could repurchase an
additional 1,679 Class A common shares under existing board of directors'
authorizations.
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 six months ended March 31, 2000. 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 March 31, 2000, the company had no foreign currency exchange
contracts outstanding. Based on the company's overall foreign currency exchange
rate exposure at March 31, 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 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
business forms products and substantially 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
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 7 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 February 9, 2000, which we incorporate herein by reference.
PART II - OTHER INFORMATION
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
At the Annual Meeting of Shareholders on February 10, 2000, the shareholders of
the company voted on and approved the following issues.
Issue 1 Election of Directors
<TABLE>
<CAPTION>
Shares
Shares For Withheld
--------------- ---------------
<S> <C> <C>
Three-year terms Expiring in 2003
James L. Arthur 84,769,289 1,075,259
Cleave L. Killingsworth, Jr. 84,732,267 1,112,281
Dale L. Medford 84,754,623 1,089,925
Lloyd G. Waterhouse 84,765,477 1,079,071
</TABLE>
14
<PAGE> 15
Issue 2 Proposal to approve material terms of a performance-based incentive plan
to ensure deductibility of officer compensation exceeding one million dollars.
Shares For 83,916,021
Shares Against 1,727,443
Shares Abstain 201,084
Issue 3 Appointment of Deloitte & Touche LLP as Independent Auditors
Shares For 85,464,033
Shares Against 321,942
Shares Abstain 58,573
ITEM 5. OTHER INFORMATION
On May 9, 2000, the board of directors elected Eustace W. Mita, general manager,
Reynolds' Transformation Services, as a director of the company. Mita, whose
term expires in 2001, fills a vacancy created in February when Richard H. Grant
Jr. announced his retirement. Mita was previously chief executive officer of the
HAC Group LLC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedules
(b) Reports on Form 8-K
On February 9, 2000 the company filed a report on
Form 8-K disclosing certain factors that may affect
future results of the company.
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.
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 May 11, 2000 /s/ David R. Holmes
----------------- -------------------
David R. Holmes
Chairman of the Board
and Chief Executive Officer
Date May 11, 2000 /s/ Dale L. Medford
----------------- -------------------
Dale L. Medford
Corporate Vice President, Finance
and Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 102,659
<SECURITIES> 0
<RECEIVABLES> 248,256
<ALLOWANCES> 4,602
<INVENTORY> 88,165
<CURRENT-ASSETS> 479,585
<PP&E> 444,022
<DEPRECIATION> 237,460
<TOTAL-ASSETS> 1,306,987
<CURRENT-LIABILITIES> 209,681
<BONDS> 295,834
0
0
<COMMON> 96,446
<OTHER-SE> 412,989
<TOTAL-LIABILITY-AND-EQUITY> 1,306,987
<SALES> 541,520
<TOTAL-REVENUES> 845,724
<CGS> 331,097
<TOTAL-COSTS> 443,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,766
<INCOME-PRETAX> 109,091
<INCOME-TAX> 44,823
<INCOME-CONTINUING> 64,268
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,268
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.81
</TABLE>
