<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 April 1, 1995 to June 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.
Yes X No
------------------- ---------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1995.
Class Outstanding at July 31, 1995
----- -----------------------------
Common Stock, $1 par value 14,465,281
Preferred Stock Purchase Rights 14,465,281
1 of 30
<PAGE>
HOUGHTON MIFFLIN COMPANY
INDEX
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets
June 30,1995 and 1994 and December 31,1994 ................ 3 - 4
Consolidated Condensed Statements of Income
and Retained Earnings -- Three and Six
Months Ended June 30, 1995 and 1994........................ 5 - 6
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 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 - 25
Part II. Other Information
Item 4. Submission of Matter to a Vote of
Security Holders..................................... 26 - 27
Item 6. Exhibits and Reports on Form 8-K..................... 27
Signatures........................................... 28
2
<PAGE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1995 and 1994, and DECEMBER 31, 1994
(In thousands of dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
June 30 June 30 December 31
1995 1994 1994
------- ------- -----------
<S> <C> <C> <C>
Current assets
Cash and cash
equivalents $ 9,592 $ 20,161 $ 30,372
Marketable securities
available-for-sale,
at fair value 600 600 16,821
Accounts receivable 122,616 124,838 143,599
Less allowance for
book returns 5,850 5,958 12,836
------- ------- -------
116,766 118,880 130,763
Inventories
Finished goods 85,938 71,506 55,174
Work-in-process 5,781 2,563 4,460
Raw materials 6,973 3,372 2,027
------- ------- -------
98,692 77,441 61,661
Current income tax
benefit 17,241 - -
Deferred income taxes
and prepaid expenses 13,976 19,284 10,484
------- ------- -------
Total current assets 256,867 236,366 250,101
Property, plant and equip-
ment and book plates (net
of accumulated depreciation
and amortization of $92,499
in 1995, $84,986 in 1994,
and $96,173 at December 31,
1994) 70,515 74,636 68,888
Intangible assets, net 120,623 129,242 124,408
Other assets 56,919 56,709 53,869
-------- -------- --------
$504,924 $496,953 $497,266
======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated condensed
financial statements.
3
<PAGE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1995 and 1994, and DECEMBER 31, 1994
(In thousands of dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30 June 30 December 31
1995 1994 1994
------- ------- -----------
<S> <C> <C> <C>
Current liabilities
Accounts payable $ 47,643 $ 32,825 $ 45,023
Commercial paper 54,925 59,478 -
Royalties 18,193 18,241 32,947
Salaries, wages and
commissions 2,595 2,605 13,634
Other 16,978 17,187 13,106
------- ------- -------
Total current
liabilities 140,334 130,336 104,710
Long-term debt 99,475 99,415 99,445
Accrued royalties 2,915 4,291 3,169
Other liabilities 13,849 11,593 13,005
Accrued postretirement
benefits 25,392 24,550 24,864
Stock repurchase
commitment 7,600 - 7,600
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 28,015 28,272 22,316
Retained earnings 219,074 215,926 248,828
Notes receivable from
purchase agreements (5,661) - (5,841)
------- ------- -------
256,187 258,957 280,062
Less:
Benefits trust assets,
at market (34,577) (29,052) (29,498)
Common shares held in
treasury, at cost (295,375
shares at June 30, 1995,
250,685 at June 30, 1994
and 328,685 at December 31,
1994) (6,251) (3,137) (6,091)
-------- -------- --------
Total stockholders'
equity 215,359 226,768 244,473
-------- -------- --------
$504,924 $496,953 $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 JUNE 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 $ 73,383 $ 83,597
College 9,764 12,537
------- -------
83,147 96,134
General publishing 21,508 21,007
------- -------
104,655 117,141
Costs and expenses:
Cost of sales 55,815 55,666
Selling and administrative 46,966 45,678
Special charges 7,033 -
------- -------
109,814 101,344
------- -------
Operating income (loss) (5,159) 15,797
Other income and (expense):
Equity in earnings (losses) of
INSO Corporation (1,061) 322
Interest expense, net (2,147) (2,100)
------- -------
(3,208) (1,778)
Income (loss) before taxes (8,367) 14,019
Income tax provision (benefit) (3,263) 5,319
------- -------
Net income (loss) (5,104) 8,700
Retained earnings at beginning
of period 227,185 210,206
Valuation allowance on noncurrent
marketable equity securities 99 -
Dividends declared (3,106) (2,980)
-------- -------
Retained earnings at end of period $219,074 $215,926
======== ========
Net income (loss) per share $ (0.37) $ 0.63
======== ========
Average number of common shares 13,809 13,853
======== ========
Cash dividends paid per common share $ 0.225 $ 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
SIX MONTHS ENDED JUNE 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 $ 96,855 $103,893
College 19,321 22,217
------- -------
116,176 126,110
General publishing 38,984 40,419
------- -------
155,160 166,529
Costs and expenses:
Cost of sales 95,696 93,532
Selling and administrative 87,060 82,776
Special charges 7,033 6,513
------- -------
189,789 182,821
------- -------
Operating loss (34,629) (16,292)
Other income (expense):
Gain on sale of interest in
Software Division - 36,212
Equity in earnings (losses) of INSO
Corporation (440) 571
Interest expense, net (3,678) (2,652)
------- -------
(4,118) 34,131
------- -------
Income (loss) before taxes and
extraordinary item (38,747) 17,839
Income tax provision (benefit) (15,111) 5,929
------- -------
Income (loss) before extraordinary
item (23,636) 11,910
Extraordinary loss on early
extinguishment of debt (net of
income tax benefit of $759) - (1,239)
------- -------
Net income (loss) (23,636) 10,671
Retained earnings at beginning
of period 248,828 211,222
Valuation allowance on noncurrent
marketable equity securities 92 -
Dividends declared (6,210) (5,967)
-------- --------
Retained earnings at end of period $219,074 $215,926
======== ========
Per share:
Income (loss) before
extraordinary item $ (1.71) $ 0.86
Loss on early extinguishment
of debt - (0.09)
-------- --------
Net income (loss) per share $ (1.71) $ 0.77
======== ========
Average number of common shares 13,800 13,868
======== ========
Cash dividends paid per common share $ 0.45 $ 0.43
======== ========
</TABLE>
See accompanying notes to unaudited consolidated condensed
financial statements.
6
<PAGE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 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 (loss) $(23,636) $ 10,671
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Gain on sale of interest in
Software Division - (36,212)
Equity (earnings) losses in INSO
Corporation 440 (571)
Depreciation and amortization 17,858 17,348
Loss on early extinguishment of
debt, net - 1,239
Changes in operating assets and liabilities:
Accounts receivable 13,997 (14,851)
Inventories (37,031) 940
Royalty advances (18,028) (10,278)
Accounts payable 2,620 (5,493)
Income taxes (17,525) 349
Other, net 1,842 (5,039)
Salaries, wages and commissions (11,039) (9,067)
------ -------
Net cash used in operating activities (70,502) (50,964)
------- -------
Cash flows provided by (used in)
investing activities:
Acquisition of McDougal, net of cash acquired - (130,342)
Dividend received from INSO Corporation - 32,860
Book plate expenditures (15,595) (12,514)
Property, plant, and equipment
expenditures (3,374) (3,700)
Marketable securities 16,221 17,507
Sale of building and equipment 3,186 -
------- -------
Net cash provided by (used in)
investing activities 438 (96,189)
------- -------
Cash flows provided by (used in)
financing activities:
Dividends paid on common stock (6,210) (5,967)
Issuance of commercial paper 54,925 34,873
Issuance of long-term debt - 99,400
Senior notes redemption - (26,960)
Purchase of common stock (957) (3,189)
Exercise of stock options 1,690 611
Other (164) 1,304
-------- --------
Net cash provided by
financing activities 49,284 100,072
-------- --------
Net decrease in cash and cash equivalents (20,780) (47,081)
Cash and cash equivalents at beginning
of period 30,372 67,242
-------- -------
Cash and cash equivalents at end of period $ 9,592 $ 20,161
======== ========
Supplementary disclosure of
cash flow information:
Income taxes paid $ 2,261 $ 5,190
Interest paid $ 5,044 $ 2,035
</TABLE>
See accompanying notes to unaudited consolidated condensed
financial statements.
7
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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.
(In millions, except Six Months Ended
per share amounts) June 30, 1994
--------------------- --------------------
Net sales $ 168.2
Income before
extraordinary item $ 6.0
Net income $ 4.7
Net income per share $ .34
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.
(3) In March 1994, the Company spun-off its former Software Division in an
initial public offering. In connection, the Company received a cash
dividend of $32.9 million
9
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
-- Continued--
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 (losses)
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 expects to record a gain in the third
quarter of approximately $15 million representing the increase in its
equity in net assets of INSO.
(4) The Company has incurred special charges of $7.0 million and $6.5 million
for the six months ended June 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.
(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 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
10
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
-- Continued--
the Senior Notes with operating cash and a portion of the net proceeds
received in connection with the INSO public offering. (See Note 3.)
In August 1995, the Company completed a public offering of 1,750,000 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 $115.4 million were received and will be
used for general corporate purposes. 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%.
(6) Intangible assets consist of the following:
As of June 30 December 31
In thousands 1995 1994 1994
----------------------------------------------------------
Goodwill $113,268 $114,512 $113,268
Publishing rights 15,636 15,595 15,530
Other 5,606 5,731 5,731
----------------------------------------------------------
Accumulated
amortization (13,887) ( 6,596) (10,121)
----------------------------------------------------------
Total $120,623 $129,242 $124,408
==========================================================
The carrying value of goodwill is periodically reviewed to determine
recoverability based upon projected undiscounted net cash flows over the
11
<PAGE>
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
-- Continued--
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.
(7) The Board of Directors, at its July 26, 1995, meeting, declared a
quarterly dividend of $.24 per share, payable on August 23, 1995, to
shareholders of record on August 9, 1995.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter 1995 and 1994
- ----------------------------
Net sales for the second quarter ended June 30, 1995, were
$104.7 million, a decrease of 10.7% from the $117.1 million
reported for the second quarter of 1994. The total consolidated
net loss incurred in the second quarter of 1995 was $5.1 million,
or $.37 per share, compared to 1994's second quarter net income
of $8.7 million, or $.63 per share. Included in 1995's second
quarter results were special charges of $7.0 million, which were
$4.3 million after-tax, or $.31 per share, relating to the
outsourcing of distribution operations. These charges
are primarily severance costs due to the elimination of
warehouse positions, warehouse closing costs, and charges for
inventory transportation. Equity losses in INSO were $1.1
million, which included $2.2 million, or $.16 per share, of
the Company's portion of special charges of $5.5 million
recognized by INSO in connection with its acquisition of
Systems Compatibility Corporation ("SCC"). Absent these
special charges, earnings from INSO would have been
$1.1 million, or $.08 per share.
13
<PAGE>
The Company's sales and related earnings are seasonal in nature.
Over forty-five percent of the annual net sales and almost all of
the operating earnings are generated in the third quarter due
to the timing of sales from the educational publishing segment.
Net sales from the educational publishing segment declined by
$13.0 million, or 13.5%, from last year's second quarter. The
decrease in net sales is primarily due to the delays encountered
in completing the outsourcing of the product distribution
services located in the Geneva, Illinois facility for the
School Division, McDougal and College Division. During the
changeover, order fulfillment fell behind the normal pace
due to the difficulties in completing the transition by the date
scheduled. As of June 30, 1995 there was a $20 million increase,
over the prior year, in orders received and not shipped. These
orders were filled and shipment took place early in the third
quarter. Consequently, the timing of revenue recognition for
these order backlogs will be shifted from this year's second
quarter to the third quarter. School districts also continue to
order products later in the school year, resulting in the
14
<PAGE>
shifting of additional revenue into the third quarter.
The School Division did enjoy strong sales of the Houghton
Mifflin Reading: Invitations to Literacy(C) 1996 and to a lesser
extent the Houghton Mifflin Mathematics program. Backlist
titles experienced a decline in sales in the second quarter of
1995 compared to 1994, primarily in the previously published
reading programs.
Sales from McDougal were flat in the second quarter of 1995
compared to 1994. The aforementioned warehouse transition
adversely affected McDougal's sales for the quarter. However,
sales of the new program for language arts, The Writer's Craft,
showed promising results from state adoptions, especially in
Florida.
Strong sales gains from test products and scoring services
were recorded by The Riverside Publishing Company ("Riverside").
Reported revenues of $18.5 million exceeded last year's second
quarter by $3.1 million, or approximately 20%. The College
Division's net sales declined $2.8 million in the second
quarter of 1995 from last year's second quarter's sales of
$12.5 million. The College Division's decrease in net sales was
15
<PAGE>
directly impacted by the Geneva warehouse transition.
Net sales for the general publishing segment increased
slightly to $21.5 million from $21.0 million from the same
period year-to-year. Revenues were flat for reference
products, while juvenile and adult titles experienced a slight
decrease totaling $.9 million. Included in the net
revenues for the second quarter of 1995 was approximately $2.0
million from the sale of the Information Please(R) publishing
rights to INSO.
Cost of sales for the second quarter of $55.8 million were flat
compared to the same period for 1994. Cost of sales as a
percentage of net sales rose 5.8%. The cost of sales for the
second quarter reflect a significant increase in editorial
spending in preparation for future adoption opportunities
in the upcoming elementary and secondary publishing
calendars. Additional funds have been used by Riverside for its
continued development of customized criterion-referenced
testing programs currently sought by state and open territory
school districts and the enhancement and diversification of its
product offerings, including expansion in group assessment
16
<PAGE>
testing. Editorial and development costs for the Trade &
Reference Division have increased primarily due to the
scheduled launch of the new multimedia publications in
the Fall of 1995. The multimedia products have an emphasis on
the children's, reference, and hobby markets. The manufacturing
component of cost of sales in the second quarter has not been
materially affected by the continued increases in paper costs
due to the implementation of publishing plans which were
structured to mitigate the effect of the anticipated price
increases. The plans include, but are not limited to, the
substitution of paper grades and negotiated price protection
from certain suppliers.
Selling and administrative expenses were up slightly in the
second quarter of 1995 compared to 1994. The increase is
attributed primarily to the increased costs incurred in product
sampling and temporary duplicative product delivery expenses.
Special charges of $7.0 million related to the costs of
outsourcing the distribution processes at the Geneva, Illinois
and Burlington, Massachusetts facilities were recorded in the
second quarter of 1995.
17
<PAGE>
These charges include $2.7 million for severance, $1.1 million
for inventory relocation, and $3.2 million for the transition
and winding down of in-house operations.
The Company's operating loss of $5.2 million, after special
charges, compares to last year's second quarter operating income
of $15.8 million. The $21.0 million increase in the operating
loss is attributed primarily to the delay in divisional sales
from the School Division, McDougal, and the College Division,
as well as the special charges.
Net interest expense for the second quarter of 1995 was flat
compared to the same period in 1994. The decrease of $1.4
million in the equity earnings in INSO is principally due to
the Company's $2.2 million, or $.16 per share, portion of INSO's
$5.5 million of special charges related to the SCC acquisition
recorded in the second quarter of 1995.
18
<PAGE>
Six Months Ended June 30, 1995 and 1994
- ---------------------------------------
Net revenues for the six months ended June 30, 1995, were $155.2
million, or 6.8% lower than the $166.5 million from the same
period in 1994. Consolidated net losses were $23.6 million,
or $1.71 per share, compared to net income of $10.7 million,
or $.77 per share in 1994. Net losses in 1995 included after-tax
special charges of $4.3 million, or $.31 per share, and one-time
charges related to the equity investment in INSO of
$2.2 million, or $.16 per share. Excluding these items, net
losses were $17.1 million, or $1.24 per share. The six months
ended June 30, 1994, also include an after-tax loss of $1.2
million, or $.09 per share, from the early extinguishment of
long-term debt, an after-tax gain of $22.8 million,
or $1.65 per share, related to the spin-off of the former
Software Division, and an after-tax charge of $4.0 million, or
$.29 per share, for restructuring items. Absent these items,
net losses of $6.9 million, or $.50 per share, were recognized
in the six months ended June 30, 1994.
Net sales for the educational publishing segment declined by
$9.9 million, or 7.8%, to $116.2 million. As previously
19
<PAGE>
mentioned, the transition of the distribution outsourcing
resulted in the lower revenues reported for the 1995 period
for the School Division, McDougal, and the College Division.
The School Division and McDougal were also affected by the
previously mentioned patterns of late ordering. Riverside's
six-months revenues in 1995 increased over 10%,
to $28.1 million, as a result of increased sales from test
products and scoring services.
General publishing net sales experienced a 3.6% decline from
1994's six months total of $40.4 million. Reference product
sales were up $1.0 million, or 7.8%, from 1994's $12.2 million.
This increase and the revenue from the sale of the Information
Please(R) publishing rights were offset by decreases in juvenile
and adult titles.
Cost of sales for the six months ended June 30, 1995, of $95.7
million were $2.2 million, or 2.3% higher than for the six
months ended June 30,1994. Cost of sales as a percent of sales
rose from 56% in 1994 to 62% in 1995, reflecting the increase
in editorial spending in preparation for future adoption
opportunities in the upcoming elementary and secondary
20
<PAGE>
calendars, as well as for testing programs for Riverside and
multimedia products created by the Trade & Reference Division.
The manufacturing component of cost of sales has not been
affected by the continued increases in paper costs due to the
implementation of publishing plans which were structured to
mitigate the effect of anticipated price increases. These plans
include, but are not limited to, the substitution of paper
grades and negotiated price protection from certain suppliers.
Selling and administrative costs were up $4.3 million from the
$82.8 million incurred as of June 30, 1994, primarily due
to the increased sampling costs for adoption programs and the
higher distribution costs incurred as parallel operations are
being maintained during the outsourcing transition period for
the Trade & Reference Division.
Special charges of $7.0 million were recognized in the second
quarter of 1995 in connection with the Company's decision to
outsource the distribution operations of the Geneva, Illinois
and Burlington, Massachusetts facilities. The $6.5 million of
special charges recorded in the first quarter of 1994 relate to
21
<PAGE>
the substantial completion of the reorganization of certain
administrative and corporate functions begun in 1991, which
were intended to hold down operating costs and increase
efficiency.
The Company's operating loss before special charges was $27.6
million for the six months ended June 30, 1995 compared to $9.8
million for the comparable period in 1994. The increase in
the loss is primarily attributed to the decrease in net
revenues and the increased spending for editorial development.
Interest expense increased $1.0 million from 1994 to 1995. The
increase is due to the issuance in April 1994 of the 7.125%,
$100 million in medium-term notes to partially fund the
acquisition of McDougal. The six months ended June 30, 1994,
include an after-tax gain of $22.8 million, or $1.65 per
share, recognized in connection with the spin-off, in an initial
public offering, of INSO, the successor company to the former
Software Division.
The Company's effective tax rate for the six months ended
June 30, 1995 was 39% compared to 33% for the same period of the
prior year. The effective tax rate of 33% reflected the
22
<PAGE>
utilization of available tax benefits due primarily to the
pre-tax gain related to the INSO initial public offering.
The Company's effective tax rate for all of 1994 was 38%.
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements are primarily determined by its
seasonal working capital needs. Cash used to fund operating
activities in the six months ended June 30, 1995 was $70.5
million compared to $51.0 million for the same period in 1994.
The significant increase in current period cash usage was
driven by the decrease in net earnings from operations and the
build-up of inventory balances, partially offset by a reduction
in net trade receivables.
Investment activities provided cash from the normal draw-down of
marketable securities and the sale of the Company's
St. Charles, Illinois warehouse to fund publishing investments
and general operating requirements. Requirements for financing
activities for the first half of 1995 were principally for the
payment of quarterly dividends and treasury share purchases
pursuant to the Company's repurchase program. The $20 million
23
<PAGE>
increase in the issuance of commercial paper over the same
period of 1994 is primarily due to the increase in operating
requirements.
On August 2, 1995, the Company completed a public offering of
1,750,000 6% Exchangeable Notes (SAILS) due 1999 at $68 per
SAILS. Net proceeds of approximately $115.4 million were
recognized in connection with this offering. It is intended
that the proceeds from this offering will be used for general
corporate purposes. At maturity the principal amount of each
SAILS will be mandatorily exchanged by the Company 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 share market
price at the time of the redemption. There is also an optional
redemption date in 1998 which allows for a one-time redemption
of up to 50% of the issue.
In a separate transaction, INSO issued in a new public offering
600,000 shares of its common stock. The effect of this
transaction has been a reduction of the Company's equity
ownership to approximately 36%. Also, the Company expects to
24
<PAGE>
record a gain in the third quarter of approximately
$15 million, representing the increase in its equity in the net
assets of INSO.
In August 1994, the Company sold in a private placement 2,000
put warrants on 200,000 shares of its common stock. The total
exercise price of $7.6 million was recognized as a provisional
liability. These warrants expired on August 7, 1995, without
being exercised by the counterparty.
The Company's available resources at June 30, 1995, plus
funds generated from operating activities, existing credit
facilities, and use of the debt market are believed to be
sufficient to meet total cash requirements for the foreseeable
future.
25
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders
At the Annual Stockholders' Meeting on April 26, 1995,
at which a quorum was present, the stockholders
approved the following proposals by the number of
shares of common stock voted as noted:
Proposal #1 - Election of Class III Directors for
a three year term:
Number of Shares
Voted For Against
---------- ---------
Mary H. Lindsay 12,137,562 41,071
John F. Magee 12,137,556 41,080
Claudine B. Malone 12,147,235 31,401
Ralph Z. Sorenson 12,147,683 30,953
The following directors continued their term in
office: Joseph A. Baute, Nader F. Darehshori,
George Putnam, and DeRoy C. Thomas, Gail Deegan,
James O. Freedman, Charles Longsworth, and Alfred
McDougal.
Proposal #2 - Approval of Houghton Mifflin Company
1995 Stock Compensation Plan
For - 7,790,464
Against - 2,352,409
Abstained - 258,172
Withheld - 1,777,591
26
<PAGE>
PART II. OTHER INFORMATION - Continued
Item 4. Submission of Matter to a Vote of Security Holders
Proposal #3 - Ratification of Ernst & Young LLP as
independent auditors for the fiscal
year ended December 31, 1995.
For - 12,092,867
Against - 33,497
Abstained - 52,272
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 10 (iii) (A), Agreement and
General Release, pages 29 - 30
Exhibit 27, Financial Data Schedules
(b) Report on Form 8-K
None
27
<PAGE>
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: August 11, 1995 /S/ Michael J. Lindgren
------------------------
Michael J. Lindgren
Vice President, Controller
and Treasurer
28
<PAGE>
Exhibit 10 (iii) A
AGREEMENT AND GENERAL RELEASE
Houghton Mifflin Company (the "Company") and Joseph A.
Kanon (the "Employee") agree that the following sets out their
complete agreement and understanding regarding the separation
of the Employee from the Company's employ:
1. The Company and the Employee agree that the Employee's
employment with the Company shall terminate effective
June 30, 1995.
2. The status of the Employee's benefits at separation
from employment, including severance pay, are as set
forth on the attached page entitled "Separation
Benefits - Joseph Kanon" and in the attached
memorandum from Margaret M. Doherty dated June 21,
1995.
3. The consideration from the Company set forth in
Paragraph 2 above constitutes full settlement of
any and all claims that the Employee may have against
the Company, its successors, assigns, affiliates, or
any of its officers, directors, shareholders,
employees, agents, or representatives, for
compensation or otherwise.
4. In consideration for the promises made by the Company
in this Agreement, the Employee, on behalf of himself,
his agents, assignees, attorneys, heirs, executors,
and administrators, fully releases the Company, and
its successors, assigns, parents, subsidiaries,
divisions, affiliates, officers, directors,
shareholders, employees, agents and representatives,
from any and all liability, claims, demands, actions,
causes of action, suits, grievances, debts, sums of
money, controversies, agreements, promises, damages,
back and front pay, costs, expenses, attorneys' fees,
and remedies of any type, by reason of any matter,
cause, act or omission arising out of or in connection
with his employment or separation from employment with
29
<PAGE>
the Company, including without limiting the generality
of the foregoing, claims, demands or actions under
Title VII of the Civil Rights Act of 1964; the Age
Discrimination in Employment Act of 1967; as amended;
the Rehabilitation Act of 1973; the Civil Rights Act
of 1866; the Massachusetts Fair Employment Practices
Act; any other federal, state, or local statute or
regulation regarding employment, discrimination in
employment, or the termination of employment; and the
common law of any state relating to employment
contracts, wrongful discharge, or any other matter.
5. The Employee understands and agrees that the existence
and terms of this Agreement and General Release are
confidential and that the Employee shall not disclose
such information to any third party, other than the
Employee's spouse, attorney, and financial advisor,
without the written consent of the Company.
6. The existence and execution of this Agreement and
General Release shall not be considered, and shall not
be admissible in any proceeding, as an admission by
the Company, or its agents or employees, of any
liability, error, violation or omission.
7. This Agreement and General Release shall be binding
upon and shall be for the benefit of the Company and
the Employee, as well as their respective heirs,
personal representatives, successors and assigns.
8. The provisions of this Agreement and General Release
shall be severable, and the invalidity of any
provision shall not affect the validity of the other
provisions.
9. The Employee also acknowledges that during the course
of his employment with the Company, he has acquired
confidential information about the Company, including
but not limited to information about its business
and publishing plans, operations, customers,
suppliers, and operations. The Employee agrees not
to disclose any such confidential information to
anyone without the written consent of the Company.
10. The Employee acknowledges that the Company advised
<PAGE>
him in writing to consult with an attorney before
executing this Agreement, that he was given a period
of 21 days within which to consider the consideration
for this Agreement, that he had an adequate
opportunity to review the Agreement with an attorney,
that he fully understands its terms, that he was not
coerced into signing it, and that he has signed it
knowingly and voluntarily.
11. The Employee agrees to cooperate with the Company in
connection with any litigation currently pending or
which is threatened or instituted in the future and
the Company agrees to indemnify the Employee for any
costs or damages incurred by the Employee in
connection with such matters on the same basis as
applied during his term of employment.
12. The Employee agrees not to publicly disparage the
Company or its officers and Board members.
13. This Agreement and General Release shall take effect
seven days after the Employee executes it. The
Employee has the right to revoke this Agreement
during a period of seven days following his execution
of this Agreement. In order to revoke the Agreement,
he must notify Gary L. Smith, Senior Vice President,
of the Company, in writing of his decision to revoke,
and said notice must be received by Mr. Smith no
later than seven days following the execution of this
Agreement. If he revokes this Agreement, he shall
promptly repay to the Company all consideration paid
under this Agreement to which he is not otherwise
entitled.
HOUGHTON MIFFLIN COMPANY NAME:
BY: /S/ Gary L. Smith /S/Joseph A. Kanon
DATED: 6/30/95 DATED: 6/28/95
Subscribed and sworn
before me this 28th day
of June, 1995.
Notary Public
/S/ Kathleen A. Rideout
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 9,592
<SECURITIES> 600
<RECEIVABLES> 112,616
<ALLOWANCES> 5,850
<INVENTORY> 98,692
<CURRENT-ASSETS> 256,867
<PP&E> 163,014
<DEPRECIATION> 92,499
<TOTAL-ASSETS> 504,924
<CURRENT-LIABILITIES> 140,334
<BONDS> 0
<COMMON> 14,759
0
0
<OTHER-SE> 200,600
<TOTAL-LIABILITY-AND-EQUITY> 504,924
<SALES> 155,160
<TOTAL-REVENUES> 155,160
<CGS> 95,696
<TOTAL-COSTS> 189,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,678
<INCOME-PRETAX> (38,747)
<INCOME-TAX> (15,111)
<INCOME-CONTINUING> (23,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,636)
<EPS-PRIMARY> (1.71)
<EPS-DILUTED> (1.71)
</TABLE>
