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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1994
---------------------------------------------------
Commission file number 1-5406
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HOUGHTON MIFFLIN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1456030
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
222 Berkeley St., Boston 02116-3764
- -------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, (617) 351-5000
including area code ------------------------------------
Securities registered pursuant
to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------- ------------------------------------
Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to None
Section 12(g) of the Act: ------------------------------------
(Title of Class)
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
-----
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant was approximately $593,167,198 as of February
28, 1995.
The registrant had outstanding 14,444,586 shares of common stock (exclusive of
Treasury shares) and 14,444,586 Preferred Stock Purchase Rights as of February
28, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy Statement") to
be filed with the Securities and Exchange Commission relative to the Company's
1995 Annual Meeting of Stockholders are incorporated into Part III.
1 of 69
Exhibit Index Pages 59 - 61
HOUGHTON MIFFLIN COMPANY
TABLE OF CONTENTS
FORM 10-K
Part I
Item 1. Business pages 3 - 5
Item 2. Properties pages 6 - 7
Item 3. Legal Proceedings page 8
Item 4. Submission of Matters to a Vote of Security Holders pages 8 - 10
Part II
Item 5. Market for the Company's Common
Stock and Related Stockholder Matters page 11
Item 6. Selected Financial Data page 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations pages 13 - 23
Item 8. Consolidated Financial Statements and
Supplementary Data page 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure page 57
Part III
Item 10. Directors and Executive Officers of the Company page 57
Item 11. Executive Compensation page 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management page 57
Item 13. Certain Relationships and Related Transactions page 57
Part IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form
8-K
Index to Consolidated Financial Statements and Financial Schedules page 57
Financial Statement Schedule page 58
Index to Exhibits pages 59 - 61
Signatures page 69
2
PART I
ITEM 1. BUSINESS
- ------- --------
(a) General development of business
-------------------------------
Houghton Mifflin Company (the "Company") was incorporated in 1908
in Massachusetts as the successor to a partnership formed in 1880.
Antecedents of the partnership date back to 1832. The Company has
two significant subsidiaries: McDougal Littell Inc., Evanston,
Illinois, publishes educational materials for the secondary school
market; and The Riverside Publishing Company, Chicago, Illinois,
publishes assessment materials for the educational and clinical
testing markets. The Company's principal business is publishing,
and its operations are classified into two industry segments: (1)
textbooks and other educational materials and services for the
school and college markets and (2) general publishing, including
fiction, nonfiction, children's books, and dictionary and reference
materials in a variety of formats and media. In this description of
the Company's business, all subsidiaries are treated as part of the
Company.
In March 1994, the Company recorded special charges related to
corporate and divisional staff reductions and the consolidation of
Company leased facilities.
In March 1994, the Company's former Software Division successfully
completed a public offering. The Company's equity interest in the
successor company, InfoSoft International, Inc. ("InfoSoft") is
approximately 40%.
In March 1994, the Company completed the acquisition of McDougal,
Littell & Company, a leading secondary school textbook publisher.
The $130.3 million net cash cost was financed through a combination
of debt and operating cash. The acquisition has been accounted for
as a purchase and, accordingly, the operating results from the date
of acquisition have been included in the educational publishing
segment of the Company's consolidated financial statements.
(b) Financial information about industry segments
---------------------------------------------
Financial information about the Company's industry segments is set
forth in Note 16 to the Consolidated Financial Statements (Part II,
Item 8) under the heading "Segment Information" on page 55 herein,
and in the schedule "Five-Year Financial Summary" on page 12
herein.
(c) Narrative description of business
---------------------------------
For the Company, the business of publishing is the shaping of
ideas, information, and instructional methods into various media
that satisfy the lifelong needs of people to learn, gain
proficiency, and be entertained. The Company seeks out, selects,
and generates worthwhile concepts and then enhances their value and
accessibility through creative development, design, production
(performed by outside suppliers), marketing, sales, and
distribution. While the Company's works have been published
principally in the form of printed materials, many programs or
works are published in other formats. These include CD-ROM,
computer software, laser discs, and other multi-media products.
3
Textbooks and other educational materials and services
------------------------------------------------------
Classified in this industry segment are textbooks, materials for
measuring achievement and aptitude, clinical/special needs
assessment testing products, computer-assisted as well as computer-
managed instructional programs on all educational levels, new
computer tools and operating systems for the college market, and a
computer-based career and college guidance information system in
versions for both junior and senior high school students. The
principal markets in this segment are elementary and secondary
schools and two- and four-year colleges. Major corporate
distribution and/or sales offices exist in Illinois and Texas. The
Company is required by certain states to use state textbook
depositories for the distribution of educational materials.
Textbooks and materials for the elementary market are sold by the
School Division while sales for the high school market are made by
McDougal Littell Inc. The School Division, McDougal Littell Inc.,
and the College Division have their own sales forces, as does The
Riverside Publishing Company.
General publishing
------------------
Classified in this industry segment are trade books of fiction and
nonfiction for adults and children, dictionaries and other
reference works; and a new line of multimedia products for the
consumer market, which will include children, reference and adult
hobby titles. The principal markets for trade books and reference
works in this segment are retail stores. The sales volume for trade
books and reference works may vary significantly from year to year
based on the success of one or more titles. In addition, book
reprint rights are sold to paperback publishers, book clubs, and
publishers in the U.S. and internationally, and reference and
dictionary materials are sold to schools, colleges, office supply
distributors, and businesses. Major corporate distribution and/or
sales offices are maintained in Massachusetts and New York. The
Trade & Reference Division's publications are sold by its own sales
force, as well as the Company's other divisional sales forces,
commission agents, and wholesalers. On March 8, 1994, the Company
transferred the assets, businesses and employees of its Software
Division to InfoSoft International Inc., a newly formed company
which completed a public stock offering on March 8, 1994. The
Company has retained an equity interest in InfoSoft of
approximately 40%. On January 5, 1995, the Company announced that
it was outsourcing its trade distribution operations to Publishers
Resources Inc., beginning June 1, 1995, and intended to close its
Burlington, Massachusetts office and warehouse facility.
Company business as a whole
---------------------------
The availability of printing and binding capacity and raw materials
continued at satisfactory levels throughout the year. However, the
availability of adequate high quality paper supplies has tightened.
Although the Company believes it has sufficient contractual
coverage for most paper grade requirements, the overall cost of
paper is expected to increase significantly in 1995. The Company is
not dependent upon any one supplier. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" set
forth on page 13 herein.
As is typical of publishers selling predominately to schools and
colleges, sales are seasonal. Third-quarter results are material to
full-year performance. In recent years the Company has realized
more than 40 percent of its net sales and substantially all of its
net income during the third quarter. The acquisition of McDougal,
Littell & Company has not changed the seasonal nature of the
Company's net sales. See "Summary of Quarterly Results of
Operations (unaudited)" for the two-year period ended December 31,
1994, set forth on page 56 herein.
Sales of educational materials are cyclical as a result of
purchasing patterns that are based on both the academic year and
the textbook adoption process. Approximately one-half of the United
States school population adopts new elementary and secondary school
textbooks on a statewide basis for a particular subject every five
to seven years. Although 1994 did not offer an increase in the
number of states adopting elementary and secondary school programs,
the textbook development spending increased in 1994 in anticipation
of sales opportunities for 1995
4
and 1996. The loss of a single customer or a few customers would
not have a materially adverse effect on the business of the
Company, but as discussed above, the timing of adoption
opportunities may affect year-to-year revenue performance.
The Company's products are sold in highly competitive markets. In
the elementary and high school field, the Company competes with
approximately 30 other publishers; in the college book market with
approximately 25 other publishers; in the general book market with
approximately 200 other publishers of which 20 are significant; in
the children's book market with approximately 50 other publishers;
and in the markets for its reference and dictionary works with
approximately 10 other publishers. The major competitive factors in
the industry are believed to be quality of product and customer
service. The periodic consolidation within the publishing industry
continued during the fiscal year as a number of publication lists
and some publishing units were purchased by other companies.
On December 31, 1994, the Company employed approximately 2,023
people. Included are approximately 83 members of a collective
bargaining unit. These employees will leave the Company in
connection with the outsourcing of trade distribution operations as
discussed in "General Publishing."
The Company anticipates no substantial expenditures for compliance
with environmental laws or regulations.
(d) Financial information about foreign and export sales
----------------------------------------------------
Operations in foreign countries were substantially reduced in 1992
with the sale of the Gollancz publishing and distribution
businesses in the United Kingdom and school publications of the
Company's Canadian subsidiary. Export sales are not at present
significant to either of the Company's two business segments.
5
ITEM 2. PROPERTIES
- ------- ----------
The Company's principal executive office is currently located at
222 Berkeley Street, Boston, Massachusetts.
The following table describes the approximate building areas and
principal uses of the significant operating properties of the
Company and its subsidiaries at December 31, 1994. The Company
believes that its owned and leased properties are suitable and
adequate for its present and anticipated business needs,
satisfactory for the uses to which each is put, and in general
fully utilized.
APPROXIMATE AREA PRINCIPAL USE SEGMENT USED
LOCATION IN SQUARE FEET OF SPACE BY
- -------- ---------------- ------------- ------------
OWNED PREMISES
- --------------
Geneva, Illinois 486,000 Offices & Textbooks and other
warehouse educational materials
and services
Burlington, 241,000 Offices & (1) General publishing and
Massachusetts warehouse (2) Corporate support
Palo Alto, California 18,000 Offices Textbooks and other
educational
materials
sales office
LEASED PREMISES
- ---------------
Boston, Massachusetts
222 Berkeley Street 246,000 Executive & (1) Textbooks and other
business offices educational materials and
services, (2) General
publishing, and
(3) Corporate headquarters
Dallas, Texas 70,000 Offices & Textbooks and other
warehouse educational materials and
services
Chicago, Illinois 53,000 Offices Textbooks and other
educational materials
and services
Evanston, Illinois 48,000 Offices Textbooks and other
educational materials
sales office
6
APPROXIMATE AREA PRINCIPAL USE SEGMENT USED
LOCATION IN SQUARE FEET OF SPACE BY
- --------- ---------------- ------------- ------------
Atlanta, Georgia 31,000 Offices & Textbooks and other
warehouse educational materials
sales office
New York, New York 30,000 Offices General publishing
Princeton, New Jersey 5,700 Offices Textbooks and other
educational materials
sales office
The years of expiration on leased premises are as follows:
222 Berkeley, Boston 2007
Dallas, Texas 2005
Chicago, Illinois 1996
Evanston, Illinois 2004
Atlanta, Georgia 1999
New York, New York 2004
Princeton, New Jersey 1999
Idle facilities held for sale:
St. Charles, Illinois 120,000 sq. ft. Formerly used as office and
warehouse for the acquired
McDougal Littell Inc.
7
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of the Company's security
holders during the last quarter of its fiscal year ended December
31, 1994.
Executive Officers of the Company
- ---------------------------------
Other
Office positions
Age at held with the
Name 2/28/95 Office since Company
- ---- ------- ---------------- ------ ----------
Nader F. Darehshori 58 Chairman, President, and 1991 Director
Chief Executive Officer
Margaret M. Doherty 56 Senior Vice President 1994 -
Elizabeth L. Hacking 53 Senior Vice President, 1993 -
Strategic Development
Stephen O. Jaeger* 50 Executive Vice President, 1991 Director
Chief Financial Officer,
and Treasurer
Joseph A. Kanon 48 Executive Vice President, 1991 -
Trade and Reference Publishing
Michael J. Lindgren** 37 Vice President, Controller, and Treasurer 1995 -
Vice President, Controller 1994 -
Julie A. McGee 52 Executive Vice President, 1995 -
President, McDougal Littell Inc.
John H. Oswald 45 Executive Vice President, 1993 -
President, The Riverside Publishing 1992
Company
Gary L. Smith 50 Senior Vice President, 1991 -
Administration
June Smith 51 Executive Vice President, 1994 -
College Publishing
John E. Tyler 54 Senior Vice President, 1993 -
Chief Technology Officer
Paul D. Weaver 52 Senior Vice President, 1989 -
Clerk, Secretary, and General Counsel
William J. Wisneski 48 Executive Vice President, 1992 -
School Publishing
* Resigned officer positions effective March 15, 1995.
** Became Treasurer effective March 15, 1995
8
Executive officers are elected by the Board of Directors to serve
annual terms.
Below is a brief account of the business experience of each
executive officer during the past five years. Each executive
officer has been employed by the Company for more than five years
with the exception of Mr. Lindgren, Ms. McGee, Mr. Oswald, Ms.
Smith and Mr. Tyler.
Nader F. Darehshori
1991 - Chairman, President, and Chief Executive Officer
1990 - Chairman and Chief Executive Officer
Margaret L. Doherty
1994 - Senior Vice President
1990 - Vice President, Personnel
Elizabeth L. Hacking
1993 - Senior Vice President, Strategic Development
1993 - Vice President, Strategic Development
1992 - Vice President, Higher Education Planning, Research, and
Development, College Division
1990 - Vice President, College Division
Stephen O. Jaeger
1991 - Executive Vice President, Chief Financial Officer, and
Treasurer
1990 - Senior Vice President, Chief Financial Officer, and
Treasurer
Joseph A. Kanon
1991 - Executive Vice President, Trade and Reference Publishing
1990 - Senior Vice President, Trade & Reference Division
Michael J. Lindgren
1995 - Vice President, Controller, and Treasurer
1994 - Vice President, Controller
1994 - Divisional Vice President, Controller
1993 - Director of Planning & Analysis, ITT Sheraton
1992 - Director of Accounting and Management Reporting, ITT
Sheraton
1990 - Manager of Financial Controls, ITT Corporation
(ITT Sheraton is a hotel and real estate subsidiary of ITT
Corporation, primarily an insurance and financial services
holding company not affiliated with the Company)
Julie A. McGee
1995 - Executive Vice President
1994 - Senior Vice President, Houghton Mifflin Company
1994 - President, McDougal Littell/Houghton Mifflin Inc.*
1991 - President, McDougal, Littell & Company
1990 - Vice President and Editor-in-Chief, McDougal, Littell &
Company
(McDougal, Littell & Company was a publisher not affiliated
with the Company prior to its acquisition on March 1, 1994.)
9
John H. Oswald
1993 - Executive Vice President, Houghton Mifflin Company
1992 - President, The Riverside Publishing Company*
1992 - Vice President, Houghton Mifflin Company
1991 - Executive Vice President for Sales, Customer Service, and
Operations for
The Psychological Corporation of Harcourt Brace Jovanovich,
Inc. (a publisher not affiliated with the Company)
Gary L. Smith
1991 - Senior Vice President, Administration
1990 - Vice President, Corporate Counsel, Assistant Clerk
June Smith
1994 - Executive Vice President
1992 - Editorial Director, College
1991 - Editorial Director and Publisher - College Division of
McGraw-Hill, Inc. (a publisher not affiliated with the
Company)
John E. Tyler
1993 - Senior Vice President, Chief Technology Officer
1992 - Vice President, Information Technology, Seattle Times
(a publisher not affiliated with the Company)
Paul D. Weaver
1989 - Senior Vice President, Clerk, Secretary, and General Counsel
William J. Wisneski
1992 - Executive Vice President, School Publishing
1991 - Senior Vice President; President, The Riverside Publishing
Company*
1990 - Vice President; President, The Riverside Publishing Company*
* A subsidiary of the Company
10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
- ------- -------------------------------------------------------------
MATTERS
-------
The Company's common stock is traded on the New York Stock
Exchange. As of February 28, 1995, the approximate number of
holders of common stock of the Company was 4,512.
Information about stock prices and dividends paid per share is set
forth under the heading "Stock Prices and Dividends Paid Per Share"
presented below:
HOUGHTON MIFFLIN COMPANY
STOCK PRICES AND DIVIDENDS PAID PER SHARE
(Unaudited)
- ------------------------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------------
Dividend Dividend
High Low Paid High Low Paid
- ------------------------------------------------------------------------------------------------------
First quarter $53.00 $40.63 $.215 $43.00 $37.63 $.205
Second quarter 48.25 38.88 .215 41.25 36.38 .205
Third quarter 46.13 36.13 .215 45.75 40.75 .205
Fourth quarter 47.88 40.63 .225 50.38 42.75 .215
- ------------------------------------------------------------------------------------------------------
Year $.870 $.830
- ------------------------------------------------------------------------------------------------------
11
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The response to this item is set forth below under the heading
"Five-Year Financial Summary."
FIVE-YEAR FINANCIAL SUMMARY
(Unaudited, in thousands of dollars except per share amounts)
Years ended December 31, 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales $483,076 $462,969 $454,706 $466,801 $421,600
Operating income 53,464 51,370 44,310 44,862 34,248
Loss on disposition of
foreign publishing operations - - (13,527) (710) -
Gain on sale of interest in
Software Division 36,212 - - - -
Income before taxes, extraordinary item
and accounting changes 85,140 49,023 28,444 40,446 31,257
Cumulative effect of accounting
changes - - (14,657) - -
Net income 51,191 30,371 4,414 25,077 18,035
Net income per share of common
stock 3.70 2.20 0.31 1.75 1.27
Dividends paid per share $ 0.87 $ 0.83 $ 0.79 $ 0.75 $ 0.71
Average number of shares
available for earnings per share
(in thousands) 13,822 13,823 14,029 14,314 14,255
==================================================================================================================================
From Balance Sheet
Total assets $497,266 $398,086 $371,421 $381,780 $366,496
Long-term debt 99,445 26,438 52,608 52,975 52,985
Working capital 145,391 156,186 149,837 176,279 158,286
Current ratio 2.39 to 1 2.40 to 1 2.79 to 1 2.91 to 1 2.71 to 1
Stockholders' equity 244,473 224,082 199,839 223,181 209,504
Stockholders' equity
per share $ 17.74 $ 16.15 $ 14.52 $ 15.63 $ 14.69
==================================================================================================================================
From Statement of Cash Flows
Dividends paid $ 12,026 $ 11,475 $ 11,037 $ 10,746 $10,121
Capital expenditures:
Book plates 25,242 25,796 28,459 33,759 34,324
Other fixed assets 8,478 10,728 9,727 7,278 5,907
- ----------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 33,720 $ 36,524 $ 38,186 $ 41,037 $ 40,231
==================================================================================================================================
Net Sales - Classes of Similar Products
Textbooks and other educational materials
and services
School publishing $303,370 $267,106 $272,289 $291,896 $253,898
College publishing 84,057 90,092 81,212 78,336 75,610
- ----------------------------------------------------------------------------------------------------------------------------------
387,427 357,198 353,501 370,232 329,508
General publishing 95,649 105,771 101,205 96,569 92,092
- ----------------------------------------------------------------------------------------------------------------------------------
$483,076 $462,969 $454,706 $466,801 $421,600
==================================================================================================================================
In 1994, the Company recognized an after-tax gain of $22.8 million, or $1.65 per
share, in connection with the public offering of InfoSoft International, Inc.,
the successor company to the former Software Division.
In 1994, the Company acquired the net assets of McDougal, Littell & Company in a
purchase transaction.
In 1992, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting of Postretirement Benefits Other Than
Pensions" and No.109, "Accounting for Income Taxes."
In the fourth quarter of 1992, the Company recognized the loss associated with
the sale of certain foreign operations. Note 8 to the Consolidated Financial
Statements further describes the transactions.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS, 1994 VERSUS 1993
On March 1, 1994 the Company acquired McDougal, Littell & Company ("McDougal")
for a net cash consideration of $130.3 million. The acquisition has been
accounted for as a purchase and, accordingly, the operating results of McDougal
are included in the Company's consolidated financial statements from the date of
acquisition.
Net sales increased 4.3% in 1994 to $483.1 million from 1993 net sales of $463.0
million. The educational publishing segment's net sales increased by $30.2
million, or 8.5%, in 1994. Net sales from McDougal of $62.4 million more than
offset a net sales decrease from other educational publishing segment
components.
General publishing segment net sales decreased $10.1 million, or 9.6%, from
1993, reflecting the disposition of the Company's former Software Division which
successfully completed a public offering in March 1994. In connection with the
public offering, the Company recognized a net gain of $22.8 million, or $1.65
per share. General publishing segment sales were up slightly in comparison to
1993, excluding the former Software Division's sales results for both years.
The Company's operating income for 1994 was $53.5 million, a 4.1% increase from
$51.4 million in 1993. The $53.5 million reported for 1994 and the $51.4 million
for 1993 included $6.5 million and $10.6 million of special charges that were
recognized in the first quarter of 1994 and the second quarter of 1993,
respectively. The 1994 special charges included $3.5 million for corporate and
divisional staff reductions, $2.0 million for consolidation of Company owned and
leased facilities, and $1.0 million for disposal of assets. The 1993 charges
included $7.5 million for the realignment of corporate and divisional
responsibilities and workforce reductions, $.9 million for the sale of a
California warehouse facility and related costs, and $2.2 million to relocate
and consolidate Boston area operations in a new Boston
13
headquarters location. The after-tax cost of the $6.5 million and $10.6 million
in special charges was $4.0 million, or $.29 per share, and $6.6 million, or
$.48 per share, for 1994 and 1993, respectively.
The educational publishing segment's operating income decreased by $.7 million,
or 1%, on a sales increase of 8.5%. The general publishing segment's income from
ongoing operations decreased from $8.3 million in 1993 to $7.3 million in 1994.
The Company's general corporate expenses declined from $18.9 million in 1993 to
$15.6 million in 1994, a decrease of more than 17%. This reduction is due in
part to the restructuring actions taken in 1994 and prior years.
Consolidated net income in 1994 was $51.2 million, or $3.70 per share. Included
are the previously discussed after-tax gain recognized in connection with the
public offering of the Company's former Software Division of $22.8 million, or
$1.65 per share, the after-tax special charges of $4.0 million, or $.29 per
share, and an extraordinary item of $1.2 million, or $.09 per share, related to
the early extinguishment of long-term debt. Consolidated net income in 1993 was
$2.20 per share, including the previously discussed after-tax special charges of
$6.6 million, or $.48 per share, and an extraordinary item of $1.0 million, or
$.07 per share, related to the early extinguishment of long-term debt.
Net interest expense increased nearly $4.2 million in 1994 primarily due to the
debt service requirements of the $100 million of 7.125% Notes issued in April
1994.
The Company's effective tax rate for 1994 was approximately 38% compared with
36% for 1993. The increase over the 1993 effective tax rate reflects the impact
of federal tax law changes enacted in 1993 which became effective on January 1,
1994, and the intangible asset amortization expense related to the McDougal
acquisition.
14
TEXTBOOKS AND OTHER EDUCATIONAL MATERIALS
The educational publishing segment's net sales of $387.4 million in 1994 were
$30.2 million higher than the $357.2 million reported in 1993, an increase of
8.5 %. Net sales of $62.4 million from McDougal, acquired on March 1, 1994, more
than offset a net sales decrease from other educational publishing segment
components. School Division sales, exclusive of McDougal, decreased 14%, or
$30.4 million from last year mainly due to the significant state adoption
opportunities available in 1993 for elementary school reading products. The
decrease in School Division revenues in 1994 was partially offset by open-
territory sales for reading and the Company's new elementary school mathematics
program. The Riverside Publishing Company ("Riverside") reported a sales
increase of 6.9% over 1993. The educational testing market continues to shift
from norm-referenced standardized tests to customized criterion-referenced
tests. This change was anticipated by Riverside and its publishing plan included
the development of criterion-referenced tests and diversification of its product
base to include more clinical and guidance assessment products. The College
Division, which continues to compete in a difficult industry, reported a 6.7%
decrease in net sales from 1993 primarily due to more favorable returns
experience in 1993. Gross sales of College products increased slightly in 1994.
Operating income for the educational publishing segment decreased $.7 million to
$68.2 million from $68.9 million in 1993. The resulting operating margin for
1994 was 17.6% as compared with 19.3% in 1993. Selling and administrative costs
increased approximately 17%, reflecting the incremental McDougal costs and 1995
adoption opportunities. Excluding the effect of McDougal, the educational
publishing segment's selling and administrative expenses would have declined
approximately $1.8 million. This decrease is due in large part to the
restructuring actions taken. The decrease in the segment's operating income and
margin also reflects a 36% decrease in the College Division's operating income.
15
GENERAL PUBLISHING
Compared with 1993's net sales from ongoing operations, adjusted for the sale of
the former Software Division, the general publishing segment's net sales
increased $1.6 million, or 1.7%, to $93.8 million. Net sales of reference
products increased 4%, juvenile sales were flat, and adult trade sales were down
6%. The division's distribution revenues increased sharply over 1993 from $4.4
million to $7.3 million.
The general publishing segment's income from ongoing operations was $7.3 million
compared to $8.3 million in 1993. The decrease in operating income reflects
higher manufacturing and selling costs with some offset from distribution
income. As in prior years, there were no material charges to operating income
for royalty advances to authors.
RESULTS OF OPERATIONS, 1993 VERSUS 1992
Net sales increased 5.1% in 1993 to $463.0 million from adjusted 1992 net sales
from continuing operations of $440.4 million. The pro forma adjustment to 1992
net sales amounted to $14.3 million, representing net sales prior to the time
certain foreign publishing operations were sold late in 1992. The educational
publishing segment's net sales increased 2.5%. A 6% decline in School Division
sales was more than offset by increased sales from the College Division and
Riverside. General publishing segment net sales increased 15.2%.
The Company's operating income for 1993 was $51.4 million, a 15.9% increase from
$44.3 million in 1992. However, the $51.4 million reported for 1993 included the
previously discussed special charges of $10.6 million that were recognized in
the second quarter. The after-tax cost of the $10.6 million in special charges
was $6.6 million, or $.48 per share. The Company's operating income for 1992
included losses of $2.5 million that were incurred by foreign publishing
operations prior to their sale in the fourth quarter of 1992.
16
The educational publishing segment's income from ongoing operations increased by
$11.4 million, or nearly 20%, on a sales increase of 2.5%. Although the School
Division's sales decreased in the year, operating income before special charges
was up nearly 10%. This increase was due in part to 1993 restructuring
activities. The College Division and Riverside also contributed significant
increases in net sales and operating income.
The general publishing segment's income from ongoing operations increased over
30% to $11.9 million in 1993 on a net sales increase of 15.2%. The segment's
two operating units both reported increased sales and higher margins for the
year.
The Company's general corporate expenses declined from $19.8 million in 1992 to
$18.9 million in 1993, a decrease of 4.8%. This reduction was due in part to the
restructuring actions announced in mid-1993 and represented more than 10% of the
increase in 1993's operating income.
Consolidated net income in 1993 was $2.20 per share, including the previously
discussed after-tax special charges of $6.6 million, or $.48 per share, and an
extraordinary after-tax charge of $1.0 million, or $.07 per share, related to
the early extinguishment of debt. Net income in 1992 was $4.4 million, or $.31
per share, including special charges and accounting changes totaling $22.4
million, or $1.60 per share. The after-tax special charges in 1992 amounted to
$7.0 million, or $.50 per share and represented the transaction and other costs
incurred with the sale of the Gollancz publishing and distribution operations
and Canadian school publications. The accounting changes were for postretirement
benefits and income taxes. The cumulative effect of the accounting changes plus
incremental expense for the year resulted in an after-tax charge of $15.5
million, or $1.10 per share.
Net interest expense was relatively unchanged from 1992's $2.3 million,
reflecting a decrease in cash available for investment, the mid-June 1993
refinancing of $25 million in senior notes and the elimination of the Gollancz
indebtedness.
17
The Company's effective tax rate for 1993 was 36% as compared with 33% for 1992.
The lower 1992 rate reflected the realization of tax benefits for the
accumulated operating losses of the Gollancz units as well as the write-off of
the Company's Gollancz investments. The 36% effective rate for 1993 included a
benefit from the utilization of Canadian tax losses. The federal tax law changes
enacted in 1993 did not materially affect income tax expense or the effective
rate for 1993. However, the tax law changes included a number of provisions
deferred until 1994, which, when combined with the 1% increase in the federal
tax rate, added an estimated 1.5% to the Company's effective tax rate.
TEXTBOOKS AND OTHER EDUCATIONAL MATERIALS
The educational publishing segment's net sales of $357.2 million were $8.6
million higher than the $348.6 million reported for 1992, an increase of 2.5%.
School publishing was flat with 1992 as Riverside's sales gain of better than
20% in the year was essentially offset by the School Division, where sales
declined 6%. Sales of elementary school products were up due to a better than
20% increase in sales of reading products. This gain was more than offset by
lower sales of other elementary school products and a decline of approximately
30% in the sale of secondary school programs due to reduced adoption
opportunities. The School Division's secondary school sales were nearly $60
million in 1992, a strong adoption year. Riverside's sales growth reflected the
success of its 1993 editions of the Iowa Tests of Basic Skills(R), Iowa Tests of
Educational Development(R), Tests of Achievement and Proficiency, (TM) and
Cognitive Abilities Test, (TM) as well as sales of its clinical test products.
The clinical test lists was substantially expanded with the DLM test products
acquired in October 1992. The College Division net sales increase for 1993 was
nearly $9 million, or 10.9%. Approximately half of that gain related to the 1992
acquisition of "Becoming a Master Student." Favorable returns experience also
benefited the year's net sales.
Operating income for the educational publishing segment's ongoing operations
increased $11.4 million to $68.9 million in 1993 from $57.6 million in 1992. The
operating margin increased to 19.3% from 16.5% in 1992. Operating income
benefited from lower selling and administrative expenses, which decreased in
part due to savings from the restructuring actions announced in the second
quarter of 1993. Editorial costs increased approximately 8% reflecting
preparation for favorable school textbook adoption opportunities in 1995 and
subsequent years, as well as expanded publishing efforts in college and testing
publishing. A
18
decrease in plate amortization expense in 1993 was offset by higher
manufacturing and royalty costs.
GENERAL PUBLISHING
Compared with 1992's net sales from ongoing operations, the general publishing
segment's net sales increased $13.9 million, or 15.2%, to $105.8 million. The
Trade & Reference Division's net sales increased 12.5%. Net sales of reference
products increased significantly, led by the line of Insight Guides added in
1993, the fifth edition of the "Columbia Encyclopedia" and the third edition of
"The American Heritage College Dictionary". Juvenile and adult trade sales were
flat with 1992, although adult trade net sales included the highly successful
"The Hidden Life of Dogs", which spent nineteen weeks on "The New York Times"
bestseller list in 1993. The Software Division's net sales increased more than
20%, with revenue from new licensing arrangements and product royalties
contributing. The Company's former Software Division accounted for nearly 13%
and 30% of the segment's net sales and operating income in 1993, respectively.
Operating income for the general publishing segment was $11.9 million in 1993
compared to 1992's operating income from ongoing operations of $9.0 million. The
increase in income reflects slightly lower trade book returns and an increase in
rights income slightly offset by a significant increase in Software Division
research and development expenditures. As in prior years, there were no material
charges to operating income for royalty advances to authors. The segment's
operating income in 1992 included $1.9 million in operating losses from the
Gollancz operations sold in late 1992.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal businesses are seasonal with nearly 70% of net sales
normally reported in the second and third quarters. The first and fourth
quarters historically have contributed approximately 10% and 20%, respectively,
of the Company's annual net sales. The 1994 acquisition of McDougal did not
materially change this seasonal pattern.
The revenue seasonality also affects the Company's operating cash flow. A net
cash deficit from all Company activities is normally incurred through the middle
of the third quarter. This deficit is funded through the draw-down of cash and
marketable securities, supplemented by short-term borrowings, principally
commercial paper.
19
In March 1994, the Company acquired McDougal, a leading publisher of high school
and elementary educational products, for $130.3 million in net cash, including
investment advisory and other third party costs. The acquisition cost was
financed through a combination of existing cash balances and a public debt
offering of $100 million of 7.125% Notes due 2004.
The Company's former Software Division successfully completed a public offering
in March 1994. In connection with the public offering, the Company received a
pre-tax cash dividend of $32.9 million from the successor company, InfoSoft
International, Inc.
Average short-term borrowings increased in 1994 primarily due to the early
redemption in March 1994 and June 1993 of $25 million of 8.78% senior notes that
were scheduled to mature in 1997 and 1994, respectively. The Company financed
the March 1994 redemption of the senior notes with a combination of the InfoSoft
International, Inc. dividend and operating cash. The June 1993 redemption was
financed with commercial paper that was repaid in the third and fourth quarters
of 1994. At December 31, 1994, the Company had no short-term borrowings
outstanding. Short-term borrowings of $25 million (discounted value of $24.6
million) were outstanding at the end of 1993. The Company's average short-term
borrowings (exclusive of the commercial paper used to refinance the June 1993
senior notes redemption), were $8.9 million, $3.9 million, and $3.2 million in
1994, 1993, and 1992, respectively. The increase in 1994 average short-term
borrowings reflects bridge financing of $100 million for the McDougal
acquisition, and for higher seasonal borrowing requirements.
At December 31, 1994, the Company's long-term debt was $100 million (discounted
value $99.4 million) as compared with $25 million (exclusive of capitalized
lease obligations) at the end of 1993. The ratio of long-term debt to the
Company's total capitalization (long-term debt plus shareholders' equity) was
28.9% at the end of 1994 as compared to 11.2% at the end of 1993 . The increase
in the ratio at the end of 1994 is principally due to the $100 million in long-
term debt that partially funded the McDougal acquisition, offset by the $25
million early redemption of senior notes.
20
The Company's cash and marketable securities position at the end of 1994 was
$47.2 million, compared to $85.0 million at the end of 1993. Although net cash
from operating activities increased $6.3 million, due primarily to increased net
income, the Company's year end cash and marketable securities position decreased
$37.8 million.
Net cash required to meet 1994's investing activities (excluding proceeds from
marketable securities) increased by $97.5 million. This increase included the
$130.3 million acquisition of McDougal, offset by the $32.9 million dividend
received from InfoSoft International, Inc.
The Company's financing activities required $10.9 million in 1993 and
contributed net cash of $26.2 million in 1994. This change included proceeds
from the $100 million of long-term debt issued to partially finance the McDougal
acquisition. Financing activity outflows in 1994 included $51.6 million to
retire debt and the purchase of $12.9 million in common stock. The common stock
purchased in 1993 totaled $.7 million.
The Company continues to stress more effective cost management, productivity
gains and reduced investment in working capital. In 1994, the Company continued
the reorganization of certain administrative and corporate functions begun in
1991, culminating in the actions resulting in the special charges taken in the
first quarter of 1994 and the second quarter of 1993. The areas affected in both
years included workforce changes and distribution consolidation. These actions,
as well as other measures taken over the past four years, are expected to hold
down operating costs and increase efficiency. The Company remains committed to
further investment in new technology and enhancement of existing technology now
used in the publishing process. These efforts are expected to yield further
operating and publishing cost savings, as well as to free up capital for
investment in new publishing opportunities.
The Company believes that its cash and marketable securities position, funds
generated from operating activities and available borrowing facilities will be
sufficient to meet total cash requirements for the foreseeable future. The
periodic use of the short-term debt market, primarily commercial paper, for
seasonal liquidity needs will continue. The average seasonal borrowings in 1995
are expected to be
21
marginally higher than undertaken over the past three years, due in part to the
addition of McDougal's seasonal operations.
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation on the Company's cost base remained low in 1994. The
paper price increases that occurred in the fourth quarter of 1994 were largely
offset by previously negotiated contractual price protection with certain paper
suppliers. The Company's paper costs over the past three years have averaged
approximately 6% of net sales. The ratio of paper costs to net sales is expected
to approximate 7.5% in 1995, reflecting a year over year cost increase of more
than 30% in most grades of paper used by the Company. The Company's ability to
adjust selling prices remains limited by competitive factors and for school
publishing, in particular, long-term contractual arrangements and adoption state
requirements. The Company typically implements price changes for its school
publishing operations on October 1 covering the succeeding twelve-month fiscal
period (except for contractual arrangements and certain adoption state
commitments), but may implement increases more frequently in 1995. The Company
expects to selectively increase prices on certain products in 1995. The price
increases introduced on October 1, 1994, and expected in 1995, the planned
substitution of paper grades in certain product areas, and acceleration of
manufacturing activities only partially offset currently announced paper price
increases. The relationship in future years of paper costs to net sales is
expected to increase, but at levels below that expected for 1995.
The most significant Company investments affected by inflation include
inventories, book plates and other property, plant, and equipment. The last-in,
first-out (LIFO) method is used to value substantially all inventory and,
therefore, the cost of inventory charged against income approximates replacement
value. During 1994, inventory quantities were reduced, excluding the impact of
the McDougal acquisition. These reductions resulted in the liquidation of
certain LIFO layers carried at costs which were lower than the cost of current
purchases. The effect of the reductions was to lower cost of goods sold by $2.4
million and to increase net earnings in 1994 by $1.5 million, or $.11 per share.
The incremental replacement cost expense amounted to $.6 million in 1994 as
compared with $.9 million in 1993. The replacement cost expense for 1995,
primarily due to paper prices discussed above, is expected to increase
substantially.
22
The Company's publishing business does not require a high level of investment in
property, plant, and equipment. Such net assets represented 6% of consolidated
assets at December 31, 1994. The Company's net investment in book plates for
educational and reference works represented approximately 8% of total assets at
December 31, 1994. The Company's commitment to and investment in technological
improvements and emphasis on quality control have resulted in a book plate
investment that remains at or below the historical relationship of book plates
to total assets. This has occurred during a period in which the textbook
revision cycle has shortened, and funding has remained at historic lows. The
Company intends to continue the commitment of funds to new publishing areas
through both acquisitions and internal growth.
Management believes that by valuing its inventory using the LIFO method and
continuing to emphasize technological improvements and quality control, the
impact of cost inflation on operating results and financial position will
continue to be moderated.
23
Item 8. Consolidated Financial Statements and Supplementary Data
- ------- --------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors Page 25
Consolidated Balance Sheets at December 31, 1994
and 1993 Pages 26 - 27
Consolidated Statements of Income for the years
ended December 31, 1994, 1993, and 1992 Page 28
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1993, and 1992 Page 29
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1994, 1993, and 1992 Page 30
Notes to Consolidated Financial Statements Page 31 - 55
SUPPLEMENTARY DATA
Summary of Quarterly Results of Operations (unaudited) are
presented on page 56.
24
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Stockholders
Houghton Mifflin Company
We have audited the accompanying consolidated balance sheets of Houghton Mifflin
Company as of December 31, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. Our audits also included the
financial statement schedule listed in the Index at Item 14(a) 2. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Houghton Mifflin Company at December 31, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Notes 2 and 6 to the financial statements, in 1992 the Company
changed its methods of accounting for income taxes and postretirement benefits
other than pensions, respectively.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
January 18, 1995
25
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 30,372 $ 67,242
Marketable securities available-for-sale, at fair value 16,821 17,714
- ------------------------------------------------------------------------------------------------------------------------
47,193 84,956
Accounts receivable 143,599 116,814
Less allowance for book returns 12,836 12,325
- ------------------------------------------------------------------------------------------------------------------------
130,763 104,489
Inventories
Finished goods 55,174 56,479
Work-in-process 4,460 4,875
Raw materials 2,027 2,647
- ------------------------------------------------------------------------------------------------------------------------
61,661 64,001
Deferred income taxes 8,334 10,904
Prepaid expenses 2,150 3,106
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 250,101 267,456
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements 2,640 1,950
Buildings and building equipment 18,560 14,359
Machinery and equipment 50,225 45,721
Leasehold improvements 6,318 4,467
- ------------------------------------------------------------------------------------------------------------------------
77,743 66,497
Less accumulated depreciation and amortization 47,921 36,991
- ------------------------------------------------------------------------------------------------------------------------
29,822 29,506
Book plates, less accumulated depreciation of $48,252 in 1994 and $51,148 in 1993 39,066 36,664
- ------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT, AND EQUIPMENT 68,888 66,170
OTHER ASSETS
Royalty advances to authors, less allowance of $11,079 in 1994 and $11,866 in 1993 19,750 21,382
Intangible assets, less accumulated amortization of $10,120 in 1994 and $3,566 in 1993 124,408 19,661
Investment in InfoSoft International, Inc., at cost plus equity in undistributed earnings 10,783 -
Deferred income taxes 12,227 12,758
Long-term receivables and other 11,109 10,659
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 178,277 64,460
- ------------------------------------------------------------------------------------------------------------------------
$ 497,266 $ 398,086
========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
26
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 45,023 $ 33,622
Commercial paper - 24,605
Royalties 32,947 27,696
Salaries, wages, and commissions 13,634 10,301
Other 13,106 13,091
Current debt maturities - 1,955
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 104,710 111,270
Long-term debt 99,445 26,438
Accrued royalties payable 3,169 2,935
Other liabilities 13,005 9,413
Accrued postretirement benefits 24,864 23,948
Stock repurchase commitment 7,600 -
Commitments and contingencies (Note 12)
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value,
500,000 shares authorized, none issued - -
Common stock, $1 par value, 70,000,000
shares authorized, 14,758,726 shares
issued in 1994 and 1993 14,759 14,759
Capital in excess of par value 22,316 30,612
Retained earnings 248,828 211,222
Notes receivable from stock
purchase agreements (5,841) -
- --------------------------------------------------------------------------------
280,062 256,593
Less:
Common shares held in treasury,
at cost (328,685 shares in
1994, 232,459 shares in 1993) 6,091 1,367
Benefits trust assets, at market 29,498 31,144
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 244,473 224,082
- --------------------------------------------------------------------------------
$ 497,266 $ 398,086
================================================================================
See accompanying Notes to Consolidated Financial Statements.
27
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 483,076 $ 462,969 $ 454,706
COSTS AND EXPENSES
Cost of sales 230,674 227,969 220,278
Selling and administrative 192,425 173,070 190,118
Special charges 6,513 10,560 -
- ----------------------------------------------------------------------------------------------------------------------------------
429,612 411,599 410,396
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 53,464 51,370 44,310
OTHER INCOME (EXPENSE)
Gain on sale of interest in Software Division 36,212 - -
Equity in earnings of InfoSoft International, Inc. 1,973 - -
Loss on disposition of foreign publishing operations - - (13,527)
Net interest expense (6,509) (2,347) (2,339)
- ----------------------------------------------------------------------------------------------------------------------------------
31,676 (2,347) (15,866)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes, extraordinary item, and
cumulative effect of accounting changes 85,140 49,023 28,444
Taxes on income before extraordinary item and
cumulative effect of accounting changes 32,710 17,650 9,373
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 52,430 31,373 19,071
- ----------------------------------------------------------------------------------------------------------------------------------
EXTRAORDINARY ITEM, NET OF TAXES
Loss on early extinguishment of debt (1,239) (1,002) -
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET OF TAXES
Postretirement healthcare benefits - - (13,357)
Income taxes - - (1,300)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 51,191 $ 30,371 $ 4,414
==================================================================================================================================
PER SHARE:
Income before extraordinary item and cumulative effect of $ 3.79 $ 2.27 $ 1.35
accounting changes
Loss on early extinguishment of debt (0.09) (0.07) -
Cumulative effect of accounting changes - - (1.04)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3.70 $ 2.20 $ 0.31
==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
28
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 51,191 $ 30,371 $ 4,414
Adjustments to reconcile net income to net cash from operating activities:
Gain on sale of interest in Software Division (36,212) - -
Equity in earnings of InfoSoft International, Inc. (1,973) - -
Early extinguishment of debt cost, net of taxes 1,239 1,002 -
Loss on disposition of foreign publishing operations - - 13,527
Cumulative effect of accounting changes, net of taxes - - 14,657
Depreciation and amortization expense 44,416 39,361 42,280
- -----------------------------------------------------------------------------------------------------------------------------------
58,661 70,734 74,878
Change in operating assets and liabilities:
Accounts receivable, net (26,751) (19,497) 6,105
Inventories 17,606 (2,454) 6,338
Royalty advances, net 3,448 1,085 (373)
Accounts payable 6,705 5,645 (2,905)
Prepaid and income taxes payable 5,949 (1,455) (4,549)
Other, net 1,634 6,899 (3,040)
- -----------------------------------------------------------------------------------------------------------------------------------
8,591 (9,777) 1,576
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES 67,252 60,957 76,454
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of publishing assets, net of cash acquired (130,342) - (31,394)
Dividend received from InfoSoft International, Inc. 32,860 - -
Book plate expenditures (25,242) (25,796) (28,459)
Property, plant, and equipment expenditures (8,478) (10,728) (9,727)
Marketable securities 893 11,250 22,230
Sale of building and equipment - 2,836 -
Proceeds from the sale of publishing operations - - 5,708
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (130,309) (22,438) (41,642)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Dividends on common stock (12,026) (11,475) (11,037)
Issuance (repayment) of commerical paper (24,605) 24,605 -
Senior note redemption (26,960) (26,511) -
Issuance of long-term debt 99,415 - -
Purchase of common stock (12,913) (654) (19,496)
Exercise of stock options 1,442 2,377 3,038
Proceeds from rate lock 1,404 - -
Put option proceeds 430 - -
Other - 740 (8,829)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH FROM (USED IN) FINANCING ACTIVITIES 26,187 (10,918) (36,324)
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - (30) (427)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (36,870) 27,571 (1,939)
Cash and cash equivalents at beginning of year 67,242 39,671 41,610
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 30,372 67,242 39,671
MARKETABLE SECURITIES AT END OF YEAR 16,821 17,714 28,964
- -----------------------------------------------------------------------------------------------------------------------------------
$ 47,193 $ 84,956 $ 68,635
===================================================================================================================================
SUPPLEMENTARY INFORMATION:
Income taxes paid $ 26,252 $ 19,121 $ 13,893
Interest paid $ 6,323 $ 3,632 $ 5,977
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
29
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Common Notes
stock Capital in receivable
excess Retained from stock Treasury Stock
$ 1 par of par Earnings purchase --------------------- Benefits
Years ended December 31, value value agreements Shares Amount trust
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1992 $ 14,759 $ 13,461 $ 198,949 $ - (478,105) $ (4,103) $ -
- -----------------------------------------------------------------------------------------------------------------------------
Net income - - 4,414 - - - -
Common stock dividends,
$.79 per share - - (11,037) - - - -
Stock options exercised - 971 - - 129,495 2,766 -
Share repurchases - - - - (655,432) (19,496) -
Shares sold to benefits - - - - 650,000 18,551 (18,551)
trust
Other equity transactions, - (353) - - 6,339 27 -
net
Benefits trust asset - 7,605 - - - - (7,605)
remeasurement
Amortization of restricted - - - - - - -
shares
Foreign currency - - - - - - -
translation adjustments
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 14,759 21,684 192,326 - (347,703) (2,255) (26,156)
- -----------------------------------------------------------------------------------------------------------------------------
Net income - - 30,371 - - - -
Common stock dividends,
$.83 per share - - (11,475) - - - -
Stock options exercised - 958 - - 94,486 1,419 -
Share repurchases - - - - (16,400) (654) -
Other equity transactions,
net - 2,310 - - 37,158 123 672
Benefits trust asset
remeasurement - 5,660 - - - - (5,660)
Amortization of restricted
shares - - - - - - -
Foreign currency - - - - - - -
translation adjustments
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 14,759 30,612 211,222 - (232,459) (1,367) (31,144)
- -----------------------------------------------------------------------------------------------------------------------------
Net income - - 51,191 - - - -
Common stock dividends,
$.87 per share - - (12,026) - - - -
Stock options exercised - (233) - - 50,203 1,675 -
Notes receivable from
stock purchase agreements - 443 - (5,893) 138,272 5,450 -
Issuance of restricted
shares - 73 - - 1,789 14 -
Share repurchases - - - - (318,900) (12,913) -
Other equity transactions,
net - 1,133 - 52 32,410 1,050 (466)
Benefits trust asset
remeasurement - (2,112) - - - - 2,112
Valuation allowance on
noncurrent marketable
securities - - (1,559) - - - -
Stock repurchase commitment - (7,600) - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $ 14,759 $ 22,316 $ 248,828 $ (5,841) (328,685) $ (6,091) $ (29,498)
=============================================================================================================================
Foreign
Unamortized currency
value of translation
Years ended December 31, restricted adjustments Total
shares
- -------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1992 (1,098) $ 1,213 $ 223,181
- -------------------------------------------------------------------------------------
Net income - - 4,414
Common stock dividends, - - (11,037)
$.79 per share
Stock options exercised - - 3,737
Share repurchases - - (19,496)
Shares sold to benefits - - -
trust
Other equity transactions, - - (326)
net
Benefits trust asset - - -
remeasurement
Amortization of restricted 549 - 549
shares
Foreign currency - (1,183) (1,183)
translation adjustments
- -------------------------------------------------------------------------------------
Balance at December 31, 1992 (549) 30 199,839
- -------------------------------------------------------------------------------------
Net income - - 30,371
Common stock dividends, - - (11,475)
$.83 per share
Stock options exercised - - 2,377
Share repurchases - - (654)
Other equity transactions, - - 3,105
net
Benefits trust asset - - -
remeasurement
Amortization of restricted
shares 549 - 549
Foreign currency - (30) (30)
translation adjustments
- -------------------------------------------------------------------------------------
Balance at December 31, 1993 - - 224,082
- -------------------------------------------------------------------------------------
Net income - - 51,191
Common stock dividends, - - (12,026)
$.87 per share
Stock options exercised - - 1,442
Notes receivable from - - -
stock purchase agreements
Issuance of restricted
shares - - 87
Share repurchases - - (12,913)
Other equity transactions, - - 1,769
net
Benefits trust asset - - -
remeasurement
Valuation allowance on - - (1,559)
noncurrent marketable
securities
Stock repurchase commitment - - (7,600)
- -------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 - $ - $ 244,473
=====================================================================================
See accompanying Notes to Consolidated Financial Statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist primarily of cash in banks and other short-
term securities available-for-sale which have original maturities of three
months or less. The carrying amount approximates fair value due to the short-
term maturity of these instruments.
MARKETABLE SECURITIES AVAILABLE-FOR-SALE:
Marketable securities included in current assets consist of instruments with
maturities of three months or greater. While management's intention is to hold
these instruments until maturity, they are classified as available-for-sale.
The securities held consist primarily of tax-exempt municipal certificates
issued by investment grade institutions, and are stated at fair value, which
approximates cost due to the short maturity of the instruments. The fair values
are estimated based on quoted market prices.
Marketable securities included in other assets are classified as "Long-term
receivables and other" for consolidated financial statement purposes. These
investments, which consist of equity securities, are carried at market value.
Unrealized holding gains and losses are recognized as a reduction in
stockholders' equity.
BOOK RETURNS:
A provision for future estimated returns, consisting of the sales value less
related inventory value and royalty costs, is made at time of sale.
INVENTORIES:
Inventories are stated at the lower of cost or market (replacement cost for raw
materials, net realizable value for other inventories). The last-in, first-out
(LIFO) method is used to determine the cost of inventory for the Company's
operations. At December 31, 1994 and 1993, inventories valued at the lower of
LIFO cost or market were approximately $20,017,000 and $19,075,000,
respectively, less than they would have been valued under the first-in, first-
out (FIFO) method, which approximates replacement cost.
During 1994, inventory quantities were reduced, excluding the impact of the
McDougal acquisition. These reductions resulted in the liquidation of certain
LIFO layers carried at costs which were lower than the cost of current
purchases. The effect of the reductions was to lower cost of goods sold by $2.4
million and to increase net earnings for 1994 by $1.5 million, or $.11 per
share.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CON'T)
PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment are recorded at cost and depreciated over the
estimated useful lives of the underlying assets ranging from three to forty
years. Depreciation and amortization are provided on a straight-line method for
buildings, leasehold and land improvements; and accelerated methods for
machinery and equipment and book plates.
The Company's investment in book plate costs is capitalized and depreciated over
three years, except for trade publication book plate costs and some reference
plate costs which are expensed when incurred. Maintenance and repair costs are
charged to expense as incurred, and renewals and improvements that extend the
useful life of the assets are added to the plant and equipment accounts.
Depreciation expense was $37,757,000 in 1994; $36,757,000 in 1993; and
$40,824,000 in 1992.
INTANGIBLE ASSETS:
Purchased editorial publishing rights are amortized on a straight-line basis
over the estimated economic life of the titles or contracts, but do not exceed
15 years. The excess of cost over net assets acquired, or goodwill, is
amortized on a straight-line basis over periods that do not exceed 25 years.
Amortization expense was approximately $6,659,000 in 1994; $2,055,000 in 1993;
and $907,000 in 1992.
INCOME TAXES:
The Company provides deferred and prepaid taxes for temporary differences in the
recognition of income and expense for financial reporting and tax accounting
purposes. Differences relate principally to publishing expenses, depreciation
expense, deferred compensation, deferred income, postretirement benefits, and
allowance for book returns.
FOREIGN CURRENCY TRANSLATION:
Gains and losses on foreign currency transactions are reflected in income.
Gains and losses on translation of the Company's net equity interests in foreign
subsidiaries are reported separately and accumulated in the "Net foreign
currency translation adjustment" in stockholders' equity.
BENEFITS TRUST:
Assets held in the benefits trust were purchased from the Company's treasury at
quoted market value in 1992. The trust assets are only available to fund
certain of the Company's obligations for compensation and benefit plans. The
trust included 650,000 shares of the Company's common stock and cash of $5,700
and $21,000 at December 31, 1994 and 1993, respectively. The shares of common
stock are valued at market with changes in share price from prior reporting
periods reflected as an adjustment to capital in excess of par value.
EARNINGS PER SHARE:
Earnings per share are based on the weighted average number of shares of common
stock deemed outstanding for financial accounting purposes. Shares of common
stock held in the benefits trust and common stock equivalents, such as employee
stock options, are evaluated for inclusion in the earnings per share calculation
under the treasury stock method and currently have no dilutive effect.
PRESENTATION:
Certain 1993 and 1992 amounts have been reclassified to conform to the 1994
presentation.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. TAXES ON INCOME
Effective January 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." As permitted, prior years' financial statements have not been
restated. The cumulative effect of adopting SFAS No. 109 was to decrease net
income by $1.3 million for 1992.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's net deferred tax assets are shown in the following
table:
In thousands 1994 1993
------------ ---- ----
Tax liability-related:
Depreciation expense $ 1,758 $ 1,663
Deferred income 1,079 3,205
----- -----
2,837 4,868
Tax asset-related:
Pension and postretirement benefits 13,610 12,566
Publishing expenses 5,614 8,745
Allowance for book returns 1,259 3,145
Deferred compensation 2,254 2,782
Other, net 661 1,292
------- -------
23,398 28,530
------- -------
Net deferred tax assets $20,561 $23,662
======= =======
At December 31, 1994 and 1993, net deferred tax assets represented 4% and 6%,
respectively, of the Company's consolidated total assets. The net deferred tax
asset balance is stated at prevailing statutory income tax rates. The Company
currently does not anticipate any change in valuation methodology applied to the
determination of net deferred tax assets.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. TAXES ON INCOME (CON'T)
For financial reporting purposes, income before taxes, extraordinary item, and
the cumulative effect of accounting changes includes the following components:
In thousands 1994 1993 1992
- ------------ ------ ------ ------
Pretax income (loss):
United States $ 84,945 $ 48,137 $ 44,868
Foreign 195 886 (16,424)
-------- -------- --------
$ 85,140 $ 49,023 $ 28,444
======== ======== ========
Significant components of the provision for income taxes attributable to income
before taxes, extraordinary item, and the cumulative effect of accounting
changes are as follows:
In thousands 1994 1993 1992
- ------------ ------ ------ ------
Current:
Federal $ 23,711 $ 15,715 $ 8,606
Foreign 142 256 236
State 5,577 3,266 2,439
--------- --------- --------
Total current 29,430 19,237 11,281
Deferred:
Federal 2,653 (1,398) (1,081)
Foreign - - (642)
State 627 (189) (185)
--------- --------- --------
Total deferred 3,280 (1,587) (1,908)
--------- --------- --------
$ 32,710 $ 17,650 $ 9,373
========= ========= ========
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. TAXES ON INCOME (con't)
The reconciliation of the income tax rate attributable to income before taxes,
extraordinary item, and the cumulative effect of accounting changes computed at
the U.S. federal statutory tax rate to reported income tax expense is as
follows:
1994 1993 1992
---- ---- ----
Federal statutory rate 35.0% 35.0% 34.0%
State income taxes, net of
federal benefit 4.6 4.6 4.6
Nondeductible goodwill 2.2 - -
Foreign losses (0.1) (0.5) (3.2)
InfoSoft investment earnings (1.0) - -
Other (2.3) (3.1) (2.4)
----- ----- -----
Effective tax rate 38.4% 36.0% 33.0%
===== ===== =====
The Company does not provide deferred income taxes on undistributed earnings of
InfoSoft International, Inc., as such earnings are assumed to be permanently
reinvested in that company's operations. Accumulated undistributed earnings of
InfoSoft International, Inc. on which taxes have not been provided are
approximately $2.0 million at December 31, 1994.
The Omnibus Budget Reconciliation Act of 1993 increased the federal statutory
rate to 35% from 34% effective for income earned after January 1, 1993. There
were no other material changes to the Company's effective tax rate which
resulted from this legislation.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: SHORT-TERM BORROWINGS AND LINES OF CREDIT
At December 31, 1994 and 1993, the Company had an unsecured line of credit for
$25 million available to be used for direct borrowings or as support for the
issuance of commercial paper. Additional lines of credit intended to serve as
support for seasonal commercial paper borrowings also were maintained in 1994
and 1993.
In 1994, the Company established short-term credit facilities totaling $100
million. These lines were drawn upon to initially finance the acquisition of
McDougal, Littell & Company ("McDougal") in March 1994. The borrowings under
these facilities were subsequently refinanced with the proceeds from a $100
million public debt offering.
All of these lines were supported by commitment fees. Commercial paper
borrowings outstanding at December 31, 1993, were $24.6 million at a weighted
average interest rate of 3.45%. These borrowings related to the Company's June
1993 redemption of $25 million of 8.78% senior notes due December 1994.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993, consisted of the following:
In thousands 1994 1993
- -----------------------------------------------------------------------
7.125% $100 million due
April 1, 2004, interest payable
semi-annually $ 99,445 $ -
8.78% senior notes, unsecured,
due March 30, 1997, interest payable
semi-annually - 25,000
Capital lease obligations - 3,393
- -----------------------------------------------------------------------
99,445 28,393
Less current maturities of capital
lease obligations - 1,955
- -----------------------------------------------------------------------
$ 99,445 $ 26,438
- -----------------------------------------------------------------------
On April 5, 1994, the Company issued $100 million of non-callable unsecured
notes ("Notes") through a public debt offering. The Notes were priced at 99.4
to yield an effective rate of 7.21% and mature on April 1, 2004. The proceeds
from the issuance were applied to repay the short-term credit facilities used as
bridge financing in the acquisition of McDougal.
In March 1994, the Company completed an early redemption of $25 million of 8.78%
senior notes scheduled to mature in March 1997. The extraordinary refinancing
cost of $1.2 million, or $.09 per share, was net of an income tax benefit of $.8
million. The Company financed the early redemption of the senior notes with
operating cash and a portion of the after-tax proceeds received in connection
with the InfoSoft public offering.
In June 1993, the Company completed an early redemption of $25 million of 8.78%
senior notes due to mature in December 1994. The extraordinary refinancing cost
of $1.0 million, or $.07 per share, was net of an income tax benefit of $.6
million. The Company financed the early redemption of the senior notes with
commercial paper.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: LONG-TERM DEBT (CON'T)
The Company has used interest rate swaps primarily for the purpose of achieving
a debt structure whose interest costs include both fixed and variable
components. An interest rate swap agreement covering interest payments for $25
million in notional debt was in place at December 31, 1994. Under this
agreement, the Company pays semi-annual interest on the notional $25 million
principal amount at a variable rate related to the six-month London Interbank
Offering Rate (LIBOR) and receives semi-annual interest on the notional
principal at 8.78%. The swap rate at December 31, 1994, was 9.5%. The net
interest settlements are recognized as an adjustment to interest expense. The
swap will reset in March 1995, and semi-annually thereafter through March 1996.
The Company is exposed to market risk in the event of nonperformance by the
counterparty. Nonperformance by the counterparty is not anticipated nor would it
have a material adverse effect on the results of operations or the financial
position of the Company.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: RETIREMENT PLANS
The Company has a noncontributory, trusteed defined benefit pension plan that
covers substantially all employees. Pension benefits are generally based on
years of service and compensation during active employment. The plan's assets
consist principally of common stocks, fixed income securities, and cash and cash
equivalents. The Company provides funds sufficient to meet accrued benefit and
statutory funding requirements.
Pension expense for 1994, 1993, and 1992 included the following components:
In thousands 1994 1993 1992
- ------------------------------------------------------------------------
Service cost (benefits earned
during the year) $ 3,275 $ 3,420 $ 3,336
Interest cost on projected
benefit obligation 5,045 4,809 4,375
Actual return on
plan assets (1,165) (12,136) (4,388)
Net amortization and
deferral (4,432) 7,244 (100)
- -------------------------------------------------------------------------
Net pension expense $ 2,723 $ 3,337 $ 3,223
=========================================================================
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: RETIREMENT PLANS (con't)
The following table sets forth the Plan's funded status:
In thousands 1994 1993
- --------------------------------------------------------------------------
Plan assets at fair value
at September 30 $69,750 $70,064
Projected benefit obligation 69,446 69,674
- --------------------------------------------------------------------------
Excess of plan assets over projected
benefit obligation at September 30 304 390
Unrecognized items:
Net gain (4,404) (3,346)
Prior service cost (1,095) 242
Net transition asset (1,424) (1,607)
Cash contribution after
September 30 - 425
- --------------------------------------------------------------------------
Accrued pension liability
at December 31 $(6,619) $(3,896)
==========================================================================
Actuarial present value of accumulated
benefits at September 30 $56,923 $54,357
Accumulated benefit obligation
related to vested benefits at
September 30 $53,312 $49,172
- --------------------------------------------------------------------------
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: RETIREMENT PLANS (CON'T)
1994 1993 1992
- --------------------------------------------------------------------------------
Actuarial assumptions:
Discount rate 8.0 % 7.5 % 8.0 %
Increase in future compensation 6.0 % 6.0 % 6.5 %
Expected long-term rate of return
on assets 8.5 % 8.5 % 8.5 %
- --------------------------------------------------------------------------------
The actuarial assumption changes made in 1994 were applied to the determination
of the September 30, 1994 benefit obligation valuations. The impact on pension
expense was recognized in 1994 and was not material.
Due to workforce changes in 1993, there was a reduction in the Company's defined
benefit pension obligation. A pre-tax expense reduction of $1,164,000 ($745,000
after-tax, or $.05 per share) was recorded in the fourth quarter of 1993 in
accordance with Financial Accounting Standard No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans."
In addition, the Company has a Retirement Savings Plan, formerly known as the
Employees' Savings & Thrift Plan, and the McDougal, Littell & Company Employee
Savings and Stock Ownership Plan, as a result of the acquisition of McDougal.
Effective December 1, 1994, the McDougal plan was merged with the Company's
Retirement Savings Plan. Under the Retirement Savings Plan, which conforms to
Section 401(k) of the Internal Revenue Code and covers substantially all of the
Company's employees, participants may elect to contribute up to 15% of their
compensation subject to an annual limit of $9,240 in 1994 to ten funds: seven
equity funds, two fixed income funds, and a fund invested solely in the
Company's common stock.
The Company currently matches an employee's contribution to the Retirement
Savings Plan in amounts up to 3% of employee compensation. The Company's
contribution expense, which is invested solely in shares of the Company's common
stock, amounted to approximately $1,805,000 in 1994; $1,663,000 in 1993; and
$1,782,000 in 1992.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: POSTRETIRMENT BENEFITS
In addition to the provision of pension benefits, the Company sponsors a
contributory health care plan that provides postretirement medical benefits to
full-time, non-union employees hired before April 1, 1992, who have provided a
minimum of 10 years of service and attained age 55.
In years prior to 1992, the expenses for postretirement health care coverage
were recognized for accounting purposes when paid. The Company adopted the
provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," in the fourth quarter of 1992 with effect from January 1,
1992. The Company's initial accumulated postretirement benefits obligation was
$21.5 million, representing the actuarially determined present value of the
benefits earned under the Company's plan prior to January 1, 1992. The after-
tax cost of the $21.5 million charge amounted to $13.4 million, or $.95 per
share, in 1992.
Although the Company has not specifically funded the retiree health care
liability, the benefits trust formed in 1992 is intended to provide funding for
retiree health care costs. At December 31, 1994 and 1993, the fair value of the
benefits trust net assets was $29.5 million and $31.1 million, respectively.
The assets in the benefits trust consist principally of the Company's common
stock. Under the terms of the trust agreement, proceeds from the periodic sale
of common stock by the trustee, as well as cash dividends received, will be used
to pay designated compensation and benefit plan obligations, including retiree
health care costs.
The following table presents the postretirement benefit liability recognized in
the Company's statement of financial position at December 31:
In thousands 1994 1993
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 18,344 $ 21,328
Fully eligible active plan participants 1,828 2,050
Other active participants 2,777 2,586
-------- --------
22,949 25,964
Unrecognized net gain (loss) 719 (2,016)
Unrecognized prior service cost 1,196 -
-------- --------
Accrued postretirement benefit liability $ 24,864 $ 23,948
======== ========
Net periodic postretirement benefit cost include the following components:
In thousands 1994 1993
- ------------------------------------------------------------------------------
Service cost $ 354 $ 426
Interest cost 1,786 1,859
Amortization of unrecognized prior service cost (67) -
------- -------
Net periodic postretirement benefit cost $ 2,073 $ 2,285
======= =======
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: POSTRETIREMENT BENEFITS (CON'T)
The principal actuarial assumptions used for the first four months of 1994 were
a discount rate of 7.5% and an inflation rate of 11.5%, declining one percent
per annum through the year 2000. As of May 1, 1994, the discount rate was
changed to 8% and the inflation rate to 9%, declining one percent per annum to
5% in 1998. The principal actuarial assumptions used to determine the Company's
postretirement benefit cost in 1993 were a discount rate of 8% and a health care
cost inflation rate of 13%, declining one percent per annum through the year
2000.
The inflation rate assumption change has an effect on the postretirement
obligation and the accounting expense reported. To illustrate, increasing the
assumed inflation rate by one percentage point would increase the benefit
obligation by $1,882,000 and $1,813,000 at December 31, 1994 and 1993,
respectively. In addition, a one percent increase in the assumed inflation rate
would increase the 1994 and 1993 annual expense by $160,000 and $146,000,
respectively. The Company expects to maintain a discount rate of 8% and to
reduce the health care inflation rate to 8% for 1995. These changes reflect
stable long-term interest rates and a moderation of health care costs
experienced over the past two years.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: STOCK OPTIONS
The Company has granted options to eligible employees under the 1982 Incentive
Stock Option Plan (the 1982 Plan); the 1987 Stock Compensation Plan (the 1987
Plan), which replaced the 1982 Plan; and the 1992 Stock Compensation Plan (the
1992 Plan), which replaced the 1987 Plan. Under each of the plans, shares of
common stock are reserved and authorized to be issued upon the exercise of stock
options, or awards of restricted or bonus stock, or other performance awards.
Recipients of restricted stock awards may not sell or transfer the shares until
the restricted period lapses and shares have not been forfeited due to
termination of employment. During the restriction period, the recipient is
entitled to the right to vote and receive dividends. In 1991, 81,000 shares of
restricted stock were awarded under the 1987 Plan, of which none remained
outstanding at the end of 1994. The Plans provide that the option price shall
not be less than the fair market value of the shares on the date of grant.
Options granted under all plans become exercisable at such times as the
Compensation & Nominating Committee has determined, but not later than ten years
from the date of the grant. No further options may be granted under the 1982 or
1987 Plans.
In August 1994, the Company granted 124,272 options under the 1992 Stock
Compensation Plan to certain corporate officers for exercise at the then market
price of $42.625. The options were exercised and stock was issued from the
Company's treasury shares. A note receivable was obtained from the officers and
collateralized by the stock. In addition, each participant has entered into a
risk sharing agreement which, among other things, limits the gains and losses
associated with stock in the event of a future sale. (See Note 15.)
The Company realizes income tax benefits from the exercise or early disposition
of certain stock options. This benefit results in a decrease in current income
taxes payable and an increase in capital in excess of par value.
44
NOTE 7: STOCK OPTIONS (con't)
Transactions involving outstanding stock options under these plans were as
follows:
NUMBER OF COMMON SHARES OPTION PRICE
--------------------------------- ----------------------------------
1982 PLAN 1987 PLAN 1992 PLAN PER SHARE AGGREGATE
=================================================================================================================================
(In thousands)
Outstanding at December 31, 1991 65,418 399,344 - $ 22.25 - 49.25 $ 13,992
Granted - - 17,000 35.25 599
Exercised (37,326) (92,169) - 23.88 - 39.00 (3,737)
Cancelled/expired (28,092) (65,732) - 23.88 - 34.38 (3,611)
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1992 - 241,443 17,000 22.25 - 49.25 7,243
Granted - - 196,000 44.63 8,747
Exercised - (93,886) (600) 23.88 - 44.63 (2,377)
Cancelled/expired - (9,340) (4,900) 23.88 - 44.63 (495)
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1993 - 138,217 207,500 22.25 - 49.25 13,118
Granted - - 490,772 37.50 - 47.50 22,028
Exercised - (44,103) (130,372) 23.25 - 44.63 (6,739)
Cancelled/expired - (21,540) (18,500) 23.88 - 49.25 (1,826)
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 - 72,574 549,400 $ 23.88 - 47.50 $ 26,581
=================================================================================================================================
Exercisable at:
December 31, 1992 - 168,469 3,533
December 31, 1993 - 114,578 49,243
December 31, 1994 - 69,215 165,590
Available for grant:
December 31, 1994 - - 84,628
=================================================================================================================================
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: SALE OF FOREIGN PUBLISHING OPERATIONS
In the fourth quarter of 1992, the Company announced the sale of certain foreign
operations. The assets sold included the publishing and distribution operations
of Gollancz (Holdings) Limited, a wholly owned subsidiary based in England, and
the majority of the school publishing rights owned by Houghton Mifflin Canada
Limited. The Company's net income for 1992 included a pre-tax loss of $13.5
million resulting from the disposition of these operations, including
unamortized Gollancz goodwill of $9.2 million. The after-tax transaction losses
in 1992 related to the sale of foreign operations amounted to $7.0 million, or
$.50 per share.
A summary of the net sales and financial performance of the foreign operations
sold that are included in the Company's consolidated results at December 31,
1992, is set forth in the following table:
In thousands, except per share amounts
- --------------------------------------------------------
Net sales $14,299
=======
Operating loss (2,453)
Net interest expense (389)
-------
Net loss ($2,842)
========
Net loss per share ($0.20)
========
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: ACQUISITIONS
The Company acquired McDougal, Littell & Company ("McDougal"), a leading
publisher of high school and elementary textbooks, on March 1, 1994, for $130.3
million. The acquisition was initially financed through a combination of
operating cash and $100 million in short-term bank debt. The short-term bank
debt was repaid on April 5, 1994, with the proceeds from a $100 million public
debt offering. The acquisition was accounted for as a purchase and the net
assets and results of operations have been included in the consolidated
financial statements since the date of acquisition. The purchase price has been
allocated on the basis of the estimated fair market value of the assets acquired
and the liabilities assumed. The costs of purchased editorial rights and the
excess of the net assets acquired, or goodwill, are being amortized on a
straight-line basis over a period that averages twenty years.
The following unaudited summary pro forma information combines the consolidated
results of operations as if McDougal had been acquired as of January 1, 1993.
Pro forma adjustments reflecting anticipated efficiencies in operations
resulting from a transaction are, under most circumstances, not permitted. As a
result of the limitations imposed with regard to the type of permitted pro forma
adjustments, the Company believes that this unaudited pro forma consolidated
financial information is not indicative of future results of operations, nor the
results of historical operations had the acquisition of McDougal been
consummated as of the assumed date.
Years ended December 31, 1994 1993
- ------------------------------------------------------------------------
In millions, except per share amounts
Net sales $ 484.8 $ 523.1
Income before extraordinary item 46.6 24.0
Net income 45.3 23.0
Net income per share $ 3.28 $ 1.66
In October 1992, the test publishing assets of the Assessment Division of DLM,
Inc. (DLM), were acquired for $17 million in cash. The assets included the
publishing rights for and inventory of a list of clinical/special needs
assessment products.
The publishing assets of College Survival, Inc., publisher of "Becoming a Master
Student", one of the best-selling domestic college textbooks, were purchased on
December 31, 1992, for $10 million in cash.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: ACQUISITIONS (CON'T)
The DLM and College Survival assets acquired were accounted for under the
purchase accounting method. The cost in excess of the net assets acquired is
being amortized on a straight line basis over a period not to exceed fifteen
years.
The following table presents the unaudited pro forma consolidated results of
operations for the assets acquired as if both transactions had occurred on
January 1, 1992. The results give effect to adjustments for the amortization of
publishing rights, goodwill, and net interest expense. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made at the
beginning of 1992, or of results which may occur in the future.
Year ended December 31, 1992
- -----------------------------------------------------------
In millions, except per share amounts
Net sales $ 469.2
Income before cumulative effect of
accounting changes 21.6
Net income 6.9
Net income per share $ .49
In October 1992, a 17.5% ownership interest in Cassell PLC, a privately held
company based in London, England, was acquired for $4.4 million in cash.
Cassell publishes general works with particular emphasis on the reference area.
Cassell, in a separate transaction, purchased the Gollancz (Holdings) Limited
publishing subsidiary in October 1992. The Cassell PLC investment was accounted
for using the cost method for presentation in the consolidated financial
statements at December 31, 1993. Subsequent to the completion of a public
offering of Cassell's ordinary shares in June 1994, the investment in Cassell is
now carried at fair value.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: SPECIAL CHARGES
In 1994, the Company substantially completed the reorganization of certain
administrative and corporate functions begun in 1991. These actions, as well as
other measures taken over the past four years, are expected to hold down
operating costs and increase efficiency. A summary of the principal actions
taken in 1994 and 1993, and the related costs is set forth in the table below:
Years ended December 31, 1994 1993
- ---------------------------------------------------------------------------
In thousands, except per share amounts
Corporate and divisional workforce
realignment $ 3,560 $ 7,500
Facilities sale and consolidations 1,982 900
Disposal of tangible and intangible
assets 971 -
Headquarters relocation - 2,160
------- -------
6,513 10,560
Income tax benefit 2,475 3,960
------- -------
Net charge to net income $ 4,038 $ 6,600
======= =======
Per share cost $ .29 $ .48
======= =======
The Company eliminated approximately 200 positions as a result of these actions.
As of December 31, 1994, approximately $8.8 million has been paid to employees
in the form of salary continuance and other benefits related to these
restructurings. The remaining liability of $2.4 million at December 31, 1994
is expected to be fully paid in 1995. There were no material differences
between the amounts accrued above and the payments against the liabilities
recognized.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: PREFERRED STOCK PURCHASE PLAN
In December 1988, the Company adopted a Stockholders' Rights Plan and declared a
dividend distribution of one Right for each outstanding share of common stock.
The Rights are attached to the common stock and do not have voting or dividend
rights, and until they become exercisable, can have no dilutive effect on the
earnings of the Company. Each Right, when exercisable, entitles the holder to
purchase, at an exercise price of $125, one one-thousandth of a share of Series
A Junior Participating Preferred Stock. The Rights will become exercisable
after a person or group has acquired ownership of 20% or more of the outstanding
common stock, or the commencement of a tender or exchange offer that would
result in a person or group owning 30% or more of the common stock, or the
determination by the Continuing Directors that a person or group which has
acquired a substantial amount (at least 15%) of the outstanding common stock is
an Adverse Person (as defined in the Rights Agreement). Any declaration by the
Continuing Directors that a person is an Adverse Person, any acquisition of 30%
or more of the outstanding common stock (except pursuant to an offer the Outside
Directors have determined is fair to, and in the best interest of, the Company
and its stockholders) and certain mergers, sales of assets, or other "self-
dealing" transactions with a holder of 20% or more of the outstanding common
stock, may entitle each Right holder, other than the potential acquirer, to
receive upon exercise of each Right an amount of common stock or common stock of
the acquirer in the case of certain mergers or sales of assets, having a market
value equal to twice the exercise price of the Right. In general, the Company
may redeem the Rights in whole at a price of $.05 per Right at any time prior to
the tenth day after a person or group acquires 20% or more of the outstanding
common stock. The Company may not redeem the Rights if the Continuing Directors
have declared someone to be an Adverse Person. The Rights will expire in
December 1998.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: COMMITMENTS AND CONTINGENCIES
OPERATING LEASE OBLIGATIONS
The Company has leases for various real property and equipment for warehouse and
office facilities which expire at various dates. Certain leases contain renewal
and escalation clauses for the Company's proportionate share of operating
expenses.
The future minimum rental commitments under all noncancelable leases for real
estate and equipment are payable as follows:
Years In thousands
- ----------------------------------------------------------------
1995 $ 11,991
1996 11,087
1997 10,000
1998 9,420
1999 8,460
Thereafter 54,349
- ----------------------------------------------------------------
Total minimum lease payments $105,307
================================================================
Rent expense, net of sublease income, was approximately $11,614,000 in 1994;
$9,850,000 in 1993; and $11,100,000 in 1992.
Prior to 1994, the Company had capital leases for various equipment which were
recorded as machinery and equipment in the accompanying financial statements.
At December 31, 1993, the capitalized basis was $5,925,000, less accumulated
depreciation of $2,551,000.
OTHER OBLIGATIONS
In August 1994, the Company sold in a private placement 2,000 put warrants on
200,000 shares of its common stock. Each warrant obligates Houghton Mifflin
Company to purchase 100 shares of Common Stock at $38.00 per share if the
counterparty exercises in August 1995. The total exercise price of $7.6 million
has been reflected in the Company's financial statements at December 31, 1994,
as a provisional liability with the offset as a reduction of capital in excess
of par value. The proceeds from the sale of the put option were $430,000 and
have been included in capital in excess of par value.
CONTINGENCIES
The Company is involved in ordinary and routine litigation incidental to its
business. There are no pending legal proceedings that would materially affect
the financial position of the Company.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SOFTWARE DIVISION PUBLIC OFFERING
In March 1994, the Company's former Software Division, a developer of software
tools for proofreading, reference and information management, completed a public
offering of 3,450,000 shares at an offering price of $15 per share. In
connection with the public offering, the Company received a cash dividend of
$32,860,000 from the newly-formed successor company to the Software Division,
InfoSoft International, Inc. ("InfoSoft"). An after-tax gain of $22.8 million,
or $1.65 per share, was recognized in connection with the InfoSoft public
offering. Upon the completion of the offering, the Company transferred the
assets, businesses and employees of the Software Division to InfoSoft. The
Company retained an ownership interest of 40.1% in the successor company
subsequent to the transfer. In addition, the Company and InfoSoft have entered
into a services agreement whereby general administrative services are provided
by the Company and reimbursed by InfoSoft. A portion of the facilities
currently leased by the Company have been placed under a subleasing agreement
ending December 31, 1995, subject to earlier termination as provided in the
agreement.
The Company's recognition of earnings from its investment is based upon the
equity method of accounting. The equity earnings included in the Company's
results of operations are based primarily upon the Software Division's
historical results adjusted for estimated changes in the current business
environment. Accordingly, differences between estimated annual equity income
and actual InfoSoft earnings will be reflected in the succeeding year.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The carrying amount approximates fair value due to the short-term maturity of
the instruments.
INVESTMENTS
The fair value of the Company's investments is estimated based on the quoted
market prices for these securities at December 31, 1994.
LONG-TERM DEBT
The fair value of the Company's fixed rate long-term debt is estimated based on
the quoted market prices for the same or similar issues or maturities.
INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swap agreements (used for purposes other than
trading) is the estimated amount that the Company would pay to terminate the
agreement taking into account interest rates and the credit-worthiness of the
swap counterparty. The Company has established reserves at December 31, 1994
for exposure under its 1993 swap agreement essentially equivalent to the cost to
terminate the agreement.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1994 and 1993 are as follows:
Carrying Fair
In thousands Amount Value
---------------------------------------------------------------------------
1994
---------------------------------------------------------------------------
Cash, cash equivalents and
marketable securities $ 47,193 $ 47,193
Investments:
InfoSoft International, Inc. 10,783 81,525
Cassell PLC 2,749 2,749
Long-term debt (99,445) (91,500)
---------------------------------------------------------------------------
1993
---------------------------------------------------------------------------
Cash, cash equivalents and
marketable securities $ 84,956 $ 84,956
Commercial paper (24,605) (25,000)
Senior notes (25,000) (28,000)
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: RELATED PARTIES
The Company presently holds notes receivable for a total of $5.8 million from
certain corporate officers and members of the Board of Directors. The Company
provided financing in 1994 to effect the purchase of an aggregate of 138,272
shares of the Company's common stock at the fair market value on August 24,
1994, of $42.625 per share. The loans bear an interest rate of 8% and are due
in the fourth quarter of 1999. Loans made to officers are collateralized by the
shares of common stock purchased and supported by a risk sharing agreement which
provides, among other things, for the Company to share in 50% of the gain on any
shares sold before the third anniversary. The Company will share in 50% of the
loss on any shares sold after the third anniversary. Loans provided to members
of the Board of Directors are unsecured. A director who sells shares purchased
with Company financing is responsible for 100% of any resulting loss. The notes
receivable are shown as a reduction in equity in the consolidated financial
statements.
54
NOTE 16. SEGMENT INFORMATION
The Company's principal business is publishing and is divided into two segments:
(a) textbooks and other educational materials and services for the school and
college markets; and
(b) general publishing, including fiction, nonfiction, software, children's
books, and reference materials.
A comparative summary of information about the Company's operations by segment
for the years 1994, 1993, and 1992 appears below. Net corporate expenses include
certain corporate officer compensation costs, certain system development costs,
certain occupancy costs, stockholder reporting expenses, Board of Directors fees
and expenses, and legal and consulting fees. Corporate assets are principally
cash and cash equivalents, marketable securities, and deferred income taxes.
------------------------------------------------------------------------------------------------------------------------------
Textbooks and
other educational
materials and General
In thousands services publishing Corporate Consolidated
===============================================================================================================================
1994
===============================================================================================================================
Net sales from ongoing operations $ 387,427 $ 93,811 $ - $ 481,238
Net sales from former Software Division - 1,838 - 1,838
- ------------------------------------------------------------------------------------------------------------------------------
Net sales 387,427 95,649 - 483,076
- ------------------------------------------------------------------------------------------------------------------------------
Income from ongoing operations 68,216 7,275 - 75,491
Income from former Software Division - 117 - 117
- ------------------------------------------------------------------------------------------------------------------------------
Segment income 68,216 7,392 - 75,608
- ------------------------------------------------------------------------------------------------------------------------------
Net corporate expenses - - (15,631) (15,631)
Special charges (4,575) (502) (1,436) (6,513)
Gain on sale of interest in Software
Division - 36,212 - 36,212
Interest expense, net - - (6,509) (6,509)
Equity in earnings of InfoSoft
International, Inc. - 1,973 - 1,973
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes and extraordinary item 63,641 45,075 (23,576) 85,140
- -----------------------------------------------------------------------------------------------------------------------------
Identifiable assets 172,799 99,121 95,004 366,924
Acquired assets 130,342 - - 130,342
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 303,141 99,121 95,004 497,266
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 39,439 1,692 3,285 44,416
Purchase of property, plant, and
equipment, including book plates 30,410 1,277 2,033 33,720
===============================================================================================================================
1993
==============================================================================================================================
Net sales from ongoing operations $ 357,198 $ 92,215 $ - $ 449,413
Net sales from former Software Division - 13,556 - 13,556
- ------------------------------------------------------------------------------------------------------------------------------
Net sales 357,198 105,771 - 462,969
- ------------------------------------------------------------------------------------------------------------------------------
Income from ongoing operations 68,933 8,325 - 77,258
Income from former Software Division - 3,537 - 3,537
- ------------------------------------------------------------------------------------------------------------------------------
Segment income 68,933 11,862 - 80,795
- ------------------------------------------------------------------------------------------------------------------------------
Net corporate expenses - - (18,865) (18,865)
Special charges (4,976) - (5,584) (10,560)
Interest expense, net - - (2,347) (2,347)
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes and extraordinary
item 63,957 11,862 (26,796) 49,023
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 175,378 84,559 138,149 398,086
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 34,044 1,600 3,717 39,361
Purchase of property, plant, and
equipment, including book plates 26,918 3,182 6,424 36,524
==============================================================================================================================
1992
==============================================================================================================================
Net sales from ongoing operations $ 348,581 $ 81,767 $ - $ 430,348
Net sales from former Software Division - 10,059 - 10,059
Net sales from foreign operations sold 4,920 9,379 - 14,299
- ------------------------------------------------------------------------------------------------------------------------------
Net sales 353,501 101,205 - 454,706
- ------------------------------------------------------------------------------------------------------------------------------
Income from ongoing operations 57,555 6,116 - 63,671
Income from former Software Division - 2,911 - 2,911
Loss from foreign operations sold (535) (1,918) - (2,453)
- ------------------------------------------------------------------------------------------------------------------------------
Segment income 57,020 7,109 - 64,129
- ------------------------------------------------------------------------------------------------------------------------------
Net corporate expenses - - (19,819) (19,819)
Loss on sale of foreign publishing
operations (1,468) (12,059) - (13,527)
Interest expense, net - - (2,339) (2,339)
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes and
cumulative effect of accounting
changes 55,552 (4,950) (22,158) 28,444
- ------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 152,844 75,704 109,479 338,027
Acquired assets 27,040 4,354 2,000 33,394
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 179,884 80,058 111,479 371,421
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 37,233 1,862 3,185 42,280
Purchase of property, plant, and
equipment, including book plates 33,752 1,632 2,802 38,186
==============================================================================================================================
55
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
(Unaudited, in thousands of dollars except per share amounts)
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter Year
==================================================================================================
Net sales $ 49,388 $117,141 $230,304 $ 86,243 $483,076
Gross profit (net sales less cost of
sales) 11,522 61,475 141,485 37,920 252,402
Net income (loss) before extraordinary
item 3,210 8,700 47,573 (7,053) 52,430
Extraordinary item, net of taxes (1,239) - - - (1,239)
- --------------------------------------------------------------------------------------------------
Net income (loss) $ 1,971 $ 8,700 $ 47,573 $(7,053) $ 51,191
==================================================================================================
Per share:
Net income (loss) before extraordinary
item $ 0.23 $ 0.63 $ 3.45 $ (0.51) $ 3.79
Extraordinary item, net of taxes (0.09) - - - (0.09)
- --------------------------------------------------------------------------------------------------
Net income (loss) $ 0.14 $ 0.63 $ 3.45 $ (0.51) $ 3.70
==================================================================================================
1993
==================================================================================================
Net sales $ 49,721 $121,204 $208,510 $ 83,534 $462,969
Gross profit (net sales less cost of
sales) 14,148 61,496 120,226 39,130 235,000
Net income (loss) before extraordinary
item (14,933) 4,482 41,544 280 31,373
Extraordinary item, net of taxes - (1,002) - - (1,002)
- --------------------------------------------------------------------------------------------------
Net income (loss) $(14,933) $ 3,480 $ 41,544 $ 280 $ 30,371
==================================================================================================
Per share:
Net income (loss) before extraordinary
item $ (1.08) $ 0.32 $ 3.00 $ 0.02 $ 2.27
Extraordinary item, net of taxes - (0.07) - - (0.07)
- --------------------------------------------------------------------------------------------------
Net income (loss) $ (1.08) $ 0.25 $ 3.00 $ 0.02 $ 2.20
==================================================================================================
THE ABOVE QUARTERLY INFORMATION INDICATES THE SEASONAL FLUCTUATIONS OF THE
COMPANY'S EDUCATIONAL PUBLISHING BUSINESS.
THE FIRST QUARTER OF 1994 AND THE SECOND QUARTER OF 1993 INCLUDE CHARGES RELATED
TO THE COMPANY'S CORPORATE AND DOMESTIC PUBLISHING OPERATIONS WHICH ARE OF AN
UNUSUAL NATURE. NOTE 10 TO THE CONSOLIDATED FINANCIAL STATEMENTS DESCRIBE THE
TRANSACTIONS AND RELATED FINANCIAL STATEMENT IMPACT.
IN THE SECOND QUARTER OF 1993, THE COMPANY COMPLETED AN EARLY REDEMPTION OF $25
MILLION OF 8.78% SENIOR NOTES DUE DECEMBER 1994. THE EXTRAORDINARY LOSS OF $1.0
MILLION IS NET OF AN INCOME TAX BENEFIT OF $.6 MILLION. IN THE FIRST QUARTER OF
1994, THE COMPANY COMPLETED AN EARLY REDEMPTION OF $25 MILLION OF 8.78% SENIOR
NOTES DUE MARCH 1997. THE EXTRAORDINARY LOSS OF $1.2 MILLION IS NET OF AN INCOME
TAX BENEFIT OF $.8 MILLION. NOTE 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS
DESCRIBES THE TRANSACTIONS.
THE FIRST QUARTER OF 1994 INCLUDES AN AFTER-TAX GAIN OF $22.8 MILLION, OR $1.65
PER SHARE, IN CONNECTION WITH THE PUBLIC OFFERING OF INFOSOFT INTERNATIONAL,
INC., THE SUCCESSOR COMPANY TO THE COMPANY'S FORMER SOFTWARE DIVISION. NOTE 13
TO THE CONSOLIDATED FINANCIAL STATEMENTS DESCRIBES THE TRANSACTION.
56
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
Item 10. Directors and Executive Officers of the Company
- -------- -----------------------------------------------
Information with respect to directors is incorporated herein by
reference to the Proxy Statement for the 1995 Annual Meeting of
Stockholders (the "1995 Proxy Statement"), and information with
respect to Executive Officers is set forth in Part I, Item 4 of this
report under the heading "Executive Officers of the Company" on pages
8-10 herein.
Item 11. Executive Compensation
- -------- ----------------------
Incorporated herein by reference to the 1995 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Incorporated herein by reference to the 1995 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Incorporated herein by reference to the 1995 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K
- -------- --------------------------------------------------------------------
(a) 1. Consolidated Financial Statements are listed in the accompanying
Index to Consolidated Financial Statements on page 24.
2. Financial Statement Schedule for the years ended December 31, 1994,
1993, and 1992 (Unaudited):
II - Consolidated Valuation and Qualifying Accounts Page 58
All other Schedules have been omitted because the required
information is included in the consolidated financial statements or
notes thereto or they are not required submissions.
3. Exhibits
--------
The exhibits listed in the accompanying Index to Exhibits, in
response to this item, set forth on page 59-61 herein, are filed as
part of this Report.
(b) Reports on Form 8-K filed in the fourth quarter of 1994
-------------------------------------------------------
None
57
HOUGHTON MIFFLIN COMPANY
SCHEDULE II - CONSOLIDATED VALUATION ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(IN THOUSANDS OF DOLLARS)
Additions
Balance at charged Balance
beginning (credited) at end
of year to income Retirements of year
---------- ---------- ----------- ------
1994
- ----
Allowance for book returns $ 12,325 $ 511 $ - $12,836
Allowance for authors' advances 11,866 2,593 3,380 $11,079
1993
- ----
Allowance for book returns $ 16,671 $ (4,346) $ - $12,325
Allowance for authors' advances 9,545 2,466 145 11,866
1992
- ----
Allowance for book returns $ 15,878 $ 793 $ - $16,671
Allowance for authors' advances 10,705 2,351 3,511 9,545
58
HOUGHTON MIFFLIN COMPANY
INDEX TO EXHIBITS
(Item 14(a)(3))
Exhibit No. Description of Document Page number in this report*
- ----------- ----------------------- ---------------------------
(3)(i) Restated Articles of Organization Filed as Exhibits (4.1) and (4.2)
of the Company to Registration Statement No.
33-14850 as amended, and
incorporated herein by
reference thereto
Amendment to Restated Articles Filed as part of Exhibit (1)
of Organization of the to Form 8-K on December 16,
Company in the form of a 1988, and incorporated herein
certificate of vote of by reference thereto
directors establishing a
series of a class of stock
(3)(ii) By-laws of the Company Filed as Exhibit (3) to Form 10-K for
the year ended December 31, 1990,
and incorporated herein by
reference thereto
(4) Registration Statement Filed on June 20, 1967, and
under the Securities Exchange incorporated herein by
Act of 1934 on Form 10 dated reference thereto
June 20,1967, as amended, with
particular reference to the
description of the common
stock of the Company
Rights Agreement between Filed as Exhibit (1) to Form
the Company and the First 8-K on December 16, 1988,
National Bank of Boston, as and incorporated herein by
Rights Agent reference thereto
(9) Registration Statement under Filed September 4, 1992, and
the Securities Exchange Act of incorporated herein by reference
1934 on Form S-3 dated thereto
September 4, 1992
(10)(ii) Benefits Trust Agreement between Filed as Exhibit (10)(ii)
(C) Houghton Mifflin Company and (C) to Form 10-K for the year
State Street Bank and Trust ended December 31, 1992, and
Company dated June 3, 1992 incorporated herein by reference thereto
(10)(ii) Lease between Two Twenty Two Filed as Exhibit (10) (ii)
(D) Berkeley Venture, as Landlord, (D) to Form 10-K for the year
and Houghton Mifflin Company, as ended December 31, 1991, and
Tenant incorporated herein by
reference thereto
*Page number refers to sequentially numbered copy
59
HOUGHTON MIFFLIN COMPANY
INDEX TO EXHIBITS
(Item 14(a)(3))
Exhibit No. Description of Document Page number in this report*
- ----------- ----------------------- --------------------------
(10)(iii) Form of Senior Executive Filed as Exhibit (10) (iii)
(A) Severance Agreement (A) to Form 10-K for the year
ended December 31, 1989, and
incorporated herein by
reference thereto
Key Editors' Severance Filed as Exhibit (10)(iii)(A)
Benefit Plan to Form 10-K for the year ended
December 31, 1987, and
incorporated herein by reference
thereto
Severance Agreement Filed as Exhibit (10)(iii)(A)
to Form 10-K for year ended
December 31, 1993, and
incorporated herein by reference
thereto
Agreement and Pages 62 - 64
General Release
Form of Supplemental Filed as Exhibit (10)(iii)(A)
Deferred Savings and to Form 10-K for the year ended
Thrift Plan Contribution December 31, 1985, and
Agreement incorporated herein by reference
thereto
Supplemental Benefits Filed as Exhibit (10)(iii)(A) to
Plan Form 10-K for the year ended
December 31, 1988, and
incorporated herein by reference
thereto
Non-employee Directors Filed as Exhibit (10)(iii)(A) to
Retirement Benefit Plan Form 10-K for the year ended
December 31, 1990, and
incorporated herein by reference
thereto
*Page number refers to sequentially numbered copy
60
HOUGHTON MIFFLIN COMPANY
INDEX TO EXHIBITS
(Item 14(a)(3))
Exhibit No. Description of Document Page number in this report*
- ----------- ----------------------- --------------------------
Trust Agreement for the Filed as Exhibit (10)(iii)(A)
Houghton Mifflin Pension Plan to Form 10-K for the year ended
with State Street Bank and December 31, 1990, and
Trust Company incorporated herein by
reference thereto
1994 Executive Stock Filed as Exhibit (10)(iii)(A)
Purchase Plan to Form 10-Q for the quarter ended
September 30, 1994, and incorporated
herein by reference thereto
Form of Option Grant Filed as Exhibit (10)(iii)(A)
and Exercise Agreement to Form 10-Q for the quarter ended
September 30, 1994, and incorporated
herein by reference thereto
Non-Employee Directors Filed as Exhibit (10)(iii)(A)
Stock Purchase Plan to Form 10-Q for the quarter ended
September 30, 1994, and incorporated
herein by reference thereto
Forms of Stock Purchase Agreement Filed as Exhibit (10)(iii)(A)
to Form 10-Q for the quarter ended
September 30, 1994, and incorporated
herein by reference thereto
(12) Computation of Ratio Page 65
of Earnings to Fixed Charges
(21) List of Subsidiaries Page 66
(23) Consents of Experts and Counsel Page 67
(27) Financial Data Schedule Page 68
*Page number refers to sequentially numbered copy
61
EXHIBIT 10(III) A
AGREEMENT AND GENERAL RELEASE
Houghton Mifflin Company (the "Company") and Michael Melody (the
"Employee") agree that the following sets out their complete agreement and
understanding regarding the separation of the Employee from the Company's
employ:
1. The Company and the Employee agree that the Employee's employment with the
Company shall terminate effective September 30, 1994.
2. The status of the Employee's benefits at separation from employment,
including severance pay, are set forth in the attached memorandum from
Margaret M. Doherty and letter from Nader F. Darehshori, both dated August
25, 1994. In addition, the Company will (1) make the 1994 federal income
tax gross up payments, related to the restricted stock awarded to the
Employee during 1994, at the time and on the same basis as such payments
are made for others who qualify for such payments; (2) prior to October 31,
1994, release to the Employee the balance in his deferred compensation
account; the current balance in that account is $125,652; and (3) after
January 15, 1995, release to the Employee the balance in the supplemental
ESTP account, which is currently estimated to be $2,353.00. The
consideration from the Company set forth in Paragraph 2 above constitutes
full settlement of any and all claims that the Employee may have against
the Company, its successors, assigns, affiliates, or any of its officers,
directors, shareholders, employees, agents, or representatives, for
compensation or otherwise.
3. In consideration for the promises made by the Company in this Agreement,
the Employee, on behalf of himself, his agents, assignees, attorneys,
heirs, executors and administrators, fully releases the Company and its
successors, assigns, parents, subsidiaries, divisions, affiliates,
officers, directors, shareholders, employees, agents and representatives
from any and all liability, claims, demands, actions, causes of action,
suits, grievances, debts, sums of money, controversies, agreements,
promises, damages, back and front pay, costs, expenses, attorneys' fees,
and remedies of any type, by reason of any matter, cause, act or omission
arising out of or in connection with his employment or separation from
employment with the Company, including without limiting the generality of
the foregoing, claims, demands or actions under Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act of 1967 as
amended, the Rehabilitation Act of 1973, the Civil Rights Act of 1866, the
Massachusetts Fair Employment Practices Act, any other federal, state, or
local statute or regulation regarding employment, discrimination in
employment, or the termination of employment, and the common law of any
state relating to employment contracts, wrongful discharge, or any other
matter.
4. In consideration for the promises made by the Employee in this Agreement,
the Company, on behalf of itself, and its successors, assigns,
subsidiaries, divisions, affiliates, officers, directors, shareholders,
employees, agents and representatives, fully releases the Employee, his
agents, assignees, attorneys, heirs, executors, and administrators, from
any and all liability, claims, demands, actions, causes of action, suits,
grievances, debts, sums of money, controversies, agreements, promises,
damages, back and front pay, costs, expenses, attorneys' fees, and remedies
of any type, by reason of any matter, cause, act or omission arising out of
or in connection with his employment or separation from employment with the
Company.
5. The Employee understands and agrees that the existence and terms of this
Agreement and General Release are confidential and shall not be disclosed
to any third party, other than the Employee's spouse, attorney, or
financial advisor, without the written consent of the Company.
62
6. The existence and execution of this Agreement and General Release shall not
be considered, and shall not be admissible in any proceeding, as an
admission by the Company, or its agents or employees, of any liability,
error, violation or omission.
7. This Agreement and General Release shall be binding upon and shall be for
the benefit of the Company and the Employee, as well as their respective
heirs, personal representatives, successors and assigns.
8. The provisions of this Agreement and General Release shall be severable,
and the invalidity of any provision shall not affect the validity of the
other provisions.
9. The Employee also acknowledges that during the course of his employment
with the Company, he has acquired confidential information about the
Company, including but not limited to information about its business and
publishing plans, operations, authors, customers, suppliers, and
operations. The Employee agrees not to disclose any such information to
anyone without the written consent of the Company.
10. The Employee acknowledges that the Company advised him in writing to
consult with an attorney before executing this Agreement, that he was given
a period of 21 days within which to consider the consideration for this
Agreement, that he had an adequate opportunity to review the Agreement with
an attorney, that he fully understands its terms, that he was not coerced
into signing it, and that he has signed it knowingly and voluntarily.
11. This Agreement and General Release shall take effect seven days after the
Employee executes it. The Employee has the right to revoke this Agreement
during a period of seven days following his execution of this Agreement. In
order to revoke the Agreement, he must notify Gary L. Smith, Senior Vice
President, of the Company, in writing of his decision to revoke, and said
notice must be received by Mr. Smith no later than seven days following the
execution of this Agreement. If he revokes this Agreement, he shall
promptly repay to the Company all consideration paid under this Agreement
to which he is not otherwise entitled.
HOUGHTON MIFFLIN COMPANY NAME:
BY /s/ Gary L. Smith /s/ Michael E. Melody
-------------------- -----------------------
DATED: September 22, 1994 DATED: September 22, 1994
Subscribed and sworn before me
this 22 day of September,
1994.
Notary Public /s/ Kathleen A. Rideout
-------------------------
my commission expires 7/27/95
63
HOUGHTON MIFFLIN COMPANY LETTERHEAD APPEARS HERE
August 25, 1994
PERSONAL & CONFIDENTIAL
- -----------------------
Mr. Michael Melody
Houghton Mifflin Company
222 Berkeley Street
Boston, MA 02116
Dear Mike:
This letter will confirm our discussions concerning the terms of your
separation from employment with Houghton Mifflin Company, effective September
30, 1994. As we have agreed, you will receive the following benefits:
- Salary continuation for 6 months (through March 31, 1995) at your
current rate of pay.
- You will be eligible to receive incentive compensation for 1994 on
a full year basis under the terms of the 1994 Senior Executive
Incentive Compensation Plan.
- $60,000 in consulting fees for the last calendar quarter of 1994
for assignments that we have discussed.
- Your health insurance benefits will continue at your current rate
of contribution through April 30, 1995, after which time you will
be entitled to purchase medical insurance through Houghton Mifflin
for a period of 18 months at 102% of the premium.
- You will be entitled to use the tax preparation services of Ernst &
Young for the filing of your 1994 tax return.
- We will accelerate your non-vested stock options so that you will
be able to exercise options to purchase a total of 1,500 shares at
$23.25 per share pursuant to the October 1, 1990 option grant and
1,000 shares at $23.875 per share pursuant to your January 30, 1991
option grant. The non-vested options (300 pursuant to the 1990
grant and 200 pursuant to the 1991 grant) will be exercisable
between October 1, and December 31, 1994.
As you know, these benefits go well beyond our policy and therefore we will
require our standard release of claims in exchange. We will provide you with
full details within the next couple of days. In the meantime, if you have any
questions, please talk to Gary Smith.
It has been a pleasure to work with you. I appreciate your cooperation in
working out these arrangements and look forward to continuing to work with you
over the next few months.
Sincerely,
/S/ Nader F. Darehshori
-----------------------
Nader F. Darehshori
64
HOUGHTON MIFFLIN COMPANY
EXHIBIT 12 - COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1994(B) 1993(A) 1992 1991 1990
------- ------- ---- ---- ----
Earnings before fixed
charges:
Income from continuing
operations $52.4 $31.4 $19.0 $25.1 $18.0
Provision for income taxes 32.7 17.7 9.4 15.3 13.2
----- ----- ----- ----- -----
Income from continuing
operations before taxes,
extraordinary item and
cumulative effect of
accounting changes 85.1 49.1 28.4 40.4 31.2
Interest expense* 6.5 3.6 4.4 6.1 5.9
Interest portion of rental
expense** 3.4 3.3 3.7 3.7 3.6
----- ----- ----- ----- -----
Earnings before fixed
charges $95.0 $56.0 $36.5 $50.2 $40.7
===== ===== ===== ===== =====
Fixed charges:
Interest expense * $ 6.5 $ 3.6 $ 4.4 $ 6.1 $ 5.9
Interest portion of rental
expense** 3.4 3.3 3.7 3.7 3.6
----- ----- ----- ----- -----
Total fixed charges $ 9.9 $ 6.9 $ 8.1 $ 9.8 $ 9.5
===== ===== ===== ===== =====
Ratio of earnings to fixed
charges 9.6 8.1 4.5 5.1 4.3
===== ===== ===== ===== =====
(A) On June 4, 1993, the Company completed an early redemption of $25 million
in senior notes due December 15, 1994. The company recognized an
extraordinary loss of $1.0 million, net of a tax benefit of $0.6 million.
The extraordinary loss is excluded from earnings before fixed charges and
interest expense in calculating the ratio of earnings to fixed charges.
(B) On March 30, 1994, the Company completed an early redemption of $25 million
in senior notes due March 30, 1997. The Company recognized an extraordinary
loss of $1.2 million, net of a tax benefit of $0.8 million. This
extraordinary loss is excluded from earnings before fixed charges and
interest expense in calculating the ratio of earnings to fixed charges.
* Includes: interest amortization of debt issuance costs in 1991 and 1992 of
approximately $55,000 annually and in 1993 of approximately $100,000
annually, and interest costs on capital lease obligations of $480,000 in
1990; $430,000 in 1991; and $260,000 in 1992; and $155,000 in 1993.
** Includes the portion of rent expense for each period presented that is
deemed by management to be the interest component of such rentals.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
------------------------
Registrant
By: /S/ Nader F. Darehshori
-----------------------------
Nader F. Darehshori
Chairman of the Board, President,
and Chief Executive Officer, March
14, 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 and
in the capacities and on the dates indicated:
/S/ Nader F. Darehshori /S/ John F. Magee
- ------------------------------------ ------------------------------
Nader F. Darehshori John F. Magee
Chairman of the Board, President, Director, March 14, 1995
Director, Chief Executive Officer, and
Director, March 14, 1995
/S/ Stephen O. Jaeger /S/ Claudine B. Malone
- ------------------------------------ ------------------------------
Stephen O. Jaeger Claudine B. Malone
Executive Vice President, Director, March 14, 1995
Chief Financial Officer,
Treasurer, and Director,
March 14, 1995
/S/ Joseph A. Baute /S/ Alfred L. McDougal
- ------------------------------------ ------------------------------
Joseph A. Baute Alfred L. McDougal
Director, March 14, 1995 Director, March 14, 1995
/S/ Gail Deegan /S/ George Putnam
- ------------------------------------ ------------------------------
Gail Deegan George Putnam
Director, March 14, 1995 Director, March 14, 1995
/S/ James O. Freedman /S/ Ralph Z. Sorenson
- ------------------------------------ ------------------------------
James O. Freedman Ralph Z. Sorenson
Director, March 14, 1995 Director, March 14, 1995
/S/ Mary H. Lindsay /S/ DeRoy C. Thomas
- ------------------------------------ ------------------------------
Mary H. Lindsay DeRoy C. Thomas
Director, March 14, 1995 Director, March 14, 1995
/S/ Charles R. Longsworth
- ------------------------------------
Charles R. Longsworth
Director, March 14, 1995
66