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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, 1995 Commission file number 1-5406
HOUGHTON MIFFLIN COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1456030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Berkeley St., Boston 02116-3764
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 351-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- -------------------------------------- --------------------------
Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
(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.
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant was approximately $589,777,345 as of February
29, 1996.
The registrant had outstanding 14,527,114 shares of common stock
(exclusive of Treasury shares) and 14,527,114 Preferred Stock Purchase Rights
as of February 29, 1996.
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 1996 Annual Meeting of Stockholders are incorporated into
Part III.
HOUGHTON MIFFLIN COMPANY
TABLE OF CONTENTS
FORM 10-K
Part I
Page
-------
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 7
Item 8. Consolidated Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 33
Part III
Item 10. Directors and Executive Officers of the Company 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 33
Part IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K 33
Index to Consolidated Financial Statements and Financial Schedules 33
Financial Statement Schedule 34
Signatures 35
Index to Exhibits 36
PART I
Item 1. Business
(a) Description 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 October 1995, the D.C. Heath and Company ("Heath") division of Raytheon
Company was acquired in a purchase transaction for $452.9 million in cash.
Heath is a publisher of textbooks and supplemental materials for the
elementary and secondary school and college markets. Heath's operating
results from the date of acquisition have been included in the educational
publishing segment of the Company's consolidated financial statements.
In June 1995, the Company recorded special charges related to a decision
to outsource existing distribution operations. These charges consisted
primarily of termination benefit costs, warehouse closing costs, and
inventory relocation expenses. In February 1996, the Company announced the
reassumption of the distribution function maintained at its Geneva, Illinois
facility. This warehouse will continue to service the elementary and
secondary textbook and college product distribution operations. The
distribution operations for Riverside and Trade & Reference will continue to
be managed by a third party.
In March 1994, the Company's former Software Division successfully
completed an initial public offering. The Company retained an equity interest
in the successor company, INSO Corporation ("INSO"), of approximately 40%. In
August 1995, INSO completed a new public offering of 1.2 million shares of
common stock which reduced the Company's ownership interest to approximately
36%. INSO declared a stock split in the form of a 100% stock dividend to be
paid in September 1995. All INSO share references have been restated to
reflect the effects of the stock split. Up to 3.8 million of the Company's
INSO shares have been used to collateralize the principal owed from the
issuance of the 6% Exchangeable Notes due in 1999 ("SAILS").
(b) Financial information about the industry segments
Financial information about the Company's industry segments is set forth
in Note 14 to the Consolidated Financial Statements (Part II, Item 8) under
the heading "Segment Information" on page 30 herein, and in the schedule
"Five-Year Financial Summary" on page 6 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 need for 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 including computer software, laser discs, CD-ROM, and other
electronic and multimedia products.
Textbooks and other educational materials and services
This industry segment includes textbooks and instructional materials,
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, 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 regional sales
offices are located in Illinois, Texas, Georgia, New Jersey, and California.
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; sales for the
secondary school market are made by McDougal Littell Inc. ("McDougal"); the
educational and clinical testing materials markets are serviced by The
Riverside Publishing Company ("Riverside"); and the two- and four-year higher
education markets are serviced by the College Division. Heath elementary,
secondary, and college materials will be sold by the School Division,
McDougal, and College Division, respectively. All operating divisions have
their own dedicated sales forces. In 1995, the Company outsourced the
distribution operations of all product components in the educational segment.
In December 1995, the Company
1
announced the creation of a new operating unit within the educational segment
whose focus will be the development and sale of products for the
supplementary instructional market that complement the Company's elementary
and secondary publications. Existing School, McDougal, and Heath products,
including reference, audio visual and display materials, workbooks and
manipulatives will be used as a foundation for the unit Great Source
Education Group, which was incorporated as a subsidiary in February, 1996.
The division will operate independently with its own editorial staff and
sales force and will be located in Wilmington, Massachusetts. In February
1996, the Company announced that it will resume control of distribution
operations for the shipment of product components for the School Division,
McDougal, and College Division from its Geneva, Illinois facility.
General publishing
This industry segment includes trade books of fiction and nonfiction for
adults and children, dictionaries and other reference works. 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. Reference and
dictionary materials are also sold to schools, colleges, office supply
distributors, and businesses. In 1995, the Trade & Reference Division
announced the launch of a new imprint, "Houghton Mifflin Interactive," whose
principal initiative is the development of CD-ROM titles for sale in the
multimedia consumer product markets. These products will be created from new
and existing Houghton Mifflin titles, and will include children's, reference
and adult hobby titles. 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. Major corporate sales and support
offices are maintained in Massachusetts and New York. On June 1, 1995, the
distribution operations for trade products were outsourced to Publishers
Resources Inc.'s facilities located near Nashville, Tennessee. The former
office and warehouse facility located in Burlington, Massachusetts was closed
and the property sold in November 1995.
Company business as a whole
The availability of printing and binding capacity and raw materials
continued at satisfactory levels throughout the year. The availability of
adequate high quality paper supplies has tightened during 1995; however the
Company has had available to it adequate sources to meet production
requirements at competitive prices. 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 7 herein.
The Company's principal businesses are seasonal and consist of sales
predominately to schools and colleges with approximately 70% of sales
normally occuring in the second and third quarters as purchases are made for
the school year which begins in September. Third-quarter results are material
to full-year performance with the Company realizing more than 40% of its net
sales and substantially all of its net income during the third quarter. The
acquisitions of Heath and McDougal have not materially changed the seasonal
nature of the Company's net sales or operating profits. See "Summary of
Quarterly Results of Operations (unaudited)" for the two-year period ended
December 31, 1995, set forth on page 32 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. The increase in the number of
states adopting elementary and secondary school products provided for
increased sales opportunities in 1995. It is expected that 1996 will offer
more limited sales opportunities for state-wide adoption. 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 due to the
extensive consolidations that have occurred in the publishing industry in
recent years. The major competitive factors in the industry are believed to
be quality of product and customer service. The elementary and secondary
school market is concentrated in approximately 10 significant publishers; in
the college book market the Company competes with 10 significant publishers.
In the diverse trade and juvenile book markets, approximately 60% of the
estimated $6 to $7 billion total industry sales is shared by 10 major
publishers including Houghton Mifflin.
At December 31, 1995, the Company employed approximately 2,350 people.
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.
2
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, 1995. 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 educational
warehouse materials
Palo Alto, California 18,000 Offices Textbooks and other educational
materials; sales office
Indianapolis, Indiana 503,000 Offices & Textbooks and other educational
warehouse materials; sales office
Leased premises
- ------------------------
Boston, Massachusetts * 246,000 Executive & (1) Textbooks and other
222 Berkeley Street/ business educational materials and
500 Boylston Street offices services, (2) General
publishing, and (3) Corporate
headquarters
Dallas, Texas 80,000 Offices & Textbooks and other educational
warehouse 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
Wilmington,
Massachusetts 40,000 Offices Corporate support
Atlanta, Georgia 31,000 Offices & Textbooks and other educational
warehouse materials; sales office
New York, New York 36,000 Offices General publishing
St. Charles, Illinois 14,000 Offices Textbooks and other educational
materials; sales office
Princeton, New Jersey 5,700 Offices Textbooks and other educational
materials; sales office
The years of expiration on leased premises are as follows:
Boston, Massachusetts 2007
Dallas, Texas 2005
Chicago, Illinois 1996
Evanston, Illinois 2004
Wilmington,
Massachusetts 2005
Atlanta, Georgia 1998
New York, New York 2004
St. Charles, Illinois 2006
Princeton, New Jersey 1999
* Lease agreement entered into in February 1996 for expansion of 56,000
square feet into premises adjacent to existing corporate headquarters.
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, 1995.
3
Executive Officers of the Company
Other
Office positions
Age at held with the
Name 2/28/96 Office since Company
- ----------------------- ------ --------------------------------- ---- ---------
Nader F. Darehshori 59 Chairman, President, and 1991 Director
Chief Executive Officer
Albert Bursma, Jr. 59 Executive Vice President, 1995 --
President, Great Source
Education Group, Inc.
Gail Deegan ** 49 Executive Vice President, Chief 1996 --
Financial Officer, and
Treasurer
Margaret M. Doherty 57 Senior Vice President, Human 1994 --
Resources
Elizabeth L. Hacking 54 Senior Vice President, 1993 --
Strategic Development
Michael J. Lindgren 38 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 1992 --
Publishing Company
Gary L. Smith 50 Senior Vice President, 1991 --
Administration
June Smith 51 Executive Vice President, 1994 --
College Division
Wendy Strothman 46 Executive Vice President, Trade 1996 --
& Reference Division
John E. Tyler 54 Senior Vice President, Chief 1993 --
Technology Officer
Paul D. Weaver 52 Senior Vice President, Clerk, 1989 --
Secretary, and General Counsel
William J. Wisneski 48 Executive Vice President, 1992 --
School Division
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. Bursma, Ms.
Deegan, Mr. Lindgren, Ms. McGee, Mr. Oswald, Ms. Smith, Ms. Strothman, and
Mr. Tyler.
Nader F. Darehshori
1991--Chairman, President, and Chief Executive Officer
Albert Bursma, Jr.
1995--Executive Vice President, President, Great Source Education Group,
Inc.*
1994--Executive Vice President, D.C. Heath and Company; President, School
Division (D.C. Heath and Company was a publisher not affiliated with
the Company prior to its acquisition on October 31, 1995.)
Gail Deegan **
1996--Executive Vice President, Chief Financial Officer, and Treasurer
1995--Senior Vice President, Regulatory and Government Affairs, NYNEX
1994--Vice President and Chief Finanical Officer, New England Telephone, a
wholly-owned subsidiary of NYNEX
Margaret L. Doherty
1994--Senior Vice President, Human Resources
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
Michael J. Lindgren
1995--Vice President, Controller, and Treasurer
1994--Vice President and Controller
1994--Divisional Vice President and Controller
1993--Director of Planning & Analysis, ITT Sheraton
4
1992--Director of Accounting and Management Reporting, ITT Sheraton (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
1994--President, McDougal Littell/Houghton Mifflin Inc.*
1991--President, McDougal, Littell & Company (McDougal, Littell & Company was
a publisher not affiliated with the Company prior to its acquisition on
March 1, 1994.)
John H. Oswald
1993--Executive Vice President
1992--President, The Riverside Publishing Company*
1992--Vice President
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
June Smith
1994--Executive Vice President
1992--Vice President, Editorial Director, College Division
1991--Editorial Director and Publisher--College Division of McGraw-Hill,
Inc. (a publisher not affiliated with the Company)
Wendy Strothman
1996--Executive Vice President, Trade & Reference Division
1995--Vice President, Publisher, Adult Trade and Reference
1995--Director, Beacon Press (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*
* A subsidiary of the Company
** Ms. Deegan became Executive Vice President, Chief Financial Officer, and
Treasurer on February 26, 1996, at which time she resigned as a Director
of the Company.
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 29, 1996, the approximate number of holders of common stock of the
Company was 5,121.
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)
1995 1994
------------------------ --------------------------
Dividend Dividend
High Low Paid High Low Paid
----- ----- ------ ----- ----- --------
First quarter $47.13 $39.75 $.225 $53.00 $40.63 $.215
Second quarter 54.75 45.88 .225 48.25 38.88 .215
Third quarter 52.88 44.88 .240 46.13 36.13 .215
Fourth quarter 46.75 39.63 .240 47.88 40.63 .225
---- ------
Year $.930 $.870
==== ======
5
Item 6. Selected Financial Data
The response to this item is set forth below under the heading "Five-Year
Financial Summary."
HOUGHTON MIFFLIN COMPANY
Five-Year Financial Summary
(Unaudited) Years ended December 31
(In thousands of dollars except amounts per share) 1995 1994 1993 1992 1991
--------- ------- ------- ------- ---------
OPERATING RESULTS
Net sales $ 529,022 $483,076 $462,969 $454,706 $466,801
Operating income (loss) (13,095) 53,464 51,370 44,310 44,862
Net interest expense 13,008 6,509 2,347 2,339 3,706
Gain on equity transactions of INSO Corporation
and sale of interest in Software Division 13,102 36,212 -- -- --
Loss on disposition of foreign publishing
operations -- -- -- (13,527) (710)
Income (loss) before taxes, extraordinary item
and accounting changes (11,444) 85,140 49,023 28,444 40,446
Cumulative effect of accounting changes -- -- -- (14,657) --
Net income (loss) (7,243) 51,191 30,371 4,414 25,077
- ----------------------------------------------- ------- ----- ----- ----- -------
PER COMMON SHARE
Net income (loss) per share of common stock $ (0.52) $ 3.70 $ 2.20 $ 0.31 $ 1.75
Dividends declared per share 0.93 0.87 0.83 0.79 0.75
Book value 16.89 17.74 16.15 14.52 15.63
Stock price--High 54.75 53.00 50.38 39.88 30.38
Low 39.63 36.13 36.38 26.63 22.25
Close 43.00 45.38 48.63 39.88 28.50
- ----------------------------------------------- ------- ----- ----- ----- -------
FINANCIAL DATA
Total assets $1,046,798 $497,266 $398,086 $371,421 $381,780
Long-term debt less current portion 426,148 99,445 26,438 52,608 52,975
Additions to book plates and plant, property
and equipment 54,278 33,720 36,524 38,186 41,037
Dividends paid 12,845 12,026 11,475 11,037 10,746
Average number of shares available for earnings
per share (in thousands) 13,812 13,822 13,823 14,029 14,314
- ----------------------------------------------- ------- ----- ----- ----- -------
Net Sales--Classes of Similar Products
Textbooks and other educational
materials and services
School publishing $ 359,523 $303,370 $267,106 $272,289 $291,896
College publishing 82,277 84,057 90,092 81,212 78,336
------- ----- ----- ----- -------
441,800 387,427 357,198 353,501 370,232
General publishing 87,222 95,649 105,771 101,205 96,569
------- ----- ----- ----- -------
$ 529,022 $483,076 $462,969 $454,706 $466,801
======= ===== ===== ===== =======
In October 1995, the Company completed the acquisition of D.C. Heath and
Company from Raytheon Company in a purchase transaction (See Note 2). As a
result, certain charges of $49.3 million ($30.0 million after-tax, or $2.17
per share) were recorded in 1995 associated with the integration of the Heath
business.
An after-tax gain of $7.8 million, or $.56 per share, was recognized in
1995 in connection with an additional public offering of 1.2 million shares
made by INSO. In 1994, the Company recognized an after-tax gain of $22.8
million, or $1.65 per share, in connection with the initial public offering
of INSO Corporation, the successor company to the former Software Division.
In March 1994, the Company acquired the assets of McDougal, Littell &
Company in a purchase transaction (See Note 2).
In 1992, the Company adopted the provision of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109,
"Accounting for Income Taxes."
In 1992, the Company recognized a loss associated with the sale of certain
foreign operations.
6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three years ended December 31, 1995.
On October 31, 1995, the Company acquired D.C. Heath and Company ("Heath")
for net cash consideration of $452.9 million. On March 1, 1994, the Company
acquired McDougal, Littell & Company ("McDougal") for net cash consideration
of $130.3 million. These acquisitions have been accounted for as purchases
and, accordingly, the operating results of Heath and McDougal are included in
the Company's consolidated financial statements from the date of acquisition.
Net sales in 1995 increased $45.9 million, or 9.5%, to $529.0 million from
1994 net sales of $483.1 million. The educational publishing segment's net
sales increased by $54.4 million, or 14.0%, in 1995 from net sales of $387.4
million in 1994. The increase in revenues is primarily due to the increased
adoption opportunities in 1995 and $17.8 million in incremental revenue as a
result of the Heath acquisition. The general publishing segment net sales of
$87.2 million in 1995 decreased $8.4 million, or 8.8%, from 1994 net sales of
$95.6 million. The decrease in net sales for 1995 primarily resulted from the
absence of sales from the former Software Division, lower distribution
revenues, lower revenues from weaker front list titles, and additional
provisions for book returns.
Net sales of $483.1 million in 1994 increased $20.1 million, or 4.3%, from
1993 net sales of $463.0 million. The educational publishing segment's net
sales of $387.4 million in 1994 increased by $30.2 million, or 8.5%, over net
sales of $357.2 million in 1993. Net sales from McDougal of $62.4 million
more than offset a net sales decrease from other educational publishing
segment components. The general publishing segment's net sales of $95.6
million in 1994 decreased by $10.1 million, or 9.6%, from net sales of $105.8
million in 1993. The decrease in net sales in 1994 primarily reflected the
disposition of the Company's former Software Division, which successfully
completed an initial public offering in March 1994. General publishing
segment sales were up slightly in comparison to 1993 with removal of the
former Software Division's sales from both year's results.
The Company's operating loss for 1995 was $13.1 million compared to
operating income of $53.5 million recorded in 1994, while the operating
income recorded in 1994 was a 4.1% increase from the $51.4 million recorded
in 1993. Included in these operating results were $56.3 million, $6.5 million
and $10.6 million of special charges for 1995, 1994 and 1993, respectively.
The 1995 special charges include $49.3 million of charges related to the
integration of the Heath operations and $7.0 million resulting from the
decision to outsource the Company's distribution function. The charges
related to Heath include $32.9 million for inventory and plate adjustments
based on strategic decisions made and actions taken subsequent to the
acquisition, $9.3 million for integration of administrative and sales
functions and $7.1 million for indirect costs of the acquisition. The
distribution-related charges include $3.0 million for closing costs and the
disposal of assets, $2.9 million for severance, and $1.1 million for
consulting and inventory relocation.
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 special 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
location.
The after-tax cost of the $56.3 million, $6.5 million, and $10.6 million
in special charges was $34.3 million ($2.48 per share), $4.0 million ($.29
per share), and $6.6 million ($.48 per share) for 1995, 1994, and 1993,
respectively.
The educational publishing segment's operating income decreased by $4.4
million or 6.5% in 1995 on a sales increase of 14.0%. The general publishing
segment recorded a loss from ongoing operations in 1995 of $8.5 million, a
decrease of $15.8 million from 1994, on a revenue decrease of $6.6 million or
7.0%. The Company's general corporate expenses increased 2.5% to $16.0
million in 1995 from the $15.6 million reported in 1994.
The educational publishing segment's operating income decreased by $.7
million, or 1%, in 1994 on a sales increase of 8.5%. The general publishing
segment's income from ongoing operations in 1994 decreased 12.6%, to $7.3
million from the $8.3 million recorded in 1993. The Company's general
corporate expenses declined $3.3 million, or more than 17%, to $15.6 million
in 1994 from the $18.9 million reported in 1993. This reduction was due in
part to the restructuring actions taken in 1994 and prior years.
In connection with the initial public offering by the former Software
Division, INSO Corporation ("INSO"), the Company recognized in 1994 a gain of
$36.2 million ($22.8 million after tax, or $1.65 per share). In 1995, INSO
completed an additional public offering of 1.2 million common shares at
approximately $33 per share; as a result, the Company's equity ownership has
been reduced to approximately 36%. The Company recorded a non-cash gain of
$13.1 million ($7.8 million after tax, or $.56 per share) in 1995,
representing the Company's portion of the increase in the net assets of INSO
as a result of this offering.
7
Net interest expense increased $6.5 million, or almost 100%, in 1995 due
to the $345 million of commercial paper and bank financing obtained for the
Heath acquisition, the $126.6 million SAILS issuance and a full year of
interest on the $100 million of 7.125% 10 year notes issued in April 1994
("Notes") to finance the McDougal acquisition. Net interest expense increased
nearly $4.2 million in 1994 from the $2.3 million reported in 1993 due to the
debt service requirements of the $100 million Notes used to finance the
McDougal acquisition.
The Company's effective tax rate for 1995 was approximately 37% compared
to approximately 38% for 1994 and 36% for 1993. The reduction in the
effective tax rate in 1995 is primarily due to the combination of a 41% tax
rate applied to the gain on the equity transactions of INSO offsetting the
39% tax rate used on the loss from operations. The increase in 1994 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.
The consolidated net loss in 1995 was $7.2 million, or $.52 per share.
These results included the previously discussed after-tax gain recognized in
connection with the sale of additional common shares by INSO Corporation, of
$7.8 million ($.56 per share), and the after-tax special charges of $34.3
million ($2.48 per share). Consolidated net income in 1994 was $51.2 million,
or $3.70 per share including the previously discussed after- tax gain,
recognized in connection with the public offering of the Company's former
Software Division, of $22.8 million ($1.65 per share), the after-tax special
charges of $4.0 million ($.29 per share), and an extraordinary item of $1.2
million ($.09 per share), related to the early extinguishment of debt.
Consolidated net income in 1993 was $30.4 million or $2.20 per share,
including the previously discussed after-tax special charges of $6.6 million
($.48 per share), and an extraordinary item of $1.0 million ($.07 per share),
related to the early extinguishment of long-term debt.
Textbooks and Other Educational Materials
The educational publishing segment's net sales of $441.8 million were
$54.4 million higher than the $387.4 million in 1994 an increase of 14.0%. In
elementary and secondary school publishing, the School Division and McDougal
contributed an increase of $35.8 million, reflecting the increase in adoption
opportunities as well as the expected leverage from a dedicated secondary
school sales force. Net sales of $17.8 million from Heath, acquired on
October 31, 1995, also contributed to the increase. The Riverside Publishing
Company ("Riverside") reported a sales increase of 4.7% over 1994. The
educational testing market continues a shift from norm- referenced
standardized tests to customized criterion-referenced tests. The transition
continues to affect Riverside as it develops its expertise in
criterion-referenced tests and diversifies its product base to include more
clinical and guidance assessment products. The College Division, which
continues to compete in a difficult industry, reported a 2.1% decrease in net
sales from 1994. The acquisition of Heath and its college business is
expected to significantly increase the revenues for the combined college
business in 1996.
Net sales of $387.4 million from the educational publishing segments 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, compared to 1993 mainly due to the existence
of significant state adoption opportunities in 1993 for elementary school
reading products. The decrease in School Division revenues was partially
offset by the open-territory sales of reading and the Company's new
elementary school mathematics program. Riverside reported a sales increase of
6.9% over 1993. The College Division reported a 6.7% decrease in net sales
from 1993 primarily due to 1993's favorable returns experience. Gross sales
of college product increased slightly in 1994.
Operating income for the educational publishing segment decreased $4.4
million, or 6.5%, to $63.8 million from the $68.2 million reported in 1994.
The resulting operating margin for 1995 decreased to 14.4% from 17.6% in
1994. The decrease in the operating margin is primarily due to increased
development spending, the incremental Heath operating losses, and higher
distribution costs. Development spending for School and McDougal increased
$15.4 million, or approximately 60%, reflecting the investment in new
programs for adoption opportunities in 1997 through 1999. Programs under
development included Houghton Mifflin Reading: Invitations to Literacy(C)
1996, Houghton Mifflin Social Studies(C) 1997, and McDougal Littell The
Language of Literature(C) 1997. Selling and administrative costs increased
approximately 9.5%, reflecting the incremental Heath costs and a full year of
McDougal costs, including the intangible asset amortization. Additionally,
outsourcing of distribution at the Geneva, Illinois, facility posed problems
for the Company in 1995. Distribution costs increased $6.5 million in 1995
and service to the Company's customers was not acceptable. In February 1996,
the Company announced that it was re-assuming control over the distribution
function maintained at its Geneva, Illinois, facility.
Operating income for the educational publishing segment in 1994 decreased
$.7 million to $68.2 million from the $68.9 million reported in 1993. The
resulting operating margin for 1994 decreased to 17.6% from 19.3% in 1993.
Selling and administrative costs increased approximately 17%, reflecting the
incremental costs of the
8
McDougal acquisition and 1995 adoption opportunities. Excluding the effect of
the McDougal acquisition, 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 in 1994 and
prior years. The decrease in the segment's operating income and margin also
reflects a 36% decrease from 1993 in the College Division's operating income.
General Publishing
Compared with 1994's net sales from ongoing operations, adjusted for the
sale of the former Software Division, the general publishing segment's net
sales in 1995 decreased $6.6 million, or 7.0%, to $87.2 million. The revenue
decrease was primarily due to a decline in revenue contribution from the
adult book list and lower distribution revenues. The general publishing
segment's loss from ongoing operations was $8.5 million, compared to income
of $7.3 million in 1994. There was a $7.5 million non-cash charge recorded in
the fourth quarter of 1995, to increase reserves for author advances,
inventory obsolescence, and book returns. In addition to these charges, the
division reported an operating loss from its new imprint, Houghton Mifflin
Interactive. Distribution costs increased by $1.6 million for actions
required during the transition to outsourced distribution. That transition is
now complete and the Burlington, Massachusetts, facility formerly used for
general publishing distribution has been sold.
Net sales from ongoing operations, excluding software, in 1994 increased
$1.6 million, or 1.7%, to $93.8 million from 1993's level of $92.2 million.
Net sales of reference products increased 4%, distribution revenues increased
sharply, juvenile sales were flat, and adult trade sales were down 6%
compared to 1993.
The general publishing segment's income from ongoing operations was $7.3
million in 1994 compared to $8.3 million in 1993. The decrease in 1994's
operating income reflects slightly higher manufacturing and selling costs.
There were no material charges to operating income in either 1994 or 1993 for
royalty advances to authors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal businesses are seasonal, with approximately 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 acquisitions of Heath
and McDougal have not materially changed the seasonal nature of the Company's
net sales.
The revenue seasonality also affects the Company's operating cash flow. A
net cash deficit from all the Company's 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.
In October 1995, the Company acquired Heath, a leading publisher of
elementary, secondary, and college educational products, for $452.9 million
in net cash, including investment advisory and other third-party costs. The
total acquisition cost was financed through a combination of existing cash
balances, $145 million in commercial paper, and $200 million in bank
financing. The Company has a currently effective registration statement with
the Securities and Exchange Commission for the issuance of up to $300 million
in debt securities. It is intended that a portion of the proceeds from the
issuance will be used as permanent financing for the Heath acquisition. In
March 1996, under this registration statement, the Company issued $125
million of 7% Notes due 2006. In March 1996 the Company also issued $100
million of the medium-term notes available. These notes were issued with a
weighted average interest rate of 6.0% and a weighted average maturity of 2.6
years. The proceeds from these issuances were used to repay $100 million of
the unsecured bank facility and $125 million of the commercial paper
borrowings.
In March 1994, the Company acquired McDougal, a leading publisher of
educational products, for $130.3 million in net cash, including investment
advisory and other third party costs. The total 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 an initial
public offering in March 1994. In connection with the public offering, the
Company received a pre-tax cash dividend of $32.9 million from INSO, the
successor company. In 1995, the Company recorded a non-cash gain of $13.1
million as a result of INSO's additional public offering of 1.2 million
shares at approximately $33 per share. This non-cash gain represents the
Company's portion of the increase in the net assets of INSO as a result of
this offering. The Company has pledged up to 3.8 million shares of INSO
Corporation common stock as the collateral for the redemption of the 6%
Exchangeable Notes (SAILS) due 1999, that were issued in August 1995. At
maturity, the principal amount of each SAILS will be mandatorily exchanged
for a number of shares of INSO common stock, or at the Company's option, cash
with an equal value. The number of shares which could be issued in exchange
will be dependent on INSO's market share price at the time of the redemption.
The Company will record as
9
additional non-cash interest expense, over the life of the SAILS, the excess
of the current INSO stock price over the maximum redemption price at
maturity. The additional non-cash interest expense to be recorded through
August 1999, based upon INSO's December 31, 1995 stock price, is $10.1
million. If the Company chooses to redeem the SAILS with shares of INSO
common stock, it would record a gain representing the excess of the
redemption amount over the book value of the Company's investment in INSO.
The Company's ownership percentage of INSO after this redemption would be
less than 20%. The remaining non-pledged INSO shares may be sold by the
Company, subject to certain restrictions, as market conditions and events
warrant.
The Company had $145 million in short-term borrowings outstanding at
December 31, 1995. There were no short-term borrowings outstanding at
December 31, 1994. Average short-term borrowings increased in 1995 primarily
due to $145 million in commercial paper financing for the Heath acquisition,
the increase in seasonal borrowing needs as a result of including a full year
of operations for McDougal, and the incremental impact of funding Heath
operations for the final two months of 1995. Average short-term borrowings
increased in 1994 compared to 1993 primarily due to the bridge financing of
$100 million for the McDougal acquisition, higher seasonal borrowing
requirements, and the early redemption in March 1994 and June 1993 of $25
million of 8.78% senior notes which 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 INSO dividend and operating cash. The
June 1993 redemption was financed with commercial paper. The Company's
average short-term borrowings (exclusive of the commercial paper used to
refinance the June 1993 senior notes redemption) were $13.6 million, $8.9
million, and $3.9 million in 1995, 1994, and 1993, respectively.
At December 31, 1995, the Company's debt (including the short-term
borrowings for the Heath acquisition) was $570.8 million as compared with
$100 million (discounted value $99.4 million) at the end of 1994. The
Company's percentage of debt to total capitalization (debt plus stockholders'
equity) was 71.0% at the end of 1995 as compared to 28.9% at the end of 1994.
The increase in the percentage is principally due to the $345 million in
commercial paper and bank financing which partially funded the Heath
acquisition, and the $126.6 million SAILS issuance. The capitalization
percentage at December 31, 1995 decreases to 64.6% excluding the short-term
borrowings.
The Company's cash and marketable securities position at the end of 1995
was $17.3 million, compared to $47.2 million at the end of 1994. Net cash
from operations in 1995 decreased $54.2 million from 1994, primarily due to
the increase in inventories and the additional seasonal operating losses from
the acquisition of Heath. Although net cash from operating activities
increased $6.3 million in 1994, due primarily to the McDougal acquisition,
the Company's year-end cash and cash equivalents decreased $36.9 million.
Net cash required for investing activities (excluding proceeds from
marketable securities) increased by $371.3 million in 1995. This increase
primarily resulted from the $452.9 million acquisition of Heath. Net cash
required for investing activities (excluding proceeds from marketable
securities) increased by $97.5 million in 1994. This increase resulted from
the $130.3 million acquisition of McDougal offset by the $32.9 million
dividend received from INSO.
The Company's financing activities contributed $459.6 million in 1995,
$26.2 million in 1994, and required $10.9 million in 1993. The increase in
financing sources in 1995 was a result of the incremental borrowings of $345
million used to finance the Heath acquisition and the $126.6 million SAILS
issuance. Financing activity outflows in 1995 included $12.0 million less to
repurchase stock than in 1994. The 1994 increase in financing sources
included proceeds from the 2004 Notes. Financing activity outflows in 1994
included $51.6 million to retire debt and the repurchase of $12.3 million
more common stock than in 1993.
In 1995, 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 second quarter of 1995,
first quarter of 1994, and the second quarter of 1993 related to workforce
changes and distribution consolidation and outsourcing. These actions, as
well as other measures taken over the past four years, are expected to
continue to reduce 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 to pay down debt and to invest in new product development.
The Company believes that its cash and marketable securities position,
along with funds generated from operating activities and borrowing
facilities, will be sufficient to meet total cash requirements for the
foreseeable future, including the refinancing of the borrowings from the
Heath acquisition. The periodic use of the short-term debt market, primarily
commercial paper, for seasonal liquidity needs will continue. The average
seasonal borrowings in 1996 are expected to be higher than undertaken over
the past three years due in part to the addition of Heath's seasonal
operations.
IMPACT OF INFLATION AND CHANGING PRICES
Although inflation is currently well below that of prior years, which has
benefited recent Company results, particularly in the area of manufacturing
costs, there are offsetting costs. The Company's ability to adjust selling
10
prices always has been limited by competitive factors and long-term
contractual arrangements which either prohibit price increases or limit the
amount by which prices may be increased. The combination of a weak domestic
economy and low inflation results in lower tax receipts at the state and
local level, which adversely affects the funding and buying patterns for
textbooks and other educational materials.
In 1994, the Company started to experience higher prices for paper goods
which continued into 1995. Although there has been some softness in recent
prices for certain paper products, the Company anticipates that the trend to
higher prices will continue as the demand for high quality paper continues to
outpace the available supply.
The most significant Company investments affected by inflation include
book plates, other property, plant, and equipment and inventories. 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. The incremental replacement cost expense amounted to $5.2
million in 1995 as compared with $.6 million in 1994.
The Company's publishing business does not require a high level of
investment in property, plant, and equipment. Such net assets represented
3.1% of consolidated assets at December 31, 1995. The Company's net
investment at the end of 1995 in capitalized book plates for educational and
reference works represented approximately 8.6% of total assets. The Company
continues to commit funds to new publishing areas through both acquisitions
and internal growth.
Management believes that by valuing its inventory using the LIFO method,
continuing to emphasize technological improvements, and quality control, the
Company can continue to moderate the impact of inflation on its operating
results and financial position.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of
1995: Statements in this report that are not historical facts may be
forward-looking statements that are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause
actual results to differ materially from those expressed in any
forward-looking statements made by the Company. These factors include, but
are not limited to, (i) the highly seasonal and cyclical nature of the
Company's educational sales; (ii) variable funding in school systems
throughout the nation, resulting in both cancellation of planned purchases of
educational materials and shifts in timing of purchases; (iii) changes in
purchasing patterns in elementary, secondary, and college markets; (iv)
regulatory changes which would affect the purchase of educational materials
and services; (v) severe increases in paper prices; and (vi) other factors
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
11
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
-----
Management's Responsibility for Financial Statements 13
Report of Independent Auditors 13
Consolidated Balance Sheets at December 31, 1995 and 1994 14
Consolidated Statements of Operations for the three years ended December 31, 1995 16
Consolidated Statements of Cash Flows for the three years ended December 31, 1995 17
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1995 18
Notes to Consolidated Financial Statements 20
Supplementary Data
Summary of Quarterly Results of Operations (unaudited) are presented on page 32.
12
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Houghton Mifflin Company is responsible for all
information and representations contained in the financial statements and
other sections of this annual report. Management is also responsible for the
internal consistency of such information and representations. In preparing
the financial statements it is necessary for management to make informed
judgments and estimates and to select accounting principles which it believes
are in accordance with generally accepted accounting principles appropriate
in the circumstances.
In meeting its responsibility for the reliability of the financial
statements, management relies on the Company's internal control systems and
procedures. In designing such control procedures, management recognizes that
errors or irregularities may nevertheless occur and that estimates and
judgments are needed to assess and balance the relative costs and expected
benefits of controls. However, management believes that the Company's
accounting controls do provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed in
accordance with corporate policy and management's authorization. As a further
safeguard, the Company has a program of internal audits and appropriate
follow-up by management.
The financial statements have been audited by the Company's independent
auditors, Ernst & Young LLP, in accordance with generally accepted auditing
standards. In connection with its audit, Ernst & Young LLP develops and
maintains an understanding of the Company's accounting and financial
controls, and conducts such tests and related procedures as it deems
necessary to render its opinion on the financial statements. The adequacy of
the Company's internal financial controls and the accounting principles
employed in financial reporting are under the general surveillance of the
Audit Committee of the Board of Directors, consisting of five outside
directors. The independent auditors and internal auditors have free and
direct access to the Audit Committee and meet with the committee periodically
to discuss accounting, auditing, and financial reporting matters.
The Company has distributed to its employees a statement regarding, among
other things, potentially conflicting outside business interests of
employees, and proper conduct of domestic and international business
activities. It has developed and instituted additional internal controls and
audit procedures designed to prevent or detect violations of these policies.
Management believes this provides reasonable assurance that its operations
meet a high standard of business conduct.
Nader F. Darehshori Gail Deegan
Chairman, President, Executive Vice President, Chief
and Chief Executive Officer Financial Officer, and Treasurer
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, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, 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.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
January 23, 1996, except for Note 4,
as to which the date is March 7, 1996
13
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
December 31,
---------------------
(In thousands of dollars, except share amounts) 1995 1994
--------- --------
ASSETS
Current assets
Cash and cash equivalents $ 16,701 $ 30,372
Marketable securities and time deposits available-for-sale,
at fair value 604 16,821
Accounts receivable 204,542 143,599
Less allowance for book returns 21,698 12,836
------- ------
182,844 130,763
Inventories 139,927 61,661
Deferred income taxes 23,728 8,334
Prepaid expenses 7,396 2,150
------- ------
Total current assets 371,200 250,101
Property, plant, and equipment, net 32,879 29,822
Book plates, less accumulated depreciation of $70,032 in 1995
and $48,252 in 1994 90,221 39,066
Other assets
Royalty advances to authors, less allowance of $21,848 in
1995 and $11,079 in 1994 23,988 19,750
Intangible assets, net 474,751 124,408
Deferred income taxes 15,688 12,227
Other investments and long-term receivables 38,071 21,892
------- ------
Total other assets 552,498 178,277
------- ------
$1,046,798 $497,266
======= ======
See accompanying Notes to Consolidated Financial Statements.
14
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
December 31,
---------------------
(In thousands of dollars, except share amounts) 1995 1994
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 94,556 $ 45,023
Commercial paper 144,612 --
Royalties 40,140 32,947
Salaries, wages, and commissions 18,751 13,634
Other 44,324 13,106
------- ------
Total current liabilities 342,383 104,710
Long-term debt 426,148 99,445
Accrued royalties payable 2,497 3,169
Other liabilities 15,192 13,005
Accrued postretirement benefits 26,884 24,864
Stock repurchase commitment -- 7,600
Commitments and contingencies (Note 10)
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 1995 and 1994 14,759 14,759
Capital in excess of par value 29,973 22,316
Retained earnings 228,528 248,828
------- ------
273,260 285,903
Less:
Notes receivable from stock purchase agreements 5,821 5,841
Common shares held in treasury, at cost, 273,681 shares in
1995 and 328,685 shares in 1994 5,795 6,091
Benefits trust assets, at market 27,950 29,498
------- ------
39,566 41,430
------- ------
Total stockholders' equity 233,694 244,473
------- ------
$1,046,798 $497,266
======= ======
See accompanying Notes to Consolidated Financial Statements.
15
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Operations
For the Three Years Ended December 31, 1995
(In thousands of dollars, except per share
amounts) 1995 1994 1993
------- ------- ---------
Net sales $529,022 $483,076 $462,969
Costs and expenses
Cost of sales 271,036 230,674 227,969
Selling and administrative 214,818 192,425 173,070
Special charges 56,263 6,513 10,560
----- ----- -------
542,117 429,612 411,599
----- ----- -------
Operating income (loss) (13,095) 53,464 51,370
Other income (expense)
Gain on equity transactions of INSO Corporation
and on sale of interest in Software Division 13,102 36,212 --
Equity in earnings of INSO Corporation 1,557 1,973 --
Net interest expense (13,008) (6,509) (2,347)
----- ----- -------
1,651 31,676 (2,347)
----- ----- -------
Income (loss) before taxes and extraordinary item (11,444) 85,140 49,023
Income tax (benefit) provision (4,201) 32,710 17,650
----- ----- -------
Income (loss) before extraordinary item (7,243) 52,430 31,373
----- ----- -------
Extraordinary item, net of taxes
Loss on early extinguishment of debt -- (1,239) (1,002)
----- ----- -------
Net income (loss) $ (7,243) $ 51,191 $ 30,371
===== ===== =======
Per share:
Income (loss) before extraordinary item $ (0.52) $ 3.79 $ 2.27
Loss on early extinguishment of debt -- (0.09) (0.07)
----- ----- -------
Net income (loss) $ (0.52) $ 3.70 $ 2.20
===== ===== =======
Average number of common shares outstanding 13,812 13,822 13,823
See accompanying Notes to Consolidated Financial Statements.
16
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Cash Flows
For the Three Years Ended December 31, 1995
(In thousands of dollars) 1995 1994 1993
-------- -------- ---------
Cash flows from (used in) operating activities:
Net income (loss) $ (7,243) $ 51,191 $ 30,371
Adjustments to reconcile net income to net cash from operating
activities:
Gain on equity transactions of INSO Corporation and gain on sale of
interest in Software Division (13,102) (36,212) --
Equity in earnings of INSO Corporation (1,557) (1,973) --
Early extinguishment of debt cost, net of taxes -- 1,239 1,002
Depreciation and amortization expense 52,426 44,416 39,361
Change in operating assets and liabilities:
Accounts receivable, net (4,366) (26,751) (19,497)
Inventories (25,388) 17,606 (2,454)
Royalty advances, net (5,981) 3,448 1,085
Accounts payable (11,698) 6,705 5,645
Income taxes (23,882) 5,949 (1,455)
Other, net 53,813 1,634 6,899
------ ------ -------
Net cash from operating activities 13,022 67,252 60,957
------ ------ -------
Cash flow from (used in) investing activities:
Acquisition of publishing assets, net of cash acquired (452,888) (130,342) --
Dividend received from INSO Corporation -- 32,860 --
Book plate expenditures (46,740) (25,242) (25,796)
Property, plant, and equipment expenditures (7,538) (8,478) (10,728)
Marketable securities 16,217 893 11,250
Sale of building and equipment 4,628 -- 2,836
------ ------ -------
Net cash used in investing activities (486,321) (130,309) (22,438)
------ ------ -------
Cash flows from (used in) financing activities:
Dividends on common stock (12,845) (12,026) (11,475)
Issuance (repayment) of commercial paper 144,612 (24,605) 24,605
Senior note redemption -- (26,960) (26,511)
Issuance of SAILS 126,643 -- --
Issuance of long-term debt 200,000 99,415 --
Purchase of common stock (957) (12,913) (654)
Exercise of stock options 2,175 1,442 2,377
Other -- 1,834 710
------ ------ -------
Net cash from (used in) financing activities 459,628 26,187 (10,948)
------ ------ -------
Net increase (decrease) in cash and cash equivalents (13,671) (36,870) 27,571
Cash and cash equivalents at beginning of year 30,372 67,242 39,671
------ ------ -------
Cash and cash equivalents at end of year $ 16,701 $ 30,372 $ 67,242
====== ====== =======
Supplementary information:
Income taxes paid $ 18,194 $ 26,252 $ 19,121
Interest paid $ 10,941 $ 6,323 $ 3,632
See accompanying Notes to Consolidated Financial Statements.
17
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Stockholders' Equity
For the Three Years Ended December 31, 1995 Common Capital Notes receivable
(in thousands of dollars, except share stock in excess Retained from stock
amounts) $1 par value of par value Earnings purchase agreements
------------- ------------- --------- --------------------
Balance at January 1, 1993 $14,759 $21,684 $192,326 $ --
Net income -- -- 30,371 --
Common stock dividends, $.83 per share -- -- (11,475) --
Stock options exercised -- 958 -- --
Share repurchases -- -- -- --
Other equity transactions, net -- 2,310 -- --
Benefits trust asset remeasurement -- 5,660 -- --
Amortization of restricted shares -- -- -- --
Foreign currency translation adjustments -- -- -- --
----------- ----------- ------- ------------------
Balance at December 31, 1993 14,759 30,612 211,222 --
=========== =========== ======= ==================
Net income -- -- 51,191 --
Common stock dividends, $.87 per share -- -- (12,026) --
Stock options exercised -- (233) -- --
Notes receivable from stock purchase
agreements -- 443 -- (5,893)
Issuance of restricted shares -- 73 -- --
Share repurchases -- -- -- --
Other equity transactions, net -- 1,133 -- 52
Benefits trust asset remeasurement -- (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)
=========== =========== ======= ==================
Net loss -- -- (7,243) --
Common stock dividends, $.93 per share -- -- (12,845) --
Stock options exercised -- 776 -- --
Issuance of restricted shares -- 252 -- --
Share repurchases -- -- -- --
Executive stock repurchases -- -- -- 344
Other equity transactions, net -- 573 -- (324)
Benefits trust asset remeasurement -- (1,544) -- --
Valuation allowance on noncurrent
marketable securities -- -- (212) --
Stock repurchase commitment -- 7,600 -- --
----------- ----------- ------- ------------------
Balance at December 31, 1995 $14,759 $29,973 $228,528 $(5,821)
=========== =========== ======= ==================
See accompanying Notes to Consolidated Financial Statements.
18
Unamortized Foreign
Treasury Stock value of currency
-------------- Benefits restricted translation
Shares Amount trust shares adjustments Total
- ---------- ------- -------- -------------- ------------ ---------
(347,703) $ (2,255) $(26,156) $(549) $ 30 $199,839
-- -- -- -- -- 30,371
-- -- -- -- -- (11,475)
94,486 1,419 -- -- -- 2,377
(16,400) (654) -- -- -- (654)
37,158 123 672 -- -- 3,105
-- -- (5,660) -- -- --
-- -- -- 549 -- 549
-- -- -- -- (30) (30)
- ---------- ----- ------ ------------ ---------- -------
(232,459) (1,367) (31,144) -- -- 224,082
========== ===== ====== ============ ========== =======
-- -- -- -- -- 51,191
-- -- -- -- -- (12,026)
50,203 1,675 -- -- -- 1,442
138,272 5,450 -- -- -- --
1,789 14 -- -- -- 87
(318,900) (12,913) -- -- -- (12,913)
32,410 1,050 (466) -- -- 1,769
-- -- 2,112 -- -- --
-- -- -- -- -- (1,559)
-- -- -- -- -- (7,600)
- ---------- ----- ------ ------------ ---------- -------
(328,685) (6,091) (29,498) -- -- 244,473
========== ===== ====== ============ ========== =======
-- -- -- -- -- (7,243)
-- -- -- -- -- (12,845)
70,698 1,399 -- -- -- 2,175
10,766 213 -- -- -- 465
(24,000) (957) -- -- -- (957)
(7,742) (403) -- -- -- (59)
5,282 44 4 -- -- 297
-- -- 1,544 -- -- --
-- -- -- -- -- (212)
-- -- -- -- -- 7,600
- ---------- ----- ------ ------------ ---------- -------
(273,681) $ (5,795) $(27,950) $ -- $ -- $233,694
========== ===== ====== ============ ========== =======
See accompanying Notes to Consolidated Financial Statements.
19
HOUGHTON MIFFLIN COMPANY
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include the accounts of Houghton
Mifflin Company ("the Company") and its wholly-owned subsidiaries. All
material intercompany accounts and transactions are eliminated in
consolidation.
Investment in 20% to 50% owned entities are accounted for on the equity
method. The Company uses the income statement method to account for issuances
of common stock by a subsidiary. Under this method gains and losses on
issuance of stock by a subsidiary are recognized in the income statement.
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
Cash and cash equivalents:
Cash and cash equivalents consist primarily of cash in banks and highly
liquid investment securities that have maturities of three months or less
when purchased. The carrying amount approximates fair value due to the
short-term maturity of these instruments.
Marketable securities and time deposits available-for-sale:
Marketable securities included in current assets consist of instruments
with original maturities of three months or greater. The securities held
consist primarily of tax-exempt municipal certificates, government agency
obligations, and time deposits 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 "Other
investments and long-term receivables" 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 estimated future book returns is made at time of sale, and
consists of the sales value less related inventory value and royalty costs.
Inventories:
Inventory balances at December 31, 1995 and 1994 are as follows:
In thousands 1995 1994
- --------------- ------- --------
Finished goods $120,120 $55,174
Work in process 8,733 4,460
Raw materials 11,074 2,027
----- ------
$139,927 $61,661
===== ======
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. If the
cost of all inventories had been determined by the first-in, first-out method
(FIFO), which approximates replacement cost, inventory values at December 31,
1995 and 1994, would have been higher by $23.1 and $20.0 million,
respectively.
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.
Property, plant, and equipment:
Property, plant, and equipment are recorded at cost and depreciated over
the estimated useful lives of the underlying assets. Depreciable lives range
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.
Balances of major classes of assets and allowances for depreciation and
amortization at December 31, 1995 and 1994, are as follows:
20
In thousands 1995 1994
- ------------------------------------------------ ------- ---------
Land and land improvements $ 2,046 $ 2,640
Buildings and building equipment 19,169 18,560
Machinery and equipment 57,444 50,225
Leasehold improvements 8,079 6,318
----- -------
Total 86,738 77,743
Less allowances for depreciation and
amortization (53,859) (47,921)
----- -------
Property, plant and equipment, net $ 32,879 $ 29,822
===== =======
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are
capitalized. Depreciation expense was approximately $8.8 million in 1995;
$8.6 million in 1994; and $7.2 million in 1993.
Book plates:
The Company's investment in book plate costs is capitalized and
depreciated on an accelerated basis over three years, except for trade and
some reference publication costs, which are expensed when incurred.
Depreciation expense was approximately $32.9 million in 1995; $29.1 million
in 1994; and $29.6 million in 1993.
Income taxes:
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded to reflect
the tax benefits and consequences of future years differences between the tax
bases of assets and liabilities and their financial reporting amounts.
Intangible assets:
Intangible assets at December 31, 1995 and 1994, consist of the following:
In thousands 1995 1994
- ------------------------------ ------- ---------
Goodwill $473,786 $113,268
Publishing rights 18,523 15,530
Other 5,891 5,730
----- -------
Total 498,200 134,528
Less: accumulated amortization (23,449) (10,120)
----- -------
Intangibles, net $474,751 $124,408
===== =======
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.
The carrying value of goodwill is periodically reviewed to determine the
recoverability based upon projected undiscounted net cash flows over the
remaining life of the related business unit or purchased assets. If the
analysis indicates that impairment has occurred, the book value is written
down to the undiscounted net cash flow amount. Intangible asset amortization
expense was approximately $10.7 million in 1995; $6.7 million 1994; and $2.1
million in 1993.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed Of" for fiscal
years beginning after December 15, 1995. The Company intends to adopt SFAS
121 in 1996, and does not expect the impact on its financial position or its
results of operations to be material.
Benefits trust:
The trust assets consist primarily of 650,000 shares of the Company's
common stock purchased from the Company's treasury shares at quoted market
price in 1992. The trust is available to fund certain compensation and
benefit plan obligations. The common stock is carried at market value 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 common
shares deemed outstanding. 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 have had no dilutive effect.
Risks and Uncertainties
Organization:
The Company's business is publishing and it operates primarily in the
domestic market in two industry segments. Based on sales, the Company's
largest segment is textbooks and other educational materials and services for
the school and college market. The other segment is general publishing in a
wide variety of topics, formats, and media. The principal markets for
textbooks and other educational materials and services are
21
elementary and secondary schools and two- and four-year colleges. The
principal market for trade books and reference works in the general
publishing segment is retail stores.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
significant estimates that affect the financial statements include, but are
not limited to, book returns, recoverability of advances to authors, and
amortization periods and recoverability of long-term assets such as book
plates and intangibles.
Note 2. Acquisitions
The Company acquired D.C. Heath and Company ("Heath"), a leading publisher
of high school, elementary, and college textbooks, on October 31, 1995 for
approximately $452.9 million. The acquisition was financed through a
combination of operating cash and $345.0 million in indebtedness. 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 preliminarily 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.
In conjunction with the Heath acquisition, certain charges were recorded
in the fourth quarter of 1995 for indirect costs incurred as a result of the
acquisition ($7.1 million), costs related to the integration of the
administrative and sales functions ($9.3 million), and provisions to adjust
the carrying values of certain inventory and book plates based on strategic
decisions made subsequent to the acquisition ($32.9 million). The integration
costs include the costs to consolidate certain administrative and sales
functions of the combined businesses as well as training and other similar
costs. After completion of the transaction, the Company evaluated its
publishing programs and direction and concluded that assets relating to
certain overlapping or duplicative programs should be adjusted based upon the
estimated future revenues of the combined companies.
On March 1, 1994, McDougal, Littell & Company ("McDougal"), a leading
publisher of elementary and secondary school textbooks, was acquired for
$130.3 million. Initial financing was through a combination of operating cash
and $100 million in short-term bank debt, which 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 excess of the net assets acquired, or goodwill, is being
amortized on a straight-line basis over twenty years.
The following unaudited summary pro forma information combines the
consolidated results of operations as if Heath and McDougal had been acquired
as of January 1, 1994. The pro forma financial information is not necessarily
indicative of the operating results that would have occurred had the Heath
and McDougal acquisitions been consummated as of the assumed dates, nor are
they necessarily indicative of future results of operations.
Years ended December 31, 1995 1994
- --------------------------------------- ------ -------
In millions, except per share amounts
Net sales $705.5 $664.9
Income (loss) before extraordinary item (14.9) 29.8
Net income (loss) (14.9) 28.6
Net income (loss) per share $(1.08) $ 2.06
In a separate closing, the Company intends to take possession of the
outstanding shares of Heath Canada. It is expected that this closing will
take place in 1996. The pro forma financial information above presents the
results of operations as if the Heath Canada acquisition had been made as of
January 1, 1994.
Note 3. Taxes on Income
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 net deferred tax assets are shown in the
following table:
22
In thousands 1995 1994
- ------------------------------------ ------ --------
Tax asset-related:
Pension and postretirement benefits $16,300 $13,610
Publishing expenses 22,840 5,614
Allowance for book returns 1,084 1,259
Deferred compensation 1,700 2,254
Other, net 2,936 661
---- ------
44,860 23,398
---- ------
Tax liability-related:
Depreciation expense (4,655) (1,758)
Deferred income (789) (1,079)
---- ------
(5,444) (2,837)
---- ------
Net deferred tax assets $39,416 $20,561
==== ======
At December 31, 1995 and 1994, net deferred tax assets represented
approximately 4% of total consolidated 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.
Significant components of the provision (benefit) for income taxes
attributable to income before taxes and extraordinary items consist of the
following:
In thousands 1995 1994 1993
- ---------------- ------- ------ --------
Current:
Federal $ 13,201 $23,711 $15,715
State and other 2,669 5,719 3,522
----- ---- ------
Total current 15,870 29,430 19,237
Deferred:
Federal (16,246) 2,653 (1,398)
State and other (3,825) 627 (189)
----- ---- ------
Total deferred (20,071) 3,280 (1,587)
----- ---- ------
$ (4,201) $32,710 $17,650
===== ==== ======
The reconciliation of the income tax rate computed at the U.S. federal
statutory tax rate to reported income tax expense (benefit) attributable to
income before taxes and extraordinary items is as follows:
1995 1994 1993
----- ---- ------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 4.6 4.6 4.6
Nondeductible goodwill amortization (19.8) 2.2 --
Foreign losses .8 (0.1) (0.5)
Tax-exempt income 10.2 (0.7) (0.5)
Non-deductible meals and entertainment (4.9) .7 .6
Life insurance 5.2 (0.5) --
Other 5.6 (2.8) (3.2)
--- -- ----
Effective tax rate 36.7% 38.4% 36.0%
=== == ====
As a result of the SAILS transaction, the Company is likely to record a
gain on the redemption of these debt securities. Accordingly, in 1995, the
Company is providing deferred taxes on the undistributed earnings of INSO.
Accumulated undistributed earnings of INSO on which taxes have not been
provided were approximately $2.0 million at December 31, 1995 and 1994.
Note 4. Debt and Borrowing Agreements
The Company had $400 million in unsecured credit facilities available at
December 31, 1995, which was supported by commitment fees. There was $200
million outstanding under this facility at December 31, 1995, at a weighted
average borrowing rate of 6.19%. A line of credit of $25 million was
available at December 31, 1994, for direct borrowings or as support for the
issuance of commercial paper.
23
A summary of debt at December 31 is as follows:
In thousands 1995 1994
- ----------------------------------------------------------------- ------- -------
Borrowings from financial institutions, unsecured, with interest
at 6.19%, due January 10, 2000 $200,000 $ --
Commercial paper, with a weighted average interest rate of 6.17% 144,612 --
6% Exchangeable Notes, due August 1999, Stock Appreciation
Income-Linked Securities (SAILS) 126,643 --
7.125% Notes due April 1, 2004, interest payable semi-annually 99,505 99,445
----- -----
570,760 99,445
Less: portion included in current liabilities 144,612 --
----- -----
Total long-term debt $426,148 $99,445
===== =====
On October 31, 1995, $345 million in credit facilities were drawn upon to
fund the initial purchase of Heath from Raytheon Company. These borrowings
were subsequently paid off with $200 million in proceeds from a $300 million
five-year credit facility and the issuance of $145 million in commercial
paper. On December 11, 1995, the Company filed a registration statement with
the Securities and Exchange Commission for the offering of $300 million in
debt securities. It is intended that a portion of the proceeds from the
draw-down of the shelf financing will be used as permanent funding for the
Heath acquisition. In March 1996, the Company issued $125 million of
long-term debt at 7.0% maturing in 2006 and $100 million of medium-term
notes. These notes were issued at a weighted average interest rate of 6.0%
and a weighted average maturity of 2.6 years. The proceeds from these
issuances were used to pay down part of the commercial paper and the credit
facility.
After the issuances described above, required principal payments of debt
outstanding at December 31, 1995 are: $19.6 million in 1996, $40 million in
1997 and 1998, $146.7 million in 1999, $100 million in 2000 and $224.5
million thereafter.
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes Due in 1999 (Stock Appreciation Income-Linked Securities, or "SAILS")
at a principal amount of $34 per SAILS at issue. Net proceeds of
approximately $126.6 million were used for general corporate purposes,
including the repayment of seasonal borrowings and the partial funding of the
acquisition of Heath (See Note 2). At maturity, the SAILS will be
exchangeable for shares of INSO common stock, or at the Company's option,
cash in lieu of shares. If the SAILS are redeemed with shares of INSO common
stock, a gain representing the excess of the redemption amount over the book
value of the Company's investment in INSO would be recorded. The number of
INSO shares that would be exchanged for the SAILS depends, in part, on the
fair market value of the INSO stock price on the redemption date. If the fair
market value is $34 per share, 3.8 million shares of INSO would be exchanged.
As the price of INSO common stock increases, the Company is obligated to
exchange fewer INSO shares to redeem the SAILS. If the price of INSO common
stock is $39.44 or higher at the redemption date, the Company would redeem
the SAILS with 3.3 million shares of INSO common stock. The Company will
record as non-cash interest expense over the remaining term of the SAILS, the
excess of the market value of the current INSO common stock price over the
maximum redemption price of $39.44 per INSO share. Given the INSO quoted
closing stock price at December 29, 1995, incremental non-cash interest
expense of approximately $2.75 million would be recorded in 1996.
In April 1994, the Company issued $100 million of 7.125% non-callable
unsecured notes ("Notes") through a public debt offering. The Notes mature on
April 1, 2004 and were priced at 99.4 to yield an effective rate of 7.21%.
The proceeds from the issuance were applied to repay the $100 million
short-term credit facilities used as bridge financing in the March 1994
acquisition of McDougal, Littell & Company ("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 dividend received from
INSO.
In June 1993, an early redemption of $25 million of 8.78% senior notes due
to mature in December 1994 was completed. 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.
The Company enters into transactions involving financial instruments for
purposes of managing its exposure to interest rate risks and funding costs.
Through the use of interest rate products, such as interest rate swap
agreements and interest rate locks, the Company can achieve a predetermined
mix of fixed and floating rate debt. In connection with the Company's
issuance of debt securities through the draw-down of the $300 million shelf
registration, a forward interest rate lock agreement was entered into with a
counterparty for the
24
notional principal amount of $100 million at 5.995%. Any amount received or
paid under this aggreement will be recorded as a yield adjustment to interest
expense, recognized over the term of the debt.
An interest rate swap agreement covering interest payments for $25 million
in notional debt was in place at December 31, 1994, whereby the Company paid
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 received semi-annual interest on the notional principal at 8.78%. The
swap rate at December 31, 1994, was 9.5%. The net interest settlements were
recognized as an adjustment to interest expense. The Company exited the rate
swap in May 1995 by making a payment of $.5 million. This amount had been
previously reserved.
Note 5. Retirement Plans
The Company has a noncontributory, trusteed defined benefit pension plan
that covers substantially all employees. Plan benefits are generally
determined by years of service, the final five years compensation during
active employment, and age. The funding policy is to contribute amounts
subject to minimum funding standards set forth by the Employee Retirement
Income Security Act of 1974 and the Internal Revenue Code. The plan's assets
consist principally of common stocks, fixed income securities, investment in
registered investment companies, and cash and cash equivalents.
Pension expense for 1995, 1994, and 1993 included the following
components:
In thousands 1995 1994 1993
- ---------------------------------------------- ------- ------ ---------
Service cost (benefits earned during the year) $ 2,602 $ 3,275 $ 3,420
Interest cost on projected benefit obligation 5,456 5,045 4,809
Actual return on plan assets (13,588) (1,165) (12,136)
Net amortization and deferral 7,722 (4,432) 7,244
----- ---- -------
Net pension expense $ 2,192 $ 2,723 $ 3,337
===== ==== =======
Significant actuarial assumptions:
Discount rate 7.75% 8.0% 7.5%
Increase in future compensation 5.25% 6.0% 6.0%
Expected long-term rate of return on assets 8.50% 8.5% 8.5%
The following table sets forth the Plan's funded status at December 31:
In thousands 1995 1994
- -------------------------------------------------------------- ------- ---------
Plan assets at fair value at September 30 $ 80,959 $69,750
Projected benefit obligation 72,815 69,446
----- -------
Excess of plan assets over projected benefit obligation at
September 30 8,144 304
Unrecognized items:
Net gain (14,687) (4,404)
Prior service cost (1,027) (1,095)
Net transition asset (1,241) (1,424)
----- -------
Accrued pension liability $ (8,811) $(6,619)
===== =======
Actuarial present value of accumulated benefits at September 30 $ 62,212 $56,923
Accumulated benefit obligation related to vested benefits at
September 30 $ 58,318 $53,312
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 defined
benefit pension obligation. A pre-tax expense reduction of $1.2 million ($.7
million after-tax, or $.05 per share) was recorded in the fourth quarter of
1993 in accordance with Statement of Financial Accounting Standard No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans."
In addition, the Company maintains a defined contribution benefit plan,
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 1995 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 contribution
expense, which is invested solely in shares of the Company's common stock,
amounted to approximately $1.8 million in 1995; $1.8 million in 1994; and
$1.7 million in 1993.
25
Note 6. Postretirement Benefits
The Company provides postretirement medical benefits to retired full-time,
non-union employees hired before April 1, 1992, who have provided a minimum
of 10 years of service and attained age 55.
Under the terms of the benefits trust agreement formed in 1992, proceeds
from the periodic sale of assets by the trustee, cash dividends received, and
other trust earnings may be used to pay designated compensation and benefit
plan obligations, including retiree health care benefit costs. The assets in
the benefits trust consist principally of the Company's common stock. The
fair value of the benefits trust net assets was $27.9 million and $29.5
million, at December 31, 1995, and 1994, respectively.
The following table presents the postretirement benefit liability
recognized in the statement of financial position at December 31:
In thousands 1995 1994
- --------------------------------------------- ------ --------
Accumulated postretirement benefit
obligation:
Retirees $19,318 $18,344
Fully eligible active plan participants 3,243 1,828
Other active participants 3,562 2,777
---- ------
26,123 22,949
Unrecognized net gain 745 719
Unrecognized prior service cost 16 1,196
---- ------
Accrued postretirement benefit liability $26,884 $24,864
==== ======
Net periodic postretirement benefit cost includes the following components
for the twelve months ended December 31:
In thousands 1995 1994 1993
- ----------------------------------------------- ----- ----- ------
Service cost $ 349 $ 354 $ 426
Interest cost 1,676 1,786 1,859
Amortization of unrecognized prior service cost (68) (67) --
--- --- ----
Net periodic postretirement benefit cost $1,957 $2,073 $2,285
=== === ====
Assumptions used in the actuarial computations were as follows for the
twelve months ended December 31:
1995 1994 1993
--- --- -----
Weighted average discount rate 7.9% 7.8% 8.0%
Medical inflation trend rate 8.0% 9.0% 13.0%
The changes to the discount and inflation rates reflect stable long-term
interest rates and a moderation of health care costs experienced over the
past two years. At December 31, 1995, the medical care cost trend rate was
assumed to decline one percent per annum to a projected ultimate heath care
cost trend rate of 5.0% in 1998 and thereafter.
The assumed medical inflation trend rate can significantly influence
postretirement liabilities and expenses. An increase of one percent in the
assumed medical inflation rate would increase 1995 net periodic
postretirement expense by approximately $.1 million, and increase the
accumulated postretirement benefit obligation as of December 31, 1995 by $2.1
million. The Company expects to reduce the discount rate to 7.25% and the
health care inflation rate to 7% for 1996.
Note 7. Stock Options
The Company maintains two stock option plans, the 1992 Stock Compensation
Plan and the 1995 Stock Compensation Plan. Options outstanding include some
granted under the 1992 plan, under which no further options may be granted.
The Company has authorized 900,000 common shares under the 1995 Stock
Compensation Plan for the granting of incentive and non-qualified stock
options, awards of restricted or bonus stock, or other performance awards to
eligible employees and non-employee members of the Board of Directors and
shares issued to Directors as part of their compensation. Recipients of
restricted stock awards may not sell or transfer the shares until the
restricted period lapses provided that 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 1995, grants of
10,766 shares of restricted stock were made, of which 10,080 remained
outstanding at December 31, 1995. 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.
26
The Company accounts for its stock compensation arrangements under APB 25,
"Accounting for Stock Issued to Employees," and intends to continue to do so.
In August 1994, pursuant to the 1994 Executive Stock Purchase Plan, whose
purpose was to increase stock ownership of the Company's Executive Officers,
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.
These options were exercisable only on the date granted and stock was issued
from the treasury shares. A note 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 the stock in the event of a future sale (See Note 13).
Income tax benefits are realized 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.
Transactions involving outstanding stock options under these plans were as
follows:
Option Price Per
Number of Share on Grant
Shares Date
------------- ------------------
Options outstanding at January 1, 1993 258,443 $22.25-$49.25
Granted 196,000 44.63
Exercised (94,486) 23.88-44.63
Cancelled/Expired (14,240) 23.88-44.63
----------- ----------------
Options outstanding at December 31, 1993 345,717 22.25-49.25
Granted 490,772 37.50-47.50
Exercised (174,475) 22.25-44.63
Cancelled/Expired (40,040) 23.88-49.25
----------- ----------------
Options outstanding at December 31, 1994 621,974 23.88-47.50
Granted 297,000 41.63-50.88
Exercised (70,698) 23.88-47.50
Cancelled/Expired (21,700) 35.25-45.75
----------- ----------------
Options outstanding at December 31, 1995 826,576 $23.88-$50.88
=========== ================
Exercisable at December 31, 1994 234,805
Exercisable at December 31, 1995 352,763
Available for grant at December 31, 1994 84,628
Available for grant at December 31, 1995 598,000
Note 8. Special and Restructuring Charges
In 1995, the Company incurred special charges to outsource existing
warehousing and distribution operations. 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 1995, 1994, and 1993,
and the related costs is set forth in the table below:
Years ended December 31, 1995 1994 1993
- ------------------------------------------ ------- ------- ---------
In thousands, except per share amounts
Severance $2,850 $3,560 $ 7,500
Facilities sale and consolidation 2,788 1,982 900
Inventory relocation 315 -- --
Disposal of tangible and intangible assets 250 971 --
Consulting 830 -- --
Headquarters relocation -- -- 2,160
----- ----- -------
7,033 6,513 10,560
Income tax benefit 2,743 2,475 3,960
----- ----- -------
Net charge to operations $4,290 $4,038 $ 6,600
===== ===== =======
Per share cost $ .31 $ .29 $ .48
===== ===== =======
The Company eliminated approximately 345 positions as a result of these
actions. As of December 31, 1995, approximately $12.6 million had been paid
to employees in the form of salary continuance and other benefits related to
these restructurings. The remaining liability of $1.3 million at December 31,
1995 for the remaining termination benefit obligations is expected to be
fully paid in 1996. There were no material differences between the amounts
accrued above and the payments against the liabilities recognized.
In connection with the acquisition of Heath, a non-recurring charge of
$49.3 million ($30.0 after-tax, $2.17 per share) was recognized. This charge
is principally comprised of integration costs, indirect costs of the
acquisition,
27
and adjustments to reflect strategic decisions made and actions taken
subsequent to the acquisition to state certain inventories and book plates at
estimated net realizable values (See Note 2).
Note 9. 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 Company earnings. 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.
Note 10. Commitments and Contingencies
Operating lease obligations
The Company has leases for various real property, office facilities, and
warehouse equipment which expire at various dates. Certain leases contain
renewal and escalation clauses for a 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
- -------------------------------- -------------
1996 $ 13,058
1997 11,835
1998 11,229
1999 10,387
2000 9,900
Thereafter 48,727
-----------
Total minimum lease payments $105,136
===========
Rent expense, net of sublease income, was approximately $13.0 million in
1995; $11.6 million in 1994; and $9.9 million in 1993.
Commitment
In February 1996, the Company agreed to lease an additional 56,000 square
feet of office space located adjacent to the corporate headquarters. The
annual lease commitment is approximately $1.4 million and will expire in
February 2007.
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 obligated the Company to
purchase 100 shares of Common Stock at $38.00 per share if the counterparty
exercised in August 1995. The total exercise price of $7.6 million was
reflected in the financial statements at December 31, 1994, as a provisional
liability with the offset as a reduction of capital in excess of par value.
The sale proceeds of $.4 million were included in capital in excess of par
value. The options expired unexercised in 1995, and the liability was
reclassified to capital in excess of par value.
Contingencies
The Company is involved in ordinary and routine litigation incidental to
its business. There are no such matters pending that the Company expects to
be material in relation to its financial condition or results of operations.
28
Note 11. Software Division Public Offering
In March 1994, the Company's former wholly-owned Software Division, a
developer of software tools for proofreading, reference, and information
management, completed an initial public offering of 6.9 million shares at an
offering price of $7.50 per share for total consideration of $51.8 million.
In connection with the public offering, the Company received a cash dividend
of $32.9 million from the newly-formed successor company, INSO. An after-tax
gain of $22.8 million, or $1.65 per share, was recognized in connection with
the public offering. Deferred taxes were recognized on the transaction. Upon
completion, the assets, businesses and employees of the Software Division
were transfered to INSO. The Company retained an ownership interest of
approximately 40% in the successor company subsequent to the transfer. Up to
3.8 million of the Company's INSO shares have been used to collateralize the
principal owed from the issuance of the 6% SAILS (See Note 4). In addition,
the Company and INSO had entered into a services agreement whereby certain
general administrative services were provided by the Company and reimbursed
by INSO. A portion of the facilities leased by the Company were placed under
a subleasing agreement which was terminated in May of 1995.
During 1995, the Company's Trade & Reference Division sold to INSO certain
properties and rights relating to the Information Please(R) almanac product
line for $3.3 million. At the time of the sale, the Company held a 40% equity
stake in INSO, and accordingly, $1.3 million of the gain was deferred. This
deferred gain will be recognized as income by the Company over a period of
three years.
In August 1995, INSO completed an additional public offering of 1.2
million shares of common stock at a net offering price of approximately
$33.00 for total consideration of approximately $39.6 million. As a result,
the Company's equity ownership has been reduced to approximately 36%. A gain
of $13.1 million, $7.8 million after-tax, or $.56 per share, was recorded
representing the Company's portion of the increase in INSO's net assets. On
September 1, 1995, INSO effected a two-for-one common stock split in the form
of a 100% stock dividend. All INSO share references have been restated to
reflect the effects of the stock split.
Note 12. Disclosures about Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1995 and 1994 are as follows:
1995 1994
-------------------- ----------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
- -------------------------------------- -------- -------- -------- ----------
Financial assets:
Cash, cash equivalents and marketable
securities $ 17,305 $ 17,305 $ 47,193 $ 47,193
Investments:
INSO 24,558 186,200 10,783 81,525
Cassell PLC 2,389 2,389 2,749 2,749
Financial liabilities:
Commercial paper (144,612) (144,612) -- --
7.125% Notes (99,505) (104,950) (99,445) (91,500)
SAILS (126,643) (136,800) -- --
Credit facility (200,000) (200,000)
Off-balance-sheet financial
instruments losses:
Interest rate swaps -- -- (729) (1,292)
Interest rate lock -- (2,957) -- --
The fair values of financial instruments are estimates based upon market
conditions and perceived risks at December 31, 1995 and 1994, and require
varying degrees of management judgment. The fair values of the financial
instruments presented may not be indicative of their future values. The
following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash, Cash Equivalents, Marketable Securities, and Commercial Paper
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, 1995 and 1994. The
fair value of the pledged 3.3 million shares of the investment in INSO has
been reduced to $39.44 per share to reflect the threshold appreciation price.
This is the maximum amount the Company can realize upon redemption of the
SAILS (See Note 4).
29
Long-term Debt
The fair value of the Company's $100 million 7.125% Notes fixed rate
long-term debt is estimated based on the quoted market prices for the issue.
The fair value of the SAILS is based upon the quoted market price of the
underlying INSO shares multiplied by the shares necessary to redeem the
issuance.
The carrying amount of the credit facility approximates fair value because
of the renewing feature of the facility.
Off-Balance-Sheet Financial Instruments Gains (Losses)
The fair value of interest rate swap and interest rate lock 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. There were no
interest rate swap agreements outstanding at December 31, 1995. There were no
interest rate lock agreements outstanding at December 31, 1994. At December
31, 1994, reserves to offset part of the cost of terminating the interest
rate swap agreement were established. The Company does not enter into
speculative or leveraged derivative transactions.
Note 13. 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 pursuant to the 1994 Executive
Stock Purchase Plan and the 1994 Non-Employee Director Stock Purchase Plan 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, and to 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 sell shares purchased with Company financing is
responsible for 100% of any resulting loss. The notes receivable are shown as
a reduction in stockholders' equity in the consolidated financial statements.
In 1995, the Company recognized approximately $.4 million in interest income
in connection with the outstanding loans.
Note 14. 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 segment information for the years 1995, 1994, and
1993 appears below. Net corporate expenses include certain corporate officer
compensation costs, certain system development costs, certain occupancy
costs, stockholder reporting expenses, legal costs, 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
- --------------------------------------------- ------------- --------- -------- -------------
1995
Net sales $441,800 $87,222 $ -- $ 529,022
----------- ------- ------ -----------
Segment income (loss) 63,817 (8,520) -- 55,297
----------- ------- ------ -----------
Net corporate expenses -- -- (16,018) (16,018)
Special charges related to acquisition of
Heath (49,230) -- -- (49,230)
Special charges (3,825) (2,700) (508) (7,033)
Gain on sale of warehouses -- 3,889 -- 3,889
Gain on equity transactions of INSO -- 13,102 -- 13,102
Interest expense, net -- -- (13,008) (13,008)
Equity in earnings of INSO -- 1,557 -- 1,557
----------- ------- ------ -----------
Income (loss) before taxes 10,762 7,328 (29,534) (11,444)
----------- ------- ------ -----------
Identifiable assets 366,816 89,611 137,483 593,910
Acquired assets 452,888 -- -- 452,888
----------- ------- ------ -----------
Total assets 819,704 89,611 137,483 1,046,798
----------- ------- ------ -----------
Depreciation and amortization expense 47,393 1,655 3,378 52,426
Purchase of property, plant, and equipment,
including book plates 50,566 932 2,780 54,278
=========== ======= ====== ===========
30
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 INSO -- 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
=========== ======= ====== ===========
31
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
(Unaudited, in thousands of dollars except per share amounts)
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter Year
-------- ------- ------- -------- ---------
Net sales $ 50,505 $104,655 $267,893 $105,969 $529,022
Gross profit (net sales less cost of sales) 10,624 48,840 165,964 32,558 257,986
Net income (loss) $(18,532) $ (5,104) $ 68,070 $(51,677) $ (7,243)
====== ===== ===== ====== =======
Per share:
Net income (loss) $ (1.34) (0.37) $ 4.93 $ (3.74) $ (0.52)
====== ===== ===== ====== =======
1994
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
====== ===== ===== ====== =======
The above quarterly information indicates the seasonal fluctuations of the
Company's educational publishing business.
The second quarter of 1995 and the first quarter of 1994 include charges
related to the Company's corporate and domestic publishing operations which
are of an unusual nature. Note 8 to the consolidated financial statements
describes the transactions and related financial statement impact.
The fourth quarter of 1995 includes an after-tax charge of $30.0 million
related to the D.C. Heath acquisition. Note 2 describes this transaction.
The first quarter of 1994 includes an after-tax gain of $22.8 million, or
$1.65 per share, in connection with the initial public offering of INSO, the
successor company to the Company's former Software Division. The third
quarter of 1995 includes an estimated after-tax gain of $8.9 million, or $.64
per share, due to an additional public offering of 1.2 million shares of INSO
common stock. The fourth quarter of 1995 includes an after-tax loss of $1.1
million, or $.08 per share, as an adjustment to the previously recorded
estimated gain. Note 11 to the consolidated financial statements describes
these transactions.
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, or $.09 per share, is net of an income tax benefit of $.8
million. Note 4 to the consolidated financial statements describes the
transaction.
32
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 1996 Annual Meeting of Stockholders (the "1996
Proxy Statement"), and information with respect to Executive Officers is set
forth following Part I, Item 4 of this report under the heading "Executive
Officers of the Company" on pages 4 and 5 herein.
Item 11. Executive Compensation
Incorporated herein by reference to the 1996 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the 1996 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the 1996 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 12.
2. Financial Statement Schedule for the three years ended December 31,
1995:
II -- Consolidated Valuation and Qualifying Accounts Page 34
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. The Exhibits listed in the accompanying Index to Exhibits set forth on
page 36 herein, are filed as part of this Report, and are included
only on the Form 10-K filed with the Securities and Exchange
Commission.
(b) Reports on Form 8-K filed in the fourth quarter of 1995
The Registrant filed two reports on Form 8-K in the fourth quarter of
1995:
Report dated October 6, 1995, reporting on the Company's definitive
agreement to acquire D.C. Heath and Company from Raytheon Company.
Report dated November 15, 1995, reporting on the Company's completion
of the acquisition of D.C. Heath and Company from Raytheon Company.
33
HOUGHTON MIFFLIN COMPANY
SCHEDULE II--CONSOLIDATED VALUATION ACCOUNTS
Years ended December 31, 1995, 1994, and 1993
(In thousands of dollars)
Additions
Balance at charged Balance
beginning (credited) Acquired at end
of year to income (Retirements) of year
---------- ---------- ---------- --------
1995
Allowance for book returns $12,836 $ 2,340 $ 6,522 $21,698
Allowance for authors' advances 11,079 9,557 1,212 21,848
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
34
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, 1996
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 Chairman of the Board, President,
- ------------------------- and Chief Executive Officer, Director March 14, 1996
Nader F. Darehshori
/s/Gail Deegan Executive Vice President,
- ------------------------- Chief Financial Officer, and Treasurer March 14, 1996
Gail Deegan
/s/Michael J. Lindgren Vice President and Controller March 14, 1996
- -------------------------
Michael J. Lindgren
/s/Joseph A. Baute Director March 14, 1996
- -------------------------
Joseph A. Baute
/s/James O. Freedman Director March 14, 1996
- -------------------------
James O. Freedman
/s/Mary H. Lindsay Director March 14, 1996
- -------------------------
Mary H. Lindsay
/s/ Charles R. Longsworth Director March 14, 1996
- -------------------------
Charles R. Longsworth
/s/John F. Magee Director March 14, 1996
- -------------------------
John F. Magee
/s/Claudine B. Malone Director March 14, 1996
- -------------------------
Claudine B. Malone
/s/Alfred L. McDougal Director March 14 1996
- -------------------------
Alfred L. McDougal
/s/George Putnam Director March 14, 1996
- -------------------------
George Putnam
/s/Ralph Z. Sorenson Director March 14, 1995
- -------------------------
Ralph Z. Sorenson
/s/DeRoy C. Thomas
- -------------------------
DeRoy C. Thomas Director March 14, 1996
35
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 of the Filed as Exhibits (4.1) and (4.2) to
Company Registration Statement No. 33-14850 as amended,
and incorporated herein by reference thereto
Amendment to Restated Articles of Page
Organization of the Company in the form
of a certificate of vote of directors
establishing a series of a class of stock
(3)(ii) By-laws of the Company Page
(4) Registration Statement under the Filed on June 20, 1967, and incorporated herein
Securities Exchange Act of 1934 on Form by reference thereto
10 dated June 20, 1967, as amended, with
particular reference to the description
of the common stock of the Company
Rights Agreement between the Company and Page
the First National Bank of Boston, as
Rights Agent
Registration Statement under the Filed September 4, 1992, and incorporated herein
Securities Exchange Act of 1934 on Form by reference thereto
S-3 dated September 4, 1992
Indenture dated as of March 15, 1994 Filed as Exhibit (4.1) to Registration Statement
between the Company and State Street Bank No. 33-51700 as amended, and included herein by
and Trust Company, as successor trustee reference thereto
to the First National Bank of Boston
First Supplemental Indenture dated as of Filed as Exhibit (4.2) to Registration Statement
July 27, 1995 between the Company and No. 33-64903 as amended, and incorporated herein
State Street Bank and Trust Company, as by reference thereto.
successor trustee to the First National
Bank of Boston
Registration Statement under the Filed on December 11, 1995 and incorporated
Securities Act of 1933 on Form S-3 dated herein by reference thereto
December 11, 1995
(10)(ii) Lease between Two Twenty Two Berkeley Filed as Exhibit (ii)(D) to Form 10-K for
(D) Venture, as Landlord, and Houghton the year ended December 31, 1991, and
Mifflin Company, as Tenant incorporated herein by reference thereto
(10)(iii) Benefits Trust Agreement between Houghton Filed as Exhibit (ii)(C) to Form 10-K for
(A) Mifflin Company and State Street Bank and the year ended December 31, 1992, and
Trust Company dated June 3, 1992 incorporated herein by reference thereto
Severance Agreement between the Company Page
and Mr. Darehshori
Form of Senior Executive Severance Page
Agreement
Form of Key Managers' Severance Agreement Page
Agreement and General Release Page
Supplemental Benefits Plan Page
Non-employee Directors Retirement Benefit Page
Plan
36
Exhibit No. Description of Document Page Number in this report*
- ------------ ------------------------------------------- --------------------------------------------------
Trust Agreement for the Houghton Mifflin Page
Pension Plan with State Street Bank and
Trust Company
1994 Executive Stock Purchase Plan Filed as Exhibit (iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated herein by reference thereto
Form of Option Grant and Exercise Filed as Exhibit (iii)(A) to Form 10-Q for
Agreement the quarter ended September 30, 1994, and
incorporated herein by reference thereto
Non-Employee Directors Stock Purchase Filed as Exhibit (iii)(A) to Form 10-Q for
Plan the quarter ended September 30, 1994, and
incorporated herein by reference thereto
Forms of Stock Purchase Agreement Filed as Exhibit (iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated herein by reference thereto
(12) Computation of Ratio of Earnings to Fixed Page
Charges
(21) List of Subsidiaries Page
(23) Consent of Experts and Counsel Page
(27) Financial Data Schedule Page