<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 OCTOBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-14082
MERRILL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0946258
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
ONE MERRILL CIRCLE
ST. PAUL, MINNESOTA 55108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-646-4501
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
-------- --------
The number of shares outstanding of Registrant's Common Stock, par value $.01,
on December 10, 1997 was 16,307,086.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I.--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of October 31, 1997 and January 31, 1997.............................. 3
Consolidated Statements of Operations for the three and nine-month periods ended October 31, 1997 and
1996................................................................................................ 4
Consolidated Statements of Cash Flows for the nine-month periods ended October 31, 1997 and 1996..... 5
Notes to Consolidated Financial Statements........................................................... 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 8-9
</TABLE>
2
<PAGE>
MERRILL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents......................................... $ 2,781 $ 5,161
Trade receivables, less allowance for doubtful accounts of $8,601
and $6,027, respectively........................................ 105,077 81,733
Work-in-process inventories....................................... 20,715 24,958
Other inventories................................................. 5,931 4,878
Other current assets.............................................. 13,651 9,933
----------- -----------
Total current assets............................................ 148,155 126,663
Property, plant and equipment, net.................................. 39,889 34,717
Goodwill, net....................................................... 42,844 34,030
Other assets, net................................................... 7,199 6,587
----------- -----------
Total assets.................................................... $ 238,087 $ 201,997
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable, banks.............................................. $ 9,800 $ 5,950
Current maturities of long-term debt.............................. 655 645
Current maturities of capital lease obligations................... 260 307
Accounts payable.................................................. 24,811 20,387
Accrued expenses.................................................. 34,361 30,154
----------- -----------
Total current liabilities....................................... 69,887 57,443
Long-term debt, net of current maturities........................... 40,725 40,880
Capital lease obligations, net of current maturities................ 1,687 1,849
Other liabilities................................................... 6,180 5,665
----------- -----------
Total liabilities............................................... 118,479 105,837
----------- -----------
Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized;
16,307,086 shares and 15,865,048 shares, respectively, issued
and outstanding................................................. 163 159
Undesignated stock: 500,000 shares authorized; no shares issued...
Additional paid-in capital........................................ 22,256 17,778
Retained earnings................................................. 97,189 78,223
----------- -----------
Total shareholders' equity...................................... 119,608 96,160
----------- -----------
Total liabilities and shareholders' equity...................... $ 238,087 $ 201,997
----------- -----------
----------- -----------
</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
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................................................. $112,091 $93,776 $337,551 $252,545
Cost of revenues......................................... 72,717 61,503 213,526 162,411
------------ ------------ ------------ ------------
Gross profit........................................... 39,374 32,273 124,025 90,134
Selling, general and administrative expenses............. 28,481 23,296 85,755 63,904
------------ ------------ ------------ ------------
Operating income....................................... 10,893 8,977 38,270 26,230
Interest expense......................................... (1,153) (1,402) (3,283) (2,807)
Other, net............................................... 351 304 449 529
------------ ------------ ------------ ------------
Income before provision for income taxes............... 10,091 7,879 35,436 23,952
Provision for income taxes............................... 4,384 3,502 15,663 10,659
------------ ------------ ------------ ------------
Net income............................................. $ 5,707 $ 4,377 $ 19,773 $ 13,293
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common and common equivalent share:
Primary................................................ $.32 $ .27 $1.15 $ .82
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted.......................................... $.32 $ .27 $1.14 $ .81
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Dividends per common share............................... $.02 $.015 $ .05 $.045
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common and common equivalent
shares outstanding:
Primary................................................ 17,744,637 16,365,000 17,169,934 16,216,926
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted.......................................... 17,795,247 16,455,428 17,269,300 16,366,856
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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
-----------------------
1997 1996
---------- -----------
<S> <C> <C>
Operating activities
Net income.......................................................................... $ 19,773 $ 13,293
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Depreciation and amortization..................................................... 7,950 7,611
Amortization of intangibles....................................................... 3,052 1,719
Provision for losses on trade receivables......................................... 3,002 2,611
Deferred compensation............................................................. 1,139 384
Changes in operating assets and liabilities, net of effects from business
acquisitions
Trade receivables............................................................... (26,000) (16,021)
Work-in-process inventories..................................................... 4,243 (18,091)
Other inventories............................................................... (763) 814
Other current assets............................................................ (1,286) 731
Accounts payable................................................................ 3,005 (2,297)
Accrued expenses................................................................ 4,978 5,473
Accrued and deferred income taxes............................................... (4,911) (3,784)
---------- -----------
Net cash provided by (used in) operating activities........................... 14,182 (7,557)
---------- -----------
Investing activities
Business acquisitions, net of cash acquired......................................... (10,390) (26,896)
Purchase of property, plant and equipment........................................... (12,716) (6,149)
Other, net.......................................................................... (627) (1,675)
---------- -----------
Net cash used in investing activities......................................... (23,733) (34,720)
---------- -----------
Financing activities
Borrowings on notes payable to banks................................................ 92,025 120,200
Repayments on notes payable to banks................................................ (88,175) (108,450)
Proceeds from issuance of long-term debt............................................ 35,000
Principal payments on long-term debt and capital lease obligations.................. (354) (14,407)
Repurchase of common stock.......................................................... (3,065)
Dividends paid...................................................................... (807) (710)
Exercise of stock options........................................................... 5,327 823
Tax benefit realized upon exercise of stock options................................. 2,141 240
Other, net.......................................................................... 79 166
---------- -----------
Net cash provided by financing activities..................................... 7,171 32,862
---------- -----------
Decrease in cash and cash equivalents................................................. (2,380) (9,415)
Cash and cash equivalents, beginning of period........................................ 5,161 12,074
---------- -----------
Cash and cash equivalents, end of period.............................................. $ 2,781 $ 2,659
---------- -----------
---------- -----------
</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, 1997, and for the
periods ended October 31, 1997 and 1996, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the results for the indicated
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. Certain information and accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended January 31, 1997.
2. BUSINESS ACQUISITIONS
On April 15, 1996, the Company completed the acquisition of substantially
all of the operating assets and assumed certain liabilities of the Corporate
Printing Company, Inc. and Affiliated Group (CPC). The Company did not purchase
any assets relating to CPC's pressroom and shipping business. In accordance with
the CPC purchase agreement, additional contingent purchase consideration in the
amount of $8 million was paid in August 1997. On March 28, 1996, the Company
completed the acquisition of all outstanding common stock of FMC Resource
Management Corporation (FMC). Pro forma (unaudited) results for the nine-month
period ended October 31, 1996, as though the CPC and FMC acquisitions had been
effective on February 1, 1996, are as follows:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
OCTOBER 31, 1996
------------------
(IN THOUSANDS
EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Revenues.................................................................. $ 267,787
--------
--------
Net income................................................................ $ 12,592
--------
--------
Net income per share--primary............................................. $ 0.77
--------
--------
</TABLE>
On September 30, 1997, the Company completed the acquisition of
substantially all of the operating assets and assumed certain liabilities of
Total Management Support Services, LLC for $1,000,000 cash and contingent
consideration of up to $250,000. On February 21, 1997, the Company received
substantially all operating assets and assumed certain liabilities of Roald
Marth Learning Systems, Inc., doing business as Superstar Computing for
$630,000. In addition, the agreement requires the Company to pay contingent cash
consideration of up to $5 million, dependent on future performance of Superstar
Computing, as determined by the purchase agreement. These acquisitions are not
significant to the financial position or results of operations of the Company.
6
<PAGE>
3. SHAREHOLDERS' EQUITY
The Company repurchased 264,000 shares of its Common Stock for approximately
$3.1 million during the first quarter of fiscal year 1998.
In August 1997, the Company's Board of Directors approved a 2-for-1 split of
the Company's Common Stock. The split was effected in the form of a 100%
dividend of the Company's Common Stock on October 15, 1997, for each common
share owned by shareholders of record at the close of business on September 30,
1997. All per share and number of share data have been retroactively restated to
reflect the stock split.
7
<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 revenues
of certain items in the Company's statements of operations for the three and
nine-month periods ended October 31, 1997 and 1996, and the percentage change in
such items between the corresponding periods.
<TABLE>
<CAPTION>
THREE-MONTHS NINE-MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
--------------------------------- ---------------------------------
PERCENTAGE PERCENTAGE
INCREASE INCREASE
PERCENTAGE (DECREASE) PERCENTAGE (DECREASE)
OF REVENUES ----------- OF REVENUES -----------
-------------------- 1997 VS. -------------------- 1997 VS.
1997 1996 1996 1997 1996 1996
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Financial....................................... 37.3% 41.7% 7% 36.8% 38.3% 28%
Corporate....................................... 32.8 23.8 64 34.1 28.3 61
Commercial and other............................ 18.7 23.3 (4) 18.0 21.9 10
Document management services.................... 11.2 11.2 20 11.1 11.5 29
--------- --------- --------- ---------
Total revenues................................ 100.0 100.0 20 100.0 100.0 34
Cost of revenues.................................. 64.9 65.6 18 63.3 64.3 32
--------- --------- --------- ---------
Gross profit.................................. 35.1 34.4 22 36.7 35.7 38
Selling, general and administrative expenses...... 25.4 24.8 22 25.4 25.3 34
--------- --------- --------- ---------
Operating income.............................. 9.7 9.6 21 11.3 10.4 46
Interest expense.................................. (1.0) (1.5) (18) (1.0) (1.1) 17
Other, net........................................ 0.3 0.3 16 0.2 0.2 (15)
--------- --------- --------- ---------
Income before provision for income taxes...... 9.0 8.4 28 10.5 9.5 48
Provision for income taxes........................ 3.9 3.7 25 4.6 4.2 47
--------- --------- --------- ---------
Net income.................................... 5.1% 4.7% 30 5.9% 5.3% 49
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
REVENUES
Revenues for the third quarter of fiscal year 1998 and the nine-month period
ended October 31, 1997, increased 20% and 34%, respectively, when compared to
the corresponding periods in the previous year. Financial revenues increased 7%
for the current quarter and 28% for the current nine-month period when compared
to the same periods a year ago. The 7% growth for the current quarter reflects
the slowdown of transactional revenue during the typical summer slow-down in the
deal marketplace. The increased revenues reflect continued strong mergers and
acquisition activity in financial market transactions during the first nine
months of fiscal year 1998. The Company is also currently experiencing strong
typesetting demand which is a leading indicator of continued strong volume. The
nine-month period increase is also a result of the Corporate Printing Company
(CPC) business, which was acquired in April 1996. The corporate revenue category
increases of 64% and 61% for the current quarter and nine-month period,
respectively, when compared to the same periods a year ago, are attributed to
strong corporate compliance
8
<PAGE>
work during the first nine months of fiscal year 1998, continued demand for
EDGAR services and strong growth in investment company services work. The
decrease of 4% in the commercial revenue category for the current quarter versus
last year, is the result of the absence of ballot production business as fiscal
1998 is a non-election year. The increase in the commercial revenue category of
10% for the nine-month period was primarily the result of increased business
from our managed communication programs. The nine-month period increase is also
a result of the FMC Resource Management Corporation (FMC) business, which was
acquired in March 1996. The document management services category for the
current quarter and nine-month period increased 20% and 29%, respectively, when
compared to the same periods in fiscal year 1997. Leading the growth was a 42%
increase in document service center revenues for the current quarter. Two new
document service centers were opened during the quarter.
GROSS PROFIT
Gross profit increased as a percentage of revenues for the current quarter
as a result of an increase in corporate margins compared to the prior year
period. The nine-month period gross profit increased as a percentage of revenues
primarily as a result of strong margins in our corporate revenue category and
strong activity levels generated by our financial and corporate revenue
categories during fiscal year 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
During the current quarter and nine-month period, selling, general and
administrative expenses increased as a percentage of revenues when compared to
the same periods a year ago, as a result of our continued expansion of sales and
marketing activities and provisions for incentive compensation.
PROVISION FOR INCOME TAXES
The effective income tax rate in the current quarter and nine-month period
was 43.4% and 44.2%, respectively, compared to 44.4% and 44.5% for the third
quarter and nine-month period ended October 31, 1996, respectively. The decrease
in the effective income tax rate in the third quarter resulted from a decrease
in non-deductible business and entertainment expenses as a percentage of taxable
income. Significant differences between the effective income tax rate and
federal statutory tax rate continue to be attributable to state income taxes,
net of federal benefits and non-deductible business and entertainment expenses.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at October 31, 1997, increased to $78.3 million, compared to
$69.2 million at January 31, 1997. Strong sales activity continued during the
first nine months of fiscal year 1998, resulting in an increase in the trade
receivables balance, compared to the corresponding balance at January 31, 1997.
Work-in-process inventories decreased at October 31, 1997, from January 31,
1997, reflecting the normal summer deal market activity discussed above. Capital
expenditures for the nine-month period ended October 31, 1997, approximated
$12.7 million and were principally for leasehold improvements and reprographic
and computer based production equipment. Cash and cash equivalents decreased by
approximately $2.4 million during the nine-month period ended October 31, 1997.
9
<PAGE>
PART II.--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Schedule of Computation of Per Share Earnings
(b) Reports on Form 8-K
None.
10
<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 15, 1997
BY (SIGNATURE) /s/ Kay A. Barber
(NAME AND TITLE) Kay A. Barber, Chief Financial Officer
(DATE) December 15, 1997
</TABLE>
11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD OF FILING
- --------- -------------------------------
<C> <S> <C>
11.1 Schedule of Computation of Per Share Earnings.......................... Filed herewith electronically
27. Financial Data Schedules............................................... Filed herewith electronically
</TABLE>
<PAGE>
EXHIBIT 11.1
MERRILL CORPORATION
SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Primary:
Net income........................................ $ 5,706,667 $ 4,376,851 $ 19,772,616 $ 13,293,346
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common shares
outstanding during the period................... 16,258,722 15,816,150 16,068,965 15,771,984
Add common equivalent shares relating to
outstanding options to purchase common stock
using the treasury stock method................. 1,485,915 548,850 1,100,969 444,942
------------- ------------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding............... 17,744,637 16,365,000 17,169,934 16,216,926
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Primary income per common and common equivalent
shares outstanding................................ $.32 $.27 $1.15 $.82
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Fully diluted:
Net income........................................ $ 5,706,667 $ 4,376,851 $ 19,772,616 $ 13,293,346
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common shares
outstanding during the period................... 16,258,722 15,816,150 16,068,965 15,771,984
Add common equivalent shares relating to
outstanding options to purchase common stock
using, the treasury stock method................ 1,536,525 639,278 1,200,335 594,872
------------- ------------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding............... 17,795,247 16,455,428 17,269,300 16,366,856
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Fully diluted income per common and common
equivalent shares outstanding..................... $.32 $.27 $1.14 $.81
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 2,781
<SECURITIES> 0
<RECEIVABLES> 113,678
<ALLOWANCES> 8,601
<INVENTORY> 26,646
<CURRENT-ASSETS> 148,155
<PP&E> 92,338
<DEPRECIATION> 52,449
<TOTAL-ASSETS> 238,087
<CURRENT-LIABILITIES> 69,887
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 119,445
<TOTAL-LIABILITY-AND-EQUITY> 238,087
<SALES> 337,551
<TOTAL-REVENUES> 337,551
<CGS> 213,526
<TOTAL-COSTS> 213,526
<OTHER-EXPENSES> 88,589
<LOSS-PROVISION> 3,002
<INTEREST-EXPENSE> 3,283
<INCOME-PRETAX> 35,436
<INCOME-TAX> 15,663
<INCOME-CONTINUING> 19,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,773
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.14
</TABLE>
