10-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(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, 1999
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number:  0-14082

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

Minnesota	41-0946258
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Merrill Circle St. Paul, Minnesota (Address of principal executive offices)	55108 (Zip Code)

Registrant's telephone number, including area code: (651) 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. Yes    No  X 

    As of April 15, 1999, 15,919,680 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 on that date by the Nasdaq National Market) excluding outstanding shares owned beneficially by officers and directors, was approximately $190,391,201.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the Fiscal Year ending January 31, 1999	Parts I, II and IV
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders	Part III

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to this Report to be signed on its behalf by the undersigned, thereunto duly authorized on September 30, 1999.

MERRILL CORPORATION
By:	/s/ JOHN W. CASTRO John W. Castro
Its:	President and Chief Executive Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title
/s/ JOHN W. CASTRO John W. Castro	President and Chief Executive Officer (Principal Executive Officer) and Director
/s/ KAY A. BARBER Kay A. Barber	Vice President—Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
/s/ ROBERT F. NIENHOUSE Robert F. Nienhouse	Director
/s/ RICHARD G. LAREAU Richard G. Lareau	Director
/s/ PAUL G. MILLER Paul G. Miller	Director
/s/ RICK R. ATTERBURY Rick R. Atterbury	Director
/s/ RONALD N. HOGE Ronald N. Hoge	Director
/s/ JAMES R. CAMPBELL James R. Campbell	Director
/s/ FREDERICK W. KANNER Frederick W. Kanner	Director
/s/ MICHAEL S. SCOTT MORTON Michael S. Scott Morton	Director

MERRILL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
For Fiscal Year Ended January 31, 1999

Item No.	Description	Method of Filing
3.1	Articles of Incorporation	Incorporated by reference to our Registration Statement on Form S-1 (File No. 33-4062).
3.2	Amendments to Articles of Incorporation as of June 20, 1986 and March 27, 1987	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1987.
3.3	Restated Bylaws	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1990.
10.1	Credit Agreement dated as of November 25, 1996 among First Bank, N.A., as Agent and as a Bank, Norwest Bank Minnesota, N.A., and Merrill Corporation	Incorporated by reference to our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1996.
10.2	First Amendment to Credit Agreement dated May 23, 1997 between First Bank National Association, Norwest Bank Minnesota, National Association and Merrill Corporation	Previously filed.
10.3	Second Amendment to Credit Agreement dated August 17, 1998 between First Bank National Association, Norwest Bank Minnesota, National Association and Merrill Corporation	Previously filed.
10.4	Third Amendment to Credit Agreement dated March 24, 1999 between First Bank National Association, Norwest Bank Minnesota, National Association and Merrill Corporation	Previously filed.
10.5	Note Purchase Agreement, dated as of October 25, 1996	Incorporated by reference to our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1996.
10.6	Loan Agreement, dated as of July 1, 1990 between May Printing Company and Minnesota Agricultural and Economic Development Board, amended as of December 31, 1993	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1994.
10.7	First Amendment to Loan Agreement dated as of December 31, 1993 between Merrill/May, Inc. and Minnesota Agricultural and Economic Development Board	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1994 (included with the Loan Agreement, dated as of July 1, 1990 between May Printing Company and Minnesota Agricultural and Economic Development Board, amended as of December 31, 1993).
10.8	Second Amendment to Loan Agreement dated as of July 1, 1998 between Merrill/May, Inc. and Minnesota Agricultural and Economic Development Board	Previously filed.
10.9	Bond Purchase Agreement dated June 26, 1998 between Dougherty Summit Securities LLC and Piper Jaffray Inc.	Previously filed.
10.10	Guaranty of Loan Obligations of May Printing Company by Merrill Corporation in favor of Minnesota Agricultural and Economic Development Board, dated as of December 31, 1993	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1994.
10.11	Employment Agreement between Rick R. Atterbury and Merrill Corporation, dated as of February 1, 1987, as amended	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1991.
10.12	First Amendment to Employment Agreement between Rick R. Atterbury and Merrill Corporation, dated as of April 29, 1994	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1994.
10.13	Second Amendment to Employment Agreement between Rick R. Atterbury and Merrill Corporation, dated as of April 8, 1998	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
10.14	Employment Agreement between John W. Castro and Merrill Corporation dated as of February 1, 1989	Incorporated by reference to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1989.
10.15	Amendment to Employment Agreement between John W. Castro and Merrill Corporation dated as of April 29, 1994	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1994.
10.16	Second Amendment to Employment Agreement between John W. Castro and Merrill Corporation, dated as of April 8, 1998	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
10.17	Deferred Compensation Plan for John W. Castro, dated as of March 30, 1998	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
10.18	1987 Omnibus Stock Plan, as amended	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1991.
10.19	1993 Incentive Stock Plan, as amended	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1997.
10.20	1996 Non-Employee Director Plan	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1997.
10.21	1996 Non-Statutory Stock Option Plan	Previously filed.
10.22	Option Agreement dated as of July 1, 1991 between Ronald N. Hoge and Merrill Corporation	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1993.
10.23	Stock Purchase Loan Program	Previously filed.
10.24	Stock Option Deferral Program	Previously filed.
10.25	Form of Letter Agreement effective May 28, 1998 with John W. Castro and Rick R. Atterbury	Previously filed.
10.26	Form of Letter Agreement effective May 28, 1998 with Kay A. Barber, Steven J. Machov and Kathleen A. Larkin	Previously filed.
10.27	Stock Purchase Agreement, dated March 28, 1996, by and among Merrill Corporation and the Shareholders of FMC Resource Management Corporation	Incorporated by reference to our Current Report on Form 8-K dated April 15, 1996.
10.28	Asset Purchase Agreement dated as of June 11, 1998 among Merrill Acquisition Corporation and Executech, Inc., World Wide Scan Services, LLC, the Shareholders of Executech, Inc. and the Members of World Wide Scan Services LLC	Previously filed.
10.29	First Amendment to Asset Purchase Agreement dated December 18, 1998 among Merrill/Executech, Inc. and Executech, Inc., World Wide Scan Services, LLC, the Shareholders of Executech, Inc. and the Members of World Wide Scan Services LLC	Previously filed.
10.30	Second Amendment to Asset Purchase Agreement dated effective as of June 11, 1998 among Merrill/Executech, Inc. and Executech, Inc., World Wide Scan Services, LLC, the Shareholders of Executech, Inc. and the Members of World Wide Scan Services LLC	Previously filed.
10.31	Asset Purchase Agreement dated March 11, 1999 among Merrill Daniels, Inc., Daniels Printing, Limited Partnership and all of the partners of Daniels Printing Limited Partnership	Incorporated by reference to our Current Report on Form 8-K filed on April 29, 1999.
10.32	Facilities Lease dated October 1, 1985 between the Port Authority of the City of Saint Paul as lessor and Merrill Corporation as lessee	Incorporated by reference to our Registration Statement on Form S-1 (File No. 33-4062).
10.33	Land Lease dated October 1, 1985 between the Port Authority of the City of Saint Paul as lessor and Merrill Corporation as lessee	Incorporated by reference to our Registration Statement on Form S-1 (File No. 33-4062).
10.34	Lease dated as of May 1, 1994 between The Rector, Church-Wardens, and Vestrymen of Trinity Church in the City of New York, as landlord and The Corporate Printing Company, Inc, as lessee, assignor to Merrill/New York Company	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1997.
10.35	Office Lease Agreement dated July 30, 1998 between Beametfed Inc. and Merrill Corporation	Previously filed.
10.36	Agreement of Lease dated January 25, 1995 between East 55th Street Limited Partnership (assignee of The Overton-La Cholla Joint Venture) and Merrill Daniels, Inc. (assignee to Daniels Printing, Limited Partnership)	Previously filed.
13.1	Portions of Annual Report to Shareholders	Included with this filing electronically.
21.1	Subsidiaries	Previously filed.
23.1	Consent of Independent Accountants	Previously filed.
27.1	Financial Data Schedule for the year ended January 31, 1999	Previously filed.

EX-13.1

MANAGEMENT'S DISCUSSION AND ANALYSIS

    Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations constituteforward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements involve known and unknown risks, uncertainties or achievements of the Company which may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the effect of economic and financial market conditions, government public reporting regulations, paper costs, the integration and performance of recent acquisitions and Year 2000 readiness.

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 years.

	For the Years Ended January 31,
							% Increase (Decrease)
	Percentage of Revenue
							1999 vs. 1998		1998 vs. 1997
	1999		1998		1997
Revenue
Specialty Communication Services:
Financial	36.5	%	38.2	%	40.6	%	6	%	22	%
Corporate	31.4		31.6		27.6		11		49
Commercial and other	19.7		18.5		20.6		18		17
	87.6		88.3		88.8		10		29
Document Services:
Document management services	12.4		11.7		11.2		17		35
	100.0		100.0		100.0		11		30
Cost of revenue	64.9	%	64.3	%	64.3	%	12	%	30	%
Gross profit	35.1		35.7		35.7		9		30
Selling, general and administrative expenses	25.1		24.8		25.4		12		27
Operating income	10.0		10.9		10.3		3		37
Interest expense	(0.8	)	(0.9	)	(1.2	)	(8	)	5
Other income, net	0.2		0.1		0.1		(49	)	217
Income before provision for income taxes	9.4		10.1		9.2		3		43
Provision for income taxes	4.2		4.4		4.1		4		40
Net income	5.2		5.7		5.1		2		46

    Business  Merrill Corporation is a diversified electronic and paper document management company. During 1999, the Company adopted Statement of Financial Standards No. 131. As a result, the Company defined its reportable segments and changed the information it reports about its operating segments. Operating segment information for prior years has been restated to conform to the 1999 presentation. Following the new standard, the Company's operating segments have been aggregated into two reportable segments: Specialty Communication Services and Document Services. Under Specialty Communication Services, we include three business units: Financial Document Services, Investment Company Services and Managed Communications Programs. Revenue generated by these three business units is categorized as financial, corporate and commercial and other. Document Management Services is the sole business reported in the Document Services segment. Revenue generated by this business unit is categorized as document management services. All accounting policies of the reportable segments are consistent with generally accepted accounting principles and the accounting policies of the Company described in Note One of the notes to consolidated financial statements. Additional information about the Company's reportable segments is included in Note Nine of the notes to consolidated financial statements.

1999 REVENUE
BY CATEGORY
[GRAPH]

    The financial revenue category generally reflects the level of transactional activity in the capital markets. The financial revenue category 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 category. The corporate revenue category encompasses required regulatory compliance and mutual fund documentation and other repetitive work and is typically not significantly affected by capital market fluctuations. The commercial and other revenue category tends to follow general economic trends.

    Document management services revenue category tends to follow general economic trends.

    Fiscal Year 1999 vs. Fiscal Year 1998  Overall revenue for fiscal year 1999 increased 11 percent over the previous year. Revenue in the Specialty Communication Services segment increased 10 percent over the previous year. The financial revenue category increased six percent compared to the prior year. This increase was driven by strong mergers and acquisition activity in the first six months of fiscal year 1999. The financial revenue category declined in the second half of the fiscal year by 15 percent as a result of the Fall market volatility. International revenue, which is included in the financial revenue category, represented less than 10 percent of consolidated revenue and increased over fiscal year 1998 revenue. Management does not anticipate significant fluctuations in the relative percentage of international revenue during fiscal year 2000. The corporate revenue category increased 11 percent compared to fiscal year 1998. This increase is attributed mainly to strong growth in Investment Company Services products and continued solid demand for corporate compliance business. The commercial and other revenue category realized revenue growth of 18 percent over fiscal year 1998. The growth is primarily the result of our Managed Communications Programs business.

    Document Services segment revenue grew 17 percent in fiscal year 1999. Ten percent of the growth was a result of the acquisition of Executech and affiliated World Wide Scan Services in June 1998. Document Service Centers, which totaled 80 at January 31, 1999, contributed revenue growth of seven percent on a same-site comparison.

    We anticipate that our total revenue for fiscal year 2000 will continue to grow compared to our total revenue for fiscal year 1999, primarily as a result of our acquisition activity, increased selling efforts and new product offerings. As a percentage of our total revenue, we anticipate that our financial revenue category in fiscal year 2000 will decline as a percentage of total revenue as our other business sectors continue to grow. The forward-looking statements in this paragraph contain various risks and uncertainties that may make these statements untrue. These risks and uncertainties include, but are not limited to, the effect of economic and financial market conditions on our revenue, the extent of changes to government reporting requirements and the ability of our management to successfully select suitable acquisition candidates and the ability to integrate and manage them successfully.

    Fiscal year 1999 gross profit of approximately 35 percent declined slightly from fiscal year 1998. Strong margins were maintained despite the significant slowdown in financial transaction activity in the second half of the fiscal year 1999. Management implemented cost control measures in the second half of the fiscal year 1999 to offset the lower production activity. These cost controls measures included a reduction in our workforce of approximately 100 employees (approximately three percent of our total workforce) and a decrease in our incentive bonuses payable to employees (resulting from anticipated lower company performance compared to the quantitative targets set forth in our plan). On February 1, 1999, we also reorganized our company into five distinct business units: Financial Document Services, Investment Company Services, Management Communications Programs, the Merrill Print Group and Document Management Services. By realigning our business into five operating units, we believe that we are able to achieve more accountability for overall profitability of these business units. In addition, by establishing the Merrill Print Group as a separate profit center, we hope to increase the utilization of our printing assets. In order to further this objective, management compensation for the Merrill Print Group is now based on profitability. We believe that these cost cutting initiatives together with our expectation that overhead costs will remain stable, will result in higher operating margins during the next couple of years. The decrease in gross profit as a percentage of revenue resulted from a shift in revenue mix from higher gross margin financial transaction revenue to revenue generated by our other business units which tend to carry lower gross margins. We expect to continue to realize decreasing gross margins due to the changing mix of our revenue between Financial Document Services (higher gross margin business) and non-Financial Document Services (lower gross margin business).

    The immediately preceding paragraph contains forward-looking statements involving various risks and uncertainties that may make these statements untrue. These risks and uncertainties include, but are not limited to, the effect of economic and financial market conditions on our revenue, the extent of changes to government reporting requirements, the ability of our management to successfully select suitable acquisition candidates and the ability to integrate and manage them successfully, the success of our focus on value-added technology and the ability of our management to successfully continue to diversify our operations.

    Selling, general and administrative expenses increased in both dollar terms and as a percentage of revenue. The increase in these expenses in fiscal year 1999 was principally a result of our continued expansion of the Company's sales and marketing activities and provisions for losses on trade receivables. Specifically, during fiscal year 1999, we hired additional sales personnel, marketing employees and product managers, and engaged in several, nationwide corporate branding and product marketing programs. We anticipate that we will continue to hire additional sales and marketing personnel in the immediate future, and will continue our corporate branding and product marketing inititatives for the foreseeable future. During the fiscal year ending January 31, 1998, management decided to discontinue the sales of hardware and software related to its Merrill Training and Technology group, formerly Merrill/Superstar Computing Company. As a result of this decision, the Company recorded a $1.2 million goodwill impairment as it was determined that the carrying amount of the goodwill related to the Superstar acquisition was not fully recoverable. The Company reviews the carrying value of long-lived assets and certain identifiable intangibles for impairment, at least quarterly but more frequently whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on this policy, no other goodwill or long-lived asset was determined to be impaired.

    Average short-term borrowings under the Company's line of credit arrangement were approximately $4.3 million, $4.7 million and $30.1 million in fiscal years 1999, 1998 and 1997, respectively.

    Interest expense for fiscal year 1999 declined slightly compared to fiscal year 1998, which reflects stable interest rates and a slight reduction in overall amounts borrowed during fiscal year 1999.

    The effective income tax rate for fiscal year 1999 was 44.5 percent compared to 44 percent for fiscal year 1998. The effective rates were higher than the statutory federal income tax rate primarily because of state income taxes and the impact of increased non-deductible business entertainment expenses incurred in conjunction with the financial and corporate revenue category activity previously discussed. The effective income tax rate in future years is expected to approximate 44.5 percent.

    Fiscal Year 1998 vs. Fiscal Year 1997  Overall revenue for fiscal year 1998 increased 30 percent over the previous year. Revenue in the Specialty Communication Services segment increased 29 percent over the previous year. The financial revenue category increased 22 percent compared to 1997. This increase was driven by continued strong mergers and acquisition activity in financial markets throughout fiscal year 1998. The increase was also driven by the results of the Corporate Printing Company (CPC) business acquired in April 1996. International revenue, which is included in the financial revenue category, represented less than 10 percent of consolidated revenue and increased over fiscal year 1997 revenue. The corporate revenue category increased 49 percent when compared to fiscal year 1997. This increase is attributed to strong corporate compliance business, continued solid demand for EDGAR services and strong growth in Investment Company Services products. The commercial and other revenue category experienced a 17 percent increase in revenue over fiscal year 1997. The growth is primarily the result of our Managed Communications Programs.

    Document Services segment revenue grew 35 percent in fiscal year 1998, reflecting continued growth in the number of Document Service Centers, which totaled 76 at January 31, 1998. This resulted from internal growth and the acquisition of selected assets of Total Management Support Services.

    Fiscal year 1998 gross profit of approximately 36 percent remained level with fiscal year 1997. Continued strong margins in both financial and corporate revenue category activity along with high production utilization allowed us to maintain the same margins.

    Selling, general and administrative expenses increased, but as a percent of revenue, declined slightly in the last year. The increase in these expenses in fiscal year 1998 was principally a result of our continued expansion of sales and marketing activities and provisions for incentive compensation.

    Average short-term borrowings under the Company's line of credit arrangement were approximately $4.7 million, $30.1 million and $2.2 million in fiscal years 1998, 1997 and 1996, respectively. The significant decrease in the average short-term borrowings in fiscal year 1998 resulted from the issuance of $35 million in unsecured senior notes in October 1996.

    Interest expense for fiscal year 1998 remained relatively consistent compared to fiscal year 1997, which reflects stable interest rates and consistent overall amounts borrowed during the time periods.

    The effective income tax rate for fiscal year 1998 was 44 percent compared to 45 percent for fiscal year 1997. The effective rates were higher than the statutory federal rate primarily because of state income taxes and the impact of increased non-deductible business entertainment expenses incurred in conjunction with the additional financial and corporate revenue category activity previously discussed.

    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  The Company continued to strengthen its financial position during fiscal year 1999. Working capital at January 31, 1999, increased to $81.6 million from $79.3 million a year ago. Our current ratio remained consistent at 2.1:1 in fiscal year 1999 when compared to fiscal year 1998. Working capital increased primarily from higher cash balances, reflecting strong collection of trade receivables during the entire year. Trade accounts receivable decreased as a result of the strong cash collections and the reduction in the financial transaction activity. Work-in-process inventories decreased at January 31, 1999, reflecting the downturn in financial transaction activity in the fourth quarter and improved inventory turns. Cash and cash equivalents increased to $23.5 million with no borrowings under the Company's line of credit at January 31, 1999. Long-term obligations to total capitalization was 21.9 percent at January 31, 1999, compared to 25.0 percent a year ago.

    Cash provided by operating activities was $55.8 million in fiscal year 1999, compared to $30.9 million in fiscal year 1998 and $8.5 million in fiscal year 1997. Operating cash flows for fiscal year 1999 included strong earnings performance and a decrease in accounts receivable and work-in-process inventories offset by decreases in accounts payable and accrued expenses. Operating cash flows for fiscal year 1998 included strong earnings performance, a decrease in work-in-process inventories and an increase in accounts payable and accrued expenses offset by an increase in accounts receivable.

    Net cash used in investing activities was $23.1 million in fiscal year 1999, compared to $30.1 million in fiscal year 1998 and $35.8 million in fiscal year 1997. Capital expenditures were $16.5 million, $17.1 million and $9.2 million for the years ended January 31, 1999, 1998 and 1997, respectively. Capital expenditures in each fiscal year were principally for reprographic and computer based production equipment and for leasehold improvements. Cash used for businesses acquired included Executech in fiscal year 1999, Superstar Computing, Total Management Support Services and The Corporate Printing Company in fiscal year 1998 and The Corporate Printing Company and FMC Resource Management Corporation in fiscal year 1997.

    Net cash used in financing activities was $11.8 million in fiscal year 1999 compared to $3.4 million in fiscal year 1998. Net cash used in these fiscal years was primarily a result of repurchases of common stock offset by stock option exercises and repayment of borrowings under the Company's line of credit. Fiscal year 1997 cash provided by financing activities of $20.4 million was primarily a result of the issuance of long-term debt offset by payments on long-term debt and capital lease obligations.

    The Company repurchased 734,000 shares of its common stock for approximately $12.8 million in fiscal year 1999. A cumulative total of 998,000 shares have been repurchased for approximately $15.9 million under the 1,500,000 share repurchase program authorized by the Board of Directors in fiscal year 1997.

    The Company expects capital expenditures in fiscal year 2000 to range from $25 million to $30 million for computer and production equipment and facility expansion and remodeling. Approximately $2 million of this amount is committed at this time.

    The Company has historically been working-capital intensive, but in recent years has increased its needs for technology and production equipment. The Company generally has been able to generate sufficient cash from operations to fund its capital needs.

    At January 31, 1999, the Company's principal internal sources of liquidity were cash and cash equivalents and cash flow provided by operating activities. The Company has available an unsecured bank line of credit expiring on November 29, 1999. The amount available was increased from $40 million to $70 million subsequent to January 31, 1999. Management anticipates that these sources will satisfy its needs for fiscal year 2000.

    Year 2000 Readiness  Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, those programs could cause date-related transaction failures. Merrill Corporation has a Year 2000 project underway that addresses our internal business systems including software, hardware and firmware as well as external business partners, supply chains and customers. Our plan includes the following steps:

Assessment.  We have identified and prioritized systems and individual components of systems that contain potentially date-sensitive computer codes.

Remediation.  We are making decisions on how to make systems and processes Year 2000-ready, then proceeding to make the necessary changes.

Third-party Vendors.  We have surveyed for Year 2000 readiness by material third-party vendors, including external providers of software and hardware products, as well as print producers.

Configuration Management.  We have tracked source code components of an application and changes to the components to manage the remediation process.

Validation/Testing.  We have substantially completed testing of data and have reviewed results to determine that errors were not introduced during the conversion process.

Contingency Planning.  We are formulating contingency plans that address the continuum from minor administrative interruptions to failure of mission critical processes to include alternate material and services suppliers where applicable.

    Our project plan includes initial testing and remediation which was begun last year and continued into the fourth quarter of the fiscal year ended January 31, 1999 (fiscal 1999). The Company completed the surveying of key suppliers in the fourth quarter of fiscal 1999. The Company is currently in the process of developing contingency plans, as necessary, with the initial draft to be completed July 31, 1999.

    We plan to have Merrill's mission-critical internal systems and electronic data links ready by July 31, 1999, and resolve any supplier problems. We have surveyed our major utility companies and have received most response statements. We are in the process of analyzing those statements and following up, where needed, for clarity.

    A master project plan has been developed and a Steering Committee, chartered by the Board of Directors, meets regularly to monitor the plan and address issues. The project has progressed through the system assessment stage into the remediation stage where programming changes are being made to major business and production systems. The Company believes that the project is currently on schedule.

    The Company estimates that the total cost to identify and remediate Year 2000 problems is approximately $3.0 million. Approximately $1.1 million of these costs have been incurred as of January 31, 1999. These costs are expensed as incurred. These costs are primarily consultant and payroll-related costs for the Company's information technology group and some computer hardware and software package upgrade purchase costs. Such costs do not include normal system upgrades and replacements.

    Detailed system-by-system status for major systems is available on our web site http://www.merrillcorp.com for those interested parties.

    We, of course, do not have control over many Year 2000 problems. The nature of our society and the interconnected systems of government agencies, utilities, businesses and even individuals can affect our ability to provide goods and services to our customers, and by extension could also affect our financial position. We are making every effort to evaluate, correct and test potential problem areas, but ultimately, the resolutions of Year 2000 questions by other entities in our network of relationships could influence us significantly.

Quarterly Stock Price Information

    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 sales 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 2,100 shareholders of record and non-objecting beneficial owners of the Company's common stock at the close of trading on April 15, 1999. The Company paid annualized cash dividends of $.08 per share in fiscal year 1999 and $.07 per share in fiscal year 1998. Total cash dividends approximated $1.3 million and $1.1 million in fiscal years 1999 and 1998, respectively.

Stock Price Per Share		First Quarter	Second Quarter	Third Quarter	Fourth Quarter
FY 1999	High	239/16	243/4	237/8	191/2
	Low	18	20	121/16	123/4
FY 1998	High	14	205/16	241/4	24
	Low	101/4	115/8	171/8	185/32

CONSOLIDATED BALANCE SHEETS

	As of January 31,
(In thousands, except share data)
	1999		1998
ASSETS
Current assets
Cash and cash equivalents	$	23,477	$	2,531
Trade receivables, less allowance for doubtful accounts of $8,126 and $6,992, respectively		102,365		116,721
Work-in-process inventories		12,639		13,686
Other inventories		7,559		7,112
Other current assets		12,253		10,290
Total current assets		158,293		150,340
Property, plant and equipment, net		44,935		41,045
Goodwill, net		49,744		44,437
Other assets		12,973		10,657
Total assets	$	265,945	$	246,479
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt	$	2,210	$	655
Current maturities of capital lease obligations		236		249
Accounts payable		29,640		29,142
Accrued expenses		44,642		41,033
Total current liabilities		76,728		71,079
Long-term debt, net of current maturities		38,110		40,225
Capital lease obligations, net of current maturities		1,375		1,616
Other liabilities		8,581		7,884
Total liabilities		124,794		120,804
Commitments and contingencies (Notes 3 and 5)
Shareholders' equity
Common stock, $.01 par value: 25,000,000 shares authorized; 15,823,155 and 16,315,136 shares, respectively, issued and outstanding		158		163
Undesignated stock: 500,000 shares authorized; no shares issued
Additional paid-in capital		12,722		22,401
Retained earnings		128,271		103,111
Total shareholders' equity		141,151		125,675
Total liabilities and shareholders' equity	$	265,945	$	246,479

    The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years Ended January 31,
(In thousands, except share and per share data)
	1999			1998			1997
Revenue	$	509,543		$	459,516		$	353,769
Cost of revenue		330,632			295,390			227,478
Gross profit		178,911			164,126			126,291
Selling, general and administrative expenses		127,705			114,174			89,946
Operating income		51,206			49,952			36,345
Interest expense		(3,961	)		(4,321	)		(4,124	)
Other income, net		426			835			263
Income before provision for income taxes		47,671			46,466			32,484
Provision for income taxes		21,214			20,445			14,645
Net income	$	26,457		$	26,021		$	17,839
Net income per share:
Basic	$	1.63		$	1.61		$	1.13
Diluted	$	1.55		$	1.54		$	1.11
Weighted average number of shares outstanding:
Basic		16,253,148			16,129,341			15,792,161
Diluted		17,020,673			16,906,382			16,117,432

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended January 31,
(In thousands)
	1999			1998			1997
Operating activities
Net income	$	26,457		$	26,021		$	17,839
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		13,066			11,147			10,825
Amortization of intangible assets		4,573			4,286			2,581
Writedown of goodwill		1,180
Provision for losses on trade receivables		3,273			2,064			2,861
Provision for unbillable inventories		67			(1,063	)		2,678
Deferred income taxes		(3,518	)		(2,592	)		(6,555	)
Change in deferred compensation		1,807			1,285			401
Changes in operating assets and liabilities, net of effects from business acquisitions
Trade receivables		11,796			(36,706	)		(18,499	)
Work-in-process inventories		865			12,082			(11,667	)
Other inventories		(333	)		(1,667	)		583
Other current assets		1,301			(1,798	)		(1,718	)
Accounts payable		(348	)		7,336			(3,720	)
Accrued expenses		(3,267	)		11,537			11,365
Income taxes		(1,109	)		(1,059	)		1,530
Net cash provided by operating activities		55,810			30,873			8,504
Investing activities
Purchase of property, plant and equipment		(16,479	)		(17,069	)		(9,216	)
Business acquisitions, net of cash acquired		(4,039	)		(13,179	)		(26,010	)
Other investing activities, net		(2,551	)		137			(564	)
Net cash used in investing activities		(23,069	)		(30,111	)		(35,790	)
Financing activities
Borrowings on notes payable to banks		86,600			104,275			139,050
Repayments on notes payable to banks		(86,600	)		(110,225	)		(139,100	)
Proceeds from issuance of long-term debt								35,000
Principal payments on long-term debt and capital lease obligations		(814	)		(936	)		(15,164	)
Repurchase of common stock		(12,813	)		(3,065	)
Dividends paid		(1,297	)		(1,133	)		(948	)
Exercise of stock options		2,149			5,417			1,045
Tax benefit realized upon exercise of stock options		884			2,192			328
Other equity transactions, net		96			83			162
Net cash (used in) provided by financing activities		(11,795	)		(3,392	)		20,373
Increase (decrease) in cash and cash equivalents		20,946			(2,630	)		(6,913	)
Cash and cash equivalents, beginning of year		2,531			5,161			12,074
Cash and cash equivalents, end of year	$	23,477		$	2,531		$	5,161
Supplemental cash flow disclosures
Income taxes paid	$	24,724		$	22,000		$	19,253
Interest paid		3,599			3,757			2,866

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

	For the Years Ended January 31, 1999, 1998 and 1997
(In thousands, except per share data)	Common Stock			Additional Paid-in Capital			Retained Earnings			Total
Balance, January 31, 1996	$	157		$	16,245		$	61,332		$	77,734
Exercise of stock options		2			1,043						1,045
Tax benefit realized upon exercise of stock options					328						328
Other					162						162
Cash dividends ($.06 per share)								(948	)		(948	)
Net income								17,839			17,839
Balance, January 31, 1997	$	159		$	17,778		$	78,223		$	96,160
Exercise of stock options		7			5,410						5,417
Tax benefit realized upon exercise of stock options					2,192						2,192
Repurchase of common stock		(3	)		(3,062	)					(3,065	)
Other								83			83
Cash dividends ($.07 per share)								(1,133	)		(1,133	)
Net income								26,021			26,021
Balance, January 31, 1998	$	163		$	22,401		$	103,111		$	125,675
Exercise of stock options		2			2,147						2,149
Tax benefit realized upon exercise of stock options					884						884
Repurchase of common stock		(7	)		(12,806	)					(12,813	)
Other					96						96
Cash dividends ($.08 per share)								(1,297	)		(1,297	)
Net income								26,457			26,457
Balance, January 31, 1999	$	158		$	12,722		$	128,271		$	141,151

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

One—Nature of Business and Significant Accounting Policies

    Nature of Business  The Company provides paper and electronic document services consisting of creative design, typesetting, printing, reproduction, distribution, data and information services to financial, legal, investment company, real estate and corporate clients worldwide.

    Use of Estimates  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The most significant areas which require the use of management's estimates relate to the determination of the allowances for doubtful accounts and unbillable inventories.

    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.

    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 a specific job-cost basis. Other inventories consist primarily of paper and printed materials and are valued at the lower of cost or market, with cost determined on a specific job-cost basis.

    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 determined using the straight-line method over the estimated useful lives of the assets which range from three to 30 years. 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 amortized on the straight-line method, principally over 15 years. The Company periodically evaluates the recoverability of unamortized goodwill through measurement of future estimated undiscounted operating unit cash flows.

    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 year and the change during the year 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  The Company has disclosed basic and diluted net income per share for all periods presented in accordance with the Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The dilutive effect on net income per share resulted from the assumed exercise of dilutive stock options outstanding under the Company's stock option plans.

    Stock-Based Compensation  The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation costs for stock options granted to employees are measured as the excess, if any, of the fair value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Such compensation costs, if any, are amortized on a straight-line basis over the underlying option vesting terms. The Company accounts for stock-based compensation to non-employees using the fair value method prescribed by SFAS No. 123, "Accounting for Stock Based Compensation." Compensation costs for stock options granted to non-employees are based on fair value of the option at the date of grant.

    Business Segments  Effective January 31, 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which requires the Company to report information about its operating segments according to the management approach for determining reportable segments. This approach is based on the way management organizes segments within a company for making operating decisions and assessing performance. Segment results have been reported for all periods presented and are described in Note Nine.

Two—Selected Financial Statement Data

	As of January 31,
(In thousands)
	1999			1998
Property, Plant and Equipment, Net
Land	$	1,951		$	1,951
Buildings		12,111			11,965
Equipment		63,068			54,929
Furniture and fixtures		14,157			11,057
Leasehold improvements		18,664			10,479
Construction in progress		1,090			5,609
		111,041			95,990
Less accumulated depreciation and amortization		(66,106	)		(54,945	)
	$	44,935		$	41,045
Goodwill, Net
Goodwill	$	63,462		$	52,913
Less accumulated amortization		(13,718	)		(8,476	)
	$	49,744		$	44,437
Accrued Expenses
Commissions and compensation	$	22,089		$	25,003
Retirement plan		3,970			4,965
Purchase price consideration		7,734			800
Other		10,849			10,265
	$	44,642		$	41,033

Three—Business Acquisitions

    On April 15, 1996, the Company purchased substantially all of the operating assets and assumed certain liabilities of The Corporate Printing Company, Inc. and Affiliated Group (CPC) for approximately $22.6 million in cash. The Company did not purchase any assets relating to CPC's pressroom and shipping businesses. The purchase price was subsequently reduced by approximately $1.7 million in accordance with terms of the purchase agreement. In accordance with the agreement, additional contingent purchase consideration of $8 million was paid in August 1997. The Company also entered into a five-year non-compete agreement with CPC's principal shareholder that requires payments totaling $3.4 million through April 15, 2001. The principal shareholder is also entitled to an additional $500,000 annually through March 31, 2001, as the Company maintained certain business of a specified customer. The acquisition has been accounted for as a purchase.

    On March 28, 1996, the Company purchased all of the outstanding common stock of FMC Resource Management Corporation for $5.4 million in cash and promissory notes for $2.0 million. The agreement calls for additional contingent consideration, not to exceed $4 million, based on annual gross profits of the acquired business through January 31, 2001, as defined in the agreement. Contingent consideration recorded through January 31, 1999, was $2.4 million. The acquisition has been accounted for as a purchase.

    Results of the acquired companies' operations have been included in the Consolidated Statements of Operations from their respective dates of acquisitions. Pro forma (unaudited) results of the Company for the year ended January 31, 1997, as if the acquisitions had been effective at February 1, 1995, are as follows:

(In thousands, except per share data)	For the Year Ended January 31, 1997
Revenue	$	376,647
Net income		17,047
Net income per share—diluted		1.05

    During fiscal year 1999, the Company completed the acquisition of substantially all of the operating assets and liabilities of Executech, Inc. and an affiliated company, World Wide Scan Services, LLC for $3.2 million in cash. The agreement calls for additional consideration totalling approximately $10.0 million through fiscal year 2003. The acquisition has been accounted for as a purchase and is not significant to the financial position or results of operations of the Company.

Four—Financing Arrangements

    Bank Financing  The Company has a revolving credit agreement with a group of banks that provides for an unsecured bank line of credit which expires on November 29, 1999. Subsequent to January 31, 1999, the agreement was amended to increase the amount available for borrowing from $40 million to $70 million. There were no borrowings outstanding under this agreement at January 31, 1999 and 1998. Under the agreement, the Company has the option to borrow at the Agent's reference rate, at 1.0% above the London Interbank Offered Rate (LIBOR) or at 1.0% above a certificate of deposit-based rate, and is required to pay quarterly commitment fees of 0.25% on the unused portion of the line of credit. The weighted average interest rates on borrowings on the line of credit were 8.44%, 8.26% and 7.39% for the years ended 1999, 1998 and 1997, respectively. The revolving credit agreement includes various covenants, including the maintenance of minimum tangible net worth and limitations on the amounts of certain transactions, including payment of dividends.

    Long-Term Debt  Long-term debt consisted of the following:

	As of January 31,
(In thousands)
	1999			1998
Unsecured senior notes, bearing interest at 7.463%, with semi-annual interest only payments through October 2000, at which time annual principal and semi-annual interest payments are due through October 2006. The notes have various covenants, including the maintenance of certain financial ratios and limitations on the amount of certain transactions including the payment of dividends	$	35,000		$	35,000
Industrial development bonds, due in annual installments, including interest ranging from 4.2% to 5.5%, 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 $4,712 at January 31, 1999		3,320			3,380
Unsecured promissory notes payable due in March 1999. The notes bear interest at LIBOR plus 1.0%, adjustable and payable annually. The interest rate at January 31, 1999 and 1998 was 6.8125% and 7.281%, respectively		2,000			2,000
Unsecured promissory note payable in equal annual installments of $500 on December 31 through 1998					500
		40,320			40,880
Less current maturities of long-term debt		(2,210	)		(655	)
	$	38,110		$	40,225

    The aggregate maturities of long-term debt are as follows:

(In thousands)
2000	$	2,210
2001		5,220
2002		5,230
2003		5,240
2004		5,250
Thereafter		17,170
	$	40,320

    Based on quoted market prices for similar issues, the fair value of long-term debt approximated its carrying value at January 31, 1999 and 1998.

Five—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 Company's property under capital leases, which is classified as property, plant and equipment, is as follows:

	As of January 31,
(In thousands)
	1999			1998
Land	$	333		$	333
Building		2,439			2,439
Equipment		389			594
Less accumulated amortization		(1,334	)		(1,366	)
	$	1,827		$	2,000

     The Company also leases office space and equipment under noncancelable operating leases which expire at various dates through October 31, 2014. Rental expense charged to operations was $9.0 million, $8.0 million and $6.0 million for the years ended January 31, 1999, 1998 and 1997, respectively.

    Future minimum rental commitments under noncancelable leases at January 31, 1999, are as follows:

(In thousands)	Capital Leases			Operating Leases
2000	$	392		$	6,697
2001		330			5,737
2002		330			4,645
2003		330			4,349
2004		330			3,751
Thereafter		605			16,317
		2,317		$	41,496
Imputed interest		(706	)
Present value of minimum lease payments		1,611
Less current maturities of capital lease obligations		(236	)
Capital lease obligations, net of current maturities	$	1,375

Six—Income Taxes

    Components of the provision for income taxes are as follows:

	For the Years Ended January 31,
(In thousands)	1999			1998			1997
Current
Federal	$	21,204		$	19,974		$	17,758
State		3,528			3,063			3,442
		24,732			23,037			21,200
Deferred		(3,518	)		(2,592	)		(6,555	)
Provision for income taxes	$	21,214		$	20,445		$	14,645

    Temporary differences comprising the net deferred tax asset recognized in the accompanying Consolidated Balance Sheets are as follows:

	As of January 31,
(In thousands)
	1999		1998
Deferred compensation	$	3,997	$	1,980
Property, plant and equipment		2,359		2,126
Insurance reserves		1,406		1,130
Vacation accrual		1,228		1,085
Allowance for doubtful accounts		1,188		1,349
Goodwill amortization		1,131		433
Inventories		1,038		958
Other, net		1,204		972
Net deferred tax asset	$	13,551	$	10,033

     Management expects that the Company will fully realize the benefits attributable to the net deferred tax asset at January 31, 1999. Accordingly, no valuation allowance has been recorded at January 31, 1999.

    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)
	1999		1998		1997
Provision for federal income taxes at statutory rate	$	16,684	$	16,263	$	11,369
State income taxes, net of federal benefit		1,967		1,646		1,444
Non-deductible business meeting and entertainment expenses		2,003		1,832		1,210
Other		560		704		622
	$	21,214	$	20,445	$	14,645

     Consolidated federal income tax returns filed by the Company have been examined by the Internal Revenue Service through fiscal 1994. The Company's fiscal 1995, 1996 and 1997 federal and certain state income tax returns are presently under audit. Management believes any additional taxes which may ultimately result from these audits or any other state or local agencies' audits would not have a material adverse effect on the Company's consolidated financial position or results of operations.

Seven—Retirement Plan

    On February 1, 1998, the Company combined its defined contribution retirement plan and its 401(k) incentive savings plan. Under the new plan, Company contributions are based on 4% of eligible employee compensation and 100% matching contributions up to a maximum of the first 3% of a participant's 401(k) contribution. Substantially all employees of the Company are covered by the new plan. Related costs of all retirement plans charged to operations were $6.1 million, $5.1 million and $4.0 million for the years ended January 31, 1999, 1998 and 1997, respectively.

Eight—Shareholders' Equity

    Common Stock  In August 1997, the Company's Board of Directors declared a 2-for-1 stock split of the Company's common stock in the form of a 100% stock dividend which was paid on October 15, 1997, to shareholders of record on September 30, 1997. The Consolidated Statements of Changes in Shareholders' Equity and all share and per share amounts have been retroactively restated to reflect the stock split. Also, all information regarding shares outstanding, stock purchase agreements, stock options and stock grants has been retroactively restated to reflect the stock split.

    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. During fiscal year 1997, the Company's Board of Directors approved the repurchase of up to 1,500,000 shares of the Company's common stock. In fiscal year 1999, the Company repurchased 734,000 shares of common stock for approximately $12.8 million. Through January 31, 1999, 998,000 shares of common stock had been repurchased for approximately $15.9 million.

    Earnings Per Share  The denominator used to calculate diluted earnings per share includes the dilutive impact of 767,525, 777,041 and 325,271 stock options for the years ended January 31, 1999, 1998 and 1997, respectively.

    Stock Plans  Under Company-sponsored incentive and stock option plans, 6,506,000 shares of common stock were reserved for the granting of incentive awards to employees in the form of incentive stock options, nonstatutory stock options and restricted stock awards at exercise prices not less than 100% of the fair market value of the Company's common stock on the date of grant. As of January 31, 1999, stock options for 5,342,300 shares and 70,800 restricted stock awards had been granted under the plans, leaving 1,092,900 shares available for future grants.

    Under the Company's 1996 Non-employee Director Plan (the Plan), 400,000 shares of common stock were reserved for granting of non-statutory options and awarding of common stock as partial payment to non-employee directors who serve on the Company's Board of Directors. Non-statutory stock options issued under the Plan are granted at an exercise price not less than 100% of the fair market value of the Company's common stock on the date of grant. Compensation expense is recorded when common stock is awarded as partial payment for the director's annual retainer in an amount approximately equal to the fair market value of the Company's common stock on the date of grant. As of January 31, 1999, non-statutory options for 120,000 shares and 10,863 shares of common stock had been granted under the Plan, leaving 269,137 shares available for future grants.

    In addition to options granted under the plans above, the Company has granted non-qualified options to directors and consultants at prices equal to or exceeding market value at date of grant. Options granted under all Company-sponsored stock plans generally vest and expire over five to seven years.

    A summary of selected information regarding all stock options for the three years ended January 31, 1999, is as follows:

	Number of Shares		Exercise Price Per Share		Weighted Average Exercise Price Per Share
Balance, January 31, 1996	1,854,628		$	2.00-14.88	$	8.46
Granted	1,092,000			8.12-11.96		9.06
Exercised	(152,436	)		3.68-10.38		6.85
Canceled	(106,364	)		8.12-13.25		9.86
Balance, January 31, 1997	2,687,828			2.00-14.88		8.74
Granted	1,129,200			11.19-22.75		13.95
Exercised	(759,400	)		2.00-15.06		7.88
Canceled	(88,200	)		8.13-10.00		8.86
Balance, January 31, 1998	2,969,428			2.00-22.75		10.94
Granted	611,000			18.25-21.38		20.95
Exercised	(239,750	)		2.00-15.06		8.97
Canceled	(70,600	)		8.13-21.38		13.92
Balance, January 31, 1999	3,270,078		$	3.68-22.75	$	12.89

     At January 31, 1999, the weighted average exercise price and remaining life of the stock options are as follows:

Range of exercise prices	$3.68-8.25		$8.50-13.50		$14.75-22.75		Total
Total options outstanding		821,700		1,485,878		962,500		3,270,078
Weighted average exercise price	$	8.06	$	10.94	$	20.00	$	12.89
Weighted average remaining life		3.3 years		3.5 years		4.6 years		3.8 years
Options exercisable		248,400		386,918		128,100		763,418
Weighted average price of exercisable options	$	7.92	$	11.30	$	18.24	$	11.37

    Had the Company used the fair value-based method of accounting for its incentive and stock option plans beginning on February 1, 1995, and charged compensation cost against income, over the vesting period based on the fair value of options at the date of grant, net income and net income per share would have been reduced to the following pro forma amounts:

	For the Years Ended January 31,
(In thousands except per share data)
	1999		1998		1997
Net Income
As reported	$	26,457	$	26,021	$	17,839
Pro forma		24,300		24,541		17,223
Net Income Per Share
As reported—basic	$	1.63	$	1.61	$	1.13
As reported—diluted		1.55		1.54		1.11
Pro forma—basic		1.50		1.52		1.09
Pro forma—diluted		1.43		1.45		1.07

    The pro forma information above includes only stock options granted since fiscal year 1996. Pro forma compensation expense under the fair value-based method of accounting will increase in the future as additional stock option grants will be considered.

    The weighted average grant date fair value of options granted during fiscal years 1999, 1998 and 1997 was $10.32, $6.68 and $4.72, respectively. The weighted average grant date fair value of options was calculated by using the fair value of each option grant, utilizing the Black-Scholes option-pricing model and the following key assumptions:

	For the Years Ended January 31,
	1999		1998		1997
Risk free interest rate	5.50	%	6.50	%	6.87	%
Expected life	5 Years		5 years		6 years
Expected volatility	51.18	%	43.52	%	48.85	%
Expected dividend yield	0.41	%	0.38	%	0.68	%

Nine—Segment and Related Information

    SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," changes the way the Company reports information about its operating segments. The information for fiscal years 1998 and 1997 is also presented.

    The Company's business units have been aggregated into two reportable segments comprising of Specialty Communication Services and Document Services.

    Specialty Communication Services  This segment consists of three business units—Financial Document Services, Investment Company Services and Managed Communications Programs—that print documents and deliver services used in the financial marketplace, including mutual fund and insurance companies and banks, and national organizations. The principal markets for this segment include major metropolitan centers in the world including North America, Europe, Latin America and the Far East. Customers include major investment bankers, corporate officers, mutual fund companies, national and regional real estate networks and other business services.

    Document Services  Document Management Services is the sole business unit reported in this segment. They deliver document management solutions to legal and corporate clients through client-based service centers. These Merrill-managed facilities provide clients with a broad range of value-added document services, including litigation copying and support, imaging, electronic document scanning, storage and retrieval, binding and post-production shipping. The principal markets for this segment are major metropolitan areas in North America. Customers include law firms and large corporations.

    The accounting policies of the reportable segments are the same as those described in Note One of Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on revenue and operating earnings of the respective business units. Intersegment sales and transfers are not significant.

    Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Interest & Other" column includes corporate-related items and, as it relates to income before provision for income taxes, income and expense not allocated to reportable segments.

(In thousands)	Specialty Communication Services		Document Services			Interest & Other			Total
1999
Revenue	$	446,579	$	62,964					$	509,543
Income (loss) before provision for income taxes		52,995		(1,789	)	$	(3,535	)		47,671
Total assets		186,825		25,966			53,154			265,945
1998
Revenue	$	405,742	$	53,774					$	459,516
Income (loss) before provision for income taxes		57,276		(7,324	)	$	(3,486	)		46,466
Total assets		205,200		16,530			24,749			246,479
1997
Revenue	$	314,187	$	39,582					$	353,769
Income (loss) before provision for income taxes		45,555		(9,210	)	$	(3,861	)		32,484
Total assets		167,043		11,729			23,225			201,997

Ten—Quarterly Data (Unaudited)

    The following is a summary of unaudited quarterly data for the years ended January 31, 1999 and 1998:

(In thousands except per share data)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
1999 Revenue	$	123,514	$	148,458	$	119,759	$	117,812	$	509,543
Gross profit		48,358		53,974		39,100		37,479		178,911
Net income		8,012		8,706		6,488		3,251		26,457
Net income per share—basic		.49		.53		.40		.20		1.63
Net income per share—diluted		.47		.50		.38		.20		1.55
Dividends declared per share		.02		.02		.02		.02		.08
1998 Revenue	$	109,859	$	115,601	$	112,091	$	121,965	$	459,516
Gross profit		43,585		41,066		39,374		40,101		164,126
Net income		7,754		6,312		5,707		6,248		26,021
Net income per share—basic		.49		.39		.35		.38		1.61
Net income per share—diluted		.47		.38		.33		.36		1.54
Dividends declared per share		.015		.015		.02		.02		.07

     For fiscal year 1999, the summations of quarterly net income per share --basic does not equate to the calculation for the year as quarterly calculations are performed on a discrete basis.

Eleven—Subsequent Event

    On April 14, 1999, the Company purchased substantially all assets and assumed certain liabilities of Daniels Printing, Limited Partnership for $45 million in cash plus $10.6 million in payoff of existing term debt and line of credit plus the assumption of $7.7 million of certain ordinary course liabilities. The acquisition will be accounted for as a purchase. The acquisition was financed using the Company's line of credit and available operating cash.

Summary of Operating and Financial Data

	For the Years Ended January 31,
(In thousands, except employee, per share data and ratio)
	1999			1998			1997			1996			1995			1994
Operating Results
Revenue	$	509,543		$	459,516		$	353,769		$	245,306		$	236,878		$	181,584
Costs and expenses		461,872			413,050			321,285			226,600			215,724			159,593
Income before provision for income taxes		47,671			46,466			32,484			18,706			21,154			21,991
Provision for income taxes		21,214			20,445			14,645			8,044			9,171			8,820
Net income	$	26,457		$	26,021		$	17,839		$	10,662		$	11,983		$	13,348
Per Common Share
Net income—basic	$	1.63		$	1.61		$	1.13		$	.69		$	.79		$	.90
Net income—diluted	$	1.55		$	1.54		$	1.11		$	.68		$	.76		$	.86
Cash dividends declared	$	.08		$	.07		$	.06		$	.06		$	.06		$	.05
Book value	$	8.92		$	7.70		$	6.06		$	4.95		$	4.35		$	3.58
Financial Data/Other
Working capital	$	81,565		$	79,261		$	69,220		$	39,379		$	31,523		$	22,528
Current ratio		2.1			2.1			2.2			2.0			2.0			1.6
Total assets	$	265,945		$	246,479		$	201,997		$	125,521		$	106,470		$	100,123
Shareholders' equity	$	141,151		$	125,675		$	96,160		$	77,734		$	66,061		$	53,597
Return on average shareholders' equity		19.8	%		23.5	%		20.5	%		14.8	%		20.0	%		28.7	%
Long-term obligations	$	39,485		$	41,841		$	42,729		$	6,454		$	7,522		$	8,656
Long-term obligations to capitalization		21.9	%		25.0	%		30.8	%		7.7	%		10.2	%		13.9	%
Number of employees		3,385			3,297			2,539			1,932			1,739			1,601

REPORT OF INDEPENDENT ACCOUNTANTS

To the shareholders and board of directors of Merrill Corporation:

    In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Merrill Corporation and Subsidiaries as of January 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Merrill Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

March 29, 1999
Saint Paul, Minnesota

QuickLinks

CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY