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Previous: SECOM GENERAL CORP, 10-K405, EX-27, 2000-12-21 |
Next: MERRILL CORP, 10-Q/A, EX-10.1, 2000-12-21 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 2000
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: 333-30732
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 (Address of principal executive offices) |
55108 (Zip Code) |
Registrant's telephone number, including area code: 651-646-4501
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
As of December 4, 2000, there were 5,282,498 shares of the Registrant's Class B voting common stock, $0.01 par value per share, outstanding.
As of December 4, 2000, there were no shares of the Registrant's voting common stock, $0.01 par value per share, outstanding.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited consolidated financial statements including the notes to those statements, included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause those differences include, but are not limited to, those discussed under the heading "Risk Factors" contained in our Form S-1/A registration statement dated September 12, 2000.
Results of Operations
Quarter ended October 31, 2000 compared to quarter ended October 31, 1999
Revenue
Overall revenue increased $4.6 million, or 3.2%, to $148.9 million for the third quarter ended October 31, 2000 from $144.3 million in the third quarter last year. Revenue in the Specialty Communication Services segment increased $4.9 million, or 3.9%, to $129.1 million for the third quarter ended October 31, 2000 from $124.2 million for the same period one year ago. Within the Specialty Communication Services segment, Financial Document Services revenue decreased $0.1 million, or 0.1%, to $63.7 million for the third quarter ended October 31, 2000 from $63.8 million for the third quarter ended October 31, 1999. Revenue generated by financial transactions accounted for 76.7% of total revenue for the third quarter ended October 31, 2000 compared to 78.0% for last year's third quarter. Financial transaction revenue decreased 1.8% for the third quarter ended October 31, 2000 when compared to the same period one year ago. The positive impact of revenue generated by our recently opened European operations was not sufficient to offset continued soft domestic financial markets. Corporate regulatory compliance revenue increased 21.3% for the third quarter ended October 31, 2000 versus the same period one year ago. The increase is attributed to our continued efforts to develop longer term corporate relationships. Investment Company Services' revenue increased $3.5 million, or 11.3% to $34.1 million for the third quarter ended October 31, 2000 from $30.6 million for the third quarter ended October 31, 1999. This increase was driven mostly by new business in the Northeast, and by strong demand for our fulfillment services. Managed Communication Program revenue decreased $1.1 million, or 4.1%, to $25.2 million for the third quarter ended October 31, 2000 from $26.3 million for the same period one year ago. The decrease in revenue for the period was primarily due to several clients temporarily postponing marketing programs either because of the soft financial markets or because of the implementation of internal cost control measures in their organizations. Merrill Print Group revenue increased $2.6 million to $6.1 million for the third quarter ended October 31, 2000 from $3.5 million for the third quarter ended October 31, 1999. This increase is primarily a result of ballot revenues associated with the fall elections.
Revenue in the Document Services segment decreased $0.3 million, or 1.4%, to $19.9 million for the third quarter ended October 31, 2000 from $20.2 million for the same period one year ago. The decrease is due to a one-time, large, transactional project completed during the prior year which positively impacted third quarter revenue in 1999 versus 2000.
Gross profit
Gross profit decreased $3.6 million, or 7.5%, to $44.8 million for the third quarter ended October 31, 2000 from $48.4 million for the same period one year ago. As a percentage of revenue, gross profit was 30.0% for the third quarter ended October 31, 2000 compared to 33.5% for the same period last year. The decrease in gross profit as a percent of revenue was due to a general shift in revenue mix from higher gross margin financial transaction revenue to revenue generated by our other business units that tend to be less cyclical, but carry lower gross margins. Specifically, the establishment of our wholly-owned European operation, lower margin commercial printing revenue associated with
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the Daniels Printing acquisition and a strong demand for fulfillment services contributed to the decrease in gross profit as a percentage of revenue.
Selling, general and administrative
Selling, general and administrative expenses increased $6.5 million, or 19.7%, to $39.5 million for the three month period ended October 31, 2000 from $33.0 million during the same period last year. Selling, general and administrative expenses as a percentage of revenue were 26.5% for the third quarter ended October 31, 2000 compared to 22.9% for the same period one year ago. The increase in selling, general and administration expenses in total, and as a percentage of revenue was driven by an increase in selling expense associated with the cost of additions to sales staff and sales management, and by an increase in general and administrative staffing to support international operations.
EBITDA
Earnings before interest, taxation, depreciation and amortization (EBITDA) decreased $12.1 million to $8.1 million for the three months ended October 31, 2000 from $20.2 million for the same period last year.
Adjusted EBITDA, which reflects EBITDA exclusive of $2.7 million of restructuring costs and $1.2 million of merger costs for the three month periods ended October 31, 2000 and 1999, respectively, decreased $10.6 million, or 49.5%, to $10.8 million for the third quarter ended October 31, 2000 from $21.4 million for the same period last year. The decrease in adjusted EBITDA is a direct result of decreased gross profit and increased selling, general and administrative expenses. Adjusted EBITDA, as a percent of revenue was 7.3% for the third quarter ended October 31, 2000 compared to 14.8% for the third quarter ended October 31, 1999. The primary contributions to this decrease in adjusted EBITDA as a percentage of revenue was the decrease in gross profit as a percentage revenue and the increase in selling, general and administrative expenses as a percentage of revenue as previously discussed.
Interest expense
Interest expense for the third quarter ended October 31, 2000 was $11.2 million compared to $1.8 million for the same period last year. The significant increase in interest expense was caused by the debt incurred to finance the merger. We anticipate that interest expense for our fourth quarter will increase as a result of the recent amendment to our Credit Facility. See Note 6 to our quarterly financial statements for further information.
Tax benefit
The benefit for income taxes was $2.2 million for the three month period ended October 31, 2000 compared to a tax provision of $6.8 million for the same period last year. This change related directly to decreased taxable income that resulted from decreased operating income and increased interest expense as previously discussed.
Net income (loss) available to common shareholders
Net loss available to common shareholders for the three month period ended October 31, 2000 was $7.2 million compared to net income available to common shareholders of $5.6 million for the third quarter ended October 31, 1999. This decrease is attributable to lower gross profit, higher selling, general and administration expenses, and higher interest expense as previously discussed.
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Nine months ended October 31, 2000 compared to nine months ended October 31, 1999
Revenue
Overall revenue increased 13.0% to $499.8 million for the nine months ended October 31, 2000 from $442.4 million for the prior year period. Revenue in the Specialty Communication Services segment increased $49.2 million, or 12.7%, to $437.2 million for the nine months ended October 31, 2000 from $388.0 million for the same period one year ago. Within the Specialty Communication Services segment, Financial Document Services revenue increased 7.1% to $218.0 million for the nine months ended October 31, 2000 from $203.5 million for the nine months ended October 31, 1999. Revenue generated by financial transactions accounted for 69.7% of the total revenue for the nine months ended October 31, 2000 compared to 71.2% for the same period one year ago. Financial transaction revenue increased 4.9% for the nine months ended October 31, 2000 when compared to the same period one year ago reflecting international activity generated by our European operations, which was partially offset by weak domestic financial markets. Corporate regulatory compliance revenue increased 27.8% for the nine months ended October 31, 2000 versus the same period one year ago. The increase is attributed to our continued aggressive effort to develop longer term corporate relationships. Investment Company Services' revenue increased $24.5 million, up 24.0% to $126.5 million for the nine months ended October 31, 2000 from $102.1 million for the nine months ended October 31, 1999. This increase was driven mostly by the positive impact of Daniels Printing operation, which was acquired in April 1999, new business in the Northeast region, and strong demand for our fulfillment services. Managed Communication Program revenue increased $4.5 million, or 6.4%, to $75.1 million for the nine months ended October 31, 2000 from $70.5 million for the same period one year ago. The positive impact of Alternative Communications operation, which was acquired in June of 1999, and revenue generated by our real estate programs and product offerings drove this growth. Merrill Print Group revenue increased $5.6 million to $17.6 million for the nine months ended October 31, 2000 from $12.0 million for the nine months ended October 31, 1999. This increase is attributed to the addition of commercial printing work contributed by the Daniels Printing operation, and to ballot revenue associated with the fall elections.
Revenue in the Document Services segment increased $8.2 million, or 15.1%, to $62.6 million for the nine months ended October 31, 2000 from $54.4 million for the same period one year ago. This increase resulted from strong growth mainly from our existing document service center clients and continued growth in our transactional and imaging businesses.
Gross profit
Gross profit increased $10.6 million, or 6.9%, to $163.1 million for the nine months ended October 31, 2000 from $152.5 million for the same period one year ago. The increase in gross profit was due to increased revenue discussed above. As a percentage of revenue, gross profit was 32.6% for the nine months ended October 31, 2000 compared to 34.5% for the same period last year. This decrease in gross profit as a percentage of revenue was due to a general shift in revenue mix from higher gross margin financial transaction revenue to revenue generated by our other business units that tend to be less cyclical, but carry lower gross margins. Specifically, the establishment of our wholly-owned European operation, lower margin commercial printing revenue associated with the Daniels Printing acquisition, and a strong demand for fulfillment services contributed to the decrease in gross profit as a percentage of revenue.
Selling, general and administrative
Selling, general and administrative expenses increased $20.3 million to $129.3 million for the nine months ended October 31, 2000 from $109.0 million during the same period last year. Selling, general and administrative expenses primarily increased as a result of variable costs associated with increased
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revenue, primarily selling compensation, costs of hiring sales staff and sales management, and related expenses associated with the acquired Daniels Printing and Alternative Communications operations. Selling, general and administrative expenses as a percentage of revenue were 25.9% for the nine months ended October 31, 2000 compared to 24.7% for the same period one year ago. The increase in selling, general and administration expenses as a percentage of revenue was driven by an increase in selling expense associated with the hiring of sales personnel during the current period, and by an increase in general and administrative staffing to support international operations.
EBITDA
EBITDA decreased $9.9 million to $48.4 million for the nine months ended October 31, 2000 from $58.3 million for the same period last year.
Adjusted EBITDA, which reflects EBITDA exclusive of $2.7 million of restructuring costs and $2.5 million of non-recurring merger and international start-up costs was $53.6 million for the nine months ended October 31, 2000. Adjusted EBITDA, which reflects EBITDA exclusive of $2.3 million of non-recurring merger costs, was $60.6 million for the nine months ended October 31, 1999. The decrease in adjusted EBITDA for the nine months ended October 31, 2000 of $7.0 million, or 11.6%, when compared to the same period one year ago, primarily resulted from increased selling, general and administrative expenses offset by decreased gross profit as previously discussed. Adjusted EBITDA, as a percentage of revenue was 10.7% for the nine months ended October 31, 2000 compared to 13.7% for the nine months ended October 31, 1999. The primary contributors to this decrease in Adjusted EBITDA as a percentage of revenue was the decrease in gross profit as a percentage of revenue and the increase in selling, general and administrative expenses as a percentage of revenue as previously discussed.
Interest expense
Interest expense for the nine months ended October 31, 2000 was $33.0 million compared to $5.0 million for the same period last year. The significant increase in interest expense related directly to the debt incurred to finance the merger.
Tax provision
The tax provision decreased $15.4 million to $1.9 million for the nine months ended October 31, 2000 from $17.2 million for the same period last year. This decrease related directly to decreased taxable income that resulted from decreased operating income and increased interest expense as previously discussed.
Net income (loss) available to common shareholders
Net loss available to common shareholders for the nine months ended October 31, 2000 was $5.9 million compared to net income available to common shareholders of $18.3 million for the same period last year. This decrease is attributable to decreased gross profit, higher selling, general and administration expenses, and transition costs associated with our European operation and higher interest expense as previously discussed.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flow from operations and borrowings under our Credit Facility. Our principal uses of cash will be interest and debt service, capital expenditures, and working capital. As of October 31, 2000, we had total indebtedness of $376.7 million. Because of the declines in our operating results during the three and nine month periods ended October 31, 2000 described above, we did not comply with certain of the financial covenants contained in our Credit Facility at
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October 31, 2000. As a result, effective on October 31, 2000, we amended our Credit Facility to provide for certain modifications. These changes are described in Note 6 of our quarterly financial statements beginning on page 7. Despite our inability to meet certain financial covenants in our Credit Facility for the third quarter, we have been able to successfully manage our cash flow to reduce net borrowings by $20.8 million during the quarter. We believe we will be able to continue to fund our cash needs in the immediate term through our operations, and borrowings under our amended Credit Facility.
Cash and cash equivalents increased $18.2 million to $32.7 million at October 31, 2000 from $14.5 million at January 31, 2000. We generated cash from operating activities of $9.2 million and $5.7 million for the nine months ended October 31, 2000 and 1999, respectively. This change was driven by an increase in cash collections from accounts receivable for the nine months ended October 31, 2000 compared to amounts paid in the same period last year, offset by decreased net income. We used cash in investing activities of $17.0 million and $65.2 million for the nine months ended October 31, 2000 and 1999, respectively. Significant uses of cash in investing activities for the nine months ended October 31, 2000 included $8.6 million for capital expenditures and $3.8 for acquisitions. Significant uses of cash in investing activities for the nine months ended October 31, 1999 included $54.6 million of cash for the Daniels Printing and Alternatives Communications acquisitions and capital expenditures of approximately $7.9 million. Financing activities provided $25.9 million and $41.0 million for the nine months ended October 31, 2000 and 1999, respectively and related primarily to net borrowings on our credit facilities used to finance the growth in accounts receivable and work-in-process inventory balances and our acquisitions as previously discussed. For the nine months ended October 31, 2000, we also generated approximately $12.2 million of cash from the issuance of Class B common stock to our employees and certain independent contractors under our Direct Investment Plan. During the second quarter of fiscal 2001, we re-purchased approximately $5.8 million, or 265,902 shares of our Class B common stock from DLJ Merchant Bank and employees. The repurchase of 258,307 shares from DLJ Merchant Bank was made in order to adjust ownership percentages contemplated as part of the merger.
Impact of Year 2000
To date, none of our products has revealed any significant year 2000 problems. However, we believe the failure of some of our customers to make their computer systems year 2000 compliant or the abandonment or delay of offerings, acquisitions or other transactions due to year 2000 concerns held by some of our customers temporarily harmed our operating results, in particular during the fourth quarter of fiscal 2000 and the first quarter of fiscal 2001. The total cost to identify and remediate our year 2000 problems was approximately $4.3 million. These costs primarily relate to the purchase of a new payroll system, consultant and payroll-related costs for our information technology group and some computer hardware and software package upgrade purchase costs. Such costs do not include normal system upgrades and replacements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We regularly invest excess operating cash in overnight repurchase agreements that are subject to changes in short-term interest rates. Accordingly, we believe that the market risk arising from holding of these financial instruments is minimal.
Borrowings under our Credit Facility accrue interest at variable rates. Based on outstanding borrowings under the Credit Facility at October 31, 2000, a one-eighth of one percent change in interest rates would impact interest expense in the amount of approximately $0.3 million annually. On December 22, 1999, we entered into an interest cap with DLJ International Capital. Beginning March 24, 2000, the interest rate for $110.0 million of borrowings under our term loans A and B is 7.5% plus applicable interest rate margins in accordance with terms of the Credit Facility until December 24, 2001.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Amendment, dated as of October 31, 2000 to the Credit Agreement among Merrill Corporation, Merrill Communications LLC, the various financial institutions from time to time parties to the Credit Agreement, DLJ Capital Funding, Inc., Wells Fargo Bank, N.A., and U.S. Bank National Association.
27. Financial Data Schedule (previously filed)
(b) Reports on Form 8-K
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to this report to be signed on its behalf by the undersigned thereunto duly authorized.
| (REGISTRANT) | MERRILL CORPORATION | |
| BY (SIGNATURE) | /s/ John W. Castro | |
| (NAME AND TITLE) | John W. Castro, President and Chief Executive Officer |
|
| (DATE) | December 20, 2000 | |
BY (SIGNATURE) |
/s/ Robert H. Nazarian |
|
| (NAME AND TITLE) | Robert H. Nazarian, Executive Vice President and Chief Financial Officer |
|
| (DATE) | December 20, 2000 |
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| No. |
Description |
Location |
||
|---|---|---|---|---|
| 10.1 | First Amendment, dated as of October 31, 2000 to the Credit Agreement among Merrill Corporation, Merrill Communications LLC, the various financial institutions from time to time parties to the Credit Agreement, DLJ Capital Funding, Inc., Wells Fargo Bank, N.A., and U.S. Bank National Association. | Filed herewith | ||
| 27. | Financial Data Schedule | Previously filed |
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