<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, 1999
COMMISSION FILE NO. 1-10147
THE REYNOLDS AND REYNOLDS COMPANY
OHIO 31-0421120
(State of incorporation) (IRS Employer Identification No.)
115 SOUTH LUDLOW STREET
DAYTON, OHIO 45402
(Address of principal executive offices)
(937) 485-2000
(Telephone No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
----
On February 9, 2000, 76,277,640 Class A common shares and 20,000,000 Class B
common shares were outstanding.
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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, 1999 and 1998 3
Condensed Consolidated Balance Sheets
As of December 31, 1999 and September 30, 1999 4
Condensed Statements of Consolidated Cash Flows
For the Three Months Ended December 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Three Months Ended December 31, 1999 and 1998 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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THE REYNOLDS AND REYNOLDS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(In thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net Sales and Revenues
Information systems
Products $ 268,675 $ 233,524
Services 139,577 112,656
--------- ---------
Total information systems 408,252 346,180
Financial services 9,764 9,370
--------- ---------
Total net sales and revenues 418,016 355,550
--------- ---------
Costs and Expenses
Information systems
Cost of sales
Products 163,958 147,948
Services 54,222 42,655
--------- ---------
Total cost of sales 218,180 190,603
Selling, general and administrative expenses 139,576 118,759
Financial services 4,849 4,535
--------- ---------
Total costs and expenses 362,605 313,897
--------- ---------
Operating Income 55,411 41,653
--------- ---------
Other Charges (Income)
Interest expense 2,926 3,336
Interest income (1,304) (1,418)
Other 593 131
--------- ---------
Total other charges 2,215 2,049
--------- ---------
Income Before Income Taxes 53,196 39,604
Provision for Income Taxes 21,896 16,523
--------- ---------
Income From Continuing Operations 31,300 23,081
Discontinued Operations 0 5,785
--------- ---------
Net Income $ 31,300 $ 28,866
========= =========
Basic Earnings Per Common Share
Income From Continuing Operations $ 0.41 $ 0.29
Discontinued Operations $ 0.00 $ 0.07
Net Income $ 0.41 $ 0.37
Average Number of Common Shares Outstanding 77,156 78,613
Diluted Earnings Per Common Share
Income From Continuing Operations $ 0.40 $ 0.29
Discontinued Operations $ 0.00 $ 0.07
Net Income $ 0.40 $ 0.36
Average Number of Common Shares Outstanding 78,783 80,499
Cash Dividends Declared Per Common Share $ 0.11 $ 0.10
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
(In thousands)
<TABLE>
<CAPTION>
12/31/99 9/30/99
----------- -----------
<S> <C> <C>
INFORMATION SYSTEMS ASSETS
Current Assets
Cash and equivalents $ 68,280 $ 103,595
Accounts receivable 247,083 244,029
Inventories 86,762 76,695
Other current assets 41,924 43,278
----------- -----------
Total current assets 444,049 467,597
Property, Plant and Equipment, less accumulated depreciation of
$231,556 at 12/31/99 and $224,741 at 9/30/99 199,586 187,774
Goodwill 85,763 65,811
Other Intangible Assets 28,776 23,115
Other Assets 91,890 90,197
----------- -----------
Total Information Systems Assets 850,064 834,494
----------- -----------
FINANCIAL SERVICES ASSETS
Finance Receivables 419,776 426,751
Cash and Other Assets 589 840
----------- -----------
Total Financial Services Assets 420,365 427,591
----------- -----------
TOTAL ASSETS $ 1,270,429 $ 1,262,085
=========== ===========
INFORMATION SYSTEMS LIABILITIES
Current Liabilities $ 213,132 $ 211,959
Long-Term Debt 164,682 163,985
Other Liabilities 94,926 93,637
----------- -----------
Total Information Systems Liabilities 472,740 469,581
----------- -----------
FINANCIAL SERVICES LIABILITIES
Notes Payable 216,343 219,423
Other Liabilities 113,327 109,646
----------- -----------
Total Financial Services Liabilities 329,670 329,069
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 79,416 79,223
Other Comprehensive Income (9,080) (9,448)
Retained Earnings 397,683 393,660
----------- -----------
Total Shareholders' Equity 468,019 463,435
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,270,429 $ 1,262,085
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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THE REYNOLDS AND REYNOLDS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
INFORMATION SYSTEMS
Cash Flows Provided By Operating Activities $ 34,060 $ 22,157
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Business combinations (26,145)
Capital expenditures (22,555) (8,716)
Net proceeds from asset sales 2,350 44,072
Capitalization of software licensed to customers (5,297) (5,033)
Repayments from (advances to) financial services 3,170 1,161
--------- ---------
Net cash flows provided by (used for) investing activities (48,477) 31,484
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 781 1,775
Principal payments on debt (3,287) (83)
Capital stock issued 1,125 4,836
Capital stock repurchased (19,885) (18,756)
--------- ---------
Net cash flows used for financing activities (21,266) (12,228)
--------- ---------
Effect of Exchange Rate Changes on Cash 368 20
--------- ---------
Increase (Decrease) in Cash and Equivalents (35,315) 41,433
Cash and Equivalents, Beginning of Period 103,595 39,980
--------- ---------
Cash and Equivalents, End of Period $ 68,280 $ 81,413
========= =========
FINANCIAL SERVICES
Cash Flows Provided By Operating Activities $ 6,957 $ 5,865
--------- ---------
Cash Flows Provided By (Used For) Investing Activities
Finance receivables originated (33,747) (36,549)
Collections on finance receivables 32,725 30,230
--------- ---------
Net cash flows used for investing activities (1,022) (6,319)
--------- ---------
Cash Flows Provided By (Used For) Financing Activities
Additional borrowings 26,512 14,625
Principal payments on debt (29,592) (14,563)
Advances from (repayments to) information systems (3,170) (1,161)
--------- ---------
Net cash flows used for financing activities (6,250) (1,099)
--------- ---------
Decrease in Cash and Equivalents (315) (1,553)
Cash and Equivalents, Beginning of Period 675 2,102
--------- ---------
Cash and Equivalents, End of Period $ 360 $ 549
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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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
12/31/99 9/30/99
------------ ------------
Finished Products $ 71,482 $ 63,647
Work In Process 6,345 6,033
Raw Materials 8,935 7,015
------------ ------------
Total Inventories $ 86,762 $ 76,695
============ ============
(3) COMPREHENSIVE INCOME
1999 1998
------------ ------------
Net Income $ 31,300 $ 28,866
Foreign Currency Translation 368 20
------------ ------------
Comprehensive Income $ 31,668 $ 28,886
============ ============
(4) BUSINESS COMBINATIONS
On October 1, 1999, the company purchased substantially all net assets of
Sterling Direct, Inc. for $26,145 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 $23,027 (based on preliminary allocation of the purchase price), 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 $15,736, gross profit $10,480, operating
income $9,992 and net income $5,835 or $.07 per diluted share during the three
months ended December 31, 1998.
(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 in the first quarter of fiscal year
1999.
(7) CONTINGENCY
The U.S. Environmental Protection Agency (EPA) has designated the company as one
of a number of potentially responsible parties (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at an
environmental remediation site. The EPA has contended that any company linked to
a CERCLA site is potentially liable for all response costs under the legal
doctrine of joint and several liability. This environmental remediation site
involves a municipal waste disposal facility owned and operated by four
municipalities. The company joined a PRP coalition and is sharing remedial
investigation and feasibility study costs with other PRPs. During fiscal year
1994, the PRP coalition received an engineering evaluation/cost analysis of the
presumed remedy for the site from its private contractor. However, because the
EPA has not yet selected a remedy, potential remediation costs remain uncertain.
Remediation costs for a typical CERCLA site on the National Priorities List
average about $30,000. The engineering evaluation/cost analysis was consistent
with this average. During fiscal year 1996, an agreement was
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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
1999 1998
---------- ----------
AUTOMOTIVE
Net Sales and Revenues
Computer Services $ 119,631 $ 103,297
Computer Systems Products 46,362 28,359
Business Forms Products 43,999 43,617
---------- ----------
Total Net Sales and Revenues $ 209,992 $ 175,273
Operating Income $ 46,544 $ 31,390
INFORMATION SOLUTIONS
Net Sales and Revenues
Business Forms Products $ 178,062 $ 160,578
Services and Computer Systems Products 20,198 10,329
---------- ----------
Total Net Sales and Revenues $ 198,260 $ 170,907
Operating Income $ 10,821 $ 9,402
FINANCIAL SERVICES
Net Sales and Revenues $ 9,764 $ 9,370
Operating Income $ 4,915 $ 4,835
CORPORATE ($ 6,869) ($ 3,974)
TOTALS
Net Sales and Revenues $ 418,016 $ 355,550
Operating Income $ 55,411 $ 41,653
12/31/99 9/30/99
---------- ----------
ASSETS
Automotive $ 311,702 $ 251,436
Information Solutions 386,184 389,823
Financial Services 420,365 427,591
Corporate 152,178 193,235
---------- ----------
Total Assets $1,270,429 $1,262,085
========== ==========
7
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(9) CASH FLOW STATEMENTS
Reconciliation of net income to net cash provided by operating activities.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
INFORMATION SYSTEMS
Net Income $ 28,355 $ 25,982
Depreciation and Amortization 13,122 11,917
Deferred Income Taxes 1,211 (582)
Deferred Income Taxes Transferred to Financial Services 529 389
Losses (Gains) on Sales of Assets 7 (6,919)
Changes in Operating Assets and Liabilities
Accounts Receivable 11,815 14,176
Inventories (9,655) (3,518)
Prepaid Expenses and Other Current Assets 731 (2,299)
Intangible and Other Assets (2,410) 2,432
Accounts Payable (3,993) (12,635)
Accrued Liabilities (6,954) (1,143)
Other Liabilities 1,302 (5,643)
-------- --------
Net Cash Provided by Operating Activities $ 34,060 $ 22,157
======== ========
FINANCIAL SERVICES
Net Income $ 2,945 $ 2,884
Deferred Income Taxes 2,663 1,464
Deferred Income Taxes Transferred from Information Systems (529) (389)
Changes in Receivables, Other Assets and Other Liabilities 1,878 1,906
-------- --------
Net Cash Provided by Operating Activities $ 6,957 $ 5,865
======== ========
</TABLE>
(10) SUBSEQUENT EVENT
On February 8, 2000, the company, the Dealer Services and Claims Solutions
Groups of Automatic Data Processing, Inc. and CCC Information Services, Inc.
announced plans to form an independent company that will develop an electronic
parts network for the automotive parts market. This transaction, subject to
regulatory approval and the execution of definitive agreements, is expected to
close by the end of March 2000.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(In thousands except per share data)
SIGNIFICANT EVENTS
BUSINESS COMBINATIONS
On October 1, 1999, the company purchased substantially all net assets of
Sterling Direct, Inc. for $26,145 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 $15,736, gross profit $10,480, operating
income $9,992 and net income $5,835 or $.07 per diluted share during the first
quarter of fiscal year 1999.
RESULTS OF OPERATIONS
CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
1999 1998 Change % Change
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales and Revenues $418,016 $355,550 $ 62,466 18%
Gross Profit $190,072 $155,577 $ 34,495 22%
Operating Income $ 55,411 $ 41,653 $ 13,758 33%
Income From Continuing Operations $ 31,300 $ 23,081 $ 8,219 36%
Discontinued Operations $ 0 $ 5,785 ($ 5,785)
Net Income $ 31,300 $ 28,866 $ 2,434 8%
Earnings Per Common Share (Diluted) $ 0.40 $ 0.36 $ 0.04 11%
EXCLUDING EFFECT OF LAST YEAR'S ACCOUNTING CHANGE
Net Sales and Revenues $418,016 $371,286 $ 46,730 13%
Gross Profit $190,072 $166,056 $ 24,016 14%
Operating Income $ 55,411 $ 51,645 $ 3,766 7%
Income From Continuing Operations $ 31,300 $ 28,906 $ 2,394 8%
</TABLE>
First quarter's consolidated revenues of $418,016 were the highest quarterly
total in the company's history. Automotive's revenues grew 20% over last year
(10% adjusting for last year's accounting change) and Information Solutions
sales increased 16%. Excluding the effect of the Sterling business combination,
Information Solutions sales grew 12% representing the highest internal growth
rate in the Group's history.
The consolidated gross profit percentage was 46.6% of revenues (excluding
financial services revenues) in the first quarter compared to last year's 44.9%.
Gross profit margins increased over last year in Automotive overcoming a slight
decline in Information Solutions gross profit margins.
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Consolidated operating income was 13.3% of revenues for the first quarter versus
11.7% last year (13.9% excluding last year's accounting change). Operating
margins increased slightly for Automotive and were the same as last year for
Information Solutions. 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 39%
to about $17,000 from about $12,000 last year. The company expects R&D expenses
to continue to exceed last year's throughout the balance of fiscal year 2000.
Net income grew 8% over last year and earnings per share increased 11%. Last
year's net income included the negative effect of the accounting change which
was essentially offset by the gain on the sale of the Healthcare Systems
segment. Earnings per share increased faster than net income reflecting the
effect of the company's share repurchase program. Annualized return on average
shareholders' equity was 25.0%, compared to 22.7% at December 31, 1998.
<TABLE>
<CAPTION>
AUTOMOTIVE
1999 1998 Change % Change
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales and Revenues
Computer Services $119,631 $103,297 $16,334 16%
Computer Systems Products $ 46,362 $ 28,359 $18,003 63%
Business Forms $ 43,999 $ 43,617 $ 382 1%
------------- -------------- -------------
Total Net Sales and Revenues $209,992 $175,273 $34,719 20%
Gross Profit $120,100 $ 93,652 $26,448 28%
Gross Margin 57.2% 53.4%
SG&A Expenses $ 73,556 $ 62,262 $11,294 18%
% of Revenues 35.0% 35.5%
Operating Income $ 46,544 $ 31,390 $15,154 48%
Operating Margin 22.2% 17.9%
EXCLUDING EFFECT OF LAST YEAR'S ACCOUNTING CHANGE
Net Sales and Revenues
Computer Services $119,631 $103,297 $16,334 16%
Computer Systems Products $ 46,362 $ 44,095 $ 2,267 5%
Business Forms $ 43,999 $ 43,617 $ 382 1%
------------- -------------- -------------
Total Net Sales and Revenues $209,992 $191,009 $18,983 10%
Gross Profit $120,100 $104,131 $15,969 15%
Gross Margin 57.2% 54.5%
SG&A Expenses $ 73,556 $ 62,749 $10,807 17%
% of Revenues 35.0% 32.8%
Operating Income $ 46,544 $ 41,382 $ 5,162 12%
Operating Margin 22.2% 21.7%
</TABLE>
Automotive's revenues increased for the first quarter primarily because of
continued strong growth in computer services revenues. Computer services
revenues, comprised predominately of recurring maintenance and support revenues,
increased 16% for the quarter primarily because of the increased number of ERA
software applications supported and the growth of newer service offerings.
Computer systems products sales increased modestly (excluding the effect of the
accounting change) as higher sales of ERA and laser printing products overcame a
decline in sales of electronic parts catalogs (EPC). EPC sales were unusually
high last year as systems were converted to year 2000 compliant versions of the
product. ERA sales increased as this year's sales mix included larger systems
and overcame a decline in the number of units. Last year's ERA revenues included
many smaller systems sales which replace older products that were not being made
year 2000 compliant. Laser revenues, while still relatively small, continued to
grow at a rapid rate. Automotive business forms sales increased slightly in
spite of the technology 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.)
Included in computer services and products revenues were e-business and customer
relationship management
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(CRM) revenues of $16,288, up 60% over last year. During the first quarter of
fiscal year 2000, new orders for computer systems products declined from last
year resulting in lower computer systems order backlogs. Second quarter sales of
computer systems products will be largely unaffected by this decline because
those sales will consist primarily of systems shipped in the first quarter and
installed during the second quarter.
Automotive gross profit margins increased over last year primarily as a result
of the growth in higher margin computer services revenues and also because of
improved gross profit margins on computer systems products. Computer systems
products gross profit margins improved primarily because last year included a
higher number of smaller lower margin systems sales. Gross profit margins on
Automotive business forms continued to be strong.
Operating margins increased to 22.2% for the first quarter, compared to 21.7%
last year (excluding the effect of the accounting change) because of higher
gross profit margins. 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.
INFORMATION SOLUTIONS
1999 1998 Change % Change
-------- -------- -------- --------
Net Sales and Revenues $198,260 $170,907 $ 27,353 16%
Gross Profit $ 69,972 $ 61,925 $ 8,047 13%
Gross Margin 35.3% 36.2%
SG&A Expenses $ 59,151 $ 52,523 $ 6,628 13%
% of revenues 29.8% 30.7%
Operating Income $ 10,821 $ 9,402 $ 1,419 15%
Operating Margin 5.5% 5.5%
Information solutions sales were higher than any prior quarter's and included
sales from the Sterling Direct business combination. Excluding Sterling's sales,
revenues increased 12% marking the first quarter in the Group's history that
internal sales growth exceeded 10%. The higher revenue growth resulted from
increased volume and reflected sales growth in several large new accounts.
Directionally, sales prices were slightly higher than last year, reflecting
higher paper costs. Information solutions sales included e-business and CRM
revenues of $17,629, double last year's. Sterling sales were included with
e-business and CRM revenues.
Gross profit margins declined from last year because of the initial negative
margin impact of several large new accounts. Higher paper costs were a slight
negative to gross margin versus last year.
Information Solutions operating margins were essentially the same as 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 declined as compared to
the fourth quarter's 7.8% because of the initial negative margin impact of
several large new accounts. The profitability of these new accounts is expected
to improve over time.
FINANCIAL SERVICES
1999 1998 Change % Change
---------- ----------- --------- ------------
Net Sales and Revenues $9,764 $9,370 $394 4%
Operating Income $4,915 $4,835 $ 80 2%
Operating Margin 50.3% 51.6%
Average finance receivables increased 5% over last year because of higher
automotive computer systems products sales. Financial Services revenues grew
primarily 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%, the same as
last year. Bad debt expenses were $712 in the first quarter, compared to $650
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
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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 three 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 three months of the fiscal year. Operating cash
flows were $34,060 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 $22,555. During the first three
months of the fiscal year the company also capitalized $5,297 of software
licensed to customers, 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
the assets of Sterling Direct for $26,145 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
26.7% at December 31, 1999 and 26.8% at September 30, 1999. Remaining credit
available under existing revolving credit agreements was $110,958 at December
31, 1999. In addition to committed credit agreements, the company also has a
variety of other short-term credit lines available. The company anticipates that
cash flow from operations and cash available from existing credit agreements
will be sufficient to fund fiscal year 2000 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 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, 1999, the company has issued $170,000 of
notes under this arrangement. Management believes that its strong balance sheet
and cash flows should help maintain an investment grade credit rating that
should provide access to capital sufficient to meet the company's cash
requirements beyond fiscal year 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
February 9, 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 three months of
fiscal year 2000, the company repurchased 1,000 Class A common shares for
$19,885 ($19.88 per share). As of December 31, 1999 the company could repurchase
an additional 1,679 Class A common shares under existing board of directors'
authorizations.
YEAR 2000 COMPLIANCE
STATE OF READINESS
The company 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
12
<PAGE> 13
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.
As of February 9, 2000, the company has not experienced any significant issues
as a result of the calendar changeover to year 2000. While the company has taken
significant actions to help ensure that its systems will be able to process and
store dates after January 1, 2000, 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 were engaged to perform specific
services. During the first quarter of fiscal year 2000, the company's year 2000
compliance expenses were about $600, bringing the total project to-date cost to
about $14,400. Management believes that remaining costs for year 2000 compliance
will not be material, 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. As of February 9, 2000, the company has not experienced any such
failures.
CONTINGENCY PLANS
In addition to the year 2000 remediation efforts, the company also focused on
year 2000 contingency planning. Through a customer-oriented risk assessment
process, the company identified areas where contingency strategies needed to be
developed. Detailed contingency plans were completed and tested as of December
31, 1999 and remain available to implement should unanticipated circumstances
arise.
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
FOREIGN CURRENCY EXCHANGE RATES
The company has foreign-based operations in Canada, which accounted for 12% of
net sales and revenues for the three months ended December 31, 1999. In the
conduct of its foreign operations the company has intercompany sales, charges
and loans between the U.S. and Canada and may receive dividends denominated in
different currencies. These transactions expose the company to changes in
foreign currency exchange rates. At December 31, 1999, the company had no
foreign currency exchange contracts outstanding. Based on the company's overall
foreign currency exchange rate exposure at December 31, 1999, management
believes that a 10% change in currency rates would not have a material effect on
the company's financial statements.
COMMODITIES
The company is exposed to changes in the cost of paper, a key raw material in
the production of business forms. The company has attempted to limit this
exposure by consolidating its purchases among a few suppliers and negotiating
longer-
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<PAGE> 14
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 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 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.
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 10, 2000 /s/ David R. Holmes
------------------------------- -------------------
David R. Holmes
Chairman of the Board
and Chief Executive Officer
Date February 10, 2000 /s/ Dale L. Medford
------------------------------- -------------------
Dale L. Medford
Corporate Vice President, Finance
and Chief Financial Officer
15
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<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
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