- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1997 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 10, 1997 was 16,307,086. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I.--FINANCIAL INFORMATION PAGE(S) ----------- ITEM 1. FINANCIAL STATEMENTS Included herein is the following unaudited financial information: Consolidated Balance Sheets as of October 31, 1997 and January 31, 1997.............................. 3 Consolidated Statements of Operations for the three and nine-month periods ended October 31, 1997 and 1996................................................................................................ 4 Consolidated Statements of Cash Flows for the nine-month periods ended October 31, 1997 and 1996..... 5 Notes to Consolidated Financial Statements........................................................... 6-7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 8-9 2 MERRILL CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS OCTOBER 31, JANUARY 31, 1997 1997 ----------- ----------- (UNAUDITED) Current assets Cash and cash equivalents......................................... $ 2,781 $ 5,161 Trade receivables, less allowance for doubtful accounts of $8,601 and $6,027, respectively........................................ 105,077 81,733 Work-in-process inventories....................................... 20,715 24,958 Other inventories................................................. 5,931 4,878 Other current assets.............................................. 13,651 9,933 ----------- ----------- Total current assets............................................ 148,155 126,663 Property, plant and equipment, net.................................. 39,889 34,717 Goodwill, net....................................................... 42,844 34,030 Other assets, net................................................... 7,199 6,587 ----------- ----------- Total assets.................................................... $ 238,087 $ 201,997 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable, banks.............................................. $ 9,800 $ 5,950 Current maturities of long-term debt.............................. 655 645 Current maturities of capital lease obligations................... 260 307 Accounts payable.................................................. 24,811 20,387 Accrued expenses.................................................. 34,361 30,154 ----------- ----------- Total current liabilities....................................... 69,887 57,443 Long-term debt, net of current maturities........................... 40,725 40,880 Capital lease obligations, net of current maturities................ 1,687 1,849 Other liabilities................................................... 6,180 5,665 ----------- ----------- Total liabilities............................................... 118,479 105,837 ----------- ----------- Shareholders' equity Common stock, $.01 par value: 25,000,000 shares authorized; 16,307,086 shares and 15,865,048 shares, respectively, issued and outstanding................................................. 163 159 Undesignated stock: 500,000 shares authorized; no shares issued... Additional paid-in capital........................................ 22,256 17,778 Retained earnings................................................. 97,189 78,223 ----------- ----------- Total shareholders' equity...................................... 119,608 96,160 ----------- ----------- Total liabilities and shareholders' equity...................... $ 238,087 $ 201,997 ----------- ----------- ----------- ----------- 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 -------------------------- -------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Revenues................................................. $112,091 $93,776 $337,551 $252,545 Cost of revenues......................................... 72,717 61,503 213,526 162,411 ------------ ------------ ------------ ------------ Gross profit........................................... 39,374 32,273 124,025 90,134 Selling, general and administrative expenses............. 28,481 23,296 85,755 63,904 ------------ ------------ ------------ ------------ Operating income....................................... 10,893 8,977 38,270 26,230 Interest expense......................................... (1,153) (1,402) (3,283) (2,807) Other, net............................................... 351 304 449 529 ------------ ------------ ------------ ------------ Income before provision for income taxes............... 10,091 7,879 35,436 23,952 Provision for income taxes............................... 4,384 3,502 15,663 10,659 ------------ ------------ ------------ ------------ Net income............................................. $ 5,707 $ 4,377 $ 19,773 $ 13,293 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income per common and common equivalent share: Primary................................................ $.32 $ .27 $1.15 $ .82 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Fully diluted.......................................... $.32 $ .27 $1.14 $ .81 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Dividends per common share............................... $.02 $.015 $ .05 $.045 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding: Primary................................................ 17,744,637 16,365,000 17,169,934 16,216,926 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Fully diluted.......................................... 17,795,247 16,455,428 17,269,300 16,366,856 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 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 ----------------------- 1997 1996 ---------- ----------- Operating activities Net income.......................................................................... $ 19,773 $ 13,293 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization..................................................... 7,950 7,611 Amortization of intangibles....................................................... 3,052 1,719 Provision for losses on trade receivables......................................... 3,002 2,611 Deferred compensation............................................................. 1,139 384 Changes in operating assets and liabilities, net of effects from business acquisitions Trade receivables............................................................... (26,000) (16,021) Work-in-process inventories..................................................... 4,243 (18,091) Other inventories............................................................... (763) 814 Other current assets............................................................ (1,286) 731 Accounts payable................................................................ 3,005 (2,297) Accrued expenses................................................................ 4,978 5,473 Accrued and deferred income taxes............................................... (4,911) (3,784) ---------- ----------- Net cash provided by (used in) operating activities........................... 14,182 (7,557) ---------- ----------- Investing activities Business acquisitions, net of cash acquired......................................... (10,390) (26,896) Purchase of property, plant and equipment........................................... (12,716) (6,149) Other, net.......................................................................... (627) (1,675) ---------- ----------- Net cash used in investing activities......................................... (23,733) (34,720) ---------- ----------- Financing activities Borrowings on notes payable to banks................................................ 92,025 120,200 Repayments on notes payable to banks................................................ (88,175) (108,450) Proceeds from issuance of long-term debt............................................ 35,000 Principal payments on long-term debt and capital lease obligations.................. (354) (14,407) Repurchase of common stock.......................................................... (3,065) Dividends paid...................................................................... (807) (710) Exercise of stock options........................................................... 5,327 823 Tax benefit realized upon exercise of stock options................................. 2,141 240 Other, net.......................................................................... 79 166 ---------- ----------- Net cash provided by financing activities..................................... 7,171 32,862 ---------- ----------- Decrease in cash and cash equivalents................................................. (2,380) (9,415) Cash and cash equivalents, beginning of period........................................ 5,161 12,074 ---------- ----------- Cash and cash equivalents, end of period.............................................. $ 2,781 $ 2,659 ---------- ----------- ---------- ----------- 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, 1997, and for the periods ended October 31, 1997 and 1996, 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. The results of operations for any interim period are not necessarily indicative of results for the full year. 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 annual report on Form 10-K for the year ended January 31, 1997. 2. BUSINESS ACQUISITIONS On April 15, 1996, the Company completed the acquisition of substantially all of the operating assets and assumed certain liabilities of the Corporate Printing Company, Inc. and Affiliated Group (CPC). The Company did not purchase any assets relating to CPC's pressroom and shipping business. In accordance with the CPC purchase agreement, additional contingent purchase consideration in the amount of $8 million was paid in August 1997. On March 28, 1996, the Company completed the acquisition of all outstanding common stock of FMC Resource Management Corporation (FMC). Pro forma (unaudited) results for the nine-month period ended October 31, 1996, as though the CPC and FMC acquisitions had been effective on February 1, 1996, are as follows: NINE-MONTHS ENDED OCTOBER 31, 1996 ------------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Revenues.................................................................. $ 267,787 -------- -------- Net income................................................................ $ 12,592 -------- -------- Net income per share--primary............................................. $ 0.77 -------- -------- On September 30, 1997, the Company completed the acquisition of substantially all of the operating assets and assumed certain liabilities of Total Management Support Services, LLC for $1,000,000 cash and contingent consideration of up to $250,000. On February 21, 1997, the Company received substantially all operating assets and assumed certain liabilities of Roald Marth Learning Systems, Inc., doing business as Superstar Computing for $630,000. In addition, the agreement requires the Company to pay contingent cash consideration of up to $5 million, dependent on future performance of Superstar Computing, as determined by the purchase agreement. These acquisitions are not significant to the financial position or results of operations of the Company. 6 3. SHAREHOLDERS' EQUITY The Company repurchased 264,000 shares of its Common Stock for approximately $3.1 million during the first quarter of fiscal year 1998. In August 1997, the Company's Board of Directors approved a 2-for-1 split of the Company's Common Stock. The split was effected in the form of a 100% dividend of the Company's Common Stock on October 15, 1997, for each common share owned by shareholders of record at the close of business on September 30, 1997. All per share and number of share data have been retroactively restated to reflect the stock split. 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 total revenues of certain items in the Company's statements of operations for the three and nine-month periods ended October 31, 1997 and 1996, and the percentage change in such items between the corresponding periods. THREE-MONTHS NINE-MONTHS ENDED OCTOBER 31, ENDED OCTOBER 31, --------------------------------- --------------------------------- PERCENTAGE PERCENTAGE INCREASE INCREASE PERCENTAGE (DECREASE) PERCENTAGE (DECREASE) OF REVENUES ----------- OF REVENUES ----------- -------------------- 1997 VS. -------------------- 1997 VS. 1997 1996 1996 1997 1996 1996 --------- --------- ----------- --------- --------- ----------- Revenues Financial....................................... 37.3% 41.7% 7% 36.8% 38.3% 28% Corporate....................................... 32.8 23.8 64 34.1 28.3 61 Commercial and other............................ 18.7 23.3 (4) 18.0 21.9 10 Document management services.................... 11.2 11.2 20 11.1 11.5 29 --------- --------- --------- --------- Total revenues................................ 100.0 100.0 20 100.0 100.0 34 Cost of revenues.................................. 64.9 65.6 18 63.3 64.3 32 --------- --------- --------- --------- Gross profit.................................. 35.1 34.4 22 36.7 35.7 38 Selling, general and administrative expenses...... 25.4 24.8 22 25.4 25.3 34 --------- --------- --------- --------- Operating income.............................. 9.7 9.6 21 11.3 10.4 46 Interest expense.................................. (1.0) (1.5) (18) (1.0) (1.1) 17 Other, net........................................ 0.3 0.3 16 0.2 0.2 (15) --------- --------- --------- --------- Income before provision for income taxes...... 9.0 8.4 28 10.5 9.5 48 Provision for income taxes........................ 3.9 3.7 25 4.6 4.2 47 --------- --------- --------- --------- Net income.................................... 5.1% 4.7% 30 5.9% 5.3% 49 --------- --------- --------- --------- --------- --------- --------- --------- REVENUES Revenues for the third quarter of fiscal year 1998 and the nine-month period ended October 31, 1997, increased 20% and 34%, respectively, when compared to the corresponding periods in the previous year. Financial revenues increased 7% for the current quarter and 28% for the current nine-month period when compared to the same periods a year ago. The 7% growth for the current quarter reflects the slowdown of transactional revenue during the typical summer slow-down in the deal marketplace. The increased revenues reflect continued strong mergers and acquisition activity in financial market transactions during the first nine months of fiscal year 1998. The Company is also currently experiencing strong typesetting demand which is a leading indicator of continued strong volume. The nine-month period increase is also a result of the Corporate Printing Company (CPC) business, which was acquired in April 1996. The corporate revenue category increases of 64% and 61% for the current quarter and nine-month period, respectively, when compared to the same periods a year ago, are attributed to strong corporate compliance 8 work during the first nine months of fiscal year 1998, continued demand for EDGAR services and strong growth in investment company services work. The decrease of 4% in the commercial revenue category for the current quarter versus last year, is the result of the absence of ballot production business as fiscal 1998 is a non-election year. The increase in the commercial revenue category of 10% for the nine-month period was primarily the result of increased business from our managed communication programs. The nine-month period increase is also a result of the FMC Resource Management Corporation (FMC) business, which was acquired in March 1996. The document management services category for the current quarter and nine-month period increased 20% and 29%, respectively, when compared to the same periods in fiscal year 1997. Leading the growth was a 42% increase in document service center revenues for the current quarter. Two new document service centers were opened during the quarter. GROSS PROFIT Gross profit increased as a percentage of revenues for the current quarter as a result of an increase in corporate margins compared to the prior year period. The nine-month period gross profit increased as a percentage of revenues primarily as a result of strong margins in our corporate revenue category and strong activity levels generated by our financial and corporate revenue categories during fiscal year 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES During the current quarter and nine-month period, selling, general and administrative expenses increased as a percentage of revenues when compared to the same periods a year ago, as a result of our continued expansion of sales and marketing activities and provisions for incentive compensation. PROVISION FOR INCOME TAXES The effective income tax rate in the current quarter and nine-month period was 43.4% and 44.2%, respectively, compared to 44.4% and 44.5% for the third quarter and nine-month period ended October 31, 1996, respectively. The decrease in the effective income tax rate in the third quarter resulted from a decrease in non-deductible business and entertainment expenses as a percentage of taxable income. Significant differences between the effective income tax rate and federal statutory tax rate continue to be attributable to state income taxes, net of federal benefits and non-deductible business and entertainment expenses. LIQUIDITY AND CAPITAL RESOURCES Working capital at October 31, 1997, increased to $78.3 million, compared to $69.2 million at January 31, 1997. Strong sales activity continued during the first nine months of fiscal year 1998, resulting in an increase in the trade receivables balance, compared to the corresponding balance at January 31, 1997. Work-in-process inventories decreased at October 31, 1997, from January 31, 1997, reflecting the normal summer deal market activity discussed above. Capital expenditures for the nine-month period ended October 31, 1997, approximated $12.7 million and were principally for leasehold improvements and reprographic and computer based production equipment. Cash and cash equivalents decreased by approximately $2.4 million during the nine-month period ended October 31, 1997. 9 PART II.--OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11.1 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 15, 1997 BY (SIGNATURE) /s/ Kay A. Barber (NAME AND TITLE) Kay A. Barber, Chief Financial Officer (DATE) December 15, 1997 11 EXHIBIT INDEX EXHIBIT METHOD OF FILING - --------- ------------------------------- 11.1 Schedule of Computation of Per Share Earnings.......................... Filed herewith electronically 27. Financial Data Schedules............................................... Filed herewith electronically