<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period from July 1, 1995 to September 30, 1995
Commission file number 1-5406
------------------------------------
HOUGHTON MIFFLIN COMPANY
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1456030
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Berkeley Street, Boston 02116 - 3754
------------------------------- -------------------
(Address of principal (Zip Code)
executive offices)
617-351-5000
----------------------------------------------------------
Registrant's telephone number, including area code
Not applicable
----------------------------------------------------------
(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.
X
Yes --------------- No __________________
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of October 31, 1995.
<PAGE>
<TABLE>
<CAPTION>
Class Outstanding at October 31, 1995
----- ------------------------------
<S> <C>
Common Stock, $1 par value 14,469,910
Preferred Stock Purchase Rights 14,469,910
</TABLE>
1 of 27
HOUGHTON MIFFLIN COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Consolidated Condensed Balance Sheets
September 30, 1995 and 1994 and December 31, 1994 3 - 4
Consolidated Condensed Statements of Income
and Retained Earnings -- Three and Nine
Months Ended September 30, 1995 and 1994 5 - 6
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994 7
Notes to Unaudited Consolidated Condensed
Financial Statements 8 - 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 26
Part II. Other Information
Item 4. Submission of Matter to a Vote of
Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
<PAGE>
Signatures 27
2
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 and 1994 and DECEMBER 31, 1994
(In thousands of dollars, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
September 30 September 30 December 31
1995 1994 1994
------------ ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash and cash
equivalents $ 95,480 $ 12,699 $ 30,372
Marketable securities,
available-for-sale,
at fair value 14,420 1,131 16,821
Accounts receivable 249,865 215,037 143,599
Less allowance for
book returns 10,618 11,635 12,836
------- ------- -------
239,247 203,402 130,763
Inventories:
Finished goods 79,852 57,929 55,174
Work-in-process 6,282 3,919 4,460
Raw materials 6,378 2,569 2,027
------- ------- -------
92,512 64,417 61,661
Deferred income taxes
and prepaid expenses 6,859 16,272 10,484
------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total current assets 448,518 297,921 250,101
Property, plant and
equipment and book plates
(net of accumulated
depreciation and amort-
ization of $107,798 at
September 30, 1995,
$99,940 at September 30, 1994
and $96,173 at
December 31, 1994) 70,443 66,782 68,888
Intangible assets, net 118,748 127,197 124,408
Other assets, net 74,225 52,733 53,869
------- ------- -------
$ 711,934 $ 544,633 $ 497,266
======= ======== ========
</TABLE>
See accompanying notes to unaudited
consolidated condensed financial statements.
3
<PAGE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 and 1994, and DECEMBER 31, 1994
(In thousands of dollars, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30 September 30 December 31
1995 1994 1994
------------ ------------ -----------
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 65,591 $ 48,013 $ 45,023
Commercial paper - 14,980 -
Income taxes payable 25,708 21,961 -
Royalties 30,116 28,077 32,947
Salaries, wages
and commissions 11,959 11,762 13,634
Other 22,139 18,041 13,106
------- ------- -------
Total current liabilities 155,513 142,834 104,710
Long-term debt 226,133 99,430 99,445
Accrued royalties 2,565 3,981 3,169
Other liabilities 14,529 12,421 13,005
Accrued postretirement
benefits 25,673 24,775 24,864
Stock repurchase
commitment - 7,600 7,600
Stockholders' equity:
Preferred stock, $1 par value:
500,000 shares authorized:
none issued - - -
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
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 31,655 19,673 22,316
Retained earnings 283,634 258,994 248,828
Notes receivable from
purchase agreements (5,744) (5,841) (5,841)
------- ------- -------
324,304 287,585 280,062
Less:
Benefits trust assets,
at market (30,668) (27,119) (29,498)
Common shares held in
treasury, at cost
(288,816 shares at September 30,
1995, 348,538 at September 30,
1994 and 328,685 at
December 31, 1994) ( 6,115) (6,874) (6,091)
------- ------- -------
Total stockholders' equity 287,521 253,592 244,473
------- -------- -------
$ 711,934 $ 544,633 $ 497,266
======= ======= =======
</TABLE>
See accompanying notes to unaudited
consolidated condensed financial statements.
4
<PAGE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 1995, and 1994
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Net sales by industry segment:
Educational publishing:
School $ 201,636 $ 163,250
College 38,859 35,755
------- -------
240,495 199,005
General publishing 27,398 31,299
------- -------
267,893 230,304
Costs and expenses:
Cost of sales 101,929 88,819
Selling and administrative 66,879 60,472
------- -------
168,808 149,291
------- -------
Operating income 99,085 81,013
Other income (expense):
Gain on equity transactions of
INSO Corporation 15,001 -
Equity in earnings of
INSO Corporation 713 650
Net interest expense (2,718) (2,353)
-------- --------
12,996 (1,703)
Income before taxes 112,081 79,310
Income tax provision 44,011 31,737
------- --------
Net income 68,070 47,573
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Retained earnings at beginning
of period 219,074 215,926
Valuation allowance on
noncurrent marketable equity
securities (193) (1,543)
Dividends declared (3,317) (2,962)
-------- --------
Retained earnings at end
of period $ 283,634 $ 258,994
======= =======
Net income per share $ 4.93 $ 3.45
======= =======
Average number of
common shares 13,817 13,789
======= =======
Cash dividends paid per
common share $ 0.24 $ 0.215
======= =======
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
<PAGE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1995, and 1994
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Net sales by industry segment:
Educational publishing:
School $ 298,491 $ 267,143
College 58,180 57,972
------- -------
356,671 325,115
General publishing 66,382 71,718
------- -------
423,053 396,833
Costs and expenses:
Cost of sales 197,625 182,351
Selling and administrative 153,939 143,248
Special charges 7,033 6,513
------- -------
358,597 332,112
------- -------
Operating income 64,456 64,721
Other income (expense):
Gain on equity transactions
of INSO Corporation and gain
on sale of interest in
Software Division 15,001 36,212
Equity in earnings of
INSO Corporation 273 1,221
Net interest expense (6,396) (5,005)
-------- --------
8,878 32,428
-------- --------
Income before taxes and
extraordinary item 73,334 97,149
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Income tax provision 28,900 37,666
------- -------
Income before
extraordinary item 44,434 59,483
Extraordinary loss on early
extinguishment of debt (net
of income tax benefit of $729) - (1,239)
-------- -------
Net income 44,434 58,244
Retained earnings at beginning
of period 248,828 211,222
Valuation allowance on
noncurrent marketable equity
securities (101) (1,543)
Dividends declared (9,527) (8,929)
-------- -------
Retained earnings at end
of period $ 283,634 $ 258,994
======== =======
Per share:
Income before extraordinary item $ 3.22 $ 4.30
Loss on early extinguishment of debt - (0.09)
------- ------
Net income per share $ 3.22 $ 4.21
======== =======
Average number of common shares 13,805 13,838
======== =======
Cash dividends paid per
common share $ 0.69 $ 0.645
======== =======
</TABLE>
See accompanying notes to unaudited consolidated
condensed financial statements.
6
<PAGE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited, in thousands of dollars)
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Cash flows provided by (used in)
operating activities:
Net income $ 44,434 $ 58,244
Adjustments to reconcile
net income to net cash
(used in) provided by operating
activities:
Gain on equity transactions of INSO
Corporation and gain on sale of
interest in Software Division (15,001) (36,212)
Equity earnings in INSO Corporation (273) (1,221)
Depreciation and amortization 35,767 34,997
Loss on early extinguishment
of debt, net - 1,239
Changes in operating assets and liabilities:
Accounts receivable (108,484) (99,363)
Inventories (30,851) 13,965
Royalty advances, net (7,986) 1,078
Accounts payable 20,566 9,695
Income taxes 25,423 20,064
Other, net 14,538 3,464
Salaries, wages and commissions (1,675) 89
-------- -------
Net cash (used in) provided by
operating activities (23,542) 6,039
------- -------
Cash flows provided by (used in)
investing activities:
Book plate expenditures (29,338) (18,100)
Property, plant, and equipment
expenditures (5,439) (5,567)
Marketable securities 2,401 16,976
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Acquisition of McDougal,
net of cash acquired - (130,342)
Dividend received from INSO
Corporation - 32,860
Sale of building and equipment 3,186 -
------- -------
Net cash used in
investing activities (29,190) (104,173)
-------- -------
Cash flows provided by (used in)
financing activities:
Dividends on common stock (9,527) (8,929)
Repayment of commercial paper - (9,625)
Issuance of long-term debt 126,643 99,415
Senior notes prepayment - (26,960)
Purchase of common stock (957) (12,923)
Exercise of stock options 1,928 779
Other (247) 1,834
------- -------
Net cash provided by financing
activities 117,840 43,591
-------- -------
Net increase (decrease) in cash
and cash equivalents 65,108 (54,543)
Cash and cash equivalents
at beginning of period 30,372 67,242
------- ------
Cash and cash equivalents at
end of period $ 95,480 $ 12,699
======== =======
Supplementary disclosure of cash flow information:
Income taxes paid $ 3,453 $ 17,192
Interest paid $ 5,379 $ 2,753
</TABLE>
See accompanying notes to unaudited
consolidated condensed financial statements.
7
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(1) The accompanying unaudited consolidated financial statements of Houghton
Mifflin Company and its subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim financial
information. All adjustments (consisting of normal recurring accruals)
that, in the opinion of management, are necessary for the fair
presentation have been included.
Results of interim periods are not necessarily indicative of results to be
expected for the year as a whole. The effect of seasonal business
fluctuations and the occurrence of many costs and expenses in annual
cycles require certain estimations in the determination of interim
results.
The information contained in the interim financial statements should be
read in conjunction with the Company's latest Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
Certain reclassifications have been made to prior period financial
statements in order to conform to the presentation used in the 1995
interim financial statements.
(2) The Company acquired McDougal, Littell & Company ("McDougal"), a leading
publisher of high school and elementary textbooks on March 1, 1994, for
$130.3 million.
The acquisition was initially financed through a combination of operating
cash and $100 million in short-term bank debt. The short-term bank debt
was repaid on April 5, 1994, with the proceeds from a $100 million public
debt offering ("Notes"). The Notes are unsecured obligations which mature
on April 1, 2004, and bear interest at 7.125%, payable semi-annually.
8
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
-- Continued--
The acquisition was accounted for as a purchase and the net assets and
results of operations have been included in the consolidated interim
financial statements since the date of acquisition. 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 excess of
the net assets acquired, or goodwill, is being amortized on a straight-
line basis over a period of twenty years.
The following unaudited summary, presented on a pro forma basis, combines
the consolidated results of operations as if McDougal had been acquired as
of January 1, 1994.
<TABLE>
<CAPTION>
(In millions, except Nine Months Ended
per share amounts) September 30, 1994
--------------------- --------------------
<S> <C>
Net sales $ 398.6
Income before
extraordinary item $ 53.5
Net income $ 52.3
Net income per share $ 3.78
</TABLE>
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results
that would have occurred had the McDougal acquisition been consummated as
of the assumed date, nor are they necessarily indicative of future results
of operations.
9
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
-- Continued--
(3) In March 1994, the Company spun-off its former Software Division in an
initial public offering. In connection with this offering, the Company
received a cash dividend of $32.9 million from the successor company INSO
Corporation ("INSO"). The equity interest in INSO after the offering was
approximately 40%. Additionally, an after-tax gain of $22.8 million, or
$1.65 per share, was recognized in connection with the INSO public
offering. The gain represents the value of the convertible preferred stock
and the cash received net of the assets transferred.
The Company's recognition of earnings from its investment in INSO is based
upon the equity method of accounting. The equity earnings included in the
Company's results of operations are based primarily upon the Software
Division's historical results adjusted for the current business
environment.
In August 1995, INSO completed a new public offering of 600,000 shares of
common stock. As a result, the Company's equity ownership has been reduced
to approximately 36%. The Company recorded an estimated gain of
approximately $15.0 million, $8.9 million after-tax, or $.64 per share, in
the third quarter representing the increase in its equity in net assets of
INSO.
(4) In March 1994, the Company completed the early redemption of $25 million
of 8.78% Senior Notes scheduled to mature in March 1997. The refinancing
cost of $1.2 million, or $.09 per share, was net of an income tax benefit
of $.8 million. The Company financed the early redemption of the Senior
Notes with operating cash and a portion of the net proceeds received in
connection with the INSO public offering. (See Note 3.)
10
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
-- Continued--
In August 1995, the Company completed a public offering of 1,920,000 6%
Exchangeable Notes Due 1999 (Stock Appreciation Income-Linked Securities,
or "SAILS"). The SAILS were issued at a principal amount of $68 per SAILS.
Net proceeds of approximately $126.6 million were received and used for
general corporate purposes, including the repayment of seasonal borrowings
and the partial funding of the acquisition of D.C. Heath and Company. (See
Note 8.) 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
Company chooses to redeem the SAILS with shares of INSO common stock, it
would record a gain representing the excess of the redemption amount over
the book value of the Company's investment in INSO. The Company's
ownership percentage of INSO after this redemption would be less than 20%.
(5) Intangible assets consist of the following:
<TABLE>
<CAPTION>
As of September 30 December 31
In thousands 1995 1994 1994
-----------------------------------------------------
<S> <C> <C> <C>
Goodwill $113,268 $114,512 $113,268
Publishing rights 15,520 15,595 15,530
Other 5,731 5,731 5,731
Less: accumulated
amortization (15,771) ( 8,641) (10,121)
----------------------------------------------------
Total $118,748 $127,197 $124,408
====================================================
</TABLE>
The carrying value of goodwill is periodically reviewed to determine
recoverability based upon projected undiscounted net cash flows over the
remaining life of the related business unit. If the analysis indicates
that impairment has occurred, the Company writes down the book value of
the intangible asset to the undiscounted net cash flow amount.
11
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION
-- Continued--
(6) The Company has incurred special charges of $7.0 million and $6.5 million
for the nine months ended September 30, 1995, and 1994, respectively. The
current year charges resulted from the decision to outsource existing
distribution operations and are primarily for severance costs, warehouse
closing expenses, and inventory relocation charges. The 1994 charges
relate primarily to corporate and divisional staff reductions and
consolidation of leased Company facilities.
(7) In August 1994, the Company sold put options on 200,000 shares of its
common stock. The put options were exercisable in August 1995 at a price
of $38.00 per share. The total exercise price of $7.6 million was
reflected in the Company's 1994 financial statements as a liability with
the offset as a reduction of capital in excess of par value. The proceeds
from the issuance of the put options have been included in capital in
excess of par value. The options expired in August 1995 unexercised and
the liability was reclassified to capital in excess of par value.
(8) On September 25, 1995, the Company entered into a definitive agreement to
acquire D.C. Heath and Company ("Heath") from Raytheon Company for $455
million in cash. The purchase was completed on October 31, 1995, and was
financed through a combination of available cash and new borrowings.
(9) The Board of Directors, at its October 25, 1995, meeting, declared a
quarterly dividend of $.24 per share, payable on November 22, 1995, to
shareholders of record on November 8, 1995.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter 1995 versus Third Quarter 1994
- -------------------------------------------------
Net sales for the third quarter ended September 30, 1995, were $267.9 million,
an increase of 16% from the $230.3 million reported in the third quarter of
1994. Total consolidated net income rose 43% to $68.1 million, or $4.93 per
share, for the quarter ended September 30, 1995, compared to $47.6 million, or
$3.45 per share, for the same period in 1994. The Company recorded a gain of
approximately $15.0 million ($8.9 million after-tax), or $.64 per share, in the
third quarter representing the increase in its equity in the net assets of INSO
as a result of INSO completing a new public offering of 600,000 shares of common
stock.
As of June 30, 1995, there was an increase from the prior year of approximately
$20 million in orders received and not shipped resulting from the transition of
warehouse operations located at
13
<PAGE>
the Geneva, Illinois facility which services the School Division, McDougal, and
the College Division. This delay in shipments caused a shift in timing of the
recording of sales from the second quarter to the third quarter. As of September
30, 1995, all of the aforementioned $20 million increase in unshipped orders had
been shipped.
Net sales from the educational publishing segment increased $41.5 million, or
21%, from last year's third quarter net sales of $199.0 million. Significant
sales increases of a combined $40.3 million were recognized in the elementary
and secondary programs. The strength of the School Division's new reading
program, Houghton Mifflin Reading: Invitations to Literacy(C) 1996 and Houghton
Mifflin Mathematics(C) 1995 added substantial sales. Sales of backlist titles in
the reading programs did decline in the third quarter of 1995 compared to 1994,
as customers elected to purchase the new reading program. McDougal added higher
net sales, primarily supported by the capture of over 70% of the available
market share in Florida with the new language arts program The Writer's Craft,
and the
14
<PAGE>
benefit of a dedicated sales force concentrating on the secondary educational
market. Revenues from the College Division increased 9% in the third quarter of
1995 over the same period in 1994. The Riverside Publishing Company
("Riverside") reported a slight sales decrease over the same third quarter
period in 1994.
Net sales for the general publishing segment decreased $3.9 million, or 12%, in
the third quarter of 1995 compared to the $31.3 million reported in 1994's third
quarter. Reference product sales decreased from 1994's third quarter levels,
primarily due to the Saturday Night Live product sales included in 1994.
Operating income for the third quarter of 1995 increased 22%, or $18.1 million,
to $99.1 million in 1995 over the same period in 1994. Higher revenues and
improved product profitability contributed to the increase. Cost of sales as a
percentage of net sales dropped slightly in the third quarter of 1995 despite a
$4.2 million increase in editorial spending, which includes
15
<PAGE>
new educational program development, as well as spending for emerging markets in
the multimedia and technology product arenas.
Manufacturing costs have not been materially affected by the steady increases in
paper costs due to the substitution of paper grades and the negotiation of price
protection from certain suppliers. Increased selling costs were largely due to
the growth in sales from the same third quarter period in 1994, and were
principally related to implementation and distribution of product samples in
connection with the new programs in the School Division and McDougal. Offsetting
these operational charge increases were cost savings in advertising.
Net interest expense for the third quarter of 1995 increased 15% to $2.7 million
from the same period in 1994, primarily due to the issuance of 1,920,000 6%
Stock Appreciation Income-Linked Securities ("SAILS") Exchangeable Notes in
August 1995.
16
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
- ---------------------------------------------
Net sales for the nine months ended September 30, 1995, were $423.1 million, or
7% higher than 1994's nine months net sales of $396.8 million. Net income for
the nine months ended September 30, 1995, of $44.4 million, or $3.22 per share,
decreased $13.8 million, or 24%, from the same period in 1994. Net income in
1995 included an estimated gain of approximately $15.0 million ($8.9 million
after-tax), or $.64 per share, representing the increase in the Company's equity
in net assets of INSO, special charges of $7.0 million ($4.3 million after-tax),
or $.31 per share, relating to the costs of outsourcing the distribution
processes at the Geneva, Illinois and Burlington, Massachusetts facilities, and
$2.2 million, or $.16 per share, representing the Company's portion of special
charges of $5.5 million recognized by INSO in connection with its acquisition of
Systems Compatibility Corporation ("SCC"). Net income for the nine months ended
September 30, 1994, of $58.2 million, or $4.21 per share, included an after-tax
gain of $22.8 million, or $1.65 per share, related to the spin-off of the former
Software Division, special charges of $6.5 million ($4.0 million after-tax), or
$.29 per share, for severance
17
<PAGE>
costs, facility closings, and disposal of tangible and intangible assets, and an
extraordinary charge of $1.2 million, or $.09 per share, for the early
extinguishment of debt. Adjusting both periods' net income for the INSO equity
gains, special charges of the Company, INSO special charges, and 1994's
extraordinary loss on early debt extinguishment, net earnings from operations in
1995 improved to $42.0 million, or $3.05 per share, from 1994's net earnings
from operations of $40.7 million, or $2.94 per share.
Net sales from the educational publishing segment increased $31.6 million, or
10%, from 1994's nine months net sales of $325.1 million. The strong results
from the sales of the School Division's new programs, Houghton Mifflin Reading:
Invitations to Literacy(c) 1996 and Houghton Mifflin Mathematics(c) 1995,
combined with the significant market share captured in Florida by McDougal's new
language arts program The Writer's Craft accounted for the majority of the net
increase in revenues. Riverside posted modest gains in net sales for the nine
months ended September 30, 1995, compared to the same
18
<PAGE>
period in 1994. Period-to-period net sales for the College Division were flat.
Net sales for the general publishing segment for the nine months ended September
30, 1995, decreased 7%, or $5.3 million, from the net sales of $71.7 million for
the nine months ended September 30, 1994. Net sales for the 1994 period included
$1.8 million related to the former Software Division and $2.0 million in sales
of backlist titles such as David Macaulay's The Way Things Work, and Chris Van
Allsburg's Polar Express and Polar Express Audio. Revenues for 1995 included
approximately $2.1 million from the sale of the Information Please(R) publishing
rights to INSO.
Operating income for the nine months ended September 30, 1995, was $64.5 million
compared to $64.7 million from the same period in 1994. Cost of sales as a
percentage of net sales increased slightly to 47% from 1994's 46%. Included in
the 1995 current period charges are $14.5 million of higher editorial costs. The
costs increases are primarily due to a greater number of new programs in
development concurrently
19
<PAGE>
than in prior years. These programs are primarily for the elementary and
secondary educational markets in the areas of reading, social studies,
mathematics, and language arts. Development costs for the Trade & Reference
division have been concentrated in the area of new multimedia products due to be
released for the Christmas season. Manufacturing costs as a percent of net sales
have declined slightly, benefiting from the increased profit margins of certain
products and the cost controls initiated to mitigate the impact of paper price
increases. Selling and administrative costs have increased $10.7 million, or 7%,
from 1994 to 1995, primarily due to the higher expenses for implementation and
distribution of product samples, as well as increased distribution costs
resulting from the delay in the transition of warehouse operations.
In August 1995, INSO Corporation completed a public offering of 600,000 shares
of common stock at $65 per share. In connection with this offering, the Company
has recorded an estimated gain of $15.0 million ($8.9 million after taxes), or
$.64 per share. Net income also included a $2.2 million charge,
20
<PAGE>
or $.16 per share, representing the Company's share of special charges recorded
by INSO related to its acquisition of SCC. Net income before an extraordinary
item for the nine months ended September 30, 1994, included the after-tax gain
of $22.8 million, or $1.65 per share, recognized for the gain on the spin-off of
the former Software Division.
Net interest expense for the nine months ended September 30, 1995, has increased
$1.4 million to $6.4 million over the $5.0 million reported as of September 30,
1994. The interest costs of the notes issued to partially fund the acquisition
of McDougal in March 1994 are included for a full nine months in 1995 compared
to the six months recorded as of September 30, 1994. Additionally, interest
costs for the SAILS Exchangeable Notes issued in August 1995 are included in the
current period. Higher earnings from marketable securities recorded from the
investment of the proceeds received from the SAILS partially offset the increase
in interest costs.
The Company's effective tax rate for the nine months ended September 30, 1995,
was approximately 39% compared to
21
<PAGE>
approximately 39% for the comparable period from the prior year. The effective
tax rate for the fiscal year 1994 was 38%.
On September 25, 1995, the Company announced that it had entered into a
definitive agreement to acquire D.C. Heath and Company ("Heath") from Raytheon
Company, for $455 million in cash. The acquisition was financed through a
combination of existing cash balances and short-term financing. Heath is a
leading publisher of textbooks in areas including modern language, language
arts, science, social studies, and mathematics for the elementary, secondary,
and college markets.
Liquidity and Capital Resources
- -------------------------------
The seasonality of revenues affects the Company's operating cash flow. A net
cash deficit from operating and investing activities, normally incurred through
the middle of the third quarter, is funded through the draw-down of cash and
marketable securities and accessing existing short-term credit facilities. Cash,
cash equivalents, and marketable securities increased
22
<PAGE>
$96.1 million to $109.9 million at September 30, 1995, compared to $13.8 million
at September 30, 1994. This increase was primarily the result of the
approximately $126.6 million of proceeds from the August 1995 issuance of
1,920,000 SAILS, offset by the reduction of seasonal borrowing obligations.
Cash used in operating activities of $23.5 million has increased $29.5 million
from the $6.0 million cash generated from operations at September 30, 1994.
Increased accounts receivable balances compared to September 30, 1994, are a
result of higher third quarter net sales compared to the same period of 1994.
The build-up of inventory balances to meet sales demands and fall product sample
distribution for upcoming adoption opportunities has further reduced the cash
available from operating activities.
At September 30, 1995, total debt increased $111.7 million to $226.1 million
from $114.4 million at September 30, 1994. In August 1995, net proceeds of
approximately $126.6 million were received in connection with the Company's
completion of a public
23
<PAGE>
offering of 1,920,000 6% Exchangeable Notes (SAILS) due 1999 at $68 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. There is
an optional redemption date in 1998 which allows for a one-time redemption of up
to 50% of the outstanding issue. These proceeds were used to purchase short-term
investment securities and pay down outstanding seasonal borrowing obligations.
As a direct result of this debt issue, the Company's total capitalization ratios
increased to approximately 44% at September 30, 1995, from 31% at September 30,
1994.
Continued investment in creating publishing assets resulted in an increase in
book plate expenditures of $11.2 million. The principal financing activity,
excluding the issuance of new debt, was the payment of cash dividends. In July
1995, the Board of Directors voted to increase the quarterly dividend
24
<PAGE>
from $.225 per share to $.24 per share, or $.96 per share annually. This is the
thirteenth consecutive year in which the Company has increased its dividends to
stockholders.
In connection with the acquisition of D. C. Heath and Company, the Company
increased its borrowings by an additional $355 million. Due to the seasonal and
cyclical nature of Heath's revenues, it is anticipated that short-term borrowing
requirements will increase in a manner which parallels the Company's current
seasonal borrowing patterns. The issuance of debt to fund the acquisition,
together with the increase in seasonal borrowing needs, will give rise to higher
incremental interest costs in the future.
The Company expects that cash flows from combined operations will be sufficient
to provide adequate financing resources to support operational needs, and also
be sufficient to fund necessary capital expenditures, debt service obligations,
and dividend payments. The Company has established several short-term credit
facilities available at September 30, 1995,
25
<PAGE>
that, together with funds expected to be generated from operating activities,
are believed to be sufficient to meet total cash requirements for the
foreseeable future.
26
<PAGE>
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
None.
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
Dated: November 13, 1995 /s/James F. Stack
------------------------
James F. Stack
Executive Vice President,
Chief Financial Officer
Dated: November 13, 1995 /s/ Michael J. Lindgren
------------------------
Michael J. Lindgren
Vice President, Controller
27
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<PERIOD-END> SEP-30-1995
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