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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number
1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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HOUGHTON MIFFLIN COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1456030
(State or other jurisdiction of (I.R.S. Employer
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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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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 $816,390,025 as of February
28, 1997.
The registrant had outstanding 14,843,455 shares of common stock (exclusive
of Treasury shares) and 14,843,455 Preferred Stock Purchase Rights as of
February 28, 1997.
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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 1997 Annual Meeting of Stockholders are incorporated into Part
III.
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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 Securities Holders ..................... 4
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 ............................................................... 34
Part III
Item 10. Directors and Executive Officers of the Company ........................... 34
Item 11. Executive Compensation ................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 34
Item 13. Certain Relationships and Related Transactions ........................... 34
Part IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K ...... 34
Index to Consolidated Financial Statements and Financial Schedules ...... 34
Financial Statement Schedule ............................................. 34
Signatures ............................................................... 36
Index to Exhibits ......................................................... 37
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled " 'Safe Harbor'
Statement under Private Securities Litigation Reform Act of 1995" on page 11 of
this Form 10-K.
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 three significant
subsidiaries: McDougal Littell Inc., Evanston, Illinois, publishes educational
materials for the secondary school market; The Riverside Publishing Company,
Chicago, Illinois, publishes assessment materials for the educational and
clinical testing markets; and Great Source Education Group, Inc., Wilmington,
Massachusetts, publishes supplementary instructional material for the elementary
and secondary school 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 net cash consideration of
$460.6 million. 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 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. In 1996, the Company sold 770,000 shares of INSO
common stock, reducing the Company's ownership interest to approximately 30%.
(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 31 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, Massachusetts, 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 school market are sold by the School Division;
sales for the secondary school market are made by McDougal Littell Inc.
("McDougal"); sales of supplemental instructional material for the elementary
and secondary school markets are made by Great Source Education Group, Inc.
("Great Source"); 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. All
operating divisions have their own dedicated sales forces. The distribution
operations for the shipment of product components for the School Division,
McDougal, Great Source, and College Division are from its two distribution
facilities located in Indianapolis, Indiana and Geneva, Illinois.
1
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 1995 and 1994, book
reprint rights were 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 ("Trade 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 are created from new and existing Houghton Mifflin
titles, and include children's, reference and adult hobby titles. The Trade
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.
Company Business as a Whole
The availability of printing and binding capacity and raw materials
continued at satisfactory levels throughout the year. 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
occurring in the second and third quarters as purchases are made for the school
year which begins in September. Third-quarter results are material to the
full-year performance of the Company, which realizes more than 40% of its net
sales and a substantial portion of its net income during the third quarter. The
acquisition of Heath has 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, 1996, set
forth on page 33 herein.
Sales of educational materials are cyclical as a result of purchasing
patterns that are based on both the academic year and the textbook adoption
process. Approximately one-half of the United States school population adopts
new elementary and secondary school textbooks on a statewide basis for a
particular subject every five to seven years. Although 1996 was not a strong
adoption year, it is expected that 1997 will offer greater sales opportunities
due to an increase in the number of states expected to adopt elementary and
secondary school products. 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 markets are
concentrated in approximately 10 significant publishers; in the college book
market the Company competes with 8 significant publishers. In the diverse trade
and juvenile book markets, approximately 60% of the total industry sales is
shared by 11 major publishers including Houghton Mifflin.
At December 31, 1996, the Company employed approximately 2,420 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 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, 1996. 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; sales office
Palo Alto, California 17,000 Office Textbooks and other educational
materials; sales office
Indianapolis, Indiana 503,000 Offices & Textbooks and other educational
warehouse materials
Leased Premises
- --------------------------
Boston, Massachusetts 301,000 Executive & (1) Textbooks and other
222 Berkeley Street/ business offices educational materials and services,
500 Boylston Street (2) General publishing, and
(3) Corporate headquarters
Batavia, Illinois 120,000 Offices & Textbooks and other educational
warehouse materials and services
Itasca, Illinois 75,000 Offices Textbooks and other educational
materials and services, sales office
Dallas, Texas 70,000 Offices & Textbooks and other educational
warehouse materials and services; sales office
Evanston, Illinois 62,000 Offices Textbooks and other educational
materials; sales office
Wilmington, Massachusetts 41,000 Offices Educational materials and services;
corporate support; sales office
Atlanta, Georgia 31,000 Offices & Textbooks and other educational
warehouse materials; sales office
New York, New York 30,000 Offices General publishing; sales office
St. Charles, Illinois 14,000 Offices Textbooks and other educational
materials; sales office
Somerville, Massachusetts 12,000 Offices General publishing; 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
Batavia, Illinois 2006
Itasca, Illinois 2006
Dallas, Texas 2005
Evanston, Illinois 2004
Wilmington, Massachusetts 2005
Atlanta, Georgia 1999
New York, New York 2004
St. Charles, Illinois 2006
Somerville, Massachusetts 1999
Princeton, New Jersey 1999
Item 3. Legal Proceedings
None
3
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, 1996.
Executive Officers of the Company
Other
Office positions
Age at held with the
Name 2/28/97 Office since Company
- ---------------------- ------------ --------------------------------------- ----------- -----------
Nader F. Darehshori 60 Chairman, President, and 1991 Director
Chief Executive Officer
Albert Bursma, Jr. 59 Executive Vice President; President, 1995 --
Great Source Education Group, Inc.
Gail Deegan 50 Executive Vice President, Chief 1996 --
Financial Officer, and Treasurer
Margaret M. Doherty 58 Senior Vice President, Human 1994 --
Resources
Elizabeth L. Hacking 55 Senior Vice President, Strategic 1993 --
Development
Michael J. Lindgren 39 Vice President, Controller 1994 --
Julie A. McGee 54 Executive Vice President; President, 1995 --
McDougal Littell Inc.
Mark Mooney 44 Senior Vice President, Chief 1997 --
Technology Officer
John H. Oswald 47 Executive Vice President; President, 1992 --
The Riverside Publishing Company
Conall E. Ryan 39 Senior Vice President; President, 1997 --
Houghton Mifflin Interactive
Corporation
Gary L. Smith 52 Senior Vice President, 1991 --
Administration
June Smith 53 Executive Vice President, College 1994 --
Division
Wendy Strothman 46 Executive Vice President, Trade & 1996 --
Reference Division
Paul D. Weaver 54 Senior Vice President, Clerk, 1989 --
Secretary and General Counsel
William J. Wisneski 50 Executive Vice President, School 1992 --
Division
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. Mooney, Mr. Oswald, Mr. Ryan, Ms. Smith,
and Ms. Strothman.
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 Financial Officer, New England Telephone, a
wholly-owned subsidiary of NYNEX
Margaret M. 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
1994--Vice President and Controller
4
1994--Divisional Vice President and Controller
1993--Director of Planning & Analysis, ITT Sheraton
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; President, McDougal Littell Inc.*
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.)
Mark Mooney
1997--Senior Vice President, Chief Technology Officer
1996--Vice President, Director of Information Technology, The Bureau of National
Affairs
1992--Director of Information Services, The Bureau of National Affairs
John H. Oswald
1993--Executive Vice President; President, The Riverside Publishing Company*
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)
Conall E. Ryan
1997--Senior Vice President; President, Houghton Mifflin Interactive Corporation
1996--President, Houghton Mifflin Interactive Corporation
1995--Corporate Vice President, Houghton Mifflin Interactive
1994--Director, New Media, Trade and Reference Division, and Chairman, On
Technology Corporation; Vice President, Publishing for Knowledge Adventure
(a publisher not affiliated with the Company)
1990--President, Chief Executive Officer, On Technology, Inc. (renamed On
Technology Corporation in 1993)
Gary L. Smith
1991--Senior Vice President, Administration
June Smith
1994--Executive Vice President, College Division
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)
Paul D. Weaver
1989--Senior Vice President, Clerk, Secretary, and General Counsel
William J. Wisneski
1992--Executive Vice President, School Division
1991--Senior Vice President; President, The Riverside Publishing Company*
* A subsidiary 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 28, 1997, the approximate number of holders of common stock of the
Company was 5,140.
5
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)
1996 1995
------------------------------------- -------------------------------------
Dividend Dividend
High Low Paid High Low Paid
--------- --------- ----------- --------- --------- ----------
First Quarter ...... $45.38 $40.50 $0.240 $47.13 $39.75 $0.225
Second Quarter ...... 49.75 42.38 0.240 54.75 45.88 0.225
Third Quarter ...... 50.50 46.13 0.240 52.88 44.88 0.240
Fourth Quarter ...... 56.63 45.38 0.240 46.75 39.63 0.240
------- -------
Year ............... $0.960 $0.930
======= =======
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
(In thousands of dollars, except per share amounts)
(Unaudited) Years ended December 31, 1996 1995 1994 1993 1992
------------ ------------ ----------- ----------- ----------
OPERATING RESULTS
Net sales $ 717,863 $ 529,022 $483,076 $462,969 $454,706
Operating income (loss) 87,382 (13,095) 53,464 51,370 44,310
Net interest expense 40,875 13,008 6,509 2,347 2,339
Gain on sale of INSO Corporation
common stock 34,261 -- -- -- --
One-time acquisition charges, INSO
Corporation (11,698) (2,200) -- -- --
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)
Income (loss) before taxes, extra-
ordinary item and accounting change 73,953 (11,444) 85,140 49,023 28,444
Cumulative effect of accounting
changes -- -- -- -- (14,657)
Net income (loss) 43,622 (7,243) 51,191 30,371 4,414
- ---------------------------------------------------- --------- --------- --------- --------- --------
PER COMMON SHARE
Net income (loss) per share of common stock $ 3.13 $ (0.52) $ 3.70 $ 2.20 $ 0.31
Dividends declared per share 0.96 0.93 0.87 0.83 0.79
Book value 19.40 16.89 17.74 16.15 14.52
Stock price--High 56.63 54.75 53.00 50.38 39.88
Low 40.50 39.63 36.13 36.38 26.63
Close 56.63 43.00 45.38 48.63 39.88
- --------------------------------------------- --------- --------- --------- --------- --------
FINANCIAL DATA
Total assets $1,006,442 $1,046,449 $497,266 $398,086 $371,421
Long-term debt less current portion 500,999 426,148 99,445 26,438 52,608
Additions to book plates and property,
plant, and equipment 74,943 54,278 33,720 36,524 38,186
Dividends paid 13,371 12,845 12,026 11,475 11,037
Average number of shares available for
earnings per share (in thousands) 13,933 13,812 13,822 13,823 14,029
- ---------------------------------------------------- --------- --------- --------- --------- --------
Net Sales--Classes of Similar Products
Textbooks and other educational
materials and services
School publishing $ 497,709 $ 359,523 $303,370 $267,106 $272,289
College publishing 138,346 82,277 84,057 90,092 81,212
--------- --------- --------- --------- --------
636,055 441,800 387,427 357,198 353,501
General publishing 81,808 87,222 95,649 105,771 101,205
--------- --------- --------- --------- --------
$ 717,863 $ 529,022 $483,076 $462,969 $454,706
========= ========= ========= ========= ========
6
In 1996, the Company recorded a gain of $34.3 million ($19.9 million
after-tax), or $1.43 per share, on the sale of 770,000 shares of INSO common
stock. In 1996, the Company recorded a one-time acquisition charge of $11.7
million ($7.2 million after-tax), or $0.52 per share, of special charges
relating to its the investment in INSO, resulting from INSO's acquisition of
ImageMark Software Labs, Inc. and Electronic Book Technologies, Inc. In 1995,
there was a $2.2 million charge, or $0.16 per share, relating to its investment
in INSO resulting from INSO's acquisition of Systems Compatibility Corporation.
In October 1995, the Company completed the acquisition of Heath 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,
associated with the integration of the Heath business were recorded in 1995.
A gain of $13.1 million ($7.8 million after-tax), or $0.56 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 a gain of $36.2
million ($22.8 million after-tax), or $1.65 per share, in connection with the
initial public offering of INSO, 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Years Ended December 31, 1996.
The consolidated net income in 1996 was $43.6 million, or $3.13 per share,
compared to a consolidated net loss in 1995 of $7.2 million, or $0.52 per share.
The Company recorded a gain of approximately $34.3 million ($19.9 million
after-tax), or $1.43 per share, in 1996 on the sale of 770,000 shares of INSO
common stock. Included in 1996's results were one-time acquisition charges of
$11.7 million ($7.2 million after-tax), or $0.52 per share, related to INSO's
acquisition of ImageMark Software Labs, Inc. and Electronic Book Technologies,
Inc. Included in 1995's results were special charges of $49.3 million ($30.0
million after-tax), or $2.17 per share, related to the integration of the Heath
operation, $7.0 million ($4.3 million after-tax), or $0.31 per share, related to
the outsourcing of distribution operations, and charges of $2.2 million, or
$0.16 per share, related to INSO's acquisition of Systems Compatibility
Corporation. The 1995 results also include a gain of $13.1 million ($7.8 million
after-tax), or $0.56 per share, for the sale of additional common shares by
INSO, and a gain of $3.8 million ($2.3 million after-tax), or $0.17 per share,
on the sale of the Burlington, Massachusetts distribution facility. Consolidated
net income in 1994 was $51.2 million, or $3.70 per share. Included in 1994
results were a gain of $36.2 million ($22.8 million after-tax), or $1.65 per
share, recognized in connection with the public offering by the former Software
Division, INSO, a special charge of $6.5 million ($4.0 million after-tax), or
$0.29 per share, for restructuring, and an extraordinary item of $1.2 million,
or $0.09 per share, related to the early extinguishment of long-term debt.
Excluding these non-recurring items, net income for 1996 would have been
$30.9 million, or $2.22 per share, compared to net income of $19.2 million, or
$1.39 per share in 1995, and $33.6 million, or $2.43 per share in 1994.
Net sales in 1996 increased $188.9 million, or 36%, to $717.9 million from
1995 net sales of $529.0 million. The educational publishing segment's net sales
of $636.1 million in 1996 increased by $194.3 million, or 44.0%, from 1995 net
sales of $441.8 million. The most significant factor in the net sales increase
was the addition of Heath publications. The general publishing segment net sales
decreased by $5.4 million, or 6.2%, to $81.8 million from 1995 net sales of
$87.2 million. The decrease in net sales is primarily due to lower frontlist
sales.
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%, in 1995 from net sales of $387.4 million in
1994. The increase in revenues was 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 frontlist titles, and additional provisions for book returns.
The Company's operating income for 1996 was $87.4 million, an increase of
$100.5 million from an operating loss of $13.1 million in 1995. Included in
1995's operating results were $56.3 million of special charges. During 1996, the
Company experienced a significant improvement in operating results due to the
increase in net sales and operating efficiencies achieved through the
integration of Heath. Cost of sales declined to 46%
7
of sales in 1996 from 51% in 1995 and selling and administrative, excluding
goodwill amortization of $26.7 million and $10.6 million, declined to 38% from
39% in 1996 and 1995, respectively.
The Company's operating loss for 1995 was $13.1 million compared to
operating income of $53.5 million recorded in 1994. Included in these operating
results were $56.3 million and $6.5 million of special charges for 1995 and
1994, respectively. The decrease in operating results was primarily due to
increased develop-
mental spending, incremental Heath operating losses, and higher distribution
costs.
The 1995 special charges included $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
included $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 included $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.
Net interest expense increased $27.9 million, or 214%, in 1996 mainly due
to a full year of interest on the financing of the Heath acquisition and a full
year of interest on $126.6 million of Stock Appreciation Income-
Linked Securities ("SAILS"). Approximately $22.8 million of the increase related
to the full year of financing for the Heath acquisition, and the balance of the
increase reflected a full year of interest on the SAILS and higher working
capital requirements in 1996. Net interest expense increased $6.5 million in
1995 from $6.5 million reported in 1994 due to the $345 million of commercial
paper and bank financing obtained for the Heath acquisition, the issuance of
SAILS, and a full year of interest on the financing of the McDougal acquisition.
The provision for taxes in 1996 increased $34.5 million over 1995. The
increase is primarily due to higher operating income and a higher effective tax
rate. The effective tax rate increased to 41% in 1996 from 37% in 1995. The
increase reflects the spread of certain fixed non-deductible tax costs over
significantly higher 1996 taxable income. The provision for taxes in 1995
decreased $36.9 million over 1994. The decrease was primarily due to lower
operating income and a lower effective tax rate. The effective tax rate
decreased to 37% in 1995 from 38% in 1994.
Textbooks and Other Educational Materials
The educational publishing segment's net sales of $636.1 million in 1996
were $194.3 million higher than the $441.8 million in 1995, an increase of
44.0%. In elementary and secondary school publishing, the School Division and
McDougal contributed an increase of $118.9 million, reflecting the addition of
Heath publications and new programs. McDougal's language arts programs The
Language of Literature (C) 1997 and The Writer's Craft (C) 1995 led the market
in new business, as did the School Division's reading program Houghton Mifflin
Reading: Invitations to Literacy (C) 1996. Great Source, the supplemental
publishing division created as a result of the Heath acquisition, reported
substantially increased net sales primarily driven by its flagship product
family, Write Source. Riverside reported a sales increase of 4.8% over 1995,
winning a number of large state-wide testing contracts. The College Division
reported net sales of $138.3 million, a 47.3% increase over 1995. The
acquisition of Heath and a strong frontlist contributed to the revenue growth.
The educational publishing segment's net sales of $441.8 million in 1995
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. Riverside reported a sales increase of
4.7% over 1994. The College Division, in 1995, reported a 2.1% decrease in net
sales from 1994.
Operating income for the educational publishing segment increased $49.6
million, or 77.7%, to $113.4 million in 1996 from the $63.8 million reported in
1995. The resulting operating margin for 1996 increased to 17.8% from 14.4% in
1995. The increase in the operating margin is primarily due to the increase in
net sales and operating efficiencies achieved through the integration of Heath.
As a percent of sales, every category of operating expense except for plate and
goodwill amortization and selling costs decreased from 1995, with the largest
savings from editorial expense. Plate amortization increased, as expected, due
to the development of elementary and secondary school programs to meet the
adoption opportunities over the next three years. The increase in goodwill
amortization expense is due to the acquisition of Heath. In 1996, the sales
force was increased to ensure adequate market exposure of the expanded product
lines due to the acquisition of Heath. In preparation for the greater number of
statewide adoption opportunities in 1997, the Company's sampling expense
increased year over year. Distribution expenses also declined as a percent of
sales with economies of scale offsetting some additional costs incurred to
improve customer service.
8
Operating income for the educational publishing segment decreased $4.4
million in 1995, 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 was 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's 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.
General Publishing
The general publishing segment reported 1996 revenue of $81.8 million, a
6.2% decline from the $87.2 million reported in 1995. The Trade Division's lower
frontlist sales were the principal cause of the decline. In 1995, the Company
reduced the number of titles to be published, which resulted in a smaller list
of new titles in 1996. The Trade Division has implemented changes in its
strategy in 1996, as a result of which some revenue streams will be curtailed,
but new sources will be generated. The new strategy will not contribute
significantly to this segment's results before 1998. Included in the results of
this segment is Houghton Mifflin Interactive, which reported net sales of
approximately $4 million. The general publishing segment's operating loss was
$5.1 million in 1996 compared to an operating loss of $8.5 million in 1995. The
1995 results included a $7.5 million non-cash charge to increase reserves. In
1996, declining revenues, as well as an increase in bad debt expense contributed
to the greater operating loss before one-time charges, year over year.
The general publishing segment's net sales in 1995 decreased $6.6 million,
or 7.0%, to $87.2 million when compared with 1994's net sales from ongoing
operations, adjusted for the sale of the former Software Division. 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 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, distribution facility formerly
used for general publishing distribution has been sold.
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.
Net cash provided by operating activities was $102.7 million, $13.0
million, and $67.3 million in 1996, 1995, and 1994, respectively. In 1996, cash
provided by operating activities increased $89.7 million. Net income, excluding
the gain on the sale of INSO stock and equity transactions of INSO, increased
$29.7 million. Depreciation and amortization expense increased $31.9 million
primarily due to increases in goodwill and plate amortization, as discussed
above. Changes in operating assets and liabilities provided $19.7 million more
of cash flow in 1996 over 1995, primarily due to improved working capital
management.
In 1995, cash provided by operating activities decreased by $54.2 million
from 1994. Net income decreased $35.3 million, excluding the gain on equity
transactions of INSO and the sale of interest in the Software Division. Changes
in operating assets and liabilities required $28.9 million of cash flow in 1995
over 1994, primarily as a result of increases in inventory, deferred taxes, and
royalty advances, offset some-what by an increase in other liabilities.
Management anticipates cash provided by operating activities in 1997 to
increase primarily as a result of growth in earnings and continued emphasis on
working capital management.
Net cash required for investing activities was $66.3 million, $486.3
million, and $130.3 million in 1996, 1995, and 1994, respectively. Book plate
expenditures in 1996 of $62.1 million, an increase of $15.4 million over
9
1995, were incurred for new products to meet the significant adoption
opportunities over the next three years. During 1996, the Company also spent
$15.5 million for publishing assets, a decrease of $437.4 million from 1995.
Included in 1996 was the final settlement for Heath and other products
purchased, while 1995 included the Heath acquisition. In 1996, the Company
received $24.2 million in proceeds, net of tax, from the sale of 770,000 shares
of INSO common stock.
In 1995, net cash required for investing activities, excluding the proceeds
from marketable securities, increased by $371.3 million from 1994. This increase
primarily resulted from the $452.9 million acquisition of Heath.
Total debt decreased approximately $30 million from $570.8 million at the
end of 1995, to $541.0 million as of December 31, 1996. The Company's percentage
of debt to total capitalization (debt plus stockholders' equity) was 66.7% at
the end of 1996 as compared to 71.0% at the end of 1995, primarily as a result
of paying down $30 million outstanding under the five year credit facility using
cash available at year end.
During 1996, commercial paper and a portion of the five year credit
facility were repaid through the issuance of long and medium term notes. The
Company issued $125 million in non-callable unsecured long-term notes and $100
million of non-callable unsecured medium-term notes.
In 1995 and 1994, financing activities contributed $459.6 million and $26.2
million, respectively. 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 was
$12.0 million less than 1994 due to a reduction in stock repurchases.
In 1996, the Company's average short-term borrowing was $71.0 million, an
increase of $57.4 million from 1995. The increase was primarily due to the
increase in seasonal borrowing needs as a result of the incremental impact of
funding Heath operations for a full year, and due to funds required for book
plate expenditures to meet the significant adoption opportunities over the next
three years. The Company repaid all short-term borrowing requirements by the end
of 1996.
In 1995, the average short-term borrowing of $13.6 million increased by
$4.7 million from 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.
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes Due in 1999 at a principal amount of $34 per SAILS. 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 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, 1996 stock price, is $1.0 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 substantially less than 20%. The INSO shares
may be sold by the Company, subject to certain restrictions, as market
conditions and events warrant.
The Company currently expects that cash flow from operations for the full
year 1997 will be sufficient to cover investment activities and dividend
payments as well as to repay by year end a portion of the debt outstanding at
the beginning of 1997. The periodic use of the short-term debt market, primarily
commercial paper, for seasonal liquidity needs, will continue.
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
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. If there were to be a weak domestic economy at a time
of low inflation, there could be lower tax receipts at the state and local
level, and the funding and buying patterns for textbooks and other educational
materials could be adversely affected.
In 1994, the Company started to experience higher prices for paper goods
which continued into 1995. However, this trend did not continue in 1996, as the
Company experienced a moderation in prices for paper products.
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
10
and, therefore, the cost of inventory charged against income approximates
replacement value. The incremental replacement cost expense amounted to $10.9
million in 1996 as compared with $5.2 million in 1995.
The Company's publishing business does not require a high level of
investment in property, plant, and equipment. Such net assets represented 3.5%
of consolidated assets at December 31, 1996. The Company's net investment at the
end of 1996 in capitalized book plates for educational and reference works
represented approximately 8.0% 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 seasonal and cyclical nature of the Company's educational sales; (ii)
variable funding in school systems throughout the nation, which may result 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) strength of the retail
market for general-interest publications and market acceptance of frontlist
titles and new electronic products; 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, 1996 and 1995 ........................... 14
Consolidated Statements of Operations for the three years ended December 31, 1996 ... 16
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 ... 17
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 18
1996
Notes to Consolidated Financial Statements .......................................... 20
Supplementary Data
Summary of Quarterly Results of Operations (unaudited) is presented on page 33.
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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, 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 27, 1997
13
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
December 31,
-------------------------------
(In thousands of dollars, except share amounts) 1996 1995
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents .................................... $ 11,534 $ 16,701
Marketable securities and time deposits available-for-sale,
at fair value ............................................. 612 604
Accounts receivable .......................................... 189,978 204,542
Less: allowance for book returns ........................... 25,166 21,698
---------- ----------
164,812 182,844
Inventories ................................................ 138,547 139,927
Deferred income taxes ....................................... 20,551 23,728
Prepaid expenses ............................................. 1,913 7,396
---------- ----------
Total current assets ....................................... 337,969 371,200
Property, plant, and equipment, net ........................... 35,430 32,879
Book plates, less accumulated amortization of $91,628
in 1996 and $70,032 in 1995 ................................. 81,017 90,221
Other Assets
Royalty advances to authors, less allowance of $20,975 in 1996
and $21,848 in 1995 .......................................... 24,761 23,988
Intangible assets, net ....................................... 485,766 474,751
Deferred income taxes ....................................... 12,514 15,688
Other investments and long-term receivables .................. 28,985 37,722
---------- ----------
Total other assets .......................................... 552,026 552,149
---------- ----------
$1,006,442 $1,046,449
========== ==========
See accompanying Notes to Consolidated Financial Statements.
14
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
December 31,
-----------------------------
(In thousands of dollars, except share amounts) 1996 1995
------------ -----------
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................ $ 57,585 $ 94,556
Commercial paper ................................................ -- 144,612
Royalties ...................................................... 38,154 40,140
Salaries, wages, and commissions .............................. 19,408 18,751
Other ......................................................... 30,783 44,324
Current portion of long-term debt .............................. 40,000 --
--------- ---------
Total current liabilities .................................... 185,930 342,383
Long-term debt ................................................... 500,999 426,148
Accrued royalties payable ....................................... 1,899 2,497
Other liabilities ................................................ 19,666 15,192
Accrued post retirement benefits ................................. 27,655 26,884
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,
14,780,926 shares issued in 1996 and 14,758,726 shares
issued in 1995 ................................................ 14,781 14,759
Capital in excess of par value ................................. 43,476 29,973
Retained earnings ............................................. 258,779 228,528
--------- ---------
317,036 273,260
Less:
Notes receivable from stock purchase agreements ............... (5,916) (5,821)
Unearned compensation related to restricted stock outstanding . (1,563) (349)
Common shares held in treasury, at cost, 115,390 shares in 1996,
and 273,681 shares in 1995 .................................... (2,448) (5,795)
Benefits trust assets, at market .............................. (36,816) (27,950)
--------- ---------
Total stockholders' equity .................................... 270,293 233,345
--------- ---------
$1,006,442 $1,046,449
========= =========
See accompanying Notes to Consolidated Financial Statements.
15
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Operations
For the Three Years Ended December 31, 1996
(In thousands of dollars, except per share amounts) 1996 1995 1994
----------- ----------- ----------
Net sales ............................................. $717,863 $529,022 $483,076
Costs and expenses ....................................
Cost of sales .......................................... 329,686 271,036 230,674
Selling and administrative ........................... 300,795 214,818 192,425
Special charges ....................................... -- 56,263 6,513
-------- -------- --------
630,481 542,117 429,612
-------- -------- --------
Operating income (loss) ................................. 87,382 (13,095) 53,464
Other income (expense)
Gain on equity transactions of INSO Corporation and
on sale of interest in Software Division ............ -- 13,102 36,212
Gain on sale of INSO Corporation common stock ......... 34,261 -- --
Net interest expense ................................. (40,875) (13,008) (6,509)
Equity in earnings (losses) of INSO Corporation ...... (6,815) 1,557 1,973
-------- -------- --------
(13,429) 1,651 31,676
-------- -------- --------
Income (loss) before taxes and extraordinary item ...... 73,953 (11,444) 85,140
Income tax (benefit) provision ........................ 30,331 (4,201) 32,710
-------- -------- --------
Income (loss) before extraordinary item ............... 43,622 (7,243) 52,430
Extraordinary item, net of taxes
Loss on early extinguishment of debt .................. -- -- (1,239)
-------- -------- --------
Net income (loss) ....................................... $ 43,622 $ (7,243) $ 51,191
======== ======== ========
Per share:
Income (loss) before extraordinary item ............... $ 3.13 $ (0.52) $ 3.79
Loss on early extinguishment of debt .................. -- -- (0.09)
-------- -------- --------
Net income (loss) .................................... $ 3.13 $ (0.52) $ 3.70
======== ======== ========
Average number of common shares outstanding ............ 13,933 13,812 13,822
See accompanying Notes to Consolidated Financial Statements.
16
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Cash Flows
For the Three Years Ended December 31, 1996
(In thousands of dollars) 1996 1995 1994
----------- ------------ ------------
Cash flows provided by (used in) operating activities:
Net income (loss) ............................................. $ 43,622 $ (7,243) $ 51,191
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization expense ........................ 84,335 52,426 44,416
Gain on equity transactions of INSO Corporation and gain on
sale of interest in Software Division ..................... -- (13,102) (36,212)
Equity in (earnings) losses of INSO Corporation ............ 6,815 (1,557) (1,973)
Early extinguishment of debt cost, net of taxes ............ -- -- 1,239
Gain on sale of INSO Corporation stock ..................... (34,261) -- --
Changes in operating assets and liablities:
Accounts receivable, net .................................... 18,031 (4,366) (26,751)
Inventories ................................................ 1,380 (25,388) 17,606
Accounts payable ............................................. (36,969) (5,981) 3,448
Royalties, net ............................................. (3,307) (11,698) 6,705
Deferred and income taxes payable ........................... 25,485 (23,882) 5,949
Other, net ................................................... (2,443) 53,813 1,634
--------- --------- ---------
Net cash provided by operating activities .................. 102,688 13,022 67,252
Cash flows provided by (used in) investing activities:
Book plate expenditures .................................... (62,080) (46,740) (25,242)
Acquisition of publishing assets, net of cash acquired ...... (15,501) (452,888) (130,342)
Property, plant, and equipment expenditures .................. (12,863) (7,538) (8,478)
Proceeds from the sales of INSO Corporation stock ............ 24,186 -- --
Purchase of marketable securities ........................... (8) (4) (16,221)
Sale of marketable securities .............................. -- 16,221 17,114
Sale of building and equipment .............................. -- 4,628 --
Dividend received from INSO Corporation ..................... -- -- 32,860
--------- --------- ---------
Net cash used in investing activities ..................... (66,266) (486,321) (130,309)
Cash flows provided by (used in) financing activities:
Dividends paid on common stock .............................. (13,371) (12,845) (12,026)
Issuance (repayment) of commercial paper ..................... (144,612) 144,612 (24,605)
Proceeds from the issuance of long-term financing ............ 224,785 200,000 99,415
Repayment of long-term financing ........................... (109,955) -- --
Proceeds from the issuance of SAILS ........................ -- 126,643 --
Senior note redemption ....................................... -- -- (26,960)
Purchase of common stock .................................... -- (957) (12,913)
Exercise of stock options .................................... 1,897 2,175 1,442
Other ...................................................... (333) -- 1,834
--------- --------- ---------
Net cash provided by (used in) financing activities ......... (41,589) 459,628 26,187
--------- --------- ---------
Decrease in cash and cash equivalents ........................ (5,167) (13,671) (36,870)
Cash and cash equivalents at beginning of year ............... 16,701 30,372 67,242
--------- --------- ---------
Cash and cash equivalents at end of year ..................... $ 11,534 $ 16,701 $ 30,372
========= ========= =========
Supplementary disclosure of cash flow information:
Income taxes paid .......................................... $ 17,409 $ 18,194 $ 25,819
Interest paid ................................................ $ 38,931 $ 10,941 $ 6,323
See accompanying Notes to Consolidated Financial Statements.
17
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Stockholders' Equity
Common Capital
For the Three Years Ended December 31, 1996 stock in excess Retained
(In thousands of dollars, except share amounts) $1 par value of par value earnings
--------------- --------------- -----------
Balance at January 1, 1994 .................................... $14,759 $30,612 $211,222
Net income ...................................................... -- -- 51,191
Common stock dividends, $0.87 per share ........................ -- -- (12,026)
Stock options exercised ....................................... -- (233) --
Notes receivable from stock purchase agreements ............... -- 443 --
Issuance of restricted stock .................................... -- 73 --
Share repurchases ............................................. -- -- --
Other equity transactions, net ................................. -- 1,133 --
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
======== ======= ========
Net loss ...................................................... -- -- (7,243)
Common stock dividends, $0.93 per share ........................ -- -- (12,845)
Stock options exercised ....................................... -- 776 --
Issuance of restricted stock .................................... -- 252 --
Share repurchases ............................................. -- -- --
Executive stock repurchases .................................... -- -- --
Other equity transactions, net ................................. -- 573 --
Benefits trust asset remeasurement .............................. -- (1,544) --
Valuation allowance on noncurrent marketable securities ......... -- -- (212)
Stock repurchase commitment .................................... -- 7,600 --
Amortization of unearned compensation on restricted stock ...... -- -- --
-------- ------- --------
Balance at December 31, 1995 .................................... 14,759 29,973 228,528
======== ======= ========
Net income ...................................................... -- -- 43,622
Common stock dividends, $0.96 per share ........................ -- -- (13,371)
Stock options exercised ....................................... 22 1,249 --
Issuance of restricted stock .................................... -- 1,009 --
Executive stock repurchases .................................... -- -- --
Other equity transactions, net ................................. -- 505 --
Issuance of stock for contribution to the retirement
savings plan ................................................... -- 1,884 --
Benefits trust asset remeasurement .............................. -- 8,856 --
Amortization of unearned compensation on restricted stock ...... -- -- --
-------- ------- --------
Balance at December 31, 1996 .................................... $14,781 $43,476 $258,779
======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
18
Unearned
Notes receivable compensation Treasury stock
from stock related to --------------------------- Benefits
purchase agreements restricted stock Shares Amount trust Total
- --------------------- ------------------- ------------ ------------ ------------ ----------
$ -- $ -- (232,459) $ (1,367) $ (31,144) $224,082
-- -- -- -- -- 51,191
-- -- -- -- -- (12,026)
-- -- 50,203 1,675 -- 1,442
(5,893) -- 138,272 5,450 -- --
-- -- 1,789 14 -- 87
-- -- (318,900) (12,913) -- (12,913)
52 -- 32,410 1,050 (466) 1,769
-- -- -- -- 2,112 --
-- -- -- -- -- (1,559)
-- -- -- -- -- (7,600)
------- ------- ---------- -------- --------- --------
(5,841) -- (328,685) (6,091) (29,498) 244,473
======= ======= ========== ======== ========= ========
-- -- -- -- -- (7,243)
-- -- -- -- -- (12,845)
-- -- 70,698 1,399 -- 2,175
-- (465) 10,766 213 -- --
-- -- (24,000) (957) -- (957)
344 -- (7,742) (403) -- (59)
(324) -- 5,282 44 4 297
-- -- -- -- 1,544 --
-- -- -- -- -- (212)
-- -- -- -- -- 7,600
-- 116 -- -- -- 116
------- ------- ---------- -------- --------- --------
(5,821) (349) (273,681) (5,795) (27,950) 233,345
======= ======= ========== ======== ========= ========
-- -- -- -- -- 43,622
-- -- -- -- -- (13,371)
-- -- 29,544 626 -- 1,897
-- (1,909) 42,414 900 -- --
209 -- -- -- -- 209
(304) -- 12,176 248 (10) 439
- -- -- 74,157 1,573 -- 3,457
-- -- -- -- (8,856) --
-- 695 -- -- -- 695
------- ------- ---------- -------- --------- --------
$(5,916) $(1,563) (115,390) $ (2,448) $ (36,816) $270,293
======= ======= ========== ======== ========= ========
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 Com- pany") 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 the issuance
of common stock by a subsidiary or equity investee. Under this method gains and
losses on issuance of stock by a subsidiary or equity investee 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. Investments in companies in which the Company has a 20%
to 50% interest are carried at cost and adjusted for the Company's proportionate
share of their undistributed earnings and losses, and for gains and losses
associated with the issuance of additional stock, as discussed above.
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, 1996 and 1995 are as follows:
In thousands 1996 1995
- ------------------------ ------------ -----------
Finished goods ...... $ 124,263 $ 120,120
Work in process ...... 9,162 8,733
Raw materials ......... 5,122 11,074
---------- ----------
$ 138,547 $ 139,927
========== ==========
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, 1996 and
1995, would have been higher by $19.8 million and $23.1 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 $0.11 per
share.
20
Property, plant, and equipment:
Property, plant, and equipment are carried on the basis of cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives as follows:
Estimated Useful Life
-------------------------------------
Building and building equipment ...... 10 years
Machinery and equipment ............... 3 to 10 years
Leasehold improvements ............... lesser of useful life or lease term
Balances of major classes of assets and allowances for depreciation and
amortization at December 31, 1996 and 1995, are as follows:
In thousands 1996 1995
- ----------------------------------------------------------- ------------ ------------
Land and land improvements .............................. $ 1,976 $ 2,046
Building and building equipment ........................ 20,884 19,169
Machinery and equipment ................................. 54,850 57,444
Leasehold improvements ................................. 10,740 8,079
-------- --------
Total ................................................... 88,450 86,738
Less: allowances for depreciation and amortization ...... (53,020) (53,859)
-------- --------
Property, plant, and equipment, net ..................... $ 35,430 $ 32,879
======== ========
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 $7.3 million in 1996; $8.8
million in 1995; and $8.6 million in 1994.
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. Amortization expense was
approximately $50.3 million in 1996; $32.9 million in 1995; and $29.1 million in
1994.
Income taxes:
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Deferred income taxes are recorded to reflect the tax benefit 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, 1996 and 1995, consist of the following:
In thousands 1996 1995
- --------------------------------------- ------------ -----------
Goodwill ........................... $510,500 $473,786
Publishing rights .................. 16,787 18,523
Other .............................. 4,000 5,891
-------- --------
Total .............................. 531,287 498,200
Less: accumulated amortization ...... (45,521) (23,449)
-------- --------
Intangibles, net ..................... $ 485,766 $ 474,751
======== ========
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 ranging from 20 to 25 years.
Amortization expense on intangible assets, principally goodwill, was
approximately $26.7 million in 1996; $10.7 million in 1995; and $6.7 million in
1994.
Impairment evaluation:
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting standards
for the evaluation and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill. There was no material effect on the
financial statements from the adoption of SFAS 121 because the Company's prior
impairment recognition practice was generally consistent with SFAS 121. Under
provisions of SFAS 121, impairment is indicated when expected future cash flows
are less than the related assets' carrying value. Accordingly, when indicators
of impairment are present, the Company evaluates the carrying value of the
related asset, including goodwill, in relation to the fair value and the
carrying value of the underlying assets is adjusted if the fair value is lower.
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
21
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.
Stock based compensation:
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to the fair market value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and accordingly recognizes no compensation expense
for the stock option grants. The Company also grants restricted stock awards to
key employees, including officers. For restricted stock awards, the Company
measures compensation cost equal to the fair value of the shares at the date of
grant. Compensation expense for these awards is then recognized over the period
of the restriction by a charge to earnings. In 1996, the Company has adopted the
disclosure-only provision of Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation" (See Note 7).
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 markets. 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 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, inventory
valuation and amortization periods, and recoverability of long-term assets such
as book plates, intangibles, and goodwill.
Note 2. Acquisitions
The Company acquired D.C. Heath and Company ("Heath"), a leading publisher
of high school, elementary, and college textbooks, from Raytheon Company
("Raytheon") on October 31, 1995 for approximately $460.6 million, including
additional purchase price amounts paid in 1996. The acquisition was financed
through 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 allocated on the basis of the estimated
fair market value of the assets acquired and the liabilities assumed, and
included revisions to the preliminary allocation based on further analysis. The
cost 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.
During the second quarter of 1996, the Company acquired all of the
outstanding shares of D.C. Heath, Canada, Limited ("Heath Canada") from Raytheon
following receipt of Canadian regulatory approval. ITP Nelson ("ITP"), a
division of Thomson Canada Limited, subsequently acquired the assets of Heath
Canada from the Company and entered into a series of agreements which expanded
an existing exclusive distribution agreement for the school and college markets.
Cash and licensing fees for these arrangements were approximately $5.0 million,
of which approximately $4.7 million has been paid.
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.
22
In 1994, the Company acquired McDougal, Littell & Company ("McDougal") for
$130.3 million. The acquisition was accounted for as a purchase.
The following unaudited summary pro forma information combines the
consolidated results of operations as if Heath, Heath Canada, 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, Heath Canada, and McDougal acquisition been consummated as of the assumed
date, 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
Net 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
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:
In thousands 1996 1995
- --------------------------------------------- ----------- ----------
Tax asset-related:
Pension and postretirement benefits ...... $ 15,741 $ 16,300
Publishing expense ........................ 14,827 22,840
Allowance for book returns ............... 3,033 1,084
Deferred compensation ..................... 1,883 1,700
Other, net .............................. 1,629 2,936
-------- --------
37,113 44,860
Tax liability-related:
Depreciation expense ..................... (3,248) (4,655)
Deferred income ........................... (800) (789)
-------- --------
(4,048) (5,444)
-------- --------
Net deferred tax asset ..................... $ 33,065 $ 39,416
======== ========
At December 31, 1996, net deferred tax assets represented approximately 3%
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 1996 1995 1994
- ------------------------- ----------- ----------- ----------
Current:
Federal ............... $ 20,573 $ 13,201 $ 23,711
State and other ...... 3,407 2,669 5,719
--------- -------- ---------
Total current ...... 23,980 15,870 29,430
Deferred
Federal ............... 5,154 (16,246) 2,653
State and other ...... 1,197 (3,825) 627
--------- -------- ---------
Total deferred ...... 6,351 (20,071) 3,280
--------- -------- ---------
$ 30,331 $ (4,201) $ 32,710
========= ======== =========
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:
1996 1995 1994
-------- ---------- ----------
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ...... 4.6 4.6 4.6
Non-deductible goodwill amortization ............ 3.0 (19.8) 2.2
Tax-exempt income .............................. (1.3) 10.2 (0.7)
Non-deductible meals and entertainment ......... 0.9 (4.9) 0.7
Life insurance ................................. (1.0) 5.2 (0.5)
Other .......................................... (0.2) 6.4 (2.9)
------ ------ ------
Effective tax rate .............................. 41.0% 36.7% 38.4%
====== ====== ======
23
As a result of the Stock Appreciation Income-Linked Securities ("SAILS")
transaction, the Company is likely to record a gain on the redemption of these
debt securities. Accordingly, in 1996 and 1995, the Company is providing
deferred taxes on the undistributed earnings of INSO Corporation ("INSO"), the
Company's former wholly-owned Software Division (See Note 11). Accumulated
undistributed earnings of INSO on which taxes have not been provided were
approximately $2.0 million at December 31, 1996 and 1995.
Note 4. Debt and Borrowing Agreements
The Company had $300 million and $400 million in unsecured credit
facilities available at December 31, 1996 and 1995, respectively, which were
supported by commitment fees. Borrowings under the $300 million facility are
outstanding under a five-year revolving commitment which expires in October
2000. The most restrictive provisions of this credit facility are as follows:
1. The Company shall maintain specified net worth levels as defined in the
Credit Agreement.
2. The Company shall maintain a consolidated fixed-charge coverage ratio, as
defined, calculated at the end of each quarter based on the preceding four
quarters. The required ratio levels adjust each quarter through the year
2000.
3. The Company shall maintain a consolidated debt-to-equity ratio, as
defined, calculated at the end of each quarter. The required ratio levels
adjust during each quarter of each year through the year 2000 reflecting
the Company's anticipated seasonal working capital borrowings.
There was $90 million outstanding under this facility at December 31, 1996, at a
weighted average borrowing rate of 5.983%. At December 31, 1995, there was $200
million outstanding under this facility at a weighted average borrowing rate of
6.19%.
In thousands 1996 1995
- ------------------------------------------------------- ------------ -----------
6% Exchangeable Notes, due August 1999, Stock
Appreciation Income-Linked Securities (SAILS) ...... $ 126,643 $ 126,643
7.00% Notes due March 1, 2006, interest payable semi-
annually .......................................... 124,791 --
7.125% Notes due April 1, 2004, interest payable semi-
annually .......................................... 99,565 99,505
Borrowings from financial institutions, unsecured,
under committed 5 year credit facility, due January
10, 2000 .......................................... 90,000 200,000
Commercial paper, with a weighted average interest
rate of 6.17% ....................................... -- 144,612
5.83% Notes due December 1, 1997, interest payable
semi-annually ....................................... 40,000 --
6.07% Notes due December 1, 1998, interest payable
semi-annually ....................................... 40,000 --
6.29% Notes due December 1, 1999, interest payable
semi-annually ....................................... 20,000 --
---------- ----------
540,999 570,760
Less: portion included in current liabilities ...... 40,000 144,612
---------- ----------
Total long-term debt ................................. $ 500,999 $ 426,148
========== ==========
Long-term debt due in each of the next five years is as follows:
Years In thousands
- -------- --------------
1997 $40,000
1998 40,000
1999 146,643
2000 90,000
2001 --
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. In March 1996, the Company issued $125 million of non-
callable unsecured notes under this offering. The notes mature on March 1, 2006
and were priced at 99.8 to yield an effective rate of 7.02%. In addition, the
Company issued a total of $100 million of non-callable, unsecured medium term
notes under this offering; $40 million with a coupon of 5.83% maturing on
December 1, 1997; $40 million with a coupon of 6.07% maturing on December 1,
1998; and $20 million with a coupon of 6.29% maturing on December 1, 1999. The
proceeds from these issuances were used to pay down part of the commercial paper
and credit facility which were used as short-term bridge financing for the Heath
acquisition.
On October 31, 1995, $345 million in credit facilities were drawn upon to
fund the purchase of Heath. 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.
24
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes due in 1999 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. The additional non-cash interest expense to be recorded through August
1999, based upon INSO's December 31, 1996 stock price, is $1.0 million.
In April 1994, the Company issued $100 million of 7.125% medium term notes
through a public debt offering. The medium term 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.
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 $0.09 per share, was net of an income tax
benefit of $0.8 million. The Company financed the early redemption of the senior
notes with operating cash and a portion of the dividend received from INSO.
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 in 1995,
a forward interest rate-lock agreement was entered into with a counterparty for
the notional principal amount of $100 million at 5.995%. This rate-lock
agreement was settled in 1996, resulting in a net gain of approximately $0.6
million, which is being amortized over the approximate term of the related
borrowings.
Note 5. Retirement Plans
The Company has a noncontributory, qualified defined benefit pension plan
that covers substantially all employees. Plan benefits were previously
determined by years of service, the highest five consecutive years of
compensation and age. On January 1, 1997, the pension plan was changed to a cash
balance plan. Under the new plan provisions, the accrued benefits of
participants were converted to notional balances that receive credits based on
pay and interest in future years. This plan change is not expected to
significantly change 1997 expense from the expense that would apply under the
prior plan provisions. The funded status as of September 30, 1996 reflects this
plan change.
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, investments in registered investment companies,
and cash and cash equivalents. The Company also has a nonqualified defined
benefit plan that covers a select group of management employees.
Net periodic pension cost for 1996, 1995, and 1994 included the following
components:
In thousands 1996 1995 1994
- ------------------------------------------------------- ------------ ------------ -----------
Service cost (benefits earned during the year) ...... $ 3,557 $ 2,602 $ 3,275
Interest cost on projected benefit obligation ...... 6,541 5,456 5,045
Actual return on plan assets ........................ (10,882) (13,588) (1,165)
Net amortization and deferral ........................ 2,984 7,722 (4,432)
-------- -------- -------
Net pension expense ................................. $ 2,200 $ 2,192 $ 2,723
======== ======== =======
Significant actuarial assumptions:
Discount rate ....................................... 7.75% 8.00% 7.50%
Increase in future compensation ..................... 5.25% 6.00% 6.00%
Expected long-term rate of return on assets ......... 9.00% 8.50% 8.50%
25
The Company uses a September 30 measurement date and adjusts for any
contributions made after the measurement date to disclose December 31 accrued
pension liability. The following table sets forth the Plan's funded status at
December 31:
In thousands 1996 1995
- -------------------------------------------------------- ------------ ----------
Plan assets at fair value at September 30 ............ $ 102,883 $ 80,959
Projected benefit obligation (PBO) .................. 101,312 72,815
--------- --------
Excess of plan assets over projected benefit obligation
at September 30 .................................... 1,571 8,144
Unrecognized items:
Net gain ............................................. (13,252) (14,687)
Prior service cost ................................. 574 (1,027)
Net transition asset ................................. (1,058) (1,241)
--------- --------
Accrued pension liability included in other long-term
liabilities .......................................... $ (12,165) $ (8,811)
========= ========
Actuarial present value of accumulated benefits at
September 30 (ABO) ................................. $ 94,464 $ 62,212
Accumulated benefit obligation related to vested
benefits at September 30 ........................... $ 92,730 $ 58,318
Significant actuarial assumptions:
Discount rate ....................................... 7.75% 7.75%
Increase in future compensation ..................... 5.25% 5.25%
The 1996 information above reflects the assets that were transferred from
Raytheon's pension plans and the assumed obligations for the former Heath
employees. This transfer of assets and the corresponding obligation is the
principal factor in the significant increase in the assets and PBO from 1995 to
1996. With the new cash balance plan, there is a smaller difference between the
ABO and the PBO formula than in the prior years because future salary increases
have a less significant impact under cash balance than under the prior final
average pay formula.
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 $9,500 in 1996 to ten funds: seven equity funds, two fixed
income funds, and a fund invested solely in the Company's common stock.
In 1996, the Company matched employees contribution to the Retirement
Savings Plan in amounts up to 3% of employee compensation. Effective January 1,
1997, the plan was renamed Houghton Mifflin 401(k) Saving Plan, and provides a
company match in amounts up to 41/2% of employee compensation. The contribution
expense, which is invested solely in shares of the Company's common stock,
amounted to approximately $2.1 million in 1996; $1.8 million in 1995; and $1.8
million in 1994.
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. Additionally, employees of Heath as of
October 31, 1995 who became Houghton Mifflin employees with the acquisition of
Heath are covered subject to the same age and service requirements.
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 $36.8 million and $27.9 million at December
31, 1996, and 1995, respectively.
The following table presents the postretirement benefit liability
recognized in the consolidated balance sheet at December 31:
In thousands 1996 1995
- ------------------------------------------------- ----------- ----------
Accumulated postretirement benefit obligation:
Retirees .................................... $ 18,590 $ 19,318
Fully eligible active plan participants ...... 2,484 3,243
Other active participants ..................... 3,827 3,562
-------- --------
24,901 26,123
Unrecognized net gain ........................ 2,739 745
Unrecognized prior service cost ............... 15 16
-------- --------
Accrued postretirement benefit liability ...... $ 27,655 $ 26,884
======== ========
Significant actuarial assumptions:
Weighted average discount rate ............... 7.75% 7.75%
Ultimate medical inflation rate ............... 4.25% 4.25%
26
Net periodic postretirement benefit cost includes the following components
for the twelve months ended December 31:
In thousands 1996 1995 1994
- -------------------------------------------------------- --------- --------- ---------
Service cost (benefits earned during the year) ...... $ 529 $ 349 $ 354
Interest cost on projected benefit obligation ......... 1,801 1,676 1,786
Amortization of unrecognized prior service cost ...... (1) (68) (67)
------ ------ ------
Net periodic postretirement benefit expense ......... $ 2,329 $ 1,957 $ 2,073
====== ====== ======
1996 1995 1994
-------- -------- -------
Significant actuarial assumptions:
Weighted average discount rate ...... 7.25% 7.90% 7.80%
Medical inflation trend rate ......... 6.25% 8.00% 9.00%
The change in the medical inflation trend rate reflects the recent
moderation of health care cost increases. As of December 31, 1996, the medical
inflation rate was assumed to decline 1% per annum to a projected ultimate rate
of 4.25% in 1998 and thereafter.
An increase of 1% in the assumed medical inflation rate would increase the
combination interest and service cost components of 1996 net periodic
postretirement benefit cost by approximately $0.1 million, and increase the
accumulated postretirement benefit obligation as of December 31, 1996 by $2.0
million. The Company expects the discount rate to remain unchanged and the
medical inflation trend rate to reduce to 5.25% for 1997.
Note 7. Stock Compensation Plans
At December 31, 1996, the Company had two stock-based compensation plans
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. The Company has adopted the
disclosure-only provision of SFAS 123. Accordingly, no compensation cost has
been recognized for its fixed stock compensation plans. In 1994, the Company
charged to income $0.6 million related to the performance-based plan. Had
compensation cost for the Company's two stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
In millions, except per share amounts 1996 1995
- --------------------------------------- --------- ----------
Net income ........................... As reported ...... $ 43.6 $ (7.2)
Pro forma ......... $ 42.4 $ (7.9)
Earning per share .................. As reported ...... $ 3.13 $ (0.52)
Pro forma ......... $ 3.04 $ (0.57)
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options in future years. Additionally, the disclosure requirements of SFAS
123 are presently applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1999 or 2000.
Fixed stock compensation plans
The Company maintains two fixed stock compensation plans, the 1992 Stock
Compensation Plan and the 1995 Stock Compensation Plan. Options outstanding
include some granted under the 1992 Stock Compensa-
tion Plan, under which no further options may be granted. The Company has
authorized 700,000 common shares and 900,000 common shares under the 1992 Stock
Compensation Plan and the 1995 Stock Compensation Plan, respectively, 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
1996, grants of 42,414 shares of restricted stock were made; at December 31,
1996, there was a total of 48,235 restricted shares unvested. 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.
27
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively:
1996 1995
---------- ---------
Dividend yield 1.89% 1.89%
Range of expected lives (years) 3 - 4.8 3 - 4.8
Expected volatility 24.90% 27.00%
Risk-free interest rate 6.21% 5.38%
A summary of the status of the Company's two fixed stock compensation plans
as of December 31, 1996 and 1995 and changes during the years ending on those
dates is presented below:
1996 1995 1994
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price (000) Price
- ----------------------------------------- --------- ------------ --------- ------------ --------- -----------
Outstanding at beginning of year ...... 802 $ 44 622 $ 43 395 $ 33
Granted .............................. 208 46 308 44 493 45
Exercised .............................. (57) 38 (72) 31 (224) 30
Forfeited .............................. (75) 44 (56) 45 (42) 46
----- ----- ----- ----- ----- -----
Outstanding at end of year ............ 878 45 802 44 622 43
===== ===== ===== ===== ===== =====
Options exercisable at year-end ...... 461 339 234
Weighted-average fair value of options
granted during the year ............... $11.50 $11.11
The following table summarizes information about fixed stock options at
December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Outstanding Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- ------------ -------------- -------------- ------------ -------------- -----------
$35 to $42 93,727 3.2 years $ 41 35,435 $ 40
43 to 44 203,500 3.8 43 89,569 43
45 to 46 434,540 2.5 45 304,733 45
48 to 53 146,000 4.4 48 31,736 49
-------- --------
877,767 3.2 45 461,473 45
======== ========
Executive Stock Purchase Plan
In August 1994, pursuant to the 1994 Executive Stock Purchase Plan
("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 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).
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 and 1994, and the related costs,
is set forth in the table below:
Years ended December 31, 1995 1994
- --------------------------------------------------- ---------- ---------
In thousands, except per share amounts
Severance ....................................... $ 2,850 $ 3,560
Facilities sale and consolidation ............... 2,788 1,982
Inventory relocation ........................... 315 --
Disposal of tangible and intangible assets ...... 250 971
Consulting ....................................... 830 --
-------- --------
7,033 6,513
Income tax benefit .............................. 2,743 2,475
-------- --------
Net charge to operations ........................ $ 4,290 $ 4,038
======== ========
Per share cost ................................. $ 0.31 $ 0.29
======== ========
28
The Company eliminated approximately 191 positions as a result of these
actions. As of December 31, 1996, approximately $6.4 million had been paid to
employees in the form of salary continuance and other benefits related to these
restructurings. Also, the liabilities related to above noted charges have been
materially settled at the end of 1996. There were no material differences
between the amounts accrued above and the payments against the liabilities
recognized.
In addition to the charges noted above and in connection with the
acquisition of Heath, a non-recurring charge of $49.3 million ($30.0 after-tax),
or $2.17 per share, was recognized in 1995. This charge is principally comprised
of integration costs, indirect costs of the acquisition, 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 on 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 $0.05 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
- ------------------------------- --------------
1997 $ 14,125
1998 13,675
1999 12,488
2000 11,764
2001 11,658
Thereafter 53,660
---------
Total minimum lease payments $ 117,370
=========
Rent expense, net of sublease income, was approximately $16.7 million in
1996; $13.0 million in 1995; and $11.6 million in 1994.
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.
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 com
29
pany, 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 transferred to INSO. The Company
retained an ownership interest of approximately 40% in the successor company
subsequent to the transfer. In addition, the Company and INSO had entered into a
service 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
1995.
During 1995, the Company's Trade & Reference Division sold to INSO certain
properties and rights relating to the Information Please[RegTM] 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, and is
being 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 $32.74 for total consideration
of $39.3 million. As a result, the Company's equity ownership reduced to
approximately 36%. A gain of $13.1 million, $7.8 million after-tax, or $0.56 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.
In 1996, the Company received $38.6 million in proceeds from the sale of
770,000 shares of INSO common stock. As a result of the sales, the Company
recorded a gain of approximately $34.3 million ($19.9 million after-tax), or
$1.43 per share. The Company's equity ownership in INSO, after the sale of
common stock, is approximately 30%.
The Company records its pro-rata share of income and losses and the impact
of INSO's equity activities, if any, on a quarterly basis, in arrears. In the
fourth quarter of 1996, INSO sold additional shares in a public offering. In the
first quarter of 1997, the Company will record an estimated gain of $15 million
associated with these sales.
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, 1996 and 1995 are as follows:
1996 1995
----------------------------- ------------------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
- ---------------------------------------- ----------- ------------- ----------- -------------
Financial assets:
Cash, cash equivalents, and marketable
securities ........................... $ 12,146 $ 12,146 $ 17,305 $ 17,305
Investments:
INSO .............................. 13,861 152,909 24,558 186,200
Cassell PLC ........................ 2,389 2,389 2,389 2,389
Financial liabilities:
SAILS .............................. (126,643) (144,000) (126,643) (136,900)
7.00% notes ........................ (124,791) (121,650) -- --
7.125% notes ........................ (99,565) (99,410) (99,505) (104,950)
Credit facility ..................... (90,000) (90,000) (200,000) (200,000)
5.83% notes ........................ (40,000) (39,940) -- --
6.07% notes ........................ (40,000) (39,772) -- --
6.29% notes ........................ (20,000) (19,860) -- --
Commercial paper ..................... -- -- (144,612) (144,612)
Off-balance-sheet instruments losses:
Interest rate-lock .................. -- -- -- (2,957)
The fair values of financial instruments are estimates based upon market
conditions and perceived risks at December 31, 1996 and 1995, 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, 1996 and 1995. The
fair value of the 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
30
the Company can realize upon redemption of the SAILS (See Note 4). Included in
the book and fair value of Cassell PLC is approximately $1.9 million of deferred
tax benefit.
Long-term debt
The fair value of the SAILS and notes is estimated based upon quoted market
prices. 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, 1996 and 1995. There were no interest
rate-lock agreements outstanding at December 31, 1996. 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 $5.9 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 27, 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 sells 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 1996, the
Company recognized approximately $0.4 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 1996, 1995, and
1994 appears below. Net corporate expenses include certain corporate officer
compensation costs, certain corporate 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
- -------------------------------------------- ------------------- ------------------- ------------ --------------
1996
Net sales ................................. $ 636,055 $ 81,808 $ -- $ 717,863
--------- ---- -------- ---------
Segment income (loss) ..................... 113,371 (5,138) -- 108,233
--------- ---- -------- ---------
Net corporate expenses .................. -- -- (20,851) (20,851)
Gain on sale of INSO common stock ......... -- 34,261 -- 34,261
Interest expense, net ..................... -- -- (40,875) (40,875)
Equity in losses of INSO .................. -- (6,815) -- (6,815)
--------- ---- -------- ---------
Income (loss) before taxes ............... 113,371 22,308 (61,726) 73,953
--------- ---- -------- ---------
Identifiable assets ..................... 816,609 90,906 83,426 990,941
Acquired assets ........................... 15,501 -- -- 15,501
--------- ---- -------- ---------
Total assets .............................. 832,110 90,906 83,426 1,006,442
--------- ---- -------- ---------
Depreciation and amortization ............ 79,529 1,403 3,403 84,335
Purchase of property, plant, and equipment,
including book plates .................. 67,651 1,139 6,153 74,943
========= ==== ======== =========
31
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 the acquisition of
Heath ............................................. (49,230) -- -- (49,230)
Special charges .................................... (3,825) (2,700) (508) (7,033)
Gain on sale of warehouse ........................... -- 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 ................................. 366,816 114,169 112,576 593,561
Acquired assets .................................... 452,888 -- -- 452,888
-------- ------- -------- ---------
Total assets ....................................... 819,704 114,169 112,576 1,046,449
-------- ------- -------- ---------
Depreciation and amortization ..................... 47,393 1,655 3,378 52,426
Purchase of property, plant, and equipment,
including book plates .............................. 50,566 932 2,780 54,278
======== ======= ======== =========
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 (loss) before taxes and extraordinary
items ............................................. 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 ..................... 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
======== ======= ======== =========
32
S U M M A R Y O F Q U A R T E R L Y R E S U L T S O F O P E R A T I O N S
(Unaudited, in thousands of dollars except per share amounts)
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Year
----------- ----------- ------------ ------------ ----------
Net sales ....................................... $ 62,835 $178,214 $356,669 $ 120,145 $717,863
Gross profit (net sales less cost of sales) ...... 12,740 93,873 219,827 61,737 388,177
Net income (loss) ................................. $(22,130) $ 9,514 $ 76,047 $ (19,809) $ 43,622
======== ======== ========= ========= ========
Per share:
Net income (loss) ................................. $ (1.60) $ 0.68 $ 5.45 $ (1.42) $ 3.13
======== ======== ========= ========= ========
1995
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)
======== ======== ========= ========= ========
The above quarterly information indicates the seasonal fluctuations of the
Company's educational publishing business.
The improved quarterly results for 1996 are primarily due to the
acquisition of Heath. Net sales increased due to the significant expansion of
the product lines from the addition of Heath publications and also from the
development of new programs. Improvement in gross profit and net income is
directly related to operating efficiencies achieved through the Heath
acquisition.
During 1996, the Company recorded a gain relating to the sales of INSO
shares. A gain of $14.2 million ($8.2 million after-tax), or $0.60 per share,
was recognized in the first quarter on the sale of 343,000 shares; in the second
quarter a gain of $8.7 million ($5.1 million after-tax), or $0.36 per share, was
recognized on the sale of 194,500 shares; during the third quarter a $9.6
million gain ($5.6 million after-tax), or $0.40 per share, was recognized on the
sale of 200,000 shares; and in the fourth quarter a $1.8 million gain ($1.1
million after-tax), or $0.08 per share, was recognized on the sales of 32,500
shares.
The second quarter of 1996 included a one-time acquisition charge of $1.4
million ($0.8 million after-tax), or $0.06 per share, relating to the Company's
investment in INSO resulting from INSO's acquisition of ImageMark Software Labs,
Inc. During the fourth quarter, a one-time acquisition charge of $10.3 million
($6.4 million after-tax), or $0.46 per share, was recognized relating to INSO's
acquisition of Electronic Book Technologies, Inc.
The second quarter of 1995 included a charge 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 trans- actions and
related financial statement impact. Also included in the second quarter is a
one-time acquisition charge of $2.2 million, or $0.16 per share, relating to its
investment in INSO resulting from INSO's acquisition of Systems Compatibility
Corporation.
The fourth quarter of 1995 included an after-tax charge of $30.0 million
related to the Heath acquisition. Note 2 describes this transaction.
The third quarter of 1995 included an estimated after-tax gain of $8.9
million, or $0.64 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 $0.08 per share, as an adjustment to the previously
recorded estimated gain. Note 11 to the consolidated financial statements
describes these transactions.
33
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 1997 Annual Meeting of Stockholders ("1997 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 through 5 herein.
Item 11. Executive Compensation
Incorporated herein by reference to the 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the 1997 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, 1996:
II--Consolidated Valuation and Qualifying Accounts Page 35
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 37 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 1996
None.
34
HOUGHTON MIFFLIN COMPANY
SCHEDULE II--CONSOLIDATED VALUATION ACCOUNTS
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
Additions
Balance at charged Balance
beginning (credited) Acquired at end
of year to income (retirements) of year
------------- ------------- ---------------- ----------
1996
Allowance for book returns ............ $ 21,698 $ (3,369) $6,837 (1) $ 25,166
Allowance for authors' advances ...... 21,848 2,793 (3,666)(2) 20,975
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
(1) This amount represents the estimated book returns for products published by
DK Publishing, Inc. and distributed by the Company. These book returns will
reduce future payments to DK Publishing, Inc.
(2) Approximately $2.1 million represents the final purchase adjustments for the
allowance for author advances related to the Heath acquisition. In addition,
the Company has written off approximately $5.8 million of author advances.
35
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
/s/ Nader F. Darehshori
By: ------------------------------------
Nader F. Darehshori
Chairman of the Board, President, and
Chief Executive Officer
March 24, 1997
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 24, 1997
Nader F. Darehshori
/s/ Gail Deegan Executive Vice President,
- ---------------------- Chief Financial Officer, and Treasurer March 24, 1997
Gail Deegan
/s/ Michael J. Lindgren Vice President and Controller
- ----------------------
Michael J. Lindgren March 24, 1997
/s/ Joseph A. Baute Director
- ----------------------
Joseph A. Baute March 24, 1997
/s/ James O. Freedman Director
- ----------------------
James O. Freedman March 24, 1997
/s/ Mary H. Lindsay Director
- ----------------------
Mary H. Lindsay March 24, 1997
/s/ Charles R. Longsworth Director
- ----------------------
Charles R. Longsworth March 24, 1997
/s/ John F. Magee Director
- ----------------------
John F. Magee March 24, 1997
/s/ Claudine B. Malone Director
- ----------------------
Claudine B. Malone March 24, 1997
/s/ Alfred L. McDougal Director
- ----------------------
Alfred L. McDougal March 24, 1997
/s/ George Putnam Director
- ----------------------
George Putnam March 24, 1997
/s/ Ralph Z. Sorenson Director
- ----------------------
Ralph Z. Sorenson March 24, 1997
/s/ DeRoy C. Thomas Director
- ----------------------
DeRoy C. Thomas March 24, 1997
36
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 Registration
Company Statement No. 33-14850 as amended, and
incorporated herein by reference thereto
Amendment to Restated Articles of Filed as Exhibit (3)(i) to Form 10-K for the year
Organization of the Company in the form of a ended December 31, 1995, and incorporated
certificate of vote of directors establishing a herein by reference thereto
series of a class of stock
(3)(ii) By-laws of the Company Filed as Exhibit (3)(ii) to Form 10-K for the
year ended December 31, 1995, and
incorporated herein by reference thereto
(4) Registration Statement under the Securities Filed on June 20, 1967, and incorporated herein
Exchange Act of 1934 on Form 10 dated June by reference thereto
20, 1967, as amended, with particular reference
to the description of the common stock of the
Company
Rights Agreement between the Company and Filed as Exhibit (4) to Form 10-K for the year
the First National Bank of Boston, as Rights ended December 31, 1995, and incorporated
Agent herein by reference thereto
Registration Statement under the Securities Filed September 4, 1992, and incorporated
Exchange Act of 1934 on Form S-3 dated herein by reference thereto
September 4, 1992
Indenture dated as of March 15, 1994 between Filed as Exhibit (4.1) to Registration Statement
the Company, as successor trustee to the First No. 33-51700 as amended, and incorporated
National Bank of Boston herein by reference thereto
First Supplemental Indenture dated as of July Filed as Exhibit (4.2) to Registration Statement
27, 1995 between the Company and State Street No. 33-64903 as amended, and incorporated
Bank and Trust Company, as successor trustee herein by reference thereto
to the First National Bank of Boston
Registration Statement under the Securities Act Filed on December 11, 1995 and incorporated
of 1933 on Form S-3 dated December 11, 1995 herein by reference hereto
(10)(ii) Lease between Two Twenty Two Berkeley Page 39
(D) Venture, as landlord, and Houghton Mifflin
Company, as tenant
Lease between New England Mutual Life Page 125
Insurance Company, as sublandlord, and
Houghton Mifflin Company, as subtenant
(10)(iii) Benefits Trust Agreement between Houghton Filed as Exhibit (10)(ii)(C) to Form 10-K for the
(A) Mifflin Company and State Street Bank and year ended December 31, 1992, and
Trust Company dated June 3, 1992 incorporated herein by reference thereto
Severance Agreement between the Company Filed as Exhibit (10)(iii)(A) to Form 10-K for
and Mr. Darehshori the year ended December 31, 1995, and
incorporated herein by reference thereto
Form of Senior Executive Severance Agreement Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
Form of Key Managers' Severance Agreement Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
37
Exhibit No. Description of Document Page Number in this report
- ------------- ------------------------------------------------ -------------------------------------------------
Supplemental Benefits Plan Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
Non-Employee Directors Retirement Benefit Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
1996 Senior Executive Incentive Compensation Page 143
Plan
Restricted Stock Agreement between the Page 149
Company and Mr. Darehshori
Restricted Stock Agreement between the Page 155
Company and Ms. Deegan
1995 Stock Compensation Plan Page 161
Trust Agreement for the Houghton Mifflin Filed as Exhibit (10)(iii)(A) to Form 10-K for
Pension Plan with State Street Bank and Trust the year ended December 31, 1995, and
Company incorporated herein by reference thereto
1994 Executive Stock Purchase Plan Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
Form of Option Grant and Exercise Agreement Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
Non-Employee Directors Stock Purchase Plan Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
Forms of Stock Purchase Agreement Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
(12) Computation of Ratio of Earnings to Fixed Page 165
Charges
(21) List of Subsidiaries Page 166
(23) Consent of Experts and Counsel Page 167
(27) Financial Data Schedule Page 168
38