MERRILL CORP
8-K, 1999-11-10
COMMERCIAL PRINTING
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934


Date of Report (Date of earliest event reported) November 8, 1999



MERRILL CORPORATION
(Exact name of registrant as specified in its charter)

Minnesota   0-14082   41-0946258
(State or other jurisdiction   (Commission File Number)   (I.R.S. Employer
of Incorporation)       Identification No.)

One Merrill Circle, St. Paul, Minnesota 55108
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (651) 646-4501



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.

    MERRILL CORPORATION
(Registrant)
 
Date: November 8, 1999
 
 
 
By:
 
/s/ 
KAY A. BARBER   
Kay A. Barber
Vice President of Finance, Chief Financial Officer and Treasurer


Item 5.  Other Events




THIRD QUARTER OUTLOOK

    Estimated operating results for the fiscal quarter ending October 31, 1999 are strong. In addition, net debt was reduced by over $15 million between July 31, 1999 and November 2, 1999. The following table sets forth our revenue and the number of composition pages processed for the two months ended September 30, 1998 and 1999, respectively:

 
  Two Months Ended
September 30,

   
 
 
  1998
  1999
  Growth
 
Revenue (in millions)   $ 70.3   $ 91.6   30.4 %
Composition pages (1)     244,748     294,330   20.3  

(1)
Represents number of composition pages processed during the periods indicated for our Financial Document Services business unit.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

    The following unaudited pro forma consolidated financial data of our company are based on our historical consolidated financial statements adjusted to give effect to the transactions described below and our proposed merger with Viking Merger Sub, Inc., the related merger financing and the application of the proceeds from the merger financing.

    The unaudited pro forma consolidated balance sheet gives effect to the merger, the related merger financing and the application of the proceeds thereof, as if it had occurred on July 31, 1999. The unaudited pro forma consolidated statement of operations for the year ended January 31, 1999 and the six month period ended July 31, 1999 give effect to the following as if each had occurred at the beginning of the period presented:


    The pro forma adjustments are described in the accompanying notes to the financial statements and were applied to the respective historical consolidated financial statements of our company to reflect and account for the merger as a recapitalization consisting of an equity investment by investors, debt financing and the redemption of shares in the merger. As a recapitalization, the historical basis of our assets and liabilities will be carried forward to the surviving company with the aggregate cost of repurchasing our shares accounted for as a reduction of shareholders' equity. Accordingly, the historical basis of our assets and liabilities has not been impacted by the merger.

    The unaudited pro forma consolidated financial data are based upon estimates, available information and certain assumptions that management believes are reasonable under the circumstances and may be revised as additional information becomes available. The unaudited pro forma consolidated financial data should be read in conjunction with our historical financial statements, including the notes thereto, our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information appearing in our 1999 Annual Report and in our Form 10-Q for the quarter ended July 31, 1999. The unaudited pro forma consolidated financial data do not purport to represent what our actual results or financial position would have been if the merger and the other transactions described above had actually occurred on the dates indicated and are not necessarily representative of our results for any future period.

MERRILL CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

 
  As of July 31, 1999
 
 
  Historical
  Merger Adjustments
  Pro Forma
 
 
  (dollars in thousands)

 
ASSETS        
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents   $ 11,001   $ (11,001 )(1) $  
Trade receivables, net     145,796         145,796  
Work-in-process inventories     16,848         16,848  
Other inventories     8,785         8,785  
Other current assets     15,369     11,489  (2)   26,858  
   
 
 
 
Total current assets     197,799     488     198,287  
Property, plant and equipment, net     58,122         58,122  
Goodwill, net     78,296         78,296  
Other assets     12,944     10,238  (3)   31,808  
            9,020  (1)      
            (394 )(4)      
   
 
 
 
Total assets   $ 347,161   $ 19,352   $ 366,513  
   
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes payable to banks   $ 68,000   $ (68,000 )(1) $  
Current maturities of long-term debt     960     (210 )(1)   750  
Current maturities of capital lease obligations     204         204  
Accounts payable     35,600         35,600  
Accrued expenses     37,993     (835 )(1)   37,158  
   
 
 
 
Total current liabilities     142,757     (69,045 )   73,712  
 
Revolving credit facility
 
 
 
 
 
 
 
 
 
 
20,559
 
 (1)
 
 
 
20,559
 
 
Term loans         205,000  (1)   205,000  
Notes         150,000  (1)   150,000  
Long term debt, net of current maturities     38,110     (38,110 )(1)    
Capital lease obligations, net of current maturities     1,292         1,292  
Other liabilities     10,266         10,266  
   
 
 
 
Total liabilities     192,425     268,404     460,829  
   
 
 
 
Preferred stock         35,265  (1)   35,265  
Shareholders' equity (deficit)     154,736     (284,317 )(5)   (129,581 )
   
 
 
 
Total liabilities and shareholders' equity (deficit)   $ 347,161   $ 19,352   $ 366,513  
   
 
 
 

MERRILL CORPORATION

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

(1)
Sets forth the estimated sources and uses of funds for the merger and the related financings:
 
 
 
 
 
(dollars in thousands)

Sources:      
Existing cash   $ 11,001
Revolving credit facility (a)     20,559
Term loans     205,000
Notes     150,000
Preferred stock and warrants (b)     40,000
Management rollover (c)     21,540
Common stock purchased by DLJMB funds     70,683
   
Total Sources    $ 518,783
   
Uses:      
Cash purchase of outstanding shares and options   $ 359,236
Management rollover     21,540
Repayment of existing debt     106,320
Fees and expenses     23,888
Funding of other obligations (d)     7,799
   
Total Uses    $ 518,783
   


(2)
Reflects tax benefit of expense adjustments at the statutory tax rate of 38.9% as shown below:
 
 
 
 
 
 

 
 
 
(dollars in thousands)

 
 
Option cash proceeds       $ 25,740  
Non-capitalized transaction fees and expenses   13,650        
Less: estimated non-deductible portion   (10,250 )      
   
       
Deductible non-capitalized transaction fees and expenses         3,400  
Write-off of existing deferred debt issuance costs         394  
       
 
Total deductible expenses         29,534  
Statutory tax rate         38.9 %
       
 
Tax benefit       $ 11,489  
       
 

(3)
Represents the portion of estimated transaction fees and expenses attributable to the new credit facility and the notes.

(4)
Reflects the write-off of existing deferred debt issuance costs.

(5)
Represents the change in shareholders' equity (deficit) as a result of the merger, including the merger financing and the application of the proceeds:


 
  (dollars in thousands)

 
Cash to purchase shares (a)   $ (333,496 )
Option cash proceeds (b)     (25,740 )
Non-capitalized transaction fees and expenses (c)     (13,650 )
Write-off of existing deferred debt issuance costs     (394 )
Common stock purchased by DLJMB funds     70,683  
Value ascribed to warrants     4,735  
Receivable related to management loans     2,056  
Tax benefit of expense adjustments     11,489  
   
 
Total change in stockholders' equity (deficit)   $ (284,317 )
   
 

MERRILL CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

for the year ended January 31, 1999

 
   
  Acquisitions
   
   
   
   
 
 
  Company Historical
  Net Acqusition Adjustments
  Superstar Computing
  Merger Adjustments
   
 
 
  Daniels
  Executech
  Alternatives
  Pro Forma
 
 
  (dollars in thousands)

 
Revenue   $ 509,543   $ 66,159   $ 2,367   $ 20,879   $   $ (1,524 ) $   $ 597,424  
Cost of revenue     330,632     49,081     1,122     15,802     569  (1)   (1,227 )       394,854  
                              (1,125 )(2)                  
   
 
 
 
 
 
 
 
 
Gross profit     178,911     17,078     1,245     5,077     556     (297 )       202,570  
Selling, general and administrative expenses     127,705     13,670     713     4,671     1,453  (3)   (2,839 )   (667 )(4)   142,961  
                              (1,981 )(2)         236  (5)      
   
 
 
 
 
 
 
 
 
Operating income     51,206     3,408     532     406     1,084     2,542     431     59,609  
Interest expense     3,961     1,281         270             35,996  (6)   41,508  
Other (income) expense, net     (426 )   75     (1 )                   (352 )
   
 
 
 
 
 
 
 
 
Income (loss) before provision for income taxes     47,671     2,052     533     136     1,084     2,542     (35,565 )   18,453  
Provision for (benefit from) income taxes     21,214                         (11,528 )(7)   9,686  
   
 
 
 
 
 
 
 
 
Income (loss) from continuing operations     26,457     2,052     533     136     1,084     2,542     (24,037 )   8,767  
Preferred stock dividends                             6,052  (8)   6,052  
   
 
 
 
 
 
 
 
 
Income (loss) from continuing operations available to common   $ 26,457   $ 2,052   $ 533   $ 136   $ 1,084   $ 2,542   $ (30,089 ) $ 2,715  
   
 
 
 
 
 
 
 
 
Other Data:                                                  
EBITDA (9)   $ 71,069   $ 5,734   $ 550   $ 443   $ 3,106   $ 677   $ 367   $ 81,946  
Adjusted EBITDA (9)                                             85,064  
Depreciation and amortization of intangibles     19,863     2,326     18     37     2,022     (1,865 )   (64 )   22,337  
Capital expenditures     16,479     985     267     342                 18,073  
Cash interest expense     3,961                                         40,232  
Ratio of earnings to fixed charges     7.8 x                                       1.4 x

MERRILL CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

for the six month period ended July 31, 1999

 
   
  Acquisitions
   
   
   
   
 
 
  Company Historical
  Net Acquisition Adjustments
  Superstar Computing
  Merger Adjustments
   
 
 
  Daniels
  Alternatives
  Pro Forma
 
 
  (dollars in thousands)

 
Revenue   $ 298,073   $ 15,725   $ 6,837   $   $ (292 ) $   $ 320,343  
Cost of revenue     193,962     10,622     4,954     116  (1)   (178 )         208,863  
                        (613 )(2)                
   
 
 
 
 
 
 
 
Gross profit     104,111     5,103     1,883     497     (114 )       111,480  
Selling, general and administrative expenses     76,009     2,814     2,295     326  (3)   (226 )   (425 )(4)   80,064  
                        (852 )(2)         123  (5)      
 
Merger costs
 
 
 
 
 
1,130
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,130
 
)
 
 
 
 
 
   
 
 
 
 
 
 
 
Operating income     26,972     2,289     (412 )   1,023     112     1,432     31,416  
Interest expense     3,167     231     63                 17,299  (6)   20,760  
 
Other expense, net
 
 
 
 
 
596
 
 
 
 
 
37
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
633
 
 
   
 
 
 
 
 
 
 
Income (loss) before provision for income taxes     23,209     2,021     (475 )   1,023     112     (15,867 )   10,023  
Provision for (benefit from) income taxes     10,467                     (5,006 )(7)   5,461  
   
 
 
 
 
 
 
 
Income (loss) from continuing operations     12,742     2,021     (475 )   1,023     112     (10,861 )   4,562  
Preferred stock dividends                         2,925  (8)   2,925  
   
 
 
 
 
 
 
 
Income (loss) from continuing operations available to common   $ 12,742   $ 2,021   $ (475 ) $ 1,023   $ 112   $ (13,786 ) $ 1,637  
   
 
 
 
 
 
 
 
Other Data:                                            
EBITDA (9)   $ 39,189   $ 2,694   $ (382 ) $ 1,465   $ 100   $ 275   $ 43,341  
Adjusted EBITDA (9)                                       44,223  
Depreciation and amortization of intangibles     11,087     405     30     442     (12 )   (27 )   11,925  
Capital expenditures     5,125     37     93                 5,255  
Cash interest expense     3,167                                   20,122  
Ratio of earnings to fixed charges     5.9 x                                 1.4 x

MERRILL CORPORATION

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

(1)
Reflects additional depreciation and amortization expense resulting from fair value adjustments to property, plant and equipment attributable to the Daniels and Executech acquisitions.

(2)
Reflects the elimination of historical operating costs in conjunction with the Daniels and Alternatives acquisitions.

 
  Year Ended January 31, 1999
  Six Months Ended July 31, 1999
 
  Daniels
  Alternatives
  Total
  Daniels
  Alternatives
  Total
 
  (dollars in thousands)

Contractual executive compensation   $ 867   $ 626   $ 1,493   $ 442   $ 202   $ 644
Services and facilities (a)     713         713     371         371
Reduced employee compensation and
benefits
    900         900     450         450
   
 
 
 
 
 
    $ 2,480   $ 626   $ 3,106   $ 1,263   $ 202   $ 1,465
   
 
 
 
 
 

(3)
Reflects the amortization of goodwill on a straight line basis.

 
  Year Ended January 31, 1999
 
  Daniels
  Executech
  Alternatives
  Total
 
  (dollars in thousands)

Goodwill   $ 23,300   $ 2,682   $ 3,313      
Amortization period in years     20     15     15      
Annual goodwill amortization   $ 1,165   $ 179   $ 221      
Months to include in pro forma     12     4.5     12      
Incremental pro forma amortization   $ 1,165   $ 67   $ 221   $ 1,453

 
  Six Months Ended July 31, 1999
 
  Daniels
  Alternatives
  Total
 
  (dollars in thousands)

Goodwill   $ 23,300   $ 3,313      
Amortization period in years     20     15      
Annual goodwill amortization   $ 1,165   $ 221      
Months to include in pro forma     2.5     4.5      
Incremental pro forma amortization   $ 243   $ 83   $ 326

(4)
Reflects the elimination of public company expenses associated with conducting an annual meeting, producing and distributing annual reports and quarterly shareholder letters and board expenses.

(5)
Reflects retainer fees for investment banking services provided by DLJ Securities Corporation of $300,000 annually and the elimination of historical deferred financing costs of $64,000 for the year ended January 31, 1999 and $27,000 for the six months ended July 31, 1999.

(6)
Reflects the additional interest expense attributable to the merger financing.


 
  Year Ended January 31, 1999
  Six Months Ended July 31, 1999
 
 
  (dollars in thousands)

 
Increase in interest expense              
Revolving credit facility (a)   $ 1,893   $ 947  
Term loan A (a)     5,987     2,993  
Term loan B (b)     13,944     6,972  
Notes (c)     18,000     9,000  
Commitment fees on undrawn revolving credit facility     147     74  
Amortization of deferred financing costs     1,276     638  
   
 
 
Total     41,247     20,624  
Elimination of historical interest expense associated with repaid indebtedness     (5,251 )   (3,325 )
   
 
 
Net increase in interest expense   $ 35,996   $ 17,299  
   
 
 

(7)
Reflects the income tax effect of all pro forma entries at the statutory tax rates.

(8)
Reflects dividends on preferred stock issued in the merger ($40.0 million liquidation preference multiplied by a 14% compounded quarterly dividend rate). For accounting purposes, a $4.7 million value has been ascribed to the warrants and has been classified as a component of shareholders' equity. The warrant value shall be amortized over 12 years. The amortization for the year ended January 31, 1999 would have been $151,000 and for the six months ended July 31, 1999 would have been $76,000.

(9)
"EBITDA" is earnings before interest, taxation, depreciation and amortization and non-recurring merger costs ($1.1 million in the six months ended July 31, 1999). EBITDA is a key financial measure but should not be construed as an alternative to operating income or cash flows from operating activities (as determined in accordance with generally accepted accounting principles). We believe that EBITDA is a useful supplement to net income and other income statement data in understanding cash flows generated from operations that are available for taxes, debt service and capital expenditures. However, our method of computation may not be comparable to similarly titled measures of other companies.

    The following table sets forth a reconciliation of Pro Forma EBITDA to Adjusted EBITDA.

 
  Year Ended January 31, 1999
  Six Months Ended July 31, 1999
 
  (dollars in thousands)

Pro Forma EBITDA   $ 81,946   $ 43,341
Severance and outplacement costs (a)     896    
Acquisition costs (b)     158     17
Non-cash compensation (c)     96    
Expected cost savings (d)     1,968     700
Non-recurring legal and employment costs         165
   
 
Adjusted EBITDA   $ 85,064   $ 44,223
   
 


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