<PAGE>
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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, 1995
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 8, 1995 was 7,824,541.
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<PAGE>
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of October 31, 1995 and January 31,
1995.
Consolidated Statements of Operations for the three-month and
nine-month periods ended October 31, 1995 and 1994.
Consolidated Statements of Cash Flows for the nine-month periods
ended October 31, 1995 and 1994.
Notes to Consolidated Financial Statements.
2
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MERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents.......................................................... $ 2,860 $ 9,967
Trade receivables, less allowance for doubtful accounts of $3,742 and $2,830,
respectively...................................................................... 52,643 39,284
Work in process inventories........................................................ 11,533 7,007
Other inventories.................................................................. 5,533 4,526
Refundable and deferred income taxes............................................... 970 265
Other current assets............................................................... 1,856 2,421
----------- -----------
Total current assets............................................................. 75,395 63,470
----------- -----------
Property, plant and equipment, net................................................... 33,007 28,918
Goodwill, net........................................................................ 10,753 11,423
Other assets, net.................................................................... 3,451 2,659
----------- -----------
Total assets..................................................................... $ 122,606 $ 106,470
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable to bank............................................................... $ 8,300
Current maturities of long-term debt............................................... 770 $ 745
Current maturities of capital lease obligations.................................... 304 738
Accounts payable................................................................... 16,398 16,004
Accrued expenses................................................................... 13,565 12,809
Deferred income taxes.............................................................. 1,651
----------- -----------
Total current liabilities........................................................ 39,337 31,947
----------- -----------
Long-term debt, net of current maturities............................................ 5,025 5,295
Capital lease obligations, net of current maturities................................. 2,024 2,227
Deferred income taxes................................................................ 46 46
Other liabilities.................................................................... 1,384 894
Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized; 7,818,141 shares and
7,605,076 shares, respectively, issued and outstanding............................ 78 76
Undesignated stock: 500,000 shares authorized; no shares issued....................
Additional paid-in capital......................................................... 15,946 14,384
Retained earnings.................................................................. 58,766 51,601
----------- -----------
Total shareholders' equity....................................................... 74,790 66,061
----------- -----------
Total liabilities and shareholders' equity....................................... $ 122,606 $ 106,470
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue......................................................................... $ 62,475 $ 57,474 $ 182,610 $ 182,616
Cost of sales................................................................... 41,489 40,553 124,120 120,917
--------- --------- --------- ---------
Gross profit.................................................................. 20,986 16,921 58,490 61,699
Selling, general and administrative expenses.................................... 15,339 12,943 44,310 41,988
--------- --------- --------- ---------
Operating income.............................................................. 5,647 3,978 14,180 19,711
Interest expense................................................................ (315) (240) (761) (742)
Other income (expense), net..................................................... (7) 101 309 295
--------- --------- --------- ---------
Income before provision for income taxes...................................... 5,325 3,839 13,728 19,264
Provision for income taxes...................................................... 2,290 1,634 5,903 7,964
--------- --------- --------- ---------
Net income.................................................................... $ 3,035 $ 2,205 $ 7,825 $ 11,300
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and common equivalent share............................... $.38 $.28 $.98 $1.41
Dividends per common share...................................................... $.03 $.03 $.09 $.09
Weighted average number of common and common equivalent shares outstanding...... 7,972,414 7,972,277 7,947,833 8,028,699
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Operating activities
Net income.......................................................................... $ 7,825 $ 11,300
Adjustments to reconcile net income to net cash (used in) provided by operating
activities
Depreciation and amortization..................................................... 7,240 6,357
Amortization of intangibles....................................................... 821 845
Provision for losses on trade receivables......................................... 1,158 1,485
Provision for losses on inventories............................................... 850 165
Tax benefit realized upon exercise of stock options............................... 1,241 795
Deferred compensation............................................................. 490 456
Changes in operating assets and liabilities
Trade receivables............................................................... (14,517) (4,576)
Work in process inventories..................................................... (5,176) 2,730
Other inventories............................................................... (1,207) 137
Refundable income taxes......................................................... (316) (309)
Other current assets............................................................ 565 (309)
Accounts payable................................................................ 394 252
Accrued expenses................................................................ 756 16
Accrued and deferred income taxes............................................... (2,040) (1,682)
---------- ----------
Net cash (used in) provided by operating activities........................... (1,916) 17,662
---------- ----------
Investing activities
Purchase of property, plant and equipment........................................... (11,329) (7,182)
Business acquisitions, net of cash acquired......................................... (346)
Other assets, net................................................................... (943) 95
---------- ----------
Net cash used in investing activities......................................... (12,272) (7,433)
---------- ----------
Financing activities
Borrowings on note payable to bank.................................................. 36,300 28,400
Repayments on note payable to bank.................................................. (28,000) (31,000)
Principal payments on long-term debt and capital lease obligations.................. (882) (1,081)
Dividends paid...................................................................... (696) (677)
Other equity transactions, net...................................................... 359 497
---------- ----------
Net cash provided by (used in) financing activities........................... 7,081 (3,861)
---------- ----------
(Decrease) increase in cash and cash equivalents...................................... (7,107) 6,368
Cash and cash equivalents, beginning of period........................................ 9,967 2,558
---------- ----------
Cash and cash equivalents, end of period.............................................. $ 2,860 $ 8,926
---------- ----------
---------- ----------
Supplemental cash flow disclosures
Income taxes paid................................................................... $ 6,265 $ 9,169
Interest paid....................................................................... 532 632
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated financial statements as of October 31, 1995 and for the
periods ended October 31, 1995 and 1994 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 results for the nine-month period
ended October 31, 1995 are not necessarily indicative of results for the full
year.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation." As allowed under SFAS No. 123, the Company will adopt the new
standard in fiscal 1997, and management has not determined the impact of this
standard on the Company's financial position or results of operations.
2. SELECTED BALANCE SHEET DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Property, plant and equipment
At cost........................................................ $ 66,876 $ 55,884
Less accumulated depreciation and amortization................. (33,869) (26,966)
----------- -----------
$ 33,007 $ 28,918
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to revenue of
certain items in the Company's statements of operations for the three-month and
nine-month periods ended October 31,
1995 and 1994, and the percentage change in such items between the periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER NINE MONTHS ENDED OCTOBER
31, 31,
-------------------------- ----------------------------
PERCENTAGE PERCENTAGE
INCREASE INCREASE
PERCENTAGE (DECREASE) PERCENTAGE (DECREASE)
OF REVENUE ---------- OF REVENUE ----------
------------- 1995 VS. --------------- 1995 VS.
1995 1994 1994 1995 1994 1994
----- ----- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Financial............................................................. 42.3% 30.2% 53% 34.2 33.0 4%
Corporate............................................................. 24.1 35.7 (27) 31.0 34.4 (10)
Commercial and other.................................................. 33.6 34.1 7 34.8 32.6 7
----- ----- ------ ------
Total revenue....................................................... 100.0 100.0 9 100.0 100.0
Cost of sales........................................................... 66.4 70.6 2 68.0 66.2 3
----- ----- ------ ------
Gross profit........................................................ 33.6 29.4 24 32.0 33.8 (5)
Selling, general and administrative expenses............................ 24.6 22.5 19 24.3 23.0 6
----- ----- ------ ------
Operating income.................................................... 9.0 6.9 42 7.7 10.8 (28)
Interest expense........................................................ (0.5) (0.4) 31 (0.4) (0.4) 3
Other income (expense), net............................................. 0.2 (107) 0.2 0.2 5
----- ----- ------ ------
Income before provision for income taxes............................ 8.5 6.7 39 7.5 10.6 (29)
Provision for income taxes.............................................. 3.6 2.8 40 3.2 4.4 (26)
----- ----- ------ ------
Net income.......................................................... 4.9% 3.8% 38 4.3 6.2 (31)
----- ----- ------ ------
----- ----- ------ ------
</TABLE>
The increase in earnings in the current three-month period compared to the
same three-month period last year was a substantial increase in the level of
financial market activity. The financial revenue category showed a 53% increase
quarter over quarter, resulting from an increase in the number of new
transactions this quarter, including mergers, acquisitions and initial public
offerings. Margins for the quarter improved from the increased volume of
financial work, which typically has realized higher margins, but are down for
the nine-month period from continued competitive pricing pressure. Corporate
revenue is down from this quarter last year. The shortfall was caused primarily
by the absence this year of a few significant, one-time mutual fund projects
that occurred during the third quarter last year. For the nine-month period
corporate revenue is down slightly compared to the same period a year ago,
reflecting continued price competition and lower print volume. Commercial and
other revenue is up slightly for the current periods from strong growth in the
document management services business. Merrill/May continues to add more
national clients, through increased marketing efforts, however, the expense of
building a sales force and creating the marketing to promote their services, has
lowered the profitability in this sector. These expenses, as well as higher
selling expense from the increase in the volume of financial work, have caused
selling, general and administrative expenses to increase slightly from previous
periods.
The effective income tax rate was 43 percent for both the current quarter
and for the current nine-month period. This compares to a tax rate of 42.6
percent for the three-month and 41.3 percent for the nine-month periods last
year. The tax rate for the current nine-month period represents the estimated
rate for the current fiscal year. The increase in the estimated rate is caused
by an increase in non-deductible business entertainment expenses as a percentage
of income before provision for income taxes.
7
<PAGE>
FINANCIAL CONDITION
Working capital increased $4.5 million for the nine-month period, reflecting
an increase in sales activity during October 1995, as compared to sales activity
during January 1995, resulting in a corresponding increase in trade receivables.
In addition, the number of jobs in process at October 31, 1995 increased
compared to January 31, 1995. Capital expenditures for the period were $11.3
million, of which $5.5 million represented the purchase of two administration
buildings in St. Paul which were previously partially leased. Other capital
expenditures were principally for production equipment and office remodeling and
furnishings. Cash and cash equivalents decreased $7.1 million in the period and
borrowings under the Company's bank line of credit were $8.3 million. These
funds were used to support a $14.5 million increase in trade receivables.
The Company has outstanding purchase commitments for capital equipment of
approximately $1 million as of October 31, 1995.
8
<PAGE>
PART II. -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Schedule of Computation of Per Share Earnings
(b) Reports on Form 8-K
None
9
<PAGE>
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.
<TABLE>
<S> <C> <C>
(REGISTRANT) MERRILL CORPORATION
BY (SIGNATURE) /s/ John W. Castro
(NAME AND TITLE) John W. Castro, President and Chief Executive Officer
(DATE) December 14, 1995
BY (SIGNATURE) /s/ Kay A. Barber
(NAME AND TITLE) Kay A. Barber, Chief Financial Officer
(DATE) December 14, 1995
</TABLE>
10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
- --------- ---------------------------------
<C> <S> <C>
11. Schedule of Computation of Per Share Earnings........................ Filed herewith electronically
27. Financial Data Schedules............................................. Filed herewith electronically
</TABLE>
<PAGE>
EXHIBIT 11
MERRILL CORPORATION
SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
---------------------------- -----------------------------
1995 1994 1995 1994
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Primary:
Net income........................................ $ 3,035,377 $ 2,204,864 $ 7,825,211 $ 11,299,777
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Weighted average number of common shares
outstanding during the period.................... 7,789,228 7,590,856 7,724,885 7,559,390
Add common equivalent shares relating to
outstanding options to purchase common stock
using the treasury stock method.................. 183,186 381,421 222,948 469,309
------------- ------------- ------------- --------------
Weighted average number of common and common
equivalent
shares outstanding........................... 7,972,414 7,972,277 7,947,833 8,028,699
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Primary income per common share..................... $.38 $.28 $.98 $1.41
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Fully diluted:
Net income........................................ $ 3,035,377 $ 2,204,864 $ 7,825,211 $ 11,299,777
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Weighted average number of common shares
outstanding during the period.................... 7,789,228 7,590,856 7,724,885 7,559,390
Add common equivalent shares relating to
outstanding options to purchase common stock
using the treasury stock method.................. 183,077 381,380 228,685 469,203
------------- ------------- ------------- --------------
Weighted average number of common and common
equivalent
shares outstanding........................... 7,972,305 7,972,236 7,953,570 8,028,593
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Fully diluted income per common share............... $.38 $.28 $.98 $1.41
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 2,860
<SECURITIES> 0
<RECEIVABLES> 56,385
<ALLOWANCES> 3,742
<INVENTORY> 17,066
<CURRENT-ASSETS> 75,395
<PP&E> 66,876
<DEPRECIATION> 33,869
<TOTAL-ASSETS> 122,606
<CURRENT-LIABILITIES> 39,337
<BONDS> 0
<COMMON> 78
0
0
<OTHER-SE> 74,712
<TOTAL-LIABILITY-AND-EQUITY> 74,790
<SALES> 182,610
<TOTAL-REVENUES> 182,610
<CGS> 124,120
<TOTAL-COSTS> 124,120
<OTHER-EXPENSES> 44,310
<LOSS-PROVISION> 1,158
<INTEREST-EXPENSE> 761
<INCOME-PRETAX> 13,728
<INCOME-TAX> 5,903
<INCOME-CONTINUING> 7,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,825
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
</TABLE>
