<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 APRIL 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-14082
MERRILL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0946258
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
One Merrill Circle
St. Paul, Minnesota 55108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-646-4501
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
-------- --------
The number of shares outstanding of Registrant's Common Stock, par value $.01,
on June 10, 1996 was 7,890,083.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of April 30, 1996 and January 31,
1996.
Consolidated Statements of Operations for the three-month periods
ended April 30, 1996 and 1995.
Consolidated Statements of Cash Flows for the three-month periods
ended April 30, 1996 and 1995.
Notes to Consolidated Financial Statements.
2
<PAGE>
MERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1996 1996
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents.......................................................... $ 468 $ 12,074
Trade receivables, less allowance for doubtful accounts of $3,638 and $3,545,
respectively...................................................................... 76,328 48,566
Work in process inventories........................................................ 26,784 10,898
Other inventories.................................................................. 2,456 5,235
Other current assets............................................................... 4,666 2,463
----------- -----------
Total current assets............................................................. 110,702 79,236
Property, plant and equipment, net................................................... 38,313 31,681
Goodwill, net........................................................................ 31,720 10,528
Other assets, net.................................................................... 6,157 4,076
----------- -----------
Total assets..................................................................... $ 186,892 $ 125,521
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable, bank................................................................. $ 43,800 $ 6,000
Current maturities of long-term debt............................................... 1,118 770
Current maturities of capital lease obligations.................................... 161 538
Accounts payable................................................................... 25,596 17,598
Accrued expenses................................................................... 15,622 14,951
Income taxes payable............................................................... 4,827
----------- -----------
Total current liabilities........................................................ 91,124 39,857
Long-term debt, net of current maturities............................................ 9,135 4,525
Capital lease obligations, net of current maturities................................. 2,060 1,929
Other liabilities.................................................................... 2,709 1,476
----------- -----------
Total liabilities................................................................ 105,028 47,787
----------- -----------
Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized; 7,876,933 shares and
7,855,783 shares, respectively, issued and outstanding............................ 79 78
Undesignated stock: 500,000 shares authorized; no shares issued....................
Additional paid-in capital......................................................... 16,437 16,324
Retained earnings.................................................................. 65,348 61,332
----------- -----------
Total shareholders' equity....................................................... 81,864 77,734
----------- -----------
Total liabilities and shareholders' equity....................................... $ 186,892 $ 125,521
----------- -----------
----------- -----------
</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
APRIL 30
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues........................................................................ $ 71,200 $ 57,432
Cost of revenues................................................................ 46,030 38,816
--------- ---------
Gross profit.................................................................. 25,170 18,616
Selling, general and administrative expenses.................................... 17,509 14,932
--------- ---------
Operating income.............................................................. 7,661 3,684
Interest expense................................................................ (221) (212)
Other income.................................................................... 140 134
--------- ---------
Income before provision for income taxes...................................... 7,580 3,606
Provision for income taxes...................................................... 3,335 1,530
--------- ---------
Net income.................................................................... $ 4,245 $ 2,076
--------- ---------
--------- ---------
Net income per common and common equivalent share:
Primary....................................................................... $ .54 $ .26
--------- ---------
--------- ---------
Fully diluted................................................................. $ .52 $ .26
--------- ---------
--------- ---------
Dividends per common share...................................................... $ .03 $ .03
--------- ---------
--------- ---------
Weighted average number of common and common equivalent shares outstanding:
Primary....................................................................... 7,933,251 7,903,269
--------- ---------
--------- ---------
Fully diluted................................................................. 8,104,958 7,902,790
--------- ---------
--------- ---------
</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>
THREE MONTHS ENDED
APRIL 30
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Operating activities
Net income............................................................................. $ 4,245 $ 2,076
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization........................................................ 2,495 2,380
Amortization of intangibles.......................................................... 303 287
Provision for losses on trade receivables............................................ 93 372
Tax benefit realized upon exercise of stock options.................................. 88
Deferred compensation................................................................ (268) (849)
Changes in operating assets and liabilities
Trade receivables.................................................................. (9,029) (8,454)
Work in process inventories........................................................ (12,233) (4,433)
Other inventories.................................................................. 4,514 (329)
Other current assets............................................................... 248 43
Accounts payable................................................................... 1,498 2,794
Accrued expenses................................................................... (2,689) (167)
Accrued and deferred income taxes.................................................. 2,830 457
--------- ---------
Net cash used in operating activities............................................ (7,905) (5,823)
--------- ---------
Investing activities
Business acquisitions, net of cash acquired............................................ (24,805)
Purchase of property, plant and equipment.............................................. (2,078) (1,807)
Other, net............................................................................. (433) 34
--------- ---------
Net cash used in investing activities............................................ (27,316) (1,773)
--------- ---------
Financing activities
Borrowings on note payable to bank..................................................... 60,675
Repayments on note payable to bank..................................................... (22,875)
Principal payments on long-term debt and capital lease obligations..................... (13,982) (152)
Dividends paid......................................................................... (236) (229)
Other equity transactions, net......................................................... 33 (114)
--------- ---------
Net cash provided by (used in) financing activities.............................. 23,615 (495)
--------- ---------
Decrease in cash and cash equivalents.................................................... (11,606) (8,091)
Cash and cash equivalents, beginning of period........................................... 12,074 9,967
--------- ---------
Cash and cash equivalents, end of period................................................. $ 468 $ 1,876
--------- ---------
--------- ---------
</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 April 30, 1996 and for the
periods ended April 30, 1996 and 1995 have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the results for the indicated periods. Certain
information and accounting policies and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report on Form 10-K. The preparation of the financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities and
the reported amounts of revenue and expenses during the reported periods. Actual
results could differ from those estimates.
2. BUSINESS ACQUISITIONS
On April 15, 1996, the Company purchased substantially all of the operating
assets and assumed certain liabilities of The Corporate Printing Company, Inc.
and Affiliated Group (CPC) for approximately $22.6 million in cash. The purchase
price is subject to reductions equal to the amount that certain liabilities, as
determined in the agreement, of CPC as of January 31, 1996, exceed $10 million,
and by the amount that CPC's book value of assets as of January 31, 1996, less
liabilities assumed by the Company is less than $13.2 million. The purchase
price is also subject to reductions for the collection of certain accounts
receivables, net losses of CPC for the period January 1, 1996 through April 15,
1996 and expenses incurred with closing certain foreign offices of CPC. The
purchase price may be increased by 11% of CPC's affiliated Subchapter S
corporations' net income for the period February 1, 1996 to April 15, 1996. The
Company did not purchase any assets relating to CPC's pressroom and shipping
businesses. The agreement calls for additional contingent consideration, not to
exceed $12 million, based on the increase average stock price, as defined in the
agreement, of the Company's common stock through April 15, 2001. The Company
also entered into a five year non-compete agreement with CPC's principal
shareholder that requires payments totalling $3.4 million. The principal
shareholder is also entitled to an additional $500,000 annually, through March
31, 2001, if certain printing business is maintained by a specified customer.
The acquisition has been accounted for as a purchase. The excess of the purchase
price over the estimated fair value of the net identifiable assets acquired
approximated $15.3 million and is being amortized using the straight-line method
over 15 years.
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 a promissory
note for $2.0 million. The agreement calls for additional contingent
consideration, not to exceed $4 million, based on annual gross profits through
January 31, 2001 as defined in the agreement. The acquisition has been accounted
for as a purchase. The excess of the purchase price over the estimated fair
value of the net identifiable assets acquired approximated $6.0 million and is
being amortized using the straight-line method over 15 years.
The Company has determined that it is impracticable at this time to provide
the pro forma financial information required under applicable Securities and
Exchange Commission rules and regulations. The Company will file the required
pro forma financial information in an amendment to the Form 8-K filed on April
15, 1996 as listed in Part II, Item 6, of the Company's April 30, 1996 Form
10-Q.
6
<PAGE>
MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
3. FINANCIAL AGREEMENT
The Company amended its revolving credit agreement during the first quarter
of fiscal year 1997. The agreement provides for an unsecured bank line of credit
through May 31, 1997. Amounts available for borrowing under the amended
agreement were increased from $15 million to $60 million. Under the amended
agreement, the Company has the option to borrow at the bank's reference rate
(8.25% at April 30, 1996), at 1.0% above the London Interbank Offered Rate or at
1.0% above a certificate of deposit based rate. The Company is required to pay a
commitment fee of 0.25% on the unused portion of the line. The amended revolving
credit agreement includes various covenants, including the maintenance of
minimum tangible net worth and limitations on the amounts of certain
transactions without the approval of the bank.
7
<PAGE>
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 revenue
of certain items in the Company's statements of operations for the three-month
periods ended April 30, 1996 and 1995, and the percentage change in such items
between the two periods.
<TABLE>
<CAPTION>
PERCENTAGE
DOLLAR
PERCENTAGE INC.
OF REVENUE (DEC.)
---------------- 1996 VS.
1996 1995 1995
------ ------ ----------
<S> <C> <C> <C>
Revenues
Financial..................................................................... 33.3% 25.8% 60%
Corporate..................................................................... 30.1 38.2 (2)
Commercial and other.......................................................... 24.2 21.9 37
Document management services.................................................. 12.4 14.1 9
------ ------
Total revenues.............................................................. 100.0 100.0 24
Cost of revenues................................................................ 64.6 67.6 19
------ ------
Gross profit................................................................ 35.4 32.4 35
Selling, general and administrative expenses.................................... 24.6 26.0 17
------ ------
Operating income............................................................ 10.8 6.4 108
Interest expense................................................................ (0.3) (0.4) 4
Other income.................................................................... 0.2 0.3 4
------ ------
Income before provision for income taxes.................................... 10.7 6.3 110
Provision for income taxes...................................................... 4.7 2.7 118
------ ------
Net income.................................................................. 6.0% 3.6% 104
------ ------
------ ------
</TABLE>
REVENUES. Revenues for the first quarter of fiscal year 1997 increased 24%.
Financial revenue increased approximately 60% compared to the same period one
year ago and reflects the continued growth of financial market transactions
which the Company began to experience during the last half of fiscal year 1996.
The increase in Commercial revenue of approximately 37% was due to the result of
election-related printing revenue generated during the first quarter of fiscal
year 1997 and the maturation of national client relationships and revenues from
our Merrill/May operation. Document management service revenue increased 9% over
the same period one year ago, but as a percent of total revenue, remained
relatively consistent with previous fiscal year 1996 quarter results. Corporate
revenue for the first quarter of fiscal year 1997 experienced a slight decrease
when compared to similar amounts one year ago and is believed to be the result
of timing of certain projects which we expect to increase during the remainder
of the year. The increase in revenue for the first quarter of fiscal year 1997
was not materially impacted by the recent acquisitions of FMC Resource
Management Corporation (FMC) and Corporate Printing Company (CPC) since these
transactions closed during the latter part of the first quarter.
GROSS PROFITS. Gross profits for the quarter increased 35% from amounts
generated during the first quarter of fiscal year 1996. The increase was
principally a result of the strong Financial category
8
<PAGE>
revenue growth which typically realizes higher margins as compared to other
category revenue and by operational efficiencies at the Company's central
typesetting facility due to the increase in volume of Financial activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased during the first quarter of fiscal year 1997
compared to the first quarter of fiscal year 1996. The increase is attributed to
the continued expansion of the Company's sales and marketing efforts
particularly at Merrill/May. Selling, general and administrative expenses, as a
percent of revenue, decreased slightly during the first quarter of fiscal year
1997, when compared to the same period one year ago, which reflects the fixed
nature of certain of these expenses.
PROVISION FOR INCOME TAXES. The effective income tax rate in the current
quarter, which reflects the estimated effective rate for fiscal year 1997, was
44.0% compared to 42.4% a year ago. The increase in the effective rate is a
result of increased non-deductible business entertainment expenses being
incurred in conjunction with the Company's expanded selling and marketing
efforts.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 30, 1996 decreased to $19.6 million from $39.4
million at January 31, 1996, reflecting the impact of the FMC and CPC
acquisitions during the first quarter. (See Note 2) These acquisitions were
principally financed by the Company's revolving credit agreement which was
amended during the quarter. Under the amended revolving credit agreement which
expires in May of 1997, the amount available for borrowing were increased from
$15 million to $60 million. The amount outstanding under the revolving credit
agreement at April 30, 1996, was $43.8 million compared to $6 million at January
31, 1996. The increase in sales activity during the quarter as compared to sales
activity during the fourth quarter of fiscal year 1996 partially offset the
financial impact of the acquisitions. The increase in sales activity and timing
of the acquisitions late in the quarter resulted in a corresponding increase in
trade receivables of $9.0 million and $12.2 million in work-in-progress
inventories at April 30, 1996. Capital expenditures for the quarter approximated
$2.1 million and were principally for production equipment. Cash and cash
equivalents decreased by $11.6 million during the quarter.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 "Accounting for Stock-Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The Company intends to follow the option that permits
companies to apply current accounting standards for stock-based employee
compensation. Effective with fiscal year-end 1997 reporting, the Company will
disclose pro forma net income and net income per share amounts as if Statement
No. 123 were applied.
9
<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
A Form 8-K, dated March 29, 1996, was filed during the first quarter of
the fiscal year ended January 31, 1997 relating to the FMC Resource
Management Corporation acquisition. This Form 8-K was subsequently
amended on June 10, 1996.
A Form 8-K, dated April 15, 1996, was filed during the first quarter of
the fiscal year ended January 31, 1997 relating to the Corporate
Printing Company, Inc. and Affiliated Group's acquisition.
10
<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) June 14, 1996
BY (SIGNATURE) /s/ Kay A. Barber
(NAME AND TITLE) Kay A. Barber, Chief Financial Officer
(DATE) June 14, 1996
</TABLE>
11
<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
ENDED APRIL 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Primary:
Net income........................................................................ $ 4,245,082 $ 2,075,544
------------- -------------
------------- -------------
Weighted average number of common shares outstanding during the period............ 7,875,200 7,641,635
Add common equivalent shares relating to outstanding options to purchase common
stock using, the treasury stock method........................................... 58,051 261,634
------------- -------------
Weighted average number of common and common equivalent
shares outstanding........................................................... 7,933,251 7,903,269
------------- -------------
------------- -------------
Primary income per common share..................................................... $ .54 $ .26
------------- -------------
------------- -------------
Fully diluted:
Net income........................................................................ $ 4,245,082 $ 2,075,544
------------- -------------
------------- -------------
Weighted average number of common shares outstanding during the period............ 7,875,200 7,641,635
Add common equivalent shares relating to outstanding options to purchase common
stock using, the treasury stock method........................................... 229,758 261,155
------------- -------------
Weighted average number of common and common equivalent
shares outstanding........................................................... 8,104,958 7,902,790
------------- -------------
------------- -------------
Fully diluted income per common share............................................... $ .52 $ .26
------------- -------------
------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 468
<SECURITIES> 0
<RECEIVABLES> 79,966
<ALLOWANCES> 3,638
<INVENTORY> 29,240
<CURRENT-ASSETS> 110,702
<PP&E> 75,346
<DEPRECIATION> 37,033
<TOTAL-ASSETS> 186,892
<CURRENT-LIABILITIES> 91,124
<BONDS> 12,474
0
0
<COMMON> 79
<OTHER-SE> 81,785
<TOTAL-LIABILITY-AND-EQUITY> 186,892
<SALES> 71,200
<TOTAL-REVENUES> 71,200
<CGS> 46,030
<TOTAL-COSTS> 46,030
<OTHER-EXPENSES> 17,509
<LOSS-PROVISION> 93
<INTEREST-EXPENSE> 221
<INCOME-PRETAX> 7,580
<INCOME-TAX> 3,335
<INCOME-CONTINUING> 4,245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,245
<EPS-PRIMARY> .54
<EPS-DILUTED> .52
</TABLE>
