MANAGEMENT'S DISCUSSION AND ANALYSIS
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 public reporting regulations, paper costs, the
integration and performance of recent acquisitions and Year 2000 readiness.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
relationship to revenue of certain items in the Company's consolidated
statements of operations and the percentage changes in the dollar amounts of
such items in comparison to the prior years.
For the Years Ended January 31,
---------------------------------------------------------
% Increase (Decrease)
---------------------
Percentage of Revenue 1999 1998
------------------------------- VS. vs.
1999 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Revenue
Specialty Communication Services:
Financial 36.5% 38.2% 40.6% 6% 22%
Corporate 31.4 31.6 27.6 11 49
Commercial and other 19.7 18.5 20.6 18 17
- ----------------------------------------------------------------------------------------------------------------
87.6 88.3 88.8 10 29
Document Services:
Document management services 12.4 11.7 11.2 17 35
- ----------------------------------------------------------------------------------------------------------------
100.0 100.0 100.0 11 30
Cost of revenue 64.9% 64.3% 64.3% 12% 30%
Gross profit 35.1 35.7 35.7 9 30
Selling, general and administrative expenses 25.1 24.8 25.4 12 27
Operating income 10.0 10.9 10.3 3 37
Interest expense (0.8) (0.9) (1.2) (8) 5
Other income, net 0.2 0.1 0.1 (49) 217
Income before provision for income taxes 9.4 10.1 9.2 3 43
Provision for income taxes 4.2 4.4 4.1 4 40
Net income 5.2 5.7 5.1 2 46
- ----------------------------------------------------------------------------------------------------------------
BUSINESS Merrill Corporation is a diversified electronic and paper document
management company. During 1999, the Company adopted Statement of Financial
Standards No. 131. As a result, the Company defined its reportable segments and
changed the information it reports about its operating segments. Operating
segment information for prior years has been restated to conform to the 1999
presentation. Following the new standard, the Company's operating segments have
been aggregated into two reportable segments: Specialty Communication Services
and Document Services. Under Specialty Communication Services, we include three
business units: Financial Document Services, Investment Company Services and
Managed Communications Programs. Revenue generated by these
16 MERRILL CORPORATION
three business units is categorized as financial, corporate
and commercial 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 the accounting policies of the
Company described in Note One of the notes to consolidated
financial statements. Additional information about the 1999 REVENUE
Company's reportable segments is included in Note Nine BY CATEGORY
of the notes to consolidated financial statements. [GRAPH]
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
category tends to follow general economic trends.
Document management services revenue category tends to follow general economic
trends.
FISCAL YEAR 1999 VS. FISCAL YEAR 1998 Overall revenue for fiscal year 1999
increased 11 percent over the previous year. Revenue in the Specialty
Communication Services segment increased 10 percent over the previous year. The
financial revenue category increased six percent compared to the prior year.
This increase was driven by strong mergers and acquisition activity in the first
six months of fiscal year 1999. The financial revenue category declined in the
second half of the fiscal year by 15 percent as a result of the Fall market
volatility. International revenue, which is included in the financial revenue
category, represented less than 10 percent of consolidated revenue and increased
over fiscal year 1998 revenue. Management does not anticipate significant
fluctuations in the relative percentage of international revenue during fiscal
year 2000. The corporate revenue category increased 11 percent compared to
fiscal year 1998. This increase is attributed mainly to strong growth in
Investment Company Services products and continued solid demand for corporate
compliance business. The commercial and other revenue category realized revenue
growth of 18 percent over fiscal year 1998. The growth is primarily the result
of our Managed Communications Programs business.
Document Services segment revenue grew 17 percent in fiscal year 1999. Ten
percent of the growth was a result of the acquisition of Executech and
affiliated World Wide Scan Services in June 1998. Document Service Centers,
which totaled 80 at January 31, 1999, contributed revenue growth of seven
percent on a same-site comparison.
Fiscal year 1999 gross profit of approximately 35 percent declined slightly
from fiscal year 1998. Strong margins were maintained despite the significant
slowdown in financial transaction activity in the second half of the fiscal
year. A significant portion of our cost structure is fixed; thus, management
implemented cost control measures in the second half of the fiscal year to
offset the lower production activity.
Selling, general and administrative expenses increased in both dollar terms
and percentage of revenue. The increase in these expenses in fiscal year 1999
was principally a result of our continued expansion of the Company's sales and
marketing activities and provisions for losses on trade receivables.
Average short-term borrowings under the Company's line of credit arrangement
were approximately $4.3 million, $4.7 million and $30.1 million in fiscal years
1999, 1998 and 1997, respectively.
Interest expense for fiscal year 1999 declined slightly compared to fiscal
year 1998, which reflects stable interest rates and a slight reduction in
overall amounts borrowed during fiscal year 1999.
The effective income tax rate for fiscal year 1999 was 44.5 percent compared
to 44 percent for fiscal year 1998. The effective rates were higher than the
statutory federal income tax rate primarily because of state income taxes and
the impact of increased non-deductible business entertainment expenses incurred
in conjunction with the financial and corporate revenue category activity
previously discussed. The effective income tax rate in future years is expected
to approximate 44.5 percent.
1999 ANNUAL REPORT 17
FISCAL YEAR 1998 VS. FISCAL YEAR 1997 Overall revenue for fiscal year 1998
increased 30 percent over the previous year. Revenue in the Specialty
Communication Services segment increased 29 percent over the previous year. The
financial revenue category increased 22 percent compared to 1997. This increase
was driven by continued strong mergers and acquisition activity in financial
markets throughout fiscal year 1998. The increase was also driven by the results
of the Corporate Printing Company (CPC) business acquired in April 1996.
International revenue, which is included in the financial
revenue category, represented less than 10 percent of consolidated revenue and
increased over fiscal year 1997 revenue. The corporate revenue category
increased 49 percent when compared to fiscal year 1997. This increase is
attributed to strong corporate compliance business, continued solid demand for
EDGAR services and strong growth in Investment Company Services products. The
commercial and other revenue category experienced a 17 percent increase in
revenue over fiscal year 1997. The growth is primarily the result of our Managed
Communications Programs.
Document Services segment revenue grew 35 percent in fiscal year 1998,
reflecting continued growth in the number of Document Service Centers, which
totaled 76 at January 31, 1998. This resulted from internal growth and the
acquisition of selected assets of Total Management Support Services.
Fiscal year 1998 gross profit of approximately 36 percent remained level with
fiscal year 1997. Continued strong margins in both financial and corporate
revenue category activity along with high production utilization allowed us to
maintain the same margins.
Selling, general and administrative expenses increased, but as a percent of
revenue, declined slightly in the last year. The increase in these expenses in
fiscal year 1998 was principally a result of our continued expansion of sales
and marketing activities and provisions for incentive compensation.
Average short-term borrowings under the Company's line of credit arrangement
were approximately $4.7 million, $30.1 million and $2.2 million in fiscal years
1998, 1997 and 1996, respectively. The significant decrease in the average
short-term borrowings in fiscal year 1998 resulted from the issuance of $35
million in unsecured senior notes in October 1996.
Interest expense for fiscal year 1998 remained relatively consistent compared
to fiscal year 1997, which reflects stable interest rates and consistent overall
amounts borrowed during the time periods.
The effective income tax rate for fiscal year 1998 was 44 percent compared to
45 percent for fiscal year 1997. The effective rates were higher than the
statutory federal rate primarily because of state income taxes and the impact of
increased non-deductible business entertainment expenses incurred in conjunction
with the additional financial and corporate revenue category activity previously
discussed.
IMPACT OF INFLATION The Company does not believe that inflation has had a
significant impact on the results of its operations.
LIQUIDITY AND CAPITAL RESOURCES The Company continued to strengthen its
financial position during fiscal year 1999. Working capital at January 31,
1999, increased to $81.6 million from $79.3 million a year ago. Our current
ratio remained consistent at 2.1:1 in fiscal year 1999 when compared to
fiscal year 1998. Working capital increased primarily from higher cash
balances, reflecting strong collection of trade receivables during the entire
year. Trade accounts receivable decreased as a result of the strong cash
collections and the reduction in the financial transaction activity.
Work-in-process inventories decreased at January 31, 1999, reflecting the
downturn in financial transaction activity in the fourth quarter and improved
inventory turns. Cash and cash equivalents increased to $23.5 million with no
borrowings under the Company's line of credit at January 31, 1999. Long-term
obligations to total capitalization was 21.9 percent at January 31, 1999,
compared to 25.0 percent a year ago.
Cash provided by operating activities was $55.8 million in fiscal year
1999, compared to $30.9 million in fiscal year 1998 and $8.5 million in
fiscal year 1997. Operating cash flows for fiscal year 1999 included strong
earnings performance and a decrease in accounts receivable and work-in-process
18 MERRILL CORPORATION
inventories offset by decreases in accounts payable and accrued expenses.
Operating cash flows for fiscal year 1998 included strong earnings performance,
a decrease in work-in-process inventories and an increase in accounts payable
and accrued expenses offset by an increase in accounts receivable.
Net cash used in investing activities was $23.1 million in fiscal year 1999,
compared to $30.1 million in fiscal year 1998 and $35.8 million in fiscal year
1997. Capital expenditures were $16.5 million, $17.1 million and $9.2 million
for the years ended January 31, 1999, 1998 and 1997, respectively. Capital
expenditures in each fiscal year were principally for reprographic and computer
based production equipment and for leasehold improvements. Cash used for
businesses acquired included Executech in fiscal year 1999, Superstar Computing,
Total Management Support Services and The Corporate Printing Company in fiscal
year 1998 and The Corporate Printing Company and FMC Resource Management
Corporation in fiscal year 1997.
Net cash used in financing activities was $11.8 million in fiscal year 1999
compared to $3.4 million in fiscal year 1998. Net cash used in these fiscal
years was primarily a result of repurchases of common stock offset by stock
option exercises and repayment of borrowings under the Company's line of
credit. Fiscal year 1997 cash provided by financing activities of $20.4
million was primarily a result of the issuance of long-term debt offset by
payments on long-term debt and capital lease obligations.
The Company repurchased 734,000 shares of its common stock for approximately
$12.8 million in fiscal year 1999. A cumulative total of 998,000 shares have
been repurchased for approximately $15.9 million under the 1,500,000 share
repurchase program authorized by the Board of Directors in fiscal year 1997.
The Company expects capital expenditures in fiscal year 2000 to range from $25
million to $30 million for computer and production equipment and facility
expansion and remodeling. Approximately $2 million of this amount is committed
at this time.
The Company has historically been working-capital intensive, but in recent
years has increased its needs for technology and production equipment. The
Company generally has been able to generate sufficient cash from operations to
fund its capital needs.
At January 31, 1999, the Company's principal internal sources of liquidity
were cash and cash equivalents and cash flow provided by operating activities.
The Company has available an unsecured bank line of credit expiring on November
29, 1999. The amount available was increased from $40 million to $70 million
subsequent to January 31, 1999. Management anticipates that these sources will
satisfy its needs for fiscal year 2000.
YEAR 2000 READINESS Many 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. Merrill Corporation has 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. We have identified and prioritized systems and individual
components of systems that contain potentially date-sensitive computer codes.
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. We have surveyed for Year 2000 readiness by material
third-party vendors, including external providers of software and hardware
products, as well as print producers.
CONFIGURATION MANAGEMENT. We have tracked source code components of an
application and changes to the components to manage the remediation process.
VALIDATION/TESTING. We have substantially completed testing of data and have
reviewed results to determine that errors were not introduced during the
conversion process.
1999 ANNUAL REPORT 19
CONTINGENCY PLANNING. We are formulating 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.
Our project plan includes initial testing and remediation which was begun last
year and continued into the fourth quarter of the fiscal year ended January 31,
1999 (fiscal 1999). The Company completed the surveying of key suppliers in the
fourth quarter of fiscal 1999. The Company is currently in the process of
developing contingency plans, as necessary, with the initial draft to be
completed July 31, 1999.
We plan to have Merrill's mission-critical internal systems and electronic
data links ready by July 31, 1999, and resolve any supplier problems. We have
surveyed our major utility companies 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 into the
remediation stage where programming changes are being made to major business and
production systems. The Company believes that the project is currently on
schedule.
The Company estimates that the total cost to identify and remediate Year 2000
problems is approximately $3.0 million. Approximately $1.1 million of these
costs have been incurred as of January 31, 1999. These costs are expensed as
incurred. These costs are primarily consultant and payroll-related costs for the
Company's 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 interested 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.
QUARTERLY STOCK PRICE INFORMATION
Merrill Corporation shares are traded on the Nasdaq Stock Market under the
symbol MRLL. The table below sets forth the range of high and low sales prices
per share as reported by the Nasdaq Stock Market. These prices do not include
adjustments for retail markups, markdowns or commissions. There were
approximately 2,100 shareholders of record and non-objecting beneficial owners
of the Company's common stock at the close of trading on April 15, 1999. The
Company paid annualized cash dividends of $.08 per share in fiscal year 1999 and
$.07 per share in fiscal year 1998. Total cash dividends approximated $1.3
million and $1.1 million in fiscal years 1999 and 1998, respectively.
First Second Third Fourth
Stock Price Per Share Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------
FY 1999 High 23 9/16 24 3/4 23 7/8 19 1/2
Low 18 20 12 1/16 12 3/4
FY 1998 High 14 20 5/16 24 1/4 24
Low 10 1/4 11 5/8 17 1/8 18 5/32
20 MERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of January 31,
---------------------------
(In thousands, except share data) 1999 1998
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 23,477 $ 2,531
Trade receivables, less allowance for doubtful accounts
of $8,126 and $6,992, respectively 102,365 116,721
Work-in-process inventories 12,639 13,686
Other inventories 7,559 7,112
Other current assets 12,253 10,290
- ------------------------------------------------------------------------------------------------
Total current assets 158,293 150,340
Property, plant and equipment, net 44,935 41,045
Goodwill, net 49,744 44,437
Other assets 12,973 10,657
- ------------------------------------------------------------------------------------------------
Total assets $265,945 $246,479
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 2,210 $ 655
Current maturities of capital lease obligations 236 249
Accounts payable 29,640 29,142
Accrued expenses 44,642 41,033
- ------------------------------------------------------------------------------------------------
Total current liabilities 76,728 71,079
Long-term debt, net of current maturities 38,110 40,225
Capital lease obligations, net of current maturities 1,375 1,616
Other liabilities 8,581 7,884
- ------------------------------------------------------------------------------------------------
Total liabilities 124,794 120,804
- ------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 3 and 5)
Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized;
15,823,155 and 16,315,136 shares, respectively, issued
and outstanding 158 163
Undesignated stock: 500,000 shares authorized; no shares issued
Additional paid-in capital 12,722 22,401
Retained earnings 128,271 103,111
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 141,151 125,675
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $265,945 $246,479
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
1999 ANNUAL REPORT 21
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended January 31,
----------------------------------------------
(In thousands, except share and per share data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Revenue $ 509,543 $ 459,516 $ 353,769
Cost of revenue 330,632 295,390 227,478
- ------------------------------------------------------------------------------------------------
Gross profit 178,911 164,126 126,291
Selling, general and administrative expenses 127,705 114,174 89,946
- ------------------------------------------------------------------------------------------------
Operating income 51,206 49,952 36,345
Interest expense (3,961) (4,321) (4,124)
Other income, net 426 835 263
- ------------------------------------------------------------------------------------------------
Income before provision for income taxes 47,671 46,466 32,484
Provision for income taxes 21,214 20,445 14,645
- ------------------------------------------------------------------------------------------------
Net income $ 26,457 $ 26,021 $ 17,839
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.63 $ 1.61 $ 1.13
Diluted $ 1.55 $ 1.54 $ 1.11
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding:
Basic 16,253,148 16,129,341 15,792,161
Diluted 17,020,673 16,906,382 16,117,432
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
22 MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 31,
----------------------------------------------
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 26,457 $ 26,021 $ 17,839
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 13,066 11,147 10,825
Amortization of intangible assets 4,573 4,286 2,581
Writedown of goodwill 1,180
Provision for losses on trade receivables 3,273 2,064 2,861
Provision for unbillable inventories 67 (1,063) 2,678
Deferred income taxes (3,518) (2,592) (6,555)
Change in deferred compensation 1,807 1,285 401
Changes in operating assets and liabilities,
net of effects from business acquisitions
Trade receivables 11,796 (36,706) (18,499)
Work-in-process inventories 865 12,082 (11,667)
Other inventories (333) (1,667) 583
Other current assets 1,301 (1,798) (1,718)
Accounts payable (348) 7,336 (3,720)
Accrued expenses (3,267) 11,537 11,365
Income taxes (1,109) (1,059) 1,530
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,810 30,873 8,504
- -------------------------------------------------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (16,479) (17,069) (9,216)
Business acquisitions, net of cash acquired (4,039) (13,179) (26,010)
Other investing activities, net (2,551) 137 (564)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,069) (30,111) (35,790)
- -------------------------------------------------------------------------------------------------------------------
Financing activities
Borrowings on notes payable to banks 86,600 104,275 139,050
Repayments on notes payable to banks (86,600) (110,225) (139,100)
Proceeds from issuance of long-term debt 35,000
Principal payments on long-term debt and
capital lease obligations (814) (936) (15,164)
Repurchase of common stock (12,813) (3,065)
Dividends paid (1,297) (1,133) (948)
Exercise of stock options 2,149 5,417 1,045
Tax benefit realized upon exercise of stock options 884 2,192 328
Other equity transactions, net 96 83 162
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (11,795) (3,392) 20,373
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 20,946 (2,630) (6,913)
Cash and cash equivalents, beginning of year 2,531 5,161 12,074
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 23,477 $ 2,531 $ 5,161
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures
Income taxes paid $ 24,724 $ 22,000 $ 19,253
Interest paid 3,599 3,757 2,866
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
1999 ANNUAL REPORT 23
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended January 31, 1999, 1998 and 1997
-------------------------------------------------------------
Additional
Common Paid-in Retained
(In thousands, except per share data) Stock Capital Earnings Total
- -------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1996 $ 157 $ 16,245 $ 61,332 $ 77,734
Exercise of stock options 2 1,043 1,045
Tax benefit realized upon
exercise of stock options 328 328
Other 162 162
Cash dividends ($.06 per share) (948) (948)
Net income 17,839 17,839
- -------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 $ 159 $ 17,778 $ 78,223 $ 96,160
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Exercise of stock options 7 5,410 5,417
Tax benefit realized upon
exercise of stock options 2,192 2,192
Repurchase of common stock (3) (3,062) (3,065)
Other 83 83
Cash dividends ($.07 per share) (1,133) (1,133)
Net income 26,021 26,021
- -------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 $ 163 $ 22,401 $103,111 $125,675
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Exercise of stock options 2 2,147 2,149
Tax benefit realized upon
exercise of stock options 884 884
Repurchase of common stock (7) (12,806) (12,813)
Other 96 96
Cash dividends ($.08 per share) (1,297) (1,297)
Net income 26,457 26,457
- -------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1999 $ 158 $ 12,722 $128,271 $141,151
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
24 MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ONE - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS The Company provides paper and electronic document
services consisting of creative design, typesetting, printing, reproduction,
distribution, data and information services to financial, legal, investment
company, real estate and corporate clients worldwide.
USE OF ESTIMATES The preparation of 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 at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
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 allowances for doubtful accounts and unbillable
inventories.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES Work-in-process, which includes purchased services, materials,
direct labor and overhead, is valued at the lower of cost or net realizable
value, with cost determined on a specific job-cost basis. Other inventories
consist primarily of paper and printed materials and are valued at the lower of
cost or market, with cost determined on a specific job-cost basis.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at
cost. Significant additions or improvements extending asset lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
Depreciation is determined using the straight-line method over the estimated
useful lives of the assets which range from three to 30 years. Amortization of
leasehold improvements is recorded on a straight-line basis over the estimated
useful lives of the assets or the lease term, whichever is shorter. When assets
are sold or retired, related gains or losses are included in the results of
operations.
GOODWILL Goodwill recognized in business acquisitions accounted for as
purchases is amortized on the straight-line method, principally over 15 years.
The Company periodically evaluates the recoverability of unamortized goodwill
through measurement of future estimated undiscounted operating unit cash flows.
INCOME TAXES Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the year and the change during the
year in deferred tax assets and liabilities.
REVENUE RECOGNITION The Company recognizes revenue when service projects are
completed or products are shipped.
NET INCOME PER SHARE The Company has disclosed basic and diluted net income
per share for all periods presented in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The
dilutive effect on net income per share resulted from the assumed exercise of
dilutive stock options outstanding under the Company's stock option plans.
1999 ANNUAL REPORT 25
ONE - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation costs for stock options granted to
employees are measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the amount an employee must pay
to acquire the stock. Such compensation costs, if any, are amortized on a
straight-line basis over the underlying option vesting terms. The Company
accounts for stock-based compensation to non-employees using the fair value
method prescribed by SFAS No. 123, "Accounting for Stock Based Compensation."
Compensation costs for stock options granted to non-employees are based on
fair value of the option at the date of grant.
BUSINESS SEGMENTS Effective January 31, 1999, the Company adopted SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which requires the Company to report information about its operating segments
according to the management approach for determining reportable segments. This
approach is based on the way management organizes segments within a company for
making operating decisions and assessing performance. Segment results have been
reported for all periods presented and are described in Note Nine.
TWO - SELECTED FINANCIAL STATEMENT DATA
As of January 31,
--------------------------
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET
Land $ 1,951 $ 1,951
Buildings 12,111 11,965
Equipment 63,068 54,929
Furniture and fixtures 14,157 11,057
Leasehold improvements 18,664 10,479
Construction in progress 1,090 5,609
- ------------------------------------------------------------------------------------------------
111,041 95,990
Less accumulated depreciation and amortization (66,106) (54,945)
- ------------------------------------------------------------------------------------------------
$ 44,935 $ 41,045
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
GOODWILL, NET
Goodwill $ 63,462 $ 52,913
Less accumulated amortization (13,718) (8,476)
- ------------------------------------------------------------------------------------------------
$ 49,744 $ 44,437
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
ACCRUED EXPENSES
Commissions and compensation $ 22,089 $ 25,003
Retirement plan 3,970 4,965
Purchase price consideration 7,734 800
Other 10,849 10,265
- ------------------------------------------------------------------------------------------------
$ 44,642 $ 41,033
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
26 MERRILL CORPORATION
THREE - 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 Company
did not purchase any assets relating to CPC's pressroom and shipping businesses.
The purchase price was subsequently reduced by approximately $1.7 million in
accordance with terms of the purchase agreement. In accordance with the
agreement, additional contingent purchase consideration of $8 million was paid
in August 1997. The Company also entered into a five-year non-compete agreement
with CPC's principal shareholder that requires payments totaling $3.4 million
through April 15, 2001. The principal shareholder is also entitled to an
additional $500,000 annually through March 31, 2001, as the Company maintained
certain business of a specified customer. The acquisition has been accounted for
as a purchase.
On March 28, 1996, the Company purchased all of the outstanding common
stock of FMC Resource Management Corporation for $5.4 million in cash and
promissory notes for $2.0 million. The agreement calls for additional
contingent consideration, not to exceed $4 million, based on annual gross
profits of the acquired business through January 31, 2001, as defined in the
agreement. Contingent consideration recorded through January 31, 1999, was
$2.4 million. The acquisition has been accounted for as a purchase.
Results of the acquired companies' operations have been included in the
Consolidated Statements of Operations from their respective dates of
acquisitions. Pro forma (unaudited) results of the Company for the year ended
January 31, 1997, as if the acquisitions had been effective at February 1, 1995,
are as follows:
For the Year Ended January 31,
------------------------------
(In thousands, except per share data) 1997
- ------------------------------------------------------------------------------
Revenue $376,647
Net income 17,047
Net income per share - diluted 1.05
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
During fiscal year 1999, the Company completed the acquisition of
substantially all of the operating assets and liabilities of Executech, Inc. and
an affiliated company, World Wide Scan Services, LLC for $3.2 million in cash.
The agreement calls for additional consideration totalling approximately $10.0
million through fiscal year 2003. The acquisition has been accounted for as a
purchase and is not significant to the financial position or results of
operations of the Company.
1999 ANNUAL REPORT 27
FOUR - FINANCING ARRANGEMENTS
BANK FINANCING The Company has a revolving credit agreement with a group of
banks that provides for an unsecured bank line of credit which expires on
November 29, 1999. Subsequent to January 31, 1999, the agreement was amended to
increase the amount available for borrowing from $40 million to $70 million.
There were no borrowings outstanding under this agreement at January 31, 1999
and 1998. Under the agreement, the Company has the option to borrow at the
Agent's reference rate, at 1.0% above the London Interbank Offered Rate (LIBOR)
or at 1.0% above a certificate of deposit-based rate, and is required to pay
quarterly commitment fees of 0.25% on the unused portion of the line of credit.
The weighted average interest rates on borrowings on the line of credit were
8.44%, 8.26% and 7.39% for the years ended 1999, 1998 and 1997, respectively.
The revolving credit agreement includes various covenants, including the
maintenance of minimum tangible net worth and limitations on the amounts of
certain transactions, including payment of dividends.
LONG-TERM DEBT Long-term debt consisted of the following:
As of January 31,
---------------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Unsecured senior notes, bearing interest at 7.463%, with semi-annual
interest only payments through October 2000, at which time annual
principal and semi-annual interest payments are due through
October 2006. The notes have various covenants, including the
maintenance of certain financial ratios and limitations on the
amount of certain transactions including the payment of dividends. $35,000 $35,000
Industrial development bonds, due in annual installments, including
interest ranging from 4.2% to 5.5%, over the life of the bonds with
the remaining unpaid balance due on August 1, 2010; collateralized
by land, building and equipment with a carrying value of $4,712
at January 31, 1999. 3,320 3,380
Unsecured promissory notes payable due in March 1999. The notes bear
interest at LIBOR plus 1.0%, adjustable and payable annually. The
interest rate at January 31, 1999 and 1998 was 6.8125% and 7.281%,
respectively. 2,000 2,000
Unsecured promissory note payable in equal annual installments of $500
on December 31 through 1998. 500
- -------------------------------------------------------------------------------------------------------------------
40,320 40,880
Less current maturities of long-term debt (2,210) (655)
- -------------------------------------------------------------------------------------------------------------------
$38,110 $40,225
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
The aggregate maturities of long-term debt are as follows:
(In thousands)
- -------------------------------------------------------------------------------------------------------------------
2000 $ 2,210
2001 5,220
2002 5,230
2003 5,240
2004 5,250
Thereafter 17,170
- -------------------------------------------------------------------------------------------------------------------
$40,320
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Based on quoted market prices for similar issues, the fair value of long-term
debt approximated its carrying value at January 31, 1999 and 1998.
28 MERRILL CORPORATION
FIVE - LEASES
The Company leases an office and production facility and the associated land
and equipment under capital leases that terminate at various dates through
November 30, 2005. Certain leases contain bargain purchase options. A summary of
the Company's property under capital leases, which is classified as property,
plant and equipment, is as follows:
As of January 31,
---------------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------------------
Land $ 333 $ 333
Building 2,439 2,439
Equipment 389 594
Less accumulated amortization (1,334) (1,366)
- -------------------------------------------------------------------------------
$ 1,827 $ 2,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The Company also leases office space and equipment under noncancelable
operating leases which expire at various dates through October 31, 2014. Rental
expense charged to operations was $9.0 million, $8.0 million and $6.0 million
for the years ended January 31, 1999, 1998 and 1997, respectively.
Future minimum rental commitments under noncancelable leases at January 31,
1999, are as follows:
Capital Operating
(In thousands) Leases Leases
- ------------------------------------------------------------------------------
2000 $ 392 $ 6,697
2001 330 5,737
2002 330 4,645
2003 330 4,349
2004 330 3,751
Thereafter 605 16,317
- ------------------------------------------------------------------------------
2,317 $41,496
-------
Imputed interest (706)
- ------------------------------------------------------------------
Present value of minimum lease payments 1,611
Less current maturities of capital lease obligations (236)
- ------------------------------------------------------------------
Capital lease obligations, net of current maturities $1,375
- ------------------------------------------------------------------
- ------------------------------------------------------------------
1999 ANNUAL REPORT 29
SIX - INCOME TAXES
Components of the provision for income taxes are as follows:
For the Years Ended January 31,
------------------------------------
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Current
Federal $21,204 $19,974 $17,758
State 3,528 3,063 3,442
- ------------------------------------------------------------------------------
24,732 23,037 21,200
Deferred (3,518) (2,592) (6,555)
- ------------------------------------------------------------------------------
Provision for income taxes $21,214 $20,445 $14,645
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Temporary differences comprising the net deferred tax asset recognized in
the accompanying Consolidated Balance Sheets are as follows:
As of January 31,
-----------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------------------
Deferred compensation $ 3,997 $ 1,980
Property, plant and equipment 2,359 2,126
Insurance reserves 1,406 1,130
Vacation accrual 1,228 1,085
Allowance for doubtful accounts 1,188 1,349
Goodwill amortization 1,131 433
Inventories 1,038 958
Other, net 1,204 972
- -------------------------------------------------------------------------------
Net deferred tax asset $13,551 $10,033
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Management expects that the Company will fully realize the benefits
attributable to the net deferred tax asset at January 31, 1999. Accordingly, no
valuation allowance has been recorded at January 31, 1999.
Significant differences between income taxes on income for financial
reporting purposes and income taxes calculated using the federal statutory tax
rate are as follows:
As of January 31,
---------------------------------------
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Provision for federal income taxes at statutory rate $16,684 $16,263 $11,369
State income taxes, net of federal benefit 1,967 1,646 1,444
Non-deductible business meeting and
entertainment expenses 2,003 1,832 1,210
Other 560 704 622
- ------------------------------------------------------------------------------------------------
$21,214 $20,445 $14,645
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Consolidated federal income tax returns filed by the Company have been
examined by the Internal Revenue Service through fiscal 1994. The Company's
fiscal 1995, 1996 and 1997 federal and certain state income tax returns are
presently under audit. Management believes any additional taxes which may
ultimately result from these audits or any other state or local agencies' audits
would not have a material adverse effect on the Company's consolidated financial
position or results of operations.
30 MERRILL CORPORATION
SEVEN - RETIREMENT PLAN
On February 1, 1998, the Company combined its defined contribution retirement
plan and its 401(k) incentive savings plan. Under the new plan, Company
contributions are based on 4% of eligible employee compensation and 100%
matching contributions up to a maximum of the first 3% of a participant's 401(k)
contribution. Substantially all employees of the Company are covered by the new
plan. Related costs of all retirement plans charged to operations were $6.1
million, $5.1 million and $4.0 million for the years ended January 31, 1999,
1998 and 1997, respectively.
EIGHT - SHAREHOLDERS' EQUITY
COMMON STOCK In August 1997, the Company's Board of Directors declared a
2-for-1 stock split of the Company's common stock in the form of a 100% stock
dividend which was paid on October 15, 1997, to shareholders of record on
September 30, 1997. The Consolidated Statements of Changes in Shareholders'
Equity and all share and per share amounts have been retroactively restated
to reflect the stock split. Also, all information regarding shares
outstanding, stock purchase agreements, stock options and stock grants has
been retroactively restated to reflect the stock split.
The classes, series, rights and preferences of the undesignated stock may be
established by the Company's Board of Directors. No action with respect to such
shares has been taken. During fiscal year 1997, the Company's Board of Directors
approved the repurchase of up to 1,500,000 shares of the Company's common stock.
In fiscal year 1999, the Company repurchased 734,000 shares of common stock for
approximately $12.8 million. Through January 31, 1999, 998,000 shares of common
stock had been repurchased for approximately $15.9 million.
EARNINGS PER SHARE The denominator used to calculate diluted earnings per
share includes the dilutive impact of 767,525, 777,041 and 325,271 stock options
for the years ended January 31, 1999, 1998 and 1997, respectively.
STOCK PLANS Under Company-sponsored incentive and stock option plans,
6,506,000 shares of common stock were reserved for the granting of incentive
awards to employees in the form of incentive stock options, nonstatutory stock
options and restricted stock awards at exercise prices not less than 100% of the
fair market value of the Company's common stock on the date of grant. As of
January 31, 1999, stock options for 5,342,300 shares and 70,800 restricted stock
awards had been granted under the plans, leaving 1,092,900 shares available for
future grants.
Under the Company's 1996 Non-employee Director Plan (the Plan), 400,000
shares of common stock were reserved for granting of non-statutory options
and awarding of common stock as partial payment to non-employee directors who
serve on the Company's Board of Directors. Non-statutory 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 January 31, 1999, non-statutory options for 120,000 shares and 10,863
shares of common stock had been granted under the Plan, leaving 269,137
shares available for future grants.
In addition to options granted under the plans above, the Company has
granted non-qualified options to directors and consultants at prices equal to
or exceeding market value at date of grant. Options granted under all
Company-sponsored stock plans generally vest and expire over five to seven
years.
1999 ANNUAL REPORT 31
EIGHT - SHAREHOLDERS' EQUITY, CONTINUED
A summary of selected information regarding all stock options for the three
years ended January 31, 1999, is as follows:
Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
- ---------------------------------------------------------------------------------------------
Balance, January 31, 1996 1,854,628 $ 2.00-14.88 $ 8.46
Granted 1,092,000 8.12-11.96 9.06
Exercised (152,436) 3.68-10.38 6.85
Canceled (106,364) 8.12-13.25 9.86
- ---------------------------------------------------------------------------------------------
Balance, January 31, 1997 2,687,828 2.00-14.88 8.74
Granted 1,129,200 11.19-22.75 13.95
Exercised (759,400) 2.00-15.06 7.88
Canceled (88,200) 8.13-10.00 8.86
- ---------------------------------------------------------------------------------------------
Balance, January 31, 1998 2,969,428 2.00-22.75 10.94
Granted 611,000 18.25-21.38 20.95
Exercised (239,750) 2.00-15.06 8.97
Canceled (70,600) 8.13-21.38 13.92
- ---------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1999 3,270,078 $3.68-22.75 $12.89
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
At January 31, 1999, the weighted average exercise price and remaining life
of the stock options are as follows:
Range of exercise prices $ 3.68-8.25 $8.50-13.50 $14.75-22.75 Total
- -------------------------------------------------------------------------------------------------------------------
Total options outstanding 821,700 1,485,878 962,500 3,270,078
Weighted average exercise price $8.06 $10.94 $20.00 $12.89
Weighted average remaining life 3.3 years 3.5 years 4.6 years 3.8 years
Options exercisable 248,400 386,918 128,100 763,418
Weighted average price of
exercisable options $7.92 $11.30 $18.24 $11.37
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
32 MERRILL CORPORATION
EIGHT - SHAREHOLDERS' EQUITY, CONTINUED
Had the Company used the fair value-based method of accounting for its
incentive and stock option plans beginning on February 1, 1995, and charged
compensation cost against income, over the vesting period based on the fair
value of options at the date of grant, net income and net income per share would
have been reduced to the following pro forma amounts:
For the Years Ended January 31,
---------------------------------------------------
(In thousands except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
NET INCOME
As reported $26,457 $26,021 $17,839
Pro forma 24,300 24,541 17,223
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NET INCOME PER SHARE
As reported - basic $ 1.63 $ 1.61 $ 1.13
As reported - diluted 1.55 1.54 1.11
Pro forma - basic 1.50 1.52 1.09
Pro forma - diluted 1.43 1.45 1.07
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
The pro forma information above includes only stock options granted since
fiscal year 1996. Pro forma compensation expense under the fair value-based
method of accounting will increase in the future as additional stock option
grants will be considered.
The weighted average grant date fair value of options granted during fiscal
years 1999, 1998 and 1997 was $10.32, $6.68 and $4.72, respectively. The
weighted average grant date fair value of options was calculated by using the
fair value of each option grant, utilizing the Black-Scholes option-pricing
model and the following key assumptions:
For the Years Ended January 31,
--------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Risk free interest rate 5.50% 6.50% 6.87%
Expected life 5 YEARS 5 years 6 years
Expected volatility 51.18% 43.52% 48.85%
Expected dividend yield 0.41% 0.38% 0.68%
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
1999 ANNUAL REPORT 33
NINE - SEGMENT AND RELATED INFORMATION
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," changes the way the Company reports information about its
operating segments. The information for fiscal years 1998 and 1997 is also
presented.
The Company's business units have been aggregated into two reportable segments
comprising of Specialty Communication Services and Document Services.
SPECIALTY COMMUNICATION SERVICES This segment consists of three business
units -- Financial Document Services, Investment Company Services and Managed
Communications Programs -- that print documents and deliver services used in the
financial marketplace, including mutual fund and insurance companies and banks,
and national organizations. The principal markets for 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 SERVICES Document Management Services is the sole business unit
reported in this segment. They deliver document management solutions to legal
and corporate clients through client-based 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 include law firms and large
corporations.
The accounting policies of the reportable segments are the same as those
described in Note One of Notes to Consolidated Financial Statements. The Company
evaluates the performance of its operating segments based on revenue and
operating earnings of the respective business units. Intersegment sales and
transfers are not significant.
Summarized financial information concerning the Company's 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.
(In thousands) Specialty Communication Services Document Services Interest & Other Total
- ----------------------------------------------------------------------------------------------------------------------------
1999
Revenue $446,579 $62,964 $509,543
Income (loss) before provision
for income taxes 52,995 (1,789) $(3,535) 47,671
Total assets 186,825 25,966 53,154 265,945
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
1998
Revenue $405,742 $53,774 $459,516
Income (loss) before provision
for income taxes 57,276 (7,324) $(3,486) 46,466
Total assets 205,200 16,530 24,749 246,479
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
1997
Revenue $314,187 $39,582 $353,769
Income (loss) before provision
for income taxes 45,555 (9,210) $(3,861) 32,484
Total assets 167,043 11,729 23,225 201,997
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
34 MERRILL CORPORATION
TEN - QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data for the years ended
January 31, 1999 and 1998:
First Second Third Fourth
(In thousands except per share data) Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------
1999 Revenue $ 123,514 $148,458 $119,759 $117,812 $509,543
Gross profit 48,358 53,974 39,100 37,479 178,911
Net income 8,012 8,706 6,488 3,251 26,457
Net income per share - basic .49 .53 .40 .20 1.63
Net income per share - diluted .47 .50 .38 .20 1.55
Dividends declared per share .02 .02 .02 .02 .08
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1998 Revenue $ 109,859 $115,601 $112,091 $121,965 $459,516
Gross profit 43,585 41,066 39,374 40,101 164,126
Net income 7,754 6,312 5,707 6,248 26,021
Net income per share - basic .49 .39 .35 .38 1.61
Net income per share - diluted .47 .38 .33 .36 1.54
Dividends declared per share .015 .015 .02 .02 .07
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
For fiscal year 1999, the summations of quarterly net income per share --
basic does not equate to the calculation for the year as quarterly calculations
are performed on a discrete basis.
ELEVEN - SUBSEQUENT EVENT
On April 14, 1999, the Company purchased substantially all assets and assumed
certain liabilities of Daniels Printing, Limited Partnership for $45 million in
cash plus $10.6 million in payoff of existing term debt and line of credit plus
the assumption of $7.7 million of certain ordinary course liabilities. The
acquisition will be accounted for as a purchase. The acquisition was financed
using the Company's line of credit and available operating cash.
1999 ANNUAL REPORT 35
SUMMARY OF OPERATING AND FINANCIAL DATA
For the Years Ended January 31,
-------------------------------------------------------------------------------------
(In thousands, except employee,
per share data and ratio) 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Revenue $ 509,543 $ 459,516 $ 353,769 $ 245,306 $ 236,878 $ 181,584
Costs and expenses 461,872 413,050 321,285 226,600 215,724 159,593
- -----------------------------------------------------------------------------------------------------------------------------
Income before provision
for income taxes 47,671 46,466 32,484 18,706 21,154 21,991
Provision for income taxes 21,214 20,445 14,645 8,044 9,171 8,820
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 26,457 $ 26,021 $ 17,839 $ 10,662 $ 11,983 $ 13,348
- -----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income - basic $ 1.63 $ 1.61 $ 1.13 $ .69 $ .79 $ .90
Net income - diluted $ 1.55 $ 1.54 $ 1.11 $ .68 $ .76 $ .86
Cash dividends declared $ .08 $ .07 $ .06 $ .06 $ .06 $ .05
Book value $ 8.92 $ 7.70 $ 6.06 $ 4.95 $ 4.35 $ 3.58
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA/OTHER
Working capital $ 81,565 $ 79,261 $ 69,220 $ 39,379 $ 31,523 $ 22,528
Current ratio 2.1 2.1 2.2 2.0 2.0 1.6
Total assets $ 265,945 $ 246,479 $ 201,997 $ 125,521 $ 106,470 $ 100,123
Shareholders' equity $ 141,151 $ 125,675 $ 96,160 $ 77,734 $ 66,061 $ 53,597
Return on average
shareholders' equity 19.8% 23.5% 20.5% 14.8% 20.0% 28.7%
Long-term obligations $ 39,485 $ 41,841 $ 42,729 $ 6,454 $ 7,522 $ 8,656
Long-term obligations
to capitalization 21.9% 25.0% 30.8% 7.7% 10.2% 13.9%
Number of employees 3,385 3,297 2,539 1,932 1,739 1,601
- -----------------------------------------------------------------------------------------------------------------------------
36 MERRILL CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MERRILL CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Merrill Corporation and Subsidiaries as of January 31, 1999 and 1998 and
the results of their operations and their cash flows for each of the three years
in the period ended January 31, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Merrill Corporation's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
March 29, 1999
Saint Paul, Minnesota
1999 ANNUAL REPORT 37