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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 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 OCTOBER 31, 1996
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
MERRILL CORPORATION
(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 Code)
Registrant's telephone number, including area code: 612-646-4501
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 December 9, 1996 was 7,924,056.
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PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following financial information:
Consolidated Balance Sheets as of October 31, 1996 and January 31,
1996.
Consolidated Statements of Operations for the three-month and
nine-month periods ended October 31, 1996 and 1995.
Consolidated Statements of Cash Flows for the nine-month periods
ended October 31, 1996 and 1995.
Notes to Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
2
MERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
OCTOBER 31, JANUARY 31,
1996 1996
----------- -----------
(UNAUDITED)
Current assets
Cash and cash equivalents........................................... $ 2,659 $ 12,074
Trade receivables, less allowance for doubtful accounts of $5,457
and $3,545, respectively........................................... 80,498 48,566
Work in process inventories......................................... 33,034 10,898
Other inventories................................................... 5,955 5,235
Other current assets................................................ 8,040 2,463
----------- -----------
Total current assets.............................................. 130,186 79,236
Property, plant and equipment, net.................................... 35,358 31,681
Goodwill, net......................................................... 34,556 10,528
Other assets, net..................................................... 5,225 4,076
----------- -----------
Total assets...................................................... $205,325 $ 125,521
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable, bank.................................................. $ 17,750 $ 6,000
Current maturities of long-term debt................................ 645 770
Current maturities of capital lease obligations..................... 492 538
Accounts payable.................................................... 21,809 17,598
Accrued expenses.................................................... 24,354 14,951
----------- -----------
Total current liabilities......................................... 65,050 39,857
Long-term debt, net of current maturities............................. 41,380 4,525
Capital lease obligations, net of current maturities.................. 1,921 1,929
Other liabilities..................................................... 5,428 1,476
----------- -----------
Total liabilities................................................. 113,779 47,787
----------- -----------
Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized;
7,920,033 shares and 7,855,783 shares, respectively, issued and
outstanding........................................................ 79 78
Undesignated stock: 500,000 shares authorized; no shares issued.....
Additional paid-in capital.......................................... 17,552 16,324
Retained earnings................................................... 73,915 61,332
----------- -----------
Total shareholders' equity........................................ 91,546 77,734
----------- -----------
Total liabilities and shareholders' equity........................ $205,325 $ 125,521
----------- -----------
----------- -----------
The accompanying notes are an integral part
of the consolidated financial statements.
3
MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues.............................................................. $ 93,776 $ 62,475 $ 252,545 $ 182,610
Cost of revenues...................................................... 61,503 41,489 162,411 124,120
--------- --------- --------- ---------
Gross profit........................................................ 32,273 20,986 90,134 58,490
Selling, general and administrative expenses.......................... 23,296 15,339 63,904 44,310
--------- --------- --------- ---------
Operating income.................................................... 8,977 5,647 26,230 14,180
Interest expense...................................................... (1,402) (315) (2,807) (761)
Other income (expense), net........................................... 304 (7) 529 309
--------- --------- --------- ---------
Income before provision for income taxes............................ 7,879 5,325 23,952 13,728
Provision for income taxes............................................ 3,502 2,290 10,659 5,903
--------- --------- --------- ---------
Net income.......................................................... $ 4,377 $ 3,035 $ 13,293 $ 7,825
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and common equivalent share:
Primary............................................................. $ .53 $ .38 $1.64 $ .98
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted....................................................... $ .53 $ .38 $1.62 $ .98
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends per common share............................................ $ .03 $ .03 $ .09 $ .09
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and common equivalent shares
outstanding:
Primary............................................................. 8,182,500 7,972,414 8,108,463 7,947,833
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted....................................................... 8,227,714 7,972,305 8,183,428 7,953,570
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part
of the consolidated financial statements.
4
MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE-MONTHS ENDED
OCTOBER 31
-------------------
1996 1995
--------- --------
Operating activities:
Net income.......................................................... $ 13,293 $ 7,825
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization..................................... 7,611 7,240
Amortization of intangibles assets................................ 1,719 821
Provision for losses on trade receivables......................... 2,611 1,158
Change in deferred compensation................................... (354) 490
Changes in operating assets and liabilities:
Trade receivables............................................... (16,021) (14,517)
Work in process inventories..................................... (18,091) (4,326)
Other inventories............................................... 814 (1,207)
Other current assets............................................ 731 249
Accounts payable................................................ (2,297) 394
Accrued expenses................................................ 5,473 756
Accrued and deferred income taxes............................... (3,784) (2,040)
--------- --------
Net cash used in operating activities......................... (8,295) (3,157)
--------- --------
Investing activities:
Business acquisitions, net of cash acquired......................... (26,896)
Purchase of property, plant and equipment........................... (6,149) (11,329)
Other, net.......................................................... (937) (943)
--------- --------
Net cash used in investing activities......................... (33,982) (12,272)
--------- --------
Financing activities:
Borrowings on note payable, bank.................................... 120,200 36,300
Repayments on note payable, bank.................................... (108,450) (28,000)
Proceeds from issuance of long-term debt............................ 35,000
Principal payments on long-term debt and capital lease
obligations........................................................ (14,407) (882)
Dividends paid...................................................... (710) (696)
Tax benefit realized upon exercise of stock options................. 240 1,241
Other equity transactions, net...................................... 989 359
--------- --------
Net cash provided by financing activities..................... 32,862 8,322
--------- --------
Decrease in cash and cash equivalents................................. (9,415) (7,107)
Cash and cash equivalents, beginning of period........................ 12,074 9,967
--------- --------
Cash and cash equivalents, end of period.............................. $ 2,659 $ 2,860
--------- --------
--------- --------
The accompanying notes are an integral part
of the consolidated financial statements.
5
MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated financial statements as of October 31, 1996 and for the
periods ended October 31, 1996 and 1995 have been prepared by the Company,
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 the Company
considers 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. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report on Form 10-K.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenue and expenses during the reported periods. Actual results could differ
from those estimates. The most significant areas which require the use of
management's estimates relate to the determination of the allowance for
uncollectible trade accounts receivable, sales credits and reserves for
unbillable inventory.
2. BUSINESS ACQUISITIONS
On April 15, 1996, the Company purchased substantially all of the operating
assets and assumed certain liabilities of The Corporate Printing Company, Inc.
and Affiliated Group (CPC) for approximately $22.6 million in cash. The purchase
price is subject to reductions equal to the amount that certain liabilities, as
determined in the agreement, of CPC as of January 31, 1996, exceed $10 million,
and by the amount that CPC's book value of assets as of January 31, 1996, less
liabilities assumed by the Company is less than $13.2 million. The purchase
price is also subject to reductions for the collection of certain accounts
receivable balances, net losses of CPC for the period January 1, 1996 through
April 15, 1996 and expenses incurred with closing certain foreign offices of
CPC. The purchase price is subject to increase by 11% of CPC's affiliated
Subchapter S corporations' net income for the period February 1, 1996 through
April 15, 1996. The Company did not purchase any assets relating to CPC's
pressroom and shipping businesses. The agreement calls for additional contingent
consideration, not to exceed $12 million, based on increases in the average
stock price, as defined in the agreement, of the Company's common stock through
April 15, 2001. The Company also entered into a five-year non-compete agreement
with CPC's principal shareholder that requires payments totalling $3.4 million
through April 15, 2001. The principal shareholder is also entitled to an
additional $500,000 annually, through March 31, 2001, if the Company maintains
certain business of a specified customer. The acquisition has been accounted for
as a purchase. The excess of the purchase price over the estimated fair values
of the net tangible and intangible identifiable assets acquired, which is
preliminary as of October 31, 1996, approximated $19.3 million and is being
amortized using the straight-line method over 15 years.
On March 29, 1996, the Company purchased all of the outstanding common stock
of FMC Resource Management Corporation for $5.4 million in cash and a promissory
note for $2.0 million. The agreement calls for additional contingent
consideration, not to exceed $4 million, based on annual gross profits through
January 31, 2001, as defined in the agreement. The acquisition has been
accounted for as a purchase. The excess of the purchase price over the estimated
fair values of the net tangible and intangible identifiable assets acquired,
which is preliminary as of October 31, 1996, approximated $6.0 million and is
being amortized using the straight-line method over 15 years.
6
MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
2. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma (unaudited) results for the three-month and nine-month periods
ended October 31, 1995 as though the acquisitions had been effective at February
1, 1995 are as follows:
THREE-MONTHS NINE-MONTHS
ENDED ENDED
OCTOBER 31, 1995 OCTOBER 31, 1995
------------------ ----------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues................................ $79,044 $237,901
-------- ----------------
-------- ----------------
Net income.............................. $ 2,510 $ 6,242
-------- ----------------
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Net income per common and common
equivalent share....................... $ 0.31 $ 0.78
-------- ----------------
-------- ----------------
3. FINANCIAL AGREEMENT
On October 25, 1996, the Company privately placed $35 million of Senior
Notes (the Notes). The Notes, which bear interest at 7.463%, require semi-annual
interest payments through October 25, 1999, at which time, semi-annual principal
and interest payments are required through October 25, 2006. The Notes include
various covenants, including the maintenance of certain financial ratios and
limitations on the amount of certain transactions including the payment of
dividends.
In conjunction with the closing of the Notes, the amount available under the
Company's revolving credit agreement was reduced from $60 million to $25
million. On November 25, 1996, the Company replaced its existing revolving
credit agreement with a $40 million revolving credit agreement with a group of
banks which expires on November 29, 1999. Under the terms of the new agreement,
the Company has the option to borrow at one of the bank's reference rate, at
1.0% above the London Interbank Offered Rate or at 1.0% above a certificate of
deposit based rate. The Company is required to pay a commitment fee of 0.25% per
annum on the unused portion of the line. The new agreement includes various
covenants, including the maintenance of minimum tangible net worth and
limitations on the amounts of certain transactions including the payments of
dividends.
4. SHAREHOLDERS' EQUITY
In May 1996, shareholders of the Company ratified the Company's 1996
Non-Employee Director Plan (the Plan) whereby 200,000 shares of common stock are
reserved for granting of nonstatutory options and awarding common shares as
partial payment to non-employee directors who serve on the the Company's Board
of Directors. Nonstatutory stock options issued under the Plan are granted at an
exercise price not less than 100% of the fair market value of the Company's
common stock on the date of grant. Compensation expense is recorded when common
stock is awarded as partial payment for the director's annual retainer in an
amount approximately equal to the fair market value of the Company's common
stock on the date of grant. As of October 31, 1996, nonstatutory options for
18,000 shares and 1,750 shares of common stock were granted.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations, constitute 'forward-looking' statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
'forward-looking' statements involve known and unknown risks, uncertainties, or
achievements of the Company which 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, the effect of economic and financial market
conditions, government security reporting regulations, paper costs and the
integration and performance of recent acquisitions.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to revenues of
certain items in the Company's consolidated statements of operations for the
three-month and nine-month periods ended October 31, 1996 and 1995, and the
percentage change in the dollar value of such items between the periods.
THREE-MONTHS ENDED OCTOBER 31, NINE-MONTHS ENDED OCTOBER 31,
-------------------------------- --------------------------------
PERCENTAGE PERCENTAGE
INCREASE INCREASE
PERCENTAGE (DECREASE) PERCENTAGE (DECREASE)
OF REVENUES ---------- OF REVENUES ----------
----------------- 1996 VS. ----------------- 1996 VS.
1996 1995 1995 1996 1995 1995
------ ------ ---------- ------ ------ ----------
Revenues
Financial.................................. 40.4% 42.3% 43% 37.7% 33.9% 54%
Corporate.................................. 25.1 24.1 57 28.9 31.3 28
Commercial and Other....................... 23.3 21.9 60 21.9 22.0 37
Document Management Services............... 11.2 11.7 43 11.5 12.8 24
------ ------ ------ ------
Total revenues........................... 100.0 100.0 50 100.0 100.0 38
Cost of revenues............................. 65.6 66.4 48 64.3 68.0 31
------ ------ ------ ------
Gross profit............................. 34.4 33.6 54 35.7 32.0 54
Selling, general and administrative
expenses.................................... 24.8 24.6 52 25.3 24.3 44
------ ------ ------ ------
Operating income......................... 9.6 9.0 59 10.4 7.7 25
Interest expense............................. (1.5) (0.5) 345 (1.1) (0.4) 269
Other income................................. .3 -- -- .2 .2 71
------ ------ ------ ------
Income before income taxes............... 8.4 8.5 48 9.5 7.5 74
Provision for income taxes................... 3.7 3.7 53 4.2 3.2 81
------ ------ ------ ------
Net income............................... 4.7% 4.8% 44 5.3% 4.3% 70
------ ------ ------ ------
------ ------ ------ ------
REVENUES. Revenues for the third quarter of fiscal year 1997 and the
nine-month period ended October 31, 1996 increased 50% and 38% respectively,
when compared to the corresponding periods during fiscal year 1996. These
increases reflect general growth in all of the Company's revenue categories and
revenues generated from the fiscal year 1997 acquisitions of The Corporate
Printing Company (CPC) and FMC Resource Management Corporation (FMC) operations.
Financial revenue increased 43% for the current quarter and 54% for the current
nine-month period when compared to the same periods a year ago. The increase in
Financial revenue was driven by the fourth consecutive quarter of strong
financial market activity and additional revenues generated by CPC operations.
The increase in Corporate revenue of 57% for the current quarter and 28% for the
nine-month period ended October 31, 1996, when compared to the same periods
during fiscal year 1996, reflect strong Fund activity and continued demand for
EDGAR services. Commercial and Other revenue increased 60% and 37% for the
current quarter and nine-month period respectively, when compared to
corresponding periods during fiscal year 1996. This grow is attributed to
increased revenues from election-
8
related printing activities and the inclusion of seven months of revenues
generated by FMC. Document Management Services revenue increased 43% and 24% for
the current quarter and nine-month period, respectively, when compared to the
same periods a year ago reflecting strong growth in revenues from document
management center services.
GROSS PROFIT. Gross profit margins for the current third quarter
approximated gross profit margins for the same period one year ago which
reflected a similar mix of business for both periods. Gross profit margins for
the current nine-month period exceeded gross profit margins for the same period
in fiscal year 1996 which is attributable to strong Financial category activity
during the entire current nine-month period which led to higher margin work mix
and increased utilization of the Company's operating resources.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, as a percent of revenue remained relatively stable for
the current quarter when compared to the same period a year ago. Selling,
general and administrative expenses increased, as a percent of revenue, during
the current nine-month period compared to the nine-month period in fiscal year
1996. This increase is attributed to integration costs associated with the CPC
and FMC acquisitions, which occurred earlier in fiscal year 1997, and the
Company's continued focus on selling and marketing activities.
PROVISION FOR INCOME TAXES. The effective income tax rate was 44.5% during
the current quarter and nine-month periods. This compares to an effective income
tax rate of 43.0% for the same periods during fiscal year 1996. The increase in
the effective rate is a result of increased non-deductible business
entertainment expenses being incurred in conjunction with increased Financial
category revenues. The tax rate for the current nine-month period represents the
estimated effective tax rate for fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at October 31, 1996 increased to $65.1 million from $39.4
million at January 31, 1996 which reflects the strong operating results the
Company has experienced during the past nine months. Increased revenues during
the nine month period and continued demand for Company products and services
have resulted in increases in October 31, 1996 accounts receivable and work-in-
process inventory balances of $31.9 million and $26.5 million, respectively,
compared to corresponding balances at January 31, 1996. During the third
quarter, the Company completed its long-term financing through a private
placement of $35 million of unsecured senior notes. The notes mature in 2006 and
bear an annual interest rate of 7.463%. Proceeds from the private placement were
used to pay-down acquisition related borrowings under the Company's revolving
credit agreement. Subsequent to October 31, 1996, the Company replaced its
revolving credit agreement with a $40 million revolving credit agreement which
expires on November 29, 1999. Capital expenditures for the nine-month period
ended October 31, 1996 approximated $6.1 million and were primarily related to
reprographic and computer based production equipment. Cash and cash equivalents
decreased by approximately $9.4 million during the nine-month period ended
October 31, 1996.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 "Accounting for Stock-Based Compensation." This statement established
financial accounting and reporting standards for stock-based employee
compensation plans. The Company intends to follow the option that permits
companies to apply current accounting standards for stock-based employee
compensation. Effective with fiscal year-end 1997 reporting, the Company will
disclose pro forma net income and net income per share amounts as if Statement
No. 123 were applied.
9
PART II. -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Note Purchase Agreement, dated October 25, 1996
10.2 Credit Agreement, dated November 25, 1996
11. Schedule of Computation of Per Share Earnings
(b) Reports on Form 8-K
None
10
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/ John W. Castro
(NAME AND TITLE) John W. Castro, President and Chief Executive Officer
(DATE) December 12, 1996
BY (SIGNATURE) /s/ Kay A. Barber
(NAME AND TITLE) Kay A. Barber, Chief Financial Officer
(DATE) December 12, 1996
11
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- --------- ---------------------------------
10.1 Note Purchase Agreement, dated October 25, 1996...................... Filed herewith electronically
10.2 Credit Agreement, dated November 25, 1996............................ Filed herewith electronically
11. Schedule of Computation of Per Share Earnings........................ Filed herewith electronically
27. Financial Data Schedules............................................. Filed herewith electronically