<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from July 1, 1996 to September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number 1-5406
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HOUGHTON MIFFLIN COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1456030
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Berkeley Street, Boston 02116 - 3754
--------------------------- ------------
(Address of principal (Zip Code)
executive offices)
617-351-3500
--------------------------------------------------
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 October 31, 1996.
Class Outstanding at October 31, 1996
- ------------------------------- -------------------------------
Common Stock, $1 par value 14,632,860
Preferred Stock Purchase Rights 14,632,860
1 of 19
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HOUGHTON MIFFLIN COMPANY
INDEX
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets
September 30, 1996 and 1995 and December 31, 1995 3 - 4
Consolidated Condensed Statements of Operations
and Retained Earnings -- Three and Nine
Months Ended September 30, 1996 and 1995 5 - 6
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 7
Notes to Unaudited Consolidated Condensed
Financial Statements 8 - 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
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HOUGHTON MIFFLIN COMPANY
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996, 1995, AND DECEMBER 31, 1995
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, September 30, December 31,
1996 1995 1995
------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 18,911 $ 95,480 $ 16,701
Marketable securities available
for sale, at fair value 611 14,420 604
Accounts receivable 308,875 249,865 204,542
Less: allowance for book returns (18,063) (10,618) (21,698)
---------- -------- ----------
290,812 239,247 182,844
Inventories
Finished goods 125,488 79,852 120,120
Work in process 17,094 6,282 8,733
Raw materials 5,173 6,378 11,074
---------- -------- ----------
147,755 92,512 139,927
Income taxes 23,727 8,334 28,472
Prepaid expenses 2,446 2,081 2,652
---------- -------- ----------
Total current assets 484,262 452,074 371,200
Property, plant and equipment,
and book plates (net of accumulated
depreciation and amortization of
$140,291 in 1996, $107,798 in 1995
and $123,891 at December 31, 1995) 109,369 70,443 123,100
Intangible assets, net 484,595 118,748 474,751
Other assets 82,445 74,086 77,747
---------- -------- ----------
$1,160,671 $715,351 $1,046,798
========== ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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HOUGHTON MIFFLIN COMPANY
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996, 1995, AND DECEMBER 31, 1995
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, September 30, December 31,
1996 1995 1995
------------- ------------- -----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 70,151 $ 65,591 $ 94,556
Commercial paper 76,488 -- 144,612
Royalties 35,326 30,116 40,140
Salaries, wages, and commissions 19,143 11,959 18,751
Income taxes payable 39,309 25,708 --
Other accrued expenses 31,072 25,695 44,673
---------- -------- ----------
Total current liabilities 271,489 159,069 342,732
Long-term debt 550,978 226,133 426,148
Accrued royalties 2,040 2,565 2,497
Other liabilities 17,582 14,529 15,192
Accrued post retirement medical benefits 27,672 25,673 26,884
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 35,645 31,655 29,973
Retained earnings 281,945 283,634 228,528
---------- -------- ----------
332,349 330,048 273,260
Less:
Notes receivable from purchase agreement (5,840) (5,744) (5,821)
Unearned compensation related to outstanding
restricted stock (1,716) (139) (349)
Common shares held in treasury, at cost
(131,772 shares in 1996 , 288,816
shares in 1995 and 273,681 shares
at December 31, 1995) (2,796) (6,115) (5,795)
Benefits trust assets, at market (31,087) (30,668) (27,950)
---------- -------- ----------
Total stockholders' equity 290,910 287,382 233,345
---------- -------- ----------
$1,160,671 $715,351 $1,046,798
========== ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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HOUGHTON MIFFLIN COMPANY
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $334,229 $240,495
General publishing 22,440 27,398
-------- --------
356,669 267,893
Costs and expenses:
Cost of sales 136,842 101,929
Selling and administrative 90,711 66,879
-------- --------
227,553 168,808
-------- --------
Operating income 129,116 99,085
Other income (expense):
Gain on equity transactions of INSO Corporation -- 15,001
Gain on sale of INSO Corporation common stock 9,596 --
Net interest expense (11,327) (2,718)
Equity in earnings of INSO Corporation 1,280 713
-------- --------
(451) 12,996
-------- --------
Income before taxes 128,665 112,081
Income tax provision 52,618 44,011
-------- --------
Net income 76,047 68,070
Retained earnings at beginning of period 209,247 219,074
Valuation allowance on noncurrent marketable
equity securities -- (193)
Dividends declared (3,349) (3,317)
-------- --------
Retained earnings at end of period $281,945 $283,634
======== ========
Net income per common share $ 5.45 $ 4.93
Average number of common shares 13,946 13,817
Cash dividends paid per common share $ 0.240 $ 0.240
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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HOUGHTON MIFFLIN COMPANY
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $536,376 $356,671
General publishing 61,342 66,382
-------- --------
597,718 423,053
Costs and expenses:
Cost of sales 271,323 197,625
Selling and administrative 222,607 153,939
Special charges -- 7,033
-------- --------
493,930 358,597
-------- --------
Operating income 103,788 64,456
Other income (expense):
Gain on equity transactions of INSO Corporation -- 15,001
Gain on sale of INSO Corporation common stock 32,546 --
Net interest expense (31,593) (6,396)
Equity in earnings of INSO Corporation 2,170 273
-------- --------
3,123 8,878
-------- --------
Income before taxes 106,911 73,334
Income tax provision 43,480 28,900
-------- --------
Net income 63,431 44,434
Retained earnings at beginning of period 228,528 248,828
Valuation allowance on noncurrent marketable
equity securities -- (101)
Dividends declared (10,014) (9,527)
-------- --------
Retained earnings at end of period $281,945 $283,634
======== ========
Net income per common share $ 4.56 $ 3.22
Average number of common shares 13,913 13,805
Cash dividends paid per common share $ 0.720 $ 0.690
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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HOUGHTON MIFFLIN COMPANY
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED; IN THOUSANDS)
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 63,431 $ 44,434
Adjustments to reconcile net income to
net cash used in operating activities
Gain on equity transactions of INSO Corporation -- (15,001)
Equity in (earnings) losses of INSO Corporation (2,170) (273)
Depreciation and amortization 66,526 35,767
Gain on sale of INSO Corporation stock (32,546) --
Changes in operating assets and liabilities:
Accounts receivable (107,968) (108,484)
Inventories (7,827) (30,851)
Accounts payable (24,403) 20,566
Royalties (7,476) (7,986)
Deferred and income taxes payable 44,053 25,423
Salaries, wages and commissions 391 (1,675)
Other, net (2,425) 14,538
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (10,414) (23,542)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from the sales of INSO Corporation stock 36,663 --
Book plate expenditures (46,207) (29,338)
Acquisition of publishing assets (15,501) --
Property, plant and equipment expenditures (9,708) (5,439)
Marketable securities (7) 2,401
Sale of building and equipment -- 3,186
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (34,759) (29,190)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock (10,014) (9,527)
Net payment of commercial paper (68,124) --
Proceeds from the issuance of long-term financing 224,785 126,643
Payment of long-term financing (99,955) --
Purchase of common stock -- (957)
Exercise of stock options 919 1,928
Other (228) (247)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,383 117,840
Increase in cash and cash equivalents 2,210 65,108
Cash and cash equivalents at beginning of period 16,701 30,372
--------- ---------
Cash and cash equivalents at end of period $ 18,911 $ 95,480
========= =========
Supplementary disclosure of cash flow information:
Income taxes paid $ 5,235 $ 3,453
Interest paid $ 27,292 $ 5,379
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated condensed financial statements of
Houghton Mifflin Company and its subsidiaries ("the Company") 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 of
this interim financial information 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 1996 interim
financial statements.
(2) Acquisitions
------------
On October 31, 1995, the Company acquired D.C. Heath and Company
("Heath"), a leading publisher of textbooks in areas including modern language,
language arts, science, social studies, and mathematics for the elementary,
secondary, and college markets, from Raytheon Company ("Raytheon"). The
acquisition has been accounted for as a purchase and the net assets and results
of operations are included in the Company's consolidated financial statements
from the date of acquisition. Net cash consideration for the acquisition was
$460.6 million, which was financed through a combination of existing cash
balances and indebtedness. 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.
During the second quarter of 1996, the Company acquired all of the
outstanding shares of D.C. Heath, Canada, Limited ("Heath Canada") from Raytheon
following receipt of Canadian regulatory approval. ITP Nelson ("ITP")
subsequently acquired the assets of Heath Canada from the Company and entered
into a series of agreements which expanded existing exclusive distribution
agreements for the school and college markets. Cash and licensing fees in
respect of this distributorship amount to approximately $5.5 million, of which
approximately $4.6 million has been paid.
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
<TABLE>
The following unaudited summary, presented on a pro forma basis, combines
the consolidated results of operations as if Heath, including Heath Canada, had
been acquired as of January 1, 1995.
<CAPTION>
(In millions, except Nine Months Ended
per share amounts) September 30, 1995
------------------- ------------------
<S> <C>
Net sales $600.6
Net income $ 48.3
Net income per share $ 3.50
</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 Heath acquisition been consummated as of the assumed
date, nor are they necessarily indicative of future results of operations.
(3) INSO Corporation
----------------
In March 1994, the Company spun-off its former Software Division in an
initial public offering. The equity interest in INSO Corporation ("INSO") , the
successor company, was approximately 40% after the offering. The Company's
recognition of earnings from its investment in INSO is based upon the equity
method of accounting.
In the nine month period ended September 30, 1996, the Company received
$36.7 million in proceeds from the sale of 737,500 shares of INSO common stock.
As a result of the sale the Company recorded a gain of approximately $32.5
million ($18.8 million after-tax) or $1.35 per share. The proceeds from this
sale were used to fund seasonal working capital requirements. The Company's
equity ownership in INSO, after the sale of common stock, is approximately 30%.
A portion of the remaining INSO shares may be sold by the Company, subject to
certain restrictions, as market conditions and events warrant.
9
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(4) Intangible Assets
-----------------
<TABLE>
Intangible assets consist of the following (in thousands):
<CAPTION>
September 30, December 31,
1996 1995 1995
------------------------------------------
<S> <C> <C> <C>
Goodwill $502,183 $113,268 $473,786
Publishing rights 16,638 15,520 18,523
Other 4,000 5,731 5,891
Less:
accumulated (38,226) (15,771) (23,449)
amortization
------------------------------------------
Total $484,595 $118,748 $474,751
==========================================
</TABLE>
The carrying value of goodwill is periodically reviewed to determine
recoverability based upon projected net cash flows over the remaining life of
the related business unit. If the analysis indicates that impairment has
occurred, the Company will adjust the book value of the intangible asset to the
undiscounted net cash flow amount.
(5) Subsequent Events
-----------------
The Board of Directors, at its October 30, 1996 meeting, declared a
quarterly dividend of $0.24 per share, payable on November 27, 1996, to
shareholders of record on November 13, 1996.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
- ---------------------
Third Quarter 1996 versus Third Quarter 1995
- --------------------------------------------
Net sales for the quarter ended September 30, 1996 were $356.7 million, an
increase of 33% from the $267.9 million reported in the third quarter of 1995.
Consolidated net income was $76.0 million, or $5.45 per share, for the quarter
ended September 30, 1996, compared to consolidated net income of $68.1 million,
or $4.93 per share, for the same period in 1995. The Company recorded a gain of
approximately $9.6 million ($5.6 million after-tax), or $0.40 per share, in the
third quarter of 1996 on the sale of 200,000 shares of INSO Corporation ("INSO")
common stock. The Company recorded a gain of approximately $15.0 million ($8.9
million after-tax), or $0.64 per share, in the third quarter of 1995,
representing the increase in its equity in the net assets of INSO as a result of
INSO completing a public offering of 600,000 shares of common stock.
Excluding these non-recurring items, net income for the third quarter of 1996
would have been $70.4 million, or $5.05 per share, compared to net income of
$59.2 million, or $4.29 per share, for the third quarter of 1995.
Net sales of $334.3 million from the educational publishing segment in the third
quarter of 1996 increased $93.8 million, or 39%, from last year's third quarter
net sales of $240.5 million. Results for the third quarter of 1995 included $20
million of sales which had been delayed from the second quarter due to
distribution problems. Net sales increased primarily due to the addition of
Heath titles and new product offerings, despite limited adoption opportunities
in 1996. Strong sales have been experienced for the School Division's reading
program, Invitations to Literacy[Copyright] 1996, which captured a significant
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market share in the two largest reading adoption opportunities in 1996 and did
extremely well in open territories, winning some of the largest adoptions.
McDougal Littell's secondary school literature program, The Language of
Literature[Copyright] 1997, and other programs achieved major successes in the
market this year, gaining significant market share in two adoption states and in
numerous open territories. Driven by the addition of Heath products, College
Division's net sales rose 63% in the third quarter to $63.3 million from $38.9
million in the third quarter of 1995. Due to higher sales of custom products,
Riverside Publishing Company reported higher net sales than in the third quarter
of 1995 and Great Source, the Company's supplemental products publishing
division, achieved substantial revenue growth.
Net sales of $22.4 million from the general publishing segment decreased $5.0
million, or 18%, from last year's third quarter net sales of $27.4 million. The
decrease is a result of a change in strategy and lower frontlist sales compared
to 1995. The new strategy being implemented will continue to curtail some
revenue streams, resulting in lower revenues. The new strategy will not
contribute significantly to this segment's results before 1998. General
publishing sales also include sales of $0.9 million from Houghton Mifflin
Interactive's (HMI) products, which have won market recognition, and include
four new products introduced in the third quarter. HMI began shipping product in
the fourth quarter of 1995.
Operating income for the third quarter of 1996 was $129.1 million, a $30.0
million increase from last year's third quarter operating income of $99.1
million. Improved profitability from the educational publishing business and
economies of scale due to the Heath acquisition contributed to the increase.
Plate amortization was significantly higher, $26.9 million versus $14.5 million,
in the third quarter of 1996 and 1995, respectively, reflecting the addition of
Heath titles and investment in new products to meet adoption opportunities in
1997 and beyond. The higher plate amortization results in cost of sales as
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a percent of net sales increasing slightly from 38% to 38.4% for the same period
in 1995. Goodwill amortization of $6.7 million in the third quarter was $4.8
million higher than last year, reflecting the Heath acquisition. Excluding
goodwill, selling and administrative expenses decreased as a percent of sales to
23.6% versus 24.3% in the third quarter in 1995.
Net interest expense for the third quarter of 1996 increased $8.6 million to
$11.3 million from the same period in 1995. Approximately $7.7 million of the
increase related to the financing of the Heath acquisition, and the balance of
the increase reflected higher working capital requirements in 1996. Seasonal
working capital requirements reach a peak in the third quarter of the year, but
as receivables are collected in the third and early fourth quarters of the year,
seasonal borrowings are repaid.
The provision for taxes for the third quarter of 1996 increased $8.6 million
over the third quarter of 1995. The increase is primarily due to higher
operating income and a higher effective tax rate. The effective tax rate
increased to 40.9% in the third quarter of 1996, from 39.3% in the same period
of 1995. In the third quarter of 1996, the tax rate was adjusted on operating
income to 40.3% from 42% used in the first two quarters to reflect the spread of
certain fixed nondeductible tax costs over significantly higher 1996 taxable
income resulting from the sale of INSO shares.
13
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Results of Operation:
- --------------------
Nine Months Ended September 30, 1996 and 1995
- ---------------------------------------------
Net revenues for the nine months ended September 30, 1996 were $597.7 million,
or 41% higher than the $423.1 million recorded from the same period in 1995.
Consolidated net income was $63.4 million, or $4.56 per share, for the nine
months ended September 30, 1996, compared to a net income of $44.4 million, or
$3.22 per share, for the same period in 1995. The Company recorded a gain of
approximately $32.5 million ($18.8 million after-tax), or $1.35 per share, in
the nine months ended September 30, 1996, on the sale of 737,500 shares of INSO
common stock. In addition, a one time charge related to the equity investment in
INSO of $1.4 million ($0.8 million after-tax), or $0.06 per share was recorded.
Net income in 1995 included a gain of approximately $15.0 million ($8.9 million
after-tax), or $0.64 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 $0.31 per share, relating to the outsourcing of distribution
operations and one time charges related to the Company's investment in INSO of
$2.2 million , or $0.16 per share.
Excluding these non-recurring items, net income for the first nine months of
1996 was $45.4 million, or $3.27 per share, compared to a net income of $42.0
million, or $3.05 per share, for the first nine months of 1995.
Net sales of $536.4 million for the educational publishing segment in 1996
increased by $179.7 million, or 50%, from the same period in 1995. This increase
primarily reflected the impact of the addition of Heath titles and new product
offerings.
General publishing net sales of $61.3 million in 1996 decreased $5.0 million, or
8%, from the same period in 1995. The decrease is attributable to the change in
strategy, lower frontlist sales, and the sale
14
<PAGE> 15
of publishing rights in 1995 offset somewhat by $2.3 million in sales in 1996
from Houghton Mifflin Interactive which recorded no sales until the fourth
quarter of 1995.
The Company's operating income was $103.8 million for the nine months ended
September 30, 1996 compared to $64.5 million for the comparable period in 1995.
Improved profitability from the educational publishing business and economies of
scale due to the Heath acquisition contributed to the increase. Cost of sales
declined as a percent of net sales, despite higher plate amortization for the
nine months of 1996 relating to the addition of Heath titles and investment in
new products to meet adoption opportunities in 1997 and beyond. Selling and
administrative expenses increased as a percent of sales to 37%, versus 36% for
the nine months ended 1996 and 1995, respectively, due mainly to the increase in
goodwill amortization of $14.1 million in 1996, from the same period in 1995,
due to the Heath acquisition. Excluding goodwill, selling and administrative
expenses decreased as a percent of sales, primarily reflecting efficiencies
associated with the Heath acquisition. In the second quarter of 1995, special
charges of $7.0 million related to the costs of outsourcing the distribution
process at the Geneva, Illinois and Burlington, Massachusetts facilities were
recorded.
Interest expense for the first nine months of 1996 increased $25.2 million over
the first nine months of 1995. Approximately $21 million of the increase related
to the financing of the Heath acquisition, and the balance of the increase
reflected higher working capital requirements in 1996. The greater portion of
educational publishing in the business mix has heightened seasonal working
capital requirements and increased the seasonality of the Company's business.
The provision for taxes for the nine months ended September 30, 1996 increased
$14.6 million over the same period in 1995. The increase is primarily due to a
higher operating profit and a higher effective tax
15
<PAGE> 16
rate, which increased to 40.7% from 39.4% for the nine months ended September
30, 1996 and 1995, respectively. The higher effective tax rate is in part due to
providing tax on the equity in earnings of INSO in 1996.
Liquidity and Capital Resources
- -------------------------------
The seasonality of the Company's business has a significant effect on operating
cash flow. In order to fund operating and investing activities through the third
quarter, the Company issues short-term debt to supplement cash on hand at the
beginning of each year.
During the nine month period ended September 30, 1996, the Company used proceeds
of $36.7 million from the sale of INSO stock and issued approximately $56.7
million of commercial paper to cover its seasonal working capital needs and to
fund publishing and capital investments.
Cash used in operating activities was $10.4 million in 1996. Net earnings from
operations after non-cash adjustments provided cash of $95.2 million, while
changes in working capital, primarily due to an increase in accounts receivable,
and other items used cash in the amount of $105.6 million.
Net cash of $34.8 million was required for investing activities in the first
nine months of 1996. Book plate expenditures of $46.2 million were incurred for
new products to meet significant adoption opportunities over the next several
years. In the first nine months of 1996, the Company also spent $15.5 million
for publishing assets, which included the final settlement for the Heath
purchase and other products. In the nine month period ended September 30, 1996,
the Company received $36.7 million in
16
<PAGE> 17
proceeds from the sale of 737,500 shares of INSO common stock. The tax on this
gain will be paid later in the year.
At September 30, 1996, total debt was $627.5 million consisting of approximately
$56.5 million to support working capital requirements and the balance to finance
prior acquisitions. The Heath acquisition was initially financed with the draw
down of $345 million in credit facilities and cash on hand from the Stock
Appreciation Income Linked Securitied ("SAIL") issuance. These borrowings were
refinanced in the fourth quarter of 1995 with $200 million in proceeds from a
five year credit facility and the issuance of $145 million in commercial paper.
In March 1996, the Company completed the refinancing of the debt incurred in
conjunction with the Heath acquisition with the issuance of $125 million of
long-term debt and $100 million of medium-term notes. Proceeds from these
issuance's were used to repay $125 million of the commercial paper and $100
million of the five year credit facility drawn upon in conjunction with the
Heath acquisition.
The Company currently expects that cash flow from operations for the full year
1996 and proceeds from the sale of INSO stock will be sufficient to cover
investment activities and dividend payments as well as to repay by yearend a
portion of the debt outstanding at the beginning of 1996.
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
Statements in this report that are not historical facts may be forward-looking
statements that are subject to a variety of risks and uncertainties. There are a
number of important factors that could cause actual results to differ materially
from those expressed in any forward-looking statements made by the Company.
These factors include, but are not limited to, (i) the seasonal and cyclical
nature of the Company's educational sales; (ii) variable funding in school
systems throughout the nation, which may result in both cancellation of planned
purchases of educational materials and shifts in timing of purchases; (iii)
changes in purchasing patterns in elementary, secondary, and college markets;
(iv) regulatory changes which would affect the purchase of educational materials
and services; (v) strength of the retail market for general-interest
publications and market acceptance of frontlist titles and new electronic
products; and (vi) other factors detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE> 19
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 5,1996 /s/ Gail Deegan
----------------------------------------
Gail Deegan
Executive Vice President,
Chief Financial Officer, and Treasurer
Dated: November 5, 1996 /s/ Michael J. Lindgren
----------------------------------------
Michael J. Lindgren
Vice President, Controller
19
<PAGE> 20
Houghton Mifflin Company
Index To Exhibits
Item 6(a)
Exhibit No. Description of Document Page Number in This Report
- ----------- ----------------------- --------------------------
27 Financial Data Schedule 21 - 22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 18,911
<SECURITIES> 611
<RECEIVABLES> 308,875
<ALLOWANCES> (18,063)
<INVENTORY> 147,755
<CURRENT-ASSETS> 481,546
<PP&E> 249,660
<DEPRECIATION> (140,291)
<TOTAL-ASSETS> 1,157,955
<CURRENT-LIABILITIES> 268,773
<BONDS> 0
<COMMON> 14,759
0
0
<OTHER-SE> 276,151
<TOTAL-LIABILITY-AND-EQUITY> 1,157,955
<SALES> 597,718
<TOTAL-REVENUES> 597,718
<CGS> 271,323
<TOTAL-COSTS> 493,930
<OTHER-EXPENSES> (34,716)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,593
<INCOME-PRETAX> 106,911
<INCOME-TAX> 43,480
<INCOME-CONTINUING> 63,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,431
<EPS-PRIMARY> 4.56
<EPS-DILUTED> 4.56
</TABLE>
