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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 APRIL 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-14082
MERRILL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0946258
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
ONE MERRILL CIRCLE
ST. PAUL, MINNESOTA 55108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-646-4501
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
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The number of shares outstanding of Registrant's Common Stock, par value $.01,
on June 10, 1997 was 8,033,350.
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PART I.--FINANCIAL INFORMATION
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<CAPTION>
PAGE(S)
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of April 30, 1997 and January 31, 1997................................ 3
Consolidated Statements of Operations for the three-month periods ended April 30, 1997 and 1996...... 4
Consolidated Statements of Cash Flows for the three-month periods ended April 30, 1997 and 1996...... 5
Notes to Consolidated Financial Statements........................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 7-8
</TABLE>
2
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MERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1997
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(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents........................................................... $ 4,113 $ 5,161
Trade receivables, less allowance for doubtful accounts of $8,017 and $6,027,
respectively...................................................................... 93,395 81,733
Work-in-process inventories......................................................... 29,323 24,958
Other inventories................................................................... 4,750 4,878
Other current assets................................................................ 7,755 9,933
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Total current assets.............................................................. 139,336 126,663
Property, plant and equipment, net.................................................... 35,884 34,717
Goodwill, net......................................................................... 36,023 34,030
Other assets, net..................................................................... 6,311 6,587
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Total assets...................................................................... $ 217,554 $ 201,997
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable, banks................................................................ $ 7,750 $ 5,950
Current maturities of long-term debt................................................ 645 645
Current maturities of capital lease obligations..................................... 287 307
Accounts payable.................................................................... 27,214 20,387
Accrued expenses.................................................................... 31,399 30,154
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Total current liabilities......................................................... 67,295 57,443
Long-term debt, net of current maturities............................................. 40,880 40,880
Capital lease obligations, net of current maturities.................................. 1,789 1,849
Other liabilities..................................................................... 5,666 5,665
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Total liabilities................................................................. 115,630 105,837
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Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized; 7,915,900 shares and
7,932,524 shares, respectively, issued and outstanding............................ 79 79
Undesignated stock: 500,000 shares authorized; no shares issued.....................
Additional paid-in capital.......................................................... 16,107 17,858
Retained earnings................................................................... 85,738 78,223
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Total shareholders' equity........................................................ 101,924 96,160
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Total liabilities and shareholders' equity........................................ $ 217,554 $ 201,997
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</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
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MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30
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1997 1996
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<S> <C> <C>
Revenues........................................................................ $ 109,859 $ 71,200
Cost of revenues................................................................ 66,274 46,030
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Gross profit.................................................................. 43,585 25,170
Selling, general and administrative expenses.................................... 28,495 17,509
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Operating income.............................................................. 15,090 7,661
Interest expense................................................................ (994) (221)
Other (expense) income, net..................................................... (125) 140
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Income before provision for income taxes...................................... 13,971 7,580
Provision for income taxes...................................................... 6,217 3,335
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Net income.................................................................... $ 7,754 $ 4,245
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Net income per common and common equivalent share:
Primary....................................................................... $ .94 $ .54
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Fully diluted................................................................. $ .94 $ .52
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Dividends per common share...................................................... $ .03 $ .03
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Weighted average number of common and common equivalent shares outstanding:
Primary....................................................................... 8,265,624 7,933,251
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Fully diluted................................................................. 8,262,468 8,104,958
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</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
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MERRILL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30
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1997 1996
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<S> <C> <C>
Operating activities
Net income.............................................................................. $ 7,754 $ 4,245
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Depreciation and amortization......................................................... 2,743 2,495
Amortization of intangibles........................................................... 798 303
Provision for losses on trade receivables............................................. 2,107 93
Deferred compensation................................................................. 689 1,233
Changes in operating assets and liabilities, net of effects from business acquisitions
Trade receivables................................................................... (13,724) (9,029)
Work-in-process inventories......................................................... (4,365) (12,233)
Other inventories................................................................... 417 4,514
Other current assets................................................................ 2,225 248
Accounts payable.................................................................... 5,408 1,498
Accrued expenses.................................................................... (2,964) (2,689)
Accrued and deferred income taxes................................................... 4,110 2,830
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Net cash provided by (used in) operating activities............................... 5,198 (6,492)
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Investing activities
Business acquisitions, net of cash acquired............................................. (1,443) (24,805)
Purchase of property, plant and equipment............................................... (3,504) (2,078)
Other, net.............................................................................. (1,029) (1,934)
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Net cash used in investing activities............................................. (5,976) (28,817)
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Financing activities
Borrowings on notes payable to banks.................................................... 16,025 60,675
Repayments on notes payable to banks.................................................... (14,225) (22,875)
Principal payments on long-term debt and capital lease obligations...................... (80) (13,982)
Repurchase of common stock.............................................................. (3,065)
Dividends paid.......................................................................... (239) (236)
Tax benefit realized upon exercise of stock options..................................... 126 88
Other equity transactions, net.......................................................... 1,188 33
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Net cash (used in) provided by financing activities............................... (270) 23,703
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Decrease in cash and cash equivalents..................................................... (1,048) (11,606)
Cash and cash equivalents, beginning of period............................................ 5,161 12,074
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Cash and cash equivalents, end of period.................................................. $ 4,113 $ 468
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</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
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MERRILL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated financial statements as of April 30, 1997 and for the
periods ended April 30, 1997 and 1996 have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the results for the indicated periods. Certain
information and accounting policies and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report on Form 10-K.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenue and expenses during the reported periods. Actual results could differ
from those estimates. The most significant areas which require the use of
management's estimates relate to the determination of the allowance for
uncollectible trade receivables, sales credit and reserves for unbillable
inventory.
2. BUSINESS ACQUISITIONS
On February 21, 1997, the Company received substantially all operating
assets and assumed certain liabilities of Roald Marth Learning Systems, Inc.,
doing business as Superstar Computing for $630,000. In addition, the agreement
requires the Company to pay contingent cash consideration of up to $5 million,
dependent on future performance of Superstar Computing, as determined by the
purchase agreement. This acquisition was not significant to the financial
position or results of operations of the Company.
On April 15, 1996, the Company completed the acquisition of substantially
all of the operating assets and assumed certain liabilities of the Corporate
Printing Company, Inc. and Affiliated Group (CPC). The Company did not purchase
any assets relating to CPC's pressroom and shipping business. On March 28, 1996,
the Company completed the acquisition of all outstanding common stock of FMC
Resource Management Corporation (FMC). Pro forma (unaudited) results for the
three month period ended April 30, 1996 as though the CPC and FMC acquisitions
had been effective on February 1, 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30, 1996
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(IN THOUSANDS
EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Revenues................................................................. $ 86,442
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Net income............................................................... $ 3,544
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Net income per share--primary............................................ $ 0.45
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</TABLE>
3. COMMON STOCK REPURCHASE
The Company repurchased 132,000 shares of its Common Stock for approximately
$3.1 million during the first quarter of fiscal year 1998.
6
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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, 1997 and 1996, and the percentage change in such items
between the two periods.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE DOLLAR
OF REVENUE INC. (DEC.)
-------------------- 1997 VS.
1997 1996 1996
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<S> <C> <C> <C>
Revenues
Financial..................................................................... 38.5% 33.3% 78%
Corporate..................................................................... 31.5 30.1 61
Commercial and other.......................................................... 18.9 24.2 21
Document management services.................................................. 11.1 12.4 39
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Total revenues.............................................................. 100.0 100.0 54
Cost of revenues................................................................ 60.3 64.6 44
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Gross profit................................................................ 39.7 35.4 73
Selling, general and administrative expenses.................................... 25.9 24.6 63
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Operating income............................................................ 13.8 10.8 97
Interest expense................................................................ (0.9) (0.3) 350
Other (expense) income, net..................................................... (0.1) 0.2 (189)
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Income before provision for income taxes.................................... 12.8 10.7 84
Provision for income taxes...................................................... 5.8 4.7 86
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Net income.................................................................. 7.0% 6.0% 83%
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</TABLE>
REVENUES.
Revenues for the first quarter of fiscal year 1998 increased 54%. The
financial revenue category increased 78% compared to the same period one year
ago and reflected the continued growth of financial market transactions and the
inclusion of a full quarter of operating results generated by the Corporate
Printing Company (CPC) business acquired in April 1996. The corporate revenue
category for the first quarter of fiscal year 1998 increased 61% when compared
to fiscal year 1997 first quarter Corporate revenues. This increase was driven
by strong revenue from investment company services (formally referred to as
funds) which doubled during the first quarter of fiscal year 1998 versus the
first quarter of fiscal year 1997, as investment company services clients
required large volumes of year-end compliance printing. The increase in the
commercial revenue category of 21% was primarily the result of increased
business generated by our managed communication programs and the inclusion of a
full quarter of FMC Resource
7
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Management Corporation (FMC) which was acquired in March of 1996. The document
management services category grew 39% during the first quarter of fiscal year
1998 when compared to the same period one year ago. Leading the growth was a 50%
increase in document service center revenues and a 33% increase in transactional
service revenues.
GROSS PROFITS.
Gross profits for the quarter increased 73% from amounts generated during
the first quarter of fiscal year 1997. The increase was principally a result of
strong volumes of activity generated by our financial and corporate revenue
categories which allowed us to maximize the utilization of our facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses increased during the first
quarter of fiscal year 1998 compared to the first quarter of fiscal year 1997.
The increase is attributed to our continued expansion of sales and marketing
activities, provision for incentive compensation and increased provision for
losses on trade receivables. Goodwill amortization related to the CPC and FMC
acquisitions also contributed to the increase in selling, general and
administrative expenses during the current quarter.
PROVISION FOR INCOME TAXES.
The effective income tax rate in the current quarter, which reflects the
estimated effective rate for fiscal year 1998, was 44.5% compared to 44.0% a
year ago. Significant differences between the effective income tax rate and
federal statutory tax rate continue to be attributable to state income taxes,
net of federal benefits and non-deductible business and entertainment expenses.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 30, 1997 increased to $72.0 million from $69.2
million at January 31, 1997. Strong sales activity continued during the first
quarter of fiscal year 1998 resulting in increased accounts receivable and
work-in-process inventory balances when compared to corresponding balances at
January 31, 1997. Offsetting the impact of strong sales activity on the increase
in working capital was the repurchase of 132,000 shares of the Company's common
stock for approximately $3.1 million. Capital expenditures for the quarter
approximated $3.5 million and were principally for leasehold improvements and
reprographic and computer based production equipment. Cash and cash equivalents
decreased by approximately $1.0 million during the quarter.
8
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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
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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 16, 1997
BY (SIGNATURE) /s/ Kay A. Barber
(NAME AND TITLE) Kay A. Barber, Chief Financial Officer
(DATE) June 16, 1997
</TABLE>
10
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
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<C> <S> <C>
11. Schedule of Computation of Per Share Earnings.......................... Filed herewith electronically
27. Financial Data Schedules............................................... Filed herewith electronically
</TABLE>
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EXHIBIT 11
MERRILL CORPORATION
SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
--------------------------
1997 1996
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<S> <C> <C>
Primary:
Net income.......................................................................... $ 7,754,218 $ 4,245,082
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Weighted average number of common shares outstanding
during the period................................................................. 7,942,083 7,875,200
Add common equivalent shares relating to outstanding options to purchase common
stock using, the treasury stock method............................................ 323,541 58,051
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Weighted average number of common and common equivalent
shares outstanding............................................................ 8,265,624 7,933,251
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Primary income per common share....................................................... $ .94 $ .54
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Fully diluted:
Net income.......................................................................... $ 7,754,218 $ 4,245,082
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Weighted average number of common shares outstanding
during the period................................................................. 7,942,083 7,875,200
Add common equivalent shares relating to outstanding options to purchase common
stock using, the treasury stock method............................................ 320,385 229,758
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Weighted average number of common and common equivalent
shares outstanding............................................................ 8,262,468 8,104,958
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Fully diluted income per common share................................................. $ .94 $ .52
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 4,113
<SECURITIES> 0
<RECEIVABLES> 101,412
<ALLOWANCES> 8,017
<INVENTORY> 34,073
<CURRENT-ASSETS> 139,336
<PP&E> 83,119
<DEPRECIATION> 47,235
<TOTAL-ASSETS> 217,554
<CURRENT-LIABILITIES> 67,295
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 101,845
<TOTAL-LIABILITY-AND-EQUITY> 217,554
<SALES> 109,859
<TOTAL-REVENUES> 109,859
<CGS> 66,274
<TOTAL-COSTS> 43,585
<OTHER-EXPENSES> 29,614
<LOSS-PROVISION> 2,107
<INTEREST-EXPENSE> 994
<INCOME-PRETAX> 13,971
<INCOME-TAX> 6,217
<INCOME-CONTINUING> 7,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,754
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
</TABLE>
