SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 8, 1999
MERRILL CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 0-14082 41-0946258 (State or other jurisdiction (Commission File Number) (I.R.S. Employer of Incorporation) Identification No.) One Merrill Circle, St. Paul, Minnesota 55108
(Address of principal executive offices) (Zip code)Registrant's telephone number, including area code: (651) 646-4501
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.
MERRILL CORPORATION (Registrant) |
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Date: November 8, 1999 |
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By: |
/s/ KAY A. BARBER Kay A. Barber Vice President of Finance, Chief Financial Officer and Treasurer |
Item 5. Other Events
THIRD QUARTER OUTLOOK
Estimated operating results for the fiscal quarter ending October 31, 1999 are strong. In addition, net debt was reduced by over $15 million between July 31, 1999 and November 2, 1999. The following table sets forth our revenue and the number of composition pages processed for the two months ended September 30, 1998 and 1999, respectively:
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Two Months Ended September 30, |
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1998 |
1999 |
Growth |
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Revenue (in millions) | $ | 70.3 | $ | 91.6 | 30.4 | % | |||
Composition pages (1) | 244,748 | 294,330 | 20.3 |
- (1)
- Represents number of composition pages processed during the periods indicated for our Financial Document Services business unit.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data of our company are based on our historical consolidated financial statements adjusted to give effect to the transactions described below and our proposed merger with Viking Merger Sub, Inc., the related merger financing and the application of the proceeds from the merger financing.
The unaudited pro forma consolidated balance sheet gives effect to the merger, the related merger financing and the application of the proceeds thereof, as if it had occurred on July 31, 1999. The unaudited pro forma consolidated statement of operations for the year ended January 31, 1999 and the six month period ended July 31, 1999 give effect to the following as if each had occurred at the beginning of the period presented:
- (1)
- the
merger, the merger financing and the application of the proceeds thereof;
- (2)
- the
acquisition of Daniels Printing, Limited Partnership ("Daniels"), which was completed on April 14, 1999;
- (3)
- the
acquisition of Alternatives Communications, Inc. ("Alternatives"), which was completed on June 14, 1999;
- (4)
- the
elimination of Merrill Training & Technology, Inc.'s historical operating results, as management has effectively shut down Merrill Training & Technology, Inc.'s operations as of
the date hereof; and
- (5)
- in the case of the year ended January 31, 1999, the acquisition of Executech, Inc. and an affiliated company, World Wide Scan Services, LLC ("Executech"), which was completed on June 11, 1998.
The pro forma adjustments are described in the accompanying notes to the financial statements and were applied to the respective historical consolidated financial statements of our company to reflect and account for the merger as a recapitalization consisting of an equity investment by investors, debt financing and the redemption of shares in the merger. As a recapitalization, the historical basis of our assets and liabilities will be carried forward to the surviving company with the aggregate cost of repurchasing our shares accounted for as a reduction of shareholders' equity. Accordingly, the historical basis of our assets and liabilities has not been impacted by the merger.
The unaudited pro forma consolidated financial data are based upon estimates, available information and certain assumptions that management believes are reasonable under the circumstances and may be revised as additional information becomes available. The unaudited pro forma consolidated financial data should be read in conjunction with our historical financial statements, including the notes thereto, our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information appearing in our 1999 Annual Report and in our Form 10-Q for the quarter ended July 31, 1999. The unaudited pro forma consolidated financial data do not purport to represent what our actual results or financial position would have been if the merger and the other transactions described above had actually occurred on the dates indicated and are not necessarily representative of our results for any future period.
MERRILL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
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As of July 31, 1999 |
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Historical |
Merger Adjustments |
Pro Forma |
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(dollars in thousands) |
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ASSETS | ||||||||||
Current assets |
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Cash and cash equivalents | $ | 11,001 | $ | (11,001 | )(1) | $ | | |||
Trade receivables, net | 145,796 | | 145,796 | |||||||
Work-in-process inventories | 16,848 | | 16,848 | |||||||
Other inventories | 8,785 | | 8,785 | |||||||
Other current assets | 15,369 | 11,489 | (2) | 26,858 | ||||||
Total current assets | 197,799 | 488 | 198,287 | |||||||
Property, plant and equipment, net | 58,122 | | 58,122 | |||||||
Goodwill, net | 78,296 | | 78,296 | |||||||
Other assets | 12,944 | 10,238 | (3) | 31,808 | ||||||
9,020 | (1) | |||||||||
(394 | )(4) | |||||||||
Total assets | $ | 347,161 | $ | 19,352 | $ | 366,513 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |
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Current liabilities |
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Notes payable to banks | $ | 68,000 | $ | (68,000 | )(1) | $ | | |||
Current maturities of long-term debt | 960 | (210 | )(1) | 750 | ||||||
Current maturities of capital lease obligations | 204 | | 204 | |||||||
Accounts payable | 35,600 | | 35,600 | |||||||
Accrued expenses | 37,993 | (835 | )(1) | 37,158 | ||||||
Total current liabilities | 142,757 | (69,045 | ) | 73,712 | ||||||
Revolving credit facility |
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20,559 |
(1) |
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20,559 |
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Term loans | | 205,000 | (1) | 205,000 | ||||||
Notes | | 150,000 | (1) | 150,000 | ||||||
Long term debt, net of current maturities | 38,110 | (38,110 | )(1) | | ||||||
Capital lease obligations, net of current maturities | 1,292 | | 1,292 | |||||||
Other liabilities | 10,266 | | 10,266 | |||||||
Total liabilities | 192,425 | 268,404 | 460,829 | |||||||
Preferred stock | | 35,265 | (1) | 35,265 | ||||||
Shareholders' equity (deficit) | 154,736 | (284,317 | )(5) | (129,581 | ) | |||||
Total liabilities and shareholders' equity (deficit) | $ | 347,161 | $ | 19,352 | $ | 366,513 | ||||
MERRILL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
- (1)
- Sets
forth the estimated sources and uses of funds for the merger and the related financings:
(dollars in thousands)Sources: Existing cash $ 11,001 Revolving credit facility (a) 20,559 Term loans 205,000 Notes 150,000 Preferred stock and warrants (b) 40,000 Management rollover (c) 21,540 Common stock purchased by DLJMB funds 70,683 Total Sources $ 518,783 Uses: Cash purchase of outstanding shares and options $ 359,236 Management rollover 21,540 Repayment of existing debt 106,320 Fees and expenses 23,888 Funding of other obligations (d) 7,799 Total Uses $ 518,783
- (a)
- Net
debt was reduced by over $15 million between July 31, 1999 and November 2, 1999. Borrowings under the revolving credit facility will be reduced by
reductions in net debt at closing.
- (b)
- In
connection with the merger, certain affiliates of DLJMB and institutional investors will purchase preferred stock and warrants for total consideration of $40.0 million.
For accounting purposes, a $4.7 million value has been ascribed to the warrants and has been classified as a component of shareholders' equity.
- (c)
- Messrs. Castro
and Atterbury will invest, through the retention of existing shares, $21.5 million of common equity for an approximately 23.4% equity interest in our
company.
- (d)
- Reflects
the funding of deferred compensation plans and accrued interest net of repayments of $2.1 million from employee loans.
- (2)
- Reflects
tax benefit of expense adjustments at the statutory tax rate of 38.9% as shown below:
(dollars in thousands)
Option cash proceeds $ 25,740 Non-capitalized transaction fees and expenses 13,650 Less: estimated non-deductible portion (10,250 ) Deductible non-capitalized transaction fees and expenses 3,400 Write-off of existing deferred debt issuance costs 394 Total deductible expenses 29,534 Statutory tax rate 38.9 % Tax benefit $ 11,489 - (3)
- Represents
the portion of estimated transaction fees and expenses attributable to the new credit facility and the notes.
- (4)
- Reflects
the write-off of existing deferred debt issuance costs.
- (5)
- Represents the change in shareholders' equity (deficit) as a result of the merger, including the merger financing and the application of the proceeds:
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(dollars in thousands) |
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Cash to purchase shares (a) | $ | (333,496 | ) | |
Option cash proceeds (b) | (25,740 | ) | ||
Non-capitalized transaction fees and expenses (c) | (13,650 | ) | ||
Write-off of existing deferred debt issuance costs | (394 | ) | ||
Common stock purchased by DLJMB funds | 70,683 | |||
Value ascribed to warrants | 4,735 | |||
Receivable related to management loans | 2,056 | |||
Tax benefit of expense adjustments | 11,489 | |||
Total change in stockholders' equity (deficit) | $ | (284,317 | ) | |
- (a)
- Based
on the purchase of 15,158,929 shares at $22.00 per share.
- (b)
- Based
on the purchase of 3,021,118 options at an average purchase price of $8.52 (the difference between $22.00 and $13.48, the average exercise price of the options).
- (c)
- Represents
all non-capitalized transaction fees and expenses, including estimated legal, accounting, advisory and consulting fees of $10.3 million, $1.9 million of bridge finance
commitment fees and estimated debt prepayment fees of $1.5 million. The tax benefit of these expenses is included seperately in the table above.
MERRILL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended January 31, 1999
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Acquisitions |
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Company Historical |
Net Acqusition Adjustments |
Superstar Computing |
Merger Adjustments |
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Daniels |
Executech |
Alternatives |
Pro Forma |
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(dollars in thousands) |
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Revenue | $ | 509,543 | $ | 66,159 | $ | 2,367 | $ | 20,879 | $ | | $ | (1,524 | ) | $ | | $ | 597,424 | ||||||||
Cost of revenue | 330,632 | 49,081 | 1,122 | 15,802 | 569 | (1) | (1,227 | ) | | 394,854 | |||||||||||||||
(1,125 | )(2) | ||||||||||||||||||||||||
Gross profit | 178,911 | 17,078 | 1,245 | 5,077 | 556 | (297 | ) | | 202,570 | ||||||||||||||||
Selling, general and administrative expenses | 127,705 | 13,670 | 713 | 4,671 | 1,453 | (3) | (2,839 | ) | (667 | )(4) | 142,961 | ||||||||||||||
(1,981 | )(2) | 236 | (5) | ||||||||||||||||||||||
Operating income | 51,206 | 3,408 | 532 | 406 | 1,084 | 2,542 | 431 | 59,609 | |||||||||||||||||
Interest expense | 3,961 | 1,281 | | 270 | | | 35,996 | (6) | 41,508 | ||||||||||||||||
Other (income) expense, net | (426 | ) | 75 | (1 | ) | | | | | (352 | ) | ||||||||||||||
Income (loss) before provision for income taxes | 47,671 | 2,052 | 533 | 136 | 1,084 | 2,542 | (35,565 | ) | 18,453 | ||||||||||||||||
Provision for (benefit from) income taxes | 21,214 | | | | | | (11,528 | )(7) | 9,686 | ||||||||||||||||
Income (loss) from continuing operations | 26,457 | 2,052 | 533 | 136 | 1,084 | 2,542 | (24,037 | ) | 8,767 | ||||||||||||||||
Preferred stock dividends | | | | | | | 6,052 | (8) | 6,052 | ||||||||||||||||
Income (loss) from continuing operations available to common | $ | 26,457 | $ | 2,052 | $ | 533 | $ | 136 | $ | 1,084 | $ | 2,542 | $ | (30,089 | ) | $ | 2,715 | ||||||||
Other Data: | |||||||||||||||||||||||||
EBITDA (9) | $ | 71,069 | $ | 5,734 | $ | 550 | $ | 443 | $ | 3,106 | $ | 677 | $ | 367 | $ | 81,946 | |||||||||
Adjusted EBITDA (9) | | 85,064 | |||||||||||||||||||||||
Depreciation and amortization of intangibles | 19,863 | 2,326 | 18 | 37 | 2,022 | (1,865 | ) | (64 | ) | 22,337 | |||||||||||||||
Capital expenditures | 16,479 | 985 | 267 | 342 | | | | 18,073 | |||||||||||||||||
Cash interest expense | 3,961 | 40,232 | |||||||||||||||||||||||
Ratio of earnings to fixed charges | 7.8 | x | 1.4 | x |
MERRILL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the six month period ended July 31, 1999
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Acquisitions |
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Company Historical |
Net Acquisition Adjustments |
Superstar Computing |
Merger Adjustments |
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Daniels |
Alternatives |
Pro Forma |
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(dollars in thousands) |
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Revenue | $ | 298,073 | $ | 15,725 | $ | 6,837 | $ | | $ | (292 | ) | $ | | $ | 320,343 | |||||||
Cost of revenue | 193,962 | 10,622 | 4,954 | 116 | (1) | (178 | ) | 208,863 | ||||||||||||||
(613 | )(2) | | ||||||||||||||||||||
Gross profit | 104,111 | 5,103 | 1,883 | 497 | (114 | ) | | 111,480 | ||||||||||||||
Selling, general and administrative expenses | 76,009 | 2,814 | 2,295 | 326 | (3) | (226 | ) | (425 | )(4) | 80,064 | ||||||||||||
(852 | )(2) | 123 | (5) | |||||||||||||||||||
Merger costs |
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1,130 |
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(1,130 |
) |
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Operating income | 26,972 | 2,289 | (412 | ) | 1,023 | 112 | 1,432 | 31,416 | ||||||||||||||
Interest expense | 3,167 | 231 | 63 | 17,299 | (6) | 20,760 | ||||||||||||||||
Other expense, net |
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596 |
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37 |
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633 |
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Income (loss) before provision for income taxes | 23,209 | 2,021 | (475 | ) | 1,023 | 112 | (15,867 | ) | 10,023 | |||||||||||||
Provision for (benefit from) income taxes | 10,467 | | | | | (5,006 | )(7) | 5,461 | ||||||||||||||
Income (loss) from continuing operations | 12,742 | 2,021 | (475 | ) | 1,023 | 112 | (10,861 | ) | 4,562 | |||||||||||||
Preferred stock dividends | | | | | | 2,925 | (8) | 2,925 | ||||||||||||||
Income (loss) from continuing operations available to common | $ | 12,742 | $ | 2,021 | $ | (475 | ) | $ | 1,023 | $ | 112 | $ | (13,786 | ) | $ | 1,637 | ||||||
Other Data: | ||||||||||||||||||||||
EBITDA (9) | $ | 39,189 | $ | 2,694 | $ | (382 | ) | $ | 1,465 | $ | 100 | $ | 275 | $ | 43,341 | |||||||
Adjusted EBITDA (9) | | 44,223 | ||||||||||||||||||||
Depreciation and amortization of intangibles | 11,087 | 405 | 30 | 442 | (12 | ) | (27 | ) | 11,925 | |||||||||||||
Capital expenditures | 5,125 | 37 | 93 | | | | 5,255 | |||||||||||||||
Cash interest expense | 3,167 | 20,122 | ||||||||||||||||||||
Ratio of earnings to fixed charges | 5.9 | x | 1.4 | x |
MERRILL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
- (1)
- Reflects
additional depreciation and amortization expense resulting from fair value adjustments to property, plant and equipment attributable to the
Daniels and Executech acquisitions.
- (2)
- Reflects the elimination of historical operating costs in conjunction with the Daniels and Alternatives acquisitions.
|
Year Ended January 31, 1999 |
Six Months Ended July 31, 1999 |
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Daniels |
Alternatives |
Total |
Daniels |
Alternatives |
Total |
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(dollars in thousands) |
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Contractual executive compensation | $ | 867 | $ | 626 | $ | 1,493 | $ | 442 | $ | 202 | $ | 644 | ||||||
Services and facilities (a) | 713 | | 713 | 371 | | 371 | ||||||||||||
Reduced employee compensation and benefits |
900 | | 900 | 450 | | 450 | ||||||||||||
$ | 2,480 | $ | 626 | $ | 3,106 | $ | 1,263 | $ | 202 | $ | 1,465 | |||||||
- (a)
- Includes contractual reduction in purchasing costs and the elimination of redundant facilities and services.
- (3)
- Reflects the amortization of goodwill on a straight line basis.
|
Year Ended January 31, 1999 |
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Daniels |
Executech |
Alternatives |
Total |
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(dollars in thousands) |
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Goodwill | $ | 23,300 | $ | 2,682 | $ | 3,313 | ||||||
Amortization period in years | 20 | 15 | 15 | |||||||||
Annual goodwill amortization | $ | 1,165 | $ | 179 | $ | 221 | ||||||
Months to include in pro forma | 12 | 4.5 | 12 | |||||||||
Incremental pro forma amortization | $ | 1,165 | $ | 67 | $ | 221 | $ | 1,453 |
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Six Months Ended July 31, 1999 |
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Daniels |
Alternatives |
Total |
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(dollars in thousands) |
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Goodwill | $ | 23,300 | $ | 3,313 | |||||
Amortization period in years | 20 | 15 | |||||||
Annual goodwill amortization | $ | 1,165 | $ | 221 | |||||
Months to include in pro forma | 2.5 | 4.5 | |||||||
Incremental pro forma amortization | $ | 243 | $ | 83 | $ | 326 |
- (4)
- Reflects
the elimination of public company expenses associated with conducting an annual meeting, producing and distributing annual reports and
quarterly shareholder letters and board expenses.
- (5)
- Reflects
retainer fees for investment banking services provided by DLJ Securities Corporation of $300,000 annually and the elimination of historical
deferred financing costs of $64,000 for the year ended January 31, 1999 and $27,000 for the six months ended July 31, 1999.
- (6)
- Reflects the additional interest expense attributable to the merger financing.
|
Year Ended January 31, 1999 |
Six Months Ended July 31, 1999 |
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(dollars in thousands) |
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Increase in interest expense | |||||||
Revolving credit facility (a) | $ | 1,893 | $ | 947 | |||
Term loan A (a) | 5,987 | 2,993 | |||||
Term loan B (b) | 13,944 | 6,972 | |||||
Notes (c) | 18,000 | 9,000 | |||||
Commitment fees on undrawn revolving credit facility | 147 | 74 | |||||
Amortization of deferred financing costs | 1,276 | 638 | |||||
Total | 41,247 | 20,624 | |||||
Elimination of historical interest expense associated with repaid indebtedness | (5,251 | ) | (3,325 | ) | |||
Net increase in interest expense | $ | 35,996 | $ | 17,299 | |||
- (a)
- Interest
expense was calculated at an assumed interest rate of 9.21%.
- (b)
- Interest
expense was calculated at an assumed interest rate of 9.96%.
- (c)
- Interest expense was calculated at an assumed interest rate of 12.00%.
A one-eighth of one percent change in interest rates would impact interest expense for borrowings under the revolving credit facility and the term loans A and B, collectively, in the amount of approximately $282,000 for the year ended January 31, 1999 and $141,000 for the six months ended July 31, 1999.
- (7)
- Reflects
the income tax effect of all pro forma entries at the statutory tax rates.
- (8)
- Reflects
dividends on preferred stock issued in the merger ($40.0 million liquidation preference multiplied by a 14% compounded quarterly dividend
rate). For accounting purposes, a $4.7 million value has been ascribed to the warrants and has been classified as a component of shareholders' equity. The warrant value shall be amortized over
12 years. The amortization for the year ended January 31, 1999 would have been $151,000 and for the six months ended July 31, 1999 would have been $76,000.
- (9)
- "EBITDA" is earnings before interest, taxation, depreciation and amortization and non-recurring merger costs ($1.1 million in the six months ended July 31, 1999). EBITDA is a key financial measure but should not be construed as an alternative to operating income or cash flows from operating activities (as determined in accordance with generally accepted accounting principles). We believe that EBITDA is a useful supplement to net income and other income statement data in understanding cash flows generated from operations that are available for taxes, debt service and capital expenditures. However, our method of computation may not be comparable to similarly titled measures of other companies.
The following table sets forth a reconciliation of Pro Forma EBITDA to Adjusted EBITDA.
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Year Ended January 31, 1999 |
Six Months Ended July 31, 1999 |
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(dollars in thousands) |
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Pro Forma EBITDA | $ | 81,946 | $ | 43,341 | ||
Severance and outplacement costs (a) | 896 | | ||||
Acquisition costs (b) | 158 | 17 | ||||
Non-cash compensation (c) | 96 | | ||||
Expected cost savings (d) | 1,968 | 700 | ||||
Non-recurring legal and employment costs | | 165 | ||||
Adjusted EBITDA | $ | 85,064 | $ | 44,223 | ||
- (a)
- Represents
non-recurring severance and outplacement costs related primarily to implementation of work force reductions.
- (b)
- Represents
costs incurred for investigating potential acquistion targets.
- (c)
- Represents
non-cash compensation to a former shareholder in the form of forgiveness of debt owed to Daniels.
- (d)
- Represents
expected cost savings associated with the use of printing capacity acquired through the Daniels acquisition to print projects formerly vended to third-party local
printers.