- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------Prepared by MERRILL CORPORATION www.edgaradvantage.com SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549FORM 10-Q
(MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-14082
(MARK ONE)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-14082MERRILL CORPORATION
(Exact
(Exact name of Registrant as specified in its charter)MINNESOTA 41-0946258 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) ONE MERRILL CIRCLE ST. PAUL, MINNESOTA 55108 (Address of principal executive offices) (Zip
Minnesota
41-0946258(State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)
One Merrill Circle
St. Paul, Minnesota
(Address of principal executive offices)
55108
(Zip Code)Registrant's telephone number, including area code: 651-646-4501
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 filing requirements for the past 90 days.
Yes X No
-------- --------The number of shares outstanding of Registrant's Common Stock, par value $.01, on
June 10,September 9, 1999 was16,076,425. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------16,138,045.
PART
I.--FINANCIALI.FINANCIAL INFORMATION
PAGE(S) -----------ITEMPage(s) Item 1. FINANCIAL STATEMENTSFinancial Statements
Includedhereinis the following unaudited financial information:
Consolidated Balance Sheets as ofApril 30,July 31, 1999 and January 31,1999................................1999
3
Consolidated Statements of Operations for the three and six month periods endedApril 30,July 31, 1999 and1998......1998
4
Consolidated Statements of Cash Flows for thethreesix month periods endedApril 30,July 31, 1999 and1998......1998
5
Notes to Consolidated FinancialStatements........................................................... 6-7 ITEMStatements
6
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 8-11 ITEMManagement's Discussion and Analysis of Financial Condition and Results of Operations
9
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK....................................... 12Quantitative and Qualitative Disclosures About Market Risk
16PART
II.--OTHERII.OTHER INFORMATION
PAGE(S) -----------ITEMPage(s)
Item 1. Legal Proceedings
17
Item 4. Submission of Matters to a Vote of Security Holders
17
Item 6.EXHIBITS AND REPORTS ON FORM 8-K................................................................ 13 SIGNATURES............................................................................................... 14Exhibits and Reports on Form 8-K
172PART
I--FINANCIALIFINANCIAL INFORMATIONITEMItem 1.
FINANCIAL STATEMENTSFinancial StatementsMERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)(in thousands, except share data)
ASSETS
APRIL 30, JANUARYJuly 31,
1999January 31,
1999----------- -----------(UNAUDITED)(unaudited) Current assets Cash and cash equivalents..........................................................equivalents$ 4,10311,001 $ 23,477 Trade receivables, less allowance for doubtful accounts of $9,298$9,581 and $8,126,respectively..................................................................... 139,852respectively145,796 102,365 Work-in-process inventories........................................................ 25,364inventories16,848 12,639 Other inventories.................................................................. 8,046inventories8,785 7,559 Other current assets............................................................... 12,839assets15,369 12,253 ----------- -----------Total current assets............................................................. 190,204assets197,799 158,293 Property, plant and equipment, net................................................... 59,026net58,122 44,935 Goodwill, net........................................................................ 75,123net78,296 49,744 Other assets......................................................................... 12,995assets12,944 12,973 ----------- -----------Total assets.....................................................................assets$ 337,348347,161 $ 265,945 ----------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to banks.............................................................banks$ 66,50068,000 Current maturities of long-term debt............................................... 210debt960 $ 2,210 Current maturities of capital lease obligations.................................... 222obligations204 236 Accounts payable................................................................... 38,236payable35,600 29,640 Accrued expenses................................................................... 35,707expenses37,993 44,642 ----------- -----------Total current liabilities........................................................ 140,875liabilities142,757 76,728 Long-term debt, net of current maturities............................................maturities38,110 38,110 Capital lease obligations, net of current maturities................................. 1,329maturities1,292 1,375 Other liabilities.................................................................... 10,517liabilities10,266 8,581 ----------- -----------Total liabilities................................................................ 190,831liabilities192,425 124,794 ----------- -----------Shareholders' equity Common stock, $.01 par value: 25,000,000 shares authorized; 16,069,89516,130,520 and 15,823,155 shares, respectively, issued andoutstanding..........................outstanding161 158 Undesignated stock: 500,000 shares authorized; no shares issued....................issuedAdditional paid-in capital, net of note receivables of $1,547...................... 13,882$2,055 at July 31, 199914,202 12,722 Retained earnings.................................................................. 132,474earnings140,373 128,271 ----------- -----------Total shareholders' equity....................................................... 146,517equity154,736 141,151 ----------- -----------Total liabilities and shareholders' equity.......................................equity$ 337,348347,161 $ 265,945 ----------- ----------- ----------- -----------The accompanying notes are an integral part
of the consolidated financial statements.3MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)(in thousands, except share and per share data)
(unaudited)
THREE MONTHS ENDED APRIL 30 -----------------------------Three Months Ended
July 31Six Months Ended
July 31
1999
1998------------ ------------Revenue.....................................................
1999
1998
Revenue $ 131,836166,237 $ 123,514148,458 $ 298,073 $ 271,972 Cost of revenue............................................. 84,564 75,156 ------------ ------------revenue109,398 94,484 193,962 169,640 Gross profit.............................................. 47,272 48,358profit56,839 53,974 104,111 102,332 Selling, general and administrative expenses................ 37,728 33,425 ------------ ------------expenses38,281 37,267 76,009 70,692 Merger costs 1,130 1,130 Operating income.......................................... 9,544 14,933income17,428 16,707 26,972 31,640 Interest expense............................................ (1,103) (932)expense(2,064 ) (1,095 ) (3,167 ) (2,027 ) Other (expense) income, net................................. (206) 307 ------------ ------------net(390 ) 202 (596 ) 509 Income before provision for income taxes.................. 8,235 14,308taxes14,974 15,814 23,209 30,122 Provision for income taxes.................................. 3,714 6,296 ------------ ------------taxes6,753 7,108 10,467 13,404 Net income................................................income$ 4,5218,221 $ 8,012 ------------ ------------ ------------ ------------8,706 $ 12,742 $ 16,718 Net income per share: Basic..................................................... $.28 $.49 ------------ ------------ ------------ ------------ Diluted................................................... $.27 $.47 ------------ ------------ ------------ ------------Basic $0.51 $0.53 $0.80 $1.02 Diluted $0.50 $0.50 $0.77 $0.97 Dividends per common share.................................. $.02 $.02 ------------ ------------ ------------ ------------share$0.02 $0.02 $0.04 $0.04
Weighted average number of shares outstanding:Basic..................................................... 15,881,177 16,332,927 ------------ ------------ ------------ ------------ Diluted................................................... 16,470,066 17,194,712 ------------ ------------ ------------ ------------
Basic 16,089,141 16,412,306 15,985,159 16,372,617 Diluted 16,587,536 17,305,017 16,525,333 17,249,865 The accompanying notes are an integral part
of the consolidated financial statements.4
MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS) (UNAUDITED)
(in thousands)
(unaudited)
THREE MONTHS ENDED APRIL 30 ------------------------Six Months Ended
July 31
1999
1998---------- ----------
Operating activities Net income...........................................................................income$ 4,52112,742 $ 8,01216,718 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization...................................................... 3,745 2,791amortization7,959 6,024 Amortization of intangibles........................................................ 1,170 1,080intangible assets2,632 2,174 Writedown of goodwill.............................................................. --goodwill 1,000 Provision for losses on trade receivables.......................................... 1,997 1,048receivables2,883 2,585 Deferred compensation.............................................................. 691 1,338compensation910 1,519 Changes in operating assets and liabilities, net of effects from business acquisitions Trade receivables................................................................ (25,289) (8,418)receivables(29,799 ) (25,807 ) Work-in-process inventories...................................................... (7,957) (13,228)inventories559 (6,140 ) Other inventories................................................................ (487) 202inventories(237 ) (396 ) Other current assets............................................................. 164 (697)assets1,017 41 Accounts payable................................................................. 2,010 6,052payable(2,158 ) 2,924 Accrued expenses................................................................. (13,621) (9,589)expenses(11,034 ) (5,738 ) Accrued and deferred income taxes................................................ 2,693 5,794 ---------- ----------taxes(972 ) (196 ) Net cash used in operating activities.......................................... (30,363) (4,615) ---------- ----------activities(15,498 ) (5,292 ) Investing activities Business acquisitions, net of cash acquired.......................................... (50,371) --acquired(54,556 ) (3,200 ) Purchase of property, plant and equipment............................................ (2,836) (3,696)equipment(5,125 ) (7,809 ) Other investing activities, net...................................................... (1,089) (1,494) ---------- ----------net(1,888 ) (1,601 ) Net cash used in investing activities.......................................... (54,296) (5,190) ---------- ----------activities(61,569 ) (12,610 ) Financing activities Borrowings on notes payable to banks................................................. 69,900 12,600banks115,250 71,400 Repayments on notes payable to banks................................................. (3,400) (4,900)banks(49,382 ) (51,800 ) Principal payments on long-term debt and capital lease obligations................... (2,060) (71)obligations(2,120 ) (149 ) Repurchase of common stock (2,178 ) Dividends paid....................................................................... (318) (326)paid(640 ) (655 ) Exercise of stock options............................................................ 733 669options962 1,514 Tax benefit realized upon exercise of stock options.................................. 430 427options521 690 Other equity transactions, net....................................................... -- 41 ---------- ----------net 226 Net cash provided by financing activities...................................... 65,285 8,440 ---------- ---------- Decreaseactivities64,591 19,048 (Decrease) increase in cash and cash equivalents.................................................. (19,374) (1,365)equivalents(12,476 ) 1,146 Cash and cash equivalents, beginning of period.........................................period23,477 2,531 ---------- ----------Cash and cash equivalents, end of period...............................................period$ 4,10311,001 $ 1,166 ---------- ---------- ---------- ----------3,677 The accompanying notes are an integral part
of the consolidated financial statements.5
MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our consolidated financial statements as of
April 30,July 31, 1999, and for the three and six month periods endedApril 30,July 31, 1999 and 1998, have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of the results for the indicated periods. Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The year end consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 1999 Annual Report.2. MERGER
On July 14, 1999, we entered into an agreement and plan of merger with Viking Merger Sub., Inc. (Viking), an affiliate of DLJ Merchant Banking Partners II L.P. and certain of its affiliates. The merger is subject to shareholder approval and may be terminated if the merger is not consummated by December 31, 1999. The merger can also be terminated if certain events, as defined in the agreement, occur.
Upon effectiveness of the merger, Viking will be merged into us, and we will continue as the surviving company. In connection with the merger, our shareholders will receive $22.00 in cash, per share of common stock. John Castro, our President and Chief Executive Officer, and Rick Atterbury, our Executive Vice President and Chief Technology Officer, will continue to hold the shares of a new class B common stock that they will receive shortly before the merger in exchange for some of their shares of our common stock and will receive $22.00 in cash for each of their remaining shares of our common stock. The holders of each share of Viking's common stock will be entitled to receive class B common stock in Merrill for each of their shares of Viking's common stock outstanding at the time of the merger; and the holders of each share of Viking's preferred stock and warrants will be entitled to receive preferred stock or warrants, as the case may be, in Merrill for each of their shares of Viking's preferred stock or warrants outstanding at the time of the merger. The transaction is expected to be accounted for as a recapitalization and will have no impact on our historical basis of assets and liabilities.
3. NET INCOME PER SHARE
The denominator used to calculate diluted earnings per share includes the dilutive impact of stock options, which increase the actual weighted average number of shares outstanding by
588,889498,395 and861,785892,711 for the three month periods endedApril 30,July 31, 1999 and 1998, respectively and by 540,174 and 877,248 for the six month periods ended July 31, 1999 and 1998, respectively.3.4. BUSINESS ACQUISITIONS
On April 14, 1999, we purchased substantially all operating assets and assumed certain liabilities of Daniels Printing, Limited Partnership for approximately
$44$44.0 million in cash, assumption and payment of existing lines of credit obligations totaling approximately $5.6 million and the assumption of certain ordinary course liabilities of $7.7million (the Daniels Acquisition).million. The acquisition has been accounted for as a purchase. The excess of the purchase price over the estimated fair value of the net identifiable assets acquired approximated $23.3 million and is being amortized using the straight-line method over 20 years.Pro Forma (unaudited) results for the six month period ended July 31, 1999 and the three month and six month periods ended July 31, 1998, as though the acquisition had been effective at February 1, 1998, are as follows:
Three Months
ended July 31, 1998Six Months
ended July 31, 1998Six Months
ended July 31, 1999(in thousands, except per share amounts) Revenues $ 166,838 $ 311,260 $ 313,798 Net Income 8,013 16,450 13,350 Net Income Per Sharediluted $ 0.46 $ 0.95 $ 0.81 On June 11, 1999, we purchased substantially all operating assets and assumed certain liabilities of Alternatives Communications Group, Inc. for approximately $2.6 million in cash, a promissory note for $0.8 million, payment of an existing line of credit obligation of $2.1 million, and the assumption of certain ordinary course liabilities of $1.9 million. The acquisition
washas been accounted for as a purchase and is not significant to our financial position or operating results. The excess of the purchase price over the estimated fair value of the net identifiable assets acquired approximated $3.3 million and is being amortized using the straight-line method over 15 years.These acquisitions were financed with excess operating cash and amounts available under our revolving credit
agreement. We have determined that it is impracticable at this time to provide the pro forma financial information required under applicable Securities and Exchange Commission rules and regulations for this acquisition. We will file the required pro forma financial information in an amendment to the Form 8-K filed on or before June 28, 1999. 4.facility.5. SEGMENT AND RELATED INFORMATION
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
changeschanged the way we report information about our operating segments. Our five business units have been aggregated into two reportable segments,comprisingcomprised of Specialty Communication Services and Document Services.SPECIALTY COMMUNICATION SERVICESSpecialty Communication Services This segment consists of
threefour businessunits--Financialunits: Financial Document Services, Investment Company Services,andManaged CommunicationsPrograms--that printPrograms and Merrill Print Group. Our Specialty Communication Services segment provides our financial, investment company and corporate clients with information technology-based solutions for the production and distribution of transactional financial documents, marketing materials, compliance documents anddeliver services used in thebranded promotional materials. We are one of three international financialmarketplace, including mutual fundprinters with a nationwide network andinsurance companies and banks, and national organizations. The principal markets for thisrecognized brand name.Document Services This segment
include major metropolitan centers in the world including North America, Europe, Latin America and the Far East. Customers include major investment bankers, corporate officers, mutual fund companies, national and regional real estate networks and other business services. DOCUMENT SERVICESconsists solely of our Document Management Servicesis the solebusinessunit reported in this segment. They deliver document management solutions to legal and corporate clients through client-based 64. SEGMENT AND RELATED INFORMATION (CONTINUED) service centers. These Merrill-managed facilities provide clients with a broad range of value-added document services, including litigation copying and support, imaging, electronic document scanning, storage and retrieval, binding and post-production shipping. The principal markets for this segment are major metropolitan areas in North America. Customers includewhich provides law firms, corporate legal departments andlarge corporations.investment banks with information-management products and services designed to enhance productivity and reduce costs. We provide a total outsourcing solution to our clients' information management needs, including providing all of the staff, technology and equipment necessary to manage the varying levels of demand associated with this function.The accounting policies of the reportable segments are the same as those described in Note One of Notes to Consolidated Financial
Statements.Statements included in our 1999 Annual Report. We evaluate the performance of our operating segments based on revenue and operating earnings of the respective business units. Intersegment sales and transfers are not significant.Summarized financial information concerning our reportable segments is shown in the following table. The "Interest
&& Other" column includes corporate-related items and, as it relates to income before provision for income taxes, income and expense not allocated to reportable segments.
SPECIALTY INTEREST & (IN THOUSANDS) COMMUNICATION SERVICES DOCUMENT SERVICES OTHER TOTAL- ----------------------------------------------------------------------------------------------------------------(in thousands) Specialty
Communication ServicesDocument Services Interest & Other Total Three month period ending April 30,ended July 31, 1999Revenue...............................Revenue $ 115,650148,801 $ 16,18617,436 $ 131,836166,237 Income (loss) before provision for income taxes........................ 9,418 126taxes$ (1,309) 8,235 - ----------------------------------------------------------------------------------------------------------------19,763 $ (1,205 ) $ (3,584 ) $ 14,974 As of April 30,July 31, 1999Total assets.......................... 266,692 34,539 36,117 337,348 - ----------------------------------------------------------------------------------------------------------------assets$ 267,693 $ 35,195 $ 44,273 $ 347,161 Three month period ending April 30,ended July 31, 1998Revenue...............................Revenue $ 109,111133,902 $ 14,40314,556 $ 123,514148,458 Income (loss) before provision for income taxes........................ 16,641 (1,708)taxes$ (625) 14,308 - ----------------------------------------------------------------------------------------------------------------18,859 $ (2,152 ) $ (893 ) $ 15,814 As of January 31, 1999 Total assets..........................assets$ 186,825 $ 25,966 $ 53,154 $ 265,945 - ----------------------------------------------------------------------------------------------------------------Six month period ended July 31, 1999 Revenue $ 263,839 $ 34,234 $ 298,073 Income (loss) before provision for income taxes $ 29,181 $ (1,079 ) $ (4,893 ) $ 23,209 Six month period ended July 31, 1998 Revenue $ 243,012 $ 28,960 $ 271,972 Income (loss) before provision for income taxes $ 35,500 $ (3,860 ) $ (1,518 ) $ 30,122 5.6. FINANCING AGREEMENT
Subsequent to
April 30,July 31, 1999, we amended our revolving credit agreement.Amounts available for borrowing underThe termination date of theamendedagreementwere increasedwas extended to$90 million through June 30,December 31, 1999. Amounts available for borrowing under the amended agreementare scheduled to decrease to $80will remain at $80.0 millionon July 1, 1999 and $40 million on September 1, 1999, at which time, we anticipate to have completedthrough therefinancing of amounts borrowed under thisamendedagreement related to the Daniels Acquisition.termination date. Under the amended agreement, we have the option to borrow at the bank's reference rate, at 1.0% above the London Interbank Offered Rate (LIBOR), or at 1.0% above a certificate of deposit based rate. We are also required to pay a commitment fee of 0.25% on the unused portion of the line. The amended revolving creditagreementsagreement includes various covenants, including the maintenance of minimum tangible net worth and limitations on the amounts of certain transactions without the approval of the bank.6.7. SUPPLEMENTAL CASH FLOW
DISCLOSURE During the first quarter of fiscal year 2000, optionsDISCLOSURESOptions to purchase
180,040219,160 shares of common stock during the six month period ended July 31, 1999 were exercisedthrough the issuance ofusing non-interest bearingnote agreementsnotes primarily toofficers of the Company.our officers. Amounts advanced under thenote agreementsnotes, totaling approximately$1.5$2.1 million as ofApril 30,July 31, 1999, are recorded as a reduction of additional paid-in capital on the accompanying unaudited consolidated balance sheets.7ITEMDuring the second quarter of fiscal year 1998, we recorded an obligation of $8.0 million for additional consideration related to business acquisitions.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement's Discussion and Analysis
of Financial Condition and Results of OperationsCertain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute 'forward-looking' statements within the meaning of the
Privatefederal SecuritiesLitigation Reform Act of 1995.laws. Such 'forward-looking' statements involveourknown and unknown risks, uncertainties, or achievementsthatwhich may cause actual results to be materially different from any future results, performance, or achievements expressed or implied by such 'forward-looking' statements. These risks and uncertainties include, but are not limited to, our ability to continue to diversify our revenue stream, theeffectpace of technological changes affecting our business, the demand for printed financial documents, and the competitive environment in our business.Overview
We are a diversified communications and document services company applying advanced information systems and Internet technology to provide a full range of services to our corporate, financial and legal clients. We maintain a disciplined focus on specific target markets with substantial, complex business communication requirements, and we aggressively pursue a leadership position within each of these markets.
In February 1999, we realigned our corporate structure by shifting from a geographically-based matrix organization into five business units in order to provide clearer accountability, quicker decision making and sharper operational focus within each line of business. These business units have been organized into two reportable segments, Specialty Communication Services and Document Services:
Specialty Communication Services
Financial Document Services
Investment Company Services
Managed Communications Programs
Merrill Print Group
Document Services
Document Management Services
Our management's discussion and analysis for the three and six month periods ended July 31, 1999 and 1998 reflects our recent realignment into these five business units. Our management's discussion and analysis filed for prior periods reflect the historical presentation of our business on a product line basis.
Our Financial Document Services business historically has generated large, high margin cash flow. This business encompasses transactional documents that generally reflect the level of deal activity in the capital markets as well as required regulatory compliance and other repetitive work that is typically not significantly affected by capital market fluctuations. While some types of transactions tend to increase when others are out of favor, a prolonged reduction in the overall level of financial transactions could be expected to have a negative impact on our Financial Document Services business. This was the case, for example, during the Fall of 1998 when pronounced economic difficulties in certain emerging markets reduced the overall level of transaction activity on a global scale. As a result, revenue related to transaction-based financial printing was depressed for the fourth quarter of fiscal year 1999 and the first quarter of fiscal year 2000, during which time we would have completed and invoiced certain transactions that were otherwise postponed or terminated. The first and second quarters of fiscal 1999, on the other hand, represented relatively robust capital markets, which translated into strong operating results for the transaction portion of our Financial Document Services business during these periods.
In an effort to maximize the stability of our revenue and profitability, we have not only strived to grow the non-financial transaction portion of our Financial Document Services business, but we have also continued to develop and grow our other business units. Our Investment Company Services, Managed Communications Programs and Document Management Services businesses all compete in highly fragmented markets that we believe are undergoing robust growth. Compliance documentation and marketing materials for our investment fund and corporate clients are not significantly affected by capital markets fluctuations, but are usually in higher demand during our first fiscal quarter as a result of our clients' annual filing requirements. Our Managed Communications Programs and Document Management Services businesses tend to follow general economic trends. Both of these businesses also have a considerable amount of long-term contracted revenue that serves to stabilize our operating results. We generally do not begin to receive significant revenue in our Managed Communications Programs business until we have invested approximately six to 12 months analyzing our clients' communication processes and designing appropriate product and service offerings that effectively address their needs.
The strength of our diversification effort has been attributable to both internal growth and acquisitions. On June 11, 1998, we acquired Executech, Inc. and World Wide Scan Services, LLC, an East coast-based software and imaging company that expanded Document Management Services' client base, giving us a strong presence among top-100 law firms and Fortune 200 corporate law departments. On April 14, 1999, we finalized the acquisition of Daniels Printing, Limited Partnership, a full-service financial and commercial printing company based in suburban Boston, Massachusetts, that reinforce the presence of our Investment Company Services business in the important New England market. Furthermore, we acquired Alternatives Communications Group, Inc. on June 14, 1999, extending the service capabilities, customer base and geographic reach of our Managed Communications Programs business. We have accounted for all of these acquisitions under the purchase method of accounting. Accordingly, our historical results reflect these acquired operations from the date of acquisition.
In addition to broadening our revenue and customer base, we also strive to maintain a low fixed cost asset base and high utilization rates in connection with our printing assets. This enables us to better respond to a potential downturn in the financial markets and the associated reduction in demand for transaction-based printing services. In periods of strong demand, we subcontract as much as 40% of our financial and investment company printing requirements to third-party local vendors. We pursue a strategy of maintaining a low fixed cost asset base throughout all of our other business units as well. For example, we pioneered the hub and spoke network utilized in our Financial Document Services and Investment Company Services businesses as an efficient method to deploy the resources needed in those businesses. In our Document Management Services business, we recently entered into leasing arrangements with major manufacturers of photocopying equipment, whereby we lease such equipment on an as-needed basis and pay for such usage entirely on a per copy basis (as opposed to paying a fixed monthly rental cost). These arrangements are in line with our overall operating strategy of minimizing our fixed cost asset base and maximizing operating flexibility.
In all of our business units, we recognize revenue when we ship or complete the product or, in the case of our Document Management Services, when we provide the service. Prior to our recent corporate realignment, our printing operations were historically reflected as a cost center in our overall operating results for the entire company. With its formation in February 1999, the Merrill Print Group has been established as a profit center responsible for managing the printing operations for all of our internal businesses as well as our growing base of commercial printing clients.
As a result of the proposed merger with an affiliate of DLJ Merchant Banking Partners II, L.P. and certain of its affiliates, we have incurred merger costs of approximately $1.1 million through July 31, 1999. We anticipate that total merger fees and expenses will approximate $23.9 million of which $11.2 million relates to financing costs that will be capitalized and amortized over the term of the finance agreements. The remaining $12.7 million of fees and expenses relates to non-capitalizable merger fees and expenses. While the exact timing, nature and amount of these costs are subject to change, we anticipate that a substantial one-time charge will be recorded in the quarter in which the merger is consummated. Because this charge will be funded entirely through the proceeds of the merger financing, we do not expect this loss to materially impact our liquidity, ongoing operations or market
conditions, government public reporting regulations, paper cost,position. The merger is expected to be accounted for as a recapitalization and would consequently have no impact on our historical basis of assets and liabilities nor would result in theintegration and performancerecording ofrecent acquisitions and Year 2000 readiness. See our 1999 Form 10-K for further information on these risks and uncertainties. RESULTS OF OPERATIONSany goodwill.Results of operations
The following table sets forth the percentage relationship to total revenue of certain items in our consolidated statements of operations for the three and six month periods ended
April 30,July 31, 1999 and 1998, and the percentage change in the dollar amounts of such items betweentheperiods.
THREE MONTHS ENDED APRIL 30, ------------------------------------ PERCENTAGE INCREASE PERCENTAGE (DECREASE) OF REVENUE ---------- ---------------------Three Months Ended July 31, Six Months Ended July 31,
Percentage
of RevenuePercentage
Increase
(Decrease)
Percentage
of RevenuePercentage
Increase
(Decrease)1999 1998 1999 VS.vs. 19981999 1998 1999 vs. 1998 1998 -------- -------- ----------Revenue Financial Document Services 45.8 % 57.6 % (11) % 46.9 % 55.3 % (7) % Investment Company Services 25.9 18.3 59 24.0 19.0 38 Managed Communications Programs 13.9 12.1 28 14.8 13.6 19 Merrill Print Group 3.9 2.2 102 2.9 1.4 122 Subtotal Specialty Communication Services: Financial................................ 30.6% 37.5% 13% Corporate................................ 37.5 32.9 22 Commercial and other..................... 19.6 18.0 16 -------- -------- 87.7 88.4 6Communications Services89.5 90.2 11 88.6 89.3 9 Document Services: Document management services............. 12.3 11.6 12 -------- --------Management Services10.5 9.8 20 11.4 10.7 18 Total revenue..........................revenue100.0 100.0 712 100.0 100.0 10 Cost of revenue.............................. 64.1 60.8 13 -------- --------revenue65.8 63.6 16 65.1 62.4 14 Gross profit............................. 35.9 39.2 (2)profit34.2 36.4 5 34.9 37.6 2 Selling, general and administrative expenses.................................... 28.6 27.1 13 -------- --------expenses23.0 25.1 3 25.5 26.0 8 Merger costs .7 .4 Operating income......................... 7.3 12.1 (36)income10.5 11.3 4 9.0 11.6 (15 ) Interest expense............................. (0.8) (0.8) 18expense(1.3 ) (0.7 ) 88 (1.0 ) (0.7 ) 56 Other (expense) income, (expense), net.................. (0.3) 0.3 (167) -------- --------net(0.2 ) 0.1 (293 ) (0.2 ) 0.2 (217 ) Income before provision for income taxes.................................. 6.2 11.6 (42)taxes9.0 10.7 (5 ) 7.8 11.1 (23 ) Provision for income taxes................... 2.8 5.1 (41) -------- --------taxes4.1 4.8 (5 ) 3.5 4.9 (22 ) Net income............................... 3.4% 6.5% (44) -------- -------- -------- --------income4.9 % 5.9 % (6) % 4.3 % 6.2 % (24) % BUSINESS We are a diversified electronic and paper document management company. DuringQuarter ended July 31, 1999
we adopted Statement of Financial Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information." As a result, we defined our reportable segments and changed the information we report about our operating segments. Operating segment information for prior periods has been restatedcompared toconformquarter ended July 31, 1998Revenue
Overall revenue increased 12.0% to
the 1999 presentation. Following the new standard, our operating segments have been aggregated into two reportable segments: Specialty Communication Services and Document Services. 8Under Specialty Communication Services, we include three business units: Financial Document Services, Investment Company Services and Managed Communications Programs. Revenue generated by these three business units is categorized as financial, corporate and other. Document Management Services is the sole business reported in the Document Services segment. Revenue generated by this business unit is categorized as document management services. All accounting policies of the reportable segments are consistent with generally accepted accounting principles and our accounting policies. Additional information about the reportable segments is included in Note Four of the 10-Q. The financial revenue category generally reflects the level of transactional activity in the capital markets. The financial revenue category encompasses many types of transactions, and some types of transactions tend to increase when others are out of favor. However, a prolonged reduction in the overall level of financial transactions could be expected to have a negative impact on this category. The corporate revenue category encompasses required regulatory compliance and mutual fund documentation and other repetitive work and is typically not significantly affected by capital market fluctuations. The commercial and other revenue and document management services revenue categories tend to follow general economic trends. QUARTER ENDED APRIL 30, 1999 COMPARED TO QUARTER ENDED APRIL 30, 1998 Revenue$166.2 million for thefirstquarterof fiscalended July 31, 1999 from $148.5 million for the same period one year2000 increased by $8.3 million or seven percent to $131.8 million. On April 14, 1999 the Company purchased substantially all assets and assumed certain liabilities of Daniels Printing, Limited Partnership (the Daniels Acquisition). For the period April 15, 1999 to April 30, 1999, this operation contributed approximately $3.6 million of revenue.ago. Revenue in the Specialty Communication Services segment increasedsix percent in$14.9 million, or 11.1% to $148.8 million from $133.9 million. Within thefirstSpecialty Communication Services segment, Financial Document Services revenue decreased 10.9% to $76.2 million from $85.5 million. Revenue generated by financial transactions, which represented 33.5% of our revenue for the quarter ended July 31, 1999, declined 8.3% when compared to the same period a year ago. This decrease was driven by lower financial transaction activity in the quarter ended July 31, 1999 versus the record activity experienced in the prior year quarter. Corporate regulatory compliance revenue also experienced a decrease of approximately 15.6% for the quarter ended July 31, 1999. This decrease was primarily attributable to the timing of certain projects. Investment Company Services revenue increased $15.9 million, or 58.6% to $43.1 million for the current quarter from $27.2 million for the quarter ended July 31, 1998. The newly acquired Daniels Printing operation contributed $9.3 million of this revenue. Excluding revenue generated by the Daniels Printing operation, Investment Company Services' revenue grew 24.3% which represented an increase in new customer accounts and an increase in the level of services provided to our existing customers. Managed Communications Programs revenue increased $5.1 million or 28.2% to $23.1 million for the quarter ended July 31, 1999 from $18.0 million for the same period one year ago.TheOur recently acquired Alternatives Communications operations contributed $2.0 million of this revenue. Excluding this contribution, Managed Communications Programs revenuegrowthgrew 17.2% as a result of an increase inthe Specialty Communication Services was led by a 22 percentnew customer accounts and an increase in thecorporatelevel of services provided to our existing customers. Merrill Print Group revenuecategory. Thisincreased $3.2 million to $6.4 million for the quarter ended July 31, 1999. The increase wasattributedprincipally attributable tostrong Investment Company Service activity; strong demand for corporate compliance documents and approximately $2.2 million ofrevenuecontributedgenerated by theacquiredDaniels Printing operationof Daniels Printing. Commercial and other revenue category also contributed to the Specialty Communication Services segment revenue growth by posting a 16 percent increase in revenueduring thecurrent first quarter. This increase resulted from our Managed Communication Program Services' offerings to existing customers and through program introductions to new customers. Offsetting this revenue growth was a 13 percent decline in revenue from the financial revenue category. This decline reflects the sharp decline in financial transactions and the continued market volatility that began during the second half of fiscal yearquarter ended July 31, 1999.Revenue in the Document Services segment increased
12 percent in$2.9 million, or 19.8% to $17.4 million for thefirstquarter ended July 31, 1999 from $14.6 million for the quarter ended July 31, 1998. This growth was due to increased revenue from our document service centers, our regional copy centers, and from our imaging services.Gross profit
Gross profit increased $2.9 million, or 5.3% to $56.8 million for the quarter ended July 31, 1999 from $54.0 million for the quarter ended July 31, 1998. As a percentage of revenue, gross profit was 34.2% for the quarter ended July 31, 1999 compared to 36.4% for the
same period lastprior year.Leading this growthThe increase in gross profit was due to revenue increases discussed above, offset by the decrease in gross profit as a percentage of revenue. The decrease in gross profit as a percentage of revenue resulted from a shift in revenue mix from higher gross margin financial transaction revenue to revenue generated by ourimaging servicesother business units which tend to carry lower gross margins.Selling, general and
software products offered through Merrill/E-Tech. Document service center revenue was constantadministrativeSelling, general and administrative expenses increased $1.0 million to $38.3 million for the
comparable first quartersquarter ended July 31, 1999 from $37.3 million for the quarter ended July 31, 1998. Selling, general and administrative expenses primarily increased as a result of variable costs associated with increased revenues. Selling, general and administrative expenses as a percentage of revenue, were 23.0% for the quarter ended July 31, 1999 compared with 25.1% for the prior year quarter. The decrease in selling, general and administrative expense, as a percentage of revenue, resulted from our increasing ability to manage our fixed expense base and lower incentive compensation costs.Merger costs
During the quarter ended July 31, 1999, we recorded costs associated with the proposed plan of merger of approximately $1.1 million. This amount reflects investment banking fees, accounting, legal and other direct expenses. It is expected that this amount will continue to increase through the closing of the transaction.
Interest expense
Interest expense for the quarter ended July 31, 1999 was $2.1 million compared to $1.1 million for the prior year quarter. The increase in interest expense was caused by borrowings under our revolving credit facility to finance the Daniels Printing and Alternatives Communications acquisitions.
Other expense, net
Other expense, net for the quarter ended July 31, 1999 was $0.4 million compared to other income, net of $0.2 million for the quarter ended July 31, 1998. During the current quarter, we wrote off approximately $0.7 million of advances made to a technology company that filed for bankruptcy. We subsequently purchased the assets of this business for $0.8 million.
Tax provision
The effective tax rate for the quarter ended July 31, 1999 was 45.1% compared to 44.9% for the prior year quarter. The increase in the effective rate was caused by an increase in non-deductible business and entertainment expenses and non-deductible merger costs. We expect the effective tax rate to increase for the remainder of fiscal year
and 1999. Gross profit declined by approximately $1.12000 as additional non-deductible merger costs are incurred.Net income
Net income was $8.2 million, or
two percent$0.50 per diluted share, for the quarter ended July 31, 1999 versus $8.7 million, or $0.50 per diluted share, for the quarter ended July 31, 1998. The decrease in net income was related to higher selling, general and administrative expenses, merger costs and interest expense, as previously discussed.Six months ended July 31, 1999 compared to six months ended July 31, 1998
Revenue
Overall revenue increased 9.6% to $298.1 million for the six months ended July 31, 1999 from $272.0 million for the prior year period. Revenue in the Specialty Communication Services segment increased $20.8 million, or 8.6% to $263.8 million from $243.0 million. Within the Specialty Communciation Services segment, Financial Document Services revenue decreased 7.2% to $139.7 million from $150.4 million. Revenue generated by financial transactions, which represented 32.2% of our overall revenue for the current six month period, decreased by 10.3% when compared to the prior year period. This decrease reflected lower financial transaction activity in the six month period ended July 31, 1999, versus the record activity experienced in the prior year period. Offsetting this decrease was a 4.7% increase in revenue from corporate regulatory compliance work. This increase was driven by an aggressive marketing initiative implemented during the first quarter of fiscal year 2000 which resulted in increased compliance reporting work. Investment Company Services revenue increased $19.7 million, or 38.0% to $71.5 million for the six month period ended July 31, 1999 from $51.8 million for the prior year period. The newly acquired Daniels Printing operations contributed $11.5 million of this revenue. Excluding this contribution, Investment Company Services' revenue grew 15.8%, which primarily represented an increase in new customers and an increase in the level of services provided to our existing customers. Managed Communications Programs revenue increased $7.2 million, or 19.5% to $44.2 million for the six month period ended July 31, 1999 compared to $37.0 million for the prior year period. The newly acquired Alternatives Communications operations contributed $2.0 million of this revenue. Excluding this contribution, Managed Communications Programs' revenue grew 14.1% which primarily represented an increase in new customer accounts and an increase in the level of services provided to our existing customers. Merrill Print Group revenue increased to $8.5 million for the six month period ended July 31, 1999 from $3.8 million during the prior year period. This increase was primarily from $4.4 million of commercial printing generated from the recently acquired Daniels Printing operations.
Revenue in the Document Services segment increased $5.3 million, or 18.2% to $34.2 million in the six month period ended July 31, 1999 from $29.0 million for the six month period ended July 31, 1998. This growth was due to increased revenue from our document service centers, our regional copy centers, and from our imaging services.
Gross profit
Gross profit increased slightly to $104.1 million for the six month period ended July 31, 1999 from $102.3 million for the six month period ended July 31, 1998. As a percentage of revenue, gross profit was 34.9% for the six month period ended July 31, 1999 versus 37.6% for the prior year period. The increase in gross profit was due to the revenue increases discussed above, offset by the decrease in gross profit as a percentage of revenue. This decrease in gross profit as a percentage of revenue was due to a shift in revenue mix from higher gross margin financial transaction revenue to revenue generated by our other business units which tend to carry lower gross margins.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $5.3 million to $76.0 million for the six months ended July 31, 1999 from $70.7 million for the six months ended July 31, 1998. The increase in selling, general and administrative expenses was primarily related to variable costs associated with increased revenue. During the six month period ended July 31, 1998, we recorded a $1.0 million goodwill write-down associated with Merrill Training and Technology, formally Merrill/Superstar Computing Company. Selling, general and administrative expense, as a percentage of revenue, after giving effect to this write-down, was 25.5% for the six month period ended July 31, 1999 and 25.6% for the six month period ended July 31, 1998.
Merger costs
During the six month period ended July 31, 1999, we recorded costs associated with the proposed plan of merger of approximately $1.1 million. The amount recorded reflects investment banking fees, accounting, legal and other direct expenses. It is expected that this amount will continue to increase through the closing of the transaction.
Interest expense
Interest expense for the six month period ended July 31, 1999 was $3.2 million compared to $2.0 million for the prior year period. The increase in interest expense was caused by borrowings under our revolving credit facility to finance the Daniels Printing and Alternatives Communications acquisitions.
Other expense, net
Other expense, net for the six month period ended July 31, 1999 was $0.6 million compared to other income, net of $0.5 million for same period ended July 31, 1998. The primary contributor of the change relates to write-offs of approximately $1.3 million of advance payments we made to a technology company that filed for bankruptcy. We subsequently purchased the assets of this business for $0.8 million.
Tax provision
The effective tax rate for the six month period ended July 31, 1999 was 45.1% compared to 44.5% for the prior year period. The increase in the effective rate was caused by an increase in non-deductible business and entertainment expenses and non-deductible merger costs. We expect the effective tax rate to increase for the remainder of fiscal year 2000 as additional non-deductible merger costs are incurred.
Net income
Net income was $12.7 million, or $0.77 per diluted share, for the six month period ended July 31, 1999 versus $16.7 million, or $0.97 per diluted share, for the same period last year. The
current quarter gross profit percent of 35.9 percent is down from last year's corresponding period's gross profit percent of 39.2 percent. This decline isdecrease in net income was primarilyattributed to the weak financial transaction market that the industry experienced during the last half of fiscal 1999. As a result, utilization at our production facilities declined which drove gross profit margins down. We began to experience increased utilization of our production facilities during the first quarter of fiscal 2000 as evidencedcaused byour increased work-in-process balances at April 30, 1999. Selling, general and administrative expenses increased 13 percent in the first quarter compared to the same period one year ago. This increase was a result of continued investment in the selling areas, both in hiring additional sales representatives and branding new product marketing activities. In addition, as a result of the financial transactions downturn, we experienced higher than average receivables write-offs 9during the first quarter. As a result, the provision for losses on accounts receivables increased approximately $1.0 million for the current period when compared to the first quarter of fiscal 1999. We anticipate the selling, general and administrative expense to net sales ratio will decrease compared to the first quarter throughout the rest of fiscal year 2000 through cost controls and increased sales revenue from the sales and marketing activities. Interest expense increased in the first quarter compared to the same period last year. This is mainly attributable to increased interest costs associated with our revolving credit agreement as a result of higher borrowing requirements for the Daniels Acquisition and working capital needs as trade receivables and work-in-process inventories grew. The effective income tax rate for the first quarter increased by approximately one percent to 45.1 percent, compared to 44.0 percent in the same period a year ago. The increase in the rate resulted primarily from increased non-deductible business and entertainment expenses. Net income for the quarter was $4.5 million or 27 cents per diluted share compared to $8.0 million or 47 cents per diluted share in the first quarter last year. Net income, as a percentage of revenue decreased during the current quarter as a result of decreased gross profit margins andhigher selling, general and administrative expenses, asdiscussed previously. LIQUIDITY AND CAPITAL RESOURCES Workingpreviously discussed.Liquidity and capital resources
Cash and cash equivalents decreased $12.5 million to $11.0 million at
April 30,July 31, 1999decreased to $49.3 millionfrom$81.6$23.5 million at January 31, 1999.The decrease is primarily attributed toWe used cash in operating activities of $15.5 million in the six month period ended July 31, 1999 versus cash used in operating activities of $5.3 million in the six month period ended July 31, 1998. This change was driven by decreased net income, a seasonal increase in trade accounts receivable balances and the assumption and subsequent payment of ordinary course liabilities resulting from the DanielsAcquisition whichPrinting and Alternatives Communications acquisitions. Net cash used in investing activities wasfinanced through excess operating$61.6 million and $12.6 million for the six month periods ended July 31, 1999 and 1998, respectively. Significant uses of cashand our revolving credit agreement. Consideration paidin investing activities for the current six month period included $54.6 million of cash used for the DanielsAcquisitionPrinting and Alternatives Communications acquisitions and capital expenditures of approximately $5.1 million. Consideration for the Daniels Printing acquisition included approximately$44$44.0 million in cash, assumption and payment of existing line of credit obligations totaling approximately $5.6 million and the assumption of certain ordinary course liabilities of $7.7 million.We plan to refinance amounts borrowed under our revolving credit agreementConsideration for theDaniels Acquisition to term debt during 1999. Offsetting the net decrease in working capital was an increase in trade receivable and work-in-process balances totalingAlternatives Communications acquisition included approximately$50 million. We used cash in operating activities of $30.4$2.6 million inthe first quartercash, a promissory note offiscal year 2000 compared to net cash used in operating activities$0.8 million, payment of$4.6an existing line of credit obligations of $2.1 millionin the first quarterand assumption offiscal year 1999. This change is driven by an increase in trade receivables, work-in-process inventories and the assumption and subsequent payment ofcertain ordinary course liabilitiesresulting from the Daniels Acquisition. Net cash used in investing activities was $54.3 million and $5.2 million for the quarters ended April 30, 1999 and 1998, respectively. Significant useofcash in investing activities for the current quarter included $49.6 million for the Daniels Acquisition and capital expenditures of approximately $2.8$1.9 million. Net cash provided by financing activities was$65.3$64.6 million compared to$8.4$19.0 million for thequarterssix month periods endedApril 30,July 31, 1999 and 1998, respectively. This changeis primarily the result ofresulted from financing a significant portion of the DanielsAcquisition. YEARPrinting and Alternatives Communications acquisitions with our revolving credit facility.Year 2000
READINESSReadinessMany older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, those programs could cause date-related transaction failures. We have a Year 2000 project underway that addresses our internal business systems including software, hardware and firmware as well as external business partners, supply chains, and customers. Our plan includes the following steps:
ASSESSMENT.
-
- Assessment. We have identified and prioritized systems and individual components of systems that contain potentially date-sensitive computer codes.
10REMEDIATION.-
- Remediation. We are making decisions on how to make systems and processes Year 2000-ready, then proceeding to make the necessary changes.
THIRD-PARTY VENDORS.-
- Third-Party Vendors. We have surveyed
thefor Year 2000 readinessof significantour material third-party vendors, including external providers of softwareanand hardware products, as well as print producers.CONFIGURATION MANAGEMENT.-
- Configuration Management. We have tracked source code components of our business applications and changes to those components to manage the remediation process.
VALIDATION/TESTING.-
- Validation/Testing. We have substantially completed testing of data and have reviewed results to determine that errors were not introduced during the
conversionremediation process.CONTINGENCY PLANNING.-
- Contingency Planning. We
are formulatinghave formulated contingency plans that address the continuum from minor administrative interruptions to failure of mission critical processes to include alternate material and services suppliers where applicable. This plan includes a staffed "command center" that will be activated in December 1999 and stay active as long as required into January 2000.Our project plan includes initial testing and remediation which was begun last year and continued into the
firstfourth quarter ofourthe fiscal yearending January 31, 2000. The Companyended 1999. We also completed the surveying of key suppliers in the fourth quarter of fiscal 1999.The Company is currentlyOur mission critical accounting, job control, composition and EDGAR filing systems have been tested, remediated and were re-installed in
the process of developing contingency plans, as necessary, with the initial plan to be completed and distributed bya Year 2000 ready mode on or before July 31, 1999.We plan to haveThere are some ancillary systems still in thebalance of our mission-critical internal systems and electronic data links readyremediation process that are scheduled for completion by October31, 1999,1, 1999. The Managed Communications Programs' accounting andresolve any supplier problems.fulfillment system is in final testing and scheduled for re-installation in October 1999. We have surveyed our major utility companies and landlords at our facilities and have received most response statements. We are in the process of analyzing those statements and following up, where needed for clarity.A master project plan has been developed and a Steering Committee, chartered by the Board of Directors, meets regularly to monitor the plan and address issues. The project has progressed
through the system assessment stage and iswell into the final stages of remediationstagewhere programming changes are being made to major business and production systems. We believe that the project is currently on schedule.We estimate that the total cost to identify and remediate Year 2000 problems is approximately
$3.6$4.2 million. Approximately$2.0$2.8 million of these costs have been incurred as ofApril 30,July 31, 1999. These costs are expensed as incurred. These costsareprimarily relate to the purchase of a new payroll system, consultant and payroll-related costs for our information technology group and some computer hardware and software package upgrade purchase costs. Such costs do not include normal system upgrades and replacements.Detailed system-by-system status for major systems is available on our web site http:/www.merrillcorp.com for those interest parties.We, of course, do not have control over many Year 2000 problems. The nature of our society and the interconnected systems of government agencies, utilities, businesses and even individuals can affect our ability to provide goods and services to our customers, and by extension could also affect our financial position. We are making every effort to evaluate, correct and test potential problem areas, but ultimately, the resolutions of Year 2000 questions by other entities in our network of relationships could influence us significantly.
11ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk.We regularly invest excess operating cash in overnight repurchase agreements that are subject to changes in short-term interest rates. Accordingly, we believe that the market risk arising from
itsour holding of these financial instruments is minimal.12
PART
II.--OTHERII.OTHER INFORMATIONITEMItem 1. Legal Proceedings
Plaintiffs have filed two lawsuits in Minnesota state court on behalf of our shareholders. The lawsuits allege that our board of directors breached their fiduciary duties to our shareholders in approving the merger, and that our shareholders will not receive adequate compensation for their shares of Merrill common stock pursuant to the merger agreement. The plaintiffs seek to enjoin or rescind the merger, or to recover compensatory damages if the merger is closed and not rescinded. We believe these lawsuits are without merit and intend to defend them vigorously. We do not know of any other pending legal, governmental, administrative or other matters that would materially affect our business or properties.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Our annual meeting of shareholders was held on June 2, 1999.
(b) The following matters were submitted to a vote of security holders:
Proposal 1Election of Directors
To elect nine directors to terms expiring in calendar year 2000.
Directors Votes For Votes Withheld Rick R. Atterbury 12,780,910 85,009 James R. Campbell 12,781,010 84,909 John W. Castro 12,781,010 84,909 Ronald N. Hoge 12,781,010 84,909 Frederick W. Kanner 12,781,010 84,909 Richard G. Lareau 12,543,410 322,509 Paul G. Miller 12,780,010 85,909 Michael S. Scott Morton 12,781,010 84,909 Robert F. Nienhouse 12,781,010 84,909 Item 6.
EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
A Form
8-K,8-K/A dated April 14, 1999, was filed during thefirstsecond quarterof the fiscal yearendedJanuaryJuly 31,20001999 related to the acquisition of substantially all operating assets and assumption of certain liabilities of Daniels Printing, Limited Partnership.13A Form 8-K dated July 20, 1999, was filed during the second quarter ended July 31, 1999 related to the agreement and plan of merger between our company and Viking Merger Sub, Inc.
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.
(REGISTRANT) MERRILL CORPORATION BY (SIGNATURE) /s//s/ John W. Castro (NAME(NAME AND TITLE) John W. Castro, President and Chief Executive Officer (DATE) JuneSeptember 14, 1999
BY (SIGNATURE)
/s/ Kay A. Barber(NAME(NAME AND TITLE) Kay A. Barber, Chief Financial Officer (DATE) JuneSeptember 14, 1999 14