FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period from January 1, 1994 to March 31, 1994
Commission file number 1-5406
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HOUGHTON MIFFLIN COMPANY
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1456030
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(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
222 Berkeley Street, Boston 02116-3754
- - ------------------------------- -----------------------
(Address of principal (Zip Code)
executive offices)
(617) 351-5000
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Registrant's telephone number, including area code
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
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 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of April 30,1994.
Class Outstanding at April 30, 1994
- - ----------------------- --------------------------------
Common Stock, $1 par value 14,502,202
Preferred Stock Purchase Rights 14,502,202
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HOUGHTON MIFFLIN COMPANY
INDEX
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets (unaudited)
March 31, 1994 and 1993 and December 31, 1993..........3 - 4
Consolidated Condensed Statements of Income
and Retained Earnings (unaudited) ---
Three Months Ended March 31, 1994 and 1993........... 5
Consolidated Condensed Statements of Cash Flows
(unaudited) ---
Three Months Ended March 31,1994 and 1993........... 6 - 7
Notes to Consolidated Condensed
Financial Statements (unaudited)..................... 8 - 10
Management's Discussion and Analysis of
Financial Condition and Results
of Operations........................................11 - 15
II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders...............................16
Item 6. Exhibits and Reports on Form 8-K...................16
Signatures.....................................16
2
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1994 and 1993 and DECEMBER 31, 1993
(In thousands of dollars)
ASSETS
March 31 March 31 December 31
1994 1993 1993
--------- --------- -----------
(unaudited) (unaudited)
Current assets:
Cash and cash equivalents $ 23,123 $ 27,352 $ 67,242
Marketable securities, at
cost, which approximates
market 9,065 8,900 18,107
--------- --------- ---------
32,188 36,252 85,349
Accounts receivable 74,612 71,308 116,814
Less allowance for
book returns 8,872 14,311 12,325
--------- --------- ---------
65,740 56,997 104,489
Inventories:
Finished goods 70,123 67,390 56,479
Work in process 3,983 4,174 4,875
Raw materials 3,150 4,708 2,647
--------- --------- ---------
77,256 76,272 64,001
Prepaid income taxes and
other prepaid expenses 21,442 23,244 14,010
--------- --------- ---------
Total current assets 196,626 192,765 267,849
Property, plant, and
equipment and book plates
(net of accumulated
depreciation and amort-
ization of $92,570 in
1994, $106,173 in 1993
and $88,139 at
December 31, 1993) 80,464 76,440 66,170
McDougal, Littell
intangible assets, net 111,889 - -
Other assets, net 75,090 64,885 64,202
--------- --------- ---------
$ 464,069 $ 334,090 $ 398,221
========= ========= =========
See accompanying notes to unaudited
consolidated condensed financial statements.
3
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1994 and 1993, and DECEMBER 31, 1993
(In thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 March 31 December 31
1994 1993 1993
--------- --------- -----------
(unaudited) (unaudited)
Current liabilities:
Accounts payable $ 29,108 $ 32,950 $ 33,622
Short-term borrowings 24,820 - 24,605
Federal and state
income taxes (205) (4,521) 2,463
Accrued expenses:
Royalties 28,053 26,278 27,696
Salaries, wages,
and commissions 726 1,205 10,301
Other 9,436 6,125 6,732
Restructuring costs 8,591 - 3,896
--------- --------- ---------
46,806 33,608 48,625
Current debt maturities 1,438 2,057 1,955
--------- --------- ---------
Total current liabilities 101,967 64,094 111,270
Long-term debt 101,392 52,584 26,438
Accrued royalties payable 4,478 2,432 2,935
Other liabilities 10,236 8,804 9,413
Accrued postretirement
medical benefits 24,164 23,199 23,948
Deferred income taxes 135 77 135
Stockholders' equity:
Preferred stock, $1 par value;
500,000 shares authorized; - - -
none issued
Common stock, $1 par value;
70,000,000 shares authorized
14,758,726 shares issued 14,759 14,759 14,759
Capital in excess of
par value 26,696 21,958 30,612
Retained earnings 210,206 174,571 211,222
--------- --------- ---------
251,661 211,288 256,593
Unamortized value of
restricted stock (370) (437) -
Benefits trust assets,
at market value (25,944) (25,960) (31,144)
Common shares held in
treasury, at cost
(263,708 shares at
March 31, 1994, 313,571
at March 31, 1993, and
232,459 at December 31,
1993) (3,650) (1,991) (1,367)
--------- --------- ---------
Total stockholders' equity 221,697 182,900 224,082
--------- --------- ---------
$ 464,069 $ 334,090 $ 398,221
========= ========= =========
See accompanying notes to unaudited
consolidated condensed financial statements.
4
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(In thousands of dollars, except per share amounts)
1994 1993
------------- -------------
(unaudited) (unaudited)
Net sales by industry segment:
Educational publishing:
School $ 20,296 $ 19,853
College 9,680 10,526
------------- -------------
29,976 30,379
General publishing 19,412 19,342
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49,388 49,721
Costs and expenses:
Cost of sales 37,866 35,573
Selling and administrative 37,098 37,662
Special charges 6,513 -
------------- -------------
81,477 73,235
------------- -------------
Operating loss (32,089) (23,514)
Other income (expense):
Gain on sale of interest in
Software Division 36,212 -
Interest income 526 359
Interest expense (1,078) (930)
Equity in earnings of
InfoSoft International, Inc. 249 -
------------- -------------
Income (loss) before taxes and
extraordinary item 3,820 (24,085)
Income tax provision (benefit) 610 (9,152)
------------- -------------
Income (loss) before
extraordinary item 3,210 (14,933)
Extraordinary item, net of tax (1,239) -
------------- -------------
Net income (loss) 1,971 (14,933)
Retained earnings at beginning
of period 211,222 192,326
Dividends declared ($.215 per share
share in 1994, $.205 per
share in 1993) (2,987) (2,822)
------------- -------------
Retained earnings at end
of period $ 210,206 $ 174,571
============= =============
Net income (loss) per share $0.14 ($1.08)
============= =============
Average number of common shares 13,877,424 13,773,598
============= =============
See accompanying notes to unaudited
consolidated condensed financial statements.
5
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 and 1993
(Unaudited, in thousands of dollars)
1994 1993
--------- --------
Cash flows from (used in)
operating activities:
Net income (loss) $ 1,971 $(14,933)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities
Gain on sale of interest
in Software Division (36,212) -
Loss on early extinguishment
of debt, net 1,239 -
Equity earnings in
InfoSoft International, Inc. (249) -
Depreciation and amortization 5,857 5,637
Other, net 2,261 418
--------- --------
(25,133) (8,878)
Changes in operating assets and
liabilities, net of acquisition and
disposal:
Accounts receivable, net 38,242 29,870
Inventories (317) (14,725)
Royalty advances, net 2,130 (4,534)
Accounts payable (7,195) 4,973
Prepaid taxes and income taxes payable (8,504) (10,786)
Prepaid expenses and other assets (558) (6,118)
Salaries, wages and commissions (9,564) (9,108)
Other liabilities (2,947) (3,371)
--------- --------
11,287 (13,799)
--------- --------
Net cash used in operating
activities (13,846) (22,677)
--------- --------
Cash flows from (used in) investing
activities:
Acquisition of McDougal, Littell,
net of cash acquired (130,342) -
Dividend received from
InfoSoft International, Inc. 32,860 -
Book plate expenditures (7,050) (4,204)
Property, plant, and equipment
expenditures (1,778) (2,723)
Marketable securities 9,042 20,064
--------- --------
Net cash from (used in) from
investing activities (97,268) 13,137
--------- --------
Cash flows from (used in) financing
activities:
Dividends paid on common stock (2,987) (2,822)
Dividends paid to benefits trust (140) (133)
McDougal, Littell financing 100,000 -
Purchase of common stock (2,987) (654)
Exercise of stock options 418 872
Senior notes prepayment (26,960) -
Other long-term debt (349) (12)
--------- --------
Net cash from (used in)
financing activities 66,995 (2,749)
--------- --------
Effect of exchange rate changes on cash - (30)
--------- --------
Net decrease in cash and cash equivalents (44,119) (12,319)
Cash and cash equivalents
at beginning of year 67,242 39,671
--------- --------
Cash and cash equivalents
at end of period 23,123 27,352
Marketable securities at end of period 9,065 8,900
--------- --------
$ 32,188 $ 36,252
========= ========
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 and 1993
(Unaudited, in thousands of dollars)
1994 1993
--------- --------
Supplementary information:
Income taxes paid $ 1,954 $ 1,703
Interest paid $ 1,616 $ 1,117
See accompanying notes to unaudited
consolidated condensed financial statements.
7
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(1) All normal and recurring adjustments that are, in the
opinion of management, necessary for a fair
presentation of the results for the interim
periods have been included.
The information contained in the interim financial
statements should be read in conjunction with the
Company's last Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Results of interim periods are not necessarily
indicative of results to be expected for the
year as a whole. The affect of seasonal business
fluctuations and the occurrence of many costs and
expenses in annual cycles require certain
estimations in the determination of interim results.
Certain reclassifications have been made to prior
period financial statements in order to conform to
the presentations used in the 1994 interim financial
statements.
(2) The Company acquired McDougal, Littell & Company
("McDougal, Littell"), a leading publisher of elementary
and high school textbooks on March 1, 1994. The total
acquisition cost was approximately $140 million, of which
$128 million was paid to the former stockholders, $10
million represents liabilities of McDougal, Littell
paid out of corporate funds immediately prior to the
acquisition, and $2 million represents other third
party acquisition costs.
The acquisition cost was initially financed through a
combination of operating cash and $100 million in
short-term bank debt. The short-term bank debt was
repaid on April 5, 1994, with the proceeds from a
$100 million public debt offering ("Notes"). The
Notes are unsecured obligations which mature on
April 1, 2004, and bear interest at 7.125%,
payable semi-annually.
The acquisition was accounted for as a purchase
and the results of operations have been included
in the consolidated financial statements since the
date of acquisition. Proforma results, assuming
the acquisition had been made at the beginning of
each period presented, would not be materially
different from the results reported. The cost of the
acquisition has been allocated on the basis of the
estimated fair market value of the assets acquired
and the liabilities assumed. The amounts eventually
allocable to publishing rights and goodwill are
currently shown as intangible assets in the
consolidated condensed balance sheet. This
allocation will be finalized prior to December
31, 1994. The intangible assets are currently being
amortized on a straight-line basis over a period of
approximately twenty years.
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(continued)
(3) In March 1994, the Company's former Software Division
completed a public offering of 3,450,000 shares at an
offering price of $15 per share. In connection with the
public offering, the Company received a cash dividend of
$32,860,000 from the successor company to the Software
Division, InfoSoft International Inc. ("InfoSoft").
The Company's interest in InfoSoft after the offering
was 40.1%. An after-tax gain of $22.8 million,
or $1.65 per share, was recognized in connection
with the InfoSoft public offering.
The Company's recognition of earnings from its investment
in InfoSoft is based upon the equity method of accounting.
The equity income included in the Company's quarterly
results is based primarily upon the Software Division's
historical quarterly results adjusted for the current
business environment. Accordingly, differences between
estimated quarterly equity income and actual InfoSoft
earnings will be adjusted in the subsequent quarter.
(4) The $6.5 million of special charges included in the
Company's operating income for the three months ended
March 31, 1994, relate primarily to corporate and
divisional staff and Company owned and leased facilities.
(5) In March 1994, the Company completed the early redemption
of $25 million of 8.78% Senior Notes scheduled to mature
in March 1997. The extraordinary cost of $1.2 million, or
$.09 per share, was net of an income tax benefit of $.8
million. The Company financed the early redemption of the
Senior Notes with operating cash and a portion of the net
proceeds received in connection with the InfoSoft public
offering. See Note 3.
9
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(continued)
(6) The components of first quarter net income (loss) are as
follows:
Three Months Ended
March 31, 1994
--------------------------
(In thousands, Pre-tax After-tax
except per share amounts) amount amount EPS
------------------------- --------------------------
Net operating loss, before
special items $(20,282) $(11,932) $(.86)
InfoSoft gain (Note 3) 36,212 22,845 1.65
McDougal, Littell seasonal
loss and other costs ( 5,597) ( 3,665) (.27)
Special charges (Note 4) ( 6,513) ( 4,038) (.29)
Debt retirement (Note 5) ( 1,998) ( 1,239) (.09)
------- ------ -----
22,104 13,903 1.00
------- ------ -----
Net income $ 1,822 $ 1,971 $ .14
======== ======= =====
(7) The Board of Directors, at its April 27, 1994 meeting,
declared a quarterly dividend of $.215 per share, payable
May 25, 1994, to shareholders of record on May 11, 1994.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST QUARTER 1994 VERSUS FIRST QUARTER 1993
Net sales for the first quarter ended March 31, 1994 were $49.4
million, a slight decrease from $49.7 million in last year's
first quarter. Because sales of school and college textbooks
occur primarily in the summer, the Company normally incurs a
substantial seasonal loss in the first quarter. The 1994 net
seasonal loss before special charges, acquisition-related
activities, and an extraordinary financing loss was $11.9
million, or $0.86 per share. This compared with a net seasonal
loss of $14.9 million, or $1.08 per share, in 1993's first
quarter. The reduction in the net seasonal loss exceeded 20% and
demonstrates the earnings benefits realized from the
restructuring actions that have taken place over the past three
years. Net income after special charges, acquisition-related
activities, and the extraordinary financing loss was $2.0
million, or $.14 per share, for 1994.
Net sales in the Company's educational segment for the first
quarter of $30.0 million were slightly lower than the $30.4
million reported in 1993. Net sales increases from newly
acquired McDougal, Littell nearly offset sales shortfalls from
other segment components. Since approximately 70% of the
Company's school and college sales occur in the second and third
quarters, first quarter net sales for the educational publishing
segment are normally less than 10% of the segment's full year net
sales. The general publishing segment's sales were flat with the
11
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same period in 1993. However, segment sales increased 7% from
1993 when adjusted for the sales reported by the Company's former
Software Division. The Trade & Reference Division reported a 10%
sales increase, primarily from increases in juvenile titles and
other publishing income.
The Company's operating loss for the first quarter included $6.5
million in special charges and $5.2 million of costs related to
McDougal, Littell. The special charges comprise the costs
required to complete the Company's restructuring actions begun
in 1991. The charge affected all business units as well as
corporate functions and includes publishing assets and facilities
write-offs. Items in the McDougal, Littell $5.2 million of costs
included the seasonal loss, acquisition and integration expenses,
and amortization of intangible assets. The special charges and
McDougal Littell costs total $11.7 million. Absent these items,
the first quarter seasonal loss declined by $3.1 million.
Selling and administrative costs declined in total dollars and as
a percent of sales, primarily due to management's continuing
focus on streamlining operations.
Investment income increased by approximately $.2 million from
last year's first quarter due to a higher average cash balance
available for investing than last year's first quarter. Interest
expense increased in 1994 due to the debt service requirements of
the outstanding commercial paper and the short-term bank
financing for the McDougal, Littell acquisition.
12
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The first quarter included a $22.8 million after-tax gain, or
$1.65 per share, recognized in connection with the March 1
public offering of InfoSoft International, Inc., the successor
company to the former Software Division. The extraordinary
financing loss represents the cost incurred with the prepayment
of $25 million of senior notes due in 1997. The after-tax loss
amounted to $1.2 million, or $.09 per share.
The Company's effective tax rate for the first quarter of 1994
was 16% as compared with 36% for the calendar year 1993. The
first quarter effective tax rate reflects the utilization of
available tax benefits due primarily to the pre-tax gain related
to the InfoSoft public offering. The Company's effective tax
rate for 1994 is estimated at 39%. The increase over the
effective tax rate of 36% for 1993 reflects tax law changes
enacted in 1993 that were effective on January 1, 1994, and the
intangible asset amortization expense related to the McDougal,
Littell March 1, 1994 acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash position, (including marketable
securities) on March 31, 1994, was $32.2 million, compared with
$36.3 million at March 31, 1993. The Company's total cash usage
in the quarter exceeded last year's first quarter by $20.8
million. In addition to the normal draw-down of cash balances
in the first calendar quarter, the Company's net cash cost for the
13
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McDougal, Littell acquisition and related financing, redemption
of Senior Notes due in 1997, less receipt of the InfoSoft cash
dividend, amounted to $24.4 million. The Company's other
activities required $3.6 million less cash funding than in
the first quarter of 1993.
Net cash required to fund operating activities
declined by $8.8 million, due primarily to increased
collections of accounts receivable and a significant
decrease from the amount of inventory investment
made in the first quarter of 1993. The combined book plate
and other fixed asset expenditures increased nearly $2 million.
This change reflects McDougal, Littell's March investment
requirements, as well as increased plate investment for
"Houghton Mifflin Mathematics."
The net cash used in financing activities, other than
the McDougal, Littell financing and redemption of
Senior Notes, increased by $3.3 million in 1994.
The principal change reflects an increase in the amount
of Company common stock purchased in the quarter.
The $100 million of borrowings under short-term credit facilities
used to finance in part the March 1, 1994 acquisition of McDougal,
Littell was repaid on April 5, 1994 with the proceeds from a $100
million public debt offering. This financing was made pursuant
to the Company's 1992 shelf registration facility and matures
in April 2004. The coupon is 7.125% with interest
payable semi-annually.
14
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The Company's available resources at March 31, 1994, plus
funds generated from operating activities and borrowing
facilities are believed to be sufficient to meet total
cash requirements for the foreseeable future.
15
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PART II. OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 6.Exhibits and Reports on Form 8-K
(b) Report on Form 8-K
Registrant filed one (1) report on Form 8-K and
two (2) reports on Form 8-K/A during the quarter
ended March 31, 1994.
(i) Form 8-K filed March 16, 1994, reporting
the acquisition of McDougal, Littell & Company.
(ii) Amendment to Form 8-K on Form 8-K/A filed on
March 22, 1994, containing the financial
statements of the acquired business of
McDougal, Littell & Company, and pro forma
financial information.
(iii)Amendment to Form 8-K on Form 8-K/A filed
on March 24, 1994, and containing the
Consent of Experts.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
-------------------------
Registrant
/S/ Stephen O. Jaeger
Date: May 13, 1994 -------------------------
Stephen O. Jaeger
Executive Vice President,
Chief Financial Officer, and
Treasurer
/S/ Michael J. Lindgren
Date: May 13, 1994 --------------------------
Michael J. Lindgren
Divisional Vice President
and Controller
16
