<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 1, 1994
-------------
HOUGHTON MIFFLIN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Massachusetts 1-5406 04-1456030
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
222 Berkeley Street, Boston, Massachusetts 02116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-351-5000
------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and
---------------------------------------------------------
Exhibits.
--------
(a) Financial Statements of Businesses Acquired.
-------------------------------------------
Financial statements of the business acquired are filed as
Exhibit 99.1 hereto.
(b) Pro Forma Financial Information.
-------------------------------
Pro forma financial information is filed as Exhibit 99.2
hereto.
(c) Exhibits.
--------
2. Stock Purchase Agreement dated January 7, 1994 by and
among McDougal, Littell & Company, the stockholders
listed on Exhibit A thereto and Houghton Mifflin
Company (previously filed).
23. Consent of Crowe, Chizek and Company (filed herewith).
99.1 Financial Statements of Business Acquired (filed
herewith).
99.2 Pro Forma Financial information (filed herewith).
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized this 21 day of March, 1994.
HOUGHTON MIFFLIN COMPANY
By: /s/ Stephen O. Jaeger
-----------------------------------------
Stephen O. Jaeger,
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting and Financial
Officer)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
-------------
Exhibit Page
No. Exhibit Description No.
- ------- ------------------- ----
<C> <S> <C>
2. Stock Purchase Agreement dated January 7, 1994 by and among McDougal,
Littell & Company, the stockholders listed on Exhibit A thereto and
Houghton Mifflin Company (previously filed).
23 Consent of Crowe, Chizek and Company (filed herewith).
99.1 Financial Statements of Business Acquired (filed herewith).
99.2 Pro Forma Financial Information (filed herewith).
</TABLE>
<PAGE>
[LETTERHEAD OF CROWE CHIZEK AND COMPANY APPEARS HERE]
EXHIBIT 23.1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
McDougal, Littell & Company
Evanston, Illinois
We have audited the accompanying balance sheets of McDougal, Littell & Company
as of October 31, 1993 and 1992, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of McDougal, Littell & Company
as of October 31, 1993 and 1992, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Crowe, Chizek and Company
Crowe, Chizek and Company
Oak Brook, Illinois
December 10, 1993
1.
[ADDRESS FOOTLINE OF CROWE, CHIZEK AND COMPANY APPEARS HERE] [LOGO OF
HORWARTH
INTERNATIONAL
APPEARS HERE]
<PAGE>
Exhibit 99.1
MCDOUGAL, LITTELL AND COMPANY
BALANCE SHEETS
October 31, 1993 and 1992
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1993 1992
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10,675,702 $ 11,337,596
Accounts receivable, less allowance
for doubtful accounts of $50,000
in 1993 and 1992 (Note 3) 11,587,739 9,027,746
Inventories (Notes 2 and 3) 11,551,151 12,972,497
Prepaid expenses and other assets 657,425 864,822
Deferred income taxes 6,769,935 4,650,640
--------------- ---------------
Total current assets 41,241,952 38,853,301
Capitalized creative costs, net of accumulated
amortization, of $21,906,515 in 1993 and
$17,037,493 in 1992 6,260,783 6,281,460
Property and equipment
Land (Note 3) 689,973 689,973
Building (Note 3) 3,090,744 3,090,744
Office and warehouse equipment and
improvements 7,456,439 6,876,283
--------------- ---------------
11,237,156 10,657,000
Less accumulated depreciation and amortization 6,072,982 5,288,876
--------------- ---------------
Property and equipment, net 5,164,174 5,368,124
--------------- ---------------
$ 52,666,909 $ 50,502,885
=============== ===============
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,633,049 $ 4,497,014
Accrued royalties 2,808,579 3,327,109
Accrued salaries 2,324,858 2,010,332
Other accrued expenses 222,773 1,233,311
Income taxes payable 7,794,304 9,288,397
Deferred compensation (Note 5) 5,044,808 -
Current maturities of long-term debt (Note 3) 1,484,046 3,099,379
--------------- ---------------
Total current liabilities 24,312,417 23,455,542
Long-term debt (Note 3) 4,035,349 5,577,786
Deferred rent 233,751 393,369
Deferred compensation (Note 5) - 694,488
Deferred income taxes 2,581,630 2,362,801
Commitments and contingencies (Note 7)
Stockholders' equity
Common stock - par value $.005 per share;
600,000 shares authorized and issued 3,000 3,000
Additional paid-in capital 468,865 468,865
Retained earnings 31,903,064 29,153,516
--------------- ---------------
32,374,929 29,625,381
Less common stock in treasury - at cost (7,796,167) (7,506,482)
Less Company loan to ESSOP (Notes 3 and 4) (3,075,000) (4,100,000)
--------------- ---------------
Total stockholders' equity 21,503,762 18,018,899
--------------- ---------------
$ 52,666,909 $ 50,502,885
=============== ===============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
2.
<PAGE>
MCDOUGAL, LITTELL AND COMPANY
STATEMENTS OF INCOME
Years ended October 31, 1993 and 1992
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Net sales $ 60,201,945 $ 71,221,748
Direct costs
Paper, printing and binding 13,303,617 14,631,650
Creative 5,065,270 4,909,793
Royalties 3,449,457 4,211,349
Editorial 4,393,348 4,970,219
------------ ------------
Total direct costs 26,211,692 28,723,011
------------ ------------
Gross margin 33,990,253 42,498,737
Operating costs
Selling expense 7,798,844 7,470,317
Promotion expense 6,015,557 7,257,491
Fulfillment expense 2,468,718 3,638,634
Stock apppreciation rights expense (Note 5) 4,350,320 694,488
General and administrative 8,286,266 8,293,774
------------ ------------
Total operating costs 28,919,705 27,354,704
------------ ------------
Income from operations 5,070,548 15,144,033
Interest expense (771,730) (1,647,358)
Other income 140,730 87,036
------------ ------------
Income before income taxes 4,439,548 13,583,711
Income taxes (Note 6) 1,690,000 5,336,000
------------ ------------
Net income $ 2,749,548 $ 8,247,711
============ ============
Net income per share of common stock $10.13 $30.40
====== ======
Weighted average number of shares of common stock 271,418 271,300
======= =======
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended October 31, 1993 and 1992
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Common Stock Company
Common Stock Paid-in Retained in Treasury Loan to
Shares Amount Capital Earnings Shares Amount ESSOP
------ ------ ------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1991 600,000 $ 3,000 $ 252,940 $ 20,905,805 329,654 $ (7,501,172) $ (5,125,000)
Net income - - - 8,247,711 - - -
Acquisition of common stock - - - - 572 (62,185) -
Sale of treasury stock - - 215,925 - (2,500) 56,875 -
ESSOP contribution - - - - - - 1,025,000
--------- -------- ---------- ------------ -------- ------------- --------------
Balance, October 31, 1992 600,000 3,000 468,865 29,153,516 327,726 (7,506,482) (4,100,000)
Net income - - - 2,749,548 - - -
Acquisition of common stock - - - - 1,950 (289,685) -
ESSOP contribution - - - - - - 1,025,000
--------- -------- ---------- ------------ -------- ------------- --------------
Balance, October 31, 1993 600,000 $ 3,000 $ 468,865 $ 31,903,064 329,676 $ (7,796,167) $ (3,075,000)
========= ======== ========== ============ ======== ============= =============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
STATEMENTS OF CASH FLOWS
Years ended October 31, 1993 and 1992
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1993 1992
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $ 57,785,455 $ 69,690,483
Cash paid to suppliers and employees (48,511,302) (45,400,781)
Interest paid (801,283) (1,744,936)
Income taxes paid (5,084,559) (3,347,978)
-------------- --------------
Net cash provided by operating activities 3,388,311 19,196,788
Cash flows from investing activities
Proceeds from sale of assets 1,050 1,014
Capital expenditures (603,800) (467,231)
-------------- --------------
Net cash used in investing activities (602,750) (466,217)
Cash flows from financing activities
Net borrowings (payments) under line of credit - (7,121,300)
Proceeds from long-term debt 2,200,000 -
Payments of long-term debt (5,357,770) (1,592,485)
Purchase of treasury stock (289,685) (62,185)
Sale of treasury stock - 272,800
-------------- --------------
Net cash used in financing activities (3,447,455) (8,503,170)
-------------- --------------
Net increase (decrease) in cash (661,894) 10,227,401
Cash and cash equivalents at beginning of year 11,337,596 1,110,195
-------------- --------------
Cash and cash equivalents at end of year $ 10,675,702 $ 11,337,596
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
5.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
STATEMENTS OF CASH FLOWS
Years ended October 31, 1993 and 1992
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1993 1992
---- ----
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities
Net income $ 2,749,548 $ 8,247,711
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 803,928 811,454
Amortization of creative costs 4,869,022 4,697,231
Provision for deferred income taxes (1,900,466) (197,190)
Loss on sale of property and equipment 2,773 11,322
Creative cost expenditures (4,848,345) (4,333,724)
Deferred compensation costs 4,350,320 694,488
Contribution to ESSOP 1,025,000 1,025,000
Change in assets and liabilities
Increase in accounts receivable (2,559,993) (1,629,624)
Decrease in inventory 1,421,346 3,153,297
Increase (decrease) in prepaid expenses and
other assets 207,397 (1,055)
Increase (decrease) in accounts payable
and accrued expenses (1,104,593) 4,666,200
Increase (decrease) in income taxes payable (1,494,093) 2,185,212
Decrease in deferred rent (133,533) (133,534)
-------------- --------------
$ 3,388,311 $ 19,196,788
============== ==============
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
NOTES TO FINANCIAL STATEMENTS
October 31, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Description of Business: The Company publishes elementary and high school
- -----------------------
educational textbooks and materials. Its customers are comprised of educational
institutions located principally in the United States of America. Sales returns
are minimal.
Cash and Cash Equivalents: For purposes of the statement of cash flows, the
- -------------------------
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Inventories: Inventories, principally comprised of educational textbooks and
- -----------
other ancillary materials, are valued at the lower of cost (last-in, first-out
method) or market.
Creative Costs: Creative costs are capitalized as incurred and amortization is
- --------------
provided over five years using the sum-of-the-years-digits method. Additionaly,
adjustments are made to reflect impairments of the carrying value of creative
costs based on the aggregate expected future cash flows.
Property and Equipment: Property and equipment are recorded at cost. For
- ----------------------
equipment purchased prior to November 1, 1985, depreciation is computed using
the double-declining balance method. All assets purchased since November 1, 1985
are depreciated using the straight-line method over useful lives of thirty
years - building, ten years - office furniture, and five years - office and
computer equipment. Office improvements are depreciated over the lives of the
respective leases.
Income Taxes: Deferred income taxes result primarily from differences in
- ------------
recognizing creative and editorial costs for financial statement and tax
purposes and timing differences of depreciation, slow moving and obsolete
reserves and deferred rent. Income taxes are provided in accordance with
Accounting Principles Board Opinion No. 11.
The Financial Accounting Standards Board has issued its Statement No. 109,
"Accounting for Income Taxes." The statement is effective for fiscal years
beginning after December 15, 1992. Statement No. 109 provides for a liability
approach to computing deferred income taxes rather than the income statement
approach under the current method. The Company is studying the effects of
Statement No. 109 on the financial statements, but does not expect the statement
to have a material effect on the financial statements when adopted.
The Company's fiscal year end for financial reporting purposes is October 31.
For purposes of filing its federal and state income tax returns, the Company
uses a year end of April 30. As a result, the income tax liability may be
different from the actual taxes paid on the Company's tax return.
Net Income Per Share: Net income per share is computed by dividing net income by
- --------------------
the weighted average number of common shares outstanding during each year.
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
NOTES TO FINANCIAL STATEMENTS
October 31, 1993 and 1992
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
(Continued)
New Accounting Pronoucements: The Company has considered the impact of new
- ----------------------------
accounting pronouncements including Statement of Financial Accounting Standards
No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions", and Statement of Financial Accounting Standards No. 112, "Employer's
Accounting for Postemployment Benefits". The effect of these pronouncements on
the Company's financial statements is not material.
Reclassification: Certain amounts in the 1992 financial statements have been
- ----------------
reclassified to conform with the 1993 presentation.
NOTE 2 - INVENTORIES
Inventories at October 31, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Educational textbooks and other ancillary materials $ 17,287,947 $ 17,900,115
Less LIFO reserve 2,327,892 2,527,618
Less slow moving and obsolescence reserve 3,408,904 2,400,000
------------- -------------
$ 11,551,151 $ 12,972,497
============= =============
</TABLE>
If inventory costs had been determined by the first-in, first-out (FIFO) method,
net income would have decreased approximately $122,000 and increased
approximately $189,000 for 1993 and 1992, respectively.
NOTE 3 - NOTES PAYABLE TO BANK AND LONG-TERM DEBT
The Company has a revolving credit agreement which expires March 31, 1995. The
maximum borrowing amount allowed under the note is $20,000,000. This amount is
reduced to $10,000,000 for the period October 1, 1993 to March 31, 1994 and
October 1, 1994 to March 31, 1995 to reflect the Company's usual borrowing
patterns. The amount will return to the maximum of $20,000,000 for the period
April 1, 1994 to September 30, 1994. At October 31, 1993, the unused and
available credit under the agreement amounted to $10,000,000. Borrowings may be
in the form of a prime rate loan or an offered rate loan. Borrowings under the
prime rate loan are due on demand and bear interest at the bank's prime rate
(5.5% at October 31, 1993). Borrowings under the offered rate loan bear interest
at a negotiated rate based upon the original maturity of the notes. The interest
rate on borrowings up to $10,000,000 is guaranteed not to exceed 10.5% through
March 16, 1994. Commitment fees paid to the bank are not material. Borrowings
are collateralized by accounts receivable and inventory.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
NOTES TO FINANCIAL STATEMENTS
October 31, 1993 and 1992
- -------------------------------------------------------------------------------
NOTE 3 - NOTES PAYABLE TO BANK AND LONG-TERM DEBT (Continued)
Long-term debt consists of:
<TABLE>
<CAPTION>
October 31,
1993 1992
---- ----
<S> <C> <C>
Secured term loan, interest rate at 91.1% of the
bank's prime, which percent will vary based upon
changes in the tax rate. Scheduled annual
principal payments are $1,025,000. $ 3,075,000 $ 4,100,000
Mortgage payable, interest rate at 8.1%.
Principal and interest payment of $26,808 due
monthly through May, 2003. 2,139,395 -
Unsecured, subordinated note payable, interest at
13.5%. The Company may reduce this borrowing as
permitted under the secured term loan agreement. $ 305,000 $ 2,305,000
Mortgage payable, interest rate at 9.75%. The
note was repaid in May, 1993. - 2,267,543
Other - 4,622
----------- -----------
5,519,395 8,677,165
Less current portion 1,484,046 3,099,379
----------- -----------
Long-term debt $ 4,035,349 $ 5,577,786
=========== ===========
</TABLE>
In December 1986, the Company borrowed $10,000,000 (secured term loan) which was
loaned to the Company's Employee Savings and Stock Ownership Plan enabling it to
purchase certain shares of common stock (Note 4). The secured term loan is
collateralized by accounts receivable and inventory. The loan agreement contains
restrictive covenants, including the maintenance of certain debt to equity, cash
flow and current ratios. In addition, the loan agreement prohibits dividend
payments. At October 31, 1993 and 1992, the Company was in compliance with these
covenants and restrictions.
During May 1993, the Company refinanced its mortgage payable for its existing
warehouse facility. Borrowings under the new mortgage are collateralized by land
and building with a net book value at October 31, 1993 of $2,830,336 and an
assignment of any related future rents and leases. The agreement also provides
for financial covenants which the Company was in compliance with at October 31,
1993.
The unsecured, subordinated note payable relates to the acquisition of shares of
outstanding common stock. The note is held by the majority stockholder and
officer of the Company and is subordinate to any notes payable to the bank under
the revolving credit agreement and the secured term loan.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
NOTES TO FINANCIAL STATEMENTS
October 31, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 3 - NOTES PAYABLE TO BANK AND LONG-TERM DEBT (Continued)
Principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending
October 31
----------
<S> <C>
1994 $ 1,484,046
1995 1,191,998
1996 1,206,038
1997 196,259
1998 212,760
Thereafter 1,228,294
------------
$ 5,519,395
============
</TABLE>
NOTE 4 - EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Company has an employee savings and stock ownership plan (ESSOP) which
enables most employees to acquire shares of the Company's common stock. The cost
of the ESSOP is borne by the Company through annual contributions in amounts
determined by management. The plan is funded on a year ending April 30. The
Company's contribution to the plan for 1993 and 1992 was $1,025,000 for each
year.
At April 30, 1993 and 1992, the ESSOP owned 86,354 and 86,893 shares of common
stock, respectively, 65,542 and 57,706 of which had been allocated to employees.
In December 1986, the ESSOP purchased 67,542 shares from the majority
stockholder and officer of the Company, at a cost of $10,000,000 (see Note 3).
NOTE 5 - OTHER EMPLOYEE BENEFIT PLANS
Through fiscal 1990, the Company had a restricted stock purchase plan (RSPP)
which allowed certain key employees to purchase restricted-transfer shares of
the Company's common stock.
In December 1990, the RSPP was terminated and all outstanding shares previously
issued under the plan (15,300 shares) were reacquired by the Company.
As a result of the termination, the Company adopted a stock appreciation rights
(SAR) plan covering certain employees including those previously participating
in the RSPP. SAR participants may be entitled to future cash compensation based
upon any future increase in the Company's stock value. Compensation expense
relative to the SAR's was $4,350,320 and $694,488 in 1993 and 1992,
respectively. In arriving at the compensation expense for 1993, the Company used
the per share value resulting from the potential sale of the Company described
in Note 8 to the financial statements.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
NOTES TO FINANCIAL STATEMENTS
October 31, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year ended
October 31
1993 1992
---- ----
<S> <C> <C>
Currently payable
State $ 577,149 $ 897,000
Federal 3,013,317 4,636,190
------------ ------------
3,590,466 5,533,190
Deferred income taxes (1,900,466) (197,190)
------------ ------------
$ 1,690,000 $ 5,336,000
============ ============
</TABLE>
Differences between the provision for income taxes shown in the statements of
income and amounts computed by applying the statutory federal income tax rate of
34% to income before income taxes are as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Income taxes computed at the statutory rate $ 1,509,446 $ 4,618,462
State income taxes, net of federal benefit 220,112 677,983
Other, net (39,558) 39,555
------------ ------------
$ 1,690,000 $ 5,336,000
============ ============
</TABLE>
The tax effect of the principal timing differences are as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Inventory capitalization $ 179,095 $ 783,494
Employee benefit plan 83,920 27,757
Inventory obsolescence (390,718) (945,000)
Credit memo reserve (117,000) -
Deferred compensation (1,727,475) -
Other 71,712 (63,441)
------------ ------------
$ (1,900,466) $ (197,190)
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE>
MCDOUGAL, LITTELL & COMPANY
NOTES TO FINANCIAL STATEMENTS
October 31, 1993 and 1992
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases: The Company is obligated under noncancelable operating leases,
- ------
principally for office facilities and equipment, which expire through 1996.
Under the terms of the office lease agreements, the Company is required to pay
its share of real estate taxes, insurance and other occupancy costs. In
addition, the office lease agreements provide for renewal options. Rent expense
under such lease agreements for the years ended October 31, 1993 and 1992 was
$1,678,231 and $1,774,808, respectively. Aggregate future rental commitments for
noncancelable operating leases with terms longer than one year are as follows:
<TABLE>
<CAPTION>
Year ending
October 31,
-----------
<S> <C>
1994 $ 1,293,427
1995 1,322,473
1996 332,607
------------
$ 2,948,507
============
</TABLE>
Guarantees: The Company guaranteed certain employee stockholder bank loans for
- ----------
the purchase of the Company's common stock. At October 31, 1993, total loans of
$253,897 were outstanding.
NOTE 8 - SUBSEQUENT EVENT
The shareholders of the Company are in the process of executing a definitive
agreement for the sale of their common stock to an unrelated third party. The
definitive agreement requires the sale of 100% of the outstanding stock at a
price approximating $475.00 per share. The parties plan to close the transaction
in the first quarter of 1994 after meeting certain closing conditions defined in
the agreement. The Company has adjusted the financial statements to reflect the
increased obligations under the Company's stock appreciation rights (SAR) plan
described more fully in Note 5. The Company has also agreed to pay certain costs
of the transaction, which approximate $1,640,000.
- --------------------------------------------------------------------------------
12.
<PAGE>
EXHIBIT 99.2
Houghton Mifflin Company
Pro Forma Combined Balance Sheet and Statement of Operations
(Unaudited)
Background Information
- ----------------------
On March 1, 1994 Houghton Mifflin Company ("Company") acquired the outstanding
common stock of McDougal, Littell & Company ("McDougal"), a leading textbook
publisher, in a cash transaction. The total cost of the acquisition is
estimated at $140 million, of which $138 million represents the contractual
purchase amount and $2 million represents estimated professional and other fees
directly related to the acquisition.
The Company financed $100 million of the acquisition with short-term bank debt.
The Company intends to refinance this debt with debt securities issued under the
Company's $100 million shelf registration facility. Accordingly, the Pro Forma
Combined Balance Sheet classifies the bank borrowings as long-term obligations.
Operating cash of approximately $40 million was also applied to the acquisition,
including the repayment of McDougal's long-term debt and deferred compensation
obligations. The cost to retire these obligations approximated $10.6 million
and has been reflected in the Pro Forma Combined Balance Sheet.
Basis of Accompanying Unaudited Pro Forma Financial Statements
- ---------------------------------------------------------------
The acquisition will be accounted for as a purchase and the results of
McDougal's operations will be included in the Company's operating results as of
March 1, 1994, the date of acquisition. The Pro Forma Balance Sheet assumes
that the acquisition occurred on December 31, 1993 and reflects the repayment of
McDougal's long-term debt and liability for deferred compensation. The Pro
Forma Combined Statement of Operations assumes that the acquisition occurred on
January 1, 1993. Cost savings from the combination of the Company and McDougal
are not included.
The intangible assets arising in connection with the acquisition shown in the
accompanying balance sheet amount to $106.5 million. The seasonal net loss
incurred by McDougal during the period November 1, 1993 through February 28,
1994 will reduce the net assets of McDougal at the time of acquisition on March
1, 1994. Accordingly, the amount of intangible assets acquired in connection
with the acquisition is expected to be higher than the $106.5 million shown in
the Pro Forma Adjustments column. Also, the actual allocation of the purchase
price may be different from that reflected in the pro forma financial data.
The Company amortizes editorial publishing rights over a period not to exceed 15
years and goodwill over a period not to exceed 25 years. The use herein of a 20
year period to amortize the editorial publishing rights and goodwill for the
McDougal acquisition reflects the Company's
<PAGE>
initial purchase price allocation estimate. The eventual blended amortization
period will reflect the final purchase price and allocation thereof.
These unaudited pro forma combined financial data do not purport to be
indicative of the results which actually would have been obtained if the
acquisition had been effected on the date indicated or of those results which
may be obtained in the future. The pro forma combined financial data should be
read in conjunction with the consolidated financial statements included in the
Houghton Mifflin Company Annual Report on Form 10-K for the year ended December
31, 1993.
The unaudited pro forma combined statement of operations does not include non-
recurring charges which may result from the transaction and the integration of
McDougal into the Company. The Company expects these to be charged to
operations during the period ended March 31, 1994. Such charges include
integration expenses related to personnel, facilities and assets.
Pro Forma Adjustments
- ---------------------
A summary of the Pro Forma Adjustments is set forth as follows:
(a) To record operating cash and debt applied to the acquisition.
(b) To adjust assets acquired to estimated fair market value and the tax
effects thereof.
(c) To eliminate McDougal's October 31, 1993 Stockholders' Equity and record
purchased intangible assets.
(d) To record estimated net interest expense at 7% associated with acquisition
financing. This interest rate is an estimate of the rate of the debt
securities to be issued under the Company's shelf registration.
(e) To record intangible asset amortization expense using an amortization
period of approximately 20 years.
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Combined Balance Sheet
(Amounts in thousands)
McDougal -
HMCo Littell
Historical Historical Pro Forma Pro Forma
Dec. 31, 1993 Oct. 31, 1993 Adjustments Combined
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $67,242 $10,676 ($40,000) a $37,918
Marketable securities 18,107 18,107
Accounts receivable, net 104,489 11,588 116,077
Inventories 64,001 11,551 2,328 b 77,880
Other 14,010 7,427 (885) b 20,552
----------------------------------------------------------------
Total current assets 267,849 41,242 (38,557) 270,534
Property, plant and equipment,
at cost, net of accumulated amortization
and depreciation 29,506 5,164 34,670
Book plates, net of accumulated amortization 36,664 6,261 42,925
----------------------------------------------------------------
66,170 11,425 77,595
Other assets
Royalty advances to authors, net 21,382 21,382
Intangible assets, net 19,661 106,489 c 126,150
Other 23,159 23,159
----------------------------------------------------------------
Total other assets 64,202 106,489 170,691
$398,221 $52,667 $67,932 $518,820
================================================================
Current liabilities
Accounts payable $33,622 $4,633 $38,255
Short term borrowings 24,605 24,605
Accrued royalties 27,696 2,809 30,505
Other accrued expenses 20,929 2,547 23,476
Income taxes 2,463 7,794 10,257
Deferred compensation 5,045 (5,045) a
Current maturities of long-term debt 1,955 1,484 (1,484) a 1,955
----------------------------------------------------------------
Total current liabilities 111,270 24,312 (6,529) 129,053
Long-term debt 26,438 4,035 100,000 a 126,438
(4,035) a
Other liabilites 12,348 234 12,582
Accrued postretirement liablities 23,948 23,948
Deferred income taxes 135 2,582 2,717
Stockholders' equity
Common stock 14,759 3 (3) c 14,759
Capital in excess of par value 30,612 469 (469) c 30,612
Retained earnings 211,222 31,903 (31,903) c 211,222
----------------------------------------------------------------
256,593 32,375 (32,375) 256,593
Less:
Common stock held in treasury, at cost (1,367) (7,796) 7,796 c (1,367)
Benefits trust assets, at market (31,144) (31,144)
Company loan to ESSOP (3,075) 3,075 a
----------------------------------------------------------------
Total stockholders' equity 224,082 21,504 (21,504) 224,082
$398,221 $52,667 $67,932 $518,820
================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Statement of Results of Operations
(Amounts in thousands, except per share)
McDougal -
HMCo Littell Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
Net sales $462,969 $60,343 $523,312
Costs and expenses
Cost of sales 227,969 26,212 254,181
Selling and administrative 173,070 28,920 $5,500 e 207,490
Special charges 10,560 10,560
----------- ---------- --------- ---------
411,599 55,132 5,500 472,231
Operating income 51,370 5,211 (5,500) 51,081
Interest expense, net (2,347) (772) (7,000) d (10,119)
----------- ---------- --------- ---------
Income before taxes and extraordinary item 49,023 4,439 (12,500) 40,962
Taxes on income before extraordinary item 17,650 1,690 (2,660) 16,680
----------- ---------- --------- ---------
Income before extraordinary item $31,373 $2,749 ($9,840) $24,282
=========== ========== ========= =========
Income per share before extraordinary item $2.27 $0.20 ($0.71) $1.76
=========== ========== ========= =========
Shares utilized in calculation of income
per share before extraordinary item 13,823 13,823 13,823 13,823
</TABLE>
