-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, sXmv+zu2ksXMaDFjPsoNsjGonm5EjZXeHeD4f1gG303Von4ioEu+QOcyUODi9pSO jrEDbMyD6uO1BlywqnuubQ== 0000912057-95-002809.txt : 19950428 0000912057-95-002809.hdr.sgml : 19950428 ACCESSION NUMBER: 0000912057-95-002809 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19950131 FILED AS OF DATE: 19950427 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL CORP CENTRAL INDEX KEY: 0000790406 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 410946258 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14082 FILM NUMBER: 95531959 BUSINESS ADDRESS: STREET 1: ONE MERRILL CIRCLE STREET 2: ENERGY PARK CITY: ST PAUL STATE: MN ZIP: 55108 BUSINESS PHONE: 6126464501 FORMER COMPANY: FORMER CONFORMED NAME: MERRILL CORP/FA DATE OF NAME CHANGE: 19930915 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1995 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 (I.R.S. Employer Identification No.) incorporation or organization) ONE MERRILL CIRCLE ST. PAUL, MINNESOTA 55108 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 646-4501 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE ------------------------ 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 such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of April 21, 1995, 7,714,641 shares of Common Stock of the Registrant were outstanding, and the aggregate market value of the Common Stock of the Registrant as of that date (based upon the last reported sale price of the Common Stock at that date by the NASDAQ Stock Market) excluding outstanding shares owned beneficially by officers and directors, was approximately $86,433,000. DOCUMENTS INCORPORATED BY REFERENCE Parts I and II of this Annual Report on Form 10-K incorporate by reference information (to the extent specific pages are referred to herein) from the Registrant's Annual Report to Shareholders for the year ended January 31, 1995 (the "1995 Annual Report"). Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrants' Proxy Statement for its Annual Meeting to be held May 23, 1995 (the "1995 Proxy Statement"). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Merrill Corporation provides a full range of typesetting, printing, document reproduction, distribution and marketing communication services to financial, legal, insurance and corporate markets. The Company is headquartered in St. Paul, Minnesota and has 18 full service offices in major financial centers across the United States and in Canada, as well as 5 regional printing plants, and a printing and distribution operations in St. Cloud, Minnesota. The Company also has established affiliations with financial printing companies internationally. On November 10, 1994, the Company acquired substantially all of the assets of Fourtress Reprographic Services, Incorporated, a document reproduction services business in Los Angeles. On January 31, 1995, the Company merged its Merrill Custom Communications, Inc. subsidiary into its May Printing Company, Inc. subsidiary and changed the name of the merged companies to Merrill/May, Inc. The Company, which is a Minnesota corporation, was organized in 1968 under the name "K.F. Merrill Company." The Company's executive offices are located at One Merrill Circle, Energy Park, St. Paul, Minnesota 55108. Its telephone number is (612) 646-4501. Unless the context otherwise requires, the terms "Merrill Corporation" or the "Company" include its subsidiaries, Merrill/New York Company, Merrill/Magnus Publishing Corporation, Merrill Corporation, Canada, Merrill/ May, Inc., and Merrill International, Inc. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Since its inception, the Company's revenues, operating profits and assets have been attributable to one business segment -- providing document typesetting, printing, reproduction, distribution and marketing communication services for the financial, legal, insurance and corporate markets. Financial information about this segment is contained on pages 26 to 36 of the Company's 1995 Annual Report to Shareholders,which information is incorporated herein by reference. (C) NARRATIVE DESCRIPTION OF BUSINESS The Company's services can be divided into three categories: financial, corporate and commercial and other services. In its financial printing business, the Company applies advanced computer and telecommunications technology to the production and distribution of time-sensitive, transactional financial documents, such as registration statements, prospectuses and other printed materials related to corporate financings and acquisitions. The Company's corporate printing business involves typesetting and printing of corporate documents which are prepared annually or at regular intervals, such as annual and quarterly reports and proxy materials for companies, and registration statements for unit investment trusts and mutual funds. In its commercial printing business, the Company typesets price catalogs, directories, insurance industry annual reports, sample ballots and technical manuals from electronic information supplied by customers and provides printing services for customers desiring time-sensitive or other high levels of service. The Company's Merrill/May subsidiary provides custom marketing communication services to corporate customers and demand printing and distribution services designed to promote the corporate identity of large, national clients with multiple franchisees, members, divisions or affiliated organizations. The Company's document management services provide photocopying and imaging services to law firms and corporate customers. These services include dedicated office photocopying or imaging services, for which the Company provides on- site equipment, employees and management, and custom photocopying or imaging of projects requiring time-sensitivity or other special services. 1 The following table sets forth the percentage of revenue attributable to each of the Company's categories of service for each of the past three fiscal years:
YEAR ENDED JANUARY 31, ------------------------------------- CATEGORY OF SERVICE 1995 1994 1993 - --------------------------------------------------------- ----------- ----------- ----------- Financial................................................ 34% 42% 34% Corporate................................................ 33% 34% 38% Commercial and other..................................... 33% 24% 28% --- --- --- Total................................................ 100% 100% 100% --- --- --- --- --- ---
FINANCIAL AND CORPORATE SERVICES GENERAL In its financial printing business, the Company typesets, prints and distributes financial documents. These include documents which are used for specific financing transactions, such as registration statements and prospectuses filed with the Securities and Exchange Commission (the "SEC"), tender offer materials and merger documents, official statements for municipal securities, offering circulars, and other documents related to corporate financings, acquisitions and mergers, restructurings and bankruptcy reorganizations. The Company's corporate printing business involves typesetting, printing and distribution of corporate documents which are prepared annually or at regular intervals. These include annual and interim reports to shareholders, proxy materials, certificates for stocks, bonds and other securities, and periodic reports filed with the SEC. The Company includes in this category registration statements and other documents for unit investment trusts and mutual funds which are regularly produced at periodic intervals. The Company's financial and corporate document business is service oriented. The production of financial and corporate documents requires rapid typesetting and printing services, available 24 hours a day and tailored to the exacting demands of the Company's customers. Financial and corporate documents are usually prepared and edited by numerous parties involved in a transaction, including corporate executives, investment bankers, attorneys and accountants. Each document typically goes through numerous proof cycles, and at each cycle the document is typeset, duplicated and distributed to the parties. Individual participants are frequently located in different cities, often requiring proofs to be delivered simultaneously to different parts of the country. Just prior to the completion of a financial or corporate document, a drafting group generally will meet at one of the Company's service facilities where conference rooms and other amenities are maintained for customer use. Accommodating the needs of its customers "in-house" is the most time-critical service that the Company provides, and requires, among other things, the accurate and rapid turnaround of the edited pages and expert knowledge of the documents and filing requirements of the SEC. After final changes have been made, the Company is usually required to quickly prepare copies of the document (including any exhibits) for filing with the SEC. The document is then printed, collated, bound and distributed in booklet form. "HUB AND SPOKE" NETWORK By using advanced computer and telecommunications technology, the Company has created a "hub and spoke" network linking its central computerized production facility in St. Paul, Minnesota with its 18 full-service facilities. The Company's central computerized production facility (the "hub") is located in St. Paul, Minnesota, and its 18 full service facilities (the "spokes") are located in New York City, Boston, Newark, Washington, D.C., Atlanta, Chicago, Minneapolis/St. Paul, Dallas, Houston, Denver, Seattle, San Francisco, Palo Alto, downtown Los Angeles, West Los Angeles, Irvine, Montreal and Toronto, with sales offices in Baltimore, Philadelphia, Cleveland, Cincinnati and Columbus. The Company receives information directly from its customers in various forms, including typed or handwritten 2 pages, magnetic recording media, such as word-processing disks or computer tapes, and by direct telecommunication with its clients' word processing equipment. This information is transmitted by facsimile or direct electronic connection to the Company's central production facility for processing into a typeset document. CENTRAL COMPUTERIZED PRODUCTION FACILITY. The Company has integrated multiple systems with communications technology and proprietary software in its central production facility. This facility consists of multiple computers, communication controllers, text entry and editing stations, laser typesetting equipment, as well as a number of special purpose computer subsystems for data conversion and information management. Each critical piece of equipment in the system has at least one secondary or back-up device to protect against interruptions should any piece of equipment temporarily fail. This computer equipment has been integrated by the Company to create a document production environment which is designed to have a high level of performance, data protection and system reliability. The concentration of equipment and typesetting personnel in a central facility has been a key Company strategy to reduce overhead and labor expense, implement more effective training programs and more efficiently use its management resources. The Company believes that this strategy has enabled it to benefit more quickly from new technologies that have decreased costs and improved the quality of its service, since new technologies and methods, when implemented in the central facility, immediately benefit all service facilities. The Company also believes that this concentration of personnel and equipment at the hub, and the linking of service facilities to the hub, enables it to respond quickly to fluctuating demand for typesetting services in each of its service facilities across the country by efficiently allocating its typesetting resources when and where they are needed. NATIONAL COMMUNICATIONS NETWORK. The Company has established a dedicated telecommunications network, connecting each of its service facilities with the hub, which permits typeset documents and production control information to be electronically transmitted to each of its service facilities. The network consists of "tie" lines connecting each of the Company's service facilities with the hub, data switching and multiplexing equipment, and the necessary software to manage and control the communications. Designed to operate continuously, the network is highly efficient and reliable, and contains secondary or back-up service for each portion of the network to minimize the possibility of an interruption in service. SERVICE FACILITIES. Each service facility is staffed with sales, administrative, customer service, production, duplication and distribution personnel. The service facilities all have conference rooms with support staff, office equipment and amenities to give the Company's customers a comfortable work environment in which to meet, write and revise their documents. Each service facility has the necessary photo imaging equipment to produce documents with high image quality, using the electronic information received from the hub. This enables the Company to transmit completed documents to one or more service facilities for distribution within minutes of completion. MERRILLLINK-TM-. The Company has developed the MerrillLink system that connects the hub to locations outside of its service facilities through the use of portable printing devices. These printing devices, usually placed in the customer's office or at the Company's sales offices, allow the Company to edit typeset pages and provide proof distribution to remote locations throughout the world. MerrillLink lets the Company service transactional work in locations that do not justify the cost of a full service facility and where rapid turnaround distribution is needed. INTERNATIONAL SERVICE. The Company and Burrups, Ltd., a London based financial printing company, jointly market worldwide their communications and production facilities and services. The objective of this arrangement is to work together to provide customers with integrated document typesetting, printing and distribution services wherever the document originates or needs to be delivered. Besides London, Burrups has full service facilities in Luxembourg, Paris, Seoul and Tokyo. In addition, the Company has established relationships with financial printing companies in the Czech Republic, Italy, Israel, Hong Kong, Taiwan, New Zealand, Australia, Mexico, Argentina, Colombia, 3 and Brazil which have agreed to work as service facilities for the Company on an "as needed" basis. The Company has made software and hardware modifications in order to successfully establish electronic communications between its production hub and the service facilities overseas. With this electronic connection as well as the MerrillLink system, the Company is able to transmit high-quality typeset documents for printing and distribution in Europe, Asia, the Pacific Rim and South America without the time delays and costs incurred by conventional air shipment. The Company also is able to offer its financial and corporate services in Canada through its full service facilities in Toronto and Montreal. THE JOB CONTROL SYSTEM. The Company coordinates the activities of its service facilities through a proprietary Job Control System ("JCS"). This system tracks each document from the time it is initially received by the Company at a service facility through completion of production and billing. The JCS is used as a national production control system with each service facility being "on-line" to the system through the Company's communications network. Information can be sent to and retrieved from the JCS by any service facility, and can be immediately read by the hub to aid in the rapid and accurate completion of each document. Each service facility can also immediately send instructions to another service facility using this system. During the production phase of a document, the JCS assigns job numbers and keeps track of specific information about the document, such as dates and the times at which proofs are due, style and job specifications, messages regarding the job and last-minute changes. Distribution of drafts is a critical task in the preparation of financial documents, and the JCS simplifies this task by keeping a current address list for each job and history of the distribution and method of delivery for each proof of the document. The Company also uses the production information collected in the JCS to assist in the pricing of its services. EDGAR The SEC has established a program for the electronic filing of documents under the federal securities laws, entitled Electronic Data Gathering Analysis and Retrieval ("EDGAR"). This program requires participants or their agents to file disclosure information with the SEC in an electronic format rather than by the traditional paper filing package. This electronic format, usually in ASCII, includes additional submission information and coding "tags" within the document for aid in the SEC's analysis of the document and retrieval by the public. This electronic format is generally delivered by direct telecommunications, but may be delivered on magnetic computer tape or by diskette. EDGAR allows registrants to file and the public to retrieve disclosure information electronically. The SEC began the development of EDGAR with a pilot program in 1984. Through a phase-in schedule, the SEC has assigned one of ten dates by which all public companies must start filing disclosure documents through the EDGAR operational system, which began April 26, 1993. Through March 1995, there have been 7,480 companies required to file through EDGAR. All publicly-held companies are expected to be required to file disclosure documents through EDGAR by May 1996, according to the phase-in schedule. The Company has been highly involved in all stages of development of EDGAR since the start of the pilot program. The Company has written proprietary software that enables it to quickly prepare and file the electronic version of financial and corporate documents through a dedicated data line directly to the SEC's computers. In addition, the Company has spent considerable time training its staff to coordinate the preparation of these EDGAR filings. The Company also keeps current and future participants informed of EDGAR developments by publishing quarterly Merrill's EDGAR Advisor-TM-, a newsletter for distribution to lawyers, corporate executives and other interested parties, and by conducting seminars throughout the country to inform current and future participants about EDGAR. The Company has a toll-free telephone information line for its customer's questions regarding EDGAR and also distributes EDGAR rules, forms and reference materials. The Company has experienced an increased demand for EDGAR filing services for financial as well as corporate categories of services. The Company converts word processing and other computer 4 formats to the EDGAR format for SEC form types and exhibit documents, and assembles these documents for electronic filing with the SEC. The Company believes that the operational EDGAR system will continue to increase the demand for the time-sensitive services of the Company, since many filing companies will use outside services to meet EDGAR filing requirements. With the experience and expertise gained since the start of the pilot program, the Company believes it has developed the procedures and skills necessary to handle the increased volume of EDGAR filings as more companies are required to file electronically. COMMERCIAL AND OTHER SERVICES GENERAL As part of its commercial and other services, the Company provides document reproduction and imaging services for projects that are time-sensitive or otherwise require special service, such as photocopying or imaging business records or other documents for large litigation matters. The Company will produce the photocopies at its service facilities or locate photocopying equipment and personnel at the customer's office. Document reproduction services require rapid turnaround and availability 24 hours a day. The Company's document reproduction customers typically have several boxes of documents which may be in file folders, stapled or on varying sizes of paper. The Company will take apart, photocopy and reassemble the original documents and copies as instructed by the customer. The Company also provides sequential numbering and binding services for these documents, if requested. Photocopying projects range from single copies of short documents to the more complicated copying jobs described above. The Company also offers comprehensive office photocopying, typesetting and mailroom facility management services to its customers. These services involve providing for all of a customer's needs for that department, including on-site equipment, employees and management of the operation. The Company uses its service facilities in connection with its document reproduction services. Each service facility is equipped with sophisticated photocopying equipment. The Company is able to make more efficient use of this equipment by performing project photocopying during times when the equipment would otherwise be idle. The Company's imaging services captures data from its customers' paper documents and creates a digital picture of each page. The customer may then store large quantities of documents on CD-ROM (Compact disk -- read only memory), rather than on paper in boxes or file cabinets. Retrieval of the documents may be accessed simply by one user with a personal computer, or simultaneously by multiple users at multiple sites. The Company disassembles the customers' documents, captures the image, and reassembles the original documents. The Company may also create for the customer text files using Optical Character Recognition ("OCR") processing for full text retrieval systems. The Company also performs document management services such as barcoding, document coding, and services to assist with database development, programming, data management and conversions. The Company also consults with the customer regarding its hardware, software and network needs for development of an imaging system. Imaging projects can take from one day to several months to complete. The Company may provide imaging services at its service facilities, or provide on-site equipment, employees and management at the customer's location. The Company also typesets, prints and distributes commercial and other documents, including price catalogs, directories, sample ballots, legal briefs, business and college educational materials, annual reports for the insurance industry and technical manuals, often produced using electronic information supplied by its clients. The Company also has an insurance printing group which typesets and prints annual reports submitted to various governmental regulatory agencies by the insurance industry. The Company's commercial typesetting business provides turnkey document services, including camera, pre-press and printing services for one- or multi-color publications. The Company believes that offering high levels of service is a competitive advantage in certain niches of the commercial printing business. These commercial printing projects, like financial and corporate printing, require a high level of attention to detail, quick turnaround times and responsive customer service. 5 MERRILL/MAY On December 31, 1993, the Company acquired the business of May Printing Company and on January 31, 1995, the Company merged its custom communication business into May Printing and changed the name of the subsidiary to Merrill/May, Inc. Merrill/May provides demand printing and distribution services designed to support the corporate identity of large, national clients with multiple franchisees, members, divisions or affiliated organizations ("member organizations"). Merrill/May is authorized by its national clients to develop and produce custom printed products such as business cards, stationary and collateral support print materials with a uniform appearance for the client's member organizations. Working with each national account client, Merrill/May prepares a catalog to merchandise these custom printed products, along with other promotional merchandise produced by third parties. Merrill/May distributes each client-specific catalog to the national client's member organizations. In marketing its national account printed products, Merrill/May develops direct relationships with each of the individual member organizations, which are independently owned and operated and make their own print purchasing decisions. Merrill/May uses a sophisticated order entry system, supported by a large inbound telemarketing staff, to receive and process orders. After reviewing a catalog, a member organization can place an order by mail, fax or toll free Merrill/May telephone number. A Merrill/May customer service representative processing the order will have access to the customer's purchase history (if an existing customer) and can suggest reordering certain items, cross-sell complementary items or alert the customer to current specials. Merrill/May accepts major credit cards and payment is typically made upon placing the order. Merrill/May produces large quantities of printed materials for each national client, which it warehouses pending receipt of an order for the product. Merrill/May can produce multi-color, highly technical, commercial quality printed materials. Products ordered from a catalog typically require additional "personalizing" for the ordering member organization, after which they are checked for quality, packaged and shipped. Promotional merchandise (point of purchase, advertising specialty, premiums and incentives) included in a catalog that are produced by third parties are generally shipped directly by the manufacturer to the ordering member organization. Merrill/May uses a sophisticated materials handling system with automated handling, order consolidation and shipping. Most orders are filled within four days of receipt. The demand printing and distribution services provided by Merrill/May benefit both the national account client and the member organizations. The national account client benefits from Merrill/May's centralized production and fulfillment by controlling the use of its trademarks and facilitating the economies of mass production for its membership while the ultimate consumer of Merrill/May's services, the member organization, receives quality products, fast delivery and prices that the Company believes are competitive with prices charged by local print shops. In addition to working with national accounts, Merrill/May provides general commercial printing services. The commercial printing services that Merrill/May provides help keep it current with printing industry trends and enhance overall printing quality. Merrill/May's customers are located in all 50 states and Canada, with limited shipments to Mexico, Puerto Rico, Australia/New Zealand, France and England. Merrill/May also provides custom marketing communications and publishing services, primarily marketed to financial services companies, media organizations, retailers and the health care industry. The types of custom publications the Company produces include magazines, tabloids, newsletters, booklets and catalogs used by its customers for their marketing purposes. The Company, generally pursuant to an annual contract, works with customers in the design and editorial content of these publications, typesets and prints the publications, then assists the customer in locating a target mailing list and mails the publications. 6 PRINTING SERVICES The demand for financial printing services, like that for typesetting, fluctuates significantly. In order to adequately meet this fluctuating demand, financial printing companies have typically invested in printing presses and employed a complete printing workforce in or near each of the markets they serve. The Company meets this fluctuating demand by owning presses only in those markets where it has an adequate amount of recurring business and identifying in these and the other markets it serves several printers capable of meeting a portion of the Company's production needs on an "as required" basis. The Company currently operates printing plants in Minneapolis/St. Paul, Los Angeles, Chicago, Dallas, and New Jersey, markets in which the Company has found it advantageous to acquire printing presses to service a portion of its recurring corporate and commercial business. Corporate and commercial printing is generally both more predictable in volume and less time-sensitive in nature than financial printing. Because the Company only owns presses in those markets in which its corporate and commercial printing business requires presses, the Company is able to adequately utilize these printing presses for its recurring corporate and commercial work while retaining the flexibility to use the presses for financial printing. Merrill/May also operates a printing plant in St. Cloud, Minnesota, for its specialized printing services. See "Business -- Commercial and Other Services -- Merrill/May" above. The Company uses associated printers when it needs additional capacity in markets where the Company does not own presses or where special printing equipment is needed. The Company generally selects associated printers on a job-by-job basis, based upon considerations of price, availability and suitability of press equipment. MARKETING AND CUSTOMERS The Company markets its services nationwide and in Canada through a direct sales organization operating from its full service facilities and sales offices. The Company markets internationally with Burrups, Ltd. through both companies' direct sales organizations. The services provided by Merrill/ May are marketed through a direct sales organization operating from Merrill/May's principal facility in St. Cloud, Minnesota, and sales offices in the Company's facilities in Minneapolis/St. Paul, Irvine and San Francisco. The Company markets its financial and corporate document production services to executives or corporations whose securities are publicly traded, or are planned to be publicly traded, corporate finance underwriters, municipal bond underwriters, attorneys and others who require fast and accurate typesetting. The Company markets its commercial printing services primarily to corporations, associations, insurance companies and legal, institutional and governmental publishers, and markets its document reproduction services primarily to lawyers, paralegal and law office administrators, as well as to the legal departments of corporations. Merrill/May markets its demand printing and distribution services to large, national clients with multiple franchisees, members, divisions or affiliated organizations and its custom publication services to financial service companies (such as banks, credit unions and insurance companies), television and radio stations and networks, trade associations, manufacturers and the health care and vacation travel industries. The Company markets all of these services through personal contacts with customers, corporate advertising, promotional programs and direct mail. As of April 15, 1995, the Company employed 131 full-time salespeople to market its typesetting, printing, publishing, imaging and document reproduction services and 29 full-time employees to market the services provided by Merrill/May. The Company's salespersons solicit business from existing and prospective customers and, together with the customer service representatives, act as coordinators between the customer and the Company's production personnel, and provide advice and assistance to customers. 7 COMPETITION The Company competes with a number of other companies in the financial printing industry, including regional firms, two principal nationwide competitors, Bowne & Co., Inc. and R.R. Donnelley & Sons Company, and international printing firms. Both Bowne and Donnelley have been in business longer, have greater financial resources and revenues than the Company, and are major competitors in most of the Company's financial and corporate printing markets. In its commercial printing business, the Company competes for complex computer intensive and large-run typesetting work with a number of other computer typesetting firms, and medium-run printing work with a number of commercial web press printers. In its document reproduction and imaging services businesses, the Company competes with two nationwide service companies, Xerox Corporation and Pitney Bowes, litigation support services vendors, and a large number of photocopying and imaging shops, including privately owned shops as well as franchise operations. In the insurance printing business, the Company competes with other national and regional printers, including Bowne. In the Merrill/ May business, the Company believes that its primary competitors are local print shops and in its custom communications business with marketing service firms, including advertising agencies, custom publication printers, direct mail firms, and television, radio, newspapers, magazine and other media organizations. Competition in the Company's printing business is intense, and is based principally on service, price, speed, accuracy, technological capability and established relationships. The Company believes that it competes favorably with its competitors. EMPLOYEES As of April 1, 1995, the Company had 1,693 full-time employees and 28 part-time employees. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. The Company's senior management and certain technical personnel have substantial experience and expertise in the financial printing industry. The Company considers the retention of these employees to be important to its continued success. The Company competes intensively with others in the industry to attract and retain qualified sales personnel. However, the Company believes that it is able to provide employment incentives sufficient to minimize the loss of key sales producers and to attract new sales personnel capable of producing significant amounts of business should the need or opportunity arise. Many sales personnel are under employment contracts of varying terms with the Company. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Substantially all of the Company's revenue, operating profit and identifiable assets are attributable to the United States. ITEM 2. PROPERTIES The Company leases all of its facilities, other than the principal facility of May Printing, which it owns. The Company's principal production and administrative office facility, located in St. Paul, includes 47,000 square feet of space and is leased, together with the associated land, from the Port Authority of the City of St. Paul. The terms of the Company's agreements with the Port Authority are contained in a facilities lease and land lease, both dated October 1, 1985, which require the Company to pay rents to the Port Authority in the amounts of $24,069 per month and $3,431 per month, respectively, for a term expiring on November 30, 2005. Each lease grants the Company the option to purchase the property at the end of the term, or earlier. Under the facilities lease, the Company may purchase the building for $254,500 at the end of the lease term or after ten years if the Company pays the remaining principal and interest on the bonds outstanding at the time of exercise of the options. The land may be purchased for $167,140 at the end of the lease term or $334,280 at the end of ten years. 8 The Company owns May Printing's principal production, administrative and warehousing facility. This facility, which is located in St. Cloud, Minnesota, includes approximately 122,900 square feet of space. The Company also leases other office and warehouse space in the Minneapolis/St. Paul metropolitan area, service facilities in each of its other seventeen cities and sales offices in five other cities, with space ranging from 120 square feet to 77,000 square feet. These leases have expiration dates ranging from March 1995 to December 2000 under which the Company makes monthly payments aggregating approximately $311,000, including rental fees, real estate and taxes and operating expense. The Company makes a continuing effort to keep all of its properties and facilities modern, efficient and adequate for its operating needs, through the acquisition, disposition, expansion and improvement of such properties and facilities. As a result, the Company believes that its properties and facilities are, on an aggregate basis, fully utilized and adequate for the conduct of its business. ITEM 3. LEGAL PROCEEDINGS There are no material pending or threatened legal, governmental, administrative or other proceedings to which the Company or its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages, the year first elected or appointed as an executive officer and the offices held as of April 2, 1995 are as follows:
YEAR FIRST ELECTED OR APPOINTED AS AN EXECUTIVE NAME AGE OFFICER TITLE - ------------------------ --- ---------------- ------------------------------------------ John W. Castro 46 1980 President and Chief Executive Officer Rick R. Atterbury 41 1981 Vice President -- Operations John B. McCain 57 1984 Vice President -- Finance, Chief Financial Officer, Treasurer Roxanne E. Iserman 50 1986 Vice President -- Client Services Development Steven J. Machov 44 1987 Vice President, General Counsel and Secretary James G. Sippl 47 1990 Vice President Kathleen A. Larkin 35 1993 Vice President -- Human Resources Darlene M. Shay 33 1993 Vice President -- Training and Development
Executive officers of the Company are elected by the Board of Directors and serve for one-year terms, commencing with their election at the first meeting of the Board of Directors immediately following the annual meeting of shareholders and continuing until the next such meeting of the Board of Directors. Appointed officers serve at the discretion of the President and Chief Executive Officer. There are no family relationships between or among any of the executive officers or directors of the Company. Except as indicated below, there has been no change in position of any of the executive officers during the past five years. Ms. Iserman was appointed Vice President -- Client Services Development in June 1993. She had served as Vice President -- Production since July 1986. 9 Mr. Machov has been General Counsel of the Company since January 1987. He was elected to the office of Secretary in February 1990 and Vice President in May 1993. Ms. Larkin joined the Company in April 1993 as Manager of Human Resources and was appointed Vice President -- Human Resources in December 1993. From February 1987 to March 1993, Ms. Larkin was Employee Relations Manager for The Gillette Company, a manufacturer of personal care products. Ms. Shay served as Manager of Training and Development from March 1993 to December 1993 when she was appointed Vice President -- Training and Development. From July 1989 to March 1993, she was Manager of Customer Service for the Company's St. Paul operations. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the caption "Quarterly Stock Price Comparison" on page 25 of the Company's 1995 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The financial information in the table on page 38 of the Company's 1995 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 21 to 25 of the Company's 1995 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements on pages 26 to 36 (including the unaudited information set forth under the caption "Quarterly Financial Data" on page 36) and the Report of its Independent Accountants on page 37 of the Company's 1995 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) DIRECTORS OF THE REGISTRANT. The information under the captions "Election of Directors -- Information About Nominees" and "Other Information About Nominees" on pages 5 and 6 of the Company's 1995 Proxy Statement is incorporated herein by reference. (b) EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning Executive Officers of the Company is included in this Report under Item 4A, "Executive Officers of the Registrant." (c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information under the caption "Security Ownership of Certain Beneficial Owners and Management" on pages 3 and 4 of the Company's 1995 Proxy Statement is incorporated herein by reference. 10 ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Election of Directors -- Directors' Compensation" on page 7 and "Executive Compensation" on pages 7 to 13, (excluding the "Comparative Stock Performance" graph on page 11), of the Company's 1995 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Security Ownership of Certain Beneficial Owners and Management" on pages 3 and 4, and "Election of Directors -- Information About Nominees" on page 5 of the Company's 1995 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial statements: The following Financial Statements are incorporated herein by reference from the pages indicated in the Company's 1995 Annual Report: Consolidated Balance Sheets as of January 31, 1995 and 1994 -- page 26. Consolidated Statements of Operations for the years ended January 31, 1995, 1994 and 1993 -- page 27. Consolidated Statements of Cash Flows for the years ended January 31, 1995, 1994 and 1993 -- page 28. Consolidated Statements of Changes in Shareholders' Equity for the years ended January 31, 1995, 1994 and 1993 -- page 29. Notes to Consolidated Financial Statements -- pages 30-36. Report of Independent Accountants -- page 37. 11 2. Financial statement schedules: The following supplemental schedule and accountants' report thereon are included herein and should be read in conjunction with the consolidated financial statements referred to above (page numbers refer to pages in this Report):
PAGE ----- Report of Independent Accountants.................................................................... 13 Supplemental Schedule: II Valuation and Qualifying Accounts......................................................... 14
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 3. Exhibits: The exhibits to this Report are listed in the Exhibit Index on pages 16 and 17 herein. A copy of any of these exhibits will be furnished at a reasonable cost to any person who was a shareholder of the Company as of April 1, 1995, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to Merrill Corporation, One Merrill Circle, St. Paul, Minnesota 55108, Attention: Secretary. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K: A. Employment Agreement between John Castro and the Company (incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1989 (File No. 0-14082)). B. Amendment to Employment Agreement between John Castro and the Company (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994 (File No. 0-14082)). C. Employment Agreement between Rick R. Atterbury and the Company (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991 (File No. 0-14082)). D. Amendment to Employment Agreement between Rick R. Atterbury and the Company (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994 (File No. 0-14082)). E. 1987 Omnibus Stock Plan, as amended (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991 (File No. 0-14082)). F. 1993 Stock Incentive Plan, as amended (filed herewith). G. Option Agreement between Ronald N. Hoge and the Company (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 (File No. 0-14082)). H. Option Agreement between James R. Campbell and the Company (filed herewith). (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended January 31, 1995. 12 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Our report on the consolidated financial statements of Merrill Corporation has been incorporated by reference in this Form 10-K from page 37 of the 1995 Annual Report to Shareholders of Merrill Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a)2 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. St. Paul, Minnesota March 21, 1995 13 SCHEDULE II MERRILL CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JANUARY 31, 1995, 1994 AND 1993 (IN THOUSANDS)
COLUMN C ---------------------------- COLUMN B ADDITIONS COLUMN D ------------ ---------------------------- ------------ COLUMN E COLUMN A BALANCE AT CHARGED DEDUCTIONS ------------ - ---------------------------------------- BEGINNING OF CHARGED TO OTHER FROM BALANCE AT DESCRIPTION YEAR TO INCOME ACCOUNTS RESERVES END OF YEAR - ---------------------------------------- ------------ ------------ ------------ ------------ ------------ Year Ended January 31, 1993 Valuation account deducted from assets to which it applies -- Allowance for doubtful accounts...... $ 1,750 $ 1,349 $ 45 (A) $ 689 (B) $ 2,455 ------------ ------------ ----- ------------ ------------ ------------ ------------ ----- ------------ ------------ Year Ended January 31, 1994 Valuation account deducted from assets to which it applies -- Allowance for doubtful accounts...... $ 2,455 $ 579 $ 30 (A) $ 770 (B) $ 2,294 ------------ ------------ ----- ------------ ------------ ------------ ------------ ----- ------------ ------------ Year Ended January 31, 1995 Valuation account deducted from assets to which it applies -- Allowance for doubtful accounts...... $ 2,294 $ 2,038 $ 177 (A) $ 1,679 (B) $ 2,830 ------------ ------------ ----- ------------ ------------ ------------ ------------ ----- ------------ ------------ - ------------------------ (A) Recoveries on accounts previously written off. (B) Uncollectible accounts written off and adjustments to the allowance.
14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (REGISTRANT) MERRILL CORPORATION BY (SIGNATURE) (NAME AND TITLE) John W. Castro, President and Chief Executive Officer (DATE) April 26, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. BY (SIGNATURE) (NAME AND TITLE) John W. Castro, President and Chief Executive Officer (Principal Executive Officer) and Director (DATE) April 26, 1995 BY (SIGNATURE) (NAME AND TITLE) John B. McCain, Vice President -- Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) (DATE) April 26, 1995 BY (SIGNATURE) (NAME AND TITLE) Kenneth F. Merrill, Director (DATE) April 26, 1995 BY (NAME AND TITLE) Robert F. Nienhouse, Director (DATE) April 26, 1995 BY (SIGNATURE) (NAME AND TITLE) Richard G. Lareau, Director (DATE) April 26, 1995 BY (SIGNATURE) (NAME AND TITLE) Paul G. Miller, Director (DATE) April 26, 1995 BY (SIGNATURE) (NAME AND TITLE) Rick R. Atterbury, Director (DATE) April 26, 1995 BY (SIGNATURE) (NAME AND TITLE) Ronald N. Hoge, Director (DATE) April 26, 1995 BY (SIGNATURE) (NAME AND TITLE) James R. Campbell, Director (DATE) April 26, 1995
15 MERRILL CORPORATION EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED JANUARY 31, 1995
ITEM NO. DESCRIPTION METHOD OF FILING - ----------- -------------------------------------------------- -------------------------------------------------- 3.1 Articles of Incorporation of the Company Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-4062) 3.2 Amendments to Articles of Incorporation as of June Incorporated by reference to Exhibit 3.2 to the 20, 1986 and March 27, 1987 Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1987 3.3 Restated Bylaws of the Company Incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1990 10.1 1985 Incentive Stock Option Plan Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 33-4062) 10.2 Employment Agreement between Rick R. Atterbury and Incorporated by reference to Exhibit 10.2 to the the Company, dated as of February 1, 1987, as Company's Annual Report on Form 10-K for the amended fiscal year ended January 31, 1991 10.3 Amendment to Employment Agreement between Rick R. Incorporated by reference to Exhibit 10.3 to the Atterbury and the Company, dated as of April 29, Company's Annual Report on Form 10-K for the 1994. fiscal year ended January 31, 1994 10.4 Facilities Lease dated October 1, 1985 between the Incorporated by reference to Exhibit 10.17 to the Port Authority of the City of Saint Paul as Company's Registration Statement on Form S-1 lessor and the Company as lessee (File No. 33-4062) 10.5 Land Lease dated October 1, 1985 between the Port Incorporated by reference to Exhibit 10.18 to the Authority of the City of Saint Paul as lessor and Company's Registration Statement on Form S-1 the Company as lessee (File No. 33-4062) 10.6 Restated and Amended Revolving Credit Agreement Filed herewith electronically dated as of June 20, 1994 between First Bank, N.A. and the Company 10.7 Amendment to Restated and Amended Revolving Credit Filed herewith electronically Agreement dated as of September 28, 1994 between First Bank, N.A. and the Company. 10.8 Second Amendment to Restated and Amended Revolving Filed herewith electronically Credit Agreement dated as of April 20, 1995 between First Bank, N.A. and the Company. 10.9 1987 Omnibus Stock Plan, as amended Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991
16
ITEM NO. DESCRIPTION METHOD OF FILING - ----------- -------------------------------------------------- -------------------------------------------------- 10.10 Employment Agreement between John Castro and the Incorporated by reference to Exhibit 10 to the Company dated as of February 1, 1989 Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1989 10.11 Amendment to Employment Agreement between John Incorporated by reference to Exhibit 10.9 to the Castro and the Company dated as of April 29, Company's Annual Report on Form 10-K for the 1994. fiscal year ended January 31, 1994 10.12 1993 Incentive Stock Plan, as amended Filed herewith electronically 10.13 Option Agreement dated as of July 1, 1991 between Incorporated by reference to Exhibit 10.9 to the Ronald N. Hoge and the Company Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 10.14 Asset Purchase Agreement, dated as of December 31, Incorporated by reference to Exhibit 2.1 to the 1993 among the Company, Merrill Acquisition Company's Current Report on Form 8-K dated Corporation, May Printing Company and December 31, 1993. Shareholders of May Printing Company. 10.15 Loan Agreement, dated as of July 1, 1990 between Incorporated by reference to Exhibit 10.13 to the May Printing Company and Minnesota Agricultural Company's Annual Report on Form 10-K for the and Economic Development Board, amended as of fiscal year ended January 31, 1994 December 31, 1993. 10.16 Guaranty of Loan Obligations of May Printing Incorporated by reference to Exhibit 10.14 to the Company by the Company in favor of Minnesota Company's Annual Report on Form 10-K for the Agricultural and Economic Development Board, fiscal year ended January 31, 1994 dated as of December 31, 1993. 10.17 Guaranty Agreement of the obligations of Merrill Incorporated by reference to Exhibit 10.15 to the Acquisition Corporation by the Company in favor Company's Annual Report on Form 10-K for the of May Printing Company, and Thomas May and James fiscal year ended January 31, 1994 Scott May, dated as of December 31, 1993. 10.18 Option Agreement dated as of September 19, 1994 Filed herewith electronically between James R. Campbell and the Company 11.1 Computation of per share earnings Filed herewith electronically 13.1 Portions of Annual Report to Shareholders Filed herewith electronically 21.1 Subsidiaries of the Company Filed herewith electronically 23.1 Consent of Independent Accountants Filed herewith electronically
17 EX-10.6 2 EXHIBIT 10.6 RESTATED AND AMENDED REVOLVING CREDIT AGREEMENT THIS AGREEMENT is made as of the 20th day of June, 1994, by and between Merrill Corporation, a Minnesota corporation (the "Borrower"), and First Bank National Association, a national banking association (the "Bank"). R E C I T A L S The Borrower and Marquette Bank Minneapolis, National Association ("Marquette") executed and delivered a Revolving Credit Agreement dated as of September 7, 1990 (the "Original Credit Agreement") which was restated and amended pursuant to a Restated and Amended Revolving Credit Agreement dated as of September 10, 1992 by and between the Borrower and Marquette (herein, as amended, the "Credit Agreement"). On April 27, 1993, Marquette and the Bank entered into an Assignment and Assumption Agreement pursuant to which the Bank acquired all of the rights and assumed all of the obligations of Marquette under the Credit Agreement. The Borrower and the Bank have agreed to amend and restate the terms of the Credit Agreement pursuant to the terms of this Agreement. NOW, THEREFORE, for One Dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to restate and amend the Credit Agreement as follows: ARTICLE I DEFINITIONS Section 1.01 DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meaning assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles. "Advance" means an advance by the Bank to the Borrower pursuant to Article II. "Affiliate" means any officer, director, independent contractor or employee of the Borrower or any other Person under the common control of the Borrower or any other Affiliate. "Business Day" means any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which national banks are permitted to be open in Minneapolis, Minnesota and, with respect to Eurodollar Advances, a day on which dealings in Dollars may be carried on by the Bank in the interbank eurodollar market. "Cash Flow Leverage" means the ratio of (a) total interest bearing Debt, including capital leases, of the Borrower and its Subsidiaries, to (b) net income of the Borrower and its Subsidiaries before extraordinary gains and losses, plus depreciation and amortization expense, minus capital expenditures, minus dividends, all calculated over the four consecutive quarters ending as of the date of the test. "CD Assessment Rate" means the annual assessment rate (rounded upward, if necessary, to the nearest 1/100th of 1%) actually incurred by the Bank during a given Interest Period to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's insuring of time deposits at offices of the Bank in the United States, as adjusted as hereinafter provided. If the annual assessment rate for the Federal Deposit Insurance Corporation's (or any successor's) insuring such time deposits is scheduled to change during such Interest Period, the CD Assessment Rate for such Interest Period shall be the weighted average (rounded upward, if necessary, to the nearest 1/100th of 1%) of the annual assessment rates in effect at the beginning and as of such change. "CD Rate" means the rate of interest determined by the Bank for the relevant Interest Period to be the average (rounded upward, if necessary, to the nearest 1/100th of 1%) of the rates quoted to the Bank at approximately 8:00 a.m., Minneapolis time (or as soon thereafter as practicable), or at the option of the Bank at approximately the time of the request for a CD Rate Advance if such request is made later than 8:00 a.m., Minneapolis time, in each case on the first day of the applicable Interest Period by certificate of deposit dealers selected by the Bank, in its sole discretion, for the purchase from the Bank, at face value, of certificates of deposit issued by the Bank in an amount and maturity comparable to the amount and maturity of the requested CD Rate Advance. "CD Rate Advance" means an Advance designated as such in a notice of borrowing under Section 2.03 or a notice of continuation or conversion under Section 2.06. "CD Rate (Reserve Adjusted)" means a rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) calculated for the Interest Period of a CD Rate Advance in accordance with the following formula: CDRA = CD Rate + CDAR ----------- 1.00 - CDRR 2 In such formula, "CDAR" means "CD Assessment Rate", "CDRA" means "CD Rate (Reserve Adjusted)" and "CDRR" means "CD Reserve Rate", in each instance determined by the Bank for the applicable Interest Period. The Bank's determination of all such rates for any Interest Period shall be conclusive in the absence of manifest error. "CD Reserve Rate" means a percentage equal to the daily average during such Interest Period of the aggregate maximum reserve requirements (including all basic, supplemental, marginal and other reserves), as specified under Regulation D of the Federal Reserve Board, or any other applicable regulation that prescribes reserve requirements applicable to non-personal time deposits (as presently defined in Regulation D) with the Bank or applicable to extensions of credit by the Bank the rate of interest on which is determined with regard to rates applicable to non-personal time deposits. Without limiting the generality of the foregoing, the CD Reserve Requirement shall reflect any reserves required to be maintained by the Bank against (i) any category of liabilities that includes deposits by reference to which the CD Rate is to be determined, or (ii) any category of extensions of credit or other assets that includes CD Advances. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means, from time to time, the difference between $10,000,000 and the then outstanding face amounts of Letters of Credit. "Commitment Fees" means the commitment fees payable under Section 2.12 hereof. "Consolidated" shall, when used with reference to any financial information pertaining to (or when used as a part of any defined term or statement pertaining to the financial condition of) any Person, mean the accounts of such Person and its subsidiaries, determined on a consolidated basis, all determined as to principles of consolidation and, except as otherwise specifically required by the definition of such term or by such statement as to such accounts, in accordance with generally accepted accounting principles. "Consolidated Tangible Net Worth" of the Borrower means the sum of the retained earnings, capital stock and surplus of the Borrower on a Consolidated basis, less loans or accounts (other than accounts incurred in the ordinary course of business) due from Affiliates, treasury stock and good will. "Debt" means (i) all items of indebtedness or liability which, in accordance with generally accepted accounting principles, would be included in determining total liabilities as shown on the liabilities side of a balance sheet as at the date as of which Debt is to be determined, including any indebtedness owed to an Affiliate, and (ii) indebtedness secured by any mortgage, pledge, lien or security interest existing on property owned by the Person whose Debt is being determined, whether or not the indebtedness secured thereby shall have been assumed, and (iii) guaranties, endorsements (other than for purposes of collection in the ordinary course of business) and other contingent obligations in respect of, or to purchase or otherwise acquire indebtedness of others; provided, however, that for purposes of calculating that Debt evidenced by Minnesota Agricultural and Economical Development Authority Small Business Revenue Bonds, Series 1985C and Series 1990B, Debt shall be calculated net of deposits and reserves maintained with the trustee to secure these bonds. 3 "ERISA" means the Employee Retirement Income Security Act of 1974, as the same may from time to time be amended, and the rules and regulations promulgated thereunder by any governmental agency or authority, as from time to time in effect. "Eurodollar Advance" means an Advance designated as such in a notice of borrowing under Section 2.03 or a notice of continuation or conversion under Section 2.06. "Eurodollar Interbank Rate" means the offered rate for deposits in United States Dollars (rounded upwards, if necessary, to the nearest 1/16 of 1%), for delivery of such deposits on the first day of an Interest Period of a Eurodollar Advance, for the number of days comprised therein, which appears on the Reuters Screen LIBO Page as of 11:00 a.m., London time, on the day that is two Banking Days preceding the first day of the Interest Period of such Eurodollar Advance. If at least two rates appear on the Reuters Screen LIBO Page, the rate for such Interest Period shall be the arithmetic mean of such rates (rounded as provided above). If fewer than two rates appear, the rate for such Interest Period shall be determined by the Bank based on rates offered to the Bank for United States Dollar deposits in the interbank eurodollar market. "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO Page on that service for the purpose of displaying London interbank offered rates of major banks for United States Dollar deposits). "Eurodollar-Rate (Reserve Adjusted)" means a rate per annum (rounded upward, if necessary, to the nearest 1/16th of 1%) calculated for the Interest Period of a Eurodollar Advance in accordance with the following formula: ERRA = Eurodollar Interbank Rate ------------------------- 1.00 - ERR In such formula, "ERR" means "Eurodollar Reserve Rate" and "ERRA" means "Eurodollar Rate (Reserve Adjusted)", in each instance determined by the Bank for the applicable Interest Period. The Bank's determination of all such rates for any Interest Period shall be conclusive in the absence of manifest error. "Eurodollar Reserve Rate" means a percentage equal to the daily average during such Interest Period of the aggregate maximum reserve requirements (including all basic, supplemental, marginal and other reserves), as specified under Regulation D of the Federal Reserve Board, or any other applicable regulation that prescribes reserve requirements applicable to Eurocurrency liabilities (as presently defined in Regulation D) or applicable to extensions of credit by the Bank the rate of interest on which is determined with regard to rates applicable to Eurocurrency liabilities. Without limiting the generality of the foregoing, the Eurocurrency Reserve Requirement shall reflect any reserves required to be maintained by the Bank against (i) any category of liabilities that includes deposits by reference to which the Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets that includes Eurodollar Advances. "Event of Default" has the meaning specified in Section 8.01. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or an successor thereto. 4 "Interest Period" means either (a) for any Eurodollar Advance, the period commencing on the borrowing date of such Eurodollar Advance or the date a CD Rate Advance or a Reference Rate Advance is converted into such Eurodollar Advance, or the last day of the preceding Interest Period for such Eurodollar Advance, as the case may be, and ending on the numerically corresponding day one, two, three or six months thereafter, as selected by the Borrower pursuant to Section 2.03 or Section 2.06; provided, that: (i) any Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day unless such next succeeding Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period shall extend beyond the Termination Date; and (b) for any CD Rate Advance, the period commencing on the borrowing date of such CD Rate Advance or the date a Eurodollar Advance or a Reference Rate Advance is converted into such CD Rate Advance, or the last day of the preceding Interest Period for such CD Rate Advance, as the case may be, and ending one, two, three or six months thereafter, as selected by the Borrower pursuant to Section 2.03 or Section 2.06; provided, that: (i) any Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day; and (ii) no Interest Period shall extend beyond the Termination Date. "Letters of Credit" means the letters of credit issued by the Bank from time to time for the account of the Borrower. "Loan Document" means individually or collectively, as the case may be, this Agreement, the Note, and any and all other documents executed, delivered or referred to herein or therein, as originally executed and as amended, modified or supplemented from time to time. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which Borrower or any Subsidiary is making or accruing an obligation to make contributions, or has within any of the preceding three plan years made or accrued an obligation to make contributions. "Note" means the Revolving Note of the Borrower, substantially in the form of Exhibit A hereto, any note which renews a Note or extends the maturity date thereof and which specifically refers to this Agreement. 5 "Payment Date" means the Termination Date, or date of any other termination of the Commitment, plus (a) the last day of each Interest Period for each CD Rate Advance and Eurodollar Advance and, if such Interest Period is in excess of 90 days (in the case of a CD Rate Advance) or three months (in the case of a Eurodollar Advance), the day 90 days or three months, as the case may be, after the first day of such Interest Period, and thereafter each day 90 days or three months, as the case may be, after each succeeding Payment Date; and (b) the first day of each month for each Reference Rate Advance. "Person" means any individual, corporation, partnership, joint venture, association, jointstock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for employees of the Borrower or any Subsidiary and covered by ERISA. "Reference Rate" means the rate of interest from time to time publicly announced by the Bank as its "reference rate." The Bank may lend to its customers at rates that are at, above or below the Reference Rate. For purposes of determining any interest rate which is based on the Reference Rate, such interest rate shall change on the effective date of any change in the Reference Rate. "Reference Rate Advance" means an Advance designated as such in a notice of borrowing under Section 2.03 or a notice of continuation or conversion under Section 2.06. "Reportable Event" shall have the meaning assigned to that term in ERISA. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, and which is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Termination Date" means the earliest of (a) May 31, 1997, (b) the date on which the Commitment is terminated pursuant to Section 8.02 hereof or (c) the date on which the Commitment is reduced to zero pursuant to Section 2.13 hereof. ARTICLE II AMOUNT AND TERMS OF THE REVOLVING LOANS AND LETTERS OF CREDIT Section 2.01 REVOLVING LOANS. The Bank agrees, on the terms and subject to the conditions hereinafter set forth, to make Advances to the Borrower from time to time during the period from the date hereof to and including the maturity date of the Note as stated therein, or the earlier date of termination in whole of the Commitment pursuant to Section 2.13 or Section 8.02, in an aggregate amount not to exceed at any time outstanding the Commitment. Within the limits of the Commitment, the Borrower may borrow, prepay pursuant to Section 2.04 and reborrow under this Section 2.01. 6 Section 2.02 THE REVOLVING NOTE. The Advances made by the Bank shall be evidenced by the Note payable to the order of the Bank. The Note shall bear interest on the unpaid principal amount thereof from the date thereof until paid in accordance with the terms of Section 2.07 hereof. Section 2.03 BORROWING PROCEDURES. Any request by the Borrower for an Advance shall be in writing, or by telephone promptly confirmed by telecopy or in writing, and must be given so as to be received by the Bank not later than: (a) 12:01 p.m., Minneapolis time, on the date of the requested Advance, if the Advance shall be comprised of CD Rate Advances or Reference Rate Advances; or (b) 12:01 p.m., Minneapolis time, two Business days prior to the date of the requested Advance, if the Advance shall be, or shall include, a Eurodollar Advance. Each request for an Advance shall specify (i) the borrowing date (which shall be a Business Day), (ii) the amount of such Advance and the type or types of Advances, and (iii) if such Advance shall include CD Rate Advances or Eurodollar Advances, the initial Interest Periods for such Advances. Unless the Bank determines that any applicable condition specified in Article VI has not been satisfied, the Bank will make the amount of the requested Advance available to the Borrower at the Bank's principal office in Minneapolis, Minnesota, in immediately available funds not later than 5:00 p.m., Minneapolis time, on the date requested. Section 2.04 OPTIONAL PREPAYMENTS. The Borrower may, upon at least One Business Days' prior written or telephonic notice received by the Bank, prepay the Loans, in whole or in part, at any time, subject to the provisions of Section 2.08, without any other premium or penalty. Any such prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Each partial prepayment shall be in a minimum amount of $100,000. Section 2.05 ADVANCE OPTIONS. Each Advance shall be constituted of CD Rate Advances, Eurodollar Advances and Reference Rate Advances, as shall be selected by the Borrower, except as otherwise provided herein. Any combination of types of Advances may be outstanding at the same time, except that the number of separate outstanding CD Rate Advances and Eurodollar Advances shall not exceed four at any one time. Each CD Rate Advance or Eurodollar Advance shall be in a minimum amount of $100,000 or in an integral multiple of $100,000 above such amount. Each Reference Rate Advances shall be in an amount that is an integral multiple of $10,000. 2.06 CONTINUATION - OR CONVERSION OF LOANS. The Borrower may elect to (i) continue any outstanding CD Rate Advance or Eurodollar Advance from one Interest Period into a subsequent Interest Period to begin on the last day of the earlier Interest Period, or (ii) convert any outstanding Advance into another type of Advance (on the last day of an Interest Period only, in the instance of a CD Rate Advance or Eurodollar Advance), by giving the Bank notice in writing, or by telephone promptly confirmed in writing, given so as to be received by the Bank not later than: (a) 12:01 p.m., Minneapolis time, on the date of the requested continuation or conversion, if the continuing or converted Advance shall be a CD Rate Advance or Reference Rate Advance; or 7 (b) 12:01 p.m., Minneapolis time, two Business days prior to the date of the requested continuation or conversion, if the continuing or converted Advance shall be a Eurodollar Advance. Each notice of continuation or conversion of an Advance shall specify (i) the effective date of the continuation or conversion date (which shall be a Business Day), (ii) the amount and the type or types of Advances following such continuation or conversion (subject to the limitation on amount set forth in Section 2.05), and (iii) for continuation as, or conversion into, CD Rate Advances or Eurodollar Advances, the Interest Periods for such Advances. Absent timely notice of continuation or conversion, each CD Rate Advance and Eurodollar Advance shall automatically convert into a Reference Rate Advance on the last day of an applicable Interest Period, unless paid in full on such last day. No Advance shall be continued as, or converted into, a CD Rate Advance or a Eurodollar Advance if the shortest Interest Period for such Advance may not transpire prior to the Termination Date or if a Default or Event of Default shall exist. Section 2.07 INTEREST. (a) CD RATE ADVANCES. The unpaid principal amount of each CD Rate Advance shall bear interest prior to maturity at a rate per annum equal to the CD Rate (Reserve Adjusted) in effect for each Interest Period for such CD Rate Advance plus 1.50% per annum. (b) EURODOLLAR ADVANCES. The unpaid principal amount of each Eurodollar Advance shall bear interest prior to maturity at a rate per annum equal to the Eurodollar Rate (Reserve Adjusted) in effect for each Interest Period for such Eurodollar Advance plus 1.65% per annum. (c) REFERENCE RATE ADVANCES. The unpaid principal amount of each Reference Rate Advance shall bear interest prior to maturity at a rate per annum equal to the Reference Rate. (d) INTEREST AFTER MATURITY. Any amount of the Loans not paid when due, whether at the date scheduled therefor or earlier upon acceleration, shall bear interest until paid in full at a rate per annum equal to the greater of (i) 1.75% in excess of the rate applicable to the unpaid principal amount immediately before it became due, or (ii) 1.75% in excess of the Reference Rate in effect from time to time. (e) PAYMENT DATES. Accrued interest under Section 3.1(a), (b) and (c) and Commitment Fees under Section 2.12 shall be payable on the Payment Dates for the applicable types of Advances and for fees. Accrued interest under Section 3.1(d) shall be payable on demand. (f) COMPUTATION. Interest and Commitment Fees shall be computed on the basis of actual days elapsed and a year of 360 days. Section 2.08 FUNDING LOSSES. The Borrower will indemnify the Bank upon demand against any loss or expense which the Bank may sustain or incur (including, without limitation, any loss or expense sustained or incurred in obtaining, liquidating or employing deposits or other funds acquired to effect, fund, or maintain any Advance) as a consequence 8 of (i) any failure of the Borrower to make any payment when due of any amount due hereunder or under the Note, (ii) any failure of the Borrower to borrow, continue or convert an Advance on a date specified therefor in a notice thereof, or (iii) any payment (including, without limitation, any payment pursuant to Section 2.13, 3.04 or 8.02), prepayment or conversion of any CD Rate Advance or Eurodollar Advance on a date other than the last day of the Interest Period for such Advance. Determinations by the Bank for purposes of this Section 2.08 of the amount required to indemnify the Bank shall be conclusive in the absence of manifest error. At the request of the Borrower, the Bank shall furnish the Borrower with a written explanation, in reasonable detail, showing how the amounts of the indemnity payment was calculated. Section 2.09 PAYMENT. All payments of principal and interest under the Note and of the fees hereunder shall be made to the Bank in immediately available funds. The Borrower agrees that the amount shown on the books and records of the Bank as being the aggregate amount of Advances outstanding shall be prima facie evidence of the principal amount of the Note then outstanding. The Borrower hereby authorizes the Bank, if and to the extent payment is not promptly made pursuant hereto, to charge against the Borrower's account with the Bank an amount equal to the accrued principal, interest and fees from time to time due and payable to the Bank under the Note or hereunder. Section 2.10 PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a Saturday, Sunday or holiday for banks under laws of the State of Minnesota, such payment may be made on the next succeeding bank business day, and such extension of time shall in such case be included in the computation of payment interest on the Note or the fees hereunder, as the case may be. Section 2.11 USE OF PROCEEDS. The proceeds of each Advance shall be used by the Borrower for working capital, capital expenditures, and its general corporate purposes. Section 2.12 COMMITMENT FEES. The Borrower agrees to pay to the Bank a Commitment Fee at the rate of one-quarter of one percent (0.25%) per annum on the average daily unused amount of the Commitment from the date hereof to and including the termination date of the Commitment, payable quarterly, in arrears, on the first day of each September, December, March and June during the term of the Commitment, commencing September 1, 1994 (for the period of time since June 20, 1994), provided that the commitment fee remaining unpaid shall be due and payable on the termination date of the Commitment. Section 2.13 OPTIONAL REDUCTION OR TERMINATION OF COMMITMENT. The Borrower may, at any time, upon no less than three Business Days prior written or telephonic notice received by the Bank, reduce the Commitment, with any such reduction in a minimum amount of $1,000,000 or an integral multiple thereof. Upon any reduction in the Commitment pursuant to this Section, the Borrower shall pay to the Bank the amount, if any, by which the aggregate unpaid principal amount of outstanding Advances exceeds the Commitment as so reduced. Amounts so paid cannot be reborrowed. The Borrower may, at any time, upon not less than three Business Days prior written notice to the Bank, terminate the Commitment in its entirety. Upon termination of the Commitment pursuant to this Section, the Borrower shall pay to the Bank the full amount of all outstanding Advances, all accrued and unpaid interest thereon, all unpaid Commitment Fees accrued to the date of such termination and all other unpaid obligations of the Borrower to the Bank hereunder, including the face amount of all outstanding Letters of Credit. All payment described in this Section is subject to the provisions of Section 2.08. 9 Section 2.14 THE LETTERS OF CREDIT. (a) The Bank may, in its discretion, on the terms and subject to the conditions hereinafter set forth, and subject to the terms and conditions contained in the letter of credit applications executed by the Borrower in the form of Exhibit F hereof, issue the Letters of Credit for the account of the Borrower in an aggregate face amount not to exceed $1,000,000. The Letters of Credit shall mature within one year or on or before the Termination Date, whichever first occurs. The Borrower shall pay the Bank an application fee of $250 for each Letter of Credit issued. In addition, the Borrower shall pay the Bank a letter of credit fee of 1.25% per annum of the face amount of the Letter of Credit, payable in advance. The Borrower agrees to reimburse the Bank on demand for the amount of any draft drawn upon the Letters of Credit. (b) If any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of the Bank, or (ii) impose on the Bank any other conditions regarding this Agreement or the Letters of Credit, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Bank of issuing or maintaining the Letters of Credit (which increase in cost shall be determined by the Bank's reasonable allocation of the aggregate of such cost increases resulting from such events), then, upon demand, the Borrower shall pay to the Bank, from time to time as specified by the Bank, additional amounts which shall be sufficient to compensate the Bank for any increased cost, together with interest on each such amount from the date demanded until payment in full thereof at the Reference Rate. (c) The obligations of the Borrower under this Section 2.14 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: i) any lack or validity or enforceability of any Letter of Credit or any other agreement or instrument relating thereto (collectively, the "Related Documents"); ii) any amendment or waiver of, or any consent to departure from, all or any of the Related Documents; iii) the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary, or any transferee, of any Letter of Credit (or any persons for whom any such beneficiary or any such transferee may be acting), the Bank or any other person, whether in connection with any Related Document, the transactions contemplated therein, or any unrelated transaction; or iv) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect, except in the case of payment by the Bank under a Letter of Credit that shall 10 have been proven by the Borrower to have resulted from the gross negligence or willful misconduct of the Bank. ARTICLE III ADDITIONAL PROVISIONS RELATING TO LOANS Section 3.01 INCREASED COSTS. If, as a result of any law, rule, regulation, treaty or directive, or any change therein or in the interpretation or administration thereof, or compliance by the Bank with any request or directive (whether or not having the force of law) from any court, central bank, governmental authority, agency or instrumentality, or comparable agency: (a) any tax, duty or other charge with respect to any Loan, the Note or the Commitment is imposed, modified or deemed applicable, or the basis of taxation of payments to the Bank of interest or principal of the Loans or of the Commitment Fees (other than taxes imposed on the overall net income of the Bank by the jurisdiction in which the Bank has its principal office) is changed; (b) any reserve, special deposit, special assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank is imposed, modified or deemed applicable; (c) any increase in the amount of capital required or expected to be maintained by the Bank or any Person controlling the Bank is imposed, modified or deemed applicable; or (d) any other condition affecting this Agreement or the Commitment is imposed on the Bank or the relevant funding markets; and the Bank determines that, by reason thereof, the cost to the Bank of making or maintaining the Loans or the Commitment is increased, or the amount of any sum receivable by the Bank hereunder or under the Note in respect of any Loan is reduced; then, the Borrower shall pay to the Bank upon demand such additional amount or amounts as will compensate the Bank (or the controlling Person in the instance of (c) above) for such additional costs or reduction (provided that the Bank has not been compensated for such additional cost or reduction in the calculation of the CD Reserve Rate, the Eurodollar Reserve Rate or the CD Assessment Rate). Determinations by the Bank for purposes of this Section 3.01 of the additional amounts required to compensate the Bank shall be conclusive in the absence of manifest error. In determining such amounts, the Bank may use any reasonable averaging, attribution and allocation methods. At the request of the Borrower, the Bank shall furnish the Borrower with a written explanation, in reasonable detail, showing how the foregoing additional amount was calculated. Section 3.02 DEPOSITS UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE OR INADEQUATE; IMPRACTICABILITY. If the Bank reasonably determines that: (a) deposits of the necessary amount for the relevant Interest Period for any CD Rate Advance or Eurodollar Advance are not available to the Bank in the relevant markets or that, by reason of circumstances affecting such market, adequate 11 and reasonable means do not exist for ascertaining the CD Rate or Eurodollar Rate, as the case may be, for such Interest Period; (b) the CD Rate (Reserve Adjusted) or the Eurodollar Rate (Reserve Adjusted), as the case may be, will not adequately and fairly reflect the cost to the Bank of making or funding the CD Rate Advances or Eurodollar Advances, as the case may be, for a relevant Interest Period; or (c) the making or funding of CD Rate Advances or Eurodollar Advances, as the case may be, has become impracticable as a result of any event occurring after the date of this Agreement which, in the reasoned opinion of the Bank, materially and adversely affects such Advances or the Bank's Commitment to make such Advances or the relevant market; the Bank shall promptly give notice of such determination to the Borrower, and (i) any notice of a new CD Rate Advance or Eurodollar Advance, as the case may be, previously given by the Borrower and not yet borrowed or converted shall be deemed to be a notice to make an Advance of another type, as selected by the Borrower, and (ii) the Borrower shall be obligated to either prepay in full any outstanding CD Rate Advances or Eurodollar Advances, as the case may be, without premium or penalty on the last day of the current Interest Period with respect thereto or convert any such Advance to an Advance of another type, as selected by the Borrower, on such last day. Section 3.03 CHANGES IN LAW RENDERING CD RATE ADVANCES OR EURODOLLAR ADVANCES UNLAWFUL. If at any time due to the adoption of any law, rule, regulation, treaty or directive, or any change therein or in the interpretation or administration thereof by any court, central bank, governmental authority, agency or instrumentality, or comparable agency charged with the interpretation or administration thereof, or for any other reason arising subsequent to the date of this Agreement, it shall become unlawful or impossible for the Bank to make or fund any CD Rate Advance or Eurodollar Advance, the obligation of the Bank to provide such Advance shall, upon the happening of such event, forthwith be suspended for the duration of such illegality or impossibility. If any such event shall make it unlawful or impossible for the Bank to continue any CD Rate Advance or Eurodollar Advance previously made by it hereunder, the Bank shall, upon the happening of such event, notify the Borrower thereof in writing, and the Borrower shall, at the time notified by the Bank, either convert each such unlawful Advance to an Advance of another type or repay such Advance in full, together with accrued interest thereon, subject to the provisions of Section 2.08. Section 3.04 FUNDING. (a) DISCRETION OF THE BANK AS TO MANNER OF FUNDING. Notwithstanding any provision of this Agreement to the contrary, the Bank shall be entitled to fund and maintain its funding of all or any part of the Advances in any manner it elects; it being understood, however, that for purposes of this Agreement, all determinations hereunder shall be made as if the Bank had actually funded and maintained each CD Rate Advance and each Eurodollar Advance during the Interest Period for such Advance through the purchase of deposits having a term corresponding to such Interest Period and bearing an interest rate equal, in the case of CD Rate Advances, to the CD Rate for such Interest Period or, in the case of Eurodollar Advances, to the Eurodollar Rate for such Interest Period (whether or not the Bank shall have granted any participations in such Advances). 12 (b) FUNDING THROUGH THE SALE OF PARTICIPATIONS. Notwithstanding any provision of this Agreement to the contrary, the Borrower acknowledges that the Bank may fund all or any part of the Advances by sales of participations to various participants and agrees that the Bank may, in invoking its rights under this Section 3 or under Section 2.08, demand and receive payment for costs and other amounts incurred by, or allocable to, any such participant, or take other action arising from circumstances applicable to any such participant, to the same extent that such participant could demand and receive payments, or take other action, under this Section 3 or under Section 2.08 if such participant were the Bank under this Agreement. (c) FUNDING THROUGH BRANCH OR AFFILIATE. At the Bank's sole option, it may fulfill its commitment to make Eurodollar Advances by causing a foreign branch or an affiliate to make or continue such Eurodollar Advances; provided, that in such instance such Eurodollar Advances shall be deemed for purposes of this Agreement to have been made by the Bank and the obligation of the Borrower to repay such Eurodollar Advances shall be to the Bank and shall be deemed held by the Bank for the account of such branch or affiliate. ARTICLE IV CONDITIONS OF LENDING Section 4.01 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. The obligation of the Bank to make its initial Advance hereunder is subject to the condition precedent that the Bank shall have received on or before the day of such Advance (unless waived in writing by the Bank) all of the following, each dated (unless otherwise indicated) such day, in form and substance satisfactory to the Bank: (a) The Note, properly executed on behalf of the Borrower. (b) A certified copy of the resolutions of the Borrower evidencing approval of this Agreement, the Note, and other matters contemplated hereby. (c) A certificate signed by the secretary or chief financial officer of the Borrower which shall certify that the Articles of Incorporation and Bylaws of the Borrower and its Subsidiaries which were previously delivered to the Bank are true and correct copies thereof and have not been amended or modified in any material manner since the date of delivery. (d) A signed copy of an opinion of counsel for the Borrower addressed to the Bank. (e) A signed copy of a certificate of the Secretary or an Assistant Secretary of the Borrower which shall certify the names of the officers of the Borrower authorized to sign this Agreement, the Note and the other documents or certificates to be delivered pursuant to this Agreement by the Borrower or any of its officers, together with the true signatures of such officers. The Bank may conclusively rely on such certificate until it shall receive a further certificate of the Secretary or Assistant Secretary of the Borrower canceling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. 13 (f) A completed current Compliance Certificate in the form attached as Exhibit B hereto, executed by the chief financial officer of the Borrower. (g) A lien search on the Borrower showing no outstanding liens not previously disclosed. (h) A completed Environmental Risk Assessment Questionnaire showing no material environmental liabilities or contingencies. Section 4.02 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the Bank to make each Advance (including the initial Advance) shall be subject to the further conditions precedent that on the date of such Advance: (a) the representations and warranties contained in Article V are correct on and as of the date of such Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance, which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Bank as follows: Section 5.01 CORPORATE EXISTENCE AND POWER. The Borrower and each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. The Borrower and each Subsidiary has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its respective obligations under, this Agreement and the Note. Section 5.02 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS. The execution, delivery and performance by the Borrower of this Agreement and the Note and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do and will not (i) require any consent or approval of the stockholders of the Borrower, or any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Articles of Incorporation or Bylaws of the Borrower, (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected, or (iv) result in or require the creation or imposition of any mortgage, deed of 14 trust, pledge, lien, security interest or other charge or encumbrance of any nature upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 5.03 LEGAL AGREEMENTS. This Agreement and the Note constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally from time to time in effect and by general principles of equity. Section 5.04 SUBSIDIARIES. Exhibit C hereto is a complete and correct list of all present Subsidiaries and of the present ownership of each Subsidiary in each case as of the date of this Agreement. Except as otherwise indicated on Exhibit C, all shares of each Subsidiary owned by the Borrower or by any Subsidiary are fully paid and non-assessable. Section 5.05 FINANCIAL CONDITION. The Borrower has heretofore furnished the following Consolidated financial statements to the Bank: audited statements for the Borrower's fiscal year ending January 31, 1994 and unaudited interim statements for the quarter ending April 30, 1994. Said Consolidated financial statements fairly present the financial condition of the Borrower and its Subsidiaries on the dates thereof and the results of their operations for the periods then ended, and were prepared in accordance with generally accepted accounting principles. Section 5.06 ADVERSE CHANGE. There has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrower or any Subsidiary since the date of the latest financial statement referred to in Section 5.05. Section 5.07 LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or the properties of the Borrower or any Subsidiary before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any Subsidiary, would have a material adverse effect on the financial condition, properties, or operations of the Borrower or any Subsidiary. Section 5.08 REGULATION U. Neither the Borrower nor any Subsidiary is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 5.09 TAXES. The Borrower and each Subsidiary has filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower and each Subsidiary are required to be filed, and the Borrower has paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by it to the extent such taxes have become due. Section 5.10 TITLES AND LIENS. The Borrower or one of its Subsidiaries has good title to each of the properties and assets reflected in the latest balance sheet (exclusive of capitalized leases) referred to in Section 5.05 (other than any sold, as permitted by Section 7.05), free and clear of all mortgages, security interests, liens and encumbrances, except for 15 mortgages, security interests and liens permitted by Section 7.01 and covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the business or operations of the Borrower or any Subsidiary as presently conducted. Section 5.11 ERISA COMPLIANCE. (a) Each Plan is in compliance in all material respects with all applicable provisions of ERISA and the Code with respect to which failure to comply could result in a material liability to the Borrower or any Subsidiary; (b) as of the date of the most recent valuation of each Plan subject to Title IV of ERISA (other than a Multiemployer Plan), the aggregate present value of all accrued vested benefits under such Plans (calculated on the basis of the actuarial assumptions specified in the most recent actuarial valuation for such Plans) did not exceed by a material amount (relative to the Borrower's Consolidated Tangible Net Worth) the fair market value of the assets of such Plans allocable to such benefits; (c) the Borrower is not aware of any information since the date of such valuations which would materially affect the information contained therein: (d) no Plan which is subject to Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code has incurred an accumulated funding deficiency as that term is defined in Section 302 of ERISA or Section 412 of the Code (whether or not waived); (e) no liability to the Pension Benefit Guaranty Corporation (other than required premiums which have become due and payable, all of which have been paid) has been incurred with respect to any Plan, and there has not been any Reportable Event which presents a material risk of termination of any Plan by the Pension Benefit Guaranty Corporation; and (f) to the best of its knowledge, the Borrower has not engaged in a transaction which would subject it to any material tax, penalty or liability for prohibited transactions imposed by ERISA or the Code. As of the effective date of this Agreement, neither the Borrower nor any Subsidiary contributes to any Multiemployer Plan. Section 5.12 ACCURACY OF INFORMATION. All factual information heretofore or herewith furnished by the Borrower to the Bank for purposes of or in connection with this Agreement or any of the transactions contemplated hereby is, and all other such factual information hereafter furnished by the Borrower to the Bank for purposes of or in connection with this Agreement or any of the transactions will be, true and accurate in every material respect on the date as of which such information is dated or certified and no such information contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the statements contained therein not misleading. Section 5.13 DEFAULTS. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material contract or in any instrument evidencing any Debt or under any agreement relating thereto. Section 5.14 ENVIRONMENTAL REGULATIONS. To the best of the Borrower's knowledge, the Borrower and each Subsidiary is in compliance with all requirements of law relating to pollution control and environmental regulations in the respective jurisdictions where it is presently doing business or conducting operations. Section 5.15 SURVIVAL OF REPRESENTATIONS. All representations and warranties contained in this Article IV shall survive the delivery of the Note and the making of the loan evidenced thereby and any investigation at any time made by or on behalf of the Bank shall not diminish its rights to rely thereon. 16 ARTICLE VI AFFIRMATIVE COVENANTS OF THE BORROWER So long as the Note shall remain unpaid or the Commitment shall be outstanding, the Borrower will comply with the following requirements, unless the Bank shall otherwise consent in writing: Section 6.01 FINANCIAL STATEMENTS. The Borrower will deliver to the Bank: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower and its Subsidiaries, a copy of the annual Consolidated audit report of the Borrower with the unqualified opinion of Coopers & Lybrand or other independent certified public accountants selected by the Borrower and acceptable to the Bank, all in reasonable detail and all prepared in accordance with generally accepted accounting principles; together with a Compliance Certificate of the chief financial officer of the Borrower in the form of Exhibit B hereto; (b) as soon as available and in any event within 45 days after the end of each interim fiscal quarter, Consolidated financial statements of the Borrower and its Subsidiaries as at the end of each interim fiscal quarter and for the year to date, in reasonable detail, all prepared in accordance with generally accepted accounting principles, together with a Compliance Certificate of the chief financial officer of the Borrower in the form of Exhibit B hereto, subject, however, to year-end audit adjustments; (c) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its stockholders; (d) promptly after the sending or filing thereof, copies of all regular and periodic financial reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange, including the Borrower's quarterly 10-Q statements and annual 10-K statements; (e) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower or any Subsidiary of the type described in Section 5.07 or which seek a monetary recovery against the Borrower in excess of $250,000; (f) as promptly as practicable (but in any event not later than five business days) after an officer of the Borrower obtains knowledge of the occurrence of any event which constitutes an Event of Default, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such event; (g) as soon as possible and in any event within 30 days after the Borrower knows that a Reportable Event with respect to any Plan has occurred, the statement of the chief financial officer of the Borrower setting forth details as to such Reportable Event and the action, if any, which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation if such notice is required to be furnished to the Pension Benefit Guaranty Corporation; 17 (h) as soon as possible, any notice of any default received by the Borrower or any Subsidiary in the repayment of any indebtedness for borrowed money owed by any of them the outstanding principal amount of which exceeds $50,000; and (i) such other information respecting the financial condition and results of operations of the Borrower and its Subsidiaries as the Bank may from time to time reasonably request. Section 6.02 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The Borrower will, and will cause each Subsidiary to, keep accurate books of record and account for itself in which true and complete entries will be made in accordance with generally accepted accounting principles consistently applied and, upon request of the Bank, will give any representative of the Bank access to, and permit such representative to examine, copy or make extracts from, any and all books, records and documents in its possession, to inspect any of their properties and to discuss their affairs, finances and accounts with any of their principal officers, all at such times during normal business hours and as often as the Bank may reasonably request. Section 6.03 COMPLIANCE WITH LAWS. The Borrower will, and will cause each Subsidiary to, comply with the requirements of applicable laws and regulations with which noncompliance would materially and adversely affect their business or their financial condition. Section 6.04 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will, and will cause each Subsidiary to, pay or discharge all taxes, assessments and governmental charges levied or imposed upon them or upon their income or profits, or upon any properties belonging to them, prior to the date on which penalties attach thereto and all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower or any Subsidiary; provided, that neither the Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceeding. Section 6.05 MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each Subsidiary to, keep and maintain all of its properties necessary or useful in their business in good condition, repair and working order. Section 6.06 INSURANCE. The Borrower will, and will cause each Subsidiary to, obtain and maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower and the Subsidiaries operate. Section 6.07 PRESERVATION OF CORPORATE EXISTENCE. Subject to Section 7.06, the Borrower will preserve and maintain, and will cause each Subsidiary to preserve and maintain, its corporate existence and all of its rights, privileges and franchises. Section 6.08 CONSOLIDATED TANGIBLE NET WORTH. The Borrower will maintain, at all times during each fiscal year designated herein, its Consolidated Tangible Net Worth at an amount not less than $37,500,000 for the fiscal year ending January 31, 1995, and for each fiscal year following January 31, 1995, an amount equal to 90% of the Consolidated Tangible Net Worth at the end of the Borrower's immediately preceding fiscal year; provided, 18 however, under no circumstances shall the minimum Consolidated Tangible Net Worth ever decrease. Section 6.09 MAXIMUM CASH FLOW LEVERAGE. The Borrower will ensure that its Cash Flow Leverage does not exceed 5.0 to 1.0 at the end of each fiscal quarter. ARTICLE VII NEGATIVE COVENANTS So long as the Note shall remain unpaid or the Bank shall have any Commitment hereunder, the Borrower agrees that, without the prior written consent of the Bank: Section 7.01 LIENS. The Borrower will not, and will not permit any Subsidiary to, create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness for borrowed money; EXCLUDING, HOWEVER, from the operation of the foregoing: (a) liens for taxes or assessments or other governmental charges to the extent not required to be paid by Section 6.04; (b) materialmen's, merchants', carriers', workmen's, repairmen's, or other like liens arising in the ordinary course of business to the extent not required to be paid by Section 6.04; (c) pledges or deposits to secure obligations under workmen's compensation laws, unemployment insurance and social security laws, or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business; (d) zoning restrictions, easements, licenses, restrictions on the use of real property or minor irregularities in title thereto, which do not materially impair the use of such property in the operation of the business of the Borrower and any Subsidiary or the value of such property for the purpose of such business; (e) purchase money mortgages, liens, or security interests (which term for purposes of this subsection shall include conditional sale agreements or other title retention agreements and leases in the nature of title retention agreements) upon or in property acquired after the date hereof, or mortgages, liens or security interests existing in such property at the time of acquisition thereof, or, in the case of any corporation which thereafter becomes a Subsidiary, mortgages, liens or security interests upon or in its property, existing at the time such corporation becomes a Subsidiary, PROVIDED that: (1) no such mortgage, lien or security interest extends or shall extend to or cover any property of the Borrower or such Subsidiary, as the case may be, other than the property then being acquired and fixed improvements then or thereafter erected thereon; 19 (2) the aggregate principal amount of all Debt of the Borrower and all Subsidiaries secured by all mortgages, liens or security interests described in this subsection plus the outstanding indebtedness permitted by Section 7.02(e) hereof shall not exceed $500,000 at any one time outstanding; and (3) the aggregate principal amount of Debt secured by mortgages, liens and security interests described in this subsection (e) at the time of acquisition of the property subject thereto shall not exceed the cost of such property or of the then fair market value of such property as determined by the Board of Directors of the Borrower, whichever shall be less, and the aggregate amount of payments made thereunder will not result in a violation of the restriction contained in Section 7.08; (f) mortgages, liens, pledges and security interests on any property of the Borrower or any Subsidiary (other than those described in subsection (e)) securing any indebtedness for borrowed money in existence on the date hereof and listed in Exhibit D to the Original Credit Agreement or as disclosed to and approved by the Bank after the date thereof and prior to the date hereof; and (g) liens arising out of a judgment against the Borrower or any Subsidiary for the payment of money not exceeding $250,000 with respect to which an appeal is being prosecuted and a stay of execution pending such appeal has been secured. Section 7.02 INDEBTEDNESS. The Borrower will not, and will not permit any Subsidiary to, incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness evidenced by the Note; (b) indebtedness of the Borrower or any Subsidiary in existence on the date hereof and listed in Exhibit D to the Original Credit Agreement or as disclosed to and approved by the Bank after the date thereof and prior to the date hereof; (c) indebtedness of a Subsidiary to the Borrower or another Subsidiary on account of borrowings, or indebtedness of the Borrower to a Subsidiary on account of borrowings from that Subsidiary; and (d) indebtedness of the Borrower or any Subsidiary incurred after the date hereof which in the aggregate cannot exceed $1,500,000 at any time outstanding. Section 7.03 GUARANTIES. The Borrower will not, and will not permit any Subsidiary to, assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower or a Subsidiary for deposit or collection or similar transactions in the ordinary course of business; (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in existence on the date hereof and 20 reflected in the most recent audited consolidated financial statements of the Borrower; and (c) guaranties given after the date hereof in the ordinary course of business of the Borrower or a Subsidiary. Section 7.04 INVESTMENTS. The Borrower will not, and will not permit any Subsidiary to, purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, except: (a) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A1" or "A2" by Standard & Poor's Corporation or "P1" or "P2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $10,000,000; (b) advances and loans to officers, independent contractors and employees of the Borrower or a Subsidiary; (c) advances in the form of progress payments, prepaid rent or security deposits; (d) loans and advances by a Subsidiary to the Borrower or another Subsidiary; (e) loans and advances by the Borrower to any Subsidiary; (f) subject to the limitation contained in Section 7.06 hereof, stock in any Subsidiaries acquired after the date hereof; and (g) investments in stock or debt instruments of other Persons which in the aggregate do not exceed $2,500,000 at any time outstanding. Section 7.05 SALE OF ASSETS. The Borrower will not, nor shall it permit any Subsidiary to, sell, lease, assign, transfer or otherwise dispose of all or a substantial part of its assets (whether in one transaction or in a series, of transactions) to any other Person other than in the ordinary course of business; provided, however, that the restrictions contained in this Section shall not apply to or prevent: (a) the conveyance, lease or transfer by a Subsidiary of all or a part of its properties to the Borrower or to another wholly-owned Subsidiary of the Borrower; (b) sales or leases by the Borrower or a Subsidiary of its properties in the ordinary course of business; and (c) sales or lease by the Borrower or a Subsidiary of its surplus, obsolete or worn-out properties. 21 Section 7.06 CONSOLIDATION AND MERGER; ACQUISITION OF ASSETS AND STOCK. The Borrower will not, nor shall it permit any Subsidiary to, consolidate with or merge into any Person, or permit any other Person to merge into it unless (i) the Borrower immediately notifies the Bank following the merger or consolidation, (ii) the Borrower or the Subsidiary is the surviving entity, and (iii) the Borrower reaffirms its liability under the Note and this Agreement after the merger or consolidation and represents and warrants to the Bank that there does not then exist any Event of Default hereunder nor any event which with the giving of notice or the passage of time would become an Event of Default; provided, however, that the restrictions contained in this Section shall not apply to or prevent the consolidation or merger of a Subsidiary with the Borrower (if Borrower shall be the continuing or surviving corporation) or another then existing wholly-owned Subsidiary of the Borrower. The Borrower agrees that in each consecutive 12 month period, the aggregate amount that is expended (whether in cash or in stock) by the Borrower and its Subsidiaries to acquire all or substantially all of the assets or any stock of another Person, and to merge or consolidate with another Person, shall not exceed $2,500,000. Section 7.07 SALE AND LEASEBACK. The Borrower will not, nor shall it permit any Subsidiary to, enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower or any Subsidiary shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower or any Subsidiary intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.08 EXPENDITURES FOR FIXED ASSETS. The Borrower will not, nor shall it permit any Subsidiary to, make any future expenditure of money for the purchase or construction of fixed assets if, after giving effect to such expenditure, the aggregate amount of such expenditures made by the Borrower and its Subsidiaries in any fiscal year will exceed $15,000,000. Section 7.09 LEASES. Enter into or permit to exist any arrangements for the leasing by the Borrower or any of its Subsidiaries, as lessee, of any real or personal property (or any interest therein) under leases (other than leases that should be capitalized under generally accepted accounting principles) which require the payment by the Borrower and its Subsidiaries on a consolidated basis of rental amounts in the aggregate in excess of $4,000,000 in any one fiscal year. Section 7.10 RESTRICTIONS ON ISSUANCE AND SALE OF SUBSIDIARY STOCK. The Borrower will not: (a) permit any Subsidiary to issue or sell any shares of stock of any class of such Subsidiary to any other Person (other than the Borrower or a wholly-owned Subsidiary of the Borrower), except for the purpose of qualifying directors or of satisfying preemptive rights of paying a common stock dividend on, or splitting, common stock of such Subsidiary; or (b) sell, transfer or otherwise dispose of any shares of stock of any class (except to a wholly-owned Subsidiary of the Borrower or to qualify directors) of any Subsidiary or permit any Subsidiary to sell, transfer or otherwise dispose of (except to the Borrower or a wholly-owned Subsidiary of the Borrower or to qualify directors) any shares of stock of any class of any other Subsidiary. 22 Section 7.11 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower will not, nor will it permit any Subsidiary to, engage in any line of business materially different from that presently engaged in by the Borrower or its Subsidiaries. ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES Section 8.01 EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of any principal or interest on the Note when it becomes due and payable and continuance of such default for a period of five days; or (b) Any representation or warranty made by the Borrower in this Agreement or by the Borrower (or any of its officers) in any certificate, instrument, or statement contemplated by or made or delivered pursuant to or in connection with this Agreement, shall prove to have been incorrect in any material respect when made; or (c) Default in the performance, or breach, of any covenant or agreement of the Borrower in this Agreement (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and the continuance of such default or breach for a period of 30 days after there has been given, by certified mail to the Borrower by the Bank, a written notice specifying such default or breach and requiring it to be remedied; or (d) Default in the performance, or breach, of any covenant or agreement of the Borrower in any Loan Document and the expiration of any applicable grace period, if any; or (e) The Borrower or any Subsidiary shall be adjudicated a bankrupt or insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any Subsidiary shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or any Subsidiary and such appointment shall continue undischarged for a period of 60 days; or the Borrower or any Subsidiary shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any Subsidiary and shall remain undismissed for a period of 60 days; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any Subsidiary and such judgment, writ, or similar process shall not be released, vacated or fully bonded within 60 days after its issue or levy; or 23 (f) Default in the performance, or breach, of any financial covenant contained in Sections 6.08, 6.09, 7.08 and 7.09 hereof; or (g) The rendering against the Borrower or any Subsidiary of a final judgment, decree or order for the payment of money in excess of $250,000 which shall not be released, vacated, fully bonded or settled within 30 days after its issue or levy, provided, however, that any settlement that provides for payments over time cannot be more than 30 days in default at any time; or (h) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower or any Subsidiary, which exceeds $200,000, or under any indenture or other instrument under which any evidence of indebtedness exceeding $200,000 has been issued or by which it is governed and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture or other instrument; or (i) To the extent that it could result in a material liability to the Borrower or any Subsidiary (relative to the Borrower's Consolidated Tangible Net Worth), (a) any Reportable Event, which the Bank determines in good faith is likely to constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any such plan shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Bank; or (b) any Plan subject to Title IV of ERISA shall have been terminated, or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan, or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or (j) Any governmental authority assesses the Borrower for violating any environmental law, regulation, ordinance, or requirement regarding hazardous waste that involves clean up costs which in the Bank's reasoned opinion may exceed $500,000. Section 8.02 RIGHTS AND REMEDIES. Upon the occurrence of an Event of Default or at any time thereafter until such Event of Default is cured to the written satisfaction of the Bank, the Bank may exercise any or all of the following rights and remedies: (a) The Bank may, by notice to the Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) The Bank may, by notice to the Borrower, declare the entire unpaid principal amount of the Note then outstanding, all interest accrued and unpaid thereon, and all other amounts payable under this Agreement to be forthwith due and payable whereupon such Note, all such accrued interest and all such amounts shall become and be forthwith due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; (c) The Bank may, without notice to the Borrower and without further action, apply any and all money owing by the Bank to the Borrower to the payment of the Note then outstanding, including interest accrued thereon, and of all other sums then owing by the Borrower hereunder; and 24 (d) The Bank may exercise and enforce its rights and remedies provided in the Loan Documents or otherwise available at common law; provided that if a petition is filed by or against the Borrower under the United States Bankruptcy Code, the entire unpaid principal amount of the Note then outstanding, all interest accrued and unpaid thereon, and all other amounts payable under this Agreement shall be immediately due and payable without presentment, demand, protest or notice of any kind. ARTICLE IX MISCELLANEOUS Section 9.01 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 9.02 AMENDMENTS, ETC. No amendment, modification, termination or waiver of any provision of this Agreement or the Note or consent by the Borrower to any departure therefrom shall be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.03 ADDRESSES FOR NOTICES, ETC. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for hereunder and under the Security Agreement shall be in writing and mailed or delivered to the applicable party at its address indicated below: If to the Borrower: Merrill Corporation One Merrill Circle St. Paul, Minnesota 55108 Attn: Chief Financial Officer If to the Bank: First Bank National Association First Bank Place 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Attn: Mr. Steven L. Flack or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such 25 notices, requests, demands and other communications shall, when mailed, be effective when deposited in the mails, addressed as aforesaid, except that notices or requests to the Bank pursuant to any of the provisions of Article II shall not be effective until received by the Bank. Section 9.04 CONSENT TO JURISDICTION. The Borrower hereby irrevocably submits to the jurisdiction of any Minnesota state court or federal court over any action or proceeding arising out of or relating to this Agreement, and the Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Minnesota state or federal court. Nothing in this Section shall affect the right of the Bank to serve legal process in any other manner permitted by law or affect the right of the Bank to bring any action or proceeding against the Borrower or its property in the courts of any other jurisdiction. Section 9.05 INDEMNIFICATION. Borrower hereby agrees to indemnify, exonerate and hold the Bank and its officers, directors, employees and agents (the "Indemnified Parties") free and harmless from and against any all actions, causes of action, suits, losses, liabilities and damages, and expenses in connection therewith including, without limitation, reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to: (i) any transaction financed or to be financed in whole or in part directly or indirectly with proceeds of any Advance, or (ii) the execution, delivery, performance or enforcement of this Agreement or any document executed pursuant hereto by any of the Indemnified Parties, except for any such Indemnified Liabilities arising on account of any Indemnified Party's gross negligence or willful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The provisions of this Section shall survive termination of this Agreement. Section 9.06 COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs and expenses of the Bank in connection with the preparation of this Agreement, the Note, and the other instruments and documents to be delivered hereunder and thereunder, including the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto, as well as all out-of- pocket expenses incurred by the Bank in connection with the enforcement of this Agreement, the Note, and the other instruments and documents to be delivered hereunder and thereunder, including the reasonable fees and out-of-pocket expenses of legal counsel retained by the Bank with respect thereto. Section 9.07 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts of this Agreement, taken together, shall constitute but one and the same instrument. Section 9.08 BINDING EFFECT, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or thereunder or any interest herein or therein without the prior written consent the Bank. 26 Section 9.09 GOVERNING LAW. This Agreement and the Note shall be governed by, and construed in accordance with, the laws of the State of Minnesota. Section 9.10 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.11 HEADINGS. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. MERRILL CORPORATION By /s/ John W. Castro -------------------------------- Its: President By /s/ John B. McCain --------------------------------- Its: Vice President and Chief Financial Officer FIRST BANK NATIONAL ASSOCIATION By /s/ Steven L. Flack ---------------------------------- Its: Asst. Vice President 27 EXHIBIT LIST EXHIBIT A Revolving Note EXHIBIT B Compliance Certificate EXHIBIT C Existing Subsidiaries EXHIBIT D Permitted Indebtedness EXHIBIT E Certificate of Authorized Borrower Representatives EXHIBIT F Letter of Credit Application EXHIBIT A RESTATED REVOLVING NOTE $10,000,000 Minneapolis, Minnesota June 20, 1994 For value received, the undersigned, Merrill Corporation, a Minnesota corporation, hereby promises to pay on May 31, 1997, to the order of First Bank National Association, a national banking association (the "Bank"), at its main office at Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Ten Million Dollars ($10,000,000) or, if less, the aggregate unpaid principal amount of all advances made by the Bank to the undersigned hereunder (the "Principal Balance"). Interest shall accrue on the Principal Balance remaining unpaid from time to time in accordance with the provisions of Section 2.07 of the Restated and Amended Revolving Credit Agreement of even date herewith by and between the undersigned and the Bank. This Note may be prepaid in whole at any time or from time to time in part only as permitted under Section 2.04 of the Restated and Amended Revolving Credit Agreement. This Note is issued pursuant to, and subject to, the Restated and Amended Revolving Credit Agreement, which, among other things, provides for acceleration of the maturity hereof upon the occurrence of an Event of Default (as defined in that Restated and Amended Revolving Credit Agreement). This Note shall be immediately due and payable (including unpaid interest accrued hereon) without demand or notice thereof upon filing of a petition by or against the undersigned under the United States Bankruptcy Code. The undersigned hereby agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses, in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. MERRILL CORPORATION By ---------------------------- Its: By ---------------------------- Its: EXHIBIT B COMPLIANCE CERTIFICATE The undersigned officer of Merrill Corporation, a Minnesota corporation (the "Borrower"), hereby certifies and represents and warrants to First Bank Minneapolis, National Association (the "Bank"), pursuant to Section 6.01 of the Revolving Credit Agreement, dated June 20, 1994 (the "Loan Agreement"), by and between the Borrower and the Bank, as follows: 1. The Consolidated financial statements of the Borrower and its Subsidiaries as at April 30, 1994 (the "Report Date") and for the year to date, which have previously been provided to you, have been prepared in accordance with generally accepted accounting practices. 2. The undersigned has no knowledge of the occurrence of any Event of Default under the Loan Agreement or of any event not heretofore reported and remedied, which with notice or lapse of time or both would constitute an Event of Default, except as follows: None. 3. As of the Report Date, the Borrower is in compliance with the following financial covenants contained in the following Sections of the Loan Agreement except Section 7.06, violation of which has been waived: Section 6.08 CONSOLIDATED TANGIBLE NET WORTH. (not less than $37,500,000) $ 46,396,000 ------------ Section 6.09 CASH FLOW LEVERAGE. (not to exceed 5.0 to 1.0) (a) Total interest bearing debt $ 13,896,000 ------------ (b) For 12 months ending 4-30-94 Net income $ 14,588,000 ------------ Depreciation and amortization 6,909,000 ------------ Capital expenditures (8,966,000) ------------ Dividends (782,000) ------------ Total $ 11,749,000 ------------ Ratio - (a) to (b) 1.18 to 1.0 ------------ Section 7.01 LIENS. (not to exceed $500,000) liens on assets of Borrower or Subsidiaries incurred after June 20, 1994 in favor of party other than the Bank. $ None ------------ Section 7.02 INDEBTEDNESS. (not to exceed $1,500,000) aggregate outstanding indebtedness of the Borrower and Subsidiaries incurred after June 20, 1994 and owed to a party other than the Bank. $ None ------------ Section 7.06 CONSOLIDATION AND MERGER; ACQUISITION OF ASSETS. (not to exceed $2,500,000 in any consecutive 12-month period) (i) consolidation and merger $ None ------------ (ii) acquisition of assets $ None* ------------ (iii) acquisition of stock $ 872,000 ------------ TOTAL $ 872,000 ------------ * Excludes May Printing authorized by Bank letter dated 12/31/93. Section 7.08 EXPENDITURES FOR FIXED ASSETS. (not to exceed $15,000,000 in any 12 consecutive months) $ 8,966,000 ------------
Section 7.09 LEASES. (annual rentals under noncancellable operating leases not to exceed $4,000,000 in any fiscal year) rent on noncancellable operating leases entered into during quarter ended April 30, 1994 will not cause aggregate rentals on such leases for fiscal year 1995 to exceed $4,000,000. 4. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. If there is any inconsistency between the terms of this Compliance Certificate and the terms of the Loan Agreement, the terms of the Loan Agreement shall control. IN WITNESS WHEREOF, the undersigned has executed this Certificate this 20th day of June, 1994. MERRILL CORPORATION By: /s/ John B. McCain ----------------------------------------- John B. McCain Vice President & Chief Financial Officer EXHIBIT E CERTIFICATE REGARDING AUTHORIZED COMPANY REPRESENTATIONS This Certificate is being delivered by the undersigned in connection with the Restated and Amended Revolving Credit Agreement dated June 20, 1994 (the "Agreement") by and between Merrill Corporation ("Merrill"), and First Bank National Association (the "Bank"). The undersigned, John W. Castro and John B. McCain, do hereby certify on behalf of the Company that they are the President & Chief Executive Officer and Vice President & Chief Financial Officer, respectively, of the Company and that as such, they duly authorized to execute this Certificate on behalf of the Company and do hereby certify on behalf of the Company as follows: (a) the following named persons are authorized on behalf of the Borrower to request Advances on behalf of the borrower received in writing or upon telephonic request by the Bank officer to whom the account has been assigned pursuant to Section 2.03 of the Agreement, and the signature appearing opposite the name of such person is his or her genuine signature: NAME SIGNATURE John W. Castro /s/ John W. Castro --------------------------------------------- Rick R. Atterbury /s/ Rick R. Atterbury --------------------------------------------- John B. McCain /s/ John B. McCain --------------------------------------------- Paul R. Wotta /s/ Paul R. Wotta --------------------------------------------- Patti Kirchgasler --------------------------------------------- James G. Sippl /s/ James G. Sippl --------------------------------------------- Holly Frye /s/ Holly Frye --------------------------------------------- IN WITNESS WHEREOF, the undersigned has executed this Certificate this 20th day of June, 1994. MERRILL CORPORATION By /s/ John W. Castro ------------------------------------------ John W. Castro President & Chief Executive Officer By /s/ John B. McCain ------------------------------------------ John B. McCain Vice President & Chief Financial Officer EX-10.7 3 EXHIBIT 10.7 AMENDMENT TO RESTATED AND AMENDED REVOLVING CREDIT AGREEMENT This Amendment is made as of the 28th day of September, 1994, by and between Merrill Corporation, a Minnesota corporation (the "Borrower"), and First Bank National Association, a national banking association (the "Bank"). RECITALS The Borrower and the Bank executed and delivered a Restated and Amended Revolving Credit Agreement dated as of June 20, 1994 (the "Loan Agreement") pursuant to which the Bank committed to extending certain financial accommodations to the Borrower on the terms and subject to the conditions therein contained. The Bank has agreed to amend the provisions of the Loan Agreement on the terms herein provided. NOW, THEREFORE, for One Dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to amend the Loan Agreement as follows: 1. AMENDMENT TO LOAN AGREEMENT. The parties hereto hereby agree to amend the Loan Agreement as follows: (a) The "1.50%" contained in Section 2.07(a) is hereby deleted and "0.85%" is substituted therefor; (b) The "1.65%" contained in Section 2.07(b) is hereby deleted and "1.00%" is substituted therefor; (c) The "1.25%" contained in Section 2.14(a) is hereby deleted and "1.00%" is substituted therefor; and (d) The first sentence of Section 5.01 is hereby deleted and the following sentences are substituted therefor: "The Borrower and each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. With the exception of Ohio, the Borrower or a Subsidiary is duly licensed and qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary." 2. REPRESENTATIONS AND WARRANTIES. The Borrower reaffirms that as of the date hereof, the representations and warranties contained in Article V of the Loan Agreement are true and correct as of the date hereof except for those representations and warranties that are by their terms, specifically limited at an earlier date. 3. MISCELLANEOUS. The Borrower acknowledges and agrees that the loans and other amounts outstanding under the Loan Agreement or evidenced by the Note are due without offset, counterclaim or defense. This Agreement shall be governed by the laws of the State of Minnesota and may not be amended except in a writing executed by the parties hereto. Except as expressly amended hereby, all of the other terms and conditions of the Loan Agreement shall remain the same. The Borrower agrees to pay the Bank for the costs and expenses of drafting this Amendment including reasonable attorneys fees. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. Merrill Corporation By: /s/ J.B. McCain ------------------------------------- Its: Vice President & CFO --------------------------------- First Bank National Association By: /s/ Steven L. Flack ------------------------------------ Its: Asst. Vice Pres. --------------------------------- 2 EX-10.8 4 EXHIBIT 10.8 SECOND AMENDMENT TO RESTATED AND AMENDED REVOLVING CREDIT AGREEMENT THIS AMENDMENT is made as of the 20th day of April, 1995, by and between MERRILL CORPORATION, a Minnesota corporation (the "Borrower") and FIRST BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"). RECITALS FIRST: The Borrower and the Bank executed and delivered a Restated and Amended Revolving Credit Agreement dated as of June 20, 1994 (the "Loan Agreement") pursuant to which the Bank committed to extending certain financial accommodations to the Borrower on the terms and subject to the conditions therein contained. SECOND: The Borrower and the Bank executed and delivered that certain Amendment to Restated and Amended Revolving Credit Agreement dated as of September 29, 1994 (the "First Amendment"). (The Loan Agreement, as amended by the First Amendment, may be referred to hereafter as the "Loan Agreement".) THIRD: Section 7.09 of the Loan Agreement provides that neither Borrower nor any of its Subsidiaries shall enter into any arrangements for the leasing of any real or personal property under leases which require payment by the Borrower or its Subsidiaries on a consolidated basis of rental amounts in the aggregate in excess of $4,000,000 in any one fiscal year. Borrower's expenditures for its fiscal year ending January 31, 1995 were approximately $4,523,000. Borrower has requested waiver of such default and certain amendments to the Loan Agreement. FOURTH: The Bank has agreed to waive such default and to amend the provisions of the Loan Agreement but only on the terms herein provided. NOW, THEREFORE, for One Dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. RECITALS. The parties hereto acknowledge the truth of the Recitals to this Agreement, and the Recitals are hereby made an integral part hereof. 2. AMENDMENT TO LOAN AGREEMENT. The parties hereto hereby agree to amend the Loan Agreement as follows: (a) As of the date hereof, the definition of Cash Flow Leverage contained in Section 1.01 of the Loan Agreement is hereby deleted and substituted therefor is the following: "Cash Flow Leverage" means the ratio of (a) total interest bearing Debt, including capital leases, plus an amount equal to 2.5 times operating lease expense, of the Borrower and its Subsidiaries, to (b) net income of the Borrower and its Subsidiaries before extraordinary gains and losses, plus depreciation expense, amortization expense, and operating lease expense, minus capital expenditures, minus dividends, all calculated over the four consecutive quarters ending as of the date of the test. (b) As of the date hereof, Section 7.09 is hereby deleted in its entirety. (c) As of the date hereof, Exhibit B is hereby deleted in its entirety and substituted therefor is EXHIBIT B attached hereto and made a part hereof. 3. REPRESENTATIONS AND WARRANTIES. The Borrower reaffirms that as of the date hereof, the representations and warranties contained in Article V of the Loan Agreement are true and correct as of the date hereof, except for those representations and warranties that are by their terms, specifically limited at an earlier date. 4. NO EVENT OF DEFAULT. As of the date hereof, except for the Event of Default described in the Third Recital hereto, no event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. 5. MISCELLANEOUS. The Borrower acknowledges and agrees that the loans and other amounts outstanding under the Loan Agreement or evidenced by the Note are due without offset, counterclaim or defense. This Agreement shall be governed by the laws of the State of Minnesota and may not be amended except in a writing executed by the parties hereto. Except as expressly amended hereby, all of the other terms and conditions of the Loan Agreement shall remain the same. The Borrower agrees to pay the Bank for the costs and expenses of drafting this Amendment including reasonable attorneys' fees. This Agreement may be executed in counterparts, each of which shall constitute an integrated part hereof. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. MERRILL CORPORATION By /s/ John W. Castro ----------------------------------------- Its President and Chief Executive Officer And By /s/ John B. McCain ------------------------------------ Its Vice President and Chief Financial Officer FIRST BANK NATIONAL ASSOCIATION By /s/ Steven L. Flack ----------------------------------------- Its Vice President -------------------------------------- 2 EXHIBIT B COMPLIANCE CERTIFICATE The undersigned officer of MERRILL CORPORATION, a Minnesota corporation (the "Borrower"), hereby certifies and represents and warrants to FIRST BANK MINNEAPOLIS, NATIONAL ASSOCIATION (the "Bank") pursuant to SECTION 6.01 of the Revolving Credit Agreement dated June 20, 1994, as amended from time to time (the "Loan Agreement") by and between the Borrower and the Bank, as follows: 1. The Consolidated financial statements of the Borrower and its Subsidiaries as at _______________________________ (the "Report Date") and for the year to date, which have previously been provided to you, have been prepared in accordance with generally accepted accounting practices. 2. The undersigned has no knowledge of the occurrence of any Event of Default under the Loan Agreement or of any event not heretofore reported and remedied, which with notice or lapse of time or both would constitute an Event of Default, except as follows: 3. As of the Report Date, the Borrower is in compliance with the following financial covenants contained in the following Sections of the Loan Agreement, except as specifically set forth herein: Section 6.08 CONSOLIDATED TANGIBLE NET WORTH. (not less than $37,500,000) $_____________ Section 6.09 CASH FLOW LEVERAGE. (not to exceed 5.0 to 1.0) (a) Total interest bearing debt $_____________ (b) Operating lease expense $_____________ (c) Product of 2.5 x (b) $_____________ (d) Sum of (a) plus (b) $_____________ (e) For 12 months ending _______ Net income $_____________ Depreciation and amortization expense $_____________ Operating lease expense $_____________ Capital expenditures ($_____________) Dividends ($_____________) Total $_____________ Ratio - (d) to (e) _____________ Section 7.01 LIENS. (not to exceed $500,000) liens on assets of Borrower or Subsidiaries incurred after June 20, 1994 in favor of party other than the Bank. $_____________ Section 7.02 INDEBTEDNESS. (not to exceed $1,500,000) aggregate outstanding indebtedness of the Borrower and Subsidiaries incurred after June 20, 1994 and owed to a party other than the Bank. $_____________ Section 7.06 CONSOLIDATION AND MERGER; ACQUISITION OF ASSETS. (not to exceed $2,500,000 in any consecutive 12-month period) (i) consolidation and merger $_____________ (ii) acquisition of assets $_____________ (iii) acquisition of stock $_____________ TOTAL $_____________ Section 7.08 EXPENDITURES FOR FIXED ASSETS. (not to exceed $15,000,000 in any 12 consecutive months) $_____________ 4. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. If there is any inconsistency between the terms of this Compliance Certificate and the terms of the Loan Agreement, the terms of the Loan Agreement shall control. IN WITNESS WHEREOF, the undersigned has executed this Certificate this ____ day of ______________, 199__. MERRILL CORPORATION By -------------------------------------- Its Chief Financial Officer 2 EX-10.12 5 EXHIBIT 10.12 MERRILL CORPORATION 1993 STOCK INCENTIVE PLAN (AS AMENDED EFFECTIVE JANUARY 23, 1995) 1. PURPOSE OF PLAN. The purpose of the Merrill Corporation 1993 Stock Incentive Plan (the "Plan") is to advance the interests of Merrill Corporation (the "Company") and its shareholders by enabling the Company and its Subsidiaries to attract and retain persons of ability to perform services for the Company and its Subsidiaries by providing an incentive to such individuals through equity participation in the Company and by rewarding such individuals who contribute to the achievement by the Company of its economic objectives. 2. DEFINITIONS. The following terms will have the meanings set forth below, unless the context clearly otherwise requires: 2.1 "ADVERSE ACTIONS" mean the actions described in Section 12.5 of the Plan. 2.2 "BOARD" means the Board of Directors of the Company. 2.3 "BROKER EXERCISE NOTICE" means a written notice pursuant to which a Participant, upon exercise of an Option, irrevocably instructs a broker or dealer to sell a sufficient number of shares or loan a sufficient amount of money to pay all or a portion of the exercise price of the Option and/or any related withholding tax obligations and remit such sums to the Company and directs the Company to deliver stock certificates to be issued upon such exercise directly to such broker or dealer. 2.4 "CHANGE IN CONTROL" means an event described in Section 11.1 of the Plan. 2.5 "CODE" means the Internal Revenue Code of 1986, as amended. 2.6 "COMMITTEE" means the group of individuals administering the Plan, as provided in Section 3 of the Plan. 2.7 "COMMON STOCK" means the common stock of the Company, par value $.01 per share, or the number and kind of shares of stock or other securities into which such Common Stock may be changed in accordance with Section 4.3 of the Plan. 2.8 "DISABILITY" means the disability of the Participant such as would entitle the Participant to receive disability income benefits pursuant to the long-term disability plan of the Company or Subsidiary then covering the Participant or, if no such plan exists or is applicable to the Participant, the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code. 2.9 "ELIGIBLE RECIPIENTS" means all employees (including, without limitation, officers and directors who are also employees) of the Company or any Subsidiary and any non-employee consultants and independent contractors of the Company or any Subsidiary. 2.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2.11 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any date (or, if no shares were traded or quoted on such date, as of the next preceding date on which there was such a trade or quote), the mean between the reported high and low sale prices of the Common Stock as reported on the NASDAQ National Market System. 2.12 "INCENTIVE AWARD" means an Option, Restricted Stock Award or Performance Unit granted to an Eligible Recipient pursuant to the Plan. 2.13 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that qualifies as an "incentive stock option" within the meaning of Section 422 of the Code. A-1 2.14 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not qualify as an Incentive Stock Option. 2.15 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock Option. 2.16 "PARTICIPANT" means an Eligible Recipient who receives one or more Incentive Awards under the Plan. 2.17 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient pursuant to Section 8 of the Plan to receive a payment from the Company, in the form of stock, cash or a combination of both, upon the achievement of established performance goals. 2.18 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are already owned by the Participant or, with respect to any Incentive Award, that are to be issued upon the grant, exercise or vesting of such Incentive Award. 2.19 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to an Eligible Recipient pursuant to Section 7 of the Plan that is subject to the restrictions on transferability and the risk of forfeiture imposed by the provisions of such Section 7. 2.20 "RETIREMENT" means termination of employment or service pursuant to and in accordance with the regular (or, if approved by the Board for purposes of the Plan, early) retirement/pension plan or practice of the Company or Subsidiary then covering the Participant, provided that if the Participant is not covered by any such plan or practice, the Participant will be deemed to be covered by the Company's plan or practice for purposes of this determination. 2.21 "SECURITIES ACT" means the Securities Act of 1933, as amended. 2.22 "SUBSIDIARY" means any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity interest, as determined by the Committee. 2.23 "TAX DATE" means the date any withholding tax obligation arises under the Code for a Participant with respect to an Incentive Award. 3. PLAN ADMINISTRATION. 3.1 THE COMMITTEE. So long as the Company has a class of its equity securities registered under Section 12 of the Exchange Act, the Plan will be administered by a committee (the "Committee") consisting solely of not less than two members of the Board who are "disinterested persons" within the meaning of Rule 16b-3 under the Exchange Act. To the extent consistent with corporate law, the Committee may delegate to any officers of the Company the duties, power and authority of the Committee under the Plan pursuant to such conditions or limitations as the Committee may establish; provided, however, that only the Committee may exercise such duties, power and authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange Act. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and binding for all purposes and on all persons, and no member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Incentive Award granted under the Plan. 3.2 AUTHORITY OF THE COMMITTEE. (a) In accordance with and subject to the provisions of the Plan, the Committee will have the authority to determine all provisions of Incentive Awards as the Committee may deem necessary or desirable and as consistent with the terms of the Plan, including, without limitation, the following: (i) the Eligible Recipients to be selected as Participants; (ii) the nature and extent of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which Incentive Awards will vest or become exercisable and whether Incentive Awards will be granted in tandem A-2 with other Incentive Awards) and the form of written agreement, if any, evidencing such Incentive Award; (iii) the time or times when Incentive Awards will be granted; (iv) the duration of each Incentive Award; and (v) the restrictions and other conditions to which the payment or vesting of Incentive Awards may be subject. In addition, the Committee will have the authority under the Plan in its sole discretion to pay the economic value of any Incentive Award in the form of cash, Common Stock or any combination of both. (b) The Committee will have the authority under the Plan to amend or modify the terms of any outstanding Incentive Award in any manner, including, without limitation, the authority to modify the number of shares or other terms and conditions of an Incentive Award, extend the term of an Incentive Award, accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Incentive Award, accept the surrender of any outstanding Incentive Award or, to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards; provided, however that the amended or modified terms are permitted by the Plan as then in effect and that any Participant adversely affected by such amended or modified terms has consented to such amendment or modification. No amendment or modification to an Incentive Award, however, whether pursuant to this Section 3.2 or any other provisions of the Plan, will be deemed to be a regrant of such Incentive Award for purposes of this Plan. (c) In the event of (i) any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, extraordinary dividend or divestiture (including a spin-off) or any other change in corporate structure or shares, (ii) any purchase, acquisition, sale or disposition of a significant amount of assets or a significant business, (iii) any change in accounting principles or practices, or (iv) any other similar change, in each case with respect to the Company or any other entity whose performance is relevant to the grant or vesting of an Incentive Award, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) may, without the consent of any affected Participant, amend or modify the vesting criteria of any outstanding Incentive Award that is based in whole or in part on the financial performance of the Company (or any Subsidiary or division thereof) or such other entity so as equitably to reflect such event, with the desired result that the criteria for evaluating such financial performance of the Company or such other entity will be substantially the same (in the sole discretion of the Committee or the board of directors of the surviving corporation) following such event as prior to such event; provided, however, that the amended or modified terms are permitted by the Plan as then in effect. 4. SHARES AVAILABLE FOR ISSUANCE. 4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided in Section 4.3 of the Plan, the maximum number of shares of Common Stock that will be available for issuance under the Plan will be 1,000,000 shares. Notwithstanding any other provisions of the Plan to the contrary, no Participant in the Plan may be granted any Options, or any other Incentive Awards with a value based solely on an increase in the value of the Common Stock after the date of grant, relating to more than 100,000 shares of Common Stock in the aggregate in any fiscal year of the Company (subject to adjustment as provided in Section 4.3 of the Plan); provided, however, that a Participant who is first appointed or elected as an officer, hired as an employee or retained as a consultant by the Company or who receives a promotion that results in an increase in responsibilities or duties may be granted, during the fiscal year of such appointment, election, hiring, retention or promotion, Options or such other Incentive Awards relating to up to 200,000 shares of Common Stock (subject to adjustment as provided in Section 4.3 of the Plan). 4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued under the Plan or that are subject to outstanding Incentive Awards will be applied to reduce the maximum number of shares of Common Stock remaining available for issuance under the Plan. Any shares of Common A-3 Stock that are subject to an Incentive Award that lapses, expires, is forfeited or for any reason is terminated unexercised or unvested and any shares of Common Stock that are subject to an Incentive Award that is settled or paid in cash or any form other than shares of Common Stock will automatically again become available for issuance under the Plan. Any shares of Common Stock that constitute the forfeited portion of a Restricted Stock Award, however, will not become available for further issuance under the Plan. 4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off) or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) will make appropriate adjustment (which determination will be conclusive) as to the number and kind of securities available for issuance under the Plan and, in order to prevent dilution or enlargement of the rights of Participants, the number, kind and, where applicable, exercise price of securities subject to outstanding Incentive Awards. 5. PARTICIPATION. Participants in the Plan will be those Eligible Recipients who, in the judgment of the Committee, have contributed, are contributing or are expected to contribute to the achievement of economic objectives of the Company or its Subsidiaries. Eligible Recipients may be granted from time to time one or more Incentive Awards, singly or in combination or in tandem with other Incentive Awards, as may be determined by the Committee in its sole discretion. Incentive Awards will be deemed to be granted as of the date specified in the grant resolution of the Committee, which date will be the date of any related agreement with the Participant. 6. OPTIONS. 6.1 GRANT. An Eligible Recipient may be granted one or more Options under the Plan, and such Options will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may designate whether an Option is to be considered an Incentive Stock Option or a Non-Statutory Stock Option. 6.2 EXERCISE PRICE. The per share price to be paid by a Participant upon exercise of an Option will be determined by the Committee in its discretion at the time of the Option grant but will not be less than 100% of the Fair Market Value of one share of Common Stock on the date of grant. 6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at such times and in such installments as may be determined by the Committee in its sole discretion at the time of grant; provided, however, that no Option may be exercisable after 10 years from its date of grant. 6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to be purchased upon exercise of an Option will be paid entirely in cash (including check, bank draft or money order); provided, however, that the Committee, in its sole discretion and upon terms and conditions established by the Committee, may allow such payments to be made, in whole or in part, by tender of a Broker Exercise Notice, Previously Acquired Shares or by a combination of such methods. 6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in whole or in part from time to time, subject to the conditions contained in the Plan and in the agreement evidencing such Option, by delivery in person, by facsimile or electronic transmission or through the mail of written notice of exercise to the Company (Attention: Secretary) at its principal executive office in St. Paul, Minnesota and by paying in full the total exercise price for the shares of Common Stock to be purchased in accordance with Section 6.4 of the Plan. A-4 7. RESTRICTED STOCK AWARDS. 7.1 GRANT. An Eligible Recipient may be granted one or more Restricted Stock Awards under the Plan, and such Restricted Stock Awards will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Restricted Stock Awards as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or a Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. 7.2 RIGHTS AS A SHAREHOLDER; TRANSFERABILITY. Except as provided in Sections 7.1, 7.3 and 12.3 of the Plan, a Participant will have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Restricted Stock Award under this Section 7 upon the Participant becoming the holder of record of such shares as if such Participant were a holder of record of shares of unrestricted Common Stock. 7.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines otherwise in its sole discretion (either in the agreement evidencing the Restricted Stock Award at the time of grant or at any time after the grant of the Restricted Stock Award), any dividends or distributions (including regular quarterly cash dividends) paid with respect to shares of Common Stock subject to the unvested portion of a Restricted Stock Award will be subject to the same restrictions as the shares to which such dividends or distributions relate. In the event the Committee determines not to pay such dividends or distributions currently, the Committee will determine in its sole discretion whether any interest will be paid on such dividends or distributions. In addition, the Committee in its sole discretion may require such dividends and distributions to be reinvested (and in such case the Participants consent to such reinvestment) in shares of Common Stock that will be subject to the same restrictions as the shares to which such dividends or distributions relate. 7.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred to in this Section 7, the Committee may place a legend on the stock certificates referring to such restrictions and may require the Participant, until the restrictions have lapsed, to keep the stock certificates, together with duly endorsed stock powers, in the custody of the Company or its transfer agent or to maintain evidence of stock ownership, together with duly endorsed stock powers, in a certificateless book-entry stock account with the Company's transfer agent. 8. PERFORMANCE UNITS. An Eligible Recipient may be granted one or more Performance Units under the Plan, and such Performance Units will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Performance Units as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or any Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. The Committee will have the sole discretion either to determine the form in which payment of the economic value of vested Performance Units will be made to the Participant (i.e., cash, Common Stock or any combination thereof) or to consent to or disapprove the election by the Participant of the form of such payment. 9. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. 9.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event a Participant's employment or other service with the Company and all Subsidiaries is terminated by reason of death, Disability or Retirement: A-5 (a) All outstanding Options then held by the Participant will become immediately exercisable in full and will remain exercisable for a period of one year (three months in the case of Retirement) after such termination (but in no event after the expiration date of any such Option); (b) All Restricted Stock Awards then held by the Participant will become fully vested; and (c) All Performance Units then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units. 9.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. (a) In the event a Participant's employment or other service is terminated with the Company and all Subsidiaries for any reason other than death, Disability or Retirement, or a Participant is in the employ or service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Participant continues in the employ or service of the Company or another Subsidiary), all rights of the Participant under the Plan and any agreements evidencing an Incentive Award will immediately terminate without notice of any kind, and no Options then held by the Participant will thereafter be exercisable, all Restricted Stock Awards then held by the Participant that have not vested will be terminated and forfeited, and all Performance Units then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units; provided, however, that if such termination is due to any reason other than termination by the Company or any Subsidiary for "cause," all outstanding Options then held by such Participant will remain exercisable to the extent exercisable as of such termination for a period of three months after such termination (but in no event after the expiration date of any such Option). (b) For purposes of this Section 9.2, "cause" (as determined by the Committee) will be as defined in any employment or other agreement or policy applicable to the Participant or, if no such agreement or policy exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in each case related to the Company or any Subsidiary, (ii) any unlawful or criminal activity of a serious nature, (iii) any intentional and deliberate breach of a duty or duties that, individually or in the aggregate, are material in relation to the Participant's overall duties, or (iv) any material breach of any employment, service, confidentiality or noncompete agreement entered into with the Company or any Subsidiary. 9.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other provisions of this Section 9, upon a Participant's termination of employment or other service with the Company and all Subsidiaries, the Committee may, in its sole discretion (which may be exercised at any time on or after the date of grant, including following such termination), cause Options (or any part thereof) then held by such Participant to become or continue to become exercisable and/or remain exercisable following such termination of employment or service and Restricted Stock Awards and Performance Units then held by such Participant to vest and/or continue to vest or become free of transfer restrictions, as the case may be, following such termination of employment or service, in each case in the manner determined by the Committee; provided, however, that no Option may remain exercisable beyond its expiration date. 9.4 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the Committee otherwise determines in its sole discretion, a Participant's employment or other service will, for purposes of the Plan, be deemed to have terminated on the date recorded on the personnel or other records of the Company or the Subsidiary for which the Participant provides employment or other service, as determined by the Committee in its sole discretion based upon such records. 10. PAYMENT OF WITHHOLDING TAXES. 10.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the A-6 Company or a Subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements attributable to an Incentive Award, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect to, an Incentive Award or a disqualifying disposition of stock received upon exercise of an Incentive Stock Option, or (b) require the Participant promptly to remit the amount of such withholding to the Company before taking any action, including issuing any shares of Common Stock, with respect to an Incentive Award. 10.2 SPECIAL RULES. The Committee may, in its sole discretion and upon terms and conditions established by the Committee, permit or require a Participant to satisfy, in whole or in part, any withholding or employment-related tax obligation described in Section 10.1 of the Plan by electing to tender Previously Acquired Shares or a Broker Exercise Notice, or by a combination of such methods. 11. CHANGE IN CONTROL. 11.1 CHANGE IN CONTROL. For purposes of this Section 11.1, a "Change in Control" of the Company will mean (a) the sale, lease, exchange or other transfer of substantially all of the assets of the Company (in one transaction or in a series of related transaction) to a person or entity that is not controlled by the Company, (b) a merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to effective date of such merger or consolidation do not have "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) immediately following the effective date of such merger or consolidation of more than 80% of the combined voting power of the surviving corporation's outstanding securities ordinarily having the right to vote at elections of directors, or (c) a change in control of the Company of a nature that would be required to be reported pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the Company is then subject to such reporting requirements, including, without limitation, such time as (i) any person becomes after the effective date of the Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20% or more of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors, or (ii) individuals who constitute the Board on the effective date of the Plan cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors comprising the Board on the effective date of the Plan will, for purposes of this clause (ii), be considered as though such persons were a member of the Board on the effective date of the Plan. 11.2 ACCELERATION OF VESTING. Without limiting the authority of the Committee under Section 3.2 of the Plan, if a Change in Control of the Company occurs, then, if approved by the Committee in its sole discretion either in an agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, (a) all Options will become immediately exercisable in full and will remain exercisable for the remainder of their terms, regardless of whether the Participants to whom such Options have been granted remain in the employ or service of the Company or any Subsidiary; (b) all outstanding Restricted Stock Awards will become immediately fully vested; and (c) all Performance Units then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units. 11.3 CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company occurs, then the Committee, if approved by the Committee in its sole discretion either in an agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, and without the consent of any Participant effected thereby, may determine that some or all Participants holding outstanding Options will receive, with respect to some or all of the shares of Common Stock subject to such Options, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value of such shares immediately prior to the effective date of such Change in Control of the Company over the exercise price per share of such Options. A-7 11.4 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in Section 11.2 or 11.3 of the Plan to the contrary, if, with respect to a Participant, the acceleration of the vesting of an Incentive Award as provided in Section 11.2 or the payment of cash in exchange for all or part of an Incentive Award as provided in Section 11.3 (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other payments which such Participant has the right to receive from the Company or any corporation that is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the payments to such Participant pursuant to Section 11.2 or 11.3 will be reduced to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that if such Participant is subject to a separate agreement with the Company or a Subsidiary which specifically provides that payments attributable to one or more forms of employee stock incentives or to payments made in lieu of employee stock incentives will not reduce any other payments under such agreement, even if it would constitute an excess parachute payment, then the limitations of this Section 11.4 will, to that extent, not apply. 12. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY. 12.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or Participant any right to continue in the employ or service of the Company or any Subsidiary. 12.2 RIGHTS AS A SHAREHOLDER. As a holder of Incentive Awards (other than Restricted Stock Awards), a Participant will have no rights as a shareholder unless and until such Incentive Awards are exercised for, or paid in the form of, shares of Common Stock and the Participant becomes the holder of record of such shares. Except as otherwise provided in the Plan, no adjustment will be made for dividends or distributions with respect to such Incentive Awards as to which there is a record date preceding the date the Participant becomes the holder of record of such shares, except as the Committee may determine in its discretion. 12.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, no right or interest of any Participant in an Incentive Award prior to the exercise or vesting of such Incentive Award will be assignable or transferable, or subjected to any lien, during the lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. A Participant will, however, be entitled to designate a beneficiary to receive an Incentive Award upon such Participant's death, and in the event of a Participant's death, payment of any amounts due under the Plan will be made to, and exercise of any Options (to the extent permitted pursuant to Section 9 of the Plan) may be made by, the Participant's legal representatives, heirs and legatees. 12.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended to modify or rescind any previously approved compensation plans or programs of the Company or create any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. 12.5 RESTRICTIONS REGARDING EMPLOYMENT OR SERVICE. (a) Notwithstanding anything in the Plan to the contrary, in the event that a Participant, prior to or following such Participant's voluntary termination of employment or other service with the Company or any Subsidiary, takes Adverse Actions with respect to the Company or any Subsidiary, the Committee in its sole discretion will have the authority (by so providing in the agreement evidencing the Incentive Award at the time of grant) to terminate immediately all rights of the Participant under the Plan and any agreement evidencing Incentive Awards than held by the Participant without notice of any kind. In addition, to the extent that a Participant A-8 takes such Adverse Actions during the period beginning 12 months prior to, and ending 12 months following, the date of such voluntary employment or service termination, the Committee in its sole discretion will have the authority (by so providing in the agreement evidencing the Incentive Award at the time of grant) to rescind the exercise or vesting of any Incentive Awards of the Participant that were exercised or became vested during such period and to require the Participant to pay to the Company, within 10 days of receipt from the Company of notice of such rescission, the amount of any gain realized or payment received as a result of such rescinded exercise or vesting. Such payment will be made in cash (including check, bank draft or money order) or, with the Committee's consent, shares of Common Stock with a Fair Market Value on the date of payment equal to the amount of such payment. The Company will be entitled to withhold and deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the Company or a Subsidiary) or make other arrangements for the collection of all amounts necessary to satisfy such payment obligation. (b) For purposes of this Section 12.5, an "Adverse Action" will mean any action by a Participant that the Committee, in its sole discretion, determines to be adverse to the interests of the Company or any Subsidiary, including, without limitation, (i) disclosing confidential information of the Company or any Subsidiary to any person not authorized by the Company to receive it, (ii) engaging, directly or indirectly, in any commercial activity that in the judgment of the Committee competes with the business of the Company or any Subsidiary, or (iii) interfering with the relationships of the Company or its Subsidiaries with their respective employees and customers. 13. SECURITIES LAW AND OTHER RESTRICTIONS. Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and a Participant may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued pursuant to Incentive Awards granted under the Plan, unless (a) there is in effect with respect to such shares a registration statement under the Securities Act and any applicable state securities laws or an exemption from such registration under the Securities Act and applicable state securities laws, and (b) there has been obtained any other consent, approval or permit from any other regulatory body which the Committee, in its sole discretion, deems necessary or advisable. The Company may condition such issuance, sale or transfer upon the receipt of any representations or agreements from the parties involved, and the placement of any legends on certificates representing shares of Common Stock, as may be deemed necessary or advisable by the Company in order to comply with such securities law or other restrictions. 14. PLAN AMENDMENT, MODIFICATION AND TERMINATION The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Incentive Awards under the Plan will conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no amendments to the Plan will be effective without approval of the stockholders of the Company if stockholder approval of the amendment is then required pursuant to Rule 16b-3 under the Exchange Act, Section 422 of the Code or the rules of the National Association of Securities Dealers, Inc. No termination, suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without the consent of the affected Participant; provided, however, that this sentence will not impair the right of the Committee to take whatever action it deems appropriate under Sections 4.3 and 11 of the Plan. 15. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan is effective as of January 18, 1993, the date it was adopted by the Board. The Plan will terminate at midnight on January 18, 2003, and may be terminated prior to such time to by Board A-9 action, and no Incentive Award will be granted after such termination. Incentive Awards outstanding upon termination of the Plan may continue to be exercised, or become free of restrictions, in accordance with their terms. 16. MISCELLANEOUS 16.1 GOVERNING LAW. The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Minnesota. 16.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the benefit of the successors and permitted assigns of the Company and the Participants. A-10 EX-10.18 6 EXHIBIT 10.18 NON-STATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is entered into and effective as of this 19th day of September, 1994 (the "Date of Grant"), by and between Merrill Corporation (the "Company") and JAMES R. CAMPBELL (the "Optionee"). A. The Company has adopted the Merrill Corporation 1993 Stock Incentive Plan (the "Plan") authorizing the Board of Directors of the Company, or a committee as provided for in the Plan (the Board or such a committee to be referred to as the "Committee"), to grant non-statutory stock options to employees and non-employee consultants and independent contractors of the Company and its Subsidiaries (as defined in the Plan). B. The Company desires to give the Optionee an inducement to acquire a proprietary interest in the Company and an added incentive to advance the interests of the Company by granting to the Optionee an option to purchase shares of common stock of the Company pursuant to the Plan. Accordingly, the parties agree as follows: ARTICLE 1. GRANT OF OPTION. The Company hereby grants to the Optionee the right, privilege, and option (the "Option") to purchase Seven Thousand Five Hundred (7,500) shares (the "Option Shares") of the Company's common stock, $.01 par value (the "Common Stock"), according to the terms and subject to the conditions hereinafter set forth and as set forth in the Plan. The Option is not intended to be an "incentive stock option," as that term is used in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). ARTICLE 2. OPTION EXERCISE PRICE. The per share price to be paid by Optionee in the event of an exercise of the Option will be $20.75. ARTICLE 3. DURATION OF OPTION AND TIME OF EXERCISE 3.1 INITIAL PERIOD OF EXERCISABILITY. The Option will become exercisable with respect to the Option Shares in five installments. The following table sets forth the initial dates of exercisability of each installment and the number of Option Shares as to which this Option will become exercisable on such dates:
Initial Date of Number of Option Shares Exercisability Available for Exercise -------------- ----------------------- September 19, 1995 1,500 September 19, 1996 1,500 September 19, 1997 1,500 September 19, 1998 1,500 March 19, 1999 1,500
The foregoing rights to exercise this Option will be cumulative with respect to the Option Shares becoming exercisable on each such date but in no event will this Option be exercisable after, and this Option will become void and expire as to all unexercised Option Shares at, 5:00 p.m. (St. Paul, Minnesota time) on September 19, 1999 (the "Time of Termination"). 3.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE. (a) In the event that the Optionee's employment or other service with the Company and all Subsidiaries is terminated by reason of the Optionee's death, Disability or Retirement (as such terms are defined in the Plan), this Option will become immediately exercisable in full and will remain exercisable for a period of one year after such termination (but in no event will this Option be exercisable after the Time of Termination). (b) In the event the Optionee's employment or other service with the Company and all Subsidiaries is terminated for any reason other than death, Disability or Retirement, all rights of the Optionee under the Plan and this Agreement will immediately terminate without notice of any kind, and this Option will no longer be exercisable; provided, however, that if such termination is due to any reason other than termination by the Company or any Subsidiary for "cause" (as defined in the Plan), this Option will remain exercisable to the extent exercisable as of such termination for a period of three months after such termination (but in no event will this Option be exercisable after the Time of Termination). 3.3 CHANGE IN CONTROL. (a) If any events constituting a Change in Control (as defined in Section 11.1 of the Plan) of the Company occur, then this Option will become immediately exercisable in full and will remain exercisable until the Time of Termination, regardless of whether the Optionee remains in the employ or service of the Company or any Subsidiary. In addition, if a Change in Control of the Company occurs, the Committee, in its sole discretion and without the consent of the Optionee, may determine that the Optionee will receive, with respect to some or all of the Option Shares, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value (as defined in the Plan) of such Option Shares immediately prior to the effective date of such Change in Control of the Company over the option exercise price per share of this Option. (b) Notwithstanding anything in this Section 3.3 to the contrary, if, with respect to the Optionee, acceleration of the vesting of this Option or the payment of cash in exchange for all or part of this Option as provided above (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other payments which the Optionee has the right to receive from the Company or any corporation which is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), the payments to the Optionee as set forth herein will be reduced to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that if the Optionee is subject to a separate agreement with the Company or a Subsidiary that specifically provides that payments attributable to one or more forms of employee stock incentives or to payments made in lieu of employee stock incentives will not reduce any other payments under such agreement, even if it would constitute an excess parachute payment, then the limitations of this Section 3.3(b) will, to that extent, not apply. 2 3.4 RESTRICTIONS REGARDING EMPLOYMENT OR SERVICE. In the event that the Optionee, prior to or following the Optionee's voluntary termination of employment or other service with the Company or any Subsidiary, takes Adverse Actions (as defined in Section 12.5 of the Plan) with respect to the Company or any Subsidiary, the Committee, in its sole discretion, will be entitled to take all actions described in Section 12.5 of the Plan, including termination of all rights of the Optionee under the Plan and this Agreement and rescission of certain exercises of this Option and payment to the Company of any gain realized as a result of such exercises. ARTICLE 4. MANNER OF OPTION EXERCISE. 4.1 NOTICE. This Option may be exercised by the Optionee in whole or in part from time to time, subject to the conditions contained in the Plan and in this Agreement, by delivery, in person, by facsimile or electronic transmission or through the mail, to the Company at its principal executive office in St. Paul, Minnesota (Attention: Secretary), of a written notice of exercise. Such notice will be in a form satisfactory to the Committee, will identify the Option, will specify the number of Option Shares with respect to which the Option is being exercised, and will be signed by the person or persons so exercising the Option. Such notice will be accompanied by payment in full of the total purchase price of the Option Shares purchased. In the event that the Option is being exercised, as provided by the Plan and Section 3.2 above, by any person or persons other than the Optionee, the notice will be accompanied by appropriate proof of right of such person or persons to exercise the Option. As soon as practicable after the effective exercise of the Option, the Optionee will be recorded on the stock transfer books of the Company as the owner of the Option Shares purchased, and the Company will deliver to the Optionee one or more duly issued stock certificates evidencing such ownership. 4.2 PAYMENT. At the time of exercise of this Option, the Optionee will pay the total purchase price of the Option Shares to be purchased solely in cash (including a check, bank draft or money order, payable to the order of the Company); provided, however, that the Committee, in its sole discretion, may allow such payment to be made, in whole or in part, by tender of a Broker Exercise Notice, Previously Acquired Shares or by a combination of such methods. For purposes of this Agreement, the terms "Broker Exercise Notice" and "Previously Acquired Shares" will have the meanings set forth in the Plan. In the event the Optionee is permitted to pay the total purchase price of this Option in whole or in part with Previously Acquired Shares, the value of such shares will be equal to their Fair Market Value on the date of exercise of this Option. ARTICLE 5. NONTRANSFERABILITY. Neither this Option nor the Option Shares acquired upon exercise may be transferred by the Optionee, either voluntarily or involuntarily, or subjected to any lien, directly or indirectly, by operation of law or otherwise, except as provided in the Plan. Any attempt to transfer or encumber this Option or the Option Shares other than in accordance with this Agreement and the Plan will be null and void and will void this Option. 3 ARTICLE 6. LIMITATION OF LIABILITY. Nothing in this Agreement will be construed to (a) limit in any way the right of the Company to terminate the employment or service of the Optionee at any time, or (b) be evidence of any agreement or understanding, express or implied, that the Company will retain the Optionee in any particular position, at any particular rate of compensation or for any particular period of time. ARTICLE 7. WITHHOLDING TAXES. The Company is entitled to (a) withhold and deduct from future wages of the Optionee (or from other amounts which may be due and owing to the Optionee from the Company), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any federal, state or local withholding and employment-related tax requirements attributable to the grant or exercise of this Option or otherwise incurred with respect to this Option, or (b) require the Optionee promptly to remit the amount of such withholding to the Company before acting on the Optionee's notice of exercise of this Option. In the event that the Company is unable to withhold such amounts, for whatever reason, the Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal, state or local law. ARTICLE 8. ADJUSTMENTS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off), or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation), in order to prevent dilution or enlargement of the rights of the Optionee, will make appropriate adjustment (which determination will be conclusive) as to the number, kind and exercise price of securities subject to this Option. ARTICLE 9. SUBJECT TO PLAN. The Option and the Option Shares granted and issued pursuant to this Agreement have been granted and issued under, and are subject to the terms of, the Plan. The terms of the Plan are incorporated by reference in this Agreement in their entirety, and the Optionee, by execution of this Agreement, acknowledges having received a copy of the Plan. The provisions of this Agreement will be interpreted as to be consistent with the Plan, and any ambiguities in this Agreement will be interpreted by reference to the Plan. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan will prevail. ARTICLE 10. MISCELLANEOUS. 10.1 BINDING EFFECT. This Agreement will be binding upon the heirs, executors, administrators and successors of the parties to this Agreement. 4 10.2 GOVERNING LAW. This Agreement and all rights and obligations under this Agreement will be construed in accordance with the Plan and governed by the laws of the State of Minnesota. 10.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the entire agreement and understanding of the parties to this Agreement with respect to the grant and exercise of this Option and the administration of the Plan and supersede all prior agreements, arrangements, plans and understandings relating to the grant and exercise of this Option and the administration of the Plan. 10.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this Agreement may be amended, waived, modified or canceled only by a written instrument executed by the parties hereto or, in the case of a waiver, by the party waiving compliance. The parties to this Agreement have executed this Agreement effective the day and year first above written. MERRILL CORPORATION By /s/ John W. Castro ------------------------------- JOHN W. CASTRO Its President and CEO ------------------------------- [By execution of this Agreement, OPTIONEE the Optionee acknowledges having received a copy of the Plan.] /s/ James R. Campbell ----------------------------------- (Signature) JAMES R. CAMPBELL ----------------------------------- (Name and Address) 5521 Woodcrest Dr. ----------------------------------- Edina, MN 55424 ----------------------------------- 5 EX-11.1 7 EXHIBIT 11.1 EXhibit 11.1 MERRILL CORPORATION SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
FOR THE YEARS ENDED JANUARY 31, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- Primary Net income.............................................................. $ 11,982,785 $ 13,348,330 $ 8,599,034 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding during the period................................................................. 7,568,380 7,408,087 7,142,470 Add common equivalent shares relating to outstanding options to purchase common stock using the treasury stock method.................. 425,853 563,768 552,643 ------------- ------------- ------------- Total common and common equivalent shares outstanding............... 7,994,233 7,971,855 7,695,113 ------------- ------------- ------------- ------------- ------------- ------------- Primary income per common share........................................... $1.50 $1.67 $1.12 ------------- ------------- ------------- ------------- ------------- ------------- Fully diluted Net income.............................................................. $ 11,982,785 $ 13,348,330 $ 8,599,034 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding during the period................................................................. 7,568,380 7,408,087 7,142,470 Add common equivalent shares relating to outstanding options to purchase common stock using the treasury stock method.................. 425,759 597,688 591,105 ------------- ------------- ------------- Total common and common equivalent shares outstanding............... 7,994,139 8,005,775 7,733,575 ------------- ------------- ------------- ------------- ------------- ------------- Fully diluted income per common share.................................... $1.50 $1.67 $1.11 ------------- ------------- ------------- ------------- ------------- -------------
EX-13.1 8 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth for the years indicated the percentage relationship to revenue of certain items in the Company's consolidated statements of operations and the percentage changes in the dollar amounts of such items in comparison to the prior year.
- ------------------------------------------------------------------------------------- YEAR ENDED JANUARY 31, - ------------------------------------------------------------------------------------- % Increase (Decrease) ---------------------- 1995 1994 1993 Percentage of Revenue ------------------------ VS. VS. VS. 1995 1994 1993 1994 1993 1992 - ------------------------------------------------------------------------------------- Revenue Financial 33.4% 42.4% 34.2% 3% 52% 30% Corporate 33.4 34.4 38.0 26 11 11 Commercial and other 33.2 23.2 27.8 87 2 14 ------------------------- 100.0 100.0 100.0 30 23 18 Cost of sales 67.3 64.1 66.4 37 19 17 Gross profit 32.7 35.9 33.6 19 32 19 Selling, general and administrative expenses 23.5 23.8 24.0 29 22 15 Operating income 9.2 12.1 9.6 (1) 55 27 Interest expense (0.5) (0.2) (0.2) 249 26 (52) Other income, primarily interest income 0.2 0.2 0.2 48 23 61 Income before taxes 8.9 12.1 9.6 (4) 55 32 Provision for income taxes 3.9 4.9 3.8 4 58 29 Income before change in accounting for income taxes 5.0 7.2 5.8 (9) 53 32 - -------------------------------------------------------------------------------------
REVENUE Merrill Corporation is engaged in one line of business--providing printed and electronic document services. The Company divides its revenue into three categories of service, financial printing, corporate printing and commercial and other services. The percentage of revenue attributable to each of the categories of service is set forth in the table above. Revenue in the financial printing category generally reflects the level of activity in the capital markets. Financial printing encompasses many types of transactions, and some types of transactions tend to increase when others are out of favor. However, a prolonged reduction in the overall level of financial transactions could be expected to have a negative impact on this revenue category. The corporate printing category encompasses required regulatory and mutual fund documentation and other repetitive work and is typically not impacted to a significant degree by capital market fluctuations. Commercial and other business tends to follow general economic trends. 21 Revenue increased 30 percent in fiscal year 1995 to a record $237 million, and was equally balanced across the three categories of service. Approximately half of the revenue increase resulted from the inclusion of a full year of operations of May Printing Company which was acquired in December 1993. May was also primarily responsible for the 87 percent increase in revenue in our commercial and other category. Also contributing to the growth in this category were document management services, particularly a near-doubling in the number of installations under management services contracts, and substantial growth in election-related printing due to 1994 being a general election year. Corporate revenue grew 26 percent in 1995, principally due to increased mutual fund documentation services provided to both new and existing clients. Also impacting corporate revenue was growth in the number of companies using electronic filing services to comply with the Securities and Exchange Commission's EDGAR program. Financial category revenue was virtually flat with year-ago levels as rising interest rates and resulting uncertainty in the financial markets caused a dramatic mid-year reduction in the volume of capital market transactions. Management believes that the Company maintained its market share during the year. However, domestic financial revenue was down 5 percent for the fiscal year and down 30 percent in the last 6 months, compared to year-ago levels. International financial printing continued its rapid growth, more than doubling in fiscal year 1995, representing just over 5 percent of consolidated revenue and nearly 15 percent of financial category revenue. The revenue improvement in fiscal year 1994 was principally due to a 52 percent increase in revenue from the financial printing category reflecting a high level of activity in the nation's financial markets throughout the year and growth in market share, particularly in the Company's West Coast markets. International revenue, which includes the results of Atwell Fleming Printing Company in Canada, acquired in June 1993, and the Company's association with England's Burrups, Ltd., also grew significantly, though still representing less than 5 percent of consolidated revenue. Corporate printing revenue increased 11 percent, due primarily to increased mutual fund documentation and corporate proxy work. In the last half of the fiscal year, however, corporate revenue was 4 percent below the comparable period of the prior year reflecting a reduction in demand from certain customers. Revenue in the commercial and other sector increased 2 percent. The inclusion of one month's revenue from May Printing Company, acquired December 31, 1993, offset a decline in election-related printing due to 1993 not being a general election year. Revenue from reprographics and facilities management increased modestly offsetting a reduction in publications revenue. All of the Company's service categories grew in fiscal 1993, led by a 30 percent increase in financial printing revenue reflecting a second consecutive year of strong capital market activity high- 22 lighted by record levels of corporate equity offerings. The corporate printing sector grew 11 percent, principally from gains in market share. Strong growth in reprographics and facilities management resulted in 14 percent growth in the commercial and other sector. GROSS PROFIT The reduction in gross margin in fiscal year 1995 primarily was due to the sharp reduction in financial printing volume discussed above. Financial printing is typically more typesetting-intensive, as opposed to printing-intensive, than business in other service categories. When a significant decline in activity is experienced, as was the case in fiscal year 1995, underutilization of skilled personnel, equipment and facilities results in depressed margins. Also in times of reduced activity, intense price competition for available work tends to develop, further pressuring margins. Conversely, as financial printing activity increases, the operating leverage inherent in the Company's centralized typesetting facility can be expected to generate lower unit costs and higher margins. Also reflected in the lower gross margins is the growth in the Company's document service center, or facilities management, business. This business has lower gross margins than the Company's more traditional businesses, but also lower selling and administrative costs. The gross margin improvement in fiscal year 1994 can be attributed primarily to operating efficiencies related to the significant increase in activity in the financial printing category. Also positively impacting gross margins in 1994 was a full year of operations from the Company's New Jersey printing operation which opened in the second quarter of fiscal year 1993. Gross margins increased slightly in fiscal year 1993 as volume-related operating efficiencies were partially offset by costs relating to increased employee training, conversion to new document imaging technology and start-up of the Company's New Jersey printing operation. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES These expenses have increased in each of the last three years, although decreasing as a percent of revenue due to the substantial increase in revenue and the fixed nature of certain of these expenses. Fiscal year 1995 included a full year of expenses from May Printing Company, together with the goodwill amortization associated with that acquisition. Bad debt expense in fiscal year 1995 increased substantially from 1994 levels principally due to securities offerings being aborted because of poor market conditions. Fiscal year 1994 expenses reflected administrative staff additions and a fourfold increase in costs for employee training and development programs, partially offset by lower provisions for doubtful accounts due to improved collection experience. Fiscal year 1993 expenses reflected expanded training of both sales and administrative personnel and the opening of three new offices. 23 INTEREST EXPENSE AND OTHER INCOME Average short-term borrowings under the Company's bank line of credit were $710,000, $93,000 and $56,000, respectively, in fiscal years 1995, 1994 and 1993. Other income is primarily interest income. Due to the cash expended and debt assumed in connection with the December 1993 acquisition of May Printing Company, as discussed under "Liquidity and Capital Resources," interest expense in fiscal year 1995 was approximately three times the level of the previous two years. PROVISION FOR INCOME TAXES The effective income tax rates for 1995, 1994 and 1993 were 43 percent, 40 percent and 39 percent, respectively. The effective rates were higher than the statutory federal rates of 35 percent in 1995 and 1994 and 34 percent in 1993, primarily due to state income taxes. In addition, in 1995, the effective rate increased because of a lower level of deductibility of business meeting and entertainment expenses, together with a provision for additional taxes payable for fiscal years 1992, 1993 and 1994 resulting from an Internal Revenue Service audit of those years. The effective income tax rate in future years is expected to approximate 42 percent. IMPACT OF INFLATION The Company does not believe that inflation has had a significant impact on the results of its operations. LIQUIDITY AND CAPITAL RESOURCES Working capital at January 31, 1995, increased to $31.5 million from $22.5 million a year ago, reflecting good earnings and operating cash flow. Capital expenditures in fiscal year 1995 were $10.1 million, primarily for production equipment and facility remodeling, compared with $7.6 million in 1994. In addition to funding capital expenditures, the strong cash flow resulted in a $7.4 million increase in cash and equivalents and elimination of short-term debt of which $2.6 million was outstanding at January 31, 1994. Long-term debt at January 31, 1995, was 10.2 percent of total capitalization compared to 13.9 percent a year ago. The Company believes that it remains relatively conservatively capitalized and has appropriate reserve borrowing capacity. The Company expects capital expenditures in fiscal year 1996 to be approximately $10 million to $13 million for production and printing equipment and facility expansion and remodeling. Approximately $1 million of this amount is committed at this time. In addition, 24 the Company is negotiating for the purchase, for an estimated $5.5 million, of office buildings adjacent to its St. Paul, Minnesota, headquarters facility which are presently approximately 30 percent leased to the Company. In December 1993, the Company completed the acquisition of substantially all of the operating assets of May Printing Company for approximately $16 million in cash, $2.5 million in promissory notes and the assumption of approximately $5 million in long-term debt. This transaction depleted the Company's cash reserves and increased the Company's total debt, thus decreasing liquidity. Working capital at January 31, 1994, was $22.5 million, down from $24.7 million a year earlier. Long-term debt, including current maturities, was $10.3 million at January 31, 1994, compared to $2.2 million a year earlier. Short-term borrowing at January 31, 1994, was $2.6 million. The Company historically has been working-capital intensive, but in recent years has increased its needs for fixed capital and expanded its internal printing capacity as well. The Company generally has been able to generate sufficient cash flow from operations to fund its capital needs. At January 31, 1995, the Company's principal internal sources of liquidity were cash and cash equivalents and cash flow from operations. The Company also has available a $10 million unsecured bank line of credit, which expires May 31, 1997, under which there were no borrowings as of January 31, 1995. Management anticipates that these sources will satisfy its normal capital needs for fiscal year 1996, although long-term financing may be sought for the building purchase discussed above if consummated. QUARTERLY STOCK PRICE COMPARISON Merrill Corporation shares are traded on The Nasdaq Stock Market under the symbol MRLL. The table below sets forth the range of high and low sale prices per share as reported by The Nasdaq Stock Market. These prices do not include adjustments for retail markups, markdowns or commissions. There were approximately 426 shareholders of record of the Company's common stock at the close of trading on March 31, 1995. The Company paid quarterly dividends in fiscal 1995 in the amount of three cents per share totaling $907,790 for the entire fiscal year. First Second Third Fourth Fiscal Year Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 1995 High 32 1/2 28 1/4 24 19 1/2 Low 21 18 17 13 3/4 - ---------------------------------------------------------------------------- 1994 High 20 1/4 24 1/4 28 31 1/4 Low 15 1/2 18 22 3/4 21 - ---------------------------------------------------------------------------- 25 CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) 1995 1994 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 9,967 $ 2,558 Trade receivables, less allowance for doubtful accounts of $2,830 and $2,294, respectively 39,284 38,777 Work in process inventories 7,007 11,821 Other inventories 4,526 3,935 Refundable income taxes 265 Other 2,421 2,344 - -------------------------------------------------------------------------------------------------------------- Total current assets 63,470 59,435 - -------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 28,918 26,678 Goodwill, net 11,423 11,616 Other assets 2,659 2,394 - -------------------------------------------------------------------------------------------------------------- Total assets $106,470 $100,123 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Note payable to bank $ 2,600 Current maturities of long-term debt $ 745 1,325 Current maturities of capital lease obligations 738 365 Accounts payable 16,004 15,939 Accrued expenses 12,809 13,145 Income taxes payable 115 Deferred income taxes 1,651 3,418 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 31,947 36,907 - -------------------------------------------------------------------------------------------------------------- Long-term debt, net of current maturities 5,295 6,040 Capital lease obligations, net of current maturities 2,227 2,616 Deferred income taxes 46 669 Other 894 294 Shareholders' equity Common stock, $.01 par value: 25,000,000 shares authorized; 7,605,076 shares and 7,492,922 shares, respectively, issued and outstanding 76 75 Undesignated stock: 500,000 shares authorized; no shares issued Additional paid-in capital 14,384 12,996 Retained earnings 51,601 40,526 - -------------------------------------------------------------------------------------------------------------- Total shareholders' equity 66,061 53,597 - -------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $106,470 $100,123 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 26 CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, - -------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Revenue $236,878 $181,584 $147,716 Cost of sales 159,462 116,350 98,119 - -------------------------------------------------------------------------------------------------- Gross profit 77,416 65,234 49,597 Selling, general and administrative expenses 55,680 43,286 35,474 - -------------------------------------------------------------------------------------------------- Operating income 21,736 21,948 14,123 Interest expense (1,120) (321) (254) Other income, primarily interest income 538 364 295 - -------------------------------------------------------------------------------------------------- Income before provision for income taxes and cumulative effect of change in accounting for income taxes 21,154 21,991 14,164 Provision for income taxes 9,171 8,820 5,565 - -------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting for income taxes 11,983 13,171 8,599 Cumulative effect of change in accounting for income taxes 177 - -------------------------------------------------------------------------------------------------- Net income $ 11,983 $ 13,348 $ 8,599 - -------------------------------------------------------------------------------------------------- Income per common and common equivalent share before cumulative effect of change in accounting for income taxes $ 1.50 $ 1.65 $ 1.12 Cumulative effect of change in accounting for income taxes .02 - -------------------------------------------------------------------------------------------------- Net income per common and common equivalent share $ 1.50 $ 1.67 $ 1.12 - -------------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 7,994,233 7,971,854 7,695,113 - -------------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
27 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, - ------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Operating activities Net income $ 11,983 $ 13,348 $ 8,599 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 8,651 5,520 4,073 Amortization of intangible assets 1,127 362 491 Provision for losses on trade receivables 2,038 579 1,349 Change in non-current portion of deferred income taxes (623) (114) (246) Cumulative effect of change in accounting for income taxes (177) Change in deferred compensation 600 Changes in operating assets and liabilities, net of effects from business acquisitions Trade receivables (1,946) (6,636) (7,725) Work in process inventories 4,814 (5,728) (1,042) Other inventories (540) (74) 433 Refundable income taxes (265) Other current assets (31) (437) (50) Accounts payable (126) 3,026 560 Accrued expenses (368) 3,710 2,167 Accrued and deferred income taxes (1,882) 254 476 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 23,432 13,633 9,085 - ------------------------------------------------------------------------------------------------------------------- Investing activities Purchase of property, plant and equipment (10,085) (7,620) (7,296) Business acquisitions, net of cash acquired (993) (16,069) Purchase of minority interest (302) Other (553) (48) (44) - ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (11,631) (24,039) (7,340) - ------------------------------------------------------------------------------------------------------------------- Financing activities Borrowings on note payable to bank 28,100 7,700 4,600 Repayments on note payable to bank (30,700) (5,100) (4,600) Principal payments on long-term debt and capital lease obligations (2,273) (117) (83) Dividends paid (908) (741) Tax benefit realized upon exercise of stock options 863 1,103 1,160 Other equity transactions, net 526 557 455 - ------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (4,392) 3,402 1,532 - ------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 7,409 (7,004) 3,277 Cash and cash equivalents, beginning of year 2,558 9,562 6,285 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 9,967 $ 2,558 $ 9,562 - ------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures Income taxes paid $ 11,088 $ 7,574 $ 4,200 Interest paid 1,019 310 245 - ------------------------------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
28 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1995, 1994, 1993 - ----------------------------------------------------------------------------------------------------------- Additional Common Paid-in Retained (IN THOUSANDS, EXCEPT PER SHARE DATA) Stock Capital Earnings Total - ----------------------------------------------------------------------------------------------------------- Balance, January 31, 1992 $71 $9,725 $19,320 $29,116 Exercise of stock options 2 439 441 Tax benefit realized upon exercise of stock options 1,160 1,160 Other 14 14 Net income 8,599 8,599 - ----------------------------------------------------------------------------------------------------------- Balance, January 31, 1993 73 11,338 27,919 39,330 - ----------------------------------------------------------------------------------------------------------- Exercise of stock options 2 579 581 Tax benefit realized upon exercise of stock options 1,103 1,103 Other (24) (24) Cash dividends ($.10 per share) (741) (741) Net income 13,348 13,348 - ----------------------------------------------------------------------------------------------------------- Balance, January 31, 1994 75 12,996 40,526 53,597 - ----------------------------------------------------------------------------------------------------------- Exercise of stock options 1 496 497 Tax benefit realized upon exercise of stock options 863 863 Other 29 29 Cash dividends ($.12 per share) (908) (908) Net income 11,983 11,983 - ----------------------------------------------------------------------------------------------------------- Balance, January 31, 1995 $76 $14,384 $51,601 $66,061 - ----------------------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS The Company provides document typesetting, printing, reproduction, distribution and publishing esrvices to financial, legal, corporate, insurance and commercial markets worldwide. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. WORK IN PROCESS INVENTORIES Work in process, which includes purchased services, materials, direct labor and overhead, is valued at the lower of cost or net realizable value, with cost determined on the specific job cost basis. OTHER INVENTORIES Other inventories consist primarily of paper and printed materials and are valued at the lower of cost or market, with cost determined at specific cost, which approximates market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Significant additions or improvements extending asset lives are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is recorded on a straight-line basis over the estimated useful lives of the assets or the lease term, whichever is shorter. When assets are sold or retired, related gains or losses are included in the results of operations. GOODWILL Goodwill recognized in business acquisitions accounted for as purchases is being amortized on the straight-line method, principally over 15 years. INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. REVENUE RECOGNITION The Company recognizes revenue when service projects are completed or products are shipped. NET INCOME PER SHARE Net income per common and common equivalent share is computed by dividing net income by the weighted average number of shares of common stock and dilutive common equivalent shares 30 outstanding during each period. Common stock equivalents result from dilutive stock options computed using the treasury stock method. Fully diluted earnings per share did not differ from primary earnings per share in the periods presented. NOTE 2 - SELECTED FINANCIAL STATEMENT DATA
AS OF JANUARY 31, - ------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------- Property, plant and equipment Land $ 853 $ 853 Buildings 6,911 6,774 Equipment 32,450 26,521 Furniture and fixtures 7,530 6,237 Leasehold improvements 6,563 5,485 Construction in progress 1,577 482 - ------------------------------------------------------------------------- 55,884 46,352 Less accumulated depreciation and amortization (26,966) (19,674) - ------------------------------------------------------------------------- $ 28,918 $ 26,678 - ------------------------------------------------------------------------- Goodwill Goodwill $ 12,597 $ 11,898 Less accumulated amortization (1,174) (282) - ------------------------------------------------------------------------- $ 11,423 $ 11,616 - ------------------------------------------------------------------------- Accrued expenses Commissions and compensation $ 7,898 $ 8,936 Pension 3,403 2,553 Other 1,508 1,656 - ------------------------------------------------------------------------- $ 12,809 $ 13,145 - -------------------------------------------------------------------------
NOTE 3 - BUSINESS ACQUISITIONS On December 31, 1993, the Company purchased substantially all of the operating assets and assumed certain liabilities of May Printing Company and obtained related covenants not to compete for approximately $16 million in cash and a promissory note payable for $2.5 million. The agreement called for an additional contingent consideration, not to exceed $2 million, which was based on pretax earnings for the 12 months ended January 31, 1995, generated from the net assets acquired as defined in the purchase agreement. Management anticipates there will be no contingent consideration paid. The excess of the purchase price over the estimated fair market value of the net assets acquired was approximately $11.5 million and is being amortized using the straight-line method over 15 years. The acquisition has been accounted for as a purchase. Results of operations since the purchase date are included in the Consolidated Statements of Operations. Pro forma data (unaudited) as though the acquisition had been effective February 1, 1992, is as follows:
YEARS ENDED JANUARY 31, - ------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1993 - ------------------------------------------------------------------------- Revenue $ 208,797 $ 174,931 Net income 14,325 9,189 Net income per share 1.79 1.19 - -------------------------------------------------------------------------
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On November 10, 1994, the Company purchased substantially all of the operating assets and assumed certain liabilities of Fourtress Reprographic Services, Inc., for approximately $647,000 cash. On June 1, 1993, the Company acquired the outstanding stock of Torrie Enterprises, LTD, doing business as Atwell Fleming Printing in Toronto, Ontario, for approximately $873,000 cash. These acquisitions were not significant to the financial position or results of operations of the Company. NOTE 4 - FINANCIAL AGREEMENTS BANK FINANCING: In June of 1994, the Company amended its revolving credit agreement which provides for a $10 million unsecured bank line of credit through May 31, 1997. There were no borrowings outstanding under this line of credit at January 31, 1995. Borrowings under the line of credit were $2.6 million at January 31, 1994 and bore interest at prime less .25%. Under the amended agreement, the Company has the option to borrow at the bank's reference rate, at 1.0% above the London Interbank Offered Rate or at 0.85% above a certificate of deposit-based rate and is required to pay a commitment fee of 0.25% on the unused portion of the line annually. The weighted average interest rate on the note payable was 7.18% for 1995 and 5.75% for 1994. The revolving credit agreement includes various covenants, including the maintenance of minimum tangible net worth and limitations on the amounts of certain transactions without the approval of the bank. LONG-TERM DEBT: Long-term debt consisted of the following:
AS OF JANUARY 31, - --------------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - --------------------------------------------------------------------------------- Industrial development bonds, due in semiannual installments including interest ranging from 7.0% to 8.375% over the life of the bonds with the remaining unpaid balance due on August 1, 2010; collateralized by land, building and equipment with a carrying value of $4,780 at January 31, 1995. $3,785 $3,900 Unsecured promissory note payable in equal installments of $500 on December 31 thru 1999. The note bears interest at prime and is payable annually. The prime interest rate at January 31, 1995, was 8.5% (6.0% at January 31, 1994). 2,000 2,500 Other notes 255 965 - --------------------------------------------------------------------------------- 6,040 7,365 Less current maturities (745) (1,325) - --------------------------------------------------------------------------------- $5,295 $6,040 - ---------------------------------------------------------------------------------
32 The aggregate maturities of long-term debt are as follows:
(IN THOUSANDS) - ------------------------------------------------------------------------------ 1996 $ 745 1997 770 1998 645 1999 655 2000 170 Thereafter 3,055 - ------------------------------------------------------------------------------ $6,040 - ------------------------------------------------------------------------------
NOTE 5 - LEASES The Company leases an office and production facility and the associated land, and equipment under capital leases that terminate at various dates through November 30, 2005. Certain leases contain bargain purchase options. A summary of the Companys property under capital leases, which is classified as property, plant and equipment, is as follows:
AS OF JANUARY 31, - ----------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - ----------------------------------------------------------------------------- Land $ 333 $ 333 Building 2,439 2,439 Equipment 1,552 1,124 Less accumulated amortization (872) (601) - ----------------------------------------------------------------------------- $3,452 $3,295 - -----------------------------------------------------------------------------
The Company also leases office space and equipment under noncancelable operating leases which expire at various dates through December of 2000. Rental expense charged to operations on noncancelable operating leases was $4,523,000, $3,303,000 and $2,531,000, for the years ended January 31, 1995, 1994 and 1993, respectively. Future minimum rental commitments under noncancelable leases at January 31, 1995, are as follows:
Capital Operating (IN THOUSANDS) Leases Leases - ------------------------------------------------------------------------------ 1996 $1,029 $3,578 1997 555 2,360 1998 445 1,766 1999 368 1,094 2000 341 362 Thereafter 1,845 - ------------------------------------------------------------------------------ $4,583 $9,160 ------ Imputed interest (1,618) - ------------------------------------------------------------------- Present value of minimum lease payments 2,965 Less current maturities of obligations under capital leases (738) - ------------------------------------------------------------------- Long-term obligations under capital leases $2,227 - -------------------------------------------------------------------
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109), effective February 1, 1993. The cumulative effect of this change in accounting for income taxes as of February 1, 1993, increased net income by $177,000 ($.02 per share) and is reported separately in the Consolidated Statement of Operations for the year ended January 31, 1994. Prior years' financial statements have not been restated. The federal and state components of the provision for income taxes are as follows:
AS OF JANUARY 31, - ------------------------------------------------------------------------------------------ (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------ Currently payable Federal $9,879 $5,394 $4,760 State 1,682 1,090 977 - ------------------------------------------------------------------------------------------ 11,561 6,484 5,737 Deferred (2,390) 2,336 (172) - ------------------------------------------------------------------------------------------ Provision for income taxes $9,171 $8,820 $5,565 - ------------------------------------------------------------------------------------------
Temporary differences comprising the net deferred tax liability recognized in the accompanying Consolidated Balance Sheet are as follows:
AS OF JANUARY 31, - ------------------------------------------------------------------------------------------ (IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------------------------ Capital loss carryforward $ 994 $ 994 Allowance for doubtful accounts 1,089 929 Deferred compensation 344 113 Work in process inventories (3,386) (4,861) Depreciation (272) (601) Other 528 333 Deferred tax valuation allowance (994) (994) - ------------------------------------------------------------------------------------------ Net deferred tax liability $(1,697) $(4,087) - ------------------------------------------------------------------------------------------
Significant differences between income taxes on income for financial reporting purposes and income taxes calculated using the federal statutory tax rate are as follows:
AS OF JANUARY 31, - ------------------------------------------------------------------------------------------ (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------ Provision for federal income taxes at statutory rate $7,404 $7,697 $4,816 State income taxes, net of federal benefit 1,039 842 607 Nondeductible business meeting and entertainment expense 565 172 138 Other 163 109 4 - ------------------------------------------------------------------------------------------ $9,171 $8,820 $5,565 - ------------------------------------------------------------------------------------------
NOTE 7 - RETIREMENT PLAN The Company has a defined contribution retirement plan covering substantially all employees. Contributions to the plan are based on 7% of eligible employee compensation. Costs charged to operations were $3,403,000, $2,553,000 and $2,005,000 for the years ended January 31, 1995, 1994 and 1993, respectively. 34 NOTE 8 - SHAREHOLDERS' EQUITY COMMON STOCK: The classes, series, rights and preferences of the undesignated stock may be established by the Company's Board of Directors. No action with respect to such shares has been taken. STOCK PLANS: 1993 STOCK INCENTIVE PLAN: Under the Company's 1993 Stock Incentive Plan, 500,000 shares of common stock were reserved for granting of incentive awards to employees in the form of incentive stock options, nonstatutory stock options and restricted stock awards. As of January 31, 1995, nonstatutory options for 463,000 shares had been granted under the plan, leaving 37,000 shares available for future grants. 1987 OMNIBUS STOCK PLANS: Under the Company's 1987 Omnibus Stock Plan, 800,000 shares of common stock were reserved for granting of incentive awards to employees in the form of incentive stock options, nonstatutory stock options or restricted stock awards. As of January 31, 1995, incentive stock options for 108,666 shares, nonstatutory options for 648,800 shares and restricted stock awards for 20,100 shares had been granted under the plan, leaving 22,434 shares available for future grants. NONQUALIFIED OPTIONS: In addition to options granted under the plans, the Company has granted nonqualified options to directors and consultants at prices equal to or exceeding market value at date of grant. A summary of selected information regarding all stock options for the three years ended January 31, 1995, is as follows:
Shares Price Per Share - ------------------------------------------------------------------ Balance, January 31, 1992 906,000 $ 3.37 - 8.75 Granted 175,000 11.55 - 14.06 Exercised (310,400) 3.37 - 8.75 - ------------------------------------------------------------------ Balance, January 31, 1993 770,600 3.37 - 14.06 Granted 401,000 17.50 - 29.50 Exercised (139,466) 3.37 - 10.50 Canceled (9,200) 3.37 - 3.87 - ------------------------------------------------------------------ Balance, January 31, 1994 1,022,934 3.37 - 29.50 Granted 110,664 14.56 - 29.75 Exercised (113,134) 3.37 - 17.50 Canceled (34,500) 3.87 - 17.37 - ------------------------------------------------------------------ Balance, January 31, 1995 985,964 $ 3.37 - 29.75 - ------------------------------------------------------------------
Options for 459,564 shares were exercisable at January 31, 1995. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of quarterly financial data for fiscal years 1995 and 1994:
First Second Third Fourth (IN THOUSANDS EXCEPT PER SHARE DATA) Quarter Quarter Quarter Quarter Total - -------------------------------------------------------------------------------------- 1995 Revenue $61,463 $63,679 $57,474 $54,262 $236,878 - -------------------------------------------------------------------------------------- Gross profit 23,016 21,762 16,921 15,717 77,416 - -------------------------------------------------------------------------------------- Net income 4,699 4,396 2,205 683 11,983 - -------------------------------------------------------------------------------------- Net income per share .58 .55 .28 .09 1.50 - -------------------------------------------------------------------------------------- Dividends declared per share .03 .03 .03 .03 .12 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- 1994 Revenue $41,244 $44,912 $42,541 $52,887 $181,584 - -------------------------------------------------------------------------------------- Gross profit 15,807 15,795 15,183 18,449 65,234 - -------------------------------------------------------------------------------------- Net income 3,459 3,518 3,034 3,337 13,348 - -------------------------------------------------------------------------------------- Net income per share .44 .44 .38 .41 1.67 - -------------------------------------------------------------------------------------- Dividends declared per share .025 .025 .025 .025 .10 - --------------------------------------------------------------------------------------
36 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MERRILL CORPORATION We have audited the accompanying consolidated balance sheets of Merrill Corporation as of January 31, 1995 and 1994, and the related consolidated statements of operations, cash flows and changes in shareholders' equity for each of the three years in the period ended January 31, 1995. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Merrill Corporation as of January 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for income taxes effective February 1, 1993. Coopers & Lybrand L.L.P. St. Paul, Minnesota March 21, 1995 37 SUMMARY OF OPERATING AND FINANCIAL DATA
FOR THE YEARS ENDED JANUARY 31, - ------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT EMPLOYEE AND PER SHARE DATA) 1995 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------- Operating results Revenue $236,878 $181,584 $147,716 $125,312 $100,951 $69,022 Costs and expenses 215,724 159,593 133,552 114,559 96,825 68,480 Income (loss) before provision for income taxes 21,154 21,991 14,164 10,753 4,126 (928) Provision for income taxes 9,171 8,820 5,565 4,308 1,570 222 Net income (loss) 11,983 13,348 8,599 6,518 2,671 (1,238) - ------------------------------------------------------------------------------------------------------- Per common share Net income (loss) $ 1.50 $ 1.67 $ 1.12 $ .86 $ .37 $ (.17) Book value 8.69 7.15 5.36 4.11 3.20 2.82 - ------------------------------------------------------------------------------------------------------- Financial data/other Working capital $ 31,523 $ 22,528 $ 24,650 $ 17,550 $ 9,388 $ 7,929 Current ratio 2.0 1.6 2.1 1.9 1.4 1.5 Total assets $106,470 $100,123 $ 66,042 $ 52,954 $ 46,892 $ 40,596 Shareholders' equity 66,061 53,597 39,330 29,116 22,486 20,491 Return on average shareholders' equity 20.0% 28.7% 25.1% 25.3% 12.4% N/A Long-term obligations $ 7,522 $ 8,656 $ 2,138 $ 2,230 $ 2,314 $ 2,390 Long-term obligations to capitalization 10.2% 13.9% 5.2% 7.1% 9.3% 10.4% Number of employees 1,739 1,601 1,041 831 784 562 - -------------------------------------------------------------------------------------------------------
38 EX-21.1 9 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE COMPANY
JURISDICTION OF NAME INCORPORATION PERCENT OWNED - --------------------------------------------------------------------- --------------- ------------- Merrill/New York Company............................................. Minnesota 100% Merrill/Magnus Publishing Corporation................................ Minnesota 100% Merrill Corporation, Canada d/b/a Merrill Atwell Fleming............. Ontario 100% Merrill/May, Inc..................................................... Minnesota 100% Merrill International Inc............................................ Minnesota 100%
EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Forms S-8 of Merrill Corporation (File No. 33-46275 and File No. 33-52623) of our report dated March 22, 1994, on our audits of the consolidated financial statements of Merrill Corporation as of January 31, 1995 and 1994 and for each of the three years in the period ended January 31, 1995 which report is included on page 37 of the Annual Report to Shareholders and our report on the related financial statement schedules included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota April 26, 1995 EX-27 11 EXHIBIT 27
5 1,000 12-MOS JAN-31-1995 FEB-01-1994 JAN-31-1995 9,967 0 42,114 2,830 11,533 63,470 55,884 26,966 106,470 31,947 9,005 76 0 0 65,512 106,470 236,878 236,878 159,462 159,462 55,680 2,038 1,120 21,154 9,171 11,983 0 0 0 11,983 1.50 1.50
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